Types Of Audit

In this tutorial, we will learn about types of audit the nature and scope of review due to various factors such as the size of the organization, strength of the internal control system, legal requirements, etc.

The reports and statements can be of any nature like revenue reports, expense reports, management account records, etc. Companies will not receive a rubber stamp certification; this is an in-depth program that requires an exhaustive and thorough audit of one’s processes said by “John Kania.”

The various types of audit are as follows:

Statutory audit
Internal audit
Secretarial audit
Cost audit

Other forms of an audit are as follows:

Tax audit
Bank audit
Co-operative society audit
Insurance audit
Partnership firm audit
Government audit
Management audit
Sole proprietorship audit
Efficiency audit
Proprietary audit

STATUTORY AUDIT / FINANCIAL AUDIT:

A statutory audit is often called a financial check. An Independent business review is usually conducted to ascertain whether the balance sheet or profit or loss account presents an accurate and fair view of financial position and a working result of an organization under audit. The financial review is needed because the company’s control is vested in the hands of the management of the company, and the administration also prepares the financial statements.

The owners (shareholders), therefore, need assurance that the financial statements prepared by the management are reliable. The opinion of the auditor an independent expert assures the owners about the reliability of the financial statements. Similarly, investors wish to invest their money in the shares of the companies based on their profitability and financial position. They will also place greater reliance on financial statements if they audited. According to the law:

The auditor will have access to books of accounts and vouchers, etc., at all times, and he can also seek information from the company’s officers as he may deem necessary.
If any qualifications in the audit report, the reason for the same must be stated in the story.
The auditor is required to comply with auditing standards.
In his story, he must declare, besides other things, whether the financial statements represent an accurate and fair view of the company’s affairs at the end of the fiscal year.
In case of auditor suspects any fraud, he must immediately report to the Central Government.

Internal Audit:

As may be prescribed, certain classes of the society shall appoint an internal auditor who will company and make a report thereon to the board of directors. The jury may decide any Chartered Accountant (except statutory auditor of the company) or cost account or other professional, can be appointed to conduct an internal audit.

Secretarial Audit:

In a compliance audit and part of total compliance management in an organization. The secretarial audit is a useful instrument for corporate compliance management. It helps to detect non-compliance and to take corrective measures. It is a process to check compliance with provisions of various laws and rules or regulations, procedures, maintenance of books, records, etc. by an independent professional to ensure that the company has complied with the legal and procedural requirements and also followed the due processes.

The ever-increasing complexity of laws and responsibilities of directors make it imperative that a practicing Company Secretary report whether or not there exist proper compliance mechanism and systems in the corporate structure. PCS has also to verify whether diverse requirements under applicable laws have been duly complied with or not and if there is a need for any corrective measures or improvement in the system.

Secretarial audit continuously would help the company initiate corrective actions and strengthen compliance mechanisms and processes. It is recommended that the secretarial audit be carried out periodically, and adverse findings, if any, be communicated to the board for corrective action. There is a multiplicity of rules or laws or compliance management systems to ensure compliance of laws applicable to the company.

It has a two-fold objective:

To protect the interest of the stakeholders.
To avoid any legal action against the company and its management.

As of now, the secretarial audit is not mandatory for companies. However, it is optionally undertaken by the companies for maintaining good Corporate Governance practices.

Cost Audit:

The growth and development of a cost accounting system made it necessary to maintain cost records and cost books to record cost and the related transactions correctly. An essential either in financial accounting, cost accounting, management accounting system, wherever books and records are kept, must be examined independently to ensure that they have been saved and recorded fairly and collectively and that there are no errors of omission and commission no defalcation.

Propriety Audit

In this tutorial, we will learn about propriety audit, which would mean whether the transactions are done in conformity with established rules, principles, and some established standards.

“Kohler,” has defined propriety as that which meets the test of public interest commonly accepted customs and standards of conduct and mainly as applied to the professional performance, requirements of government regulations and professional codes. The propriety audit means the verification of the following main aspects to find out:

Proper reading has been done in an appropriate book of accounts.
The points have not been misused and appropriately safeguarded.
The concern is yielding the expected results.
Financial records and reports are accurate and up to the mark.
The assets of the company are protected and not misused.
The propriety audit will check the utilization of funds.
The results are budgeted and expected to meet.

The system of propriety audit is applied in respect of the government company’s government departments because public money and public interest are therein involved. It is an essential function of a check to bring to light not only the cases of apparent irregularity but also every matter which is just judgmental appears to involve improper expenditure or waste of public money and stores even though the accounts themselves may be insufficient to see that sundry rules or orders of competent authority observed.

It has been described as an audit of the actions and decisions of the executives. The focus of such a check is on the financial discipline, the authority structure, efficiency, rules and regulations, and the protection of public interest. A propriety audit would mean whether the transactions have done conform with established rules, principles, and some established standards. It is of equal importance to ensure that the broad principles of orthodox finance are borne in mind, not only officers but also by sanctioning authorities.

It may state that it is the responsibility of the executive departments to enforce the economy in public expenditure. The function of the audit is to bring to the notice of the proper authorities of wastefulness in public administration and cases of improper, avoidable, and infrastructure expenditure.

Problems in propriety audit, however, arise mainly because of its distinct nature. The expression “propriety” is a moral term and can be understood by reference to the concept of morality accepted by society at a given time. In any auditing, the essential test lies in the formulation of auditing propositions. In the audit of financial accounts by reference to financial and legal requirements, propositions are built up about happening of events, existence, accuracy, title, ownership, compliance with the law and internal regulations, etc., which are all verifiable. The propriety audit has an inherent element of subjectivity because it is very difficult to establish standards of public interest, commonly accepted customs, standards for conduct which are not a firm basis for audit evaluation. To take care of this situation, the C&AG has developed the norms of propriety for the expenditure of public funds in our country. By laying down the standards of propriety for Government expenditure the C&AG has tried to tackle practically the complex problem of subjectivity inherent in a situation calling for propriety consideration. Another dimension of the problem noticed in the application of propriety norms in the Government sector needs also to be taken into account. The norms are applied often too mechanically and create problems for expeditious and efficient working. In the private sector, this attitude may prove counter-productive. Propriety as a moral element should be a matter of evaluation based on objectives and prevailing circumstances. The element of subjectivity has caused the proper discharge of duty very delicate and demands discretion, but the wisdom of taking commercial decisions under a dynamic environment (the economic, social, and political) must be evaluated concerning the circumstances in which these were taken and therefore, the auditor in his field must reconstruct such circumstances. The judgment of the auditor must be objective as otherwise, it would dampen the initiative of management and others in taking commercial decisions, and propriety audit would prove itself to be counterproductive.

Generally, in companies and other prominent organizations, ownership and management are separate. It means the real owners of the business have to rely on executives to make the correct decisions and take the due course of action as per the law. It is where the concept of propriety audit is born. It has been described as an audit of the steps and decisions of the executives.

Cost Audit Program

In this tutorial, we will learn about the cost audit program that should record in the audit manual, and the cost auditor should examine the following points.

A Cost audit program is the detailed plan of auditing work to be performed specifying the procedures to be followed in the verification of each item in the cost statements and giving the estimated time required.

The cost audit procedure and the program recorded in the audit manual, and cost auditor should examine the following points:

Materials:

Inventory control size, minimum and maximum stocks, material limits, reorder points, safety stocks, ABC analysis, etc.
Perpetual inventory system, physical stock checking, and accounting for differences.
While detection and prevention of pilferage or loss of stocks.
In the correct valuation of closing stocks and work in progress.
The method of pricing the issues, whether they are in reasonable limits, their reports should be examined.
Budgetary control for materials and variances from standards should examine for material cost control.
Wastage, scrap, spoilage, and defectives, whether they are in reasonable limits, their reports should be examined.
Examine how losses of materials in storage and the process accounted for and whether these are satisfactory according to cost auditing principles accepted as authoritative.
Check the material issue analysis with particular reference to non-production stock materials issued for non-production activities, including capital jobs.

Labor:

Application of labor cost control factors and devices and optimum utilization of labor by production planning, budgets, standards, performance reports, and study of effective wage policy.

Method of selection, appointment, and discharge labor turnover and functioning of the personal department.
Labor efficiency and productivity and their comparison with the standards fixed.
Idle time and overtime their control and treatment in accounting.
Wages policy and method of remuneration whether the system is working satisfactorily to the benefit of the management and the labor.
Timekeeping system and correct booking of labor cost about time /job cards.
Total wages charged in the cost records reconciled with the full payments paid during the financial year.
Check the calculation of incentives or bonuses for direct or indirect workers.
Check the amount of previous year\s and deferred payment, if any, and their treatment in cost accounting records.
Check the correctness of the analysis of wages and salaries into direct labor costs, indirect labor costs, fees, and salaries allocated to service cost centers/production/process centers/administration overheads, selling and distribution overheads, etc.

Overheads:

Allocation, apportionment, and absorption of overheads on sound bases to ensured.
Comparison of overhead expenditure to the volume of production.
Correct allocation of costs to work in progress.
Treatment of items of overheads example, factory rent, interest on capital, discounts, etc. should be examined whether they are treated on sound and accepted principles.
Obtain the trial balance of the organization under audit and prepare a list of overhead items covering factory, administration, selling, and distribution, eliminating those items of expenditure, which will not be considered in cost as per the record.
Total overheads relating to production, administration, selling, and distribution reconciled with financial accounts.
Examine the correctness of classification of overheads according to cost accounting principles.

Definition Of Cost Audit

In this tutorial, we will learn about the definition of cost audit means detailed checking of the costing system, technique, and accounts to verify their correctness and to ensure adherence to the objective of cost accounting.

A cost audit represents the verification of cost accounts and checking on the adherence to cost accounting plan. Cost audit ascertains the accuracy of cost accounting records to ensure that they conform with cost accounting principles, methods, procedures, and objectives.

Verification of the cost accounting records such as the accuracy of the cost accounts, cost reports, cost statements, cost data and costing technique
Examining these records to ensure that they adhere to the cost accounting principles, plans, procedures, and objective
To report to the government on optimum utilization of national resources.
To verify that the basic principles of cost accountancy or related rules framed there to implement specific statutory provisions are correctly carried out in maintaining cost accounts in the right manner.
To see that the organizations continue proper cost books, accounts and records either required by law or otherwise as a managerial decision.
To report on the optimum utilization of national resources to the government.

“Cost audit is the verification of accounts and check on the adherence to the cost accounting plan.” ICMA London

“Cost audit means detailed checking of the costing system, technique, and accounts to verify their correctness and to ensure adherence to the objective of cost accounting.” Smith & Day

“Cost audit can be defined as verification of correctness of cost accounts and adherence to the cost accounting principles, plans, and procedures.” ICWA India

OBJECTIVES OF COST AUDIT:

PROTECTIVE OBJECTS:

Under which cost audit aims to identify the undue wastage or losses and ensure that the costing system determines the correct and realistic cost of production.

To check the accuracy of cost accounting records and to verify that the cost accounting principles have maintained them.
To verify that the management is adhering to the accepted procedures and processes of cost accounting.
It detects errors and frauds if any.
The pinpoint deficiencies or inefficiencies in the use of material, labors, and machines and to assist the management thereby.
To see that the cost control and cost reduction program has rightly enforced.
To examine whether the expenditure incurred up to date is within the budget estimates.

CONSTRUCTIVE OBJECTS:

Cost audit provides useful information to the management regarding regulating production, economical method of operation, reducing the cost of service, and reformulating cost auditing plans.

To provide useful information and data to management for regulating production.
To assist in the selection of economical methods of operation.
To present suggestions for reducing operational costs.
To advise to resolve errors in cost accounts.
To provide recommendations and consultancy for cost control.

Benefits Of Auditing

In this tutorial, we will learn about the benefits of auditing. The main reason for setting up a business is to maximize profit for the shareholders, but problems often arise.

An audit helps to identify weaknesses in the accounting systems and enables us to suggest improvements. The process keeps our partners informed of areas/situations where advice is useful.
An audit assures directors not involved in the accounting functions on a day-to-day basis that the business is running following the information they are receiving, and helps reduce the scope for fraud and poor accounting.
An audit facilitates the provision of advice that can have real financial benefits for a business, including how the business is running, what margins can be expected, and how these can be achieved. The advice can cover anything from the tightening of internal controls to reducing the risk of fraud or tax planning.
An audit will enhance the credibility and reliability of the figures being submitted to prospective purchasers. If an owner-manager is planning on selling in the next 3 years, it may be beneficial to carry out regular audits.
An audit may be advantageous if a company is growing and likely to exceed the turnover threshold shortly, to avoid having to revisit the previous years’ figures, once the threshold has been reached.
An audit adds credibility to published information for employees, customers, suppliers, investors, and tax authorities:
- Credit ratings may be affected by not having an audit. Suppliers may not be prepared to give appropriate credit limits. Banks and trade suppliers rely in part on credit rating agencies’ assessment of the company and will look more favorably on companies that have an audit.
- The HMRC may consider the figures to be less reliable.
- In the event of insurance claims, loss adjusters often have more faith in audited accounts.
An audit assures shareholders (if they are not directors closely involved in the business) that the figures in the accounts show a true and fair view.

The various benefits of auditing are as follows:

The satisfaction of the owner:

Because of an audit, the owner will be satisfied with its various departments’ business operations and work.

Moral Check:

The process of an audit will establish a check on the minds of staff working in the business, and they will not be able to commit any irregularity as they will have fear and will also be aware that the accounts will examine soon and that action will be taken against them if any defect will be discovered. Thus the audit prevents the happening of any irregularity before it starts, and the staff hence becomes more active and responsible.

Loan Facility:

Money can borrow quickly based on the audited balance sheet from financial institutions. If accounts are audit, the real picture will be visible to banks, and it will be easy for them to issue loans as early as possible.

Ensures Compliance With Legal Requirements:

Audited statements are necessary to fulfill individual legal requirements, e.g., listing requirements of a stock exchange, etc.

Reliance By Outsiders:

Outsiders like creditors, debenture holders, and banks, etc., will rely on the books of accounts and financial statements of the business if they are audit by an independent authority (external auditor).

Independent Opinion:

Auditing is very useful in obtaining the independent opinion of the auditor about business conditions. If an independent auditor audits the accounts, the auditor’s report will be fair and correct in all respects. It will be of extreme importance for the management of the company.

Protection of rights and interest of the shareholders:

An audit helps protect the interests of shareholders in the case of a Joint Stock Company. The inspection gives the shareholders that the company’s accounts are appropriately maintained and that their investment will not suffer under any circumstances.

Detection and prevention of errors and frauds:

The errors, whether committed innocently or deliberately, are discovered by the process of audit, and its presence prevents their occurrence in the future. No one will try to subject to inspection, and hence they will have a fear of being detected.

Reinforce and strengthen internal controls:

Since the auditing exercise involves the review of the internal control system, an auditor will identify the internal control system gaps and suggest the necessary changes in the internal control system.