recent trends in auditing

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Recent Trends inRecent Trends in Auditing Auditing

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COST AUDITCOST AUDIT




INTRODUCTIONINTRODUCTION

³It is the detailed checkingof the costing system,

technique and accounts toverify their correctness andto ensure adherence to the

objective of costaccountancy.´




OVERVIEWOVERVIEW

y India was the first country in South Asia (and perhaps in the world)to make cost audit mandatory for some of its business sectors. The

Institute of Cost and Works Accountants of India (ICWAI) refers tocost audit as an audit of efficiency of minute details of expenditurewhile the work is in progress and not a post-mortem examination.

y Objectives of cost audit include the determination and control of cost together with providing data for making judgements and

decisions on various matters, such as operational efficiency.

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




OBJECTIVESOBJECTIVES

1. From the perspective of management:Cost audit detects errors, frauds and misappropriation and hence

enhances efficiency.2. From the perspective of shareholders:

Cost audit ensures that the valuation of closing stock and work-in-progress are correct, hence helps in the computation of more accurateprofit figures.

3. From the perspective of the government:To curb the profiteering by the manufacturing concerns and help in the

decision to provide tariff protection to any industry.4. From the perspective of customers:

Customers may obtain more benefit if the cost is reduced due toeffective control, implemented as a result of a cost audit.

5. From the perspective of cost accountants:Cost accountants, who are employees of a company, obtain a share

of all benefits derived by the company from a cost audit.




F inancial Audit F inancial Audit vsvs Cost Audit Cost Audit

y Financial Audit The Companies Act 1956, which has been amended several times,

and is now known as Companies (Amendment)/(Second Amendment) Act 2002 contains the detailed provisions concerningthe preparation of annual accounts and reporting.

y C ost Audit A cost accountant offers to perform or perform services concerning

the costing or pricing of goods and services or the preparation,verification or certification of cost accounting and relatedstatements.




COST AUDIT P ROGR AMM ECOST AUDIT P ROGR AMM E

T he Cost Auditor should pay his attentionto the following records:

y R ecord of Materialsy Labour R ecordsy R ecord of Overhead Chargesy Depreciationy Work-in-Progress R ecordsy Incomplete R ecordsy Stores and Spare Parts R ecords




TAX A UDITTAX A UDIT




TAX A UDITTAX A UDIT

TaxAuditor:role,qualifications &

appointment

Section 44ABy It was introduced by section 11 of the

Finance Act, 1984 with effect from 1stApril, 1985.

y Audit of the accounts of certain assesses.




OBJECTIVES OF TAX A UDITOBJECTIVES OF TAX A UDIT

y To ensure that the books of account andother records of the assessee are properlymaintained.y To ensure that the records faithfully reflectthe correct income of the tax-payer andclaims for deduction are correctly made.

y To facilitate administration by properpresentation of accounts before the taxauthorities and to save Assessing Officer¶stime in carrying out routine verification.

y To ensure that the revenue authorities areprovided with audited financial statementsalong with the relevant data andinformation for assessment.




Intricacie s of tax audit Intricacie s of tax audit

Section 44AB of the Income-tax Act providesfor compulsory audit of accounts of certainpersons carrying on business or profession.Ca s e s

In the case of a businessy E very assessee whose total sales, turnover or

gross receipts for the previous year exceedsR s. 40 lakhs has to get his accounts audited.In the case of a profession

y E very assessee whose gross receipts for theprevious year exceed R s.10 lakhs has to gethis accounts audited.




N o nN o n-- Appl icabi lity of Tax AuditAppl icabi lity of Tax Audit

Tax Audit shall not apply to the person whoderives income of the nature referred to insection 44B or section 44BBA, on or from the1 st day of April, 1985 or, as the case may be,the date on which the relevant section cameinto force, whichever is later. Moreover aperson who is wholly outside the purview of Income-tax Act need not get his accountsaudited u/s 44AB even though his total salesexceed R s. 40 lakh. E g: An agriculturist.




Compl iance of c o nditi o n s be fo re Compl iance of c o nditi o n s be fo re

accep

tanceof

TaxA

udit

accep

tanceof

TaxA

udit

a ss ign m enta ss ign m ent

y A person defined as a chartered

accountant within the meaning of Chartered Accountant Act, 1949 andwho hold a Certificate of Practice canperform tax audit u/s 44AB. An auditoris required to comply with the followingconditions before acceptance of taxaudit:




y In the interest of both client and auditor,the auditor should send an engagementletter, preferably before thecommencement of the engagement, tohelp avoid any misunderstandings withrespect to the engagement. Thi s isnece ss ary s ince s ecti o n 44 AB d o e s n o tsp eci f y the right s of the audit o r. It hasbecome mandatory from 2003-04.

y In case where the previous year¶s audit isconducted by any other auditor, then ³NoObjection Certificate (NOC)´ to be obtainedfrom the previous auditor before theacceptance of the tax audit assignment.




Furni s hing of re po rt sFurni s hing of re po rt sy In all other cases, an audit report is to

be given in Form No. 3CB. T he report inForm No. 3CA or 3CB is to beaccompanied with Form No. 3CD.

y For the purpose of section 44AB, anaudit report is to be given in Form No.3CA if the person carrying on businessor profession is required to get his

accounts audited under any other law.




In the audit report, the tax auditor has to express hisopinion as to

Ø Whether or not the financial statements give a trueand fair view of the profit or loss and the state of affairs (the auditor is required to state this where theaccounts of the assessee have not been auditedunder any other law); and

Ø Whether or not the prescribed particulars containedin the statement annexed to the audit report are trueand correct.




MA N AGE MENT AUDITMA N AGE MENT AUDIT




Objectives of Management Audit

Management audit is carried out to:

» App raise the managerial performance at all levels;

»S potlight the decisions or activities that are not in conformity

with organizational objectives;

»A scertain that objectives are pro perly understood at all levels;

» A scertain that controls provided at different levels are

adequate and effective in accom plishing management objectives or plans of o perations;

»Evaluate plans which are projected actions to meet objectives;

» Review the com pany·s organisational structure, i.e..

assignment of duties and res ponsibilities and delegation of

authority.www.professoraugustin.com



1. App raisal of Objectives.

Objectives are goals towards

which any function or organization is guided. Organizational

objectives should be referred to as primary objectives.

objective clause of the Memorandum of A ssociation

details with primary objectives of an organization.

Functional objectives should be referred to as subordinate

objectives and are set for accom plishment of organizational

objectives. Management audit should consider the following

points for a pp raisal of com pany objectives and functional

objectives:www.professoraugustin.com



C om pany Objective .

T hese objectives are rather fixed targets, which arementioned in the Memorandum of A ssociation. T heseare not changed.

Objectives are clear and understandable;

Objectives are reasonable and pro perly· reflect

com pany·s res ponsibility towards shareholders,

em ployees, community and Government;

Objectives are not changed frequently.




Functional Objective . T he review of the management

audit can make substantial contribution in this area.

T hese objectives are set for accom plishment of com pany·s

objectives. T

he objectives are clear and understandable. T he objectives are sufficiently divided and sub-divided.

as follows:

a. Out put goal

b. System goal

c. Product characteristic goal




» T he objectives are documented.» T he objectives are sufficiently communicated to pro per

o perating level.

» The objectives must be in pro per balance with each

other.

» T he objectives aid in motivating the persons engaged

in different Sections/de partments.




2 . App raisal of Organizational Structure.

Organizational structure is a part of the means by which themanagement controls the o perations of an organization.

A ssigi 1ment of duties and res ponsibilities and delegation of

authority offers a very im portant area for review of management audit. Following points should be noted in the

a pp raisal of organizational structure:

» T he organizational structure is in harmony with objectivesof com pany, division, de partment or unit.




» T he structure should provide for unity of command, i.e., a

person should not re port to more than one su pervisor.» T he structure clearly defines res ponsibility for every

management person in organization.

» The structure has pro per balance, i.e., no function shouldbe

excessively weak or excessively dominant

» T he organizational structure should permit flexibility tosuit to the changing conditions.




3 . App raisal of Planning Process and Plans.

Planning is an economic and motivational necessity. It is

a beginning of the order. It provides basis for decisionmaking.

It aims at designing tomorrow. It is a call for action.

Plans are the measures devised within the guidelines laid

down by policies, to attain an objective.

» T he planning process is efficient enough to antici patetrouble s pots.

» T he planning process existing in the organizationca pitalizes the abilities and ideas of individuals

working in the organization.www.professoraugustin.com



4 App raisal of C ontrol.

C ontrol assures attainment of objective. It com pels events

to conform to plans. T

here are two im portant as pects of control:

» Measurement of accom plishment against standard; and

» C

orrection of deviations.In this area, the activities of management audit should be

directed to determine whether controls provided are adequat

and are providing effectively for accom plishment of

management objectives and plans of o peration. T he auditor

examines and re ports directly on control involved in various

s pheres. www.professoraugustin.com



5 . App raisal of Organizational Functions.Management audit is not confined to critical a pp raisal of

management functions alone ( i.e., Planning, Organization

and C ontrol, etc. It has to be subject to its review organizational functions ( i.e., Production, Distribution,

Personnel, etc.) Management functions influence

organizational functions. Planning is a management functionand production is an organizational function. T his ex plainsthe basic attitude of management audit.




A . App raisal of Production

For a pp raisal of production, management will have toreview a number of activities like:

a. Buying,

b. Planning,b. Processes,

d. Storage and

e. Ins pection.




» Management auditor should see that purchase of right

s pecifications in the right quantities are made at the right

time and at the right place. T he em phasis will be to

review the methods, procedures and routines followed

determine ¶right s pecifications·, ¶right time· and ¶right

place, etc.

» O ptimum utilization of available ca pacity is ensured by

the organizational procedures.

»Procedures related to inventory control would be

thoroughly scrutinized to s potlight the areas forim provement. C ontrol techniques used to avoid

dis pro portionate amount being used in inventory are




A . App raisal of Purchase Function

Following points are taken care of:

a. Organization of purchase function.

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

c. It should be examined whether purchase Procedure

necessitates that the purchase requirements should be

de pendent on production schedule and level of inventories.

d. Does the com pany ensure regular and de pendable su pp lier

f. How is latest market information collected?

g. A re the prices pro perly analyzed?




B. T he App raisal of Distribution

i. Sales Records.

ii. Sales policy

iii. Service to customer

iv. Publicity.

A ccounts and Finance . Here management auditor should not

criticize the technical accountancy of the com pany: T hat is the

subject of financial auditor. Management auditor may point

out, if necessary, statistical information, which may have

bearing on decision-making in the organization. Following

points are of concern to management au 4 itor in this area:www.professoraugustin.com



» A dequacy and effectiveness of financial analysis being

submitted by management

» A dequacy and efficacy of procedures and practices

followed in cost accounting de partment, i.e., methods of

collecting material cost, labor cost, overhead, o peration of

budgetary control, standard costing and re porting of variances.» A dequacy and efficiency of management informationsystem.

» A dequacy of internal audit procedures.» Methodology ado pted for financial pro posal,investment plans and project decisions.




L egal and Secretarial Practice .

Here management auditor critically reviews the systemrelating to office organization. A n effort will be made todetermine whether the activities and routines related tohandling of corres pondence, filing system, tele phone, telexand messenger service, etc, are carried out in sim plest and

most effective manner. Main concern management auditorin this area remains focused on a pp raisal of systems in vogue.

Personnel and Industrial Relations . T his function has

assumed a lot of im portance in recent years. Following

activities are primarily studied:

» Em ployment and discharge, personnel records and works

Management, internal welfare and external welfarewww.professoraugustin.com



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