⬆⬆⬆⬆ Full notes of Auditing ⬆⬆⬆⬆
Introduction To Auditing
Auditing:- Auditing simply refers to the evaluation of business books of accounts & vouchers. It is done to make sure whether all the financial transactions are accurately recorded. Auditing aims at finding out the errors from books of accounts of the business.
It aims at the prevention of frauds. This examination is totally unbiased & conducted by an independent person. The person doing auditing should be qualified for the job to perform it with accuracy. This can be performed either by internal employees of a business or the person who are external to business.
Auditing is conducted continuously at regular intervals by the auditor. However, auditing is not mandatory for all businesses.
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Characteristics
of Auditing:-
The main characteristics of Auditing are given below-
1. Examination:- A Critical review of the system of book-keeping accounting and internal control and its design and operation in a business enterprise to ascertain its adequacy and appropriateness to the enterprise.
2.
Comparison:-
A comparison of profit and loss account and balance sheet with the underlying
records to ensure that they are in agreement therewith.
3.
Verification:-
Verification of results shown by profit and loss account and the state of
affairs disclosed by the balance sheet.
4.
Confirmation:-
Confirmation as to compliance with the statutory requirements relevant to joint
stock companies.
5. Opinion:- Finally, the expression of opinion by the auditor by the way of report to the client stating whether in his opinion the accounts present a true and fair view or not.
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Objectives
of Auditing:-
1. Accounts and statements verification:- evaluating the fairness & accuracy of books of accounts is the primary objective of auditing. it checks each & every financial transaction thoroughly. it detects and prevents any frauds in the books of accounts. the auditor is provided with free hands to audit the books of accounts & is independent of business.
2. Checking accounting policies:- every business or organisation needs to follow some accounting policies. books of accounts are prepared according to these accounting policies. if a business has an effective accounting system, its efficiency can be increased. it is the duty of the auditor to check the accounting policies of business & express his independent opinion.
3. Error and fraud detection:- auditing helps in easy finding of errors & frauds from the books of accounts. it is the duty of management to avoid & check errors & frauds. however, sometimes it becomes difficult for management to find out the errors. it is through auditing that helps managers to find out errors & frauds. after this managers take corrective steps against these errors or frauds.
4. Improves quality of business processes:- auditing helps management in finding out the errors & frauds. management can take corrective measures against these errors. steps are taken so that they are not repeated again. this way it improves the quality of business process & improves its efficiency. also the employees of business work properly due to the threat of auditing.
5. Assurance to investors:- auditing assures that each & every figure represented in the financial statement is correct. it helps in evaluating every figure of business books of accounts. financial statements after being audited are considered trustworthy by investors. investors are fully assured by these financial statements.
6. Checking assets and liabilities:- auditing thoroughly evaluates the financial statements of the business. it helps in confirming the true value of assets & liabilities of the organisation. this helps in determining true financial position of the business. after that accordingly, proper plans can be made to achieve targets & goals.
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Types of Audit:-
1. Internal Audit:- An internal audit is one that is conducted within the organization by its own employees and stakeholders. it is conducted for accessing the effectiveness of internal processes, reviewing financial information, and ensuring whether a business is complying itself with proposed laws and regulations. internal audit is termed as a first checkpoint for every organization to check the authenticity of their book of accounts, operational processes, security protocols and it infrastructure are in line with their internal aims and external regulatory requirements.
2. External Audit:- External audit refers to the evaluation of books of accounts by external persons that are independent of the business organization. external auditors are third parties like a charted accountants and a tax agency. these all have specialized knowledge and tasked with examination of organization’s book of accounts in compliance with (GAAS) generally accepted auditing standards. external audit is mandatory in nature which need to be done due to shareholders requirements and regulatory reasons. it provides more transparency to business state of affairs and determine the accuracy of its accounting records. external audit is more preferred by investors and lenders for ensuring financial heath of business.
3. Financial Audit:- It is one of the most common type of audit which are mostly done external auditors. financial audit is also known as a statutory audit which evaluates the truth and fairness of financial statements of business organization. every business exists to generate profits and enhance wealth of their shareholders. financial audit enables investor and other stakeholders to ensure whether the business is going well or not so that their capital remain safe and yield expected returns. under it, financial transactions, procedures and balances are reviewed by auditors in order to provide their credit opinion to lenders, investors and creditors.
4. Operational Audit:- Operational audit is an internal audit performed by organization voluntarily for accessing the effectiveness of its internal operations. this audit determines whether all resources are utilized in the most efficient manner towards the achievement of organizational objectives. it monitors activities like handling of cash, materials procurement, equipment inventories and services of manpower working within the organization. scope of operational audit is broader that encompasses everything which influence attainment of goals by business.
5. Compliance Audit:- Compliance audit is a specific audit that is conducted to ensure whether business comply with internal and external standards. it examines the policies and procedures of business as per the requirements of prescribed laws and regulations. compliance audit is most commonly conducted in educational institutions and regulated industries.
6. Tax Audit:- Tax audit is one which verifies the authenticity of tax returns filed by the company. these audits are conducted by designated tax authority or government tax department. tax auditors checks for any discrepancies in tax liabilities of business for ensuring that there is no underpay or overpay of tax amount towards the tax authorities. it evaluates for any possible errors on tax return of business.
7. Information System Audit:- This type of audit is conducted for examining the reliability of security systems and structures. information system audit is most important type of audit as most of the operations of organizations are today based on it infrastructure. it ensures that accurate information is delivered by system to users and no unauthorized person have access to confidential data of organization. information system audit may be performed as a part of internal control assessment either as a part of internal audit or external audit.
8. Environmental and Social Audit:- Environmental and social audit is performed for assessing the footprints left by an organization on environment and society around it by doing its economic activities. the main objective of this audit is to ensure that business do not have any adverse effects on the environment.
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Audit Program:- An audit program is a set of directions that the auditor and its team members need
to follow for the proper execution of the audit. After preparing an audit plan,
the auditor allocates the work and prepares a program which contains steps that
the audit team needs to follow while conducting an audit. Thus, an auditor
prepares a program that contains detailed information about various steps and
audit procedures to be followed by the audit.
An audit program provides a basic plan for the
audit team regarding the entity’s business, its size, how to conduct the audit,
allocation of work among team members and the estimation of time within which it should complete the work. It
contains details regarding the relevancy of evidence, materiality level, risk
tolerance, measure of the sufficiency of the evidence. Thus, programs enhance
the accountability of the audit team and its members for the work performed by
them.
An auditor may revise the audit program if he
considers it necessary due to prevailing circumstances. The size of the entity, type of business or services in which entity deals, applicable laws, the
effectiveness of internal controls, and various other relevant factors, also
affect an audit program. Thus, an auditor prepares an audit program according
to its scope of work. The minimum essential work to be performed is the
Standard Programme. However, there is no set audit standard program applicable
in all the circumstances.
Audit working papers document the activities that the audit
program performs. Audit working papers support the work performed by the
auditor for providing assurance that the audit was performed in accordance with
all the applicable standards on auditing (SA’s). It helps the auditor in the
proper execution of audit work.
An audit program covers
various steps of auditing in an audit program like the assessment of internal control, ascertaining accuracy and
reliability of books of accounts, inspection, vouching and verification,
valuation of assets and liabilities, scrutiny of
accounts, presentation of financial statements, and submission of reports and
related disclosures.
Advantages of the Audit Programme
1. An audit program helps in ensuring that all-important
areas are considered while conducting the audit.
2. An audit program helps an auditor in the allocation of work among its team members according to their skills
and competency.
3. It enhances the accountability of audit team members
towards work performed by them
4. An audit program also reduces the scope for
misunderstanding among team members regarding the performance of audit work.
5. It helps the auditor in checking the status of audit
work, its progress, how much it is left for performance while conducting the
audit.
6. Auditor prepares audit working papers which contains a
record of various audit procedure applied which serves as evidence against the
charge of negligence.
7. Audit program enables the auditor to keep a
record of useful information specifically for future audit and references.
Disadvantages of Audit Programme:-
1. Rigidity:
There is no set standard audit program that can be applied in the case of every
entity. However, programs differ for different types of entities. Every entity
has its own problems. Therefore, we cannot apply for a single audit program in
the case of all business entities.
2. Reduces the Initiative of Efficient Staff: – A program reduces the initiatives of efficient and competent
staff. Thus, staff members cannot make changes to the audit plan and cannot make suggestions for it.
3. Audit Work becomes Mechanical: The program becomes mechanical when it ignores
other aspects like internal control.
4. Overlooking New Areas: A program may overlook the new areas. With the
change in time and technology, new problems may arise that an audit program may
not consider.
Types of Audit Programs:- The two
main types of audit programs are:
1.
Fixed Audit Program
2.
Flexible Audit Program
1.
Fixed Audit
Program:- A fixed
audit program is a set of standardized instructions that need to be followed by
the auditor while conducting the audit. It includes all possible audit
procedures to be followed during the audit although all of them may not be
applicable in a situation. A fixed audit program aims to take care of every
possible audit situation that may arise during an audit. The disadvantage of
the fixed audit program is that it is very rigid and nothing is left to the
discretion of the audit team. Also, it is difficult to follow the same audit
program even in the same organization over the years, as the conditions in the
organization are likely to change.
2.
Flexible Audit
Program:- A flexible audit program
is one that does not prescribe the exact audit procedure to be followed by the
auditors while conducting an audit. It simply gives an outline of the scope,
nature and limitations of the audit assignment to be conducted. Also, the
nature of work to be performed by each person of the audit staff is not
predetermined under it. The auditors decide most of the things as the work
proceeds and the reliability of procedures and internal control system become
known to the auditor. Thus, it allows the auditor to develop, adapt and modify
the program according to the situation. Also, there is a scope for some
initiative by the audit staff if the situation so requires. However, it is
possible that some important audit procedures may not be followed.
Audit Notebook:- Audit Note Book is a register maintained by the
audit staff to record important points observed, errors, doubtful queries,
explanations and clarifications to be received from the clients. It also
contains definite information regarding the day-to-day work performed by the
audit clerks. In short, audit note book is usually a bound note book in which a
large variety of matters observed during the course of audit are recorded. The
note book should be maintained clearly, completely and systematically. It
serves as authentic evidence in support of work done to protect the auditor
against any legal charge initiated against him for negligence. It is of immense
help to the auditor in preparing audit report. It also acts as a valuable guide
for conducting audit for future years.
Contents of Audit Note Book
1.
A list of the account books normally used and maintained.
2. Names of the
principal officers, their duties and responsibilities.
3. Nature of business
carried on and important documents relating to the constitution of business
like Memorandum of Association, Articles of Association, Partnership deed etc.,
4. Extracts of minutes
and contracts affecting the accounts.
5. Extracts of
correspondence with statutory authorities.
6. Copy of audit
programme.
7. Accounting methods,
internal control and internal check system in operation.
8. Routine queries
like missing receipts and vouchers etc.
9. Details of errors
and frauds discovered during the course of audit.
10. Points to be
included in audit report.
11. Details of all
important information to be used as reference for future audits.
12. Date of
commencement and completion of audit.
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Meaning
of Routine Checking:- In every
organisation/enterprise whether it is of a small size or a big
size, certain important books of accounts are bound to be
maintained. These books of accounts are books of original entry, i.e.,
Journal, Prime Entry i.e., Ledger Book, Cash Book and other Subsidiary
Books. Checking of these books by an auditor or his staff is called Routine Checking.
The
transactions recorded in these books are ticked by the auditor or his
staff, after being satisfied about their correctness.
Routine Checking involves:-
- Checking of castings, sub-castings, carry forwards and. other
calculations in the books of original entry i.e., Journal and its
Subsidiary Books.
- Checking of postings into the Ledger Book.
- Checking of castings and balances in the Ledger Book.
- Checking of transfer of balances from the Ledgers to the
Trial Balance.
Routine
Checking is done by the staff of the auditor, which is usually junior
staff. It is mostly mechanical in nature, but its importance is great.
It forms the basis of the audit report as the final checking depends upon
it.
Objectives
of Routine Checking:-
- Routine Checking discovers
clerical errors and ordinary frauds. It is quite useful in
ascertaining arithmetical accuracy of the books of accounts.
- It also ensures, that
no alteration in figures has been made by the staff of the
enterprise, after these have been checked and verified by the auditor
or his staff.
- It comprises a
through checking of the original and prime books, which are the basis of
drawing final accounts. When these books have been routine checked,
it is presumed that the final accounts prepared depict a true and
fair state of affairs of the enterprise.
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Adoption of test checking methods by auditors:-
The decision to adopt
testing methods depends entirely on the auditor’s judgement and discretion
depending on the individual cases and circumstances.
Test checking should be
applied and carried out intelligently and carefully; otherwise, it may lead to
dangerous consequences. However, the use of test checking depends much upon the
system of internal check in operation and the intelligence of the auditor.
Safeguards for the Application of Test
Checking:- While
applying test checks the auditor should take the following precautions:
a) As far as possible sample transactions should be selected from every book.
b)
The
selection of transactions should be so distributed that the work of almost all
the clerks of the client is checked.
c)
The
items should be selected at random.
d)
As
fraudulent manipulations are common during the first and last months of the
period under audit, the entries made during these periods should be checked
thoroughly.
e)
In
the selection of entries and accounts for applying test checks, care should be
taken to check the different portions of the work at each audit.
f)
Cash
book and pass book should be checked thoroughly.
g)
The
auditor should select the transactions on his own. He should not consult the
staff of the client while selecting the transactions.
Advantages of Test Checking:- Test checking enjoys the
following advantages:
a)
It
saves time and energy.
b)
If
the selection of transactions is done intelligently, test checking is useful
and purposeful.
c)
The
volume of work is reduced. So the auditor can carry on many audit
simultaneously.
d)
It
helps the auditor to arrive at a definite conclusion in regard to the true and
fair view of the state of affairs of the concern.
e)
It
helps in reducing the cost of audit.
Disadvantages of Test Checking:- Test checking suffers from the
following disadvantages:
a)
It
is not possible to detect all the errors and fraud.
b)
The
clerks of the client may become careless because they know that their work will
not be checked in detail.
c)
Under
test checking, although the auditor checks the whole of the work through test
checking, suspicion and doubt will remain in his mind.
d)
It
is of no use if proper and effective systems of internal checks and controls
are not being adopted in business.
e)
It
is not suitable for small business concerns.
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Unit II
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Internal Check :- Internal Check is an integral function of the internal control system. It is an arrangement of duties of the staff members in such a way that the work performed by one person is automatically and independently checked by the other.
Objectives Of Internal Check
Following are the main objectives of Internal Check −
To protect business from carelessness, inefficiency and fraud.
To ensure and produce adequate and reliable accounting information.
To keep moral pressure over staff.
To minimize the chances of errors and frauds and to detect them easily on early stage if it is committed.
To divide the work in such a way that no business transaction should be left unrecorded.
To fix the responsibility of every clerk according to the division of work.
Principles of Internal Check
Let us now understand the principles of Internal Check −
Responsibility − Allocation of business work amongst the various staff members should be done in such a way that their duties and responsibilities should be judiciously and clearly divided.
Automatic check − Automatic checking of work of one employee by another forms part of a good Internal Check system.
Rotation − Transfer or rotation of employees from one seat to another must be followed under good system of internal control.
Supervision − Prescribed procedures and Internal Check should be strictly supervised.
Safeguard − To safeguard files, securities, cheque books is also recommended in Internal Check.
Formal Sanction − Without formal sanction, no deviation should be allowed from the established procedures.
Reliance − Under good system, too much reliability on one employee should not be there.
Review − From time to time, system of Internal Check should be reviewed to introduce improvement.
Advantages of Internal Check
Following are the advantages of a good system of Internal Check −
From the Owner’s Point of View
Good system of Internal Check provides accurate, reliable and genuine accounting record and data to the owner of the business on which he can rely upon.
Economy in operations and overall efficiency in system due to good Internal Check may result in more profits.
From the Auditors Point of View
Due to efficient system of Internal Check, the statutory Auditor can avoid deep and detailed checking of transactions. He may rely on test checks, hence Internal Check provides convenience to Auditor.
Since the Balance Sheet and the Profit and the Loss account is prepared without wasting of time, hence quick preparation of final accounts is possible.
For the Business
Moral Check − Great check to commission of errors and frauds is possible with knowledge of subsequent checking of work of each employee by others.
Detection of Errors and Frauds − This helps in early detection of errors and frauds because work of each clerk is checked by another automatically and no one is allowed to do complete work from the beginning to the end.
Proper Division of Work − According to qualification, experience and area of specialization of work, proper and rational distribution of work among the members of staff is done.
Increases Efficiency − A good internal control system provides increased efficiency of work coupled with overall economy.
Disadvantages of Internal Check
Let us now discuss the disadvantages of Internal Check −
It is costly for small business units.
If Internal Check system is not properly organized, there are chances of disorder in the working of business.
There might be instances where the quality of the product and the work is compromised with by the staff members due to greater importance to faster results.
An Auditor cannot be relied on if he does not conduct tests with procedures of his own.
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Internal Controls:- Internal control consists of five
interrelated components. This is derived from the process specified by the
management to run an operation or function and also integrated with other
management functions. Although the components apply to companies from small to
mid-size to large companies, they may implement them differently at all stages.
Internal
controls are designed in a way to provide reasonable assurance regarding the
achievement of objectives in the following categories:
- Effectiveness and efficiency of the
operations.
- Reliability of financial reporting.
- Compliance with the applicable laws
and regulations.
Types of
Internal Control Audit
· Detective
Control:- This type of control is designed to detect the
errors that might have occurred. This will help in analyzing the discrepancies
in financial reports. Detective control identifies existing problems. When an
audit is performed, it is considered as an example of detective control.
· Corrective
Control:- In this type of internal control audit, if you find
a discrepancy, it will take measures to prevent the recurrence of this error.
For example, if there is a typing error in the payroll that results in
employees being paid and also an incorrect amount. For the correction of
payroll, the associate needs to address this problem and perhaps provide
additional training for the prevention of future discrepancies. This means that
you have performed a corrective control.
· Preventative
Control:- After performing the internal control audit and
correcting the discrepancies, the controls can be put in place to prevent
future errors. With the preventive controls, you can now design controls to
help in preventing errors from occurring in the future. To keep proper check-in
errors and to prevent any type of mistakes, the duties must be segregated to
different employees to authorize and record transactions.
Procedure for Internal
Control Audit:-
Physical Controls:- These
controls include restrictions on access to buildings or any specified office or
factory areas or equipment, such as turnstiles at the entrance to the premises,
swipe cards, and passwords. This also includes physical restraints, such as
fixing non-current assets to prevent removal.
Authorization and approval
limits:- Many employees need to adhere to the authorization limits, and
these are usually specified in terms of employment.
Segregation of duties:- To
limit the risk of fraud and errors, the duties related to cash handling are
generally segregated. For instance, in the post room of an organization that
receives money by post, the employee recording the cash will be a different
person from the receiver of money. Segregation is likewise pertinent to different
capacities. At the official level, it is presently best practice to segregate
the jobs of administrator and CEO, and as an independent assurance function,
internal audit must be completely segregated from the finance department, with
a reporting line directly to the board of directors or the audit committee.
Management Controls:- Manager
controls are operated by the managers. Performance management of the
subordinates is also an integral part of many managerial positions. Further
down the chain of command, supervision controls are exercised with respect to
day-to-day transactions. Organization controls operate according to the
configuration of the organization chart and line/staff responsibilities.
Arithmetic and accounting
controls:- These controls ensure accurate recording and processing of
transactions. The procedures here
include reconciliations and trial balances.
Human Resources (HR) Controls:- HR controls are implemented for all aspects of HR management. Some of the examples are qualifications verification, references, and criminal record checks on new employees, checks on staff for competence, and effective training.
Auditing Verification:- Verification means the inspection of assets appearing in
financial statement, whether the assets are according to legislation or not.
Verification of assets and liabilities are done to confirm the following:-
§ Existence
§ Ownership
§ Proper Valuation
§ Possession
§ Freedom from
encumbrances
§ Proper recording
Objective of Verification:- Following are the objectives of verification:-
·
Confirmation about the existence of assets
through physical verification.
·
Legal and official documents relating to
assets and checked to confirm the ownership of assets.
·
It is confirmed that assets are free from any
charge of Lien.
·
To confirm that assets are properly accounted
for in the books of accounts.
·
Proof regarding proper valuation of assets.
Vouching and Verification:- Both are considered to be same thing but there are lots
of difference between vouching and verification.
Vouching relates to confirmation of the correctness and
authenticity of accounting entries as appeared in the books of accounts whereas
verification confirms the existence, ownership and valuation of assets as
appear in the balance sheet. The Auditor’s duty is not only vouching the
entries appearing in the books because vouching cannot prove the existence of
the related assets or liabilities at the balance sheet date.
Verification of Liabilities:- Following are the objectives of verification of
liabilities:-
·
Creditors reflect a true position as to
liabilities of the business.
·
All liabilities are disclosed in the balance
sheet whether recorded in the books or not.
·
Value of liabilities is according to the
generally accepted accounting principles.
·
Liabilities are properly classified and
disclosed in the balance sheet.
Confirmation and
Verification:- the difference between
confirmation and verification as follows:-
Confirmation:- Auditor requires confirmation from third party and management
about any fact or figure. Few of the examples in which the Auditor requires
confirmations are as follows:-
a.
Confirmation from debtors about balances
b.
Confirmation from creditors about balances
c.
confirmation from banks about Bank balances , fixed deposits,
interest accrued, overdraft or cash credit limit balance ,etc
d.
Confirmation from financial institution about loans and
interests
e.
Confirmation from management about contingent liabilities etc.
Verification:- Verification means inspection of assets by the Auditor and it includes identification, weighing and counting of Assets. Following items require physical verification-
· · Land and building
·
Plant and machinery
·
Stock in hand
·
Stores and consumables
·
Investments
·
Securities
·
Cash in hand
· Bills receivables
Thus, confirmation and verification are altogether different
processes of Audit and both are equally important too.
Valuation of assets
and liabilities:- Is estimation of
various Assets and liabilities. It is the duty of auditor to confirm that
Assets and liabilities are appearing in the balance sheet exhibiting their
proper and correct values. In the absence of proper valuation of Assets and
liabilities, they will exhibit either overvalued or under-valued.
It is therefore required for an auditor to exercise reasonable
care and skill to analyse the basis of valuation from technical experts and
satisfy himself that assets shown in balance sheet or properly valued
accordance with the Generally Accepted conventions and accounting principles.
Components of
Valuation:- Methods of valuation of
assets are as hereunder:-
a)
Cost Price:- This is
the cost price paid at the time of acquisition of assets plus The freight
charges, octroi charges, and commissioning and installation charges, etc. to
bring that asset in usable condition.
b)
Book Value:- This is
the value of appearing in the books of accounts, the cost price less
depreciation.
c)
Realizable Value:- A Value
which can be realised from the sale of assets.
d)
Market Value:- A value
which the asset can fetch at the time of sale.
e)
Replace Value:- A value
on which an asset can be replaced.
f)
Conventional Value:- It means
the cost price less depreciation written off ignoring any kind of fluctuation
in the price.
g)
Scrap Value:- If the
asset is not working condition and sold as scrap, then the sale value of asset
is scrap value.
UNIT III
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Private
Limited Company Audit:-
The
statutory audit:- The statutory audit must be done before the
AGM of the company is conducted. The statutory auditor needs to submit the
audit report to the board. The audit report should be attached with the
company’s financial statements and filed with the ROC. The due dates are as
follows:
i.
The audit
report must be attached to form AOC-4 (financial statement) and filed with the
ROC within 30 days of the AGM.
ii.
The
form MGT-7 (annual return of the company) must be filed within 60 days of the
AGM
iii.
The due
date for holding AGM is before or on 30 September every year
Internal Audit:- There is no due date for conducting the internal audit. The internal auditor is required to submit a report to the board before the AGM.
Cost Audit:- The cost audit report is to be submitted to
the board within 30 September every year in form CRA-3. After receiving the
cost audit report, the board will consider and examine the cost report. The
board must submit the cost report with relevant information to the Central
Government within 30 days of receiving the cost audit report in form CRA -4.
Report on Compliance form for Audit
Requirements:-
|
Forms |
Purpose |
|
Form ADT-1 |
Appointment of Company Auditor |
|
Form AOC-4 |
Annual filing of company financial
statements |
|
Form MGT-7 |
Filing of company annual return |
|
Form CRA-2 |
Appointment of cost auditor |
|
Form CRA-3 |
Submission of cost audit records to the
board |
|
Form CRA-4 |
Filing of cost audit report |
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POWER OR RIGHTS OF
THE COMPANY AUDITOR:– Following are
the rights of company auditor:-
- Right
to access at all the times to the books and accounts and vouchers of the
company whether kept in head office of the company or elsewhere and shall
be entitled to require from the office of the company such information and
explanation as the auditor may think necessary for the performance of his
duties as auditor.
- The
auditor shall make a report to the members of the company on the accounts
audited by him and on every balance sheet or profit and loss account which
are laid before the company in general meeting.
The said account give the information required by the act in the manner so
required by and gives a true and fair view.
- Right
to receive notice of and to attend every general meeting of the company.
- Right
to speak to such general meeting when the accounts are being discussed.
- He
has right to be indemnified for any liability incurred by him in defending
himself against civil and criminal proceedings by the company.
- Right
to visit branches of the company to audit the accounts if no other auditor
has been appointed to audit branch accounts.
- Right
to take legal and technical advice wherever necessary.
- Right
to receive remuneration for the work done by him.
- Right
to sign the report.
- Right
to keep the working notes with him.
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LIABILITIES
OF AN AUDITOR:- Following are
the liabilities of an auditor:-
1)
If an auditor is
guilty of negligence in the execution of his duty, he may be held liable to
make good any damage resulting from that negligence.
2)
An auditor is
appointed to detect frauds, errors etc. He is responsible on account of
negligence in performance of his duties.
3)
Any clause in the
agreement between the company and the auditor whereby the auditor is freed from
liability has been declared void.
4)
If in the course of
the winding up of a company it appears that the auditor has been guilty of any
misfeasance or breach of trust in relation to the company, he may be held
liable as an officer of the company. The court may examine into his conduct and
compel him to contribute such sum to the assets of the company by way of
compensation in respect of the breach of the trust as the court thinks fit.
5)
If the dividends have
been improperly declared and paid of the accounts audited by him and which did
not show a true and fair picture and were incorrect and misleading, he will be
liable to refund such an amount.
6)
Where a prospectus is
issued inviting persons to subscribe for shares or debentures of a company, an
auditor is liable in respect of an untrue statements which is made by him as an
expert, to pay compensation t every person who subscribes for any shares or
debentures on the faith of the prospectus for any loss or damages, he may have
sustained by reason of untrue statements included therein.
7)
If an auditor makes a
false statements, particularly knowing it to be false or omits any material
fact, knowing it to be material, he may be punishable with imprisonment or a
fine.
8)
If an auditor is a
party to a untrue statements in prospectus, he shall be punishable with
imprisonment or fine or both.
9)
Under Indian Penal
Code – whosoever issues or signs any certificate required by law to be given or
signed or relating to any fact which such certificate by law, admissible by
evidence. Knowing or believing that such certificate is false in any material
point, shall be punishable in the same manner as if he gives a false evidence.
DUTIES
OF COMPANY AUDITOR:-
Duties of an auditor are as under:-
1)
To make the report to
the members of the company on the accounts examined by him which should contain
all the matters as the companies act.
2)
Auditor should perform
his duties as per articles of association of the company.
3)
He should certify the
statements included in prospectus whenever the same is issued.
4)
He should certify the
contents of the statutory report.
5)
To comment on all such
material violations of the law or sound accounting practices which can
reasonably effect directly or indirectly the fortune of the accounts of the
company.
6)
An auditor must know
the provisions of memorandum and articles of association of the company.
7)
He not only should
verify the arithmetic accuracy of the accounts but should check the fairness of
accounts as well.
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Audit Report:- An audit report is an opinion of the auditor on
his analysis after reviewing all the company’s financial statements. An audit
report is an instrument used by the auditor to convey his opinion on the
accumulated results obtained after evaluating the financial statements of a
client. It is the final product given at the conclusion of the audit
proceedings. No audit proceeding can be concluded successfully without the
submission of audit report from the auditor’s end. The Companies Act, 2013 makes
it mandatory that an audit report should be duly signed by the auditor and must
be laid down before the members of the company at the time of Annual General
Meeting.
Audit Certificate:- An audit
certificate is a statement given by an auditor providing confirmation about the
accuracy of specific information sought to be verified by the client. The
auditor in an audit certificate does not give an opinion or estimate about the
accuracy. Through the instrument of audit certificate, an auditor certifies the
accuracy of particular information. In audit certificate, since the auditor
vouches for the accuracy regarding particular information, legal liability is
attached to the auditor. The audit certificate is not given for all the books
of accounts for the entire year. It is given for specific portion of the
financial transactions.
Ten
Major Differences between an Audit Report and Audit Certificate
Following are the ten major
differences that exist between an audit report and audit certificate:
- Meaning: An audit
report is the summary of information and review of the same done by an
auditor from the given financial statements to provide a clear picture
about the company’s affairs to those who do not know about it. An audit
certificate is an instrument though which an auditor vouches for the
accuracy of particular information provided by the client.
- Extent of
Guarantee:
Since an audit report is based on the opinion of the auditor regarding the
financial affairs of the company, there is no guarantee about the
financial accuracy of the books of accounts. On the other hand the audit
certificate is issued to validate the accuracy of the data provided by the
client in an objective manner. Therefore, the extent of guarantee is very
high in case of an audit certificate.
- Opinion: The audit
report provides the client an opinion regarding the status of the
financial position of the company based on the financial statements
provided by the client. However, as audit certificate does not provide any
opinion, instead it validates the correctness of some particular
information.
- Scope of
audit:
An auditor’s scope is very wide in case of an audit report where he has
to cover the entire books of accounts of the company for an entire year
and in case of an audit certificate scope of audit is very limited since it
has to audit specific information from a small portion of accounts and
does not extent to the whole of business accounts.
- Room for
advice:
There exists a scope of advice from the auditor in case of an audit report
regarding the possible improvements and suggestions as to how company can
better manage its financial affairs. This is not the case in case of an
audit certificate an audit certificate is merely an objective statement spelling
whether the accuracy exists or not in the information provided by the
client. This leaves no scope for advice on improvement from the auditor’s
end.
- Liability of
the auditor:
No liability accrues in case of an audit report since the auditor is only
providing his opinion on the general financial functioning of the
business. The auditor does not vouch for the authenticity of the financial
statements. Since there is no vouching for accuracy, there exists no
liability. However, in audit report the auditor certifies the accuracy of
the information provided by the client. Here the auditor’s audit
certificate vouches for accuracy of the finding made by the auditor. This
attracts liability on the auditor’s end.
- Basis of
verification: an audit report is prepared on the basis of
facts, assumptions and estimates adopted by the auditor which can differ
from auditor to auditor. An audit certificate is prepared based on actual
facts where the auditor guarantees correctness of the facts.
- Characteristics: Since an
audit report is based on the estimates and opinion of the auditor, it is
highly subjective in nature whereas an audit certificate is based only on
the facts and figures which need to be verified. Therefore, it is highly
objective in nature.
- No specific
format:
An auditor needs to comply with the Standards of Auditing while preparing
an audit report whereas in case of an audit certificate there is no
specific format which needs to be adhered to except in few statutory
cases. An auditor is independent to form his audit certificate as he finds
reasonable.
- Periodicity: An audit
report is prepared every year at the closing of financial year according
to the mandate of the statute. This is not compulsory in case of audit certificate
where no such mandate has been provided in the statute to issue one. An
audit certificate can be issued at any time of the year based on the needs
of the business or any statutory requirement.
Conclusion
Both the terms audit report and
audit certificate are similar in nature. However, the above discussion has
clarified both the concepts of the concepts of audit report and audit
certificate to a great extent. An audit report is a subjective opinion of the
auditor and can differ from auditor to auditor whereas the audit certificate is
a step forward as it is a certification from the auditor’s end regarding the
accuracy of the financial statements. This makes the auditor liable for his
certification in the case of audit certificate and absolves him for any
liability in case of audit report.
Special Audit:- A Special Audit can be defined as a tightly
defined type of audit that is conducted in order to probe into a specific area
of the organization’s activities. As a matter of fact, it can be seen that this
type of audit is mainly initiated by a third party, like a government agency or
the tax authority.
However, it can also be authorized by
any other relevant entity, including any internal authorities that might be in
a position to do so. Examples of special audits include Compensation audits,
control audits, cost audits, fraud audits and royalty audits.
The Need for A Special Audit:- Special
Audits are mostly needed when some abnormal behavior is suspected within the
organization. Mostly, they are called for when it is suspected that the laws
and regulations have been overlooked pertaining to finances, or financial
management within the organization. However, they are not only restricted to
cases pertaining to fraud.
They can also be conducted when there are other
institutional violations that might include pertaining to duties,
authorizations, internal control procedures or responsibilities of the Senior
Management. In the same manner, Special Audits can also be related to corporate
reorganization or bankruptcy.
Scope of Special Audit:- As mentioned
earlier on, it can be seen that a special audit is conducted out of routine,
with a specific or a special purpose. However, these special purposes are quite
varied in their nature, and the overall outcomes based on those special audits.
- Compliance Audit – This is
mainly conducted when there is a need to examine the policies and
procedures to check if they follow internal or regulatory standards.
- Construction Audit – This
analyzes the costs that occur for a given construction project. In the
same manner, this also tracks down the actual amount that is paid to
contractors, suppliers, and other reimbursement that takes place in this
regard.
- Information Systems Audit:-
Information System Audit is mainly conducted when there is a need to
review the overall controls present in software development. Additionally,
it also involves a review of controls regarding software development, data
processing and the overall access to computer systems.
- Investigative Audit:-
Investigative Audits take place when there is a need to find details of a
specific event or an incident within the company, that was suspicious.
- Tax Audit:- This Audit is mainly initiated to analyze the overall tax returns that are submitted by an individual or business entity. The main rationale is to see if the paid tax is actually valid.
Bank Audit:- Bank audit is a procedure performed by an auditor appointed
by RBI and ICAI to verify the financial statements of the banking institutions
and to verify whether the banking concerns are following the law and
compliances or regulatory framework applicable on them or not.
Regulatory framework under which banks has to perform their work are mentioned below:
1.
Banking Regulation Act, 1949.
2.
RBI Act, 1934.
3.
Companies Act, 2013.
4.
Income Tax Act, 1961.
5.
Information Technology Act, 2002.
6.
SBI Act, 1955.
7.
SBI Subsidiaries Act, 1959.
8.
Banking co. Acquisition and transfer of undertaking Act, 1970
(amended in 1980).
9.
SARFAESI Act, 2002.
10.
Credit information companies’ regulation Act, 2005.
11.
Payment and Settlement Act, 2007.
Procedure
of Bank Audit
Banking sector is a dynamically changing sector. Thus, it
requires proper and effective audit measures to understand the exact financial
condition of the banks for which the following procedure is adopted:
RBI and Indian Institute of Chartered Accountants of
India (ICAI) together scrutinise and appoint an auditor or audit firm for the
audit of the bank after obtaining indebtedness declaration from a respective
firm or an auditor.
The audit firm or an auditor cannot assign with any other
statutory audit in the year they are appointed as a bank auditor. Before
initialising the audit, the firm needs to establish the undertaking of
engagement terms describing the time period of audit term. However, as per ICAI
Act, 1949 before getting engaged the auditor need to communicate with the
previous auditor of the bank in writing for taking his consent.
After that, the new auditor will review the initial
opening balance, and if he founds any material misstatement or errors affecting
financial statement, he can assert his point of view in his audit report by
way of qualified or adverse.
Types of Bank Audit:- Audit can be of following types:-
1. Concurrent Audit:- Banks
deals with a large number of transactions on a daily basis whose examination is
also necessary on a continuous basis for determining the accuracy of the
financial statement. For conducting such audit an external auditor is appointed
by the bank known as a concurrent auditor who performs an audit of the
transaction on a monthly basis.
The main objective of conducting a concurrent audit is to
ensure compliance with the internal systems, procedures and the guidelines of
the bank. Concurrent audit is always performed on a continuous basis to examine
whether proper guidelines are following by the banks or not such as proper
documentation, proper cash verification, NPA classification, etc.
2. Internal Audit:- With
the concurrent audit, banks also perform an internal audit for which they
appoint an internal auditor to make a regular check on the financial activities
of the bank throughout the year.
One of the prominent sectors of internal audit is
information system audit, which is becoming a necessary part of a banking
system with the rapid growth of computerised banking functions, and it is
important to keep an eye on such system on timely intervals to check their work
ability.
Therefore, the auditor should also have a basic knowledge
of banking software’s so that he may identify the errors easily without any
help of bank employee as they sometimes also try to distract the auditor for
overlapping their mistakes.
3. Statutory Audit:- Statutory
Audit itself comprises the word statute, which means regulation. Thus, it can
be understood easily that the statutory audit is a mandatory audit defined
under the law or Banking Regulation Act, 1949. Under Statutory Audit ICAI and
RBI altogether assigns the banks to an auditor who is generally a practising
chartered accountant and this auditor performs year-end audit in all branches
assigned to them by the ICAI from the end of March to first or second week of
April.
Some of the important aspects which should be covered
under statutory audit is cash verification, tax-related issues, loan accounts
verification. After that, an auditor prepares an audit report defining his
opinion on a financial statement for which he has been allotted a specific time
under which he has to perform an audit and submit his report.
Audit of Educational Institutions:- The auditor may
thoroughly study the trust deed of the trust to which the school or the college
belongs and in the case of the audit of an University, he may study the Act of
Legislature and the rules that are applicable to that university.
Records to be verified by Auditor in Educational Institutions:- To verify the above, the auditor may examine the following books and records:
a.
Minutes
of the managing committee.
b.
Students’
fees Register.
c.
Cash
Book and counterfoils of receipts for fees, caution deposit, fine etc.
d.
Rental
and Lease agreements.
e.
Correspondence
and other documents relating to legacies, grants etc.
Role of an Auditor in Audit of
Educational Institutions:- While examining the above
records, the auditor has to ensure the following:
a. He shall evaluate and confirm the
effectiveness of internal check system of accounting of the receipts.
b.
He
should verify that the fees are collected from all the students and if there is
any concession, the same is granted by a person who is so authorized.
c.
He
should also ensure that the fees received in advance and fees receivable are
properly accounted and irrecoverable fees are written off under the
authorization of the appropriate person.
An auditor may ensure the following while
verifying records of Educational Institutions:
·
That
the admission fees are credited to capital fund A/c.
·
That
the fines and penalties are collected after due authorization and accounted
properly.
·
That
a separate register is maintained for caution deposit received from students
and the refund due out of caution deposit is refunded to the students.
·
That
long outstanding tuition fees, hostel fees etc., are periodically reviewed
and reported to the management for
further action.
·
that
the funds created for specific purpose are maintained separately, the
investments representing such funds are
kept separately and the surplus
income from such funds are
accumulated and invested along with the capital
fund maintained for the
purpose.
·
that
the amounts that are refundable to the students are shown as liability in
the Balance sheet.
·
that
all the capital expenditure are approved by the managing
committee.
·
that
the internal control procedure relating to purchase of stationery,
provisions,
clothing and other items are effective and chances of pilferage and
fraud are minimum.
·
The
auditor may verify all the expenditure in the usual manner and examine
the payment out of funds created for specific
purpose thoroughly and ensure
that the receipts and
payments out of this funds are accounted and presented
separately in the Balance
Sheet.
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Audit of Co-operative Societies:- The co-operative societies Act,1912, a
central act, contain fundamental law regarding the formation and working of
co-operative societies in India and is applicable in many states with or
without amendments.
Co-operative
society is a business organization with a special mode of doing business , by
pulling together all the means of production co-operatively , eliminating the
middlemen and exploitation from outside force.
Audit as per Section 17 of the Co-operative
Societies Act , 1912.
- The
registrar shall audit or cause to be audited by some person authorized by
him, the accounts of every registered society at least once a year.
- The audit
under shall include an examination of overdue debts , if any, and a valuation
of assets and liabilities of the society.
- The
registrar, the collector or any person authorized shall at all the times
have access to all the books , accounts, papers and securities of a
society, and every officer of the society shall furnish such information
in regard to the transactions and working of the society as the person
making such inspection may require.
REGISTRAR
means a person appointed to perform the duties of registrar of co-operative
societies under this act.
The following
points are required to be kept in mind in connection with the audit of
co-operative society:
- Qualification of auditor: Apart from
the chartered Accountant within the meaning of the Chartered Accountancy
Act, 1949, some of the state co-operative Acts have permitted persons
holding a government diploma in co-operative accounts or in co-operation
and accountancy and also a person who has served as an auditor in the
co-operative department of government to act as an auditor.
- Appointment of the auditor: An auditor
of co-operative society is appointed by the registrar of co-operative
societies and the auditor so appointed conducts the audit in behalf of
registrar and also submits his audit report to him as well as to the
society.
- Books, Accounts and other records of co: operative societies-under section 43(h) of the
Act . a state government can frame rules prescribing the books and
accounts to be kept by a co-operative society.
Special
features of co-operative Audit:- The
general process of auditing involved in audit work such as checking of posting
, ascertainment of arithmetical accuracy ,vouching , verification of assets and
liabilities and final scrutiny of balance sheet are well known by everyone. But
in case of co-operative society audit certain special features are there to be
borne in mind while doing audit of it. These features are as follows:
- Examination of overdue debts: Auditor
shall report these overdue debts as for period from 6 months to 5 years
and more than 5 years. Furthermore, analysis is done by the auditor in
viewpoint of recovery of these debts and these are classified as good debt
or bad debts. Now auditor is also liable to checkout whether provision
regarding bad debts is provided or not and if provided then that is
appropriate or not for current situation of bad debts of the society.
- Overdue interest: Overdue
interest should be excluded from interest outstanding and accrued due
while calculating profit. In practice an overdue interest reserve is
created and the credit of overdue interest credited to interest account is
reduced.
- Certification of bad debts: As per the
law, bad debts can be written off only when they are being certified by
the auditor as bad where the law requires it and if not then managing
committee of society must authorize the write-off.
- Valuation of assets and liabilities: They will
have to ascertain the existence , ownership and valuation of assets. Fixed
assets should be valued at cost less adequate provision for depreciation.
The incidental expenses incurred in acquisition and the installation
expenses of assets should be properly capitalized. The current assets be
valued at cost or market price , whichever is lower. Regarding
liabilities, the auditor should see that all the known liabilities are
brought into the account, the contingent liabilities are stated by way of
a note.
- Adherence to co-operative principles: The auditor
will have to ascertain that how far the objective for which the
co-operative organization is set up , have been achieved in the course of
its working. The assessment is not necessary in terms of profits , but in
terms of extension of benefits to its members who have formed it. While
auditing the expense , the auditor should see that they are economically
incurred and no wastage of funds. The principle of propriety audit should
be followed for this purpose.
- Observations of the provisions of the act and rules: The
financial implications of the infringements which are pointed out by the
co-operative societies Act and rules and bye-laws, should be assessed by
the auditor and they should be reported properly.
- Verification of member’s register and examination of their
pass books: Examination of the entries in member’s pass
books regarding the loan given and its repayment and confirmation of loan
balances in person is very much important in co-operative societies to
assure that the entries in books of accounts are free from manipulation.
- Special report to registrar: During
the course of audit if the auditor notices that there is some serious
irregularity then he has report this irregularity to the registrar by
drawing his specific attention to the point. The registrar on receipt of such
special report may take necessary action against the society.
- Audit classification of the society: After
the judgement of an overall society, the auditor has to award a class to
the society. This specific class is awarded by the auditor as accordance
to the criteria given by the registrar. It is to be noted that if
management is not satisfied by the class given by the auditor then they
may appeal to the registrar.
- Discussion of draft audit report with managing committee : On
conclusion of the audit , they should ask to the secretary of the society
to convene managing committee meeting to discuss the audit draft report.
The audit report should never be finalized without the discussion with the
managing committee.
FORM OF
AUDIT REPORT:- The form of audit report to
be submitted by the auditor , as prescribed in various states , contains a
number of matters which the auditor has to state or comment upon. In addition
to the report the auditor has to attach schedules to the report regarding the
following Information:
- All
transactions which appears to be contrary to the provisions of the Act ,
the rules and bye-laws of the society.
- All sums
which ought to have been, but have not been brought into account by the
society.
- Any
material, or property belonging to society which appears to the auditor to
be bad or doubtful of recovery.
- Any
material, or property belonging to society which appears to the auditor to
be bad or doubtful of recovery.
- Any
material irregularity or impropriety in expenditure or in the realization
or monies due to society.
- Any other
matters specified by the registrar in this behalf.
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Efficiency Audit:- Efficiency Audit may be
defined as a systematic examination of management’s efforts to accomplish goals
efficiently and effectively in order to determine adherence to the management
policies and stated requirements.
Efficiency audit is so
designed as to determine the potential danger spots, to highlight possible
opportunities, to eliminate waste or unnecessary loss or to observe the
executive performance and evaluate the effectiveness of executive control.
Performance
and Efficiency Audit’ is a diagnostic appraisal process for analysing goals,
plans, policies, and activities in every phase of operation to uncover
unsuspected weaknesses and to develop ideas for improvement in areas that have
escaped management attention.
- American Institute of Management
Objectives of Efficiency Audit:- Objectives of the efficiency audit can be explained as under:
- To understand the objectives
pre-determined for the organization.
- To find out the variance between
planned objectives & achieved objectives.
- To find out the reasons due to
which the variance has occurred.
- To recommend to the management the
action to be taken to reduce the causes that have resulted into waste and
inefficiency.
Purpose of Efficiency Audit:- The
basic purpose of the efficiency audit is to reveal defects or irregularities in
any of the elements examined. Its aim is to assist management in achieving the
most efficient and effective administration of the operations performed. The
intent is to examine and appraise the methods and performance in all areas.
Scope of Efficiency Audit:- Efficiency Audit does it to make a judgement regarding the efficiency of existing practices. It shall, however include an enquiry into, whether, in carrying out its responsibilities, the audited entity is giving due consideration to conserving its resources and using the minimum effort to do its work.
Efficiency Audit Report:- The Report
should be written in good English and lucid style so that it may not be
misunderstood. The following are some of the important aspects of audit report:
- Significance
- Timeliness
- Carrying Convictions
- Accuracy & Adequacy
- Clarity & Simplicity
- Objectivity & Perspective
- Conciseness
- Completeness
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Social Audit:- A social audit is a formal review of a company's
endeavors, procedures, and code of conduct regarding social responsibility and
the company's impact on society. A social audit is an assessment of how well
the company is achieving its goals or benchmarks for social responsibility.
In
the era of corporate social responsibility, corporations are often expected to
deliver value to consumers and shareholders as well as meet environmental and
social standards. Social audits can help companies create, improve, and
maintain a positive public relations image. For many companies, a good public
perception helps foster a positive image of the company and ultimately reduce
negative impacts on earnings from bad press.
Items
Examined in a Social Audit:- The scope of a social audit can vary and be
wide-ranging. The assessment can include social and public responsibility but
also employee treatment. Some of the guidelines and topics that comprise a
social audit include the following:
a)
Environmental impact
resulting from the company's operations
b)
Transparency in reporting
any issues regarding the effect on the public or environment.
c)
Accounting and financial
transparency
d)
Community development and
financial contributions
e)
Charitable giving
f)
Volunteer activity of
employees
g)
Energy use or impact on footprint
h)
Work environment including
safety, free of harassment, and equal opportunity
i)
Worker pay and benefits
j)
Non-discriminatory
practices
k)
Diversity
There
is no standard for the items included in a social audit. Social audits are
optional, which means that companies can choose whether to release the results
publicly or only use them internally.
The
flexibility surrounding social audits allow companies the ability to expand or
contract the scope based on their goals. While one company might wish to
understand the impact it has on a particular town or city, other companies
might choose to expand the range of the audit to include an entire state,
country, or throughout the globe.
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Recent
Trends in Auditing :-
Technology never fails to change the way we
do things. It has transformed how we think, how we interact, and how we do
business. No one can deny that technology has made a remarkable impact in the
finance and accounting industry. Accounting and finance professionals can now
perform tasks faster and with greater precision. With these developments in the
industry, auditors have also utilized the latest technological advancements to
improve their service offerings.
As we begin the second half of 2020,
here are the audit trends that are continuously shaping the audit industry.
1.
Artificial
Intelligence and Robotic Process Automation:- The adoption of smart automation and
machine-learning artificial intelligence in accounting has led to a tremendous
overall improvement in the accounting process. Accountants can now shift to
more complex tasks by automating time-consuming tasks, tighten controls with
the aid of advanced software, and eventually produce high-end results. As more
tasks are performed with these innovative tools, internal audit should be able
to identify, monitor, and evaluate the risks that come with these tools. Audit
professionals need to have an understanding of how these systems are designed
and how they affect business operations, administration, and the structure of
the organization as a whole.
2. Cyber and
data security:- Even before the Facebook-Cambridge Analytica Scandal, the world has
been moving towards better data and cybersecurity. Businesses have been working
on regulatory compliance with different countries on varying cybersecurity
requirements and data management directives. The roll-out of the European
Union’s GDPR has signaled sweeping changes in the way businesses handle data
and information. Auditors must keep up with these updates to ensure that the
company’s cyber data are well protected and secure, at the same time, monitor
that data collection, processing, and management by the company are in
accordance with data privacy regulations such as the EU’s GDPR.
3.
Data
Analytics:- Modern business operations are now heavily relying on data to optimize
product and/or service lines. From time to time, data are collected by
companies to identify process bottlenecks and reduce unnecessary costs. To help
them in the audit process, audit professionals also harness the capabilities of
data analytics software. Data analysis helps auditors to check irregularities
in data trends or patterns and identify errors that the company may have
made during their processes.
Data analytics tools are also of tremendous
help for auditors, especially when it is necessary for them to look at the bulk
of data collected and processed by their organization. Finally, like other
professionals in different industries, auditors have been able to produce smarter,
faster, and better results.
4.
Technology
and Talent Development:- All these technological trends have led to the necessity for
professionals to develop proficiency and have a keen understanding of the
latest technological tools and software. The top audit firms have invested in
the skills development of their people to catch up with the new trends in
auditing, with new but competitive audit players following this practice.
As we continue with the second stretch of
2018, we can only expect to see more technological trends dictating the future
of the audit industry. Audit firms around the world are innovating on how the
practice adjusts to the adoption of sophisticated business processes such as
robotic process automation, artificial intelligence, and blockchain technology.
If anything, the recent audit trends above only show the increasing importance
of technology in audit and the necessity for firms to ensure that their people
are up to the tasks.
6.
Shift
away from SOX compliance towards risk-based auditing:- Out of necessity, internal
auditors have been devoting their time, energy and resources in recent years
primarily to SOX compliance activities. Now, it is time for internal auditors
to reevaluate its activities and sharpen its focus on stakeholder expectations
and risk-based auditing. Enterprise-wide risk management and fraud are also
gaining precedence. Moreover, the modern day, technology savvy companies
require additional focus on risk assessment, particularly because these risks have
the potential to impact organizations more rapidly. Activities relating to
fraud detection and auditing IT security are also generating more
responsibility for internal audit.
7.
Upgrading
audit infrastructure and technological advancement:- Large companies, specially with
complex auditing requirements that span not just financial audits but also
audits, assessments and inspections related to operations, quality, safety,
suppliers and IT are upgrading the technology infrastructure used to carry out
auditing from risk assessments and audit universe creating and planning to
audit data collection, reporting and remediation. Companies are migrating from
their legacy systems, point applications and paper-based procedures to a
web-based integrated audit management system. The technological advancement
allows the CAE to streamline and strengthen the internal audit function
enabling it to deliver more strategic value while lowering its costs of
operation. Expected benefits are better enterprise wide visibility, a transparent
and collaborative environment and data-driven decision making. Solution and
tools available today provide a reliable means to monitor access controls,
observe the closed-loop processes and analyze important data and KRIs.
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CIMA defines cost audit as – ‘the
verification of cost accounts and a check on the adherence to the cost
accounting plan.’ Cost audit system is employed for the verification of cost
accounting records according to the cost accounting system and checking on the
adherence to the cost accounting plan.
A cost audit, therefore, includes
verification of correctness of the cost accounts, cost statements, cost
reports, costs data, and costing techniques applied, and finally checking these
data to see that they adhere to cost accounting principles, plans, procedures,
and objectives.
According to the Institute of Cost and
Works Accounts of India (ICWAI), cost audit checks the minute details when the
work is still in progress. It is a preventive measure, a barometer of
performance, to guide management policies and decisions. Cost audit is the
process of detecting errors and faults in the cost accounts, thereby preventing
possible frauds and misappropriations.
The Institute of Cost & Works
Accountants of India defines ‘cost audit’ as “an audit of efficiency of minute
details of expenditure while the work is in progress and not a post-mortem
examination. Financial audit is a ‘fait accompli’.
Cost Audit is mainly a preventive
measure, a guide for management policy and decision, in addition to being a
barometer of performance”. The Institute of Cost and Management Accountants,
U.K., has defined ‘Cost Audit’ as
“the verification of the correctness of
cost accounts and a check on the adherence to the cost accounting plan”.
According to Smith and Day “By the term
‘Cost-Audit’ is meant the detailed checking of the costing system, techniques
and accounts to verify their correctness and to ensure adherence to the
objective of cost accounting”.
In the words of R.W. Dobson “Cost Audit
is the verification of the correctness of cost accounts and of the adherence to
the cost accountancy plans”.
On the basis of the analysis of the
above definitions, it can be said that cost audit is the detailed checking as
well as the verification of the correctness of costing techniques, system and
cost accounts. In any manufacturing concern or in a service organisation, it is
generally felt necessary to compute the correct cost of products or services so
as to charge the customers correctly. For this purpose, cost accounts or
costing records are maintained.
But, only the maintenance of cost
accounts is not sufficient. In order to ascertain the true and accurate cost of
products and services, it is necessary to ensure that these records are
accurate and correct. As such there is a need to get the costing records
properly audited and checked by a properly qualified and trained professional.
1) The governments have powers to order for the
audit of cost account of a company, which fails under the purview of the
recorded rules.
2) The government of India has framed Cost
Accounting (Records) Rules for the maintenance of cost accounts for certain
selected industries.
3) The cost auditor has the powers and duties as
the financial auditor.
4) Copy of cost audit report has to be attached
to income tax return.
5) Cost auditor shall submit a report in
triplicate to the central government.
6) The cost auditor is appointed by the board of
Directors of the company.
7) Statutory cost audit can be conducted by a
qualified cost accountant only.
8) Cost auditor has to submit audit reports in
the prescribed proforma.
9) Time limit prescribed for submission of cost
audit reports by the cost auditor is one hundred and eighty days.
10) Cost audit shall be in addition to the usual
financial audit.
11) The cost audit of a company is a regular
feature.
12) Section 209 of the Companies Act, 1956, 2003,
ensures the existence of cost accounts.
Scope:- The scope of audit has expanded at a very
rapid rate in recent times. The frontiers of audit have covered not only
financial audit, performance audit, efficiency audit, management audit, but
also cost audit within its fold.
The government of India has also introduced
Cost Audit by Cost Accountants in public interest by an amendment under Section
233 (B) of Indian Companies Act, 1956. It authorizes the central government to
direct an audit of the cost accounts of a company engaged in production,
processing, manufacturing, and mining activities.
The scope of cost audit will depend upon the
terms of reference as may be specified by the management, for example, an
in-depth analysis of the present system of accounting for materials or
examining the adequacy of the method of overhead recovery in vogue.
Where the cost audit has been undertaken for
reviewing the costing system as a whole, the cost auditor examines the
following aspects of the system and offers his suggestions for improvement –
1) Method of costing employed – job costing or
process costing or any variant of the methods.
2) Method of accounting for raw materials and
stores.
3) Method of accounting for wastages, spoilages,
and defectives.
4) System of recording wages, salaries, and
overtime.
5) Incentive schemes.
6) Basis of apportionment of overheads to cost
centers.
7) Basis of reapportioning service center
overheads and the absorption of overheads into product costs.
8) Treatment of interest on borrowings – whether
it is to be included as an element of cost.
9) Method
of accounting for R&D expenses.
10) Method
followed for providing depreciation,
11) Valuation
of work-in-progress and finished goods.
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