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Types of audit

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Title: Types of audit


1
Types of audit
2
DEFINITION OF AUDIT
  • Definition by International Auditing Practices
    Committee
  • The independent examination of financial
    information of any entity, whether profit
    oriented or not, and irrespective of its size, or
    legal form, when such an examination is conducted
    with a view to expressing an opinion thereon.

2
3
  • Another definition - Concerned with the
    verification of accounting data, with determining
    the accuracy and reliability of accounting
    statements and reports.
  • Auditing, therefore
  • Verifies accounting data and
  • report on accuracy and reliability of accounting
    statements.

3
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  • Verification involves
  • evaluation of evidence in support of transactions
  • Internal evidence, e.g. the records, vouchers,
    books of accounts
  • External evidence, e.g. Confirmation of balances
    as from Bank, data from other department/agencies.
  • Includes assessment and evaluation of relevant
    system in the organisation.

4
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  • Audit is not limited to only financial and
    accounting records.
  • It also includes review of costing records,
    operational and managerial performance, HR
    policies, issues of corporate governanace, etc.

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Types of CAGs Audit
  • Propriety Audit
  • Certification Audit/Account Audit
  • Propriety Audit can again be divided into two
    categories
  • Compliance/Regularity audit
  • Performance Audit/3E Audit/VFM Audit

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Compliance Audit
  • A compliance audit is a comprehensive review of
    an organization's adherence to laws, statutes,
    rules and regulatory guidelines.
  • Each transactions is audited separately in
    isolation to verify compliance with rules and
    regulations affecting that particular transaction
  • What, precisely, is examined in a compliance
    audit will vary depending upon the nature of
    transaction

7
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  • It involves examination of transactions relating
    to receipts and expenditure, assets and
    liabilities of government companies and
    corporations to ensure compliance with all
    applicable laws, rules and regulations and
    procedures. (Compliance/Regularity Audit)
  • It also involves the evaluation of transactions
    for observance of principles of financial
    propriety. (Propriety Audit)

9
  • Various statutes require compliance of relevant
    provisions. In each case, the organization must
    be able to demonstrate compliance by producing an
    audit trail, often generated by data from records
    (manual or electronic).
  • E.g.- GFR, internal rules/circulars of
    department, rules of financial prudence,
    Companies Act, Environmental laws, Factory Act,
    Minimum Wages Act, Contractual obligations, etc.
  • Organisations need not only to comply with the
    provisions of laws/rules but also to keep records
    to show the compliance.

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Principles of Financial propriety
  • (a) Expenditure should not be prima facie more
    than what the occasion demands.
  • (b) to apply the same vigilance on public
    expenditure as on expenditure from personal
    funds.
  • (c) sanction of expenditure should not result in
    financial advantage to sanctioning authority.
  • (d) public money not to be spent for the benefit
    of a particular person or a section or a
    community.
  • (e) allowances should not be a source of personal
    profit.

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Performance Audit
  • Performance audit is an independent assessment or
    evaluation of an entitys programme or activity
    with reference to the laid down goals, objectives
    and targets, taking into account relevant
    criteria for assessment of efficiency, economy
    and effectiveness of operations.
  • This is done for government departments as well
    as PSUs
  • In case of Central PSUs, this is done mainly
    through the Audit Board mechanism, chaired by the
    Deputy Comptroller and Auditor General
    (Commercial), with senior officers of the CAG
    and two technical experts inducted as special
    invitees, if necessary.

12
Performance Audit (contd..)
  • Main objective - to assist peoples
    representatives in exercising effective
    legislative control and oversight over the policy
    objectives and their implementation.
  • Performance audit involves understanding the
    activities of the organisation, risk assessment,
    systems and controls, and brings out systemic
    deficiencies, absence of controls or their
    ineffective functioning and compliance failures.
  • The Audit probe goes into the root causes of the
    problems and suggests constructive
    recommendations to the executives for improvement.

13
Certification Audit
  • As per the provisions of the Companies Act, 1956
    read with Section 19 of the Comptroller and
    Auditor Generals (Duties, Powers and Conditions
    of Service) Act, 1971 and the CAGs Regulations
    2007, the CAG is vested with audit of the
    financial statements of all the Government
    companies.

14
Certification Audit (Contd..)
  • Section 19 of CAGs (DPC) Act, 1971
  • (1) duties and powers of CAG for audit of
    accounts of Govt Companies, in accordance with
    provisions of Companies Act, 1956.

15
Certification Audit (Contd..)
  • SEC 617 Definition of government company
  • SEC 619 Application of Sections 224 to 233
    (relating to audit)
  • (2) Auditors to be appointed and re-appointed by
    the CAG.
  • (3) CAG shall have power
  • (a) to direct the manner in which the companys
    accounts shall be audited by the statutory
    auditors.
  • (b) to conduct a supplementary or test audit of
    the companys accounts by such person(s) as he
    may authorise in this behalf and for the purpose
    of such audit, to require information in such
    form as CAG directs.
  • (4) Auditor to submit report to CAG. CAG may
    comment upon or supplement the audit report in
    such manner as he may think fit.
  • (5) Such comments or supplement to the audit
    report to be placed before AGM along with the
    audit report.

16
Certification Audit (Contd..)
  • Thus, in order to discharge this responsibility,
    he is empowered to appoint the auditors as well
    as issue directions to the auditors specifying
    the manner in which the accounts of government
    companies are to be audited, keeping in view his
    overall responsibility of ensuring public
    accountability.

17
Certification Audit (Contd..)
  • As the Supreme Audit Institution of the country,
    the CAG plays an oversight role ensuring that
    the statutory auditors discharge their assigned
    responsibilities with due diligence on his behalf
    by exercising the power to supplement or comment
    upon the statutory auditors report.

18
CAGs Audit Framework (contd..)
  • By conducting audit of PSEs by three frameworks
    viz. financial audit, performance audit and
    transaction audit, which are interlinked and
    complementary to one another, CAG prepares three
    distinct audit reports on the functioning of the
    PSEs, commenting upon their state of financial
    affairs, operational efficiency, governance and
    compliance issues.
  • These reports are placed in the Parliament and
    the selected reports are discussed
    comprehensively by COPU recommending remedial
    measures for improvement.

19
Certification Audit Steps
  • Appointment of Auditors by CAG
  • Issuing directions/sub-directions by CAG to SAs
  • Preparation of financial statements by management
  • Audit by statutory auditors
  • Boards approval of audited accounts
  • Supplementary audit by CAG under section
    619(3)(b) of Companies Act
  • Comments on accounts/certificate by CAG

20
Ensuring public accountability by oversight audit
of financial statements
  • Appointment of independent statutory auditors
    with proven track record and credentials
  • Issuing general directions and industry specific
    sub-directions to statutory auditors
  • Overall responsibility being vested upon CAG, he
    should not only guide, direct, monitor, oversee,
    review, supplement and complement the financial
    attestation functions of the statutory auditors
    but also safeguard the independence of auditors
    against unethical practices and conflicting
    demands from the management.

21
  • The supplementary audit by CAG has withstood
    years of criticism but so far deterred the
    management frauds like Satyam.
  • The supplementary audit by the CAG has deterrent
    effects on companys management and statutory
    auditor as well.

22
  • The significance of CAGs supplementary audit
    can be gauged from the fact that every year
    several PSEs revise their accounts after
    supplementary audit and comments are issued to
    number of PSEs.
  • In 2006-07, twelve Central PSEs revised their
    accounts after supplementary audit and comments
    were issued in respect of 72 Central PSEs besides
    number of state government PSEs as well.

23
Audit Process
  • Audit Planning
  • Audit Execution
  • Reporting
  • Follow up
  • (Governed by CAGs Auditing Standards)

24
Audit Planning
  • Collection of information about the Auditee
  • Activities/operations/projects/Plans/revenue and
    expenditure details/targets vs.
    achievements/previous audit results and
    outstanding audit objections/internal
    controls/etc.
  • Risk Assessment
  • materiality/topicality/internal
    controls/criticality/etc.
  • Audit Plan
  • Categorization of audit entities based on risk
    assessment/periodicity/allocation of mandays)
  • Quarterly audit programme
  • allocation of mandays and party personnel
  • Audit entity wise audit planning
  • High risk areas/methodolgy/sampling/ records for
    scrutiny/inspection/etc.

25
Audit Execution
  • Field audit (auditing at the premises of auditee)
  • Audit work programme
  • Compliance testing to ensure reliance on
    internal controls
  • Direct substantive testing for detailed test
    check of records
  • Issue of audit memo
  • Reply from management and evaluation thereof
  • Settlement/Inclusion of audit observation in
    Audit Inspection Report

26
Audit Execution
  • Audit report is finalised at the respective HQ
    offices
  • Issue of lack of considered reply by audited
    entity
  • Mechanism of ACM (Audit Committee Meetings)
  • Conversion of IR/LAR para into Factual Note (FN)/
    Potential Draft Para (PDP)
  • Conversion of FN into Draft Para (DP)

27
Audit Reporting
  • Standard formats of reporting have been
    established
  • The views or explanation of the audited entity is
    invariably incorporated
  • Chapter-1 generally gives the overall situation
    of the government in respect of the aspects
    covered in that particular report e.g. Financial
    situation, overview of all PSUs, overview of
    receipts etc.

28
  • THANK YOU

28
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