Year: 2020

A management audit is an independent and systematic analysis and evaluation of a company’s overall activities and performances. It is a valuable tool used to determine the efficiency, functions, accomplishments and achievements of the company.

The primary objective of the management audit is to identify errors in management activities and suggest possible changes. It guides the management to manage the operations most effectively and productively.

In other words, a management audit is involved in evaluation and assessment of the management system and information in the various departments or the entire company. Its reach has been extended to review system and subsystem, authorisation, procedure, accountability, quality of data generated, quality of personnel, etc.,

The Scope of Management Audit:

A management audit is vast as compared to financial review because it not only evaluates finance but also other features of a company. It has an efficiency for assessing management from top to lower level. Few main scopes of management audit are described below:

• Calculate the Effectiveness of the Management: It audits the entire level of management of a company.
• Execution of Principals and Policies: It reviews whether the policies and the principals deployed by the company is effective and successful.
• Locate and Examine the Differences: It helps to identify the differences in productivity and if the pattern set by the company is not fulfilled.
• Suggest for Improvement: The management audit suggests improvement in areas, e.g. purchase, sale, finance, administration, human resources, etc.

Scope of Management Audit

The scope of Management Audit has no limitations. The areas of review depend on the objectives of the business.

Accordingly, the scope of Management Audit may include:

(a) The suitability, practicability and present compliance or otherwise of the organization with its designated objects and aims.

(b) The current reputation of the organization in relation to the general public and within its own particular industrial or commercial field.

(c) The rate of return on investors’ capital whether poor, adequate or above average.

(d) Relationship of the business with its own shareholders and the investing public in general.

(e) The ratios of operating returns and the rate of return on capital projects.

(f) The relationship between management and staff within the business.

(g) The aims and effectiveness of management at its various levels such as top level, middle level and operational level.

(h) Financial policies and control relating to production, sales and distribution and in other functions of the organization.

Weaknesses Revealed by Management Audit

The weaknesses that a Management Audit might reveal may include:

(a) Weaknesses among the members of the Board of Directors.

(b) A lack of awareness among directors and managers of the objectives of the organization and the extent to which these are being achieved, failure to define clearly the objectives and responsibilities of individual managers.

(c) Inadequate steps taken to provide adequate finance.

(d) Lack of technical competence of managers.

(e) Retaining authority by managers for matters which ought to have been delegated.

(f) Lack of clear and identifiable management style in the organization.

(g) Lack of proper staff/management training.

(h) Failure on the part of managers to measure and assess the performance of their subordi­nates.

(i) Inadequacy of the management information system.

(j) Lack of enforcement of procedures and too much wastage of time in enforcing such procedures.

Weaknesses revealed by Management Audit should be studied in detail to ascertain the real causes and proper remedial action may be taken by the top management to eliminate such weaknesses.

Cost audit may be defined as “the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures and the continuing relevance of such procedures.”

Smith and Day in their book ‘Advanced Cost Accountancy’ define it, “the term ‘Cost Audit’ is meant the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.”

R.W. Dobson Smith and Day in their book Introduction to Cost Accountancy’ defines it, “Cost audit is the verification of the correctness of cost accounts and the adherence to the cost accountancy plan.”

Cost audit is the verification of the correctness of cost accounts and a check on the adherence to the cost accounting plan.

This is, it not only involves the examination of cost accounts but also the fact that the plan prepared in this connection has been duly executed. Cost audit as an audit of the efficiency of minute details of expenditure in which the work is in progress and not a post-mortem examination.

The first function of cost audit is the verification of cost accounting records according to the cost accounting system and the second function is the 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, cost data and costing techniques applied and finally checking these data to see that they adhere to cost accounting principles, plans, procedures and objectives.

Objectives of Cost Audit

The following are some of the objectives for which cost audit is undertaken:

1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy of cost accounting entries in the books of accounts.
2. To ensure that cost accounting principles are governed by the management objectives and these are strictly adhered to in preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect errors, frauds and wrong practice in the existing system.
4. To check up the general working of the cost department of the organization and to make suggestions for improvement.
5. To help the management in taking correct decisions on certain important matters
6. To determine the actual cost of production when the goods are ready.
7. To reduce the amount of detailed checking by the external auditor its effective internal cost audit system is in operation.
8. To find out whether each item of expenditure involved in the relevant components of the goods manufactured or produced has been properly incurred or not.

Advantages of Cost Audit

The important advantages of cost audit are briefly discussed as follows:

1. Advantages to the Management

• It provides necessary information for prompt decision decisions.
• It helps management to regulate production.
• Errors, omission, fraud, and mistakes can be detected and prevented due to the effective auditing of cost accounts.
• It reduces the cost of production through plugging loopholes relating to wastage of material, labor, and overheads.
• It can fix the responsibility of an individual wherever irregularities or wastage are found.
• It improves the efficiency of the organization as a whole and costing system in particular by constant review, revision and checking or routine procedures and methods.
• It helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
• It also enables comparison among different units of the factory to find out the profitability of the different units.
• It exercises a moral influence on employees which keeps them efficient and alert.
• It ensures that the cost accounts have been maintained under the principles of costing employed in the industry concerned.
• It ensures effective internal contr
• It helps to increase the overall efficiency of productivity.
• Inefficiency can be eliminated by suitable corrective actions.
• It facilitates cost control and cost reduction
• It assists in the valuation of stock of materials, works in progress and finished goods.
• It ensures maximum utilization of available resources,
• It enables the management to choose economic methods of operations and thus earn profits to satisfy the shareholders and the investing public.
• It enables the management to chalk out the future policy based on the report by the cost auditor especially regarding labor, raw material, plant, etc. to maximize production and reduce the cost of production.
• It tests the effectiveness of cost control techniques and to evaluate their advantages to the enterprise.

2. Advantages to the Shareholders

• It ensures that proper records are maintained as to purchases, utilization of materials and expenses incurred on various items i.e. wages and overheads, etc. It also makes sure that the industrial unit has been working efficiently and economically.
• It enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.
• It ensures true picture of the company’s state of affairs. It reveals whether resources like plant and machinery are being properly utilized or not.
• It creates an image of the creditworthiness of the concern.
• Advantages to the Society
• It tells the true cost of production. From this, the consumer may know whether the market price of the article is fair or not. The consumer is saved from exploitation.
• It improves the efficiency of industrial units and thereby assists in the economic progress of the nation.
• Since the price increase by the industry is not allowed without justification as to an increase in the cost of production, consumers can maintain their standard of living.

3. Advantages to the Government

• It assists the tariff board in deciding whether tariff protection should be extended to a particular industry or not.
• It helps to ascertain whether any particular industry should be given any subsidy to develop that industry.
• It provides reliable data to the government for fixing up the selling prices of the various commodities.
• It helps in fixing contract prices in a cost-plus contract.
• It determines whether differential pricing within the industry is desirable.
• It helps the government to take necessary measures to improve the efficiency of sick industrial units.
• It can reveal the fraudulent intentions of the management.
• Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.
• It facilitates settlement of trade disputes of the companies.
• It imposes an automatic check on inflation.
• It assists the Tariff Board to consider the extension or removal of protection.

Disadvantages of Cost Audit

Cost audits verify expense records and accounts. Audit also ensures that accounts and bookkeepers comply with ethical practices.

Effective cost audits provide a complete breakdown of expense that gives a company financial clarity about accounts. Although they provide such transparency “there are many disadvantages to conducting cost audits.

1. Expensive

One primary disadvantage associated with cost audits is the excessive fees. Auditors are typically independent contractors who can charge relatively high prices for services rendered.

In addition to initial charges, auditors may increase fees in the middle of the project if companies fail to prohibit such action in the contract. A person or corporation can essentially go from paying $4,000 to $6,000 for an audit.

2. Lengthy

Cost audits are also lengthy processes that require employee devotion.

Although the auditor may be an outside contractor, employees must provide requested information and be accessible in case further explanation of documents is necessary.

3. Lost Time

Although thorough an auditor’s report is usually given three to five weeks after the balance sheet is released. This means people who have been stealing from an establishment have nearly a month to form an excuse or leave the company.

4. Uncertainty

Because a major part of the process involves estimating there’s the possibility of numerical figures being wrong.

Besides, if receipts and other forms of record-keeping are skewed an auditor relying on such documents may produce an inaccurate report.

Types of Cost Audit

The main types of Cost audit are the following:

1. Cost Audit as an Aid to Management

The aim is to see that all information placed before management is relevant, reliable and prompt so that management can discharge its duties well. It must also be seen that no relevant or pertinent information is suppressed.

2. Cost Audit on Behalf of a Customer

Often contracts are placed on “Cost Plus” basis. In other words, the customer will determine the final price to be paid on the basis of exact cost plus an agreed margin of profit. The customer, in such a case, usually gets cost accounts of the product concerned audited to establish correct cost and, therefore, price.

3. Cost Audit on Behalf of Government

Sometimes the Government is approached with request for financial help or protection. Before taking a decision on the request, the Government may choose to get cost accounts of the applicant audited to establish whether the need for help is genuine or is a result of mere inefficiency.

4. Cost Audit under Statute

The Amendment Act of 1965 has inserted a new section, 233B, in the Companies Act, 1956 whereby the Central Government may order that certain classes of companies will get their cost accounts audited by a member of the Institute of Cost and Works Accounts of India. Only such companies as are required to maintain proper records regarding materials consumed, labour and other expenses under Section 209 (as amended to date) and may be required to get their cost accounts audited.

The powers and duties and manner of appointment of the cost auditor are the same as that of external financial auditor and the same disqualifications will apply. The cost auditor will submit his report to the Company Law Board with a copy to the company. The right to investigate all aspects of cost accounts is presumably granted to the cost auditor.

The aim of cost audit under statute seems to be that the Government wishes to know, as an instrument of control, the costs of various goods. Government has the power to prescribe the forms in which cost audit reports are to be made out. These are designed not only to verify information, but also to convey good deal of information to Government.

5. Cost Audit on Behalf of the Trade Association

Sometimes trade associations seek to maintain prices at a certain level. For this purpose, the accuracy of costing information submitted by various concerns has to be checked. The trade associations may seek to have full information about production capacity and the relative efficiency of productive processes.

The tax audit is a technique through which the facts related to acts of a tax nature are verified and analyzed. It is a method used to inspect both companies and individuals, that is, all those subjects who are taxpayers and have tax obligations for the Public Administration or the State.

Through the fiscal audit, the accounting records, monetary movements, as well as all the documentation that contains information related to the operations carried out by the subject during a determined period of time are analyzed and analyzed (the periods in fiscal terms go from year to year).

The tax audit is a method through which it is analyzed if the taxpayer, whether company or person, fulfills its tax obligations.

The function of the fiscal auditor goes through the verification of the declarations made by the taxpayer before the Public Treasury and the tax payments and determining whether or not everything is in order and according to reality.

Once the auditor has obtained and analyzed sufficient information (whether from a corporate entity or from an individual), he will make an opinion, called an audit report , where, on the one hand, he will detail all the information gathered; On the other hand, there will be a section of comments and opinion of the auditor.

Objectives of Tax Audit of a Company

Next, we highlight the main objectives of the tax audit, focusing especially on the scope of a corporate entity:

• That the balances of the liabilities of the balance correspond to outstanding debts to the Public Treasury at the closing date of the fiscal year
• That the debit balances to the Public Treasury have been valued according to the Accounting Principles and the pertinent fiscal regulations.
• Evaluate that the accounts are correctly classified in the balance sheet, between assets and liabilities.
• Check that, if there are claims raised by the Public Administration that are not resolved at the closing date, they are correctly accounted for.
• Evaluate that the procedures have been carried out in accordance with good faith, ensuring that the established legal regulations have been complied with.

Income Tax Audit in India

There are various laws in India that govern different kinds of audit like income tax audit, stock audit, cost audit, company or statutory audit as per company law, to name a few. Section 44AB of the Income Tax Act, 1961, lays down the provisions for income tax audit.

Income Tax audit, as evident from the name, is aimed at evaluating whether an individual or company has accurately filed the income tax returns of an assessment year. An external agency is mandated to assess returns filed from income, deductions and expenditures and other rules as mentioned by the Income Tax Act, 1961. The tax audit process simplifies the computation of tax returns. The Chartered Accountant of the concerned agency performing the tax audit has to submit Form 3CA or Form 3CB, and Form 3CD, as an audit report comprising of the observations.

Income Tax Audit for companies whose tax audit is not conducted under Section 44AB of the Income Tax Act, 1961

Taxpayers who have to get their accounts audited under any law other than Section 44AB of the Income Tax Act, 1961, (for instance, stock audit or statutory audit) do not have to get their accounts audited again for the purpose of income tax audit. In such cases, accounts audited under other laws can be presented as a tax audit report for income tax filing, provided it is submitted before the stipulated due date.

The following are the other sections under Income Tax Act, 1961, which also lay down regulations related to income tax audit in India. These are presumptive taxation schemes, wherein a pre-determined percentage of income is assumed to be the gain or profit meant for taxation.

• Section 44BB: For Non-Resident Indians (NRIs) involved in business specialising in the mineral oils industry, like exploration
• Section 44BBB: International company involved in the business of civil construction etc. in certain power projects
• Section 44AD: Any business except those businesses mentioned under Section 44AE
• Section 44ADA: This section focuses on the regulations regarding income tax audits for eligible professionals
• Section 44AE: Businesses specialising in leasing, hiring and plying of goods carriages

Rules Governing Tax Audit

The following is the procedure for filing tax audit report:

• The Chartered Accountant assigned for conducting tax audit of an individual or an organisation has to present the tax audit report online, using his/her official login credentials.
• The taxpayer also has to mention the relevant information about their Chartered Accountant in their login platform.
• Once the tax audit report is uploaded by the auditor, it has to be either accepted or rejected by the taxpayer on their login portal. If the taxpayer rejects the tax audit report, the entire process has to be repeated until the tax audit report is accepted by him/her.
• Tax audit report has to be filed on or before the pre-determined due date of filing income return, i.e., 30th November of the subsequent assessment year for taxpayers who have engaged in an international transaction and 30th September of the subsequent assessment year for other taxpayers. Rules Governing Tax Audit

The following points are to be noted with regards to Tax Audit:

• If you are involved in more than 1 business, you will be liable to audit your accounts if the total turnover of all your businesses is more than Rs. 1 crore.
• If you operate more than 1 profession, you have to audit your account books in case the gross receipts of all the professions cumulatively cross Rs. 50 lakhs.
• If you run a business as well as a profession, then tax audit is not based on total turnover from both. If your business turnover is more than Rs. 1 crore then an audit is required for the business accounts, and if the gross receipts from your profession is more than Rs. 50 lakhs then an audit of the profession accounts is needed. But if your business turnover is Rs. 90 lakhs and your profession receipts are Rs. 40 lakhs, then no audit is required for either accounts.
• If the turnover of your business or profession is below Rs. 1 crore or Rs. 50 lakhs, but you have sold a fixed asset (such as vehicle or immovable property), the amount you gain from the sale will not be considered as part of your business or professional profits. Sale of the following items are excluded from calculation into total turnover/gross receipts of a businessperson or professional:
• Assets held as investment (e.g. shares, stocks, securities)
• Fixed assets
• Rental income
• Income from interest that is not part of the business income
• Any expense reimbursed by the client
• Once the tax audit report is filed online, it cannot be revised. But if the accounts have been revised – for example, a company account revision after acceptance at the Annual General Meeting, change in law or change in interpretation of law – then the audit report that has been filed can also be changed. The reasons for change in audit report have to be explicitly mentioned while filing the revised report.

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.

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.

Audit Program

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 Program. 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.

Definition

Prof. Meigs defines an audit program as, “an audit program is a detailed plan of the auditing work to be performed, specifying the procedures to be followed in verification of each item and the financial statements and giving the estimated time required.”

Features (or) Characteristics of an Audit Programme

The features of an audit programme may be of the following:

1. It is a set of procedures to be adopted to conduct the audit more efficiently.
2. It is a written scheme designed by the auditor.
3. It is a blue print of the audit work.
4. It facilitates delegation of work, based on the capabilities of audit staff.
5. It acts as evidence in future for the audit work being performed.
6. It specifies the work to be done by the audit staff, the manner and time limit for completion of the work.

Objectives of Audit Program

The following are the objectives of audit programme:

1. To provide clear instructions to the audit assistants specifying the nature of work to be performed and fixing the time span for completion of each work.
2. To facilitate coordination among various parts of audit work.
3. To ensure uniformity in the performance of audit work and to avoid duplication and repetition of work.
4. To attain a fair allocation of work among audit team.
5. To fix responsibility and accountability of each audit assistant.
6. To serve as a guide for planning the audit work in future.
7. To serve as evidence in future showing the date of completion of audit work, methods or procedures undertaken, persons involved in completion of audit work etc.

Contents of an Audit Programme

The following are the details of an audit programme:

1. Name of the client.
2. Nature of operations and business of client.
3. Review of system of internal check.
4. Date of commencement of audit work.
5. Duration of audit work.
6. Accounting system followed in client organization.
7. Review the report of the previous auditor.
8. Review the remarks, instructions or objections raised in the previous audit report.
9. Examine the various ledger accounts and subsidiary books.
10. Examine the statutory books and registers, profit and loss account, and balance sheet.

Advantages of an Audit Program

An audit programme can give the following advantages:

1. Helps in Estimation and Division of Work

Audit Programme helps in estimating the quantum of audit work in advance and also helps in dividing the work among the audit assistants based on their capabilities.

2. Helps in Fixation of Responsibility

It enables to fix responsibility on the audit assistants by clearly defining the scope of work.

3. Helps in Future Planning

Audit programme serves as a basis for planning the audit work for subsequent year.

4. Serves as a Guide

It serves as  a valuable guide for the audit staff in execution of the audit work for succeeding years.

5. Valuable Evidence

It serves as an evidence for the work done as initials of those who have done the particular work are appended to it. The auditor can produce the audit programme as a proof when a charge of negligence being brought upon him.

6. Uniformity

It provides for uniformity in audit work as the same work will be done every year.

7. Continuity

When an audit staff goes on leave others can continue the work by referring to the audit programme, hence, audit programme provides for continuity of work.

8. Coordination

If facilitates coordination and helps in supervising the work of the audit staff.

Disadvantages of an Audit Programme

The disadvantages that may be experienced by conducting audit as per predetermined audit programme are –

1. Mechancial

When audit work is conducted mechanically every year based on the audit programme, it causes monotony and boredom to the auditor and audit staffs.

2. No Quality in Work

The audit staff will be more interested to complete the work in time rather than to maintain any standard in the work.

3. Loss of Initiative

Audit staff cannot take their own decisions and they are compelled to comply with the audit programme. Hence, an efficient audit clerk loses his initiative and interest as he cannot make any suggestions.

4. Rigidity

A rigid and inflexible audit programme cannot be laid for all types of business. During the course of audit, new areas to be verified may come to the notice of the audit staff. Unless the audit programme is revised, such areas may escape from auditing.

5. Shelter for Inefficient Staff

Inefficient audit staffs conceal their mistakes or weakness on the basis of audit programme. Hence, it provides shelter for inefficient audit staff.

6. Unsuitable

Pre-determined audit programme is not suitable for small business organizations.

Audit working papers are the outcome of the documentation process. Working papers are the record of various audit procedures performed, audit evidence obtained, allocation of work between audit team members etc. Audit working papers are the documents and evidence that an auditor collects and retains with himself during the audit.

Audit working papers support the work that the auditor performs for providing assurance that he conducts the audit in accordance with all the applicable standards on auditing (SA’s).

They constitute all the audit evidence that an auditor obtains. Also, it contains various procedures that he applies to indicate that the audit is performed by him.

The auditor and his audit team members prepare the audit working papers while performing the audit. Working papers are connecting link between the client’s records and audited financial statements.

Working papers provide entity’s historical records as well as matters which should be taken care and given due importance while performing future audit’s of such entity.

Audit working papers help auditor in audit planning and collecting evidence of the audit work performed on which his opinion is based.

Working papers helps auditor in allocating the time required for performing various audit procedures. The working paper helps auditor to maintain a record of various matters discussed with management while conducting an audit.

Also, the working papers help audit team members to understand entity’s business, points which they need to check on a priority basis, queries and actions against them in previous audits. Working papers helps auditor in future cases to protect himself if the client files a suit against auditor for auditor’s negligence while conducting the audit.

Working papers provide information on the following matters

• Information about audit team members and work allocated to them. Information regarding unallocated work
• Whether he follows all the applicable standards on auditing (SA’s) or not
• He properly plans the audit or not
• Whether there was proper supervision over the work performed. Enabling the audit team members to be responsible for the work performed by them
• An auditor undertakes an appropriate review or not
• Whether the evidence is relevant, sufficient and appropriate to support the opinion of the auditor

We can divide the working papers into two parts

• Permanent audit file
• Current audit file

A permanent audit file contains information which is of continuous interest and is relevant in future audits. Information like articles of association, loan agreements, leases, documents related to internal control of the entity, record of accounting policies followed by the entity on a continuous basis, significant observations of previous audits etc.

A current audit file contains information regarding audit conducted for the current period. It includes information like financial statements and audit report of the entity, trial balance and worksheets, records regarding internal control risk of an entity, external confirmations received, queries of auditor and reply received from the management etc.

Examples of Audit Working Papers

Here is the example of audit working papers:

• Audit documents on client nature of business
• Audit documents of team meeting
• Evidence of the planning process including audit programs and any changes thereto
• Evidence of the auditor’s consideration of the work of internal audit and conclusions reached
• Analyses of transactions and balances
• Analyses of significant ratios and trends
• Identified and assessed risks of material misstatements
• A record of the nature, timing, extent, and results of audit procedures
• Evidence that the work performed was supervised and reviewed
• An indication as to who performed the audit procedures and when they were performed
• Details of audit procedures applied regarding components whose financial statements are audited
• Result of audit testing on depreciation expenses
• Result of audit testing on salaries expenses

Working papers are very important for auditors to support the audit opinion. It proves that auditors perform an audit assignment based on applicable standards, and as well as policy.

These working papers should state the proper information like source of the documents, the period of audit, who prepared the working papers, objective obtained or prepared the working papers and the conclusion.

Commencement of audit means that  when an organization is going to start final audit before commencement of audit the following instruction must be given by the auditor to his client.

• A list of book in use, list of employees, their duties and internal control should be provided to the audit staff.
• Books of original entry, ledgers, trial balance and Final account should be provided to the auditor.
• All supporting document should be properly arranged.
• List and schedule of assets and liabilities should be arranged properly for the examination to the audit staff managed properly for the examination to the audit staff.

The auditor of the newly established company should also carry out the following primary work before commencing the audit.

1. Appointment of the auditor

The auditor can examine his appointment the shareholder have right to appoint an auditor .a copy of resolution shows the decision of management for appointment.

2. Previous auditor

The auditor can write a letter to old auditor for obtaining his consent. He must have no objection to such appointment. it is moral duty of new auditor to inform old auditor for appointment.

3. Time of Audit

The audit can consult the management for fixing time of audit the stating data is fixed with the consent of management. The time allocated utilized for proper audit work.

4. Time required

The auditor can decide the time required for completion of audit work he can engage sufficient audit clerks to complete work in time otherwise the cost of audit increases.

5. Audit Staff

The auditor can arrange audit staff on the basis of work load. The number of audit Clerks can be engaged on the basis of audit work. There should be no extra burden of work on audit staff.

6. Audit Duties

The auditor cannot fix audit duties such duties are usually stated in audit engagement letter. The duties stated in company’s ordinance cannot be overlooked.

7. Nature of Business

The auditor can check the nature of business. The nature may relate to manufacturing, trading or services. The auditor must know the nature of activities in order to conduct audit.

8. Business History

The auditor should record the history of business. He can record year of establishment nature and number of products available in market.

9. Types of Product

The business may produce different products of successful working. One product or service is not sufficient to compete in the market the auditor should note the types of product.

10. List of officers

The auditor can ask for list of officer their duties and specimens signature he must know authority and responsibility of officer.it is essential for completion of audit work.

11. Copies of documents

The auditor can collect copies of document like memorandum of association and articles of association. He can examine all such document for the purpose of audit.

12. Books of account

The auditor can obtain lists of books of account he can check that legal requirement are followed in preparing books of account.

13. Internal control

The internal control system is tested to rely on it. Audit sampling is possible if it is effective the business work flow under proper accounting and administrative control.

14. Certificates of clients

The auditor can obtain certificate from client, the confirmation of accounts from debtors and creditor is possible. The client can issue stock valuation certificate for the auditor.

15. Old reports

   The auditor should examine old audit report. he can note the weakness stated in previous report he can check that weak point stated in old report are net repeated during this year.

16. Analytical review

The auditor can check the ration and percentage for a number of years he can examine the trend of various items in order to note the usual items.

17. Prepare report

The auditor can prepare report for work done by him. When he is fully satisfied there is clean report. In case of bad working he can submit qualified report to the shareholders.

When accounting process ends, auditing begins, for the purpose of determining the true and fair picture of books of accounts. It is an activity of record keeping and preparation & presentation of the financial statement. Accounting is used by the firms for keeping a track of their monetary transactions. It is the language the business understands, as it is the tool for reporting financial statement of the business entity.

Conversely, Auditing is an activity of verification and evaluation of financial statement. It aims at checking and comfirming the authenticity of financial books prepared by the accounting staff of the enterprise. Thus, it determines the validity and reliability of accounting information.

Accountancy

It is the process of recording, classifying, summarising and interpreting all the financial transactions.

Accounting

Accounting is a specialised language of business, which helps to understand the economic activities of the entity. It is an act of orderly capturing the day to day monetary transactions of the business and classifying them into various groups along with that, the transactions are summarized in a way that they can be easily referred at the time of urgency, thereafter analyzing and understanding the results of the financial statement and finally communicating the results to the interested parties.

The main function of accounting is to provide material information, especially of a financial nature for decision making. Cost Accounting, Management Accounting, Tax Accounting, Financial Accounting, Human Resource Accounting, Social Responsibility Accounting are the fields of Accounting. The primary objectives of Accounting are as under:

Proper record keeping through Journal, Subsidiary Books, Ledger and Trial Balance

Determination of the results (profitability position) from the records maintained through Trading and Profit & Loss Account

Showing the financial position of the entity through Balance Sheet

Providing necessary information about solvency and liquidity position to the interested parties.

Auditing

The audit is a methodical procedure of independently examining the financial information of an entity with the aim of giving an opinion on true and fair view. Here organization refers to all the entities, regardless of their size, structure, nature and form.

Auditing is a critical, unbiased investigation of each and every aspect of the transaction, i.e. vouchers, receipts, account books and related documents are verified, in order to spot the validity and reliability of the financial statement. Moreover, errors and frauds or deliberate manipulation in accounts or misappropriation etc. can also be detected through detailed scrutiny.

The auditor will inspect the accuracy and transparency of the financial information, compliance with the accounting standards and taxes are properly paid or not. After the complete inspection of accounting books and financial records, he will give an opinion in the form of a report. The reporting on the true and fair view shall be made to the person who appoints the auditor. There are two types of Audit Report, they are:

(i) Unmodified

(ii) Modified

• Qualified
• Adverse
• Disclaimer

The audit can be conducted internally and externally. The task of internal audit is conducted by an internal auditor who is appointed by the management of the organization for improving its internal control systems and accounting system. External Auditor is appointed by the shareholders of the company.

Differences between Accountancy and Auditing

Conclusion

Accounting and Auditing both are specialized fields, but the scope of auditing is wider than accounting as it needs a thorough understanding of various acts, tax rules, knowledge of accounting standards and standards on auditing as well as communication skills are also required.

Apart from that, confidentiality, integrity, honesty and independence are the basic requirements that is to be maintained while performing the audit procedure. The reports submitted by the auditor are helpful for the users of the financial statement like creditors, shareholders, investors, suppliers, debtors, customers, government, etc. for rational decision making.

Although Accounting is not less, it also requires complete knowledge of the accounting standards, principles, conventions and assumptions as well as Companies Act rules and tax laws. The procedure of auditing is conducted only when the accounting is done properly so; it cannot be neglected.

Auditing is the process of inspecting the books of accounts to authenticate their accuracy and reliability. It is an important process to the company itself, the government, the investors, creditors, shareholder etc. They all rely on audited accounts to make important decisions.

An audit is a systematic examination or review of a system, organization, process, or set of financial records to verify its accuracy, completeness, and compliance with established criteria or standards. The primary purpose of an audit is to provide an independent and objective assessment of the subject matter, allowing stakeholders to make informed decisions based on reliable information. Audits are conducted in various fields, including financial accounting, information technology, quality management, and compliance.

The term “audit” is derived from the Latin word “audire,” which means to hear. Historically, auditors would listen to the accounts being read aloud to ensure accuracy. Today, an audit involves a thorough examination and evaluation of information, records, systems, or processes.

Objectives of an Audit:

• Reliability and Accuracy:

The primary objective of an audit is to ensure the reliability and accuracy of information. This is particularly crucial in financial audits where stakeholders rely on financial statements for decision-making.

• Compliance:

Audits often assess whether the subject matter complies with applicable laws, regulations, policies, or standards. This could include financial regulations, industry standards, or internal organizational policies.

• Risk Assessment:

Audits help identify and assess risks associated with the subject matter. This includes the risk of fraud, errors, inefficiencies, or non-compliance.

• Accountability:

Audits contribute to establishing accountability within an organization. By examining processes and records, auditors help ensure that individuals and entities are responsible for their actions.

• Improvement:

Audits can provide valuable insights and recommendations for improvement. Whether it’s improving internal controls, operational efficiency, or overall effectiveness, audit findings can guide organizations in enhancing their processes.

• Assurance:

One of the key objectives is to provide assurance to stakeholders that the information under examination is reliable and accurate. This is particularly important for financial audits, where external parties such as investors and creditors rely on audited financial statements.

• Transparency:

Audits contribute to transparency by providing an unbiased and independent assessment. This transparency is essential for building trust among stakeholders.

Relationship of Audit with other disciplines

• Accounting:

Relationship: Auditing and accounting are closely connected. Auditors often examine financial statements prepared by accountants to ensure they present a true and fair view of an organization’s financial position. Auditors may also assess accounting practices and adherence to accounting standards.

• Finance:

Relationship: Auditing plays a crucial role in financial management and decision-making. Financial audits provide assurance to investors, creditors, and other stakeholders about the accuracy and reliability of financial information, influencing financial decisions.

• Risk Management:

Relationship: Auditors assess risks during their examinations, including the risk of fraud, financial misstatements, and non-compliance. The findings of an audit can be valuable input for risk management strategies within an organization.

• Information Technology (IT):

Relationship: With the increasing reliance on information systems, IT audits have become integral. IT auditors examine the controls and security measures in place to safeguard information assets. The field of information systems auditing is a subset that focuses specifically on IT-related controls and risks.

• Legal:

Relationship: Auditors may work with legal professionals to ensure that an organization’s activities comply with relevant laws and regulations. Legal considerations can be a crucial aspect of audits, especially in areas such as regulatory compliance and corporate governance.

• Quality Management:

Relationship: Auditing is an essential component of quality management systems. Quality audits assess whether an organization’s processes and products meet established quality standards. This is common in industries such as manufacturing and healthcare.

• Compliance:

Relationship: Auditors often evaluate compliance with laws, regulations, and internal policies. Compliance audits help ensure that an organization adheres to established rules and guidelines, whether they are financial regulations, industry standards, or internal governance policies.

• Management:

Relationship: Internal auditors work closely with management to assess and improve internal controls, risk management processes, and operational efficiency. The findings of internal audits can be instrumental in enhancing organizational performance.

• Economics:

Relationship: Audits, particularly financial audits, contribute to the economic landscape by providing stakeholders with reliable information for decision-making. The credibility of financial statements influences investment decisions and economic activities.

• Environmental and Social Responsibility:

Relationship: Audits may extend to areas of environmental and social responsibility. For example, sustainability audits assess an organization’s environmental impact, and social audits evaluate its social and ethical practices.

Advantages of Auditing

• Assurance to the Owners/Investors

One of the biggest advantages of auditing is that it offers assurances to the owners, investors, shareholders etc. The owners of the business will be assured about the accuracy of their books of accounts.

They will be satisfied with the workings of their various departments and the overall efficiency and profitability of their business operations. It is the same case with investors, who will find assurance in the books of accounts after auditing.

• Errors and Frauds

An error is something that is done without the intention to fraud the company, it is an innocent mistake. Fraud, on the other hand, is deliberate. During the process of auditing, both errors and frauds are discovered. Auditing also helps prevent such errors and frauds. It creates a fear of being detected.

So auditing helps us minimize the risks of errors and frauds in our books of accounts but does not eliminate the risk entirely. There is always the chance that the error may go unnoticed, and the fraud is very cleverly hidden so may go undetected.

• Independent Viewpoint

If the auditor is an external auditor, the business can get a second opinion on their financial statements and their financial standing as well.

An external auditor will closely inspect the books and be completely true and fair in his opinion as he has no hidden agenda. If he says the accounts are true and fair, it has a lot of weightage with the company and the investors.

• Moral Check

One of the other advantages of auditing is that the staff and the workers of the company do not try to steal or defraud the company. They are under constant scrutiny since they know that the accounts will be audited. Any irregularities can be identified during such an audit, and they will be caught eventually. This helps the staff in being honest and responsible at all times.

• Stakeholders Confidence

After auditing stakeholders like creditors, investors, banks, debenture holders etc. can rely on the books of accounts with more confidence. And so after auditing by an independent authority, the financial statements have more credibility.

Limitations of Auditing

• Cost Factor

A very thorough and detailed audit would be a costly affair. It is not cost effective. So the auditor has to limit the scope of his audit and use techniques like sampling and test checking.

• Time Factor

Auditors generally work on a very specific timeline. Sometimes this is due to statutory requirements. This means he has to audit a whole year’s accounts in a few weeks. Hence insufficient time is one of the main limitations of auditing.

• Inconclusive Evidence

Generally, the audit evidence the auditor collects is persuasive in nature, not conclusive in nature. So there is never cent percent conclusive evidence in most cases while auditing.

This is one of the major limitations of auditing. There also a lot of use of estimates in accounting. The auditor cannot measure or comment on the exact accuracy of these estimates. He has to rely on his knowledge.

Audit

The term ‘audit’ means examination of books of accounts and vouchers so as to establish their accuracy. It is defined as “a systematic examination of financial statements, records and related operations to determine adherence to generally accepted accounting principles, management policies or stated requirements”.

According to International Federation of Accountants, “An audit is the independent examination of financial information of any entity whether profit-oriented or not and irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereof.”

The essential features of auditing (as per ICWAI, India) are:

1. Making a critical review of the system and procedures in an organization
2. Making such tests and enquiries into the results as well as the operation of such systems and procedures, as the auditor may consider necessary to form an opinion;
3. Expressing that opinion in the accepted phraseology that has been developed;
4. Ensuring that the opinion covers all aspects which are required to be covered by law or accepted professional norms.

The value of audit is in its independence and the auditor should report directly to the managing director.

Types of Functional Audit

Following are the main types of functional audit:

• Propriety (or Higher) Audit

This audit is the audit of such executive actions and plans of management which have a bearing on the finance and expenditure of the company.

Here the cost auditor has got an important advisory function and has to judge:

(а) Whether or not the planned expenditure would give maximum results;

(b) Whether the size and channels of expenditure were designed to produce the best possible results; and

(c) Whether the return from expenditure on capital as well as current operations could not be bettered by some other alternative plan of action. Thus, it is the audit with an objective to examine the propriety of the transaction. It attempts to evaluate the correctness of conduct of persons concerned in auditing the transactions. It safeguards the tax-payer’s money and the shareholders’ capital.

• Efficiency (or Performance or Profitability) Audit

This audit is the appraisal of performance so as to ascertain whether the plan has been effectively and efficiently executed. It is concerned with the utilisation of the resources in optimum manner to achieve the objectives of the concern. Efficiency audit ensures application of basic economic principle that resources flow into the most remunerative channels.

It starts with the study of the plan and extends to the comparison of the actual performance against the budgeted performance and investigation into the reasons of variances. The main function of efficiency audit is to ensure that every rupee invested in capital or in other fields gives the optimum return and that balancing of investment between different functions and aspects of the company is designed to give optimum results. In this type of audit a survey of activities is made to appraise the management and accounting standards and practices.

• Operational Audit

This type of audit appraises the activities of each operation as production, sales, administration, accounting, engineering etc., in relation to the overall objective of the concern. It also checks the control systems introduced in various operations of the business in order to know their satisfactory working, the aim being to improve the system and its operation wherever feasible.

• Voucher Audit

This audit is done to judge the honesty and integrity and carried out with the help of vouchers. It ensures that the transactions of a business are correct and true and can be verified with the help of receipts and vouchers. Every transaction must be supported by valid voucher which should be properly drawn and authenticated by a responsible person authorised to do so.

• Regulation Audit

A set of rules and regulations are prescribed in government departments, statutory bodies and in private sector organizations which govern day-to-day operations of these organizations and are contained in manuals. This audit ensures that these rules and procedures are correctly and faithfully adhered to.

• Statutory Audit

This audit is conducted in accordance with the provisions of any Act or Statute laid down by the Government. It may be both financial audit and cost audit. Such audit of the accounts of the Government departments and statutory bodies is conducted by the representative of the Comptroller and Auditor General of India.

• Social Audit

In order to utilise the nation’s resources properly, many large scale corporations have come into existence. Like individual, these corporations have also some social responsibilities towards the society to which they belong. Social audit, therefore, becomes the review of assessing to what extent the corporations have discharged their responsibilities and at what cost.

There are various ways by which these corporations can render social services to the society. Some measures will not impose financial burden on the corporation but most of actions would involve social costs. This audit covers both cost and non-cost aspects of social performance in order to see how far the social obligations have been met by these corporations and whether the cost incurred have been commensurate with the benefit rendered to the society.

This audit is a new concept in India and is undertaken by TISCO to see whether the company has met successfully its social responsibilities to the consumers, employees, shareholders, society and the local community.

• Cost Audit

Cost audit is mainly a preventive measure. It acts as a guide for policy formulation and decision making. It is to judge the efficiency of expenditure while the work is in progress.