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Recent Trends in Auditing

BY

Vinod.A (05B126)

Naveed (05B136)

Varun(05B125)Yeshwanth(05B165)

Rajesh(05B181)

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COST AUDIT

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INTRODUCTION

It is the detailed checking of

the costing system, technique

and accounts to verify their

correctness and to ensure

adherence to the objective ofcost accountancy.

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OVERVIEW

j India was the first country in South Asia (and perhaps in theworld) to make cost audit mandatory for some of its businesssectors. The Institute of Cost and Works Accountants of India(ICWAI) refers to cost audit as an audit of efficiency of minutedetails of expenditure while the work is in progress and not a

post-mortem examination.

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

j GOI has added industries involved in the manufacturing ofplantation products together with the petroleum andtelecommunication industries in 2002 to the list of industriesrequiring mandatory cost audits.

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OBJECTIVES

1. From the perspective of management:

Cost audit detects errors, frauds and misappropriation and henceenhances 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 moreaccurate profit figures.

3. From the perspective of the government:

To curb the profiteering by the manufacturing concerns and help inthe 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 toeffective 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 ashare of all benefits derived by the company from a cost audit.

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Financial Auditvs Cost Audit

j 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.

j Cost Audit

A cost accountant offers to perform or perform services

concerning the costing or pricing of goods and services or thepreparation, verification or certification of cost accounting and

related statements.

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COST AUDIT PROGRAMME

The Cost Auditor should pay his attention to thefollowing records:

j Record of Materials

j Labour Recordsj Record of Overhead Charges

j Depreciation

j Work-in-Progress Records

j Incomplete Records

j Stores and Spare Parts Records

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TAX AUDIT

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TAX AUDIT

TaxAuditor:role,qualifications & appointment

Section 44ABj It was introduced by section 11 of the

Finance Act, 1984 with effect from 1st

April, 1985.jAudit of the accounts of certain assesses.

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OBJECTIVES OF TAX AUDIT

j To ensure that the books of account and otherrecords of the assessee are properly maintained.

j To ensure that the records faithfully reflect the

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

j To facilitate administration by properpresentation of accounts before the tax authorities

and to save Assessing Officers time in carryingout routine verification.

j To ensure that the revenue authorities areprovided with audited financial statements along

with the relevant data and information forassessment.

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Intricacies of tax audit

Section 44AB of the Income-tax Act provides forcompulsory audit of accounts of certain personscarrying on business or profession.

CasesIn the case of a business

j Every assessee whose total sales, turnover or grossreceipts for the previous year exceeds Rs. 40 lakhs

has to get his accounts audited.In the case of a profession

j Every assessee whose gross receipts for theprevious year exceed Rs.10 lakhs has to get his

accounts audited.

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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 therelevant 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 totalsales exceed Rs. 40 lakh. Eg: An agriculturist.

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Compliance of conditions

beforeacceptance of Tax Auditassignment

j

A person defined as a chartered accountantwithin 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 complywith the following conditions before

acceptance of tax audit:

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j 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 boardresolution in case of audit of a company.

A member of AOP in case of audit of AOP.

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j In the interest of both client and auditor, theauditor should send an engagement letter,preferably before the commencement of theengagement, to help avoid any misunderstandingswith respect to the engagement. This is necessarysince section 44AB does not specify the rights ofthe auditor. It has become mandatory from 2003-

04.j In case where the previous years audit is

conducted by any other auditor, then NoObjection Certificate (NOC) to be obtained from

the previous auditor before the acceptance of thetax audit assignment.

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

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

jFor the purpose of section 44AB, an auditreport is to be given in Form No. 3CA if theperson carrying on business or profession isrequired to get his accounts audited under

any other law.

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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.

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MANAGEMENT AUDIT

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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 ofAssociation

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:

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Company Objective.

These objectives are rather fixed targets, which are

mentioned in the Memorandum ofAssociation. These

are not changed.

Objectives are clear and understandable;

Objectives are reasonable and properly reflect

companys responsibility towards shareholders,

employees, community and Government;

Objectives are not changed frequently.

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Functional Objective. The review of the management

audit can make substantial contribution in this area.

These objectives are set for accomplishment of

companys

objectives. T

he 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

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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.

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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 objectivesof company, division, department or unit.

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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.

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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 decisionmaking.

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 anticipatetrouble spots.

The planning process existing in the organizationcapitalizes the abilities and ideas of individuals

working in the organization.

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4Appraisal ofControl.

Control assures attainment of objective. It compels events

to conform to plans.T

here are two important aspects ofcontrol:

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 adequat

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.

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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 explainsthe basic attitude of management audit.

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A. Appraisal of Production

For appraisal ofproduction, management will have toreview a number of activities like:

a. Buying,

b. Planning,b. Processes,

d. Storage and

e. Inspection.

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Management auditor should see that purchase of right

specifications in the right quantities are made at the right

time and at the right place.T

he emphasis will be toreview 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

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A. Appraisal of Purchase Function

Following points are taken care of:

a. Organization ofpurchase function.

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

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?

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B. The Appraisal of Distribution

i. Sales Records.

ii. Sales policy

iii. Service to customer

iv. Publicity.

Accounts and Finance. Here management auditor should no

criticize the technical accountancy of the company: That is t

subject of financial auditor. Management auditor may pointout, 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:

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Adequacy and effectiveness of financial analysis being

submitted by management

Adequacy and efficacy ofprocedures 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 informationsystem.

Adequacy of internal audit procedures.

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

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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 auditorin 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. Followingactivities are primarily studied:

Employment and discharge, personnel records and works

Management,internal welfare and external welfare

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