Audit

BY

Kirankumar Jathar 23
Rupeshree Pawar 43
Priyam Shah 50
Vijayraj Shetty 53
Sonali Suri 57
Ritesh Wadhwani 58
Introduction
Auditing along with other disciplines such as accounting
and law, equips with all the knowledge that is required to enter into
auditing as a profession. No business or institution can effectively
carry on its activities without the help of proper records and
accounts, since transactions take place at different points of time
with numerous persons and entities

Definition of Auditing
“Auditing is defined as 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 recognizes 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.”
The Auditor

The person conducting audit is known as the auditor; he makes a report

to the person appointing him after due examination of the accounting
records and the accounting statement in the form of an opinion on the
financial statements.

The opinion that he is called upon to express is whether the financial

statement reflect a true and fair view. Auditing, especially of companies
and for public purpose has become the preserve of persons having
recognized professional training and qualification. In India, under the
authority of the Companies Act 1956 only Chartered Accounts are
professionally qualified for the audit of accounts of companies.
Aspects to Be Covered In Audit.
The principle aspects to be covered in an audit are as following.

•An examination of the system of accounting and internal control to

ascertain whether it is appropriate for the business and helps in
properly recording all transactions.

•Reviewing the system and procedures to find out whether they are
adequate and comprehensive and incidentally whether material
inadequacies and weaknesses exist to allow frauds and errors going
unnoticed.
•Checking of the arithmetical accuracy of the books of account by
the verification of postings, balances, etc.

•Verification of the authenticity and validity of transaction entered

into by making an examination of the entries in the books of
accounts with the relevant supporting documents
COST AUDIT
 INTRODUCTION
“It is the detailed checking of
the costing system, technique
and accounts to verify their
correctness and to ensure
adherence to the objective of
cost accountancy.”
 OVERVIEW
• 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 to cost audit as an
audit of efficiency of minute details of expenditure while
the work is in progress and not a post-mortem
examination.

• Objectives of cost audit include the determination and

control of cost together with providing data for making
judgement and decisions on various matters, such as
operational efficiency.
 OBJECTIVES
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 accurate
profit 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 to
effective 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.
Financial Audit vs Cost Audit
• Financial Audit
The Companies Act 1956, which has been amended several times,
and is now known as Companies (Amendment)/(Second
Amendment) Act 2002 contains the detailed provisions concerning
the preparation of annual accounts and reporting.

• Cost 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
related statements.
COST AUDIT PROGRAMME
The Cost Auditor should pay his attention to the
following records:
•Record of Materials
•Labour Records
•Record of Overhead Charges
•Depreciation
•Work-in-Progress Records
•Incomplete Records
•Stores and Spare Parts Records
TAX AUDIT
TAX AUDIT
TaxAuditor:role,qualifications & appointment

Section 44AB
• It was introduced by section 11 of the Finance
Act, 1984 with effect from 1st April, 1985.
• Audit of the accounts of certain assesses.
OBJECTIVES OF TAX AUDIT
• To ensure that the books of account and other
records of the assessee are properly maintained. 
• To ensure that the records faithfully reflect the
correct income of the tax-payer and claims for
deduction are correctly made.
• To facilitate administration by proper
presentation of accounts before the tax
authorities and to save Assessing Officer’s time in
carrying out routine verification. 
• To ensure that the revenue authorities are
provided with audited financial statements along
with the relevant data and information for
assessment.
Intricacies of tax audit
Section 44AB of the Income-tax Act provides for
compulsory audit of accounts of certain persons
carrying on business or profession. 
Cases 
In the case of a business
• Every assessee whose total sales, turnover or gross
receipts for the previous year exceeds Rs. 40 lakhs
has to get his accounts audited.
In the case of a profession
• Every assessee whose gross receipts for the previous
year exceed Rs.10 lakhs has to get his accounts
audited.
Non-Applicability of Tax Audit
Tax Audit shall not apply to the person who
derives income of the nature referred to in
section 44B or section 44BBA, on or from the 1st
day of April, 1985 or, as the case may be, the
date on which the relevant section came into
force, whichever is later. Moreover a person who
is wholly outside the purview of Income-tax Act
need not get his accounts audited u/s 44AB even
though his total sales exceed Rs. 40 lakh.  Eg: An
agriculturist.
 Compliance of conditions before
acceptance of Tax Audit
assignment
• A person defined as a chartered accountant
within the meaning of Chartered Accountant
Act, 1949 and who hold a Certificate of
Practice can perform tax audit u/s 44AB. An
auditor is required to comply with the
following conditions before acceptance of tax
audit:
• At the time of appointment a letter evidencing
appointment shall be obtained by the auditor from
· An individual himself in case of audit of an
individual.
 ·  A partner in case of audit of a firm.
 ·  A director, preferably with reference to a board
resolution in case of audit of a company.
·   A member of AOP in case of audit of AOP.
• In the interest of both client and auditor, the
auditor should send an engagement letter,
preferably before the commencement of the
engagement, to help avoid any misunderstandings
with respect to the engagement. This is
necessary since section 44AB does not
specify the rights of the auditor. It has
become mandatory from 2003-04. 

• In case where the previous year’s audit is

conducted by any other auditor, then “No
Objection Certificate (NOC)” to be obtained from
the previous auditor before the acceptance of the
tax audit assignment.
 Furnishing of reports

• In all other cases, an audit report is to be given in

Form No. 3CB. The report in Form No. 3CA or
3CB is to be accompanied with Form No. 3CD.

• For the purpose of section 44AB, an audit report

is to be given in Form No. 3CA if the person
carrying on business or profession is required to
get his accounts audited under any other law.
In the audit report, the tax auditor has to express
his opinion as to
 
Ø Whether or not the financial statements give a
true and fair view of the profit or loss and the state
of affairs (the auditor is required to state this where
the accounts of the assessee have not been audited
under any other law); and
 
Ø Whether or not the prescribed particulars
contained in the statement annexed to the audit
report are true and correct.
MANAGEMENT AUDIT
 Definition
• Systematic assessment of methods and policies of a firm's
management in the administration and the use of resources,
tactical and strategic planning, and employee and organizational
improvement

• A detailed audit that concentrates on analysis and evaluation of

management procedures and the overall performance of an
organization. A management audit is undertaken to discover
weaknesses and to institute improvements within the
organization. Also called operational audit, performance audit.

• establish the current level of effectiveness,

• suggest improvements and
• lay down standards for future performance
Objectives of Management Audit
Management audit is carried out to:

Appraise the managerial performance at all levels

Spotlight the decisions or activities that are not in conformity with
organizational objectives
Ascertain that objectives are properly understood at all levels
Ascertain that controls provided at different levels are adequate
and effective in accomplishing management objectives or plans of
operations
Evaluate plans which are projected actions to meet objectives
Review the company’s organizational structure, i.e. assignment of
duties and responsibilities and delegation of authority
1. Appraisal of Objectives

Objectives are goals towards which any function or organization is guided

Organizational objectives should be referred to as primary objectives i.e.

objective clause of the Memorandum of Association which details with
primary objectives of an organization.

Functional objectives should be referred to as subordinate

objectives and are set for accomplishment of organizational objectives

Management audit should consider the following points for appraisal of

company objectives and functional objectives:
Company Objective

 These objectives are rather fixed targets, which are mentioned in the
Memorandum of Association. These are not changed

 Objectives are clear and understandable

 Objectives are reasonable and properly’ reflect company’s

responsibility towards shareholders, employees, community and
Government

 Objectives are not changed frequently

Functional Objective
The review of the management audit can make substantial contribution in this
area.
These objectives are set for accomplishment of company’s
objectives
 The objectives are clear and understandable
 The objectives are sufficiently divided and sub-divided as follows:
a. Output goal
b. System goal
c. Product characteristic goal
The objectives are documented
The objectives are sufficiently communicated to proper operating level
The objectives must be in proper balance with each other
The objectives aid in motivating the persons engaged in different
Sections/departments
2. Appraisal of Organizational Structure
Organizational structure is a part of the means by which the
management controls the operations of an organization.
Assignment of duties and responsibilities and delegation of
authority offers a very important area for review of
management audit.
Foll points to be noted in organizational structure:
» The organizational structure is in harmony with objectives
of company, division, department or unit.
» The structure should provide for unity of command, i.e., a
person should not report to more than one supervisor.
» The structure clearly defines responsibility for every
management person in organization.
»The structure has proper balance, i.e., no function should
be excessively weak or excessively dominant

»The organizational structure should permit flexibility

to suit to the changing conditions.
3. Appraisal of Planning Process and Plans
Planning is an economic and motivational necessity. It is
a beginning of the order. It provides basis for decision
making.
Plans are the measures devised within the guidelines laid
down by policies, to attain an objective.

» The planning process is efficient enough to anticipate

trouble spots.

» The planning process existing in the organization

capitalizes the abilities and ideas of individuals
working in the organization.
4 Appraisal of Control
Control assures attainment of objective. It compels events
to conform to plans. There are two important aspects of
control:
» Measurement of accomplishment against standard; and
» Correction of deviations.
In this area, the activities of management audit should be
directed to determine whether controls provided are
adequate
and are providing effectively for accomplishment of
management objectives and plans of operation. The auditor
examines and reports directly on control involved in various
spheres.
 Process of Management Audit
 1. Establishing the objects of organization- The first job in the management audit is to
identify the objectives of the business organization.

2. Evaluation of the organization structure- Next step in the management audit is to

evaluate the organization structure. To find out that whether the structure enough to
achieve the goals of the organizations.

3. Evaluating the policies of the organization- Evaluating the policies of the organization
is very important is very important. Any scope of improvement in it should be
reported.

4. Reviewing the actual performance- Auditor should review the actual performance of
the various work centers. The performance should be carefully and critically evaluated.

5. On the basis of the above steps, auditor should prepare a report and submit to the
appointing authority. The report should point out all the weak and inefficient points
present in the organization.
THANK YOU !!!