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 A STATUTORY AUDIT?
- The statutory audit is a type of audit which is mandatory by the Companies law. It is also known as financial audit.
- The main motive behind the statutory audit is to make sure that the financial statements presented by the company display a true and fair view of the company’s financial position.
- Statutory audit is mandatory, if certain criteria is being met by the business, it is carried out by independent external auditors.
- In India, the statutory audit is governed by the Companies Act. The purpose of statutory audit is to ensure the fairness and credibility of accounting records. Scope of work and functions of the statutory auditor are decided by the law.
Objectives:
Audit is mandatory in case of a company because the shareholders are the owners of the company, however, they do not handle the routine activities of the business. The management of the company is done by its Board of Directors. So the shareholders need an assurance that the accounts maintained are published by the company present a true and fair valuation of the business. Potential stakeholders also benefit from the statutory audit. They too take decision based on the audit reports which are accurate.
Advantages:
- Statutory audit improves the reliability and credibility of the published financial statements.
- It enhances the trustworthiness of published financial statements.
- It improves internal control systems prevalent in the organisation like the auditor’s appointment, remuneration, duties are assigned by the provisions of the law.
Disadvantages:
- The costs associated to a statutory audit can be very high.
- In order to answer the day to day query of the auditor or while providing the auditor any reports or data required to them may disturb the work of the client’s employees.
- There are certain limitations of audit like time, internal control systems prevalent in the organisations, etc. The auditors are watchdogs and not the bloodhounds. The reporting is based on sample data and not the total data.
- The auditor, at times, conducts test checking, which consist of in depth checking of only few selected items and form an opinion about the quality of the accounts.
- An auditor may comment upon the fundamental principle of going concern of the entity but doesn’t promise about its future possiblity. The shareholders and other probable stakeholders should not take any important decisions by only taking into account that the financial statements are audited.
WHAT IS TEST CHECKING IN AUDIT?
The test checking can be defined as “indepth checking of only a few selected items and to form an opinion about the quality of the accounts". If the items selected are accurate, the auditor can assume that the other entries are also accurate. For the success of test checking system, representative number of entries of each class is selected for checking. It is an accepted substitute of detailed checking which is applied where the volume of transactions is huge. Test checking is based on the theory of probability. If the selected sample is truly representative of the population it will yield reliable results.
WHAT IS AN INTERIM AUDIT?
An interim audit is one when the auditor completes an audit up to the date of a set of interim accounts, for example quarterly or half yearly accounts. G. William
Objectives:
- To know profits or losses of the interim period.
- To declare the interim dividend.
- To get a loan sanctioned on the basis of interim accounts.
- To get information about the financial standing of the interim period.
- To take important short term business decisions.
- To analyse the business activities of the interim period and check for further improvements, if any.
Advantages:
- Suitable for big firms: Interim audit is suitable for large and dynamic type of business organizations.
- Moral check: There is a moral check on the staff of the client as the accounts are checked frequently.
- Helpful for final audit: The interim audit is helpful for the early completion of the final audit.
- Detection of frauds and errors: There is quick detection of errors as the auditor visits the client regularly and checks the accounts at regular intervals.
- Interim dividend: The interim audit is conducted to declare the interim dividend.
- Publication of interim figures: In some business concerns, the publication of interim figures is mandatory.
- Convenient for the management: The interim audit conducted, provides mid year financial information. This proves helpful for the management to take important business decisions.
- Internal control: If the internal control systems prevalent in the organisations are not up to the mark the company must get its accounts audited on an interim basis.
Disadvantages:
- Additional work: The interim audit is not the part of the final audit. Final audit must be conducted after the completion of this audit. So, this is an additional workload for the staff.
- Unsuitable for small firms: Interim audit is not suitable for small business organisations with less volume of transactions.
- Disturbance at work: Interim audit disturbs the working environment in the office. Frequent visits by the auditor may disturb the work of the client.
- Expensive: Interim audit prove expensive because it involves additional work on the part of the auditor.
- Alterations of figures: Already audited accounting figures may be changed by a dishonest employee.
WHAT IS A CONCURRENT AUDIT?
- The word concurrent itself defines its meaning, it means existing, happening, or done at the same time. Concurrent audit means doing the examination of the financial transactions at the time of happening or parallel with the transaction. Time between compiling and checking accounts is very short.
- Concurrent audit is the systematic and timely review of transactions on a regular basis to ensure accuracy and true and fair valuation of the business organisation.
Objectives:
- The emphasis under the concurrent audit is not on test checking but on substantial checking of transactions.
- The concept of concurrent audit has been established to reduce the time gap between occurrences of transactions and the checking or reviewing of these transactions.
- The concurrent audit is useful to develop moral check on employees. Time between recording and checking the entries is very short, the staff cannot think to plan any fraud. Therefore, it serves the purpose of effective control.
- It aims to shorten the time duration between the occurrence of a transaction and its examination by an independent external auditor.
- In concurrent audit, there is a prominence in favour of substantive checking in key areas rather than test checking.
- The main objective of concurrent audit is to disclose any violation of procedure. The focus is on adherence to laid down systems, procedures and legal compliances.
- It checks the transactions systematically at the time of occurrence to exhibit a true and fair, accurate and authentic financial position of the concerned body.
WHAT IS A CONTINUOUS AUDIT?
- Audit that remains continue throughout the financial year is known as the continuous audit.
- The auditor checks each and every transaction. The large scale business organisations require constant check of their business matters, as there may be declaration of dividend, during the year.
- In case of a company, where the volume of transactions is quite large, the management can follow the policy of applying continuous audit.
- If the internal control systems prevalent in the organisations are not satisfactory, then to apply continuous audit will be the best option in order to represent a true and fair view of the organisation.
R.G. Williams says that continuous audit is one where the auditor or his staff is consistently engaged in checking the accounts during the whole period, or where the auditor or his staff, attend at regular or irregular intervals during the period.
Advantages:
- Thorough check: The primary advantage of the continuous audit is thorough checking. The audit staff remains busy throughout the year, as each and every transaction is reviewed in detail.
- Quick detection of errors: As the auditor checks the transactions, in detail, at regular intervals there is quick detection of errors.
- Timely presentation of accounts: As most of the checking work is already performed during the year, the final audit can be presented on a timely basis to the shareholders, after the close of the financial year at the annual general meeting.
- Prompt filing of returns: The continuous audit proves beneficial for the quick filing of returns as the accounts are prepared as well as audited at the end of the year.
- Interim dividend: The continuous audit proves to be helpful for the declaration of the interim dividend.
- Moral check on the client’s staff: The continuous audit is useful to develop moral check on employees. As the time between recording and checking is quite short, the staff cannot think to plan any frauds. The auditor at times may surprisingly visit the client’s office, therefore, it will have a considerable moral check.
- Convenient for auditor: The continuous audit is helpful for the audit staff for distribution of work, for the whole year. The audit staff can prepare the programme on the basis of time alloted. The auditor gets sufficient time for important and suspicious matters to draw conclusion.
Disadvantages:
- Small entity: The continuous audit is not fit for small scale business organisations since it has fewer transactions.
- Expensive: It is not suitable for small business organisations with less financial transactions, as the continuous audit is an expensive system of audit.
- Alterations of figures: Figures in the books of accounts which have already been checked by the auditor, may be altered by a dishonest employee and frauds may be committed.
- Disturbance at work: The frequent visits by the auditor may disturb the work of the client. When the audit work starts, the work of accounting staff suffers, as the books are not spare.
What is an IT/ Computerized Audit?
A computerised auditing system is an accounting information system that processes various financial transactions as per the generally accepted accounting principles.
Computerised Audit is the use of computerised system to conduct audit in an efficient way. It uses technology to collect and gather data, conduct the audit operations and further reporting of the same. It refers to the use of computers to achieve audit objectives.
Computerized Assisted Audit Techniques (CAATs) refer to the use of technology for increasing the effectiveness and efficiency of audit work. This system enables the auditors to perform more with less and add more value through the assurance process which is more robust and comprehensive.
The Need for Computerised Auditing:
- It help auditors to change the focus from time consuming manual audit procedures to focused analysis of data so as to provide better reports to clients.
- In the absence of input documents the use of computerised auditing helps with compliance.
- Helps to increase audit quality and arthimetic accuracy of procedures.
- Helps to comply with prescribed auditing standards.
- To improve the overall efficiency of the audit procedures.
- To ensure an optimum utilization of the audit resources.
Advantages:
- Speed Driven: The accounting data is processed faster and more efficiently by using a computerised accounting system.
- Accurate Information: The possibility of human error is eliminated in a computerised accounting system as the primary accounting data is entered once for all the subsequent usage and procedures in preparing the accounting reports.
- Framework: Accounting based on computerised systems is more reliable as it works under the various accounting standards.
- Updated Information: The records are updated automatically as and when the accounting data is entered and refreshed. The latest information related to the accounts immediately gets reflected when the accounting reports are produced and printed.
- Convenient: Sometimes, companies are located at geographical distances. Computerised accounting system facilitates the availability of information to various users simultaneously on real time basis.
- Optimum Storage: Computerised Accounting system does not require a large amount of physical space to store the data.
- Time Efficient: Adopting the computerised accounting system permits fast and accurate retrieval of data and information, it immediately reflects the financial position as and when required, works under accounting standards as prescribed.
- Quality Reports: The computerised accounting system has several inbuilt checks and control norms which facilitate true accounting reports.
- Documentation: The computerised accounting system softwares have standardised, user defined format of accounting reports which are issued automatically.
- Management Information System (MIS) Reports: The major application of MIS is on financial accounting system, it is essential for any organisation for improving the company’s performance, with the help of computerised accounting system the management is able to extract accounting reports on a real time basis. It helps the management with better decision making.
Disadvantages:
- Training Costs: The sophisticated, high end computerised accounting software packages need a professional staff which knows the mechanism in which the software works.
- System Crash: At times, the server crashes due to hardware failures or any other technical error. This issue is a limitation of the computerised accounting system. There needs to be an arrangement of a proper backup facility.
- Security Checks: In todays Technology era, crimes are difficult to detect as any alteration of data may be made intentionally. Frauds and embezzlement of cash are usually committed with the help of a computerised accounting system softwares which is done by making alterations in its programming system.
- Screen Time: The excessive use of technology leads to the development of various health issues like back pain, eye strain, issues relating to posture.
Audit Procedure:
- Obtain Data: Get a copy of data of the original format for independent interpretation for the auditor which has to be obtained in a commonly accepted format.
- Establishing a Framework: This is the preliminary work to plan, how the audit is to be conducted. The auditor grabs information about the way the computerised accounting system works. This includes a comprehension of how the computerised accounting functions are organised, understanding the software used.
- Checking Various Internal Control Systems: The auditor has to check the various internal control systems prevalent in the organisation and the mechanism in which they function.
- Compliance Testing: This is performed by the auditor to determine whether the controls mentioned actually exist and work as intended. This can be checked by comparing the results to the forecasted and estimated results.
- Auditors Opinion: The auditor’s report contains a detailed information on various aspects of their findings in the process in a computerised environment.
Steps to Obtain Data:
In most cases, where computerised accounting systems are used, it becomes important to get a copy of data of the original format for independent interpretation for the auditor. The data has to be obtained in a commonly accepted format. At times, the auditor may not be aware of the data structures of a software used by the client hence, the auditor may have to study the reporting features and use the export features to get the data in the required form.
- The auditor has to discuss with the client about the requirement of the raw data for audit and issue a request letter for getting the requested data as per the required format.
- To discuss with the IT staff who maintains the data, to obtain copies which explain the mechanism in which the computerised accounting software is framed and the way it works.
- Print sample list of the first few transactions as given in the database of the client and compare the same to the print out which is obtained by the client.
- Verification of data for completeness and accuracy by checking various transactions, like the transactions which have cash discounts.
- Acquire the totals of all the key data and compare with totals from the raw data to ensure that the records tally accurately.
Methodology for Achieving Success in Computerised Accounting System:
- Understand the business environment prevalent, including IT (components of ERP).
- Identification of scope and objectives of the audit.
- Identify the critical data which is being audited as per the audit scope and objectives.
- Identify the sources from which this relevant data is to be exported. For example: inventory, sundry debtors and creditors, cash and bank balances.
- Recognise the IT staff responsible for the management of the data and information system.
- Obtain various documents relating to data or information systems.
- Check for documentary evidences for confirming the results.
- The auditor has an important role to play, he/she has to understand the software used by the client, right from the user creation, grant of user access, various settings, to the mechanism in which it functions.
- Has to prepare a framework with a detailed plan for analysing the data.
- Perform test checks for all the audit data and prepare audit. For example: Identification of exceptional transactions, checking the internal control systems, finding errors and frauds, selecting samples from a population, verification of arithmetical accuracy, verification of money received and payments made, categorization of inventory, classification of accounts.