Financial Audit

Independent financial audit:-

For any foreign operating have branches in India, it is beneficial to have a basic understanding and should have full knowledge of audit procedures in the country. The auditors have introduced audit in India for non-auditors. In this article, we provide an overview o with the different types of audit and audit reporting in India.

Audits are generally classified into two groups:-

  • ^Statutory audit
  • ^Internal audit

Statutory audit is conducted in order to report the state or we can say the current financial position of the company and accounts related work to the Indian government. Such audits are performed by qualified auditors who are experienced in their field and those 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 audit is conducted at the best of internal management and internal working in order to check the health of a company’s finance and analyze the operational efficiency of the organization. Internal audits may be performed by an independent party or by any of the companies own internal staff kept as an auditor.

As per the Indian companies act, 2013 the following companies must have an internal auditing system:-

  • 1)Every company whose shares must be registered on the stock exchange.
  • 2)Companies whose shares are not listed in the stock market and have the following:-

-Paid-up share capital of ₹500 million i.e US$6.7million

-Remaining loans and advances from banks or any financial institutions exceeding ₹1 billion i.e US$13.4 million
-Outstanding deposit of ₹250 million i.e US$3.3 million

  • 3)Every private company with:-
    -Turnover of ₹2 billion i.e US$26.9 million
    -Remaining loans and advances or borrowings from a bank or public financial institution exceeding ₹1 billion i.e US$13.4 million

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 i.e ( 1st April to 31st March ) and not the calendar year but the financial year. The two most common types of statutory audits in India are TAX AUDIT AND COMPANY AUDIT

Tax Audits:-

Tax audits are registered under section 44AB of India’s income tax act 1961. This section says that every person whose business turnover exceeds ₹10 million i.e US$134508 and every person working in a professional with gross receipts exceeding ₹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.

Company audits:-

The provision for a company audit are contained in the companies act, 2013. Every 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. Therefore at each annual general meeting(AGM), an auditor is appointed by the shareholders of the company who will hold the position from one annual general meeting to the conclusion of the next annual general meeting.

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 of corporate
  • ^An employee of the company
  • ^A person who is a partner with an employee of the company

Audits are conducted to express a true and fair view of a company. By completing the report, the auditor may express one of the following four opinions:-

  • ^Unqualified opinion
  • ^Qualified opinion
  • ^Disclaimer of opinion
  • ^Adverse opinion

Qualified Opinion:-

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.

Pervasive effects on the financial statements are those that, the auditor’s judgement:-

  • *Are not confined to specific elements, account or items of the financial statements
  • *If so confined, represent or could represent a substantial proportion of the financial statements
  • *In relation to disclosure, are fundamental to users understanding of the financial statements

Unqualified 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 judgement 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
  • -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.

Disclaimer of opinion:-

A disclaimer of opinion is expressed when the possible effect of a limitation on the 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.

Adverse opinion:-

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, method of their application, or the adequacy of the financial statement disclosure.

Basis of valuation of assets:-

In view of the importance of valuation, an auditor should always be careful to see whether assets are valued on some reasonable and appropriate basis.

The standard methods of valuation that are usually followed in respect of different classes of assets are enumerated.

Nature and purpose of acquisition:-

  • 1)Fixed
  • 2)Intangible
  • 3)Fictitious
  • 4)Floating

Basis of valuation:-

  • 1)Fixed
  • 2)Intangible
  • 3)Fictitious
  • 4)Floating

Fixed:-

The ongoing concern value i.e historical cost or original cost of acquisition ( including adjustments for additions including all expenses of bringing an asset into a reason-able condition or disposals) minus proper depreciation on a consistent basis irrespective of the market value.

Intangible:-

Usually on the same basis as fixed asset i.e written down value according to the policy on amortisation of fair value of benefits enjoyable on the future. As per new norms from ICA, intangible assets will have to be written-off in a maximum of 10 years.

Fictitious:-

Cost/ expenditure incurred or balances thereof less amount written-off from years to year depending on financial policy

Floating:-

Realisable value i.e market value ( net realisable value ) or cost price whichever is lower.

Contingent liabilities:-

A contingent liability is an incidence which is conditional or contingent on the happening of certain events. There is an element of uncertainty about this group of liability, which may or may not occur.

The following are the main types of contingent liabilities:-

  • 1)Liability in respect of bills discounted or accepted on behalf of other parties, but not matured
  • 2)Liability under guarantee or surety arrangements in favour of others
  • 3)Liability under incomplete contracts
  • 4)Liability under pending lawsuits
  • 5)Liability under taxation appeals
  • 6)Liability under unpaid calls on partly paid shares
  • 7)Liability for accumulated pending dividends on cumulative preference shares
  • 8)Liability for not acknowledge as debts
  • 9)Liability of members of a company limited by guarantee
  • 10)Possible personal liabilities of partners in a firm
  • 11)Liability under guarantees for loans
  • 12)Other uncertain financial liability

Advantage of cost audit to management:-

  • ^Errors in following costing principles, rules and regulations and techniques are detected
  • ^Cost audit can serve to see the volume of performance of managers
  • ^It helps to prepare accurate cost reports
  • ^Cost audit can give an idea about the comparative operational efficiency of each department

Advantages to the statutory auditor:-

  • ^Audited cost date helps him to determine the value of stocks, remuneration of managing personnel
  • ^Data and cost statement of cost audit help him to prepare his audit programme and plan so that he concentrates more on those aspects rather than concentrating on other items

Advantages to consumers:-

  • ^The direct benefit to consumers where a statutory cost audit has been done to fix a reasonable price for the consumers
  • ^Since cost audit aims at ensuring efficiency in the organization or entity this may also get reflected in the reduced price to the consumers.

Advantages to labour:-

  • ^If cost audit is done thoroughly labour also stands to gain through increased profitability in the shape of bonus and other benefits
  • ^Also brings into focus the role of labour in improving efficiency in term of increased productivity

Advantages to shareholders of the company:-

  • ^There is the correct valuation of all kinds of inventories
  • ^The project should be a true picture of the organization before the shareholders and other investors help to assess its performance
  • ^External cost audit highlights efficiency or inefficiency
  • ^Utilisation of manpower and other natural resources
  • ^Adequacy of return

Advantages to government and economy:-

  • ^It helps the government to settle accounts
  • ^The government can protect the interests of the consumers the labours the shareholders and lastly the investors
  • ^At the national level cost audit promotes cost consciousness and overall efficiency.

Types of cost audit:-

  • ☆Cost audit as an aid to management
  • ☆Cost audit on behalf of a customer
  • ☆Cost audit on behalf of the government
  • ☆Cost audit under the statue
  • ☆Cost audit on behalf of the trade association

Management audit:-

  • Management audit is the process of systematic and dispassionate examination and appraisal of managements overall performance.
  • Management audit is an important tool for the continuous appraisal and evaluation of the methods and performance of an organization.

Objectives of management audit:-

The main objective of the management audit are:-

  • *To ensure optimum utilization of human resources and available physical facilities
  • *To point out deficiencies in objectives
  • *To point out deficiencies in policies
  • *To point out deficiencies in procedures
  • *To point out deficiencies in planning
  • *To suggest improved methods of operations
  • *To anticipate problems and suggest remedies to solve them in time.

Energy audit:-

Energy today has become a key factor in deciding the cost of the product at the micro-level as well as in dictating the inflation and the debt burden at the macro level. An energy audit helps in energy cost optimization, population control, and safety aspects.

Objectives of energy audit:-

The energy aunty aims at the following:-

  • *Identifying the quality and cost of various energy inputs
  • *Energy inputs
  • *production outputs
  • *Highlighting wastages in major areas
  • *Fixing of energy saving
  • *Implementation of measures for energy conservation
  • *Realization of savings

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