Finance is a vast subject with several branches. The modern business world is changing rapidly in terms of its functioning. One has to be familiar with the terminologies associated with the finance world. By understanding various financial terms and the mechanism in which it functions, one can reach great heights.
This website, ‘Simplified Fiscal Affairs’ presents to you the various topics/concepts in the form of series and imparts the knowledge in a simplified way.
WHAT IS AUDIT?
- Auditing is nothing but the systematic and critical examination and verification of the books of accounts. It can be undertaken throughout the year or periodically.
- The primary aim is to find out whether the financial statements exhibit a true and fair view of the business.
- Origin of the term audit is said to be in the Latin term audire which means to listen.
- Audit of accounts by a duty qualified chartered accountant is mandatory for the registered joint stock companies, public trusts, bigger co-operative societies and for income tax and VAT tax payers above a particular limit.
“Audit is an examination of accounting records, undertaken with a view to establishing whether they correctly and completely reflect the transactions to which they purport to relate.” Prof. Dickers
“Auditing is concerned with the verification of accounting data, determining the accuracy and reliability of accounting statements and reports.” R.R. Mautz
WHAT IS AN AUDIT PROGRAMME?
- An audit program is the auditor’s plan of action in a written form or a document.
- The auditor should prepare a written program containing procedures needed to implement it. It should also contain the audit objectives. Detailed instructions should be included so that the assistants can properly implement the program. If the auditor’s staff follows this program well, it will be easy for the boss to control the proper execution of the same.
- While preparing such an auditing programme the auditor has to decide to what extent he can really rely on the internal control system and internal check systems being used by the business unit. If there is a proper internal control system, the auditor need not check each and every transaction and item in detail as the occurrence and possibility of errors and frauds are scares.
- If the auditor feels that the internal control system is not sufficiently reliable he or she must insist on production of appropriate reliable accounting evidences or supporting documents for every transaction entered in the books of accounts. The auditor may also decide the appropriate time allocation for different procedures to be followed, the number of assistants he or she can spare for the particular task.
- The auditor, if the circumstances demand, may have to make changes in the plan if there are significant changes. In other words, the audit plan should be flexible enough.
In simple words, the audit programme, is a sort of time table containing the sequence in which the auditor wants to verify the books of accounts of an entity and the time he or she allots to each operation. An auditor should prepare for the audit programme for every audit especially in the case of a data of a large concern.
Development of an Audit Programme:
- Internal control: Before preparing the audit program the auditor should study the internal control systems prevalent in the organisation and to what extend it is reliable. When the auditor is satisfied enough that the system found is reliable the auditor need not verify each and every item in details and he or she can just go for test checking.
- Business of the client: There should be an indepth study of the business of the client, there should be enough study of the way the business functions its important features and the way it is conducted. The auditor needs to find enough information of the working of the business of the client so that it is easy for him or her to analyse the activities and each and every transaction of the financial statements.
- Cost benefit: The cost analysis is an integral part of the audit program, the auditor cannot neglect the cost factor. Huge cost associated to the business which could be minimised to a certain extent, should be analysed by the auditor.
- Assistants available: The auditor must analyse the amount or the volume of work. He or she should take into account in number of assistants to make available to complete this assignment.
Advantages:
- The audit program conducted has several advantages attached to it.
- It ensures that each and every transaction is accounted for and registered, checked and verified accurately. There is a check on the progress of the work completed everyday.
- There is a proper and systematic way for the proper allocation of time, coordination between the work done by different assistance can be easily done.
- Audit Programme is suitable and helps to a great extent to big firms which are dynamic and large.
- The auditor can see the day to day proceedings of the work. Audit programme maintains enough control over the work of the auditing staff.
- Facilitates timely completion of work, with accuracy.
Conclusion:
- Any vital and important task to be completed successfully needs proper planning, similarly, audit of a firm needs proper pre-planning before it is actually performed. Information required to perform a successful audit is first collected and gathered. Accounting system prevalent in the client’s business is studied thoroughly.
- Auditor then studies and analyses the internal control systems predominant in the organisations and decides to what extent he can rely on the same. Appropriate accounting and auditing methods need to be followed to come at a conclusion which is accurate and presents a true and fair valuation of the business.
HOW TO PREPARE FOR AN AUDIT?
Planning is thinking well before commencing any activity. We all think before doing any important work. Audit of accounts being an important job the auditor things in advance before starting any audit and prepares a detailed plan of action.
Necessary steps:
1. Ascertain the scope of duties: To start with, the auditor should assertain the exact nature and scope of his or her duties. This question does not arise in case of a statutory audit as his or her duties are enumerated in the concerned law only.For example; when an auditor is appointed to audit the accounts of a joint stock company, there are provisions in the Companies Act, about the duties, rights of an auditor. However, if a concern in which audit is not legally mandatory, auditor must communicate or discuss the scope of his or her duties with the management of the concern.
2. Acquisition of Appointment letter: Before the commencement of the audit work, the auditor must obtain his or her appointment letter from the client. Such letter should consist of his or her duties, remuneration, duration allowed to complete the job. Engagement letter leads to an audit contract.
3. Nature of the client’s business: Each and every business has its own special and unique features. Hence, business follows and accounting system that suits its needs. There is no one uniform accounting system that can be followed by every business organisation. So the auditor before commenting his auditing work should study the special problems of the business unit and the system of accounts prevalent in the organisation.
4. Obtain a list of accountable officers: The auditor should obtain a list of responsible and accountable officers, so that, while going through the audit procedure, if the auditor needs any information or clarification on any specific point, he can directly contact the concerned officer. Auditor should also obtaine information about the extent and scope of authority of each of them.
5. Knowledge of technical details: The auditor should also acquire some knowledge about the technical details of business. This will help him or her to understand and analyse the nature of the transactions while auditing them.
6. Inquiry into special circumstances, if any: Should enquire into special circumstances surrounding his appointment. In case he or she is appointed in place of another auditor it is his professional duty to communicate with him.
7. Instructions to the client:
- Accounts should be finalized and kept ready for audit.
- Necessary schedules be prepared and made available. For example: list of debtors and creditors, fixed assets, outstanding incomes, incomes received in advance, cost of acquisition and market price statement of deferred revenue expenditure etc. The auditor should also ask to produce the final accounts of last two three years with auditor’s report.
