Continuous Auditing: Advantages & Disadvantages

Instructor: Ryan Morales
Continuous auditing is an emerging trend in the auditing landscape today. Read this lesson to learn more about continuous auditing, how it differs from traditional auditing, and the advantages and disadvantages it offers to business organizations.

As a business student, you probably know by now what auditing is. An external audit is the systematic examination of a company's records, books and documents to ensure that transactions are properly recorded and that the entity's financial statements fairly present the financial position, performance and cash flows of the firm. An internal audit is done to ensure that systems are in place, that they are properly functioning and that errors in the system are promptly corrected.

There is an emerging concept in auditing today called continuous auditing. The dynamic business environment with its ever increasing volume and complexity of business transactions, along with recent developments in technology, have brought about this emerging trend in the area of auditing.

Continuous Auditing Defined

Continuous auditing is done on an ongoing basis. Audit activities are conducted as frequently as possible. Most continuous auditing systems employ real time audits. That is, business transactions are audited as they occur. This process is made possible because continuous auditing is technology-based. This greater use of technology in auditing facilitates real time, automatic data verification and checking. Alarms are incorporated into the system when exceptions are detected. Data analysis, trend analysis, and test of controls are computer-aided.

Continuous versus Traditional Auditing

Traditional auditing is often performed manually, though there are times it can be computer-aided. This type of audit is scheduled annually and testing is performed on a selected sample population only as the basis in forming audit opinion. These particular limitations of traditional auditing are due to the time and cost constraints associated with conducting such an audit. On the other hand, continuous auditing is highly automated and done on a real time basis. The continuous auditing system operates in a paperless or almost paperless environment and also allows for a 100% population audit rather than testing on a sampling basis only.

Continuous auditing is more appropriate for larger companies with very high volume of business transactions. It is also appropriate for companies with weak internal controls. For smaller companies with fewer transactions, the traditional manual audit at the end of the year would normally be enough.

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