Overview Of Auditing
Economic decisions in every society must be based upon the information available at the time the decision is made. For example, the decision of a bank to make a loan to a business is based upon previous financial relationships with that business, the financial condition of the company as reflected by its financial statements, and other factors.
If decisions are to be consistent with the intention of the decision-makers, the information used in the decision process must be reliable. Unreliable information can cause inefficient use of resources to the detriment of society and to the decision-makers themselves. In the lending decision example, assume that the barfly makes the loan on the basis of misleading financial statements and the borrower Company is ultimately unable to repay. As a result, the bank has lost both the principal and the interest. In addition, another company that could have used the funds effectively was deprived of the money.
As society becomes more complex, there is an increased likelihood As society become more complex, there is an increased likelihood several reasons for this: remoteness of information, voluminous data and several reasons for this: remoteness of information, voluminous data and As a means of overcoming the problem of unreliable information. the decision-maker must develop a method of assuring him that the information is sufficiently reliable for these decisions. In doing this he must weigh the cost of obtaining more reliable information against the expected benefits.
The term audit is derived from the Latin term ‘audire,’ which means to hear. In the early days, an auditor used to listen to the accounts read over by an accountant in order to check them Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia, Greece, Egypt. Rome, U.K., and India. The Vedas contain references to accounts and auditing. Arthasashthra by Kautilya detailed rules for accounting and auditing of public finances.
The term auditing has been defined by different authorities
- Spicer and Pegler“Auditing is such an examination of books of accounts and vouchers of business, as will enable the auditors to satisfy himself that the balance sheet is properly drawn up, so as to give a true and fair view of the state of affairs of the business and that the profit and loss account gives a true and fair view of the profit/loss for the financial period, according to the best of information and explanation given to him and as shown by the books; and if not, in what respect he is not satisfied.”
- Prof. L.R.Dicksee. “auditing is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they relate.
- The book “an introduction to Indian Government Accounts and audit” “issued by the Comptroller and Auditor General of India defines audit as “an instrument of financial control. It acts as a safeguard on behalf of the proprietor (whether an individual or group of persons) against extravagance, carelessness, or fraud on the part of the proprietor’s agents or servants in the realization and utilization of the money or other assets and it ensures on the proprietor’s behalf that the accounts maintained truly represent facts and that the expenditure has been incurred with due regularity and propriety. The agency employed for this purpose is called an auditor.”
FEATURES OF AUDITING
- audit is a systematic and scientific examination of the books of accounts of a business audit is undertaken by an independent person or body of persons who are duly qualified for the job.
- The audit is a verification of the results shown by the profit and loss account and the state of affairs as shown by the balance sheet.
- Audit is a critical review of the system of accounting and internal control.
- Audit is done with the help of vouchers, documents, information, and explanations received from the authorities.
- The auditor has to satisfy himself with the authenticity of the financial statements and report that they exhibit a true and fair view of the state of affairs of the concern.
Type of Audit and Audit Reporting in India
For any foreign executive operating in India, it is beneficial to have a basic understanding of audit procedures in the country. we provide an overview of the different types of audit and audit reporting in India.The audit is classified into many different types and levels of assurance according to the objectives, scopes, purposes, and procedures of auditing.The execution of financial statements auditing normally follows International Standards on Auditing (ISA) and other local auditing standards.There are many types of audits including financial audit, operational audit, statutory audit, compliance audit, and so on.In this article, we will explain the main 14 types of audits being performed in the current audit industry or practices.Here is the list of 14 Types of Audits and Level of Assurance:
The external audit refers to the audit firms that offer certain auditing services, including Assurance Service, Consultant Service, Tax Consultant Service, Legal Service, Financial Advisory, and Risk Management Advisory.External auditors are normally referring to audit staff who are working in audit firms. The positions are ranking from audit associate, senior auditors to audit partners, and managing partners.These kinds of firms are sometimes called CPA firms as they are required by law to hold a CPA qualification/certificate to run an audit firm and issue the audit reports.
Internal Auditing is an independent and objective consulting service designed to add value to the business and improve the entity’s operation.
It provides a systematic and disciplined approach to evaluating and assessing risk management, internal control, and corporate governance.
The audit committee generally determines the scope of internal audit, the board of directors, or directors with equivalence authorization. And if there is no audit committee and board of directors, an internal audit normally reports to the entity owner.
Internal audit activities normally cover internal control reviewing, operational reviewing, fraud investigation, compliant reviewing, and other special tasks assigned by the audit committee or BOD
The forensic audit is normally performed by a forensic accountant who has the skill in both accounting and investigation.Forensic Accounting is the type of engagement undertaking the financial investigation in response to a particular subject matter. The findings of the investigation normally are used as evidence in court or conflict resolution among the shareholders.The investigation covers several areas: fraud investigation, crime investigation, insurance claims, and disputes among shareholders.A forensic audit is also needed to have a proper plan, procedure, and report like other audit engagements.
Statutory audits are conducted in order to report the state of a company’s finances and accounts to the Indian government. Such audits are performed by qualified auditors who are working as external and independent parties. The audit report of a statutory audit is made in the form prescribed by the government department. Internal audits are conducted at the bequest of internal management in order to check the health of a company’s finances and analyze the operational efficiency of the organization. Internal audits may be performed by an independent party or by the company’s own internal staff.
As per India’s Companies Act, 2013, the following companies must have an internal auditing system:
- Every company whose shares are registered on the stock exchange.
- Companies whose shares are not listed on the stock exchange and have:
- Paid-up share capital of Rs 500 million (US$6.7 million) or more during the preceding financial year;
- Turnover of Rs 2 billion (US$26.9 million) or more during the preceding financial year;
- Outstanding loans or borrowings from banks or public financial institutions exceeding Rs 1 billion (US$13.4 million) or more at any point in time during the preceding financial year; or
- Outstanding deposits of Rs 250 million (US$3.3 million) or more at any point in time during the preceding financial year.
- Every private company with:
- Turnover of Rs 2 billion (US$26.9 million) or more during the preceding financial year; or
- Outstanding loans or borrowings from banks or public financial institutions exceeding Rs 1 billion (US$13.4 million) or more at any point in time during the preceding financial year.
The statutory auditor of the company must report on the internal auditing system of the company in the audit report.
Statutory audits in India
In India, statutory audits are conducted for each fiscal year (April 1 to March 31) and not the calendar year. The two most common types of statutory audits in India are:
- Tax audits; and
- Company audits
Tax audits are required under Section 44AB of India’s Income Tax Act 1961. This section mandates that every person whose business turnover exceeds Rs 10 million (US$ 134,508) in any previous year, and every person working in a profession with gross receipts exceeding Rs 5 million (US$ 67,254) must have their accounts audited by an independent chartered accountant.
It should be noted that the provision of tax audits are applicable to everyone, be it an individual, a partnership firm, a company or any other entity. The tax audit report is to be obtained by September 30 after the end of the previous fiscal year. Non-compliance with the tax audit provisions may attract a penalty of 0.5 percent of turnover or Rs 100,000 (US$1,345), whichever is lower.
There are no specific rules regarding the appointment or removal of a tax auditor.
The provisions for a company audit are contained in the Companies Act, 2013. Every company, irrespective of its nature of business or turnover, must have its annual accounts audited each financial year. For this purpose, the company and its directors have to first appoint an auditor at the outset.
Thereafter, at each annual general meeting (AGM), an auditor is appointed by the shareholders of the company who will hold the position from one AGM to the conclusion of the next AGM.
The Companies (Amendment) Act, 2017 provides that auditors can be appointed for a term of five consecutive AGMs and their appointment need not be ratified in each of the AGMs. Individuals and partnership firms, auditors cannot be appointed for more than one or two terms, respectively. After the completion of the term, the auditor must be changed.
Only an independent chartered accountant or a partnership firm of chartered accountants can be appointed as the auditor of a company. The following persons are specifically disqualified from becoming an auditor per the Companies Act:
- A body corporate;
- An officer or employee of the company;
- A person who is a partner with an employee of the company or employee of an employee of the company;
- Any person who is indebted to a company for a sum exceeding Rs 1,000 (US$13) or who have guaranteed to the company on behalf of another person a sum exceeding Rs 1,000 (US$13); or
- A person who has held any securities in the company after one year from the date of commencement of the Companies (Amendment) Act, 2000.
The auditor is required to prepare the audit report in accordance with the Company Auditor’s Report Order (CARO), 2016.
CARO requires an auditor to report on various aspects of the company, such as fixed assets, inventories, internal audit standards, internal controls, statutory dues, among others.
The audit report must be obtained before holding the AGM, which itself should be held within six months from the end of the financial year.
Financial audit refers to the audit of the entity’s financial statements by an independent auditor where audit opinion will be provided on those financial statements after auditing works are done.
A financial audit normally performs by an external audit firm that holds a CPA, and it is normally performed annually and at the end of the accounting period. This type of audit is also known as financial statements auditing.
But, sometimes, as required by management, bank, security exchange, regulation, or else, the financial audit is also performing quarterly.
Most of the entity prepares its financial statements based on IFRS, and some entities ‘ financial statements are prepared based on local GAAP.
For example, the entity register in the US, their financial statements are prepared based on US GAAP. If the financial statements are prepared based on IFRS, the financial audit needs to be audit against IFRS.
A compliance audit is a type of audit that checks against internal policies and procedures of the entity as well as laws and regulations where the entity operates. Law and regulation here is referring to the government’s law where the business is operating. For example, in the banking sector, there are many kinds of regulation required bankers to follow and comply with.Most of the central banks required commercial banks to set up the complaint review (assessment) or compliance audit to make sure that they are complying with those laws and regulations set.The entity may also assign its internal audit function to review whether the entity’s internal policies and procedures are complying and effectively follow.A compliance audit is part of the system used by the entity’s management to enforce the effectiveness of the implementation of the government’s law and regulation, and the entity’s internal policies and procedures.
Value For Money Audit
Value for money audit refers to audit activities that perform in assessing and evaluating three main difference factors: Economy, Efficiency, and Effectiveness.Economy, auditor assess and evaluate whether the resources that entity purchases are at the low cost with acceptable quality where efficiency audit, auditor check whether resources that entity use have better conversion ratio.Effectiveness, by the way, looks at the big picture of the objective whether the entity using the resources meets its objective or not.The auditor might review the entity’s purchasing system to assess and evaluate whether it is helping the entity to purchase materials or services at low costs or not.Value for money audit is really important for the entity since it helps the entity not only to improve resource efficiency usage but also to make sure that the entity obtains good quality material at a low costs.
Review Financial Statements
Review financial statements is a type of negative engagement where auditors are engaged to review the financial statements of the entity.At the end of the review, the audit is not going to express whether financial statements are the true and fair view and free from material.But, the auditor will issue the opinion to say that there is nothing come to their attention that financial statements are not prepared true and fair view and free from material.
Agreed Upon Procedures (AUP)
The agreed-upon procedure is the type of negative engagement where auditors perform their review on the procedures that are agreed with the client. This type of engagement is called limited assurance.Even though the client’s procedures are set, auditors will also need to make sure that the firm has enough resources to perform the job and the fee is not low-balling.Auditors will also need to ensure no conflict of interest between the audit team and the client management team.If the auditor found that there is a conflict of interest, the safe guide needs to check and introduce to reduce the conflict.Once auditors complete their review or perform all the procedures required by management, the auditor will issue the report call factual finding report by list down all the findings they found during the audit.
Integrate audit is happen when there are two different areas of audit requirements. For example, there is a financial audit and a social audit, or there are some areas that need to be confirmed with the financial audit.
For example, the NGO requires their financial statements to be audited and the technical areas that those NGOs are spending the money for need to be audited by the specialist auditor.
For example, NGOs are working on public health and most of the money spent is related to public health.
Besides the expenses reports that present the expenses that NGOs paid for and need to be audited by the financial auditor, there are many technical reports like health reports that need to be verified by technical auditors that have experienced in assessing health reports.This is called an integrated audit. The integrated audit also happens when the entity operates in many different countries, and the financial statements are an audit by different audit firms
A special audit is a type of audit assignment that is normally done by the internal auditor.This had happened when a problem/case occurred in the organization, like fraud, business case, or other special cases.
For example, fraud occurred in the payroll department, and this concern was raised to the audit committee or board of directors, or sometimes there is a request from the CEO to have a special audit on these areas.
The special audit is a bit different from the forensic audit as a special audit done by the internal staff of the entity.Once the auditor completes the audit, then the report is prepared by the audit team and then submit to the audit committee or board of directors. It is sometimes also reported to the CEO of the entity.
Operational audit is the type of audit service that mainly focuses on the key processes, procedures, systems, and internal control. The main objective is to improve productivity and efficiency, and effectiveness of the operation.Operation audit has also targeted the leak of key control and processes that cause waste of resources and then recommend improvement.
Operational audit is the part of the internal audit and their main aim is to add value to the business their professional services.Systematic and highly discipline is also the part that helps to make sure the operational audit adds value to the organization
Audits are conducted to express a true and fair view of a company’s financial statements. Therefore, the auditor’s opinion expressed in the ultimate report is based on the information reviewed and analyzed during the verification of financial statements. Upon completing the report, the auditor may express one of the following four opinions:
- Unqualified opinion;
- Qualified opinion;
- Disclaimer of opinion; and
- Adverse opinion.
When an independent auditor concludes that the financial records and statements of a company are present fairly and appropriately, in accordance with the financial reporting framework, the judgment is called an unqualified opinion.
An unqualified opinion generally indicates the following points:
- Generally accepted accounting principles (GAAP) are consistently applied in the preparation of financial statements;
- Financial statements comply with the relevant statutory requirements and regulations;
- There is adequate disclosure of all material matters relevant to the proper presentation of financial information (subject to statutory requirements); and
- If there are any changes in the accounting principles or in the application method, then it has been properly checked and determined in the financial statement of the company.
An auditor expresses a qualified opinion when according to him or her, the financial statements of the company – as a whole – are not free from material misstatements, and the misstatements are material but not pervasive in nature.
The effect of misstatement is material when information with such misstatement can affect the decisions of the users of the financial statements
The effect of misstatement is pervasive when such misstatement is not confined to one element, account, or item of financial statement and reflects the widespread effect of misstatement.
Pervasive effects on the financial statements are those that, in the auditor’s judgment:
- Are not confined to specific elements, accounts or items of the financial statements;
- If so confined, represent or could represent a substantial proportion of the financial statements; or
- In relation to disclosures, are fundamental to users’ understanding of the financial statements.
Disclaimer of opinion
A disclaimer of opinion is expressed when the possible effect of a limitation on scope is material and pervasive to the extent that the auditor is unable to obtain sufficient appropriate audit evidence.
As a result, the auditor is unable to express an opinion on the financial statements.
An adverse opinion is issued when there are limitations on the scope of the auditor’s work.
It is also issued when there is disagreement with management regarding the acceptability of the accounting policies selected, the method of their application, or the adequacy of the financial statement disclosure.
When an auditor expresses an adverse opinion, a clear description of all the substantive reasons is included in the audit report.
The most rigorous level of assurance is provided by an audit. It offers a reasonable level of assurance that your financial statements are free from material misstatement and conform with GAAP.
The Securities and Exchange Commission requires public companies to have an annual audit. Larger private companies also may opt for this service to satisfy outside lenders and investors. Audited financial statements are the only type of report to include an express opinion about whether the financial statements are fairly presented and conform with GAAP.
Beyond the analytical and inquiry steps taken in a review, auditors perform “search and verification” procedures. They also review internal control systems, tailor audit programs for potential risks of material misstatement, and report on control weaknesses when they deliver. The objective of an assurance engagement is to obtain sufficient appropriate evidence to express a conclusion, providing reasonable or limited assurance, as to whether the audited body has complied with the specified requirements of the appropriate legislation (the ‘criteria’) in all material respects. The higher the level of assurance provided, the greater the confidence the individual can place in the matter being assured. However, for an audit team leader to provide a higher level of assurance, they need to reduce the risk that a material misstatement exists in the matter being audited. The audit team leader achieves this by conducting a more in-depth and rigorous assessment of the matter being audited. Absolute assurance means that there is no assurance risk. Reducing assurance risk to zero is very rarely attainable or cost-beneficial cost-beneficial; primarily because the evidence available to an audit team leader is persuasive rather than conclusive, and audit team leaders are required to use judgment in gathering and evaluating assurance evidence. audit report.
WHAT DOES ASSURANCE MEAN?
The term assurance refers to the expression of a conclusion by an assurance practitioner that is intended to increase the confidence that users can place in a given subject matter. An audit is a form of assurance engagement which provides an opinion giving reasonable assurance on a financial report. An auditor is an assurance practitioner who conducts an audit. Therefore, an auditor’s report provides a conclusion that increases the confidence that users can place in a company’s financial report. There are differing levels of assurance, which result in different types of conclusions, depending on the type of work that the assurance practitioner performs. The following diagram illustrates different levels of assurance, in some of the different activities performed by accountants: