Tuesday, May 17, 2022

Introduction To Auditing


Introduction to Auditing

NOTE :-
All students are subjected to come at campus. 
All important questions will be discussed in classroom Only.



 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

 The following matters should have been incorporated in an 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:-

  1. Checking of castings, sub-castings, carry forwards and. other calculations in the books of original entry i.e., Journal and its Subsidiary Books.
  2. Checking of postings into the Ledger Book.
  3. Checking of castings and balances in the Ledger Book.
  4. 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:-

  1. Routine Checking discovers clerical errors and ordinary frauds. It is quite useful in ascertaining arithmetical accuracy of the books of accounts. 
  2. 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.
  3. 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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What is Test Checking?

Test checking in Audit means checking a few transactions selected at random from a large number of transactions. It is also known as “Selective Verification” or “Sampling Process“.

It is a substitute for detailed checking. It involves only a partial checking. It is based on a simple theme that

If a representative number of transactions, randomly selected by the auditor for test checking is found to be correct, the rest might be correct too.

In simple words in test checking a representative number of entries of each class is selected and checked and, if they are found correct, the remaining entries are also taken to be correct. Test checking is an accepted substitute of detailed checking, which in most of the cases from the economic point of view is unwarranted.



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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.


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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.


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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. 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.  
  7. 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.
  8. 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.
  9. 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.
  10. 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.  




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UNIT -IV
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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.
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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.

 

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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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 Unit V


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.

 5.      Organizational structure for accountability and transparency:- Today’s environment calls for greater collaboration and strong relationship between the auditor and the auditee at all levels. The trend therefore is moving towards developing a structure that facilitates healthy environment. This will encourage free flow of information regarding any issues or concern between the auditee and the auditor. The organization has to be structured in a way that facilitates accountability i.e. not limited to only the Audit Committee.

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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 Cost Audit – Definitions

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.

 The main features of cost audit in India may be summarised as under:

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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Some Useful Videos that will help for understanding Financial Literacy.

1. How to file ITR 


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