Advantages of Continuous Audit and its Suitability

Continuous audit and its advantages:

A ‘continuous audit’ is an auditing process that examines accounting operations continually, throughout the year. It completely differs from a ‘final audit’ where the auditor visits the client just once a year and takes up the audit work when all accounts are balanced and financial statements are prepared. But in continuous audit, the audit work is carried out as and when the accounts are being prepared. In this blog, we have highlighted the advantages and disadvantages of continuous audit as well as its suitability. 

What is a Continuous Audit?

According to the Institute of Internal Auditors, USA, continuous auditing is “a method used to perform control and risk assessments automatically on a more frequent basis. Continuous auditing changes the audit paradigm from periodic reviews of a sample of transactions to ongoing audit testing of 100 percent of transactions. It becomes an integral part of modern auditing at many levels…… technology is a key to enabling such an approach.”

A continuous audit is referred to as the study and examination of a company’s financial transactions and their supporting documents on a continuous basis throughout the year, at regular or irregular intervals. The intervals may be fixed or otherwise, say a month or a few months.

In such a scenario, the accounts are subjected to audit as and when they are prepared. Therefore, the audit proceeds as accounting progresses. An auditor in continuous audit visits and examines the accounts at regular or irregular intervals throughout the year. Such an audit is usually only required for large corporations, and not for small businesses that can have their final accounts audited after they are completed at the end of the fiscal year.

In most companies, the system of continuous audit is installed with the aid of technology. Also, a continuous audit-driven system creates alarm triggers that can provide prior notice of discrepancies and errors found by the system. It is typically performed by the firm’s internal auditors to reduce year-end workload.

Some of the basic features of a continuous audit are as follows:

• It is an ongoing procedure that takes place throughout the year.
• It takes place at regular or irregular intervals.
• It focuses on testing each and every transaction (100% testing).
• It requires technology to be configured.
• It gives information in advance about suspected errors and anomalies.
• The auditor will make surprise visits.

Suitability

A continuous audit is suitable, especially where:

• Internal controls are weak.
• The transactions are numerous.
• The management would like to have the financial books audited on a continuous basis in order to improve the management of resources.

Example

A continuous audit is useful for identifying odd or non-compliant activities in different areas of the company and ensuring that predefined procedures are followed. For instance, in the accounts payable department, the continuous audit system could prevent an incorrect amount from being transferred to a vendor. It might also be used in the accounting or legal departments to ensure that a mandatory filing to the ROC, SEBI, or RBI is sent before the deadline.

Advantages of continuous audit

Given below are some advantages of continuous audit:

Exhaustive checking:

It allows for a more thorough & extensive examination of accounting records and related documentation because the auditor has more time at his disposal.

Early detection of errors and frauds:

It aids in detecting fraud and errors immediately as they occur, rather than towards the end of the fiscal year when it is more difficult to implement corrective control procedures.

Early rectification:

Since errors are located quickly, their rectification can be made possible at an early stage.

Guidance:

It provides a sort of continuous guidance to the client.

Proper planning:

There is no pressure of work at any given time because the audit work is evenly distributed throughout the year. Planning or auditing can be done ahead of time, and the audit personnel can be kept busy all year.

Finalization of accounts on time:

With the books of account being audited throughout the year, finalization of accounts can be made on time, i.e., just at the year-end. The audited final accounts can be provided to shareholders shortly after the fiscal year ends without wasting any time.

Interim accounts:

It also facilitates the preparation of interim accounts when the issue of declaring an interim dividend arises.

Moral check on employees:

It makes the client’s staff more aware and efficient in their work as they know that their work is under scrutiny all the time. Hence, they keep the work up-to-date and do not commit fraud.

Reduces the burden of statutory auditor:

It relieves statutory auditors of the burden of routine checking and allows them to spend their resources on more valuable operations.

Disadvantages of continuous audit

Despite the above advantages, there are a few apparent disadvantages of continuous audit too. Some of these are:

• A continuous audit is not economical for small companies.
• After the audit is done, the records and statistics in the books of account that have already been examined by the auditor may be altered by the staff of the client.
• The auditor’s frequent visits to the workplace may cause inconvenience at times.
• The client may suffer due to a clash of work between his staff and the duties of the auditor.
• It is more expensive since the auditor must commit more time to this audit.
• The auditing work/process can become very mechanical and repetitive.
• Audit personnel may not complete the work on each visit. As a result, they may forget to clear out the queries or follow up on the tasks left on the last visit.

However, these limitations of continuous audit can be solved if the auditor firmly prohibits the client’s staff from changing the figures and passing journal entries to correct the errors identified. The altered figures can also be discovered using special ticks and coloured pencils. Further, work must be completed as much as possible at each visit, and notes regarding incomplete work or queries must be preserved in the current audit file.

Takeaway

A continuous audit is one in which the auditor’s staff checks the accounts of the client at frequent intervals, such as weekly, fortnightly, or monthly during an accounting period. This audit is mostly used in large organizations where several transactions of varied nature need to be examined and audited accounts need to be provided immediately after the fiscal year ends.

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