Answer of Question No.1.
“Auditing begins where Accountancy ends”
The word
audit is derived from the Latin word “AUDIRE”
which means to hear. Initially auditor was a person appointed by the owners to
check account whenever the suspected fraud, he was to hear explanation given by
the person responsible for financial transactions. Emergence of joint stock
companies changed the approach of auditing as ownership was pestered from
management. The emphasis now is clearly on the verification of accounting date
with a view on the reliability of accounting statement.
In the words
of Spicier and Pegler ,“An
audit is such an examination of the books, accounts and vouchers of a business
as it enable the auditor to satisfy that the Balance Sheets is properly drawn
up, so as to give a true and fair view of the state of the affairs of the
business and whether the profit and loss accounts gives a true and fair view of
the profit or loss for the financial period according to the best of his
information and explanations given to him and as shown by the books, and if
not, in what respects he is not satisfied”.
In the words
of Montgomery,”Auditing
is a systematic examination of the books and records of a business or other
organization, in order to ascertain or verify and report upon the facts
regarding its financial operation and the result thereof”.
In the words
of Lawrence R. Dicksee,”An audit is an examination of records
undertaken with a view to establishing whether they correctly and completely
reflect the transactions to which they relate. In some circumstances it may be
necessary to ascertain whether the transactions are supported by authority.
In the words
A.W. Hanson,”An
audit is an examination of such records to establish their reliability and the
reliability of statement drawn from them”.
In the words
of R.B. Bose,”Audit
may be said to the verification of the accuracy and correctness of the books of
accounts by independent person qualified for the job and not in any way
connected with the preparation of such accounts”.
The main purpose of Auditing or object is to find the opinion of an
auditor about the correctness and reliability of accounts and the financial
position of the business concern. For this purpose auditor has to check the
arithmetical accuracy of the books of account and to find out that whether the
transactions entered in the books of account are correct or incorrect. This is
done by various methods like inspecting comparing and checking. So all that
work that is done by the auditor ensures him that figures are facts.
From the
above definitions it is clear that the auditor’s basic duty is to examine the
accounts and its arithmetical accuracy. He must ensure than the financial
statements depicts true and fair view of the state of affairs of the business.
Since, Auditing is a full and critical examination of the
books of accounts to find out their accuracy. That is why it is said that auditing begins where accounting ends.
DIFFERENCE BETWEEN ACCOUNTING AND AUDITING
a)
Scope: Accounting is concerned with preparing
of financial statements. Auditing is concerned with checking of financial
statements.
b)
Purpose: The
purpose of accounting is to show the performance and financial statement. The
purpose of auditing is to certify the true and fair view of financial
statement.
c)
Nature: Accounting
is concerned with current data. It constructive in nature. Auditing is concern
with past data. It is analytical nature.
d)
Knowledge: Accounting
works requires that accountant must have accounting knowledge. Auditing work
required that an auditor must have accounting as well as auditing knowledge.
e)
Status: The
accountant is permanent employee of the business. The auditor is an independent
person.
f)
Start: The
work of an accountant starts when the work of bookkeeper ends. The work of an
auditor starts hen the work of an accountant ends.
g)
Qualification: An
accountant may not be a Chartered Accountant as per law. An auditor must be
Chartered Accountant for public companies.
h)
Principles: The
accounting principles include going concern accrual consistency and prudence.
The auditing principles include independence, objectivity, full disclosure and
materiality.
i)
Methods: The
accounting methods include depreciation, amortization and valuation. The
auditing method include manual and computerized.
j)
Techniques:
Accounting technique includes depreciation rate interest rate and
installment payment. Auditing technique include vouching, verification and
valuation.
k)
Rules: Accounting
is not governed by any code of conduct laid down by any institute. Auditing is
governed by code of conduct as laid down by institute of chartered accountants.
l)
Necessity: Accounting
is necessity of every business entity whether small or large. Auditing is not
necessity of every business.
m)
Report: The
accounting work requires no report to any party. The auditing work requires
separate report to shareholders director or owners.
Answer of Question no.2.
INTERNAL CHECK(IC)
The term
internal check implies that the work of various members of the staff is
allocated in such a way that the work done by one person is automatically
checked by another. It is defined as “such an arrangement of book keeping
routine where in errors and frauds are likely to be prevented or discovered by
the very occupation of book keeping itself’.
Internal
check is a system under which accounting methods and details of an
establishment are laid out that the accounts and procedures are not under the
absolute and independent control of any one person or the contrary the work of
one employee is complementary to that of another.
The system
of IC is based upon the principle of division of labor, where in performance of
each individual is automatically checked by another. This is possible by
properly allocation the work and integration of function of the employees in
such a manner their work complements each others.
OBJECTIVES OF INTERNAL CHECK:
a)
Eliminates
frauds and errors to prevent misappropriation of goods in cash.
b)
To encourage
specialization of labor.
c)
To reduce
the time spent on a particular work.
d)
To exercise
moral pressure over staff members.
e)
To make
accounting system more reliable.
Essentials of good
internal check system
a. No single staff shall have absolute control over recording of all the
aspects of business transactions by himself.
b. The same staff shall not be allowed to have access to all books of
accounts as well as physical custody of the assets.
c. Each member of the staff should be made responsible for a specific work.
d. All officials and employees holding responsibility towards cash,
securities or stock should be encouraged to proceed on annual leave to prevent
the concealed fraud.
e. The duties of the members of the staff should be changed from time to
time.
f.
Attempt should be made to introduce mechanical
devices to prevent mis-appropriation of cash.
g. Each transaction should pass through a definite route and through
several hands.
h. All books, vouchers, documents should be classified and made available
for easy reference.
i.
Proper record must be maintained of the incoming
and outgoing of goods from the business premises.
j.
Self balancing ledger system should be introduced
to make the system more efficient and effective.
k. No undue importance should be given to any staff member and too much
reliance on any staff member should be avoided.
l.
Division and allocation of duties among the staff
members must provide for an automatic check by others.
Difference between Internal Check, Internal audit
and Internal Control
Internal
check is a system under which accounting methods and details of an
establishment are laid out that the accounts and procedures are not under the
absolute and independent control of any one person or the contrary the work of
one employee is complementary to that of another.
Large
scale organizations usually develop a system to review their activities to
identify areas of non performances. Internal audit is a tool used in this
regard. Internal auditing
involves a continuous critical review of financial and operating activities by
a staff of auditors functioning as full time salaried employees.
Internal
control is a broad term which is normally used to control financial and
non-financial activities. It involves a number of checks and controls exercised
in a business to ensure efficient and economic working.
Main points of distinction are
given below:
Internal Check
|
Internal Audit.
|
Internal Control
|
1. It is an arrangement of
duties allocated in such a way that the work of one person is automatically
checked by another.
|
1. It is independent appraisal
of operation and records of the company.
|
Internal control is the whole system of controls, financial and otherwise,
established by the management in order to carry on the business of the
company in an orderly manner.
|
2. The purpose of IC is to
prevent minimize possibilities of errors and frauds.
|
2. The purpose is to detect errors and
frauds that are already committed.
|
2. The purpose is to ensure adherence to management policies,
safeguard assets and completeness of records
|
3. IC doesn’t require separate
staff. It represents only the arrangement of duties.
|
3. It requires separate staff
employed only for this purpose.
|
3. It requires separate staff
employed for internal audit and internal check.
|
4. IC is a continuous process.
|
4. The Internal auditor has to
report periodically about various inefficiencies and suggest improvements.
|
4. Internal control is a wider term which includes internal check, internal
audit, etc.
|
5. It is devices of doing the
work.
|
5. It is a device for
monitoring the work.
|
5. It is a device of managing
the work.
|
6. Scope of Internal Check is
limited especially to the accounting department.
|
6. The scope of internal audit
goes on beyond accounting department.
|
6. It covers whole
organisation.
|
Answer of Question
no.3.
Vouching is the
backbone of auditing
The act of
examining vouchers is referred to as vouching.
It is the practice followed in an audit, with the objective of
establishing the authenticity of the transaction recorded in the primary books
of account. It essentially consists of
verifying a transaction recorded in the books of account with the relevant
documentary evidence and the authority on the basis of which the entry has been
made; also confirming that the amount mentioned in the voucher has been posted
to an appropriate account which would disclose the nature of transaction on its
inclusion in the final statements of account.
After examination, each voucher is marked in a manner to ensure that it
may not be presented again in support of another entry.
Vouching is
a substantive audit procedure which aims at verifying the genuineness and
validity of a transaction contained in the accounting records. It involves examination of documentary
evidence to support the genuineness of transaction. Thus the object of vouching the payments of a
business is not merely to ascertain that money has been paid away; but the
auditor aims to obtain reasonable assurance in respect of following assertions
in regard to transactions recorded in the books of account that:
(i)
a
transaction is recorded in the proper account and revenue or expense is
properly allocated to the accounting period;
(ii)
a
transaction pertains to entity and took place during the relevant period;
(iii)
all
transactions which have actually occurred have been recorded;
(iv)
all
transactions were properly authorised; and
(v)
transactions
have been classified and disclosed in accordance with recognised accounting
policies and practices.
It is
through vouching that the auditor comes to know the genuineness of transactions
recorded in the client’s books of account wherefrom the financial statements
are drawn up.
Apart from
genuineness, vouching also helps the auditor to know the regularity and
validity of the transaction in the context of the client’s business, nature of
the organisation and organisational rules.
Thus, the
auditor’s basic duty is to examine the accounts, not merely to see its
arithmetical accuracy but also to see its substantial accuracy and then to make
a report thereon. This substantial
accuracy of the accounts and emerging financial statements can be known
principally by examination of vouchers which are the primary documents relating
to the transactions. If the primary
document is wrong or irregular, the whole accounting statement would, in turn,
become wrong and irregular. Precisely
auditor’s role is to see whether or not the financial statements are wrong or
irregular, and for this, vouching is simply imperative. Thus, vouching which has traditionally been
the backbone of auditing does not merely involve checking arithmetical accuracy
but goes much beyond and aims to check the genuineness as well as validity of
transactions contained in accounting records
Important points to be
considered while vouching :
a)
All the vouchers must be printed and serially numbered. Any hand
written voucher must be seen with suspicion.
b)
Accounting entries must correspond to serial number of vouchers.
c)
Voucher should belong to the period under audit and it should be in
the name of client.
d)
Receipt voucher should have signature of recipient if received in
cash.
e)
Payment should be made through cheques only. Cash payment voucher
should be examined in detail to detect
embezzlement or misappropriation of money.
f)
All voucher should be seen and
signed by the competent authority
of business.
g)
voucher is
duly authorised;
1)
the voucher
comprised all the relevant documents which could be expected to have been
received or brought into existence on the transactions having been entered
into, i.e., the voucher is complete in all respects; and
2)
the account
in which the amount of the voucher is adjusted is the one that would clearly
disclose the character of the receipts or payments posted thereto on its
inclusion in the final accounts.
h)
All expenses and expenditure should be reasonable in the eyes of
auditor. He can always raise his eyebrows if any excessive payment is noticed.
i)
All vouchers should relate to business. Any voucher of personal
expense should not be paid by the business.
Answer of Question no.
4.
A person can be appointed as
Company only if he has the following Qualification(Section 226) :
a)
He/She be
practicing chartered accountant. Section 226
b)
If auditor
is a firm, all the partners must be practicing chartered accountants. Sec. 226
c)
To audit the
cost records of the firm maintained u/s 209(1)(d) of Company's Act 1956, the
auditor must be a practicing cost accountant. Section 233 B.
d)
If a firm of
cost accountants is appointed as cost auditor to audit the cost records, all
the partners of the firm must be practicing cost accountants. Section 233B
Appointment of Company Auditor: (Section 224) :
Appointment of First Auditor: The first auditor of the company is to be
appointed by BOD within 30 days from the date of incorporation of company. Note
here that this is not from the date of commencement of business. First auditor
shall hold office upto the conclusion of first AGM. If BOD fails to appoint the
first auditor, the auditor can be appointed in first general meeting. If no
auditor is appointed in general meeting, the CG will appoint the first auditor.
Appointment of subsequent auditor : All subsequent auditors will be
appointed in AGM except in certain circumstances.
Appointment by Special Resolution Section 224A :(Special resolution means 75% votes in favour). In case of a
company in which 25% or more of
subscribed capital is held by any Govt., Govt. Company, Financial Institutions,
Nationalized Bank or Insurance company, then the auditor will be appointed in AGM by passing special
resolution.
If the
company fails to pass the special resolution, then CG will make the
appointment. The detailed description of the above is as follows: An auditor
will be appointed by passing special resolution in the following case When the
25% or more of the subscribed share capital is held (singly or jointly) by :
a)
Central
govt. or State govt. or a Govt. company ;
b)
A public
financial institution ;
c)
Any
financial institution or other institution in which state govt. has 51% of
subscribed capital
d)
A
nationalized bank or an insurance company carrying on general insurance
business.
Appointment in case of Casual Vacancy : Casual vacancy created due
death, insolvency or disqualification (but not due to resignation) of the
present auditor can be filled by the BOD. Casual vacancy created due to resignation
of auditor, can be filled only in the general meeting. An auditor appointed
under casual vacancy will hold office upto the end of next AGM.
Appointment by CG : When no auditor is appointed by the company, the company will
inform the CG within 7 days of such meeting and the CG will appoint the
auditor.
Removal of an auditor:
To
secure the independence and authority of auditor, his removal before the expiry
of his term has been deliberately made hard in the Company's Act 1956.
Following procedure should be adopted for removal of auditor before the expiry
of his term ;
1)
The company
must obtain the prior permission of CG.
2)
After
obtaining permission from CG, the company will give 14 days notice to
shareholders with a copy to concerned auditor.
3)
The auditor
may send his representation to the company. The company will circulate such
representation to all shareholders or such representation may be read out in
the general meeting.
4)
If general
meeting passes a resolution to remove the auditor, the auditor stands removed.
5)
If the
auditor is to be removed by the company after the expiry of his term (which is
conclusion of next AGM), the company has to give 14 days notice to its members
with a copy to the concerned auditor.
Duties of Company Auditor (Section 227) :
Duties towards the shareholders :
a.
Report
shareholders about true and fair state of affairs of the company;
b.
State that
balance sheet and profit and loss a/c give all information required by law;
c.
State that
balance sheet and profit and loss a/c agree with the books of account;
d.
State that
balance sheet and profit and loss a/c agree with accounting standards;
e.
State that
he has obtained all the necessary information ;
f.
State
whether the company has maintained all books as required by law;
g.
State the
reasons of qualification in his report;
h.
State that
he has received the audit report on the branch accounts audited by other
auditor and how he has dealt with the same in preparing his report;
i.
Auditor
shall state in his report whether :
j.
The loans
taken are properly secured and the terms of loans are not against the interests
of the company ;
k.
Loans given
are shown as fixed deposits and the terms of loans are not against the
interests of the company;
l.
Transactions
recorded as book entry are not against the interests of the company
m.
Personal
expenses of directors have not been charged to revenue a/c of company;
n.
The company
fulfills the requirements of CARO 2003.
Duties towards Company :
a.
Prospectus :
According to Sec 56, the auditor is required to certify profits or losses,
assets & Liabilities and dividend paid etc in the prospectus.
b.
Statutory
Report: Section 165 requires that the auditor has to certify the statutory
report. (what is statutory report any way?)
c.
Public
Deposits : Section 58AA requires the auditor to report about whether the
company has followed all rules and guideline of RBI in regard to public
deposits or not.
d.
Signature on
Audit Report : Section 229 :It is duty of auditor to sign on his report.
e.
Insolvency :
Section 488 : If the company wants itself to be declared insolvent, it is duty
of auditor to prepare profit and loss a/c for the current period.
Duties towards government :
a.
CARO − 2003
: The auditor has to report para-wise that the company has fulfilled all the
requirements of CARO − 2003.
b.
Assist the
Investigation u/s 237: It is duty of auditor to assist the investigation
ordered by the CG u/s 237.
Duties towards General Public :
a.
His office
is of confidence and faith. He must be reliable in all respects.
b.
He should
reveal all material information regarding the state of affairs of the company
to the company as well as to the general public.
c.
While
issuing prospectus u/s 56, he should see that the prospectus does not include
any misleading information or material.
Answer of Question no.5.
a) Management Audit:
Objectives of management audit are (i) to detect and correct the human
limitations of top management; (ii) to improve upon management’s productivity;
(iii) to avoid possible losses arising from inefficient management and (iv) to
study the current state of all affairs of the management and suggest suitable
measures for improvement.
The management audit is very
useful for society at large. It is intended to review all managerial aspects of
the company so as to enhance efficiency and efficacy of the entire system which
has a social advantage as well. It serves the interest of different segments of
society like customers, creditors, stakeholders, government and people at
large.
Management audit is beneficial to every one connected with the
organization in any manner because it is intended to make improvements in all
processes and functions of management. Foreign collaborators invest their funds
in the organization and would always wish for better utilization of it. They
would like to ensure that the management is not inefficient; management audit
provides them such assurance.
The following are some of the circumstances in which the management
audit may be useful :
1)
While advancing loans, the lending institutions may require the
management audit to be conducted;
2)
Foreign investors / collaborators usually demand management audit
report before releasing funds for growth and expansion;
3)
Company may itself feel the necessity of management audit for
evaluating its performance, efficiency and efficacy;
4)
When one company wants to acquire another company, it may insist on
conduct of management audit before acquisition;
5)
Social image may be bettered by conduct of management audit as it is
not mandatory in nature.
b) Cost Audit
It is an audit process for
verifying the cost of manufacture or production of any article, on the basis of
accounts as regards utilisation of material or labour or other items of costs,
maintained by the company. In
simple words the term cost audit means a systematic and accurate verification
of the cost accounts and records and checking of adherence to the objectives of
the cost accounting.
As per ICWA London’ “cost audit is the verification
of the correctness of cost accounts and of the adherence to the cost accounting plan.”
The ICWAI defines cost audit as " system of
audit introduced by the government of India for the review, examination and
appraisal of the cost accounting records and attendant information required to
be maintained by specified industries"
From above definition of cost audit, it is clear that cost audit is a
sytematic examination of cost accounts to verify correctness of cost accounting
records.
As per the section 233 B of Company Law 1956, there is the provision for
cost audit. Under this section, cost audit is compulsory for all the public and
govt. companies which are associated with the processing and production. If
there aggregate value of net worth exceeds 5 crores or total sale exceeds 20
crores, the cost audit is must.
c) Efficiency Audit
Efficiency audit means whether operations of organization are
competent to achieve the goal of organization. Its purpose is to assess that
the control and supervision of management are in every functional and
operational area of the firm. Efficiency audit means study of competence of
people, policy and procedure to achieve goals.
Efficiency audit has two parts :
First part is about people working in the organization. Whether they
have proper qualification, experience, quality and facility to work efficiently
and effectively. The efficiency and the effectiveness of an executive in
discharging his obligation towards the attainment of objectives of the
organization will also form part of efficiency audit.
The second part is about functions and operations in the organization.
Whether the tools, techniques and terms of functions and operations are
effective and efficient with a view to attain optimum utilisation of resources
of the organization.
Efficiency audit includes the following :
a.
Reduce the areas of uncertainty of the business;
b.
Remove the bottlenecks to achieve the goals and objectives of the
organization;
c.
Remove the inefficiency and ineffectiveness of operations;
d.
Protect against the causes of business failures;
e.
You can also write your own points.
d) Propriety audit
Propriety
audit is a method of audit which verifies the reasonableness of expenditure
incurred by an organization and is not detrimental to public interest. This
audit is generally applicable to the government organizations.
According to
E. L. Kohler, " Propriety means that which meets the test of public
interest, commonly accepted customs and standards of conduct. Propriety audit
is an audit in which various actions and decisions are examined to find out
whether they agree in public interest and whether they meet the standards of
conduct."
Propriety
audit not only determines the accuracy of books of accounts but also justify
the expenditure in term of propriety and reasonableness. Therefore, this audit
tests the public interest and evaluates its financial propriety in relation to
standards or commonly accepted customs. Propriety audit is generally applicable
to the government organizations as it involves a huge public money. So, public
accountability is the main criteria of propriety audit. It evaluates the
efficiency and prudence of government department and its propriety in relation
to public money. The scope and objectives are:
a)
Confirm
collection of revenue: Propriety audit helps to assess whether revenue are
properly collected and recorded in the books of accounts.
b)
Helps to
detect fraud and misrepresentation: This audit helps to judge whether there is
any fraud and misrepresentation of funds.
c)
Wastage of
funds: With the help of propriety audit wastage of public funds can be
determined and also its utilization can be verified.
d)
Verify
justification of expenditure: Verify Justification of expenditure in relation
to generally accepted standards and customs.
e)
Not
detrimental: It verifies that the contracts made by the organization with the
third parties are not detrimental to the public interest.
Post a Comment
Kindly give your valuable feedback to improve this website.