MAHARSHI DAYANAND COLLEGE OF ARTS,

SCIENCE AND COMMERCE MUMBAI – 400012

Master of commerce (M.com)

Advance Accounting

PART II – SEMESTER III

(2018 – 2019)

In partial fulfillment of the requirement for the Award of Degree

of Master of Commerce (Advance Accounting)

PROJECT NAME : AUDIT REPORT

Submitted by,
Ankita Gajanan Kamble
Roll No – 3027
Under the guidance of,
PROF. N.N. JANI

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 DECLARATION

I, Ankita Gajanan Kamble Student Of MAHARSHI DAYANAND

COLLEGE OF ARTS, SCIENCE & COMMERCE Of M.Com
SEMESTER-III, Hereby Declare That I Have Completed Project On

AUDIT REPORT
In The Academic Year 2018-2019
The Information Is True And Original To The Best Of My Knowledge.

Signature of Student

Ankita G. Kamble

Roll no. 3027

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 MAHARSHI DAYANAND COLLEGE OF ARTS,
SCIENCE AND COMMERCE

PAREL, MUMBAI-400 012

CERTIFICATE

This is to certify that MASTER ANKITA GAJANAN KAMBLE of

M.Com Semester-III (2018-2019) has successfully completed the

project on AUDIT REPORT under the guidance of

Prof. CA N. N. JANI

Project Guide Internal Examinar External Examinar

Prof. Prof.

Prof. N. N. Jani

Course Co-Ordinator Principal

Date: Seal Of College

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 ACKNOWLEDGEMENT

I acknowledge the valuable assistance provided by MAHARSHI DAYANAND COLLEGE OF

ARTS, SCIENCE & COMMERCE, for two year degree course in M.COM.

I specially thank the Prof. N. N. Jani for allowing us to use the facilities such as library, computer
laboratory, internet etc.

I sincerely thank the M.com Prof. N. N. Jani for guiding us in the to prepare the project.

I thank my guide Prof. N.N. Jani, who given their valuable time, knowledge and guidance to
complete the project successfully in time.

My family and peers were great source of inspiration throughout my project, their support is deeply
acknowledged.

SIGNATURE OF STUDENT

(ANKITA G. KAMBLE)

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 Contents
CHAPTER 1 PAGE NO.

 INTRODUCTION 06
 FEATURES OF AUDIT 08
 TYPES OF AUDIT 13
 INTERNAL CONTROL 23
 AUDIT ENGAGEMENT AND DOCUMENTATION 27
 TYPES OF AUDIT REPORT 32

CHAPTER 2

 OBJECTIVE 37
 AUDIT OPINION 39
 GENERAL PRINCIPLES GOVERNING THE AUDITOR 41
 SCOPE OF AUDIT REPORT 43
 ADVANTAGES & LIMITATIONS OF AUDIT REPORT 47
 CARO – COMPANIES (AUDITOR’S REPORT) ORDER, 2003 53
 REVISION OF THE AUDIT REPORT 58

CHAPTER 3

 REVIEW OF LITERATURE 64
 LITRATURE REVIEW (CASE STUDY 2) 69
 CASE STUDY 3 (INTERNAL AUDIT) 77

CHAPTER

 DATA ANALYSIS AND PRESENTATION 79

CHAPTER 5

 CONCLUSION 84

 BIBLOGRAPHY 85

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 CHAPTER-1

EVOLUTION OF AUDIT

The term audit is derived from the Latin term ‘audire,’ which means to hear. In early days a person
used to listen to the accounts read over by an accountant in order to check them. He was known as
auditor. Auditing is as old as accounting and there are signs of its existence in all ancient cultures
such as Mesopotamia, Greece, Egypt. Rome, U.K. and India. Arthasashthra by Kautilya detailed
rules for accounting and auditing of public finances. The original objective of auditing was to detect
and prevent errors and frauds. Auditing evolved and grew rapidly after the industrial revolution in
the 18th century with the growth of the joint stock companies the ownership and management
became separate. The shareholders who were the owners needed a report from an independent
expert on the accounts of the company managed by the board of directors who were the employees.
The objective of audit shifted and audit was expected to ascertain whether the accounts were true
and fair rather than detection of errors and frauds.

In India the Companies Act, 1913 made audit of company accounts compulsory. With the increase
in the size of the Companies and the volume of transactions the main objective of audit shifted to
ascertaining whether the accounts were true and fair rather than true and correct. Hence the
emphasis was not on arithmetical accuracy but on a fair representation of the financial efforts. The
Companies Act, 1913 also prescribed for the first time the qualification of auditors. After the
independence in year 1956, Companies Act, 1956 was implemented and detailed provisions were
made in act regarding audit and auditors. This act provides provisions regarding compulsory
statutory audit of companies, auditor appointment, auditor disqualifications, cost audit, appointment
of cost auditors, government audit, special audit etc. The Companies Act, 1956 has been replaced
with the Companies Act, 2013. Chapter X of the Companies Act, 2013 (Sections 139-148) deals
with the provisions related to Audit & Auditors.

DEFINATION OF AUDITING

It is a bit difficult to give a precise definition of word audit in a word or two, originally its meaning
and use was confined merely to cash audit and the auditor had to ascertain whether the person
responsible for the maintenance of accounts had properly accounted for all the cash receipts the
payment on behalf of his principle. But the word, audit, had a wide usage and it now means a
through scrutiny of the books of accounts and its ultimate aim is to verify the financial position
disclosed by the balance sheet and the profit and loss account of a company. The following are the
some of the definitions of audit given by some writers:
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Lawrence R. Dicksee-‘ An 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.

Taylor and Perry - “Audit is defined as an investigation of some statements of figures involving
examination of certain evidence, so as to enable an auditor to make a report on the statement.

Prof. Montgomery- “Auditing is a systematic examination of the books and records of business or
other organization, in order to ascertain or verify and to report upon the facts regarding its financial
operations and the result thereof.

Spicer & Pegler- “Audit such an examination of the books of accounts and vouchers of a business,
as will enable the auditor to satisfy himself that the Balance Sheet is properly drawn up, so as to give
a true and fair view of the state affairs of the business, and whether the profit and loss account gives
a true and fair view of the profit or loss for the financial period according to the best of his
information and explanations given to him and as shown by the books, and if not, in what respect he
is not satisfied”.

F.R.M De Paula- “An audit denotes the examination of Balance Sheet and Profit and Loss Account
prepared by others together with the books of accounts and vouchers relating there to in such a
manner that the auditor may be able to satisfy himself and honestly report that, in his opinion, such
Balance Sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs of
the particular concern according to the information and explanations given to him and as shown by
the books”.

Institute of Chartered Accountants of India (ICAI) defines Auditing as- Auditing is defined as a
systematic and independent examination of data, statements, records, operations and performance of
an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognizes the
propositions before him for examination, collect evidence, evaluates the same and on this basis
formulates his judgement which is communicated through his audit report”.

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FEATURES OF AUDITING

1. Audit is a systematic and scientific examination of the books of accounts of a business;

2. Audit is undertaken by an independent person or body of persons who are duly qualified for
the job.
3. 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.
4. Audit is a critical review of the system of accounting and internal control.
5. Audit is done with the help of vouchers, documents, information and explanations received
from the authorities.
6. 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.
7. The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the
transactions and examine correspondence, minute books of share holders, directors,
Memorandum of Association and Articles of association etc., in order to establish
correctness of the books of accounts.

OBJECTIVES OF AUDITING

The objectives of auditing may be classified into two parts:

1. The primary objective

2. The secondary or incidental objective.

Primary Objective – The primary objective of the auditors is to report to the owners whether the
balance sheet give a true and fair view of the company’s state of affairs and the correct figure of the
profit or loss for the financial year.

Secondary objective – It is also called the incidental objective as it is incidental to the satisfaction
of the main objective.

The incidental objectives of auditing are:

(i) Detection and prevention of frauds, and

(ii) Detection and prevention of errors.

Detection of material frauds and errors as an incidental objective of independent financial auditing
flows from the main objective of determining whether or not the financial statements give a true and

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fair view. The statement on auditing practices issued by the Institute of Chartered Accounts of india
states, an auditor should bear in mind the possibility of the existence of frauds or errors in the
accounts under audit since they may cause the financial position to be mis-stated. Fraud refers to
intentional misrepresentation of financial information with the intention to deceive. Frauds can take
place in the form of manipulation of accounts, misappropriation of cash and misappropriation of
goods. It is of great importance for the auditor to detect any frauds, and prevent their recurrence.
Errors refer to unintentional mistake in the financial information arising on account of ignorance of
accounting principles i.e. principle errors, or error arising out of negligence of accounting staff i.e.
clerical errors.

SCOPE OF AUDITING

Audit scope determines the time involved in audit exercise, depth of auditing, aspects to be covered
etc. Audit scope depends on nature of audit, objectives of audit & terms of engagement, requirement
of applicable legislations and auditing standard. However the terms of engagement cannot, restrict
the scope of an audit in relation to matters which are prescribed by legislation or by the auditing
standard.

The audit should be organized to cover adequately all aspects of the enterprise as far as they are
relevant to the audit objectives. For example while carrying out the statutory audit, to form an
opinion on the financial statements; the auditor should be reasonably satisfied as to whether the
information contained in the underlying accounting records and other source data is reliable and
sufficient as the basis for the preparation of the financial statements. In forming his opinion, the
auditor should also decide whether the relevant information is properly disclosed in the financial
statements subject to statutory requirements, where applicable.

The auditor assesses the reliability and sufficiency of the information contained in the underlying
accounting records and other source data by:

A. Making a study and evaluation of accounting systems and internal controls on which he wishes to
rely and testing those internal controls to determine the nature, extent and timing of other auditing
procedures; and

B. Carrying out such other tests, enquiries and other verification procedures of accounting
transactions and account balances as he considers appropriate in the particular circumstances.

The auditor determines whether the relevant information is properly disclosed in the financial
statements by :

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 (a) Comparing the financial statements with the underlying accounting records and other source data
to see whether they properly summarize the transactions and events recorded therein; and

(b) Considering the judgments that management has made in preparing the financial statements
accordingly, the auditor assessees the selection and consistent application of accounting policies, the
manner in which the information has been classified, and the adequacy of disclosure.

BASIC PRINCIPLES GOVERNING AN AUDIT

SA 200 “Basic Principals Governing an Audit”, describes the basic principles which govern the
auditor’s professional responsibilities and which should be complied with wherever an audit is
carried. They are described below:

I. Integrity objectivity and independence: An auditor should be honest, sincere, impartial

and free from bias. He should be a man of high integrity and objectivity.
II. Confidentiality: The auditor should respect confidentiality of information acquired during
the course of his work and should not disclose the information without the prior permission
of the client, unless there is a legal duty to disclose.
III. Skill and competence: The auditor must acquire adequate training and experience. He
should be competent, skillful and keep himself abreast of the latest developments including
pronouncements of ICAI on accounting and auditing matters.
IV. Work performed by others: If the auditor delegates some work to others and uses work
performed by others including that of an expert, he continues to be responsible for forming
and expressing his opinion on the financial information.
V. Documentation: The auditor should document matters which are important in providing
evidence to ensure that the audit was carried out in accordance with the basic principles.
VI. Planning: The auditor should plan his work to enable him to conduct the audit in an
effective, efficient and timely manner. He should acquire knowledge of client’s accounting
system, the extent of reliance that could be placed on internal control and coordinate the
work to be performed.
VII. Audit evidence: The auditor should obtain sufficient appropriate evidences through the
performance of compliance and other substantive procedures to enable him to draw
reasonable conclusions to form an opinion on the financial information.
VIII. Accounting System and Internal Control: The management is responsible for maintaining
an adequate accounting system incorporating various internal controls appropriate to the size

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 and nature of business. He auditor should assure himself that the accounting system is
adequate and all the information which should be recorded has been recorded. Internal
control system contributes to such assurance.
IX. Audit conclusions and reporting: On the basis of the audit evidence, he should review and
assess the audit conclusions. He should ascertain:
1. As whether accounting policies have been consistently applied;
2. Whether financial information complies with regulations and statutory requirements; and
3. There is adequate disclosure of material matters relevant to the presentation of financial
information subject to statutory requirements.

The auditor’s report should contain a clear written opinion on the financial information. A clean
audit report indicates the auditor’s satisfaction in all respects and when a qualified, adverse or a
disclaimer of opinion is to be given or reservation of opinion on any matter is to be made, the audit
report should state the reasons thereof.

TRUE AND FAIR VIEW

The main object of audit is to find out whether the financial statements prepared by a company show
the true and fair view of the financial state of affairs of a company and if not then in what respect
they are not showing. The accounts are said to be true and fair:

1. The books of account have recorded all the business transaction correctly.
2. The books of account have been prepared according to the accepted principles of
accountancy and have followed accounting standards issued by different regulatory bodies.
3. There are no errors and frauds present in the books of account.
4. The financial statements that have been prepared by the company are in conformity with the
books of accounts and all mandatory provisions of companies Act and other relevant laws
have been followed:
5. The profit and loss shown in the profit and loss account shows the true and fair results of
entity’s operations and the value of assets and liabilities appears in the balance sheet is
showing the correct financial picture.
6. The books of accounts must disclose all material facts regarding revenue, expenses, assets
and liabilities.
7. Material means important and essential. The disclosure of important matters in the accounts
helps the users in taking business decisions. There should be neither suppression of vital
facts nor mis-statements.

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What constitutes true and fair is not defined under any law. In order to show a true and fair view the
auditor should ensure that:

1. The final accounts (Trading and Profit and loss Account and Balance Sheet) agree with the
books of accounts.
2. The closing stock is physically verified and valued properly.
3. Intangible assets like goodwill, patents, preliminary expenses or other deferred revenue
expenses are valued and written off properly.
4. Expenses/income of Capital nature is not treated as revenue and vice versa. 5. Contingent
liabilities are not treated as actual liabilities and vice versa
5. Provision is made for all known losses and liabilities
6. Transactions are recorded on accrual basis, i.e. outstanding expenses, prepaid expenses,
income accrued and advance income is recorded properly
7. The exceptional or non-recurring transactions are disclosed separately in the accounts.

INVESTIGATION

Investigation is an exercise which is carried out with a specific objective. The investigation means
in-depth analysis of books of accounts, transaction, and event. Investigation exercise is voluntary in
nature and used extensively by Internal and management auditors. It is neither accounting nor
auditing but a special audit limited or extended scope keeping in view the object behind it. It is
intensive and comprehensive than auditing. Dicksee has defined it thus: ”An investigation is an
examination of accounting records for a specific purpose“.

Scope of investigation

No general principle can be laid down with regard to the scope of every type of investigation. Scope
of investigation, in each case, would be limited to the period or area to be covered by the
investigator.

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 TYPES OF AUDIT

AUDIT OF COMPANIES UNDER THE COMPANIES ACT 2013

The Companies Act, 2013 is focused on transparency and disclosure. In the new Act, attempt has
been made to cover each aspect of corporate functioning under audit by prescribing various types of
audits like internal audit and secretarial audit.

STATUTORY AUDIT

Sections 139 to 147 under chapter X of the Companies Act 2013 along with the Companies (Audit
and Auditors) Rules, 2014 contain provisions regarding audit and auditors.

I. Section 139 contains provision regarding Appointment of auditors.

II. Removal, resignation of auditor and giving of special notice is provided in Section 140.
III. Section 141 prescribes eligibility, qualifications and disqualifications of auditors.
IV. Section 142 deals with the provisions of Remuneration of auditors.
V. Powers and duties of auditors and auditing standards is provided in Section 143.
VI. Section 144 provides a list of certain services which auditor is not to render.
VII. Section 145 deals with signing of Audit Reports. • Section 146 deals with Auditors to atteng
General Meeting • Section 147 deals with punishment for contravention.

INTERNAL AUDIT

Section 138 under Chapter IX of the Companies Act, 2013 contains provisions regarding internal
audit. The provisions regarding internal audit of the company according to section 138 of the
Companies Act, 2013 and the Companies (Accounts) Rules, 2014 are discussed below

Qualifications for the internal auditor: The internal auditor shall either be a chartered accountant
whether engaged in practice or not or a cost accountant, or such other professional as may be
decided by the Board to conduct internal audit of the functions and activities of the company.

Report of the internal audit: The report of internal audit shall be submitted to the Board of the
company.

Companies required to appoint internal auditor: The following class of companies shall be required
to appoint an internal auditor or a firm of internal auditors, namely:-

(a) every listed company;

(b) every unlisted public company having-

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 • paid up share capital of fifty crore rupees or more during the preceding financial year; or
• turnover of two hundred crore rupees or more during the preceding financial year; or
• outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year; or
• outstanding deposits of twenty five crore rupees or more at any point of time during the
preceding financial year; and (c) every private company having-
• turnover of two hundred crore rupees or more during the preceding financial year; or
• outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year
• All the companies covered under any of the above criteria will have to comply with the
requirements of section 138 and this rule within six months of commencement of such
section.
• The internal auditor may or may not be an employee of the company.
• The Audit Committee of the company or the Board shall, in consultation with the Internal
Auditor, formulate the scope, functioning, periodicity and methodology for conducting the
internal audit.  

SECRETARIAL AUDIT

The Companies Act 2013 has introduced a new requirement of Secretarial Audit for bigger
companies, which has been prescribed under Section 204 of the Act. The provisions regarding
secretarial audit of the company according to section 204 of the Companies Act, 2013 and the
Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are discussed
below
Companies required conducting secretarial audit:
(1) Every listed company and
(2) Company belonging to other class of companies: The other class of companies are
• every public company having a paid-up share capital of fifty crore rupees or more; or
• every public company having a turnover of two hundred fifty crore rupees or more.
Qualifications for the secretarial auditor: A Secretarial Audit has to be conducted by a
Practising Company Secretary in respect of the secretarial and other records of the company.
Report of the secretarial audit: A secretarial audit report shall be annexed with the Board’s
report of the company. The Board of Directors, in their report made in terms of sub-section

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(3) of section 134, shall explain in full any qualification or observation or other remarks made by the
company secretary in practice in his report under sub-section (1). The format of the Secretarial Audit
Report shall be in Form No.MR.3.

Other Provisions:
• It shall be the duty of the company to give all assistance and facilities to the company secretary in
practice, for auditing the secretarial and related records of the company.
• If a company or any officer of the company or the company secretary in practise, contravenes the
provisions of this section, the company, every officer of the company or the company secretary in
practice, who is in default, shall be punishable with fine which shall not be less than one lakh
rupees but which may extend to five lakh rupees. As per Section 143(14), all provisions regarding
rights, duties and obligations of statutory auditors shall also apply to Company Secretary in
Practice conducting secretarial audit.

COST AUDIT

Section 148 of the Companies Act provides that the Central Government may, by order, in respect of
such class of companies engaged in the production of such goods or providing such services as may
be prescribed, direct that particulars relating to the utilisation of material or labour or to other items
of cost as may be prescribed shall also be included in the books of account kept by that class of
companies:

• If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct
that the audit of cost records of class of companies, which are covered under sub-section (1) and
which have a net worth of such amount as may be prescribed or a turnover of such amount as
may be prescribed, shall be conducted in the manner specified in the order.
• The audit under sub-section (2) shall be conducted by a Cost Accountant in practice who shall be
appointed by the Board on such remuneration as may be determined by the members in such
manner as may be prescribed.
• An audit conducted under this section shall be in addition to the audit conducted under section
143.
• The qualifications, disqualifications, rights, duties and obligations applicable to auditors under
this Chapter shall, so far as may be applicable, apply to a cost auditor appointed under this
section and it shall be the duty of the company to give all assistance and facilities to the cost
auditor appointed under this section for auditing the cost records of the company.
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• A company shall within thirty days from the date of receipt of a copy of the cost audit report
prepared in pursuance of a direction under sub-section (2) furnish the Central Government with
such report along with full information and explanation on every reservation or qualification
contained therein.
• If, after considering the cost audit report referred to under this section and the information and
explanation furnished by the company under sub-section (6), the Central Government is of the
opinion that any further information or explanation is necessary, it may call for such further
information and explanation and the company shall furnish the same within such time as may be
specified by that Government.
• If any default is made in complying with the provisions of this section,—
i. the company and every officer of the company who is in default shall be punishable in the
manner as provided in sub-section (1) of section 147;
ii. the cost auditor of the company who is in default shall be punishable in the manner as
provided in sub-sections (2) to (4) of section 147.

JOINT AUDIT

Meaning of Joint Audit: when two or more auditors are appointed for the execution of same audit
assignment, it is termed as joint audit. Joint auditors are mainly appointed for audit assignment of
public enterprises and big companies.
Institute of Chartered Accountants of India (ICAI) has issued SA 299 on “Responsibility of Joint
Auditors” w.e.f. April, 1996. Basic principles governing a joint audit are discussed herein given
below
Division of Work - Where joint auditors are appointed, they should, by mutual discussion, divide
the audit work among themselves in terms of audit of identifiable units or specified areas. If due to
the nature of the business of the entity under audit, such a division of work may not be possible the
division of work may be with reference to items of assets or liabilities or income or expenditure or
with reference to periods of time. The division of work among joint auditors as well as the areas of
work to be covered by all of them should be adequately documented and preferably communicated
to the entity.
Coordination - Where, in the course of his work, a joint auditor comes across matters which are
relevant to the areas of responsibility of other joint auditors and which deserve their attention, or
which require disclosure or require discussion with, or application of judgement by, other joint
auditors, he should communicate the same to all the other joint auditors in writing. Thus should be
done by the submission of a report or note prior to the finalisation of the audit.
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Relationship among joint auditors - In respect of audit work divided among the joint auditors,
each joint auditor is responsible only for the work allocated to him, whether or not he has prepared
as separate report on the work performed by him. On the other hand, all the joint auditors are jointly
and severally responsible:
i. In respect of the audit work which is not divided among the joint auditors and is carried out by
all of them;
ii. In respect of decisions taken by all the joint auditors concerning the nature, timing or extent of
the audit procedures to be performed by any of the joint auditors. It may, however, be clarified
that all the joint auditors are responsible only in respect of the appropriateness of the decisions
concerning the nature, timing or extent of the audit procedures agreed upon among them;
proper execution of these audit procedures is the separate and specific responsibility of the
joint auditor concerned;
iii. In respect of matters which are brought to the notice of the joint auditors by any one of them
and on which there is an agreement among the joint auditors; (d) For examining that the
financial statements of the entity comply with the disclosure requirements of the relevant
statute; and
iv. For ensuring that the audit report complies with the requirements of the relevant statute.

If any matters of the nature referred above are brought to the attention of the entity or other joint
auditors by an auditor after the audit report has been submitted, the other joint auditors would not be
responsible for those matters.

Reporting Responsibilities - Normally, the joint auditors are able to arrive at an agreed report.
However, where the joint auditors are in disagreement with regard to any matters to be covered by
the report, each one of them should express his own opinion through a separate report. A joint
auditor is not bound by the view of the majority of the joint auditors regarding matters to be covered
in the report and should express his opinion in a separate report in case of a disagreement. For the
purpose of computation of the number of company audits held by an auditor pursuant to the ceiling
rule introduced in the Companies Act, 1956 each joint auditor ship in a company will be counted as
one unit.

CAG AUDIT

CAG Audit is known as audit of public enterprises done by Comptroller and Auditor General of
India and here we will be discussing about Government Audit as CAG audit.

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In India, government audit is performed by an independent constitutional authority, i.e. Comptroller
and Audit General of India (C&AG), through the Indian Audit and Accounts Department. The
Constitution of India gives a special status to the C&AG and contains provisions to safeguard his
independence. Article 148 of the constitution provides that the C&AG shall be appointed by the
President and can be removed from the office only in a like manner and on the like grounds as a
judge of the Supreme Court. Article 151 of the Constitution requires that the audit reports of the
C&AG relating to the accounts of the Central/State Government should be submitted to the
President/Governor of the State who shall cause them to be laid before Parliament/State Legislative.

Organizations subject to the audit of the Comptroller and Auditor General of India The
organisations subject to the audit of the Comptroller and Auditor General of India are:

– All the Union and State Government departments and offices including the Indian Railways and
Posts and Telecommunications.

– About 1500 public commercial enterprises controlled by the Union and State governments, i.e.
government companies and corporations.

– Around 400 non-commercial autonomous bodies and authorities owned or controlled by the Union
or the States.

– Over 4400 authorities and bodies substantially financed from Union or State revenues.

AUDIT OF GOVERNMENT COMPANYS (COMMERCIAL AUDIT)

There is a special arrangement for the audit of companies where the equity participation by
Government is 51 percent or more. The primary auditors of these companies are Chartered
Accountants, appointed by the Comptroller and Auditor General of India, who gives the directions
to the auditors on the manner in which the audit should be conducted by them. The Comptroller and
Auditor General of India is also empowered to comment upon the audit reports of the primary
auditors. In addition, the Comptroller and Auditor General of India conducts a test audit of the
accounts of such companies and reports the results of his audit to Parliament and State Legislatures.

INTERNAL AUDIT

ICAI describes Internal Audit as “an independent management function, which involves a
continuous and critical appraisal of the functioning of entity with a view to suggest improvements
thereto and to add value and strengthen the overall governance mechanism of the entity, including

18
the entity’s strategic risk management and internal control system. Internal Audit, therefore,
provides assurance that there is transparency in reporting, a part of good governance”.
Internal Audit being an independent appraisal function ensures objectivity and consultation which
enhances the value and improves an organization’s operations. It not only includes matters related to
finance but also critical appraisal of the policies and procedures of the company

PROPRIETY AUDIT

Kohler has defined propriety as that which meets the test of public interest, commonly accepted
customs and standard of conduct and particularly as applied to professional performance,
requirements of Government regulations and professional codes. Propriety Audit carry out to check,
mean whether the transactions have been done in conformity with established rules, principles and
established standard.

The Propriety Audit means the verification of following main aspects to find out whether:

(i) Proper recording has been done in appropriate books of accounts.

(ii) The assets have not been misused and have been properly safeguarded.

(iii) The business funds have been utilized properly.

(iv) The concern is yielding the expected results.

The system of Propriety Audit is applied in respect to Government companies, Government

Department because public money and public interest are involved therein. It is an essential function
of audit to bring to light not only cases of clear irregularity but also every matter which in its
judgement appears to involve improper expenditure or waste of public money or stores, even though
the accounts themselves may be insufficient to see that sundry rules or orders of competent authority
have been observed. It is of equal importance to ensure that the broad principles of orthodox finance
are borne in mind not only by disbursing officers but also by sanctioning authorities.

COMPLIANCE AUDIT

A compliance audit is a comprehensive review of an organization’s adherence to regulatory

guidelines. What, precisely, is examined in a compliance audit will vary depending upon whether
an organization is a public or private company, what kind of data it handles and if it transmits or
stores sensitive financial data. It is common to us that the business undertakings require some
certified statement on various matters and the auditors certify such statements after carrying out

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audit which might be necessary under the particular cases. All such audits are called Compliance
Audit.

EFFICIENCY AUDIT

In essence, efficiency indicates how well an organization uses its resources to produce goods and
services. It focuses on resources (inputs), goods and services (outputs), and the rate (productivity) at
which inputs are used to produce or deliver the outputs. To understand the meaning of “efficiency”,
it is necessary to understand the following terms: inputs, outputs (including quantity and quality),
productivity, and level of service. Inputs are resources (e.g., human, financial, equipment, material,
facilities, information, energy and land) used to produce outputs.  Outputs are goods and services
produced to meet client needs. Outputs are defined in terms of quantity and quality and are delivered
within parameters relating to level of service.

INTERNAL AUDIT

Internal Audit is performed by professionals with an in-depth understanding of the business culture,
systems, Lesson 12 Internal Audit 487 and processes. Internal audit activity provides assurance that
internal controls in place are adequate to mitigate the risks, governance processes are effective and
efficient, and organizational goals and objectives are met

As per The Institute of Internal Auditors (IIA): Internal Auditing is an independent, objective
assurance and consulting activity designed to add value and improve an organization’s operations. It
helps an organization accomplish its objectives by bringing a systematic, disciplined approach to
evaluate and improve the effectiveness of risk management, control, and governance processes.
Independence is established by the organizational and reporting structure.

A dedicated, independent and effective internal audit activity assists both management and the
oversight body (e.g. the board, audit committee) in fulfilling their responsibilities by bringing a
systematic disciplined approach to assessing the effectiveness of the design and execution of the
system of internal controls and risk management processes. The objective assessment of internal
controls and risk management processes by the internal audit activity provides management, the
oversight body, and external stakeholders with independent assurance that the organization’s risks
have been appropriately mitigated. Because internal auditors are experts in understanding
organizational risks and internal controls available to mitigate these risks, they assist management in
understanding these topics and provide recommendations for improvements.

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TAX AUDIT

The main objective of the tax audit is to compute the taxable income according to the law and for
maintaining transparency in the financial statements filed by the assessees with the Income-tax
department. The tax audit u/s. 44AB of the Income-tax Act 1961 is significant practice area for
Chartered Accountants. Since the introduction of tax audit, we have been given responsibilities to
discharge the duties as tax auditors for the proper compliance of tax law by the assessees. The Institute
of Chartered Accountants of India has defined auditing as follows – “A systematic and independent
examination of data, statements, records, operations and performances (financial or otherwise) of an
enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognises the
propositions before him for examination, collects evidence, evaluates the same and on this basis
formulates his judgment which is communicated through his audit report”. Under the existing provisions
of section 44AB, every person carrying on business is required to get his accounts audited if the total
sales, turnover or gross receipts in the previous year exceed sixty lakh rupees. Similarly, a person
carrying on a profession is required to get his accounts audited if the total sales, turnover or gross
receipts in the previous year exceed fifteen lakh rupees. In order to reduce the compliance burden on
small businesses and on professionals, it is proposed to increase the threshold limit of
total sales, turnover or gross receipts, specified under section 44AB for getting accounts audited, from
sixty lakh rupees to one crore rupees in the case of persons carrying on business and
from fifteen lakh rupees to twenty five lakh rupees in the case of persons carrying on profession.
It is also proposed that for the purposes of presumptive taxation under section 44AD, the threshold limit
of total turnover or gross receipts would be increased from sixty lakh rupees to one crore rupees.

SOCIAL AUDIT

Organizations, these days, focus on attaining economic growth through performing processes that
ensure social and environmental development simultaneously. A social audit is a way of measuring,
understanding, reporting and improving an organization’s performance towards meeting its social
and ethical objectives
Objectives of Social Audit
(1) Assessing the needs of the society and resources available for fulfilling them.
(2) Spreading awareness among beneficiaries about the business’ efforts towards attaining social
objectives.
(3) Increasing efficacy and effectiveness of the organization’s corporate social responsibility
(CSR) programmes.
(4) Scrutiny of policy decisions, keeping in view the interests of stakeholders.

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(5) Advantages of Social Audit
(6) Encourages community participation among different business entities.
(7) Ensures continuous efforts towards environmental protection and use of environment
friendly production processes.
(8) Builds customer satisfaction and trust through ethical business practices.
(9) Promotes collective decision making and sharing responsibilities.

OPERATIONAL AUDIT

Operational Audit is a systematic review of effectiveness, efficiency and economy of operation.

Operational audit is a future-oriented, systematic, and independent evaluation of organizational
activities. In Operational audit financial data may be used, but the primary sources of evidence are
the operational policies and achievements related to organizational objectives.[1] Operational audit is
a more comprehensive form of an Internal audit.

The Institute of Internal Auditor (IIA) defines Operational Audit as a systematic process of
evaluating an organization's effectiveness, efficiency and economy of operations under
management's control and reporting to appropriate persons the results of the evaluation along with
recommendations for improvement.

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INTERNAL CONTROL
Introduction

Internal control means different things to different people. This causes confusion among
businessman, legislators, regulators and others.

Internal control is broadly defined as a process, effected by an entity’s board of directors,

management and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:

1. Effectiveness and efficiency of operations.

2. Reliability of financial reporting.

3. Compliance with applicable laws and regulations.

The first category addresses an entity’s basic business objectives, including performance and
profitability goals and safeguarding of resources. The second relates to the preparation of reliable
published financial statements, including interim and condensed financial statements and selected
financial data derived from such statements, such as earnings releases, reported publicly. The third
deals with complying with those laws and regulations to which the entity is subject. These distinct
but overlapping categories address different needs and allow a directed focus to meet the separate
needs.

Definitions of Internal Control

De Paula [1989] defined internal controls as a system of controls, financial and otherwise
established by management in order to carry on the business of the company in an orderly and
efficient manner to ensure the adherence to management policies, safeguard the assets, and secure as
much as possible the completeness of an internal control system.

Gibbins, [1990]; argues that the safeguarding of assess , prevention and detection of frauds and
errors , the accuracy and completeness of accounting records and timely preparation of reliable
information, he argues that internal controls may be incorporated with in computerized accounting
system, which extends beyond those matters which are related directly to the accounting system.

The international standards of auditors define internal controls as a system comprising of

controls environment and procedures. It includes polices and ways adapted by management of an
enterprise to assist it in achieving its objectives.

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Nature of Internal control

Internal controls can be detective, corrective, or preventive by nature.

1. Detective controls are designed to detect errors or irregularities that may have occurred.
2. Corrective controls are designed to correct errors or irregularities that have been detected.
Lesson 13 Internal Control 499
3. Preventive controls, on the other hand, are designed to keep errors or irregularities from
occurring in the first place.

Scope of Internal Control

It is very important to have an internal control system for an organisation. There is no universal
model of internal control, system. It is up to every company to design an internal control system
which is suitably adapted to its situation. Internal control is neither limited to a set of procedures nor
to financial controls. Operational control such as quality control, work standards, budgetary control,
periodic reporting, policy appraisal, quantitative controls etc are all parts of internal control system.

Internal Control Objectives

Internal control objectives are desired goals or conditions for a specific event cycle which, if
achieved, minimize the potential that waste, loss, unauthorized use or misappropriation will occur.
They are the conditions which we want the system of internal control to satisfy. For a control
objective to be effective, compliance with it must be measurable and observable.

Internal audit evaluates the organisation’s system of internal control by accessing the ability of
individual process controls to achieve seven pre-defined control objectives. The control objectives
include:

Authorization - the objective is to ensure that all transactions are approved by responsible
personnel in accordance with their specific or general authority before the transaction is recorded.

Completeness - the objective is to ensure that no valid transactions have been omitted from the
accounting records.

Accuracy - the objective is to ensure that all valid transactions are accurate, consistent with the
originating transaction data, and information is recorded in a timely manner.

24
Validity - the objective is to ensure that all recorded transactions fairly represent the economic
events that actually occurred, are lawful in nature, and have been executed in accordance with
management’s general authorization.

Physical Safeguards and Security - the objective is to ensure that access to physical assets and
information systems are controlled and properly restricted to authorized personnel.

Error Handling - the objective is to ensure that errors detected at any stage of processing receive
prompts corrective action and are reported to the appropriate level of management.

Segregation of Duties - the objective is to ensure that duties are assigned to individuals in a manner
that ensures that no one individual can control both the recording function and the procedures
relative to processing a transactions.

INTERNAL CHECK

Internal check is best regarded as indicating checks on the day-to-day transactions which operate
continuously as a part of the routine systems whereby work of one person is proved independently
or is complementary to the work of another, the object being the prevention of or early detection of
errors and frauds”.

The main objective of internal check is prevention of errors and frauds and/or detection of errors and
frauds at the earliest. Internal check is a continuous process and is part of the day-to-day routine. It
relates to all the transactions that take place every day.

Internal check is achieved by complementary allocation of duties and by independent verification of

the work of one person by another. Internal check is a part of internal control system. It ensures that
all financial transactions are properly recorded. It also ensures efficiency of the accounting system
followed by the organization and enables easy preparation of financial statements. It achieves its
main object of minimizing errors and frauds. A sound system of internal check increases the
reliability of financial statements. Internal check discourages fraud and collusion among employees
by instilling a fear of detection in their minds. Internal check assigns responsibilities to persons and
enables maintenance of records and documents properly and thereby ensures smooth flow of work.

Audit Testing

An audit test is a procedure performed by either an external or internal auditor in order to assess the
accuracy of various financial statement assertions. The two common categorizations of audit tests
are substantive tests and tests of internal controls. Both types of tests are used in external and

25
internal audits in order to reach established audit objectives, as can be outlined in audit checklists or
determined based on the results of audit questionnaires. Audit tests typically are performed on a
sample basis over an existing group of similar transactions. Sampling approaches can either be
statistical or non-statistical, with the ultimate goal being to obtain the most representative sample of
the population before testing begins.

Sampling Of Audit Testing

Sampling is a process of selecting a subset of a population of items for the purpose of making
inferences to the whole population. Accounting populations usually consist of a large number of
items (debtors, creditors), often totalling millions of rupees, and a detailed examination of all
accounts is not possible. Audit sampling is defined as

“The application of audit procedures to less than 100% of the items within an account balance or
class of transactions to enable the auditor to obtain and evaluate evidence about some characteristic
of the items selected in order to form or assist in forming a conclusion concerning the population
which makes up the account balance or class of transactions”

A fundamental element of any audit programme will be the selection of transactions to be tested as
a sample of all available transactions. Sampling is used in both compliance and substantive testing
and is described in numerous textbooks in auditing

Audit In Depth

Audit in depth as the name implies means checking a transaction extensively from origin to end. It is
an audit technique which is used to evaluate the effectiveness of internal control system in an
organisation. It is used in investigation exercises whereby the objective is to thorough examination
of transactions or records. In this technique all aspects relating to the transaction are checked such as
sanctity of transaction, validity of transaction, adherences of prescribed procedures, arithmetical
accuracy of transaction, accounting treatment of transaction etc. It is also called vertical vouching as
against horizontal vouching

26
AUDIT ENGAGEMENT AND DOCUMENTATION

Introduction: Audit procedures refer to the methodology adopted by an auditor in carrying out an
audit assignment. Audit procedures have a very important role in the successful execution of an
audit assignment. The most successful audits are those involving sound planning and those in which
the auditee and the auditors have a constructive working environment. In a conducive environment,
auditee, should understand what auditor has been doing and why. Although every audit is unique,
the audit process is similar for most engagements, and normally consists of three stages: planning,
executing and reporting.

Audit Plan

An audit plan is a step-by-step, methodical approach that enables auditors to focus on important
areas under review. Audit Planning steps run the gamut, from engagement preparation and staff
appointment to testing financial accounts and internal processes.

In order to ensure a high standard of performance, it is important that the auditor should prepare
adequately for his work. Planning for an audit, just like every human endeavour, is essential for the
smooth performance of the audit work and its successful completion. Planning ahead for an audit
work will not only guarantee a valid audit opinion but will also help the auditor to ensure that:

(a)The audit objective is established and achieved;

(b) The audit is properly controlled and adequately directed at all stages;
(c)High risk and critical areas of the engagement are not omitted but that adequate attention is
focused on these areas; and
(d) The work is completed economically and expeditiously, hence, saving on audit resources

VOUCHING

Vouching means the examination of documentary evidence in support of entries to establish the
arithmetic accuracy. When the auditor checks the entries with some documents it is called vouching.

Vouching is the acid test of audit. It tests the truth of the transaction recorded in the books of
accounts. It is an act of examining documentary evidence in order to ascertain the accuracy and
authenticity of the entries in the books of accounts.

According to Dicksee, “Vouching consists of comparing entries in the books of accounts with
documentary evidence in support thereof.”

27
According to Joseph Lancaster, “it is often thought that vouching consists of the mere examination
of the vouchers or documentary evidence with the book entries. This is, however, quite wrong, for
vouching comprises such an examination of the ledger entries as will satisfy the auditor, not only
that the entry is supported by the documentary evidence but it has been properly made upon the
books of accounts.”

VOUCHER

Any documentary evidence supporting the entries in the records is termed as a voucher. Any
document, which supports the entries in the books of accounts and establishes the arithmetical
accuracy, is called a voucher.

VERIFICATION

Spicer and Pegler have defined verification as, “it implies an inquiry into the value, ownership and
title, existence and possession and the presence of any charge on the assets”. Verification is a
process by which an auditor satisfies himself about the accuracy of the assets and liabilities
appearing in the Balance Sheet by inspection of the documentary evidence available. Verification
means proving the truth, or confirmation of the assets and liabilities appearing in the Balance Sheet.

Thus, verification includes verifying:-

1. The existence of the assets

2. Legal ownership and possession of the assets

3. Ascertaining that the asset is free from any charge, and

4. Correct valuation Of course it is not possible for the auditor to verify each and every asset. It was
held in Kingston Cotton Mills case that “it is not part of an auditor’s duty to take stock. No one
contend that it is. He must rely on other people for the details of stock in trade in hand”. However,
as per the decision given in Mc Kesson and Robins case (1939) the auditor must physically inspect
some of the assets. Now the auditor has to report whether the balance sheet shows true and fair view
of the state of affairs of the company. Hence, he is required to verify all the assets and liabilities
appearing in the balance sheet. In case of failure, the auditor can be held liable for damages.

DOCUMENTATION

“The skill of an accountant can always be ascertained by an inspection of his working papers.”—
Robert H. Montgomery, Montgomery’s Auditing, 1912

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Meaning of Documentation

The word “document” is used to refer to a written or printed paper that bears the original, official, or
legal form of something and can be used to furnish decisive evidence or information.
“Documentation” refers to the act or an instance of the supplying of documents or supporting
references or records.

“Documentation” refers to the working papers prepared or obtained by the auditor and retained by
him, in connection with the performance of the audit.

SAMPLING

Audit sampling is the testing of less than 100% of the items within a population to obtain and
evaluate evidence about some characteristic of that population, in order to form a conclusion
concerning the population.

“Audit sampling” means the application of audit procedures to less than 100% of the items within an
account balance about some characteristic of the items selected in order to form or assist in forming
a conclusion concerning the population. It is important to recognise that certain testing procedures
do not come within the definition of sampling. Tests performed on 100% of the items within a
population do not involve sampling. Likewise, applying audit procedures to all items within a
population which have a particular characteristic (for example, all items over a certain amount) does
not qualify as audit sampling with respect to the population examined, nor with regard to the
population as a whole, since the items were not selected from the total population on a basis that was
expected to be representative. Such items might imply some characteristic of the remaining portion
of the population but would not necessarily be the basis for a valid conclusion about the remaining
portion of the population.

In an audit, sampling procedures are used because it is not practical to examine every single item in
a population. For example, the auditor may select an audit sample of non-current assets, and verify
their existence, condition and value. It would not be practical for the auditor to track down every
single asset on the books. But, if all the items in the audit sample are verified then it may be
appropriate to draw the conclusion that all the assets are correctly recorded in the books (assuming
the audit sample has been selected correctly and is of sufficient size).

29
SELECTION OF THE SAMPLE

The auditor should select sample items in such a way that the sample can be expected to be
representative of the population. This requires that all items in the population have an opportunity of
being selected.

While there are a number of selection methods, three methods commonly used are:

Random selection, which ensures that all items in the population have an equal chance of selection,
for example, by use of random number tables.

Systematic selection, which involves selecting items using a constant interval between selections,
the first interval having a random start. The interval might be based on a certain number of items
(for example, every 20th voucher number) or on monetary totals (for example, every ` 1,000
increase in the cumulative value of the population). When using systematic selection, the auditor
would need to determine that the population is not structured in such a manner that the sampling
interval corresponds with a particular pattern in the population. For example, if in a population of
branch sales, a particular branch’s sales occur only as every 100th item and the sampling interval
selected is 50, the result would be that the auditor would have selected all, or none, of the sales of
that particular branch.

Haphazard selection, which may be an acceptable alternative to random selection, provided the
auditor attempts to draw a representative sample from the entire population with no intention to
either include or exclude specific units. When the auditor uses this method, care needs to be taken to
guard against making a selection that is biased, for example, towards items which are easily located,
as they may not be representative.

TEST CHECKS AND TECHNIQUES OF TEST CHECKING

Carrying out detailed check of each and every transaction of a large business shall be time
consuming for the auditor. In auditing the accounts of a business, every single copy is not usually
checked by the auditor; what is usually done in practice is that a representative number of entries of
each class are selected and checked and if they are found correct, the remaining entries are taken to
be correct. This is known as Test Checking. In those organizations, where satisfactory internal check
system is in existence, the auditor need not carry out detailed checking. He may adopt Test
checking. It is a system of sampling employed by the auditor for the purpose of reducing the volume
of detail checking involved in the audit. If, in Test Checking, he finds that the records checked by
him are correct then no further detail checking need be carried out.

30
Advantages of Test Check

1. Volume of work is considerably reduced.

2. There is a saving in terms of time, cost and energy.

3. The extra time available can be utilised for concentrating on areas of considerable importance.

4. If done carefully, test checking can be quite effective.

Disadvantages of Test Check

1. The auditor always is under fear whether he has missed out certain important items or that errors
have remained undetected while test checking.

2. Where the client’s staff is aware that the auditor resorts to test checking, the staff may become
careless.

Auditor’s Liability

If any errors are found in the accounts the auditor cannot take the shield against the fact that he
conducted test check. The auditor should very carefully select the items for test check and ensure on
the whole that the accounts show a true and fair view of the Profit/Loss in the case of the Profit &
Loss Account and of the state of affairs of the organisation in the case of Balance Sheet.

31
TYPES OF AUDIT REPORT
There are four common types of auditor's reports, each one presenting a different situation
encountered during the auditor's work. The four reports are as follows:

 UNQUALIFIED OPINION REPORT

An opinion is said to be unqualified when he or she does not have any significant reservation in
respect of matters contained in the Financial Statements. The most frequent type of report is referred
to as the "Unqualified Opinion", and is regarded by many as the equivalent of a "clean bill of health"
to a patient, which has led many to call it the "Clean Opinion", but in reality it is not a clean bill of
health, because the Auditor can only provide reasonable assurance regarding the Financial
Statements, not the health of the company itself, or the integrity of company records not part of the
foundation of the Financial Statements. This type of report is issued by an auditor when the financial
statements are free of material misstatements and are presented fairly in accordance with the
Generally Accepted Accounting Principles (GAAP), which in other words means that the company's
financial condition, position, and operations are fairly presented in the financial statements. It is the
best type of report an auditee may receive from an external auditor.
An Unqualified Opinion indicates the following –
(1) The Financial Statements have been prepared using the Generally Accepted Accounting
Principles which have been consistently applied;
(2) The Financial Statements comply with relevant statutory requirements and regulations;
(3) There is adequate disclosure of all material matters relevant to the proper presentation of the
financial information subject to statutory requirements, where applicable;
(4) Any changes in the accounting principles or in the method of their application and the effects
thereof have been properly determined and disclosed in the Financial Statements.
The report consists of a title and header, a main body, the auditor's signature and address, and the
report's issuance date. US auditing standards require that the title includes "independent" to convey
to the user that the report was unbiased in all respects. Traditionally, the main body of the
unqualified report consists of three main paragraphs, each with distinct standard wording and
individual purpose.
The first paragraph (commonly referred to as the introductory paragraph) states the audit work
performed and identifies the responsibilities of the auditor and the auditee in relation to the financial
statements. The second paragraph (commonly referred to as the scope paragraph) details the scope
of audit work, provides a general description of the nature of the work, examples of procedures
performed, and any limitations the audit faced based on the nature of the work. This paragraph also
32
states that the audit was performed in accordance with the country's prevailing generally accepted
auditing standards and regulations. The third paragraph (commonly referred to as the opinion
paragraph) simply states the auditor's opinion on the financial statements and whether they are in
accordance with generally accepted accounting principles.

 QUALIFIED OPINION REPORT

Qualified report is given by the auditor in either of these two cases:

When the financial statements are materially misstated due to misstatement in one particular account
balance, class of transaction or disclosure that does not have pervasive effect on the financial
statements.
When the auditor is unable to obtain audit evidence regarding particular account balance, class of
transaction or disclosure that does not have pervasive effect on the financial statements.
The report is mostly like a Clear Opinion Report and only includes a paragraph viz. Basis for
Qualification after Scope paragraph and before Opinion paragraph. Opinion paragraph in addition to
its standard wording includes “except for the matter described in Basis for Qualification paragraph
the financial statements give true and fair view.”
Detailed below:
A Qualified Opinion report is issued when the auditor encountered one of the two types of situations
which do not comply with generally accepted accounting principles, however the rest of the
financial statements are fairly presented. This type of opinion is very similar to an unqualified or
"clean opinion", but the report states that the financial statements are fairly presented with a certain
exception which is otherwise misstated. The two types of situations which would cause an auditor to
issue this opinion over the Unqualified opinion are:
Single deviation from GAAP – this type of qualification occurs when one or more areas of the
financial statements do not conform with GAAP (e.g. are misstated), but do not affect the rest of the
financial statements from being fairly presented when taken as a whole. Examples of this include a
company dedicated to a retail business that did not correctly calculate the depreciation
expense of its building. Even if this expense is considered material, since the rest of the financial
statements do conform with gaap, then the auditor qualifies the opinion by describing the
depreciation misstatement in the report and continues to issue a clean opinion on the rest of the
financial statements.
Limitation of scope – this type of qualification occurs when the auditor could not audit one or more
areas of the financial statements, and although they could not be verified, the rest of the financial
statements were audited and they conform to GAAP. Examples of this include an auditor not being
33
able to observe and test a company's inventory of goods. If the auditor audited the rest of the
financial statements and is reasonably sure that they conform with GAAP, then the auditor simply
states that the financial statements are fairly presented, with the exception of the inventory which
could not be audited.
The wording of the qualified report is very similar to the Unqualified opinion, but an explanatory
paragraph is added to explain the reasons for the qualification after the scope paragraph but before
the opinion paragraph. The introductory paragraph is left exactly the same as in the unqualified
opinion, while the scope and the opinion paragraphs receive a slight modification in line with the
qualification in the explanatory paragraph.
The scope paragraph is edited to include the following phrase in the first sentence, so that the user
may be immediately aware of the qualification. This placement also informs the user that, except for
the qualification, the rest of the audit was performed without qualifications:
The opinion paragraph is also edited to include an additional phrase in the first sentence, so that the
user is reminded that the auditor's opinion explicitly excludes the qualification expressed.
Depending on the type of qualification, the phrase is edited to either state the qualification and the
adjustments needed to correct it, or state the scope limitation and that adjustments could have but
not necessarily been required in order to correct it.
For a qualification arising from a deviation from GAAP, the following phrase is added to the
opinion paragraph, using the depreciation example mentioned above:
"In our opinion, except for the effects of the Company's incorrect determination of depreciation
expense, the financial statement referred to in the first paragraph presents fairly, in all material
respects, the financial position of…"
For a qualification arising from a scope of limitation, the following phrase is added to the opinion
paragraph, using the inventory example mentioned above:
"In our opinion, except for the effects of such adjustments, if any, as might have been determined to
be necessary had we been able to perform proper tests and procedures on the Company's inventory,
the financial statementreferred to in the first paragraph presents fairly, in all material respects, the
financial position of company

 ADVERSE OPINION REPORT

An Adverse Opinion Report is issued on the financial statements of a company when the financial
statements are materially misstated and such misstatements have pervasive effect on the financial
statements.

34
In Audit Report after Scope paragraph but before Opinion paragraph, Basis for Adverse Opinion
paragraph is added. In Opinion paragraph the wording changes to, "Because of situations mentioned
in Basis for Adverse Opinion paragraph, in our opinion the financial statements of XYZ Co. Ltd. as
mentioned in first paragraph does not give true and fair view/are not free from material
misstatements."
An Adverse Opinion is issued when the auditor determines that the financial statements of an
auditee are materially misstated and, when considered as a whole, do not conform with GAAP. It is
considered the opposite of an unqualified or clean opinion, essentially stating that the information
contained is materially incorrect, unreliable, and inaccurate in order to assess the auditee's financial
position and results of operations. Investors, lending institutions, and governments very rarely
accept an auditee's financial statements if the auditor issued an adverse opinion, and usually request
the auditee to correct the financial statements and obtain another audit report.
Generally, an adverse opinion is only given if the financial statements pervasively differ from
GAAP. An example of such a situation would be failure of a company to consolidate a material
subsidiary.
The wording of the adverse report is similar to the qualified report. The scope paragraph is modified
accordingly and an explanatory paragraph is added to explain the reason for the adverse opinion
after the scope paragraph but before the opinion paragraph. However, the most significant change in
the adverse report from the qualified report is in the opinion paragraph, where the auditor clearly
states that the financial statements are not in accordance with GAAP, which means that they, as a
whole, are unreliable, inaccurate, and do not present a fair view of the auditee's position and
operations.

 DISCLAIMER OF OPINION REPORT

A Disclaimer of Opinion is issued in either of the following cases:

When the auditor is not independent or when there is conflict of interest. 29 and includes an
explanatory paragraph stating the reasons for the disclaimer. Although the report still contains the
letterhead, the auditee's name and address, the auditor's signature and address, and the report's
issuance date, every other paragraph is modified extensively, and the scope paragraph is entirely
omitted since the auditor is basically stating that an audit could not be realized.
In the introductory paragraph, the first phrase changes from "We have audited" to "We were
engaged to audit" in order to let the user know that the auditee commissioned an audit, but does not
mention that the auditor necessarily completed the audit. Additionally, since the audit was not
completely and/or adequately performed, the auditor refuses to accept any responsibility by omitting
35
the last sentence of the paragraph. The scope paragraph is omitted in its entirety since, effectively,
no audit was performed. Similar to the qualified and the adverse opinions, the auditor must briefly
discuss the situations for the disclaimer in an explanatory paragraph. Finally, the opinion paragraph
changes completely, stating that an opinion could not be formed and is not expressed because of the
situations mentioned in the previous paragraphs.
The following is a draft of the three main paragraphs of a disclaimer of opinion because of
inadequate accounting records of an auditee, which is considered a significant scope of limitation:
We were engaged to audit the accompanying balance sheet of ABC Company, Inc. (the "Company")
as of December 31, 20XX and the related statements of income and cash flows for the year then
ended. These financial statements are the responsibility of the Company's management.
The Company does not maintain adequate accounting records to provide sufficient information for
the preparation of the basic financial statements. The Company's accounting records do not
constitute a double-entry system which can produce financial statements.
Because of the significance of the matters discussed in the preceding paragraphs, the scope of our
work was not sufficient to enable us to express, and we do not express, an opinion of the financial
statements referred to in the first paragraph.

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 CHAPTER 2

OBJECTIVE

Audit objectives are varybase on the types of audit engagement and scope of audit. Internal audit might
have different objective from external audit or statutory audit. For example, the objective of audit on
financial statements basically are to assess the financial statements that prepare by audit’s client are true
and fair or not. Auditor ensures that by obtain sufficient and appropriate audit evident to support their
opinion.
Internal audit however might have different objective from external audit. In general, the objective of
internal audit is to exercise an audit independently and objectively to add value to the organization.
We will discuss in detail about the main objective of external audit and internal audit.
Objective of external audit:
The main objectives of external auditors or financial audit are to let auditors to be able to perform their
audit on financial statements independence and objectively and let them issued opinion whether:
Financial Statements that prepare by managements are true and fair view in all material respects in all
material respect, and
Whether those financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework.
And to meet these objective, external audits are requires to strictly follow the guideline from IFAC and
others related professional body. Sometime, the external auditor also need to follow local professional
body which is part establish by the governments. Internal policies and manual to make sure that all audit
assignments are perform at the required quality should be establish and follow. The audit standard that
related to objective of audit on financial statements is ISA 200.
The objective of audit on financial statements can be found in the audit engagement letter. this letter play
as contract and it contain many importance information include audit objective, scope of audit, timing,
audit fee, auditor right and obligation, management right and obligation etc.
Objective of internal audit:
The best answer to the question about what is the objective of internal audit is why does this department
exist in the entity?

In general, there are two main reasons why it is exist. First, for some entity, it is the required by law,
or regulation where the entity operating in. Second, it is part of the risks entity risks managements.

Setting up internal audit department is sometime to meet the requirement of local law. For example,
most of listed companies are required to setting up internal audit department to review and assess
internal control both operation and internal control over financial reporting.

37
This internal audit must be independence and people who management this department must be
qualified. In some country, recruitment of the head of internal audit department or chief of internal
audit need to get some approval from certain local authority or body to ensure that the quality of this
department is meet the requirement.
Existing of some internal audit departments are sometime part of board of directors as the result of
risks management. This is not required by law. In this case, the objective and scope of internal audit
department is set by board of directors or those charge with government. This department is
normally under the control of audit committee.
Objective of audit report:
The purpose of an audit report is to inform external stakeholders of an auditor's objective opinion of
a company's financial health. Many auditor's reports are made up of three paragraphs, which explain
the responsibilities of the parties involved, describe how well generally accepted accounting
principles were used, and finally form an opinion of the financial health of the company. An
auditor's job is to collect information and assess the finances of a company. Depending on how large
the company is, this can take anywhere from a few days to several weeks or even months. The
auditor is an objective outside source that has no personal interest in the company, and makes sure
that all finances are taken care of in accordance with national and international laws. While auditors
make sure a company is paying all of its required taxes and keeping track of legal finances, they also
make opinionated conclusions about the financial health of the company, according to Accounting,
Financial and Tax.
At the end of the company's financial assessment, the auditor compiles a report that explains his or
her findings. The reports are extremely important for both the company and the company's external
shareholders. The company learns how well they have been managing finances, and can make
changes to fix problems that the auditor found, while external shareholders learn important
information regarding whether or not their investments in the company are worthwhile.

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AUDIT OPINION
The audit opinion is given on whether the financial statements give a true and fair view of the
entity’s financial statements and whether they have been properly prepared in accordance with the
applicable reporting framework. This opinion is reached after:
Extensive risk assessment has been performed.
Extensive testing of controls and substantive tests on transactions and balances for validity, accuracy
and completeness of recording.
Extensive verification procedures have been performed to test for existence, ownership, valuation,
presentation and disclosure of items in the financial statements.
Extensive review of whether the financial statements comply with applicable accounting standards
and legal requirements.
As such, the audit opinion gives a high level of assurance to the users of financial statements.
Whenever an audit is conducted, it must be performed in accordance with ISAs or national auditing
standards, and if it is a statutory audit, it cannot be restricted in any way. An example of an audit
report given in ISA 700.
The auditor’s report on financial statements illustrates the high level of assurance given by an audit:
Auditor’s Report to the Shareholders of ABC Company
We have audited the accompanying balance sheet of ABC Company as at 31 December 20X1, and
the related statements of income and cash flows for the year then ended. These financial statements
are the responsibility of the company’s management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing (or to relevant
national standards). Those Standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In out opinion, the financial statements give a true and fair view of (or present fairly, in all material
respects) the financial position of the company as at 31December 20X1, and of the results of its
operations and its cash flows for the year then ended in accordance with International Accounting
Standards (or title of national standards used) and comply with ( title of relevant statute or law)
Auditor Address
Date
Concept of “True and Fair”
39
Many countries’ legislation requires that financial statements give a “true and fair view” (e.g. the
UK) or “present fairly, in all material respects” (e.g. the USA)
There has never been, however, any definition in legislation as to the meaning of the expression.
The following would be generally accepted definition (based on legal opinion commissioned by the
UK Accounting Standards Committee in 1983):
The financial statements comply with Accounting Standards whose purpose is to narrow the areas of
divergent opinion and practice in accounting – these are the profession’s attempt, in the absence of
statutory definition, to define true and fair view
By “true” is meant that financial statements are free from material misstatement and based on
verifiable evidence.
By “fair” is meant that the financial statements are objectively presented, free from management
bias, and relevant to the needs of users.
The concept is a dynamic concept and is incapable of precise lasting legal definition, but to be true
and fair, financial statements must live up to the current needs and expectations of users

Concept of Materiality
Materiality is an important concept in the audit process and affects audit risk evaluation, the nature,
timing and extent of audit procedures (eg sample sizes), and the determination of whether the
financial statements are distorted by misstatements discovered.
ISA 320 - Audit Materiality defines the concept as follows:
Transactions, items, events will be material in financial statements if their omission, misstatement,
misclassification or non-disclosure would distort the view given by the financial statements and
would responsibly influence the understanding and economic decisions of users.
Materiality, however, is not capable of general mathematical definition since it involves qualitative
as well as quantitative considerations
For example, materiality can be viewed in terms of size, an item being compared with a transaction
or balance class or being compared with the financial statements as a whole (quantitative judgement)
It can also be viewed in terms of the nature of an item irrespective of size – e.g. the non-disclosure
of an accounting policy or non-compliance with the
requirements of law such as errors or omissions in relation to the disclosure of director’s
remuneration (qualitative judgement).
It can also be viewed in terms of the nature of an item irrespective of size – e.g. the non-disclosure
of an accounting policy or non-compliance with the requirements of law such as errors or omissions
in relation to the disclosure of director’s remuneration (qualitative judgement).

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GENERAL PRINCIPLES GOVERNING THE AUDITOR

Ethical Principles

The auditor should comply with the International Federation of Accountants’ (IFAC) “Code of
Ethics for Professional Accountants”:

1. Independence
2. Integrity
3. Objectivity
4. Professional competence and due care
5. Confidentiality
6. Professional behaviour
7. Technical standards.

Adherence to Standards on Auditing

An audit should be conducted in accordance with ISAs. ISAs provide:

Standards (i.e. basic principles and essential procedures); and
Related guidance (i.e. explanatory and other material).

Professional Skepticism

An audit should be planned and performed (“conducted”) with an attitude of “professional

skepticism” recognizing circumstances that may bring about material misstatement in the financial
statements.
An auditor should assume neither dishonesty nor unquestioned honesty.
See also the auditor’s responsibilities for fraud and error.

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The Audit Process
AUDIT CYCLE (NATURE OF A TRADITIONAL AUDIT)

THE AUDIT PROCESS

1.

Engagement letter – Auditor should send all clients an engagement letter setting out the
auditor’s duties and responsibilities.
2. Planning – Planning and controlling audit work is essential to performing work to the
required high standard of skill and care.
3. Ascertain accounting systems – auditors enquire into and ascertain the client’s system of
accounting and internal controls in order to understand how accounting data is prepared and
to gain an impression as to whether systems are reliable.
4. Test controls and transactions – Controls must be tested if the auditor intends to rely on
them. Records must be tested to obtain evidence that they are a reliable basis for the
preparation of accounts.
5. Verify assets and liabilities – Figures appearing in financial statements must be verified.
6. Review financial statements – To see if, overall, they appear sensible.
7. Obtain management representations – The auditor asks management to confirm formally
the truth and fairness of certain aspects of financial statements.
8. Sign auditor’s report – After the directors have approved the accounts.

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SCOPE OF AUDIT REPORT
i. The Auditor's Report should describe the scope of the audit by stating that the audit was
conducted in accordance with auditing Standards generally accepted in India.
ii. The Report should include a statement that the audit was planned and performed to obtain
reasonable assurance whether the Financial Statements are free of material misstatement.
iii. The Auditor's Report should describe the Audit as including examining, on a test basis, evidence
to support the amounts and disclosures in Financial Statements, assessing the accounting
principles used in the preparation of the Financial Statements, assessing significant estimates
made by management, in the preparation of Financial Statements, & evaluating the overall
position of Financial Statements.
iv. The Report should include a statement by the Auditor that the audit provides a reasonable basis
for his opinion.
Audit Procedures Deemed Necessary An audit conducted in accordance with ISAs must have regard
to the requirements of:
ISAs (i.e. to plan, evaluate controls, obtain evidence, form conclusions, and report);
Relevant professional bodies (eg ACCA);
Legislation and regulations (eg Companies Acts);
The terms of the audit engagement and reporting requirements.
Fundamental Concepts
Reasonable assurance – in an audit engagement, the auditor provides a high, but not absolute, level
of assurance, expressed positively in the audit report as reasonable assurance, that the information
subject to audit (ie the financial statements)is free of material misstatement.
To provide such assurance, the auditor assesses the evidence collected in respect of the fianncial
statements as a whole and expresses a conclusion thereon.
Inherent limitations – However, the auditor may not be able to detect all material misstatements
because:
Testing is on a sample basis. Any accounting and internal control system has inherent limitations.
Most audit evidence is presuasive rather than conclusive (eg an asset purchased by an entity, though
physically possessed, may no longer be owned if title has been transferred to another). Transactions
between related parties (ie where one has the abilitiy to control or exercise significant influence over
the other) may not be identified as such.
The rule of judgement – Judgement is particularly important in gathering audit evidence (eg in
deciding the nature, timing and extent of audit procedures);
Nature (e.g. whether to test controls over transactions or substantiate them “in depth” or using
analytical procedures);
43
Extent (e.g. sample sizes);
Timing (e.g. at an interim visit during the year, the year end or after the year end at the final audit
visit.
Judgment is also important In drawing conclusions based on that evidence (eg in assessing the
persuasiveness of conflicting evidence from different sources).
A. Significance of Opening Paragraph:
(a) The Opening or Introductory Paragraph identifies the Financial Statements of the entity that
have been audited, including the date of and period covered by the Financial Statements.
(b) The ‘Opening Paragraph’ seeks to bring to the notice of the Users of Financial Statements, that
preparation of the accounts is the responsibility of the Management of the enterprise, whereas
the responsibility of the Auditor is to express an opinion on the said accounts based on the audit
carried out by him.
(c) Through the Opening Paragraph, the Auditor communicates the basic message that the
preparation of Financial Statements requires Management to make significant accounting
estimates and judgements, as well as to determine the appropriate accounting principles and
methods used in preparation of the said Financial Statements.
B. Significance of Scope Paragraph:
(a) The `Scope Paragraph' seeks to inform the Users about the practices and procedures followed
in the conduct of audit by the Auditor.
(b) In the Scope Paragraph, the Auditor states that the audit was planned and performed in
accordance with Auditing Standards generally accepted in India, and also that the audit provides
a reasonable basis for his opinion.
(c) The significance of the Scope Paragraph lies in the fact that the Auditor intends to convey to
the readers of his report, about the scope of audit by highlighting the nature and progress of
audit. The test check approach of audit adopted by the Auditor in performing his audit work as
also the significant aspect of evaluation of accounting principles and accounting estimates is also
clarified.
(d) The basic objective of auditing that the Auditor provides only "reasonable assurance" is
emphasized in the Scope Paragraph. Thus, this paragraph signifies the inherent limitations of
audit.

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Scope or Functions of Internal Auditing
Internal audit involves five major functions or areas of operation. They are as below:
1. Reliability and Integrity of Information: The internal auditor should review the reliability and
integrity of financial and operating information and examine the effectiveness of the means used
to identify, measure, classify, and to report such information.

2. Compliance with Policies and Procedures: The systems and procedure also.have considerable
impact on the operation of the business enterprise. The internal auditor should gauge the
effectiveness and impact of such systems and report thereon.

3. Safeguarding the Assets: The internal auditor should review the existing system for
safeguarding the assets and if necessary should verify the existence of such assets.

4. Economical and Efficient Use of Resources: The internal auditor should also appraise the
economy and efficiency with which the resources are employed. Further the internal auditor
should identify the conditions, which would prevent the economical use of resources.
They are as follows:
1. Underutilization of capacity.
2. Non-productive work.
3. Procedures, which are not cost, justified.
4. Over staffing or under staffing.
5. Accomplishment of the Established Objectives and Goals: The internal auditor should make a
review of the operations or programmes of the enterprise and should ascertain whether the
results are not inconsistent with the established goals and objectives of the enterprise. He should
also ascertain whether the programmes are carried out as per plan.

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Scope Of Audit Committee
An Audit Committee consists of three to five members formed to serve as communication link
among various departments. Audit Committee has a fourfold relationship and therefore has to
interact with management, internal auditor, statutory auditor and the public.
The Scope of Audit Committee can be discussed as follows: -
(i) Review of annual financial statements before submission to the Board of Directors.

(ii) Selection of the Statutory Auditor

(iii) Act as lies on between the Statutory Auditor and Board of Directors

(iv) Administrative control of the internal control functions through the feedback between the
Internal Auditor and the Audit Committee.

(v) Over seeing internal central operation.

(vi) Over seeing internal audit operations and feedback between internal audit committee and
developing the internal auditing authority through broad based internal audit programming.

(vii) Review and approval of financial information for publication

(viii) Review proposed changes in accounting system and procedures.

(ix) Help resolve differences between management, internal and statutory auditor.

(x) Report on the audit committee acting in the Annual Reports of Board of Directors.

(xi) Ensure reliability of organisation’s financial statements and operational activities. To be

effective and purposeful, the audit committee should maintain the following:-
(1) Audit Committee should have the independence of management, Statutory Auditor and
Internal Auditor. The Board of Directors allows full freedom to the audit committee to
investigate into any areas of operation.
(2) The relation between the audit committee and management should be cordial and congenial
towards optimum efficiency and healthy growth of the organization.
(3) There should be a regular line of communication through occasional meetings with the
management.
(4) There should be good communication relationship interwoven among management,
internal auditor and statutory auditor.

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ADVANTAGES AND LIMITATIONS OF AUDIT REPORT
Advantages of Audit Reports:
a.Provide assurance on Financial Statements. Audit reports issued by an professional and
independence auditor which is operational independence from management of entity. The report
issued from them could help the users of financial statement to assure that financial information
is correct or not.

b. Prove management integrity on their shareholders. As auditor is independence from

management, the report could prove whether managements are honest to their shareholders or
not. This is related to principle and agency theory.

c.It is the requirement of law and regulation. Most of the countries required the entities which
have the specific criteria to have their financial statements audited by independence auditors.
Those criteria like annual turnover, value of assets, and number of employee. Auditor is the
evidence that could prove to the government that entity is complying with the law.

d. It is the requirement of shareholders. Most of the corporate shareholders want their entity’s
financial statements to be audited. This report is examined by the experts and express into the
easy words that could be understand by most of the shareholders who does not have financial or
audit background.

e.Parent company’s requirement. Many parent companies that have subsidiaries operating in the
others countries or even in the same country normally required their subsidiaries’ financial
statements to be audited. This report could help them manage the subsidiary even more
effectively.

f. Help stakeholders to understand about entity’s financial and operational situation. This is
probably the most importance point. Auditor is required to state the auditor report whether the
entity has any going concern problem or not. This include financial and non financial problems
that could lead entity to face bankruptcy in the next forceable period from audit report date.

47
Limitation of audit reports:

i) Scope of audit might limited by management. This is popular discussion about audit’ issues. In the
audit standard, auditors should have full right to access to any kind of information that could help
them to obtain audit evidence express their opinion. However, in practice, management might try
their best to prevent auditors to obtain some sensitive information. These are probably the
management don’t fully trust auditors ethic related to confidentiality or management themselves
have integrity problems. These problems might prevent auditors to provide the best quality of audit
opinion that it should be.

ii) Time too constraints for auditors. In practice, auditor normally face too time constraints which
does not provide them enough time to perform their testing as they should be.

iii) Auditors’ Independence. Code of ethic required auditors to stay independence from their audit
client. This is to make sure that auditors do not bias when they perform their works as well as when
they issue audit opinion.

iv) Risks that might not detect by auditors: Inherent Risks and Fraud Risks. Audit standard require
auditors to have proper audit planning as well as risks assessment. This is to make sure that the audit
quality is maintain, and audit risks are identified and minimize. However, these things could not
auditor to eliminate all kind of risks of material misstatement from financial statements. For
example, inherent risks and fraud risks.

v) Auditors Qualification and Competency. This is also the importance point. We all know that in
order to run audit firm, someone who represent the firm need to hold CPA qualification. But the
thing is because the competition, and because of the amount of works, the quality of audit report
might have some problems. As you may know there are always news about audit firm got penalty on
count cases.

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AUDIT REPORT UNDER THE COMPANIES ACT, 2013
The matters to be included in the Report of the Company Auditor u/s 143 are - Powers and Duties of
Auditors and Auditing Standards [Section 143]
(1) Every auditor of a company shall have a right of access at all times to the books of account and
vouchers of the company, whether kept at the registered office of the company or at any other
place and shall be entitled to require from the officers of the company such information and
explanation as he may consider necessary for the performance of his duties as auditor and
amongst other matters inquire into the following matters, namely:—
(a) whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are prejudicial to the
interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company, whether so
much of the assets of the company as consist of shares, debentures and other securities have
been sold at a price less than that at which they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment, and if
no cash has actually been so received, whether the position as stated in the account books
and the balance sheet is correct, regular and not misleading. Provided that the auditor of a
company which is a holding company shall also have the right of access to the records of all
its subsidiaries in so far as it relates to the consolidation of its financial statements with that
of its subsidiaries.
(2) The auditor shall make a report to the members of the company on the accounts examined by
him and on every financial statements which are required by or under this Act to be laid before
the company in general meeting and the report shall after taking into account the provisions of
this Act, the accounting and auditing standards and matters which are required to be included in
the audit report under the provisions of this Act or any rules made thereunder or under any order
made under sub-section (11) and to the best of his information and knowledge, the said accounts,
financial statements give a true and fair view of the state of the company’s affairs as at the end
of its financial year and profit or loss and cash flow for the year and such other matters as may
be prescribed.
(3) The auditor’s report shall also state—
49
 (a) whether he has sought and obtained all the information and explanations which to the best
of his knowledge and belief were necessary for the purpose of his audit and if not, the details
thereof and the effect of such information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have been kept by the
company so far as appears from his examination of those books and proper returns adequate
for the purposes of his audit have been received from branches not visited by him; (c)
whether the report on the accounts of any branch office of the company audited under sub-
section (8) by a person other than the company’s auditor has been sent to him under the
proviso to that sub-section and the manner in which he has dealt with it in preparing his
report;
(d) whether the company’s balance sheet and profit and loss account dealt with in the report
are in agreement with the books of account and returns;
(e) whether, in his opinion, the financial statements comply with the accounting standards; (f)
the observations or comments of the auditors on financial transactions or matters which have
any adverse effect on the functioning of the company;
(g) whether any director is disqualified from being appointed as a director under sub-section
(2) of section 164;
(h) any qualification, reservation or adverse remark relating to the maintenance of accounts
and other matters connected therewith;
(i) whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls;
(j) such other matters as may be prescribed.
(4) Where any of the matters required to be included in the audit report under this section is
answered in the negative or with a qualification, the report shall state the reasons therefor.
(5) In the case of a Government company, the Comptroller and Auditor-General of India shall
appoint the auditor under sub-section (5) or sub-section (7) of section 139 and direct such
auditor the manner in which the accounts of the Government company are required to be audited
and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller
and Auditor-General of India which, among other things, include the directions, if any, issued by
the Comptroller and Auditor-General of India, the action taken thereon and its impact on the
accounts and financial statement of the company.
(6) The Comptroller and Auditor-General of India shall within sixty days from the date of receipt
of the audit report under sub-section (5) have a right to,—
(a) conduct a supplementary audit of the financial statement of the company by such person or
persons as he may authorise in this behalf; and for the purposes of such audit, require
50
 information or additional information to be furnished to any person or persons, so authorised,
on such matters, by such person or persons, and in such form, as the Comptroller and
AuditorGeneral of India may direct; and
(b) comment upon or supplement such audit report. Provided that any comments given by the
Comptroller and Auditor-General of India upon, or supplement to, the audit report shall be
sent by the company to every person entitled to copies of audited financial statements under
sub section (1) of section 136 and also be placed before the annual general meeting of the
company at the same time and in the same manner as the audit report.
(7) Without prejudice to the provisions of this Chapter, the Comptroller and Auditor- General of
India may, in case of any company covered under sub-section (5) or sub-section (7) of section
139, if he considers necessary, by an order, cause test audit to be conducted of the accounts of
such company and the provisions of section 19A of the Comptroller and Auditor-General’s
(Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.
(8) Where a company has a branch office, the accounts of that office shall be audited either by the
auditor appointed for the company (herein referred to as the company’s auditor) under this Act
or by any other person qualified for appointment as an auditor of the company under this Act
and appointed as such under section 139, or where the branch office is situated in a country
outside India, the accounts of the branch office shall be audited either by the company’s auditor
or by an accountant or by any other person duly qualified to act as an auditor of the accounts of
the branch office in accordance with the laws of that country and the duties and powers of the
company’s auditor with reference to the audit of the branch and the branch auditor, if any, shall
be such as may be prescribed. Provided that the branch auditor shall prepare a report on the
accounts of the branch examined by him and send it to the auditor of the company who shall deal
with it in his report in such manner as he considers necessary.
(9) Every auditor shall comply with the auditing standards.
(10) The Central Government may prescribe the standards of auditing or any addendum thereto, as
recommended by the Institute of Chartered Accountants of India, constituted under section 3 of
the Chartered Accountants Act, 1949, in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority. Provided that until any
auditing standards are notified, any standard or standards of auditing specified by the Institute of
Chartered Accountants of India shall be deemed to be the auditing standards.
(11) The Central Government may, in consultation with the National Financial Reporting
Authority, by general or special order, direct, in respect of such class or description of
companies, as may be specified in the order, that the auditor’s report shall also include a
statement on such matters as may be specified therein.
51
(12) Notwithstanding anything contained in this section, if an auditor of a company, in the course
of the performance of his duties as auditor, has reason to believe that an offence involving fraud
is being or has been committed against the company by officers or employees of the company,
he shall immediately report the matter to the Central Government within such time and in such
manner as may be prescribed.
(13) No duty to which an auditor of a company may be subject to shall be regarded as having been
contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in
good faith.
(14) The provisions of this section shall mutatis mutandis apply to—
(a) the cost accountant in practice conducting cost audit under section 148; or
(b) the company secretary in practice conducting secretarial audit under section 204.
(15) If any auditor, cost accountant or company secretary in practice do not comply with the
provisions of sub-section (12), he shall be punishable with fine which shall not be less than one
lakh rupees but which may extend to twenty-five lakh rupees.

52
CARO – COMPANIES (AUDITOR’S REPORT) ORDER, 2003
CARO – COMPANIES (AUDITOR’S REPORT) ORDER, 2003 issued by the Central Government
as per the power granted under section 227(4A) of the Companies Act, 1956 is applicable to an
auditor report submitted after 31st December 2003. Till date revised CARO in parallel to Companies
Act, 2013 has not been come into the picture. Hence the existing CARO, 2003 is applicable as of
now. According to 143, the auditor is required to report on certain matters only if he is not satisfied
after his examination of the accounts but after this new order, the auditor has to make a statement on
each of the specified matters likewise in case of Govt. companies, this order is in addition to the
directions of the Comptroller and Auditor General in India.
This new order is applicable to every company except,
(a) Banking Company as defined u/s 5(c) of the Banking Regulation Act, 1949,
(b) Insurance Company as defined u/s 2(21) of the Companies Act, 1956, [Insurance Company
has not been defined under Companies ACT, 2013].
(c) Company licensed to operate u/s 8 of the Companies Act, 2013 and
(d) Private Limited Companies subject to the following condition
Aggregate of Paid Up Capital and Reserves should not exceed ` 50 Lakhs.
Loan outstanding from any Bank or Financial Institution should not exceed ` 25 Lakhs.
Turnover should not exceed` 5 crores.
The order is applicable to foreign Companies incorporated outside India but having a place of
business within India. The branches of the Companies liable to this order also come under the
purview of this order.
Meaning of "Chit Fund", "Nidhi" or "Mutual Benefit" Company:
(a) These Companies –
(i) manage,
(ii) conduct or
(iii) supervise as a foreman / agent, monetary transactions.
(b) Such transactions or arrangement is based upon an agreement between the Company and a
number of people called as Subscribers.
(c) Each Subscriber shall subscribe a certain amount of money as instalment for a definite period
of time.
(d) At the end of every instalment period, one subscriber shall be entitled to the prize amount.
Such entitlement comes either –

(i) by draw of lots, or

(ii) by auction, or
53
 (iii) by tender, or

(iv) in such other manner as may be provided for in the agreement.

(e) The definition also includes Companies whose principal business is accepting Fixed Deposits
from and also lending to its members.
The following matters are required to be dealt in the Auditor’s Report:
a.Fixed Assets: Auditor should comment whether the company is maintaining proper records of
fixed assets, the management verified the fixed assets frequently and the material discrepancies
found accounted properly, the substantial dispose of fixed assets has affected considerably the
going concern.

b. Inventory: The auditor has to make following statements on verification and valuation of
inventories.
i. Whether physical verification of Inventory has been conducted at reasonable intervals by the
management.
ii. Are the procedures of physical verification of inventories followed by the management
reasonable and adequate in relation to the size of the company and the nature of its business?
If not, the inadequacies in such procedures should be reported.
iii. Whether the company is maintaining proper records of inventory and whether any material
discrepancies have been noted on physical verification and if so, whether the same have been
properly dealt with in the books of account.

c.Loans: In the case of loans revised, organized to firms etc. covered in the register maintained
under Section 189 of the Companies Act, auditor has to make comments on the following :
i. Has the company either granted or taken any loans, secured or unsecured to/from companies,
firms or other parties covered under the register maintained under Section 189 of the
Companies Act. If so, give the number of parties and amount involved in the transactions.
ii. Whether the rate of interest and other terms and conditions of loans given or taken by the
company, secured or unsecured are prima facie prejudicial to the interest of the company.
iii. Whether the payment of the principal amount and interest are also regular.
iv. If over payment is more than one Lakh, whether reasonable steps have been taken by the
company for recovery/payment of the principal and interest.

d. Internal Control on Purchases of Assets and Sale of goods: Is there an adequate internal
control procedure commensurate with the size of the company and the nature of its business for
54
 the purchase of inventory and Fixed Assets, and the sale of goods? Whether there is a continuing
failure to correct major weaknesses in internal control?

e.Transactions in which Directors are interested: Auditors statements are required on the following
i. Whether transactions that need to be entered into register in pursuance of Section 189 of the
Companies Act, have been so entered.
ii. Whether each of these transactions have been made at prices which are reasonable having
regard to the prevailing market prices at the relevant time. These should be commented only
in the cases of transactions exceeding the value of ` 5 lakhs.

f. Public Deposits: In case the company has accepted deposits from the public whether the
directions issued by the Reserve Bank of India and the provisions of Sections 73 and 74 of the
Companies Act and the rules framed there under where applicable, have been complied with, if
not, the nature of contraventions should be stated; if an order has been passed by Company Law
Board, whether the same has been complied with or not.

g. Internal Audit System in certain companies: In the case of listed companies and other
companies having a paid up share capital and reserves exceeding ` 50 lakhs as at the
commencement of the financial year concerned, or having an average annual turnover exceeding
` 5 crore for a period of three consecutive financial years immediately preceding the financial
year concerned, whether the company has an internal audit system commensurate with its size
and nature of its business.

h. Maintenance of Cost Records: Where Maintenance of Cost Records has been prescribed by
the Central Government under Section 128 of the Companies Act whether such accounts and
records have been made and maintained.

i. Deposit of Statutory Dues: The Company Auditor has to report that –

i. Is the company regular in depositing undisputed statutory dues including Provident Fund,
Employees State Insurance, Income Tax, Sales Tax, Wealth Tax, Custom Duty, Excise Duty,
Cess and any other statutory dues with the appropriate authorities and if not, the extent of
arrears of outstanding statutory dues as at the last date of the financial year concerned for a
period of more than six months from the date they seem payable, shall be indicated by the
auditor.

55
 ii. In case dues of Income Tax, Sales Tax, Wealth Tax, Custom Duty, Excise Duty, Cess have
not been deposited on account of any dispute, then the amounts involved and the forum
where dispute is pending may be mentioned, but he should, while reporting, remember that a
mere representation to the department should not constitute a dispute.

j. Sickness: Where in case of a company which has been registered for a period not less than 5
years, its accumulated losses at the end of the financial year not less than 50% of its net worth
and whether it has incurred cash losses in such financial year and in the financial year
immediately preceding such financial year also.

k. Default in Repayment of Dues: Whether the company has defaulted in repayment of dues to
a financial institution or bank or debenture holders? If yes, the period and amount of default to
be reported.

l. Documents and Records for Secured Loans: Whether adequate documents and records are
maintained in cases where the company has granted loans and advances on the basis of security
by way of pledge of shares, debentures and other securities. If not the deficiencies to be pointed
out.

m. Compliance with Special Provisions: Whether the provisions of any special statute
applicable to chit fund have been complied with, in respect of nidhi, mutual benefit fund or
societies –
i. Whether the net owned fund to deposit liability ratio is more than 1 : 20 as on the date of
Balance Sheet.
ii. Whether the company has complied with the prudential norms on income recognition and
provisioning against sub-standard, doubtful or lost assets.
iii. Whether the company has adequate procedures for appraisal of credit proposals/requests,
assessment of credit needs and repayment capacity of the borrower.
iv. Whether the repayment schedule of various loans granted by the nidhi is based on the
payment capacity of the borrower and would be conductive to recovery of the loan amount.

n. Records of Dealing in Securities: If the company is dealing or trading in shares, securities,

debentures and other investments, whether proper records have been maintained of the
transactions and contracts and whether timely entries have been made there in, also, whether the
shares, securities, debentures and other investments have been held by the company in it’s own

56
 name, except to the extent of the exemption if any, granted under section 187 of the Companies
Act.
o. Guarantees for loan taken by others: Whether the company has given any guarantee for loans
taken by other from bank, or financial institutions, the terms and conditions whereof are
prejudicial to the interest of the company.

p. Application of Term Loans: Whether the term loans were applied for the purpose for which
the loans are obtained.

q. Financial Management: Whether the funds raised on short term basis have been used for long
term investment and vice-versa, if yes, the nature and amount is to be indicated

r. Preferential Allotment of Shares: Whether the company has made any preferential allotment of
shares to parties and companies covered in the Register maintained under Section 189 of the
Companies Act and if so whether the price at which shares have been issued is prejudicial to the
interest of the company.

s. Creation of Security in Respect of Debentures: Whether the securities have been created in
respect of debentures issued.

t. Disclosure of End-use of money raised from Public issue: Whether the management has
disclosed on the end use of money raised by public issue and the same has been verified.

u. Fraud: Whether any fraud on or by the company, has been noticed or reported during the
year, if yes, the nature and the amount involved is to be indicated.

v.

57
REVISION OF THE AUDIT REPORT

i. Revision of Financial Statements: The Auditor should issue a fresh report on the revised
Financial Statements in accordance with –
(a) Guidance Note on Auditor's Report on Revised Accounts of Companies before circulation to
Shareholders, and
(b) Guidance Note on Revision/Rectification of Financial Statements.

ii. Revision of Audit Report:

(a) Situations: Revision of Audit Report is required - When the Auditor considers that amendment
in Financial statements is not warranted, or When the Auditor advises amendment to Financial
Statements, but the Management does not intend to revise the same, or When the Management
agrees for revision in the Financial Statements but is unable to do so despite its bonafide
intention, but Management extends its co-operation to the Auditor and agrees to ensure that
anyone in receipt of there previously issued Financial Statements together with the Audit Report
thereon is informed of the situation and would be issued the revised Audit Report.
(b) Auditor's Duties: In the above situations, the Auditor should –
(i) issue a Revised Report in which he should refer to the earlier report, and
(ii) state the reasons for revising the report.
(c) Timing: For corporate entities, the Audit Report may be revised till the accounts are adopted at
the AGM. For entities where such adoption is not required, the Auditor may consider revising the
Audit Report within a reasonable time, but in any case not later than the issuance of the Audit
Report for the immediately succeeding accounting period.
(d) Subsequent Financial Statements: A Continuing Auditor may consider that the revision of
Financial Statements and issuance of a Revised Report is not necessary if appropriate disclosures
are made in the Financial Statements of the immediately succeeding accounting period.

iii. Preventing Reliance on Earlier Report:

(a) If the management neither agrees to revise the Financial Statements nor agrees to circulate the
proposed Revised Audit Report to the recipients of the earlier report, the Auditor should notify
the persons ultimately responsible for the overall direction of the entity that action will be taken
by him to prevent reliance on the Audit Report.
(b) The Auditor may take the following steps in this regard - Notify the client that the Audit Report
must no longer be associated with the Financial Statements. Notify the regulatory agencie. having

58
 jurisdiction over the client that the Audit Report should be no longer be relied upon. Make an
appropriate statement at the ACM, if requested by the Chairman.

iv. Withdrawal from Engagement: When the Management neither agrees to revise the Financial
Statements nor agrees to ensure that anyone in receipt of the previously issued Financial
Statements and Audit Report thereon will be informed of the situation and would be issued
Devised Audit Report, the Auditor may conclude that withdrawal from the further engagement
with the entity is necessary.

v. Signature: Where a Firm is the Auditor, the Partner who signed the Original Audit Report,
should also sign the Revised Report or the letter indicating preventing reliance on the Audit
Report, as the case may be. In case of signing by any other Partner, the reasons thereof should be
stated.

59
Section 182 of the companies act and the auditor :

i. Conditions for contribution to Political Party / Political Purpose:

(a) The Board should pass a resolution authorizing such contribution.
(b) The aggregate of the amount contributed in any financial year should not exceed 5% of the
average net profits during three immediately preceding financial years.
ii. Payments covered under Political Contribution:
(a) Contribution made directly to a Political Party whether in cash or in other form.
(b) Expenditure incurred on printing and distribution of posters and leaflets, either directly
concerned or connected with elections or otherwise for a political purpose.
(c) Contribution made directly to a political party whether in cash or in other form for running an
educational institution or for undertaking philanthropic activities.
(d) Donation, Contribution, or other form of support to a Trust, Society or Association in any of
the under noted circumstances - If the Trust, Society, or Association has any political objectives
either wholly or even partially. If the Trust, Society, or Association is formed for any political
purpose either wholly or even partially. If the Trustees or Governing Council or Committee of the
Trust, Society, Association have the discretion of using the funds wholly or partially for a
political purpose or in furtherance of a political objective. On the other hand, the mere fact that
some of the objects of a particular Trust, Society, or Association are similar to the objects of a
particular political party but are not of a political nature should not act as disqualification.
(e) Expenditure incurred on remuneration (including other benefits) to employees or on other
establishment where the services of the employees are made available in connection with the
activities of some political party, such as elections to Legislative Assembly, Parliament etc.
(f) Making available vehicles owned by the Company to any political party or to any candidate
seeking election to any local authority, assembly, Parliament, etc. either free of cost, or at less
than market rate.
(g) Expenditure incurred directly or indirectly by a Company on advertisement in any publication
like Souvenir, Brochure, Tract, etc by or on behalf of a Political Party or for its advantage.
(h) Donation, Subscription or payment by a Company to any person which can be regarded as
likely to affect public support for a Political Party shall be deemed as contribution for a political
purpose.
iii. Disclosure: Every Company should disclose in its P&L Account, the amount contributed by it
during the financial year to any political party or for 56 any political purpose, giving the particulars
of the name of the recipient party or person.

60
iv. Auditor's Duties:
(a) The Auditor should qualify his Audit Report under the following circumstances, if he is
satisfied - that the political contribution has been made in excess of the limit prescribed. (He
should also indicate the amount involved.) that facts regarding such contributions are not
properly disclosed.
(b) If the Auditor is in doubt about applicability of Section 182, he should disclose this fact in his
report.
(c) The Auditor should obtain a certificate from the Board stating the following That all amounts
of contributions to Political Parties have been properly recorded; No amounts of such nature
other than those so included in the books have been paid / given directly or indirectly.
(d) The Auditor need not make any special inquiry to unearth cases of unauthorized political
contributions if they are not readily apparent from the examination of the accounts made in the
normal course of audit.
(e) Where the Auditor fails to discover cases of contraventions of Section 182, he would be
responsible only to the extent it can be established that in the conduct of the audit he acted
without reasonable is care and skill.

61
Audit Certificate
Sometimes apart from an audit report for general use, an auditor is often called upon to give a
certificate for special purpose.
The certificate should include the following: —
i. Auditor should see that there is a suitable declaration by the management about the subject matter.
ii. Auditor should give the certificate on his letter head or on stationary carrying his name and
address to avoid misunderstanding.
iii. Auditor should clearly state his limitations and indicate the extent to which he has relied upon a
technical expert if any.
iv. Auditor should indicate the specific record covered by the certificate.
v. Auditor should mention the manner in which the audit was conducted.
vi. Auditor should indicate in the certificate if he has made certain fundamental assumptions.
Auditor should make a reference to the information and explanations obtained. Auditor should give
clear title to it, indicating whether it is a report or a certificate.
vii. Auditor should mention whether he has used any general purpose statement like Profit & Loss
Account for his investigation and also, state whether that general purpose statement has been
audited by other auditors. viii. Auditor should be careful while interpreting any law related matter,
he should clearly mention that he is expressing merely his own opinion.
ix. Auditor should see that the certificate should be self contained documents. Auditor should clearly
mention the responsibility assumed by him.

Audit report versus Audit certificate

i. Audit report is an expression of opinion on the truth and fairness of the accounts.
ii. Audit certificate is authentication of true and correctness of the data or fact certified.
iii. The existence of opinion distinguishes a report from the certificate.
iv. The example of audit report is report issued by statutory auditor of a company under Section
143 of the Companies Act, 2013.
v. The example for audit certificate is certification of consumption of imported items to be
submitted to the government department for obtaining some license etc.

62
Difference between Audit Report and Audit Certificate
(i) Meaning: Audit Report is a statement of collected and considered information so as to give a
clear picture of the state of affairs of the business to the persons who are not in possession of the
full facts. While Audit Certificate is a written confirmation of the accuracy of the information
stated there in.
(ii) Opinion: Audit Report contains the opinion of the auditor on the accounts, while Audit
Certificate does not contain any opinion but only confirms the accuracy of the figures with the
books of accounts.
(iii) Basis: Audit Report is made out on the basis of information obtained & books of account
verified by the auditor, while Audit Certificate is made out on the basis of the particular data
capable of verification as regards accuracy.
(iv) Guarantee: Audit Report may not guarantee correctness of financial statement in absolute
terms, while Audit Certificate guarantees absolute correctness of the figures & information
mentioned in the certificate.
(v) Coverage: Audit Report always covers entire accounts of the concern, while Audit Certificate
covers only certain part of the accounts of the concern (vi) Responsibility: Audit Report does not
hold auditor responsible for anything wrong in the accounts, while Audit Certificate makes an
auditor responsible if anything mentioned in the certificate found as wrong later on.
(vii) Suggestion: Audit Report may provide certain suggestions for improvement while Audit
certificate does not provide any such suggestion.
(viii) Nature: Audit Report is based on the vouching & verification of books of accounts, voucher,
assets & liabilities, while Audit Certificate is based on checking arithmetical accuracy of the
facts.
(ix) Scope: Audit Report covers all transactions done during the year, while the Audit Certificate is
very specific.
(x) Characteristics: Audit Report is subjective as it is opinion oriented, while Audit certificate is
objective as it is fact oriented.
(xi) Form: Audit Report is required to be presented in the prescribed format, while Audit
Certificate, except in few cases, is not required to be presented in any standard format.
(xii) Address: Audit report is addressed to the members of the company at large or appointing
authority, while Audit Certificate is addressed to particular person or sometimes may include the
words like “To Whomsoever it may concern”.

63
 CHAPTER 3

REVIEW OF LITERATURE
Literature review is the crucial part of any research. This helps the researcher avoid reinventing past
contributions and results. This focuses on the past literature in the field of research and its
classification under different angles. The critique comparison of the past literature will narrow down
the research topic and provide a base for selecting a research topic which will have more pay-off.
The outcome of the literature review gives a direction for future research. “Literature adds to reality,
it does not simply describe it. It enriches the necessary competencies that daily life requires and
provides; and in this respect, it irrigates the deserts that our lives have already become.” C.S.Lewis

1.RESEARCH STUDIES :(NATIONAL)

Aditya Birla Group Corporate Management Audit according to the study, Corporate Management
Audit is committed towards systems perfection across the group in India and overseas. It has been
actively involved in the evolution, implementation and review of internal controls, cost reduction
methods. Group policies, effective MIS, assessment and mitigation of business risks and promoting
effective corporate governance, etc. The audit function regularly shares information and best
practices among the units and helps the group to keep pace with the fast changing business scenario,
resulting in continuous growth of the group as well as value addition to stakeholders.

Aftab Ahmad Khan, ‗Management audit an effective tool for ensuring all round efficiency‘ this
paper explains that management audit as a concept in management literature evolved over a period
of seven decades. It was T.G. Rose, an industrial consultant from the United Kingdom who had first
introduced the concept of management audit in a paper he presented in 1932 before the Institute of
Industrial Management (now merged with the British Institute of Management).The management
audit concept, however, received greater attention in the United States of America. Jackson
Martindell, an investment consultant and founder President of the American Institute of
Management (incorporated in 1948) developed a logical system of the concept of management and
employed it for evaluating 52 publicly owned companies from 1948 to 1960.

These studies were published under the title, ―Investment Value of Management Excellence‖. Few
business terms have had as many meanings in so short a period of time as management audit. For
this reason the modern management audit is often confused with its better known (and understood)
historical antecedent – financial audit. Both of course, involve the gathering of information that can
aid decision making – a process as old as history. But as the requirement of an increasingly complex
society transformed the King‘s Court of simple times into to-day‘s ―executive court‖ of economic
64
forecasters, lawyers, accountants and management consultants, so too have the demands of
contemporary business environment created a need for analysis broader in scope and purpose than
the financial audit.

Alaa-Aldin Abdul Rahim A. Al Athmay, ‗Performance auditing and public sector management in
Brunei Darussalam‘ explains that although performance auditing is envisaged in the legislation, the
main thrust of auditing is still on financial and procedural compliance; the paper discusses why this
is so and in what circumstances it might change.
G.S. Batra, ‗ Management audit as a service to public enterprise management: a study of
management audit and the memorandum of understanding (MOU) system in India‘ the result
reviews that there is a constant demand from public enterprise managers for increased autonomy in
order to ensure better efficiency and effectiveness in public enterprises. The system of MOU and
Management Audit by articulating the missions, objectives and expected results along with the
methods of performance evaluation goes a long way towards improving the performance of public
enterprises. Hence by adopting these strategies public sector management in India is shaping up to
face turbulent times.

Government of Saskatchewan News Release (2007) Results of Independent Forest Management

Audit Released, this article refers to the results of the second independent sustainable forest
management audit conducted under Saskatchewan's updated legislation were released today,
highlighting requirements for monitoring and reporting of forest practices in the province.
Gurdeep Singh Batra, Narinder Kaur, Emerging Dimensions of Audit Accountability: A Case Study
of Public Enterprise Management and Efficiency Audit in India‘ this paper finds that audit control
over public enterprises varies from case to case, and the CAG should interpret this power according
to the need of situation, and there should be external efficiency audit for public enterprises.

Jacab Sunil, Management Audit – Presentation Transcript‘ this paper explore that management audit
is an independent review and investigation which is concerned with the identification of those
functional and operational areas where management has failed to achieve the required external
standards of performance and with evaluation of decision making with the aim of monitoring and
improving the efficiency and effectiveness of the organization.
J.P.Srivastav, GirishK.Srisvastav, Management Audit – A pilot survey of views‘ this paper finds that
under changing conditions the current audit system is not sufficient to fulfill the needs of the public,
in the comings years management audit of private enterprise may be made compulsory as in public
enterprise.
65
K.S. Chaudhary, Relevance of management audit in modern industrialization‘ this study explores
that management audit helps management of the organization in its present and future growth and
prosperity through pragmatic and constructive appraisal of all activities of the organization.
RadhaViswanathan, Management audit: Scope & Objective‘ this article show that management audit
allows in-depth information to the top management about companies management system inter and
intra-department procedures, production methods level requirement of training etc.

Vijay Khaana&V.S.Kaveri, Implementing Risk-Based Management Audit in Indian Banks: An

Assessment of Organizational Preparedness‘ in this report it is analyzed that, banks in India have
made sufficient progress in introducing RiskBased Internal Audit (RBIA) as per the guidelines of
the Reserve Bank of India. But there are numerous issues associated with the implementation of
RBIA, which need to be analyzed in order to resolve the same. In this context, a survey of banks was
undertaken to assess the progress made in the implementation of RBIA and offer suggestions to
resolve the issues, if any. The findings of the survey are interesting and help in identifying the
relevant issues. The banks have to go a long way in resolving such issues. The present paper throws
light on these aspects.

2. RESEARCH STUDIES: (INTERNATIONAL)

Audie Waltmon, The Curriculum Management Audit‘ as per the study the Curriculum Management
Audit poses three questions to guide the process and ultimately determine the outcomes of the
curriculum audit: Does it exist? Is it quality? Is it used? The curriculum audit process tries to
determine the degree of alignment of the written, taught, and tested curriculum. While the audit is
voluntary, some state educational agencies may require a form of the management audit in the
future. The five standards in the audit are represented by key words: control, direction, equity,
feedback, and productivity. Each standard covers a component of the audit process that determines
the effectiveness and efficiency of the instructional program. This book is a powerful and practical
resource for central-office administrators, curriculum directors, and principals to examine the
curriculum using the principles espoused in the curriculum management audit process.

Dale L. Flesher, A Management Audit of Small Business Long-Term Financial Affairs‘ the result
suggested that the owner or manager of a small business can conduct the audit on sort of a do-it-
yourself basis. Although every department could possibly benefit from such an audit, it is the long-
term financial management of the organization that might profit the most from a value-for money
audit. Dale L. Flesher, An Operational Audit of Working Capital Management‘ this article explores
66
that intended to end the oversight. An operational audit can lead to better management of working
capital in the same way that it can lead to better management of a production area or by a treasurer
who merely wants to perform a self-audit of his or her own department's efficiency and
effectiveness.

Dale L. Flesher, Jeffrey S. Zanzig, Management accountants express a desire for change in the
functioning of internal auditing‘ this paper outlines the results of a survey designed to compare the
opinions of internal auditors to one class of audit customers – namely management accountants. To
function effectively, internal auditors and the customers of audit services should possess a similar
understanding of what makes internal auditing a value-added activity. Failure to reach this
understanding could result in the perception that internal audit is simply an obstacle to achieving
production objectives. This can result in underutilized audit services and ignored audit
recommendations. Fortunately, internal auditors and management accountants have similar views,
but there are a few areas of difference that should be addressed by internal auditors.
Lane, The Operational Audit: A Business Appraisal Approach to Improved Operations and
Profitability‘ the findings of that study operational audit is concerned with the appraisal of company
effectiveness, identifying operations which are open to improvement. Dessalegn Getie Mihret,
Aderajew Wondim Yismaw, Management audit effectiveness: an Ethiopian public sector case study‘
the findings of the study highlight that management audit effectiveness is strongly influenced by
internal audit quality and management support, whereas organizational setting and auditee attributes
do not have a strong impact on audit effectiveness.

D.F. Sutton, Management Audit and Appraisal‘ this general reviews that traditionally, auditors are
not popular people and their arrival in an organization is apt to give rise to an anxious wariness and
defensiveness throughout the system. Audit is believed to be a fact-based, periodical, astringent
process designed to reveal errors and weaknesses and to identify those responsible. It is a process to
be endured rather than welcomed. The philosophy outlined in this article owes little to the traditional
concept of financial audit: it is concerned with people and could possibly benefit by being known by
some name other than ―audit , with its present connotations.

F.Y. Chan, W. Willborn, H. Xiao, H. Li, Research Report: An Expert System for Quality
Management Auditing‘ this reports on the development of an expert system designed for auditors of
quality management, discussing its development process (QMA-1), composition and structure. The
system was tested in 20 Chinese organizations and user feedback reported. Outlines plans for future
development of the system. Gerrit Sarens Ignace De Beelde, The Relationship Between Internal
67
Audit and Senior Management: A Qualitative Analysis of Expectations and Perceptions‘ this study
finding that senior management's expectations have a significant influence on internal audit and that
internal audit, generally, is able to meet most of these expectations.

John A. Quelch, Paul W. Farris, James Olver, The Product Management Audit: Design and Survey‘
the result reviews that actual audit surveys and shows how one company use an audit to identify and
solve problems within its product management organization concludes that the product management
audit is an excellent tool for producing hard data which may be missed by management by walking
around.

J.M. Askey, B.G. Dale, Internal Quality Management Auditing: An Examination‘ the finding of that
study are management audit is concerned with the appraisal of medium- sized manufacturing
company effectiveness, identifying operations which are open to improvement.
J. Innes,External Management Auditing of Companies — a Survey of Credit Managers‘ this study
focus that external management auditing has links with — but is different from — external financial
auditing, internal operational auditing and management consultancy. The reasons for conducting
external management audits are considered, particularly in relation to the accountability of corporate
management, and the interests of various potential user groups. . Essentially, the conclusion was that
credit managers strongly favored external management audit reports.

68
 LITERATURE REVIEW (CASE STUDY 2)

Independent Auditor’s Report To the Members of Infosys Limited

Report on the Standalone Ind AS Financial Statements.
We have audited the accompanying standalone Ind AS financial statements of Infosys Limited (‘the
Company’), which comprise the balance sheet as at 31 March 2017, the statement of profit and loss
(including other comprehensive income), the statement of cash flows and the statement of changes
in equity for the year then ended and a summary of the significant accounting policies and other
explanatory information (herein after referred to as “standalone Ind AS financial statements”).
Management’s Responsibility for the Standalone Financial Statements.
The Company’s Board of Directors is responsible for the matters stated in Section 134(5) of the
Companies Act, 2013 (“the Act”) with respect to the preparation of these standalone Ind AS
financial statements that give a true and fair view of the financial position, financial performance
including other comprehensive income, cash flows and changes in equity of the Company in
accordance with the accounting principles generally accepted in India, including the Indian
Accounting Standards (Ind AS) prescribed under Section 133 of the Act read with relevant rules
issued thereunder.
This responsibility also includes maintenance of adequate accounting records in accordance with the
provisions of the Act for safeguarding the assets of the Company and for preventing and detecting
frauds and other irregularities; selection and application of appropriate accounting policies; making
judgments and estimates that are reasonable and prudent; and design, implementation and
maintenance of adequate internal financial controls, that were operating effectively for ensuring the
accuracy and completeness of the accounting records, relevant to the preparation and presentation of
the standalone Ind AS financial statements that give a true and fair view and are free from material
misstatement, whether due to fraud or error.
Auditor’s Responsibility:
Our responsibility is to express an opinion on these standalone Ind AS financial statements based on
our audit. We have taken into account the provisions of the Act, the accounting and auditing
standards and matters which are required to be included in the audit report under the provisions of
the Act and the Rules made thereunder.
We conducted our audit in accordance with the Standards on Auditing specified under Section
143(10) of the Act. Those Standards require that we comply with ethical requirements and plan and
perform the audit to obtain reasonable assurance about whether the standalone Ind AS financial
statements are free from material misstatement. An audit involves performing procedures to obtain
audit evidence about the amounts and the disclosures in the standalone Ind AS financial statements.
69
The procedures selected depend on the auditor’s judgment, including the assessment of the risks of
material misstatement of the standalone Ind AS financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal financial control relevant to the
Company’s preparation of the standalone Ind AS financial statements that give a true and fair view
in order to design audit procedures that are appropriate in the circumstances.
An audit also includes evaluating the appropriateness of the accounting policies used and the
reasonableness of the accounting estimates made by the Company’s Directors, as well as evaluating
the overall presentation of the standalone Ind AS financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our audit opinion on the standalone Ind AS financial statements.
Opinion.
In our opinion and to the best of our information and according to the explanations given to us, the
aforesaid standalone Ind AS financial statements give the information required by the Act in the
manner so required and give a true and fair view in conformity with the accounting principles
generally accepted in India including the Ind AS, of the financial position of the Company as at 31
March, 2017, and its financial performance including other comprehensive income, its cash flows
and the changes in equity for the year ended on that date.
Report on Other Legal and Regulatory Requirements
1. As required by the Companies (Auditor’s Report) Order, 2016 (“the Order”) issued by the Central
Government of India in terms of section 143(11) of the Act, we give in the Annexure A, a statement
on the matters specified in the paragraph 3 and 4 of the order.
2. As required by Section 143(3) of the Act, we report that:
(a) we have sought and obtained all the information and explanations which to the best of our
knowledge and belief were necessary for the purposes of our audit.
(b) in our opinion proper books of account as required by law have been kept by the Company so
far as it appears from our examination of those books;
(c) the balance sheet, the statement of profit and loss, the statement of cash flows and the statement
of changes in equity dealt with by this Report are in agreement with the books of account;
(d) in our opinion, the aforesaid standalone Ind AS financial statements comply with the
Accounting Standards specified under Section 133 of the Act read with relevant rule issued
thereunder;
(e) on the basis of the written representations received from the directors as on 31 March 2017
taken on record by the Board of Directors, none of the directors is disqualified as on 31 March
2017 from being appointed as a director in terms of Section 164 (2) of the Act;

70
 (f) with respect to the adequacy of the internal financial controls over financial reporting of the
Company and the operating effectiveness of such controls, refer to our separate report in
“Annexure B”; and
(g) with respect to the other matters to be included in the Auditor’s Report in accordance with Rule
11 of the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best of our
information and according to the explanations given to us:
i. the Company has disclosed the impact of pending litigations on its financial position in its
standalone Ind AS financial statements – Refer Note 2.24 to the standalone Ind AS financial
statements;
ii. the Company has made provision, as required under the applicable law or accounting
standards, for material foreseeable losses, if any, on long-term contracts including derivative
contracts – Refer Note 2.16 to the standalone Ind AS financial statements;
iii. there has been no delay in transferring amounts, required to be transferred, to the Investor
Education and Protection Fund by the Company; and the Company has provided requisite
disclosures in its standalone Ind AS financial statements as to holdings as well as dealings in
Specified Bank Notes during the period from 8 November, 2016 to 30 December, 2016 and
these are in accordance with the books of accounts maintained by the Company. Refer Note
2.27 to the standalone Ind AS financial statements. Annexure - A to the Auditors’ Report.

The Annexure referred to in Independent Auditors’ Report to the members of the Company on the
standalone Ind AS financial statements for the year ended 31 March 2017, we report that:
(i) (a) The Company has maintained proper records showing full particulars, including
quantitative details and situation of fixed assets.
(b) The Company has a regular programme of physical verification of its fixed assets by which
fixed assets are verified in a phased manner over a period of three years. In accordance with this
programme, certain fixed assets were verified during the year and no material discrepancies
were noticed on such verification. In our opinion, this periodicity of physical verification is
reasonable having regard to the size of the Company and the nature of its assets.
(c) According to the information and explanations given to us and on the basis of our
examination of the records of the Company, the title deeds of immovable properties are held in
the name of the Company.
(ii) The Company is a service company, primarily rendering software services. Accordingly, it
does not hold any physical inventories. Thus, paragraph 3(ii) of the Order is not applicable to the
Company.

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(iii) The Company has granted loans to two bodies corporate covered in the register maintained
under section 189 of the Companies Act, 2013 (‘the Act’).
(a) In our opinion, the rate of interest and other terms and conditions on which the loans had been
granted to the bodies corporate listed in the register maintained under Section 189 of the Act
were not, prima facie, prejudicial to the interest of the Company
(b) In the case of the loans granted to the bodies corporate listed in the register maintained under
section 189 of the Act, the borrowers have been regular in the payment of the principal and
interest as stipulated.
(c) There are no overdue amounts in respect of the loan granted to a body corporate listed in the
register maintained under section 189 of the Act.
(iv) In our opinion and according to the information and explanations given to us, the Company
has complied with the provisions of section 185 and 186 of the Act, with respect to the loans and
investments made.
(v) The Company has not accepted any deposits from the public. (vi) The Central Government has
not prescribed the maintenance of cost records under section 148(1) of the Act, for any of the
services rendered by the Company.
(vii) According to the information and explanations given to us and on the basis of our
examination of the records of the Company, amounts deducted/ accrued in the books of account
in respect of undisputed statutory dues including provident fund, income-tax, sales tax, value
added tax, duty of customs, service tax, cess and other material statutory dues have been
regularly deposited during the year by the Company with the appropriate authorities. As
explained to us, the Company did not have any dues on account of employees’ state insurance
and duty of excise. According to the information and explanations given to us, no undisputed
amounts payable in respect of provident fund, income tax, sales tax, value added tax, duty of
customs, service tax, cess and other material statutory dues were in arrears as at 31 March 2017
for a period of more than six months from the date they became payable.
(viii) The Company does not have any loans or borrowings from any financial institution, banks,
government or debenture holders during the year. Accordingly, paragraph 3(viii) of the Order is
not applicable.
(ix) The Company did not raise any money by way of initial public offer or further public offer
(including debt instruments) and term loans during the year. Accordingly, paragraph 3 (ix) of the
Order is not applicable.
(x) According to the information and explanations given to us, no material fraud by the Company
or on the Company by its officers or employees has been noticed or reported during the course of
our audit.
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(xi) According to the information and explanations give to us and based on our examination of the
records of the Company, the Company has paid/provided for managerial remuneration in
accordance with the requisite approvals mandated by the provisions of section 197 read with
Schedule V to the Act.
(xii) In our opinion and according to the information and explanations given to us, the Company is
not a nidhi company. Accordingly, paragraph 3(xii) of the Order is not applicable.
(xiii) According to the information and explanations given to us and based on our examination of
the records of the Company, transactions with the related parties are in compliance with sections
177 and 188 of the Act where applicable and details of such transactions have been disclosed in
the standalone Ind AS financial statements as required by the applicable accounting standards.
(xiv) According to the information and explanations give to us and based on our examination of
the records of the Company, the Company has not made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the year.
(xv) According to the information and explanations given to us and based on our examination of
the records of the Company, the Company has not entered into non-cash transactions with
directors or persons connected with him. Accordingly, paragraph 3(xv) of the Order is not
applicable.
(xvi) The Company is not required to be registered under section 45-IA of the Reserve Bank of
India Act 1934.

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Annexure – B

To the Auditors’ Report Report on the Internal Financial Controls under Clause (i) of Sub-section 3
of Section 143 of the Companies Act, 2013 (“the Act”)
We have audited the internal financial controls over financial reporting of Infosys Limited (“the
Company”) as of 31 March 2017 in conjunction with our audit of the standalone Ind AS financial
statements of the Company for the year ended on that date.

Management’s Responsibility for Internal Financial Controls

The Company’s management is responsible for establishing and maintaining internal financial
controls based on the internal control over financial reporting criteria established by the Company
considering the essential components of internal control stated in the Guidance Note on Audit of
Internal Financial Controls over Financial Reporting issued by the Institute of Chartered
Accountants of India (‘ICAI’). These responsibilities include the design, implementation and
maintenance of adequate internal financial controls that were operating effectively for ensuring the
orderly and efficient conduct of its business, including adherence to company’s policies, the
safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and
completeness of the accounting records, and the timely preparation of reliable financial information,
as required under the Companies Act, 2013.

Auditors’ Responsibility

Our responsibility is to express an opinion on the Company's internal financial controls over
financial reporting based on our audit. We conducted our audit in accordance with the Guidance
Note on Audit of Internal Financial Controls over Financial Reporting (the “Guidance Note”) and
the Standards on Auditing, issued by ICAI and deemed to be prescribed under section 143(10) of the
Companies Act, 2013, to the extent applicable to an audit of internal financial controls, both
applicable to an audit of Internal Financial Controls and, both issued by the Institute of Chartered
Accountants of India. Those Standards and the Guidance Note require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether adequate
internal financial controls over financial reporting was established and maintained and if such
controls operated effectively in all material respects. Our audit involves performing procedures to
obtain audit evidence about the adequacy of the internal financial controls system over financial
74
reporting and their operating effectiveness. Our audit of internal financial controls over financial
reporting included obtaining an understanding of internal financial controls over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. The procedures selected
depend on the auditor’s judgment, including the assessment of the risks of material misstatement of
the standalone Ind AS financial statements, whether due to fraud or error. We believe that the audit
evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion on
the Company’s internal financial controls system over financial reporting.

Meaning of Internal Financial Controls over Financial Reporting

A company's internal financial control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
A company's internal financial control over financial reporting includes those policies and
procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorisations
of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorised
acquisition, use, or disposition of the company's assets that could have a material effect on the
financial statements.

Inherent Limitations of Internal Financial Controls Over Financial Reporting

Because of the inherent limitations of internal financial controls over financial reporting, including
the possibility of collusion or improper management override of controls, material misstatements
due to error or fraud may occur and not be detected. Also, projections of any evaluation of the
internal financial controls over financial reporting to future periods are subject to the risk that the
internal financial control over financial reporting may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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Opinion

In our opinion, the Company has, in all material respects, an adequate internal financial controls
system over financial reporting and such internal financial controls over financial reporting were
operating effectively as at 31 March 2017, based on the internal control over financial reporting
criteria established by the Company considering the essential components of internal control stated
in the Guidance Note on Audit of Internal Financial Controls Over Financial Reporting issued by the
Institute of Chartered Accountants of India.

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CASE STUDY 3 (INTERNAL AUDIT)

Toshiba, a 140-year-old pillar of Japan Inc, is caught up in the country's biggest accounting scandal
since 2011. In 2011, Olympus Corp was embroiled in a scandal. In July 2015, Toshiba Corp
president Hisao Tanaka and his two predecessors quit after investigators found that the company
inflated earnings by at least $1.2 billion during the period 2009-2014. Toshiba is one of the early
adopters of the corporate governance reforms initiated in Japan. The corporate governance structure
met corporate governance standards. Time and again cases of corporate governance failures have
provided evidence that good corporate governance structure does not necessarily lead to good
corporate governance. Organisation culture is a critical determinant of the quality of corporate
governance.
Some of the observations of the independent investigation committee of the company on internal
audit demand discussion and debate.
The investigation committee observes, "According to the division of duties rules of Toshiba, the
corporate audit division is in charge of auditing the corporate divisions, the companies, branch
companies, and affiliated companies. However, in reality the corporate audit division mainly
provided consultation services for the 'management' being carried out at each of the companies, etc
(as part of the business operations audit), and it rarely conducted any services from the perspective
of an accounting audit into whether or not an accounting treatment was appropriate.

" The observations of the committee give the impression that the fault of the internal audit in
Toshiba was that it focused on consultation service rather than assurance service. Should internal
audit avoid providing consultation service? I do not think so. It was not the fault of the internal audit
that it provided consultation service. The fault was that it did not pay attention to accounting audit.

In Toshiba, the top management used to set targets that are unachievable. There was excessive
pressure from the top management to achieve those targets.

The variable pay is a significant portion of the total pay. The compensation of executive officers
comprises a base compensation based on title and a role compensation based on work content. Forty
per cent to 45 per cent of the role compensation is based on performance of the overall company or
business department. 'Challenge' to achieve unachievable targets and performance- based pay
provide enough motivation to manage earnings. Therefore, accounting audit should have been a
focus area for internal audit.

Internal audit can function independently only if the audit committee is capable, independent and
effective, and the internal auditor reports to the audit committee.
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In Toshiba, the audit committee was neither capable nor independent. The three external members of
the audit committee had no knowledge of finance and accounting. An ex-Chief Financial Officer
(CFO), who was the CFO during the timeframe when accounting irregularities occurred, was the
only whole time member of the audit committee. Therefore, the internal audit was not independent
of the management. Earnings management had the tacit approval of the top management. Therefore,
it is not surprising that accounting audit was excluded from the scope of internal audit. It is incorrect
to infer that the accounting audit did not receive the attention of the internal audit because its focus
was on providing consultation service.

Contemporary literature defines internal audit as 'assurance and consulting service'. The issue is of
balancing between consultation service and assurance service. Problem arises when the internal
auditor forgets that the internal audit is primarily an assurance function. The consultation service
flows from the assurance service. Although, the primary objective of operation audit is to obtain
assurance that the internal control that is installed to achieve operation objectives is adequate and
operating effectively, the auditees look to the internal auditor for suggestions and consultancy. Such
consultation service is a by-product of the assurance service. Auditees should not be denied the
benefits of internal auditor's understanding of the industry and the business, and the challenges
before the auditees in achieving operation objectives. Exclusion of consultation service from the
scope of internal audit would result in sub-optimal utilisation of internal audit resources.

Organisation culture also determines the effectiveness of internal audit. The investigation committee
observes, "A corporate culture existed at Toshiba whereby employees could not act contrary to the
intent of their superiors". In such a culture an upright internal auditor cannot survive, particularly if
he is not independent of the management. Perhaps, it is the reason that the internal audit in Toshiba
had chosen the easy path of focusing on 'consultation service' only without reporting internal control
weaknesses.

Internal auditor is the 'eyes and ears' and 'go-to man' of the audit committee. Therefore, internal
audit failure leads to corporate governance failure.

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 CHAPTER 4

DATA ANALYSIS AND PRESENTATION

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 CHAPTER 5
CONCLUSION

So, the audit objectives are different based on the types of audit reports as well as scope of audit.
The objective of audit on financial statements is to let independence to express their opinion on the
financial statements based on their independence and professional examination. Normally, there are
four types of audit opinion that auditor will express.

Internal audit objective is the act independence and objectively to add value the company by
introducing the high discipline approach to the organization. To ensure that internal auditor could
meet this objective, internal auditor need to ensure high discipline need to be introduce and in case
there is an impairment on this, audit committee need to review internal audit department again.

The scope of work of an external auditor is determined by the particular statue under which they are
appointed but the internal auditors have to work within the scope defined the management which
generally includes review and appraisal of accounting, financial and administrative controls.

I have also conducted the survey about audit report. There were 72 respondents.
Refer to the charts, pie diagrams and bar diagrams for the responses

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BIBLIOGRAPHY

https://www.wikiaccounting.com/audit-reports

https://www.infosys.com/investors/reports-filings/quarterly-results/2016-2017

https://toughnickel.com

https://en.wikipedia.org

http://icmai.in/upload/Students/Syllabus-2012/Study_Material_New/Inter-Paper12 (ICWAI-
COMPANY ACCOUNTS & AUDIT BOOK)

https://www.icsi.edu/media/webmodules/publications/5.%20Company%20Accounts%20and
%20Auditing%20Practices.pdf (ICSI-INSTITUTE OF COMPANY SECRETARIES OF INDIA)

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