CLASSES OF AUDITS 1. Classes and types of audit.—Long-standing cus tom in the accounting profession has classified the func tions of the auditor under certain definite types of contracts or engagements. It is the purpose in this chapter to explain these types. Audits may be broadly classified as follows: (a) detailed audits, which are of two kinds, the completed audit and the continuous audit; (b) balance sheet audits, sometimes called examinations; (c) investigations.
2. Detailed audits.—A detailed audit comprises a complete examination of all the books, other neces sary documents and supporting vouchers of a busi ness organization. The term, complete examination, does not, however, imply that the auditor is to check in detail every item during the period. In a large business the magnitude of the work would render this impossible. Nor is this type of examination essen tial in a business where a satisfactory system of in ternal checking has been installed. In a small busi ness, it is usually possible to make a detailed examination of every item and this may be advisable on the first audit, but if the volume of transactions is large, the expense involved is prohibitive. The proprietor will do well to follow the advice of his audi tor in this matter, allowing the latter every oppor tunity to make a preliminary survey. The auditor will be governed by his best judgment in deciding what particular phases of the record should be ex amined in detail and what may be passed over with less minute attention.
3. Testing the accuracy of the work in detailed system of internal checking which will pre vent fraud unless there is actual collusion between two or more employes, will lighten the detailed work thru the employment of the method known as "testing" when verifying the accuracy of the records. Let us consider a case where the purchase of merchandise ne cessitates the following steps: (1) the filing of a req uisition by the head of the storeroom or the head of a department; (2) the purchase of the material by a purchasing agent; (3) the receiving of merchandise by a receiving clerk, who certifies to the quantity of merchandise received on the order; (4) the approval of the invoice by the head of department for quality, and an acknowledgment of the receipt of the material in his department; (5) checking of footings and ex tensions and entry in the purchase journal by the voucher clerk; (6) drawing of the check by the cash ier, who enters the payment in the cash book; (7) the signing of the check by the proprietor, who has before him the invoice of the creditor supported by the requi sition of the purchasing agent and the record of re ceipt by the receiving clerk. It will be apparent
that if the foregoing system were installed, fraud could be perpetrated only thru the collusion of two or more individuals, and there would be no necessity for a detailed check by the auditor of all the pur chases of material or vouchers for expenses incurred. He would probably content himself with a detailed examination of the vouchers for several months se lected at random, and if this examination disclosed no evidences of fraud or error, he would probably be safe in assuming that the balance of the work was correctly and honestly done.
4. Danger in making is, of course, an element of danger in accepting such a test as final, because fraudulent entries might be made in the very months which the auditor had neglected to test. Inas much as the detailed audit of all of the purchase vouchers is prohibited by considerations of expense as well as time, it will usually be necessary to take this risk. The law of averages applies here as well as in other cases, and since the dishonest employe can never know in advance what particular month the auditor may select for checking, the opportunity for fraud is reduced to a minimum. The auditor will not en tirely ignore the vouchers of the months which he has not examined minutely. He will scrutinize the re maining entries and endeavor to satisfy himself of their correctness. The auditor is often aided in this respect by other agencies; for example, in some branches of the meat packing industry, where gains and shrinkages in the processing of the product are recorded, mechanical errors as well as errors in the valuation of the inventory may be easily detected. Where the volume of transactions is small, a slight, error in the inventory would throw the gains or shrink ages out of line with past experience. In this manner an error of one per cent in an inventory has been dis covered.