IRRESPECTIVE OF SIZE – EVERY ENTERPRISE NEED AN AUDIT
AUDIT IS ABSOLUTELY RISK-FREE –PROVIDED WE FOLLOW SCIENCE & RULES OF IT
Science is ‘a systematic enterprise that builds and organizes knowledge in the form of testable explanation and predictions about the universe‘. Performing an audit and following the process results in testing and predictions whether the financial statements are free from material misstatement. Wikipedia defines Audit a follows:
An audit is an “independent examination of financial information of any entity, whether profit-oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.
Proper and accurate compilation of financial information of a corporate and its disclosure, in a manner that is standardized and understood by stakeholders, is central to the credibility of the corporate and the soundness of investment decisions by the investors. To prescribe all the details guiding the process and principles of audit is a technical matter which needs to be gone into by experts keeping in view the requirements of proper disclosures of financial information in the interests of healthy corporate governance.
Types of Audit
Audits are generally classified into:
The Statutory audits are conducted in order to report the state of a company’s finances and accounts to the departments of Indian Government like MCA, SEBI, CBDT etc and are performed by qualified auditors who are working as external and independent parties. The audit report of a statutory audit is made in the form prescribed by the government department. The two most common types of statutory audits in India are:
Tax Audit: Tax audits are required under Section 44AB of India’s Income Tax Act 1961. This section mandates that every person whose business turnover exceeds Rs 1Crore in any previous year, and every person working in a profession with gross receipts exceeding Rs 50 Lakhs must have their accounts audited by an independent chartered accountant. However, in the case of business, if both the Payment and Receipt do not exceed 5% of the Total Receipts and Payments respectively, the turnover limit is raised to 5 crores for Assessment year 2021-22. The Finance Act, 2021 has further increased the threshold limit of turnover for tax audit u/s 44AB from Rs.5 crores to Rs.10 crores where cash transactions do not exceed 5% of total transactions.
Company audits: The provisions for a company audit are contained in the Companies Act, 2013. Every company, irrespective of its nature of business or turnover, must have its annual accounts audited each financial year.
LLP Audit: Under Section 34(4) of the Limited Liability Partnership Act, 2008 there is an LLP audit requirement for LLP whose turnover exceeds the prescribed limit of Rs. 40 lakhs or whose contribution exceeds Rs. 25 lakhs in any financial year.
Internal audits are conducted at the bequest of internal management in order to check the health of a company’s finances and analyze the operational efficiency of the organization. Internal audits may be performed by an independent party or by the company’s own internal staff. As per India’s Companies Act, 2013 the following companies must have an internal auditing system:
1. Every listed company.
2. Companies whose shares are not listed on the stock exchange and have:
3. Every private company with:
The statutory auditor of the company must report on the internal auditing system of the company in the audit report.
Besides the above there are certain other kinds of Audit like stock audit, cost audit , special audit, etc.
Stock audit or inventory audit is a term that refers to physical verification of a company or institution’s inventory assets. At times, it may also involve the valuation of the inventory but it would depend on the terms of reference or the engagement letter of the assignment. Every business institution at least needs to perform a stock audit once a year to update and ensure that the physical stock and the computed stock match. the stock audit process is concerned, the process mainly involves the counting of physical stock presenting the specified premises and verifying the same with computed stock maintained by the company. Stock Audit is done either on behest of management:
Besides, stock audit is also done from the view point of the lender/ banks, annually, semi annually or quarterly, to monitor and ensure end-use of funds lent and check the economic viability of the borrower. The appointment of stock auditor is generally made by the Regional or Zonal Office in case of Nationalized banks and in case of co-op banks sometimes concurrent auditors only are asked to conduct stock audit of select borrowers of the branch who are enjoying certain working capital credit limits. The minimum limit for conducting stock audit varies from bank to bank according to their risk perception. Normally, CA or Cost Accountants are appointed by banks for conducting Cost Audit.
Audit of Receivables
The audit of existence in accounts receivables means verifying the actual existence, rights, and obligations, completeness, accuracy, classification, and presentation of receivables account balances as shown in books of accounts. The assertions in accounts may be materially misstated due to fraud or error. It is the responsibility of the auditor to perform unique audit procedures for every assertion and reveal any misstatement if present. One important and primary risk involved in the accounts receivables balances is that the organization has not expensed out the amounts of the bad debts in the receivables balances, which cannot be recovered anymore. Normally Banks/ lenders get this audit for ongoing working capital loan or cash credits secured by book debts.
A cost audit represents the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures and the continuing relevance of such procedures. Cost audit ascertains the accuracy of cost accounting records to ensure that they are in conformity with cost accounting principles, plans, procedures, and objectives. A cost audit comprises the following:
The cost audit may be done on behalf of management, customer, government agencies or it may be required by some statute. Section 148 of The Companies Act, 2013 read with The Companies (Cost Records and Audit) Rules, 2014 and Cost and Works Accountants Act, 1959 regulates statutory cost audit in India. Every company falling in regulated Sector like telecommunication, electricity, petroleum, pharma, fertilizer, etc, should get its cost records audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs 50 crore or more and the aggregate turnover of the individual product or products or services for which cost records are required to be maintained is Rs 25 crore or more. Other companies belonging to non-regulated Sector as given under Annexure A should get their cost records audited if the overall annual turnover of the company from all its products and services during the immediately preceding financial year is Rs 100 crore or more and the aggregate turnover of the individual product or products or service or services for which cost records are required to be maintained is Rs 35 crore or more. Only a Cost Accountant can be appointed as Cost Auditor for conducting a cost audits. Cost Accountant and no person appointed statutory auditor of the company shall be appointed for conducting the audit of cost records.
A Special Audit can be defined as a tightly defined type of audit that is conducted in order to probe into a specific area of the organization’s activities. Normally, this type of audit is mainly initiated by a third party, like a government agency or the tax authority, when some abnormal behavior is suspected within the organization. They can also be conducted when there are other institutional violations that might include pertaining to duties, authorizations, internal control procedures, or responsibilities of the Senior Management. These special audits may be quite varied in their nature, purpose, and scope and may take different forms like:
Auditing is the core and original function of any Chartered Accountant. With intense training, a qualified Chartered Accountant acquires professional skepticism to identify potential risks and propose preventative measures. Their role as consultants, either internally or externally, is focused on providing objective assessments or informed opinions about how existing practices and procedures might be improved. Overall goals of an audit include increased operational efficiency, risk management and regulatory compliance. A variety of industries employ auditors to provide policy and procedural oversight and ensure accurate financial reporting. Some of the key opportunities open to CAs on audit are:
History of Auditing
The word “AUDIT” has Latin origins, In general, it is a synonym to control, check, inspect, and revise. From the time of ancient Egyptians, Greeks, and Romans, the practice of auditing the accounts of public institutions existed. At that time audit was ordered by the Kings, emperors. and Churches and were conducted by the people of the state or scribes.
Later in the 18th century, checking clerks began to be appointed by States or Courts, to check the public accounts. To locate frauds as well as to find out whether the receipts and payments are properly recorded by the person responsible was the main objective of auditing of those days. In the second half of the 18th century, with the industrial revolution taking place, the sizes and complexities of enterprises increased much fold and thus necessitated a joint-stock form of organizations and audit began its evolution into a field of fraud detection and financial accountability by professionally trained people.
Statutory Audit under the Companies Act, 2013
It is pertinent to note that from the year 1857 till date, all these Companies Act enactments have recognized the mandatory requirement relating to Accounts and Audit of accounts of the companies in India. The Companies Act 2013 states that auditing standards issued by the Institute of Chartered Accountants of India (ICAI), and subsequently approved by the Ministry of Corporate Affairs, are mandatory for the audit of financial statements of companies in India.
Chapter X Audit and Auditors (Section 139 to Section 148) of Companies Act, 2013 contains provisions related to the audit of financial statements of companies. This chapter includes provisions, inter alia, regarding appointment, resignation, removal, rights, and duties of the auditor.
Section 139 of the Act that deals with the Appointment of the Auditor prescribe that every Company shall appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. The manner and procedure for selection of auditors by the members shall be as prescribed and the matter relating to such appointment for ratification by members at every annual general meeting.
Section 143(2) casts a duty on the auditor to make a report to the members of the company on the accounts examined by him and on every financial statement which are required by or under the Act to be laid before the company in general meeting and requires that the report shall after taking into account the provisions of the Act, the accounting and auditing standards and matters which are required to be included in the audit report to the best of his information and knowledge, state that the said accounts and, 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.
Section 143(3) casts some additional reporting requirements on the auditor including the requirement that the auditor report shall state as to whether the company has adequate internal controls over financial reporting (ICFR) with reference to financial statements in place and the operating effectiveness of such controls.
Section 143(11) empowers the Central Government in consultation with NFRA, to specify certain matters to be included in the Auditor’s Report. Accordingly, the Companies(Auditor’s Report) Order (CARO) has been issued from time to time.
Tax Audit under Income Tax Act, 1961
Tax audits are required under Section 44AB of India’s Income Tax Act 1961. The provision of tax audits is applicable to everyone, be it an individual, a partnership firm, a company or any other entity. The tax audit report is to be obtained by September 30 after the end of the previous fiscal year.
As per section 44AB, the following persons are compulsorily required to get their accounts audited :
National Financial Reporting Authority (“NFRA”)
National Financial Reporting Authority (“NFRA” ), was constituted as an independent regulator for accounting and auditing in India in October 2018. As per NFRA’s Charter, an important function of NFRA under 132(2)(a) of the Companies Act 2013 is to make recommendations to Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or class of companies or their auditors.
Standards on Auditing in India
Accordingly, while formulating Engagement and Quality Control Standards, the AASB takes into consideration the corresponding Standards, if any, issued by the IAASB
Section 143(9) of the Companies Act, 2013, requires that every auditor shall comply with auditing standards. Section 143(10) of Companies Act, 2013, states that 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 (ICAI) shall be deemed to be the auditing standards. As of date, there is a single set of auditing standards issued by ICAI which is applicable for all types and sizes of companies and are to be applied whenever an independent examination of financial information is carried on for ANY entity whether the business motive is t make the profit or not, whether the size of the entity is big or small or even if the entity has does not have any legal form (unless any lays specifies something else).
Auditing Standards in India are in line with the International Standards issued by the International Auditing and Assurance Board (IAASB) and even their numbering is akin to International Standards. In all there are 45 standards.
|Standards on Quality Control (SQCs)|
|SQC 1||Quality Control for Firms that Perform Audit and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements|
|Standards on Auditing (SAs)|
|SA 200||Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing|
|SA 210||Agreeing on the Terms of Audit Engagements|
|SA 220||Quality Control for an Audit of Financial Statements|
|SA 230||Audit Documentation|
|SA 240||The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements|
|SA 250||Consideration of Laws and Regulations in an Audit of Financial Statements|
|SA 260||Communication with Those Charged with Governance|
|Rev SA 260||Communication with Those Charged with Governance|
|SA 265||Communicating Deficiencies in Internal Control to Those Charged with Governance and Management|
|SA 299||Responsibility of Joint Auditors|
|Rev SA 299||Joint Audit of Financial Statements|
|SA 300||Planning an Audit of Financial Statements|
|SA 315||Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment|
|SA 320||Materiality in Planning and Performing an Audit|
|SA 330||The Auditor’s Responses to Assessed Risks|
|SA 402||Audit Considerations Relating to an Entity Using a Service Organisation|
|SA 450||Evaluation of Misstatements Identified During the Audit|
|SA 500||Audit Evidence|
|SA 501||Audit Evidence-Specific Considerations for Selected Items|
|SA 505||External Confirmations|
|SA 510||Initial Audit Engagements – Opening Balances|
|SA 520||Analytical Procedures|
|SA 530||Audit Sampling|
|SA 540||Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures|
|SA 550||Related Parties|
|SA 560||Subsequent Events|
|SA 570||Going Concern|
|Rev SA 570||Going Concern|
|SA 580||Written Representations|
|SA 600||Using the Work of Another Auditor|
|SA 610||Using the Work of Internal Auditors|
|Rev SA 610||Using the Work of Internal Auditors|
|SA 620||Using the Work of an Auditor’s Expert|
|SA 700||Forming an Opinion and Reporting on Financial Statements|
|Rev SA 700||Forming an Opinion and Reporting on Financial Statements|
|SA 701||Communicating Key Audit Matters in the Independent Auditor’s Report|
|SA 705||Modifications to the Opinion in the Independent Auditor’s Report|
|Rev SA 705||Modifications to the Opinion in the Independent Auditor’s Report|
|SA 706||The emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report|
|Rev SA 706||The emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report|
|SA 710||Comparative Information—Corresponding Figures and Comparative Financial Statements|
|SA 720||The Auditor’s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements|
|Rev SA 720||The Auditor’s Responsibilities Relating to Other Information|
|SA 800||Special Considerations-Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks|
|SA 805||Special Considerations-Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement|
|SA 810||Engagements to Report on Summary Financial Statements|
|Standards on Review Engagements (SREs)|
|SRE 2400||Engagements to Review Financial Statements|
|SRE 2400 Rev||Engagements to Review Historical Financial Statements|
|SRE 2410||Review of Interim Financial Information Performed by the Independent Auditor of the Entity|
|Standards on Assurance Engagements (SAEs)|
|SAE 3400||The Examination of Prospective Financial Information|
|SAE 3402||Assurance Reports on Controls At a Service Organisation|
|SAE 3420||Assurance Engagements to Report on the Compilation of Pro Forma Financial Information Included in a Prospectus|
|Standards on Related Services (SRSs)|
|SRS 4400||Engagements to Perform Agreed-upon Procedures Regarding Financial Information|
|SRS 4410||Engagements to Compile Financial Information|
|SRS 4410 (Revised)||Compilation Engagements|
Benefits of Auditing
Auditing should not be viewed barely as a statutory compliance exercise as audit and assurance services provide numerous benefits to management. They can:
Quality of a Good Auditor
An auditor’s job is to obtain complete and accurate information about the activities of the enterprise. It is a very responsible job requiring specialized skills. Some of the essential qualities an auditor must possess are:
5 Phases in Auditing Process
Though the extent, nature, and requirement vary for different kinds of entities under audit, the essential process involved is similar in each audit assignment. The whole process of auditing can be understood in 5 different phases viz.
i. Pre-Commencement: Before starting the process, an auditor has to get an engagement letter and a general analysis is performed on the organization be audited to have a better understanding of how processes work and what the entity’s objectives are. To have such understanding the audit team must comprehend the organizational structure of the entity under audit. The audit team must acquire a though understanding of the legal framework in which the entity under audit operates and also the internal regulation imposed by its memorandum/ articles, board decisions, etc. Doing so will give the team an overall picture of Organizational objectives, Activities performed, Company’s structure, Resources available, Industry context, and the Budget.
ii. Audit Planning: It is a very important aspect of any audit as the work well planned is half done. In this phase of the audit, the data collected in the previous stage are used to create an audit plan. The audit plan must contain the following information:
The lead auditor must define the staff members who will be responsible for performing each of the audit activities. To ensure the independence of audit function team members involved in audit assignment must be free from conflict of interest and must not be involved in the activities they are auditing.
Action against Auditors
Under Income Tax Act, 1951: As per Section 271J of the Income Tax Act, 1961 the Assessing Officer can levy a penalty of Rs. 10,000 on a Chartered Accountant if he believes that the CA has furnished incorrect information in any report
Under Chartered Accountants Act, 1949: Section 22 of the Chartered Accountants Act 1949, provides an inclusive definition of the term Professional or Other Misconduct as acts and omissions provided in any of the Schedules annexed to the Act. There are 2 Schedules that lay down the various types of offenses by a CA.
If a CA is found guilty of professional misconduct under the First Schedule action can be taken by the Board of Discipline constituted under Section 21A of the Act and also by the Disciplinary Committee constituted under section 21B of the Act. Board of discipline adopts summary disposal procedure and may take any one or more of the following actions if a CA is found guilty under Misconduct specified in First Schedule, namely
If a CA is found guilty of professional misconduct under the Second Schedule action can be taken against a CA, by the Disciplinary Committee constituted under section 21B of the Act which has the same powers as are vested in a civil court, in matters summoning and enforcing the attendance of any person and examining him on oath; the discovery and production of any document; and receiving evidence on affidavit. It can take the following action against a CA:
Some of the clauses of Part 1 of the Second Schedule which directly deal with audit functions and which would be regarded as professional misconduct ere
Under the Companies Act, 2013
Section 140 (5):
Deals with removal, the resignation of Auditor and giving of special notice and prescribes punishment for auditor of a company who has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by or in relation to the company or its directors or officers. Apart from debarring the auditor from appointment as auditor of any company for a period of five years of the passing of the order by the NCLT, the auditor shall also be liable under Section 447.
Section 139 to 145 of the Companies Act, 2013 deals with the audit and account of the Companies. Section 147 prescribes penalties for any contraventions under the Companies Act in respect to these sections. The company in default is punishable with a fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 Lakh and every officer of the company who is in default shall be punishable with a fine which shall not be less than Rs.10,000 but which may extend to 1 lakh rupees. If an auditor of a company contravenes any of the provisions unknowingly or unwillingly,
Section 245 and 246
The Companies Act,2013 provides for class‐action lawsuits, which can allow a large number of people with a common interest in a matter to sue or be sued as a group. Sections 245 and 246 of the Act contain these provisions. Under these, class‐action suits may be filed by investors if they are of the opinion that the affairs of the company are being conducted in a manner prejudicial to the interest of the company, its shareholders, or depositors. The group of prescribed shareholders or depositors may file an application with the National Company Law Tribunal (NCLT). Such class action may include other suits against the audit firm as well as the partners responsible for any misleading or improper statements in the auditors’ report or any misconduct or fraud by act or omission.
National Financial Reporting Authority (NFRA) is an independent authority created under section 132 of the Companies Act, 2013 for the establishment and enforcement of accounting and auditing standards and oversight of the work of auditors of certain entities like listed entities, banking, insurance, and electricity companies and other large unlisted companies having
Where professional or other misconduct is proved on an auditor, NFRA shall have the power to impose the penalty which may be as follows:
Where professional or other misconduct is proved, NFRA shall have the power to debar the member/firm from being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or performing any valuation services for a period which may be from 6 months to 10 years.
Section 447 of the Companies Act, 2013 exclusively deals with punishment for Fraud. As per the section, any person who is found to be guilty of fraud involving an amount of at least Rs 10 Lakh or 1% of the turnover of the company, whichever is lower shall be punishable with imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the amount involved in the fraud: Moreover, where the fraud in question involves public interest, the term of imprisonment shall not be less than 3 years.
However, where the amount of fraud is lesser and does not involve public interest, any person guilty of such fraud shall be punishable with imprisonment for a term which may extend to 5 years or with a fine which may extend to R. 50 lakh or with both.
The penalties and responsibilities of an auditor may seem onerous however it would be incorrect to hold an audit as risky. With essential features of auditor like independence, professional skepticism, documentation skills, and continuous knowledge up-gradation any Chartered Accountant can make a name for himself in the field of the Audit profession.