MF0013 mL
1 Distinguish between Government audit(GA) & Specific audit(SA). Explain types of
GA&SA?
An audit may be GA or SA.Former covers all areas of management(M) & is co-focussed . Latter covers one or more specific areas of M . e.g, cost audit & tax audit are SA.
GA is usually done on a routine, predetermined schedule. But SA are need-based and may occur at any time, except for
statutory audit (Astatutory) of a specific nature, like cost audits, secretarial audit (Asecretarial) & tax audits.
GA are similar in terms of process and methodology. However there are major differences in terms of scope, approach and responsibilities of auditors.
GA may be:
i)Independent audit(IA) is conducted by an independent, professionally qualified auditor. He should not be employee (e) of firm for which he is conducting the audit.CA or people certified under Restricted Auditors’ Certificate Rules, 1956 can conduct audit.
They ‘ve to see financial statements (FS) as b/s ,PLA &CFS.As management (M) will want to project favourable image of their performance, & may manipulate financials .So he must be an independent to reflect a true and fair view of the financial health of co. As per Institute of Chartered Accountants of India (ICAI), he has to be ethical in using GAAP. As per ,ICA ,a person who has any interest, financial or otherwise, in co cannot be appointed as auditor(A).
Nevertheless he does not have to be hostile& view facts and figures with suspicion. He should be impartial. IA has below types
a) Astatutory (SA) is mandatory under a law. Its scope, qualifications required of A are generally prescribed by concerned enactment .e.g, Indian Companies Act(ICA), 1956. governs audit limited co ii)Banking Regulation Act, 1949 governs audit banks. iii)Insurance Act, 1938 is for insurance co iv)Electricity (Supply) Act, 1948 governs audit of Electricity Boards/Co.v)Cooperative Societies Act & Public and Charitable Trust Act are also other.
Features
1. It is compulsory and even the owners cannot waive it.
2. Qualifications of A must be in line with law.
3. Though he is appointed by the owner, his rights, duties and liabilities cannot be curtailed.
4. He is a representative of owners of firm &has to be permitted to function freely.
As per ICAI , a/c g must be as per GAAP.
Objective of audit of FS : An audit of FS s allows A to express a factual and fair opinion of FS .
Relationship of A’s opinion with propriety of business conduct: A ’s opinion helps to establish reliability of FS .
However it should not be assumed that A ’s opinion can provide a guarantee to the future viability of the enterprise or the effectiveness with which M has conducted the affairs of the enterprise.
Thus, he does not give an opinion on the propriety of business conduct or its future prospects on these matters. However, as per requirements of SA 570 ‘Going concern’, he should assess if the going concern concept can be applied to the entity and whether it will continue in the near future, i.e. a period not exceeding one year from b/s date.
Responsibility for the preparation of FS : The main responsibility of M is the preparation of FS . The other responsibilities also include:
Maintaining adequate a/cg records &IC.
Selecting and implementing a/cg policies.
Protecting the assets of the enterprise.
Scope of audit:
The scope of a financial audit is determined by the terms of engagement between the client & A , subject to need of the relevant law of ICAI.
The scope of audit needed by rule by of ICAI cannot be curtailed by the engagement terms.
Auditor(A) must focus on material aspects of the financials being audited viz., the main factors of the business at an individual level and collectively. These factors are different for different co & even for the same co they vary between different periods.
He should obtain reliable and sufficient data from a/cg records source data for preparing FS .
He should also decide whether the relevant information is properly disclosed in FS . The disclosure must be in line with a/c standards and there should be no attempt to mislead.
He is entitled to qualify his opinion or express disclaimer when it is not feasible for him to do a complete check. Some of the inherent limitations of the audit process are listed below.
Limitations: The financials are prepared on the basis of the accrual’s concept, &so absolute certainty with respect to the accuracy of the figures is rarely attainable.
e.g, A has to be content with exercising reasonable judgment are valuation of inventories, collectability of receivables, depreciation and in case of extended contracts even revenue recognition.
There is also the risk that some material misstatement may not be discovered, in view of the large volume of trn being audited in a short span of time. Hence the auditor can state in his report that his opinion is subject to the explanations provided to him.
Other iA
In the case of certain organisations, iA is not mandated by any law or required under any statute.e.g,in India sole proprietorships and partnership firms need not produce an auditor’s report along with their ITR. However, many of these entities on their own get iA done and engage a professional auditor to perform the task.
2 Write the similarity and dissimilarity of IA & External Audit(EA)? Explain the Cooperation b/w external and internal A .
Points of similarity
Both IA &EA are same are:
1. Evaluation of IC systems of the entity. 2. Correctness of a/cg documentation, bookkeeping & financial reporting. 3. Verification of assets.
There is a similarity in approach & methods also. Sampling, test checking, application of statistical tools &administering questionnaires are tools adopted in both systems.
Points of dissimilarity
EA is usually mandated by law. / But IA is not mandatory except for co to which Co (Auditor’s Report) Order, 2003 applies.Here auditor is independent of firm which appoints him. / But auditor is e of firm reporting to a Division or Functional Head (usually Finance) & so his freedom might be limited. Even if an outside firm or person is appointed, independence may not be assured as he is appointed by M & has no legal authority.
Its Scope is well-defined by the statute that mandates audit.
Limited amount of interpretative changes may be possible,
but mostly it is the beaten track. / Its scope is determined by M& may be expanded or restricted depending upon the peculiarities of the particular situation being audited.
e.g, Astatutory must compulsorily comment on physical verification of inventories being done once a year, close to the year-end. But IA may choose continuous verification as
appropriate method for co.
Responsibility of auditor is mainly towards shareholders who
have appointed him, &other external stakeholders of co. / Here he is responsible directly to internal M &to the board.
He is also answerable to E adtr & must share his findings with him.
He has statutory powers under ICA &related statutes. / He is given his powers by M. His powers depend upon needs of
M.
He submits his report to owners or
shareholders. / He submits his report to M.
Its audit is conducted periodically – usually once a year. / It is done throughout the year on the basis of a time-bound program.
3Explain quality control policies adopted by an audit firm.
Audit firms adopt policies as
1. Ensure that the checks and balances in a/cg processes are effectives. 2.Verifying compliance with rules laid down for key activities and reporting acts of omission and commission. E.g,if a purchase order for capital eq of any value requires Purchase department to get at least 3 quotes, Internal audit(IA) have to check if this rule has been followed in all cases, and report exceptions.
3. Ensure physical availability and usefulness of fixed assets as per company’s records, and checking utilisation of major assets vis-à-vis plan.e.g, a piece of equipment purchased has not been installed within a reasonable period of time. The auditor will check and report on the justification for the asset not having been put to use.
4. Review M reporting structure and the utility of reports flowing out of the system. IA is often considered a part of the finance function since the technical expertise required to do audit. While this is natural, it may be a short-sighted approach. The internal auditor should be free to review and if necessary investigate all M,& by making him report to finance this freedom might be compromised.
See below extract from IA.
IA has to ensure that a/c are maintained correctly by the accounts department and that the rules, regulations and orders having financial bearing and issued by the competent authorities are observed by all departments. For this purpose, IA scrutinizes a/c as purchase orders, receipt vouchers, issue vouchers, cash vouchers, payrolls, adjustment memos, sale invoices, journal entries etc.
It has to review all trn from the angle of financial propriety and suggest methods of executive action for effecting economy and for safeguarding against fraud, misappropriation or other losses. The emphasis is upon prevention; but where irregularities are detected IA should promptly report them to the higher authorities and ensure action is taken promptly.
IA has to appraise efficiency of AS & actual performance of a/c staff. It has to undertake special investigations and reviews as may be required from time to time and on the instructions of CFO. It is entrusted with the responsibility of conducting physical verification of stores, raw materials, finished products and movable assets.
IA should check the accuracy of monthly journal entries prepared by various sections before these are passed on to the central a/c for incorporation in the main and sub-ledgers.
It also has the duty of constantly improving the system of internal checks and controls.
4 Explain he basic principles of governing internal control(IC)
Ans:- Basic principles governing IC are as follows:
1. A proper system, preferably in writing, must be implemented so that origination, recording &a/cg of business trn take place in a standardised way. 2. Authority and responsibility of every official should be fixed. 3. A/cg entries should not be allowed without a supporting document.
4. No person should handle trn end to end: the work of a person should be checked automatically by another person in the same or another department. 5. Responsibility for custody and control of assets should be segregated from the responsibility of a/cg for the assets. 6. As far as possible controls should be built into the functions themselves. E.g, to reduce credit risk and minimising collection period can be via controls in a/cg & sales system instead of having a separate credit control function.
7. Every IC should be established after a cost-benefit analysis. 8. Books of a/c should be maintained up to date. 9. The entity must have a system of rotation of duties among e . E should be encouraged to take leave as per their roster, especially e handling cash. 10. System must have inbuilt verification system from independent records.E.G, verification of bank balances from bank statement, comparison of purchase ledger account with supplier statement, etc. 11. System must facilitate cross-functional physical verification of assets: for example cash verification by Purchase official or inventory test-check by A/c staff. 12. A reliable & accurate MIS should be in place.
5 Discuss the specific problems of Electronic Data Processing (EDP) relating to ICl.
Ans:-
Implementation of IC in EDP system, give rise to below Problems :(a)Responsibility for initiating trn,recording trn & custody of assets, lies with separate individuals in
manual system (MS). This is a basic control necessity . However, in a computer system the traditional idea of
Separation(S) of duties is not always applicable.e.g, program may print a cheque for the amount owed to a creditor after reconciling a vendor invoice against related documents. Here this program is performing functions that would be considered incompatible in MS . S of incompatible functions may be even more difficult to get in a minicomputer. While some of these allow users to change program & data easily, a trail of these changes may not be available. This makes it almost impossible to trace the origin of the error & who is responsible for it.
(b) Key characteristic of IC is a clear line of authority &responsibility (A&R). However, in a computer system delegation of A&R in a clear way may be difficult because multiple users may share some resources. E.g, one of the reasons for the use of dBMS is to reduce the control problems that arise with maintaining redundant data by providing many users access to the same data. Hence it is often difficult to identify the person responsible for compromising the integrity of data when multiple users have access to the same data. The solution proposed by some organisations is to have one user own the data and be ultimately responsible for the integrity of that data.
(c) data processing(dP) technology is much more complex today as compared to the days of MS . Personnel who are highly skilled are required to develop, modify,