Auditing

In this tutorial, we will learn about auditing the process of examining an organization’s financial records to determine if they are accurate and by any applicable rules, regulations, and laws.

Principles Of Auditing:

Fundamental principles governing an audit describe the basic law which governs the auditor’s professional responsibilities and complies with wherever an inspection is carried. They are as given below:-

Integrity Objectivity And Independence:

Any professional should be straightforward, honest, and sincere in his approach. An auditor should be fair, truthful, impartial, and have access to the organization’s entire financial records. He is also entrusted with funds of other persons for audit. They should be a man of high integrity and objective.

Confidentiality:

The auditor should respect the privacy of information acquired during his work and not disclose the information without the client’s prior permission unless there is a legal duty to disclose certain information, he may do so with specific authority. The auditor should not use the information for his gains or the advantage of the third party.

Skill And Competence:

The auditor must acquire competent, skillful, and keep himself abreast of the latest developments, including pronouncements of ICAI on accounting and auditing matters. As the professionally qualified persons act as auditors, their specialized knowledge, skills, and competence acquired through study and formal courses help them perform flawlessly. The skill and expertise gained by the auditor should be applied with due care.

Work Performed By Others:

The auditor delegates some work to others and use the work performed by others, including that an expert, he continues to be responsible for forming and expressing his opinion on the financial information. An auditor may have to rely on the work and report of another auditor. Then he should ensure the adequacy of the nature and purpose of the work.

Documentation:

The auditor should document matters essential in providing evidence to ensure that the audit is carried out following basic principles.

Planning:

The auditor should plan his work to enable him to conduct the audit in an effective, efficient, and timely manner. He should acquire knowledge of the client’s accounting system—the extent of reliance that could be placed on internal control, and coordinate the work.

Audit Evidence:

The auditor should obtain sufficient appropriate shreds of evidence through the performance of compliance and other substantive procedures to enable him to draw reasonable conclusions from an opinion on the financial information.

Accounting System And Internal Control:

The management is responsible for maintaining an adequate accounting system incorporating various internal controls appropriate to the size and nature of business. The auditor should assure himself that the accounting system is sufficient and all the information should record. The internal control system contributes to such assurance.

Audit Conclusions And Reporting:

Based on the audit evidence, he should review and assess the audit conclusions. He should ascertain:

As for whether accounting policies have consistently applied.
Whether financial information complies with regulations and statutory requirements.
There is adequate material of disclosure of material matters relevant to the presentation of financial information subject to regulatory requirements.

The auditor’s report should contain a clear written opinion on the financial information. A clean audit report indicates the auditor’s satisfaction in all respects. When a qualified, adverse, or disclaimer of view or reservation of advice on any matter is to made, the audit report should state the reasons.

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.

Disadvantages or Demerits of Auditing

In this tutorial, we will learn about the disadvantages or demerits of auditing has to depend upon books of accounts and other records presented before him. He never thinks of the intentions of those who have prepared them.

The auditor has to depend upon the book of accounts and other records presented before him. He never thinks of the intentions of those who have prepared them. If these intentions are malaise and there is manipulation in the accounts, the auditor will not be able to bring them to light. He has also to depend upon experts’ opinions as he is not an expert in all fields like technical, legal, or others. It isn’t easy to find the accounts as complete and genuine everywhere. Some other limitations of an audit are as follows:

Higher Cost Burden:

Due to the higher cost burden, the auditor limits his scope of work to selective testing and sampling; thus, in-depth checking of the book of accounts is not possible.

Based On Test Checks:

An auditing exercise is based on test checking. Inferring a result based on test check always need to be true.

Based On Information Provided By The Management

The audit opinion is based on the management’s information. Hence outsiders cannot entirely rely on the auditor’s report.

Based On Estimates:

In an inherent part of the accounting process, and no one, including auditors, can foresee the outcomes of uncertainties. Estimates range from the allowance for doubtful accounts and an inventory obsolescence reserve to impairment tests of fixed assets and goodwill. An audit cannot add exactness and certainty to financial statements when these factors do not exist.

Inconclusiveness Of Evidences:

The evidence obtained by an auditor is persuasive rather than conclusive. For example, an architect’s certificate of valuation for a newly constructed building of a client may not be convincing evidence of the correct value of a building.

Insufficient Time:

Generally, an auditor needs to release the report up to a specified timeline. Sometimes this timeline becomes a constraint for an auditor in carrying out the auditing exercises. Moreover, there is a relatively short time available for resolving uncertainties existing at the financial statement date.

The problems are being complicated day-by-day unless an auditor is familiar with the recent changes; he cannot perform his functions with ability and prudence. Hence, capable persons are needed in every country to complete the audit work so that the business may be directed appropriately and administered. It will depend upon the cooperation, especially between the businessman, the government, and the person conducting an audit.

PARTICULARS	AUDITING	INVESTIGATION
Meaning	An audit is an independent examination of financial information of an entity when such an examination is conducted with a view to express an opinion thereon.	Investigation implies the systematic, critical, and special examination of the records of a business for a specific purpose.
Mandatory nature	Mandatory for companies, for others it is voluntary	Voluntary
Conducted by	A Chartered Accountant within the meaning of the Chartered Accountant Act 1949	Any person who may not be a Chartered Accountant
Appointment agency	Owners or shareholders of the enterprise	Owners or management or even third parties may appoint the investigator
Evidence	Much of audit evidence is persuasive rather than conclusive	Seeks conclusive or corroborative evidence
Form of reporting	The matters to be covered in the audit report are sometimes prescribed by law.	There is no statutory form of the investigation report.
Pre-conceptions	An audit is not based on suspicion unless circumstances exist to arouse suspicion.	Its essence lies going into the matter with some pre-conceived notion suited to the objective.
Period covered	Generally one financial year.	Not necessarily restricted to one financial year. It can extend for a period consisting of several years.
Protection of interests	Work is carried out on behalf of the owners even if the power of appointment is delegated to say, a board of directors.	Work is carried out from the viewpoint of the appointing agency
Scope and coverage	General- when compared to investigation seeks, to form an opinion on the financial statements.	Specific- seeks to answer only those questions laid down in the engagement letter.