Continuous Audit: Advantages and Disadvantages of Continuous Audit

Continuous Audit

Continuous audit or running audit is such an audit where the auditor examines the accounting records throughout the year. The auditor and his staff visit the client’s office either weekly or fortnightly or monthly or quarterly as decided earlier. A continuous audit is necessary only for big houses.

Features of continuous audit

Following are the main features of continuous audit.

  1. Audit is carried out throughout the financial year.
  2. Dates of auditor’s visits are fixed in consultation with the management.
  3. The auditor may make surprise visit.
  4. Most of the transactions are examined during the year.
  5. Detailed examination of every transaction is happened.

Suitability of continuous audit

Continuous audit is suitable in the following circumstances.

  1. Where the business is very large and involves numerous transactions.
  2. Where statement of audited financial accounts are required to be produced before the management after every quarter.
  3. Where the financial accounts are to be audited simultaneously and the results are to be declared in the form of profit immediately after the close of financial year.
  4. Where no satisfactory system of internal control is in practice, OR internal control system is weak.
  5. Where declaring interim dividend is in practice.
  6. Where sales volume is high and it require detailed checking.

Advantages of continuous audit

  1. Detailed checking

Under this system a detailed examination of accounts is possible as the auditor gets one complete financial year for the purposes.

  1. Early detection of errors and frauds

The detailed checking in continuous audit can discover errors and frauds at an early stage as they happened and can be rectified during the financial year. If the accounts are checked after one year it would be difficult to locate errors.

  1. Moral check on employees

The frequent visit by the auditor act as a valuable moral check on the staff who keep their work up-to-date, they do not commit any fraud due to the fear of auditor’s visit, which may be surprise visit.

  1. Valuable advice from auditor

The auditor becomes more and more familiar with the business affairs. Hence he can give valuable suggestions to his clients for improving the working of the business and the system for maintaining accounts.

  1. Declaration of interim dividend

With the process of continuous audit the company can at any time prepare the interim final accounts so as to declare the dividends during the year.

  1. Quick finalization of accounts

At the end of the period as the greater part of the detailed checking will have been completed, the auditor will be able to finish the audit work soon after the accounts are prepared.

  1. Convenience of auditor

The auditor can spread his work over the full year. He can relieve himself of a lot of undue burden. He can plan his work well ahead and proceed with confidence.

  1. Efficient audit

The auditor having more time at his disposal, he can check the accounts with greater attention and in detail and his work will be more efficient.

  1. Audit staff can be kept busy

The audit staff may be sent to other clients after having finished the work for the client. Thus whole of the staff can be kept busy throughout the year.

  1. Less chances of overlook

In continuous audit the auditor has better knowledge of what is going on so there is less chances of overlooking any important matter.

  1. Easy settlement of insurance claims

It is helpful in settlement of insurance claim as net loss will be supported by auditor’s report.

Disadvantages of continuous audit

In spite of the above advantages these are certain drawbacks, which are as under:

  1. Alteration of figures

Figures in the books of accounts may be altered by a dishonest staff after auditor’s staff has checked the books for a particular period at his previous visits.

  1. Dislocation of client’s work

The frequent visit by the auditor may dislocate the work of his client and cause inconvenience to the later.

  1. Losing the link

As the audit work is not carried out at one time, the auditor’s staff may loose the thread of work. Queries arising at one sitting of the auditor and left over for clearance at the next sitting may be overlooked. He may not be able to pick up the work from the point where it was left at the previous audit session.

  1. Expensive

It is an expensive system of audit. Because auditor remains busy throughout the financial year. Therefore he charge his fee for the whole year.

  1. Uneconomic for small concerns

In case of small size concerns a continuous audit may involve a lot of expenditures, wastage of time and efforts.

  1. Collusion of client and audit staff

Client dependence on the audit staff is increased. The audit staff who visits the undertaking frequently may develop intimacy with the employees of the clients. The difficulties of the employees may be sympathetically looked by the audit staff and all their collision may result in a loss of the undertaking, because the employees feel assured that even if they commit some mistakes these will be taken care by the auditors who comes regularly.

  1. Mechanical work

Under continuous audit, work becomes too mechanical since it continues throughout the year.

  1. Not suitable at auditor

Under continuous audit the auditor remain busy for the whole trading period. Therefore it is not possible for him to start many audit and increase his income.

  1. Increase the auditor work

Alteration of figures can be avoided by taking extensive notes by auditor which increase the work of auditor.

  1. Seasonal industries

Continuous audit cannot be employed in seasonal industries because these industries operate in a particular period. And no activity occurs in off season.

Precautions in continuous audit

The disadvantages and dangers can be avoided by taking the following precaution.

  1. No alteration after audit

No alteration should be allowed to be made after the entries have been checked by the auditor without his permission.

  1. Alteration through rectifying entry

Ay If any alteration has to be made it should be done by means of a rectifying entry in the journal.

  1. Compare the closing balances

Checking of books should be complete as far as possible at one visit to avoid loose ends: he should make a note of the totals up to that date in his dairy and compare them at his next visit.

  1. Planned programme

Well draw up programme by the auditor will prevent any loose ends.

  1. List of unsatisfactory queries

A note should be made in the audit notebook regarding any queries, which have not been satisfactorily answered, effort should be made to get the matter settled rather than carry forward.

  1. Use of secret trick

If any alteration in a figure has already made, the auditor should put a secret tick against such a figure. He may enter inset, in the colored pencil, the correct figure or he may rewrite the correct figure in different coloured ink and tick it as usual.

  1. Comparison of opening and closing balances

The auditor should make a note of all the totals in the impersonal ledger upto the date to which he has checked and verify these totals on the next occasion so that there is no manipulation.

  1. Systematic programme

The complete audit programme should be made by the auditor in a systematic way.

  1. Instructions for alteration

The auditor should give specific instructions to the client’s staff that no alteration should be made after the checking of books of accounts.

  1. Surprise visit

Auditor should pay surprise visit so that the client’s staff may not be able to prepare in advance against detection of some of its errors. Keeping the precautions in mind the disadvantages arising froth the lack of continuity in the work can be remedied by proper care and supervision.

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