AUDITINGAUDITING

P.GURU PRASADP.GURU PRASAD

FACULTYFACULTY

INC GUNTURINC GUNTUR

Auditing Auditing

Audit is the activity of examination Audit is the activity of examination and verification of records and other and verification of records and other evidence by an individual or a body evidence by an individual or a body of persons so as to confirm whether of persons so as to confirm whether these records and evidence present these records and evidence present a true and fair picture of whatever a true and fair picture of whatever they are supposed to reflect. Audits they are supposed to reflect. Audits are most commonly used in the are most commonly used in the accounting and finance functionsaccounting and finance functions

Categories Of AuditsCategories Of AuditsAudit categoryAudit category Brief descriptionBrief description

Financial Financial statement auditstatement audit

Gives an opinion on the accuracy of the Gives an opinion on the accuracy of the financial statementsfinancial statementsEnsures compliance with the relevant Ensures compliance with the relevant accounting standards and reporting frameworkaccounting standards and reporting framework

Internal auditInternal audit An independent appraisal function An independent appraisal function established within an organization to examine established within an organization to examine and evaluate its activities as a service to the and evaluate its activities as a service to the organizationorganizationNeed not be limited to books of accounts and Need not be limited to books of accounts and related recordsrelated records

Fraud auditing Fraud auditing and forensic and forensic auditaudit

Deters, detects, investigates, and reports Deters, detects, investigates, and reports fraudfraudForensic: related to the legal system, Forensic: related to the legal system, especially issues of evidence especially issues of evidence

Operational Operational auditaudit

Audits operational aspects of the enterpriseAudits operational aspects of the enterpriseQuality audit, R&D audit, etcQuality audit, R&D audit, etc

Audit categoryAudit category Brief descriptionBrief description

Information Information systems auditsystems audit

Audit of computer systemsAudit of computer systemsChecks whether the computer system Checks whether the computer system safeguards assets, maintains data integrity, safeguards assets, maintains data integrity, and contributes to organizational effectiveness and contributes to organizational effectiveness and efficiencyand efficiency

Management Management auditaudit

Audit of the management, as a tool for Audit of the management, as a tool for evaluation and control of organizational evaluation and control of organizational performanceperformanceExamines the conditions and provides a Examines the conditions and provides a diagnosis of deficiencies with diagnosis of deficiencies with recommendations for correcting themrecommendations for correcting them

Social auditSocial audit Audit of the enterprise's reported Audit of the enterprise's reported performance in meeting its declared social , performance in meeting its declared social , community, or environmental objectivescommunity, or environmental objectives

Environmental Environmental auditaudit

Environmental compliance audit: a checking Environmental compliance audit: a checking mechanismmechanismEnvironmental management audit: an Environmental management audit: an evaluation mechanismevaluation mechanism

The Sarbanes-Oxley ActThe Sarbanes-Oxley Act

The Sarbanes Oxley act 2002 aimed to improve The Sarbanes Oxley act 2002 aimed to improve corporate governance and corporate accountability. corporate governance and corporate accountability. This improvement was brought about by enhancing This improvement was brought about by enhancing the internal checks within the organization by the internal checks within the organization by incorporating a new control systems which incorporating a new control systems which guaranteed complete disclosure in financial guaranteed complete disclosure in financial reporting and total transparency in corporate reporting and total transparency in corporate governance.governance.

The public organizations in the USA, international The public organizations in the USA, international companies registered with the securities and companies registered with the securities and exchange commission, and also the auditing firms exchange commission, and also the auditing firms that assisted them were all bound by the Sarbanes that assisted them were all bound by the Sarbanes Oxley actOxley act

The Sarbanes-Oxley ActThe Sarbanes-Oxley Act Sec 302:-the financial reports should be Sec 302:-the financial reports should be

certified by signing officers. (Corporate certified by signing officers. (Corporate Responsibility)Responsibility)

Sec 401:- the financial statements should be Sec 401:- the financial statements should be accurate in that they should not have wrong accurate in that they should not have wrong statementsstatements

Sec 802:-this section talked about the Sec 802:-this section talked about the punishments that could be imposed if the punishments that could be imposed if the documents were altered or information was documents were altered or information was fabricated in order to mislead the fabricated in order to mislead the stakeholders.stakeholders.

10 years for auditors, 20 years for other 10 years for auditors, 20 years for other persons-imprisonment persons-imprisonment

Types of management AuditsTypes of management Audits

Complete management auditComplete management auditCompliance management auditCompliance management auditProgram management auditProgram management auditFunctional management auditFunctional management auditEfficiency auditEfficiency auditPropriety auditPropriety audit

Components of audit riskComponents of audit risk

Audit RiskA.R

Inherent RiskIR

Control RiskCR

Detection RiskDR= * *

Audit riskAudit riskAudit risk of an auditor failing to Audit risk of an auditor failing to

detect actual or potential material detect actual or potential material losses or account misstatements at losses or account misstatements at the conclusion of the audit.the conclusion of the audit.

Inherent risk:- is the risk of a material Inherent risk:- is the risk of a material misstatement assuming that there are misstatement assuming that there are no related internal control structure no related internal control structure policies or procedures. These risks policies or procedures. These risks arise due to various factors that affect arise due to various factors that affect the entity’s operations.the entity’s operations.

Audit riskAudit risk

Control risk:- is the risk that an Control risk:- is the risk that an error occurring in an audit area, error occurring in an audit area, which could be material, which could be material, individually or in combination individually or in combination with other errors, will not be with other errors, will not be prevented or detected and prevented or detected and corrected on a timely basis by corrected on a timely basis by the internal control systemthe internal control system

Audit riskAudit riskDetection Risk:- is the risk that the Detection Risk:- is the risk that the

auditor’s substantive procedures auditor’s substantive procedures will not detect an error which will not detect an error which could be material, individually or could be material, individually or in combination with other errors. in combination with other errors. Detection risk is influenced by the Detection risk is influenced by the procedures that are used by the procedures that are used by the auditors to audit the system and auditors to audit the system and the way in which they are applied.the way in which they are applied.

Audit riskAudit risk

Audit risk is the product of the Audit risk is the product of the three components just three components just mentioned above. The audit risk mentioned above. The audit risk should not be greater than the should not be greater than the acceptable audit risk-(the acceptable audit risk-(the maximum risk that the auditor maximum risk that the auditor wishes to accept) (refer page no wishes to accept) (refer page no 114)114)

Certified fraud examiners (CFEs)Certified fraud examiners (CFEs)Who are trained to detect, Who are trained to detect,

investigate , and deter fraud. CFEs are investigate , and deter fraud. CFEs are professionals who are knowledgeable professionals who are knowledgeable in four major areas- fraud in four major areas- fraud investigation, legal standards investigation, legal standards regarding evidence of fraud, the regarding evidence of fraud, the patters of fraudulent financial patters of fraudulent financial transactions, and knowledge of the transactions, and knowledge of the criminal behavior associated with criminal behavior associated with fraudulent activities. CFEs can act as fraudulent activities. CFEs can act as forensic accountants. forensic accountants.

Various approaches of social Various approaches of social auditaudit

Inventory approachInventory approach:- a simple listing :- a simple listing and short descriptions of programs which and short descriptions of programs which a firm has developed to deal with social a firm has developed to deal with social problems.problems.

Program management approachProgram management approach:- :- is more systematic effort to measure the is more systematic effort to measure the costs, benefits, and achievementscosts, benefits, and achievements

Cost benefit approachCost benefit approach:-to list all :-to list all social costs and benefits incurred by an social costs and benefits incurred by an firm in terms of moneyfirm in terms of money

Social indicator approachSocial indicator approach:-housing, :-housing, good health, and job opportunitiesgood health, and job opportunities

Types of Types of social auditssocial audits

scopescope

Social balance Social balance sheet and sheet and income income statementsstatements

This kind of audit requires quantification of This kind of audit requires quantification of social costs and income. It is conducted to social costs and income. It is conducted to assess social costs in terms of money with assess social costs in terms of money with the ultimate objective of reducing such the ultimate objective of reducing such social costssocial costs

Social Social performance performance auditaudit

This audit is conducted to assess the This audit is conducted to assess the performance of organizations with respect performance of organizations with respect to some area of social or public concern, for to some area of social or public concern, for example, it can assume the form of a example, it can assume the form of a research based appraisal that is conducted research based appraisal that is conducted to find out the social impact of pollution to find out the social impact of pollution caused by an organizationcaused by an organization

Macro-micro Macro-micro social indicator social indicator auditaudit

This type of audit is conducted to evaluate This type of audit is conducted to evaluate an organization's social performance in an organization's social performance in terms of social indicators that signify public terms of social indicators that signify public interest. It evaluates the contribution of the interest. It evaluates the contribution of the organization to the well being of the local organization to the well being of the local communitycommunity

Constituency Constituency group group attitudes attitudes auditaudit

This kind of audit is conducted to ascertain This kind of audit is conducted to ascertain how corporate actions affect employees or the how corporate actions affect employees or the general public in different ways. Depending on general public in different ways. Depending on the findings of the audit, the policies or the findings of the audit, the policies or actions of the organizations are modified.actions of the organizations are modified.

Government Government mandated mandated auditsaudits

This type of audit is conducted by This type of audit is conducted by authorized government agencies to study authorized government agencies to study an organization's performance in areas of an organization's performance in areas of social concern , such as environmental social concern , such as environmental protectionprotection

Social Social process or process or program program auditaudit

This audit is limited to specific processes This audit is limited to specific processes and programs of an organization that and programs of an organization that may have social implications. It aims to may have social implications. It aims to appraise a program which has already appraise a program which has already been initiated by the organizationsbeen initiated by the organizations

The auditing processThe auditing process Staffing the audit teamStaffing the audit team Creating an audit project planCreating an audit project plan Laying the ground workLaying the ground work Conducting the auditConducting the audit Analyzing audit resultsAnalyzing audit results Sharing audit resultsSharing audit results Writing audit reportsWriting audit reports Dealing with resistance to audit Dealing with resistance to audit

recommendationsrecommendations Building an ongoing audit programBuilding an ongoing audit program

Audit Audit verification verification proceduresprocedures

descriptiondescription

CountCount Checking the accounting records of physical Checking the accounting records of physical assets by physically counting the assetsassets by physically counting the assets

comparecompare Identifying similarities or difference in the Identifying similarities or difference in the characteristics of information obtained from characteristics of information obtained from two or more sourcestwo or more sources

ExamineExamine Scrutinizing documents or other records in order Scrutinizing documents or other records in order to detect errors or irregularitiesto detect errors or irregularities

Inspecting Inspecting tangible tangible resourcesresources

Scrutinizing physical assets in order to detect Scrutinizing physical assets in order to detect errors or abnormalitieserrors or abnormalities

RecomputeRecomputedd

Checking the mathematical calculations that Checking the mathematical calculations that have been performed earlierhave been performed earlier

Reconcile Reconcile Matching two independent sets of records an Matching two independent sets of records an showing mathematically, with the differences showing mathematically, with the differences between the two recordsbetween the two records

Confirm Confirm Obtaining information from an independent Obtaining information from an independent source so as to verify the existing source so as to verify the existing informationinformation

vouchvouch Verifying recorded transitions or amounts by Verifying recorded transitions or amounts by examining supporting documents.examining supporting documents.

TraceTrace Tracing procedures that begin with the Tracing procedures that begin with the original documents and are followed through original documents and are followed through the processing cycles into summary the processing cycles into summary accounting records.accounting records.

Audit verification procedures

Benefits of AuditingBenefits of Auditing

Identify opportunities for Identify opportunities for improvementimprovement

Identify outdated strategiesIdentify outdated strategies Increase management’s ability to Increase management’s ability to

address concernsaddress concernsEnhance teamworkEnhance teamworkReality checkReality check

Thank youThank you It takes a minute to have a crush on It takes a minute to have a crush on

someone, an hour to like someone, and a someone, an hour to like someone, and a day to love someone -- but it takes a day to love someone -- but it takes a lifetime to forget someone. – Unknownlifetime to forget someone. – Unknown

"Copy from one, it's plagiarism; copy from "Copy from one, it's plagiarism; copy from many, it's research." -Wilson Mizner (1876-many, it's research." -Wilson Mizner (1876-1933) 1933)

One tequila, two tequila, three tequila, flat One tequila, two tequila, three tequila, flat on floor – in front of a t - shirton floor – in front of a t - shirt

I am a bomb technician. If you see me I am a bomb technician. If you see me running, try to keep up. -On the back of a t-running, try to keep up. -On the back of a t-shirtshirt