Recent Trends in Auditing

BY

Vinod.A (05B126)

Naveed (05B136)

Varun(05B125)

Yeshwanth(05B165)

Rajesh(05B181)

COST AUDIT

INTRODUCTION

“It is the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure

adherence to the objective of cost accountancy.”

OVERVIEW India was the first country in South Asia (and perhaps in the

world) to make cost audit mandatory for some of its business sectors. The Institute of Cost and Works Accountants of India (ICWAI) refers to cost audit as an audit of efficiency of minute details of expenditure while the work is in progress and not a post-mortem examination.

Objectives of cost audit include the determination and control of cost together with providing data for making judgements and decisions on various matters, such as operational efficiency.

GOI has added industries involved in the manufacturing of plantation products together with the petroleum and telecommunication industries in 2002 to the list of industries requiring mandatory cost audits.

OBJECTIVES1. From the perspective of management: Cost audit detects errors, frauds and misappropriation and hence

enhances efficiency. 2. From the perspective of shareholders: Cost audit ensures that the valuation of closing stock and work-in-

progress are correct, hence helps in the computation of more accurate profit figures.

3. From the perspective of the government: To curb the profiteering by the manufacturing concerns and help in

the decision to provide tariff protection to any industry. 4. From the perspective of customers: Customers may obtain more benefit if the cost is reduced due to

effective control, implemented as a result of a cost audit. 5. From the perspective of cost accountants: Cost accountants, who are employees of a company, obtain a

share of all benefits derived by the company from a cost audit.

Financial Audit vs Cost Audit Financial Audit The Companies Act 1956, which has been amended several

times, and is now known as Companies (Amendment)/(Second Amendment) Act 2002 contains the detailed provisions concerning the preparation of annual accounts and reporting.

Cost Audit

A cost accountant offers to perform or perform services concerning the costing or pricing of goods and services or the preparation, verification or certification of cost accounting and related statements.

COST AUDIT PROGRAMME

The Cost Auditor should pay his attention to the following records:

Record of Materials Labour Records Record of Overhead Charges Depreciation Work-in-Progress Records Incomplete Records Stores and Spare Parts Records

TAX AUDIT

TAX AUDIT

TaxAuditor:role,qualifications & appointment

Section 44AB It was introduced by section 11 of the

Finance Act, 1984 with effect from 1st April, 1985.

Audit of the accounts of certain assesses.

OBJECTIVES OF TAX AUDIT To ensure that the books of account and other records

of the assessee are properly maintained.  To ensure that the records faithfully reflect the

correct income of the tax-payer and claims for deduction are correctly made.

To facilitate administration by proper presentation of accounts before the tax authorities and to save Assessing Officer’s time in carrying out routine verification. 

To ensure that the revenue authorities are provided with audited financial statements along with the relevant data and information for assessment.

Intricacies of tax audit

Section 44AB of the Income-tax Act provides for compulsory audit of accounts of certain persons carrying on business or profession. 

Cases In the case of a business Every assessee whose total sales, turnover or gross

receipts for the previous year exceeds Rs. 40 lakhs has to get his accounts audited.

In the case of a profession Every assessee whose gross receipts for the previous

year exceed Rs.10 lakhs has to get his accounts audited.

Non-Applicability of Tax Audit

Tax Audit shall not apply to the person who derives income of the nature referred to in section 44B or section 44BBA, on or from the 1st day of April, 1985 or, as the case may be, the date on which the relevant section came into force, whichever is later. Moreover a person who is wholly outside the purview of Income-tax Act need not get his accounts audited u/s 44AB even though his total sales exceed Rs. 40 lakh.  Eg: An agriculturist.

Compliance of conditions before acceptance of Tax Audit assignment A person defined as a chartered accountant

within the meaning of Chartered Accountant Act, 1949 and who hold a Certificate of Practice can perform tax audit u/s 44AB. An auditor is required to comply with the following conditions before acceptance of tax audit:

At the time of appointment a letter evidencing appointment shall be obtained by the auditor from

 An individual himself in case of audit of an individual.

  A partner in case of audit of a firm.   A director, preferably with reference to a board

resolution in case of audit of a company.

   A member of AOP in case of audit of AOP.

In the interest of both client and auditor, the auditor should send an engagement letter, preferably before the commencement of the engagement, to help avoid any misunderstandings with respect to the engagement. This is necessary since section 44AB does not specify the rights of the auditor. It has become mandatory from 2003-04. 

In case where the previous year’s audit is conducted by any other auditor, then “No Objection Certificate (NOC)” to be obtained from the previous auditor before the acceptance of the tax audit assignment.

Furnishing of reports In all other cases, an audit report is to be

given in Form No. 3CB. The report in Form No. 3CA or 3CB is to be accompanied with Form No. 3CD.

For the purpose of section 44AB, an audit report is to be given in Form No. 3CA if the person carrying on business or profession is required to get his accounts audited under any other law.

In the audit report, the tax auditor has to express his opinion as to   Whether or not the financial statements give a true and fair view of the profit or loss and the state of affairs (the auditor is required to state this where the accounts of the assessee have not been audited under any other law); and  Whether or not the prescribed particulars contained in the statement annexed to the audit report are true and correct.

MANAGEMENT AUDIT

Objectives of Management Audit

Management audit is carried out to:

» Appraise the managerial performance at all levels;

»Spotlight the decisions or activities that are not in conformity

with organizational objectives;

» Ascertain that objectives are properly understood at all levels;

» Ascertain that controls provided at different levels are

adequate and effective in accomplishing management objectives or plans of operations;

» Evaluate plans which are projected actions to meet objectives;

» Review the company’s organisational structure, i.e..

assignment of duties and responsibilities and delegation of

authority.

1. Appraisal of Objectives.

Objectives are goals towards

which any function or organization is guided. Organizational

objectives should be referred to as primary objectives.

objective clause of the Memorandum of Association

details with primary objectives of an organization.

Functional objectives should be referred to as subordinate

objectives and are set for accomplishment of organizational

objectives. Management audit should consider the following

points for appraisal of company objectives and functional

objectives:

Company Objective.

These objectives are rather fixed targets, which are mentioned in the Memorandum of Association. These are not changed.

Objectives are clear and understandable;

Objectives are reasonable and properly’ reflect

company’s responsibility towards shareholders,

employees, community and Government;

Objectives are not changed frequently.

Functional Objective. The review of the management

audit can make substantial contribution in this area.

These objectives are set for accomplishment of company’s

objectives.

The objectives are clear and understandable.

The objectives are sufficiently divided and sub-divided.

as follows:

a. Output goal

b. System goal

c. Product characteristic goal

» The objectives are documented.

» The objectives are sufficiently communicated to proper

operating level.

»The objectives must be in proper balance with each

other.

»The objectives aid in motivating the persons engaged

in different Sections/departments.

2. Appraisal of Organizational Structure.

Organizational structure is a part of the means by which the

management controls the operations of an organization.

Assigi1ment of duties and responsibilities and delegation of

authority offers a very important area for review of

management audit. Following points should be noted in the

appraisal of organizational structure:

» The organizational structure is in harmony with objectives

of company, division, department or unit.

» The structure should provide for unity of command, i.e., a

person should not report to more than one supervisor.

» The structure clearly defines responsibility for every

management person in organization.

»The structure has proper balance, i.e., no function should be

excessively weak or excessively dominant

»The organizational structure should permit flexibility to suit to the changing conditions.

3. Appraisal of Planning Process and Plans.

Planning is an economic and motivational necessity. It is a beginning of the order. It provides basis for decision making.

It aims at designing tomorrow. It is a call for action.

Plans are the measures devised within the guidelines laid

down by policies, to attain an objective. » The planning process is efficient enough to anticipate trouble spots.

» The planning process existing in the organization capitalizes the abilities and ideas of individuals working in the organization.

4 Appraisal of Control.

Control assures attainment of objective. It compels events

to conform to plans. There are two important aspects of

control:

» Measurement of accomplishment against standard; and

» Correction of deviations.

In this area, the activities of management audit should be

directed to determine whether controls provided are adequate

and are providing effectively for accomplishment of

management objectives and plans of operation. The auditor

examines and reports directly on control involved in various

spheres.

5. Appraisal of Organizational Functions.

Management audit is not confined to critical appraisal of

management functions alone (i.e., Planning, Organization

and Control, etc. It has to be subject to its review

organizational functions (i.e., Production, Distribution,

Personnel, etc.) Management functions influence

organizational functions. Planning is a management function

and production is an organizational function. This explains the basic attitude of management audit.

A. Appraisal of Production

For appraisal of production, management will have to

review a number of activities like:

a. Buying,

b. Planning,

b. Processes,

d. Storage and

e. Inspection.

» Management auditor should see that purchase of right

specifications in the right quantities are made at the right

time and at the right place. The emphasis will be to

review the methods, procedures and routines followed

determine ‘right specifications’, ‘right time’ and ‘right

place, etc.

» Optimum utilization of available capacity is ensured by

the organizational procedures.

»Procedures related to inventory control would be

thoroughly scrutinized to spotlight the areas for

improvement. Control techniques used to avoid

disproportionate amount being used in inventory are

A. Appraisal of Purchase Function

Following points are taken care of:

a. Organization of purchase function.

b. Purchase policy should be seen, collating the various clauses.

c. It should be examined whether purchase Procedure

necessitates that the purchase requirements should be

dependent on production schedule and level of inventories.

d. Does the company ensure regular and dependable supplier?

f. How is latest market information collected?

g. Are the prices properly analyzed?

B. The Appraisal of Distribution

i. Sales Records.

ii. Sales policy

iii. Service to customer

iv. Publicity.

Accounts and Finance. Here management auditor should not

criticize the technical accountancy of the company: That is the

subject of financial auditor. Management auditor may point

out, if necessary, statistical information, which may have

bearing on decision-making in the organization. Following

points are of concern to management au4itor in this area:

» Adequacy and effectiveness of financial analysis being

submitted by management

» Adequacy and efficacy of procedures and practices

followed in cost accounting department, i.e., methods of

collecting material cost, labor cost, overhead, operation of

budgetary control, standard costing and reporting of variances.

» Adequacy and efficiency of management information system.

» Adequacy of internal audit procedures.

» Methodology adopted for financial proposal, investment plans and project decisions.

Legal and Secretarial Practice.

Here management auditor critically reviews the system relating to office organization. An effort will be made to determine whether the activities and routines related to handling of correspondence, filing system, telephone, telex and messenger service, etc, are carried out in simplest and most effective manner. Main concern management auditor in this area remains focused on appraisal of systems in vogue. Personnel and Industrial Relations. This function has

assumed a lot of importance in recent years. Following

activities are primarily studied:

» Employment and discharge, personnel records and works

Management,internal welfare and external welfare