An Audit is an evaluation process that involves performing an inspection of documents to confirm the accuracy of an organisations or individual’s financial statements. Following an initial examination of financial records, an auditor performs physical checks on inventory and makes sure that the professional or company records transaction correctly. Various types of audits are:
Statutory Audit:
A Statutory Audit is a mandatory audit of a company’s financial records by an external entity. This audit is mandated by statute or law that governs an organization’s principles and ethics. It is an independent assessment of the financial accounts of a company or institution. The auditor’s role is to report on whether the financial statements issued by an organisation are ‘true and fair’, and meet all relevant guidelines or legal requirements. This in turn allows companies to guard against risk and plan for the future.
Statutory audit under Companies Act, 2013 states that it is compulsorily required for every business to have their accounts audited every financial year (April 1 – March 31), regardless of their capital or turnover. Statutory audit under Companies Act, 2013 provides two types of audits:
Tax Audits: Tax audit are mandatory for individuals whose business turnover for a year exceeds Rs. 1 crore, and for professionals with gross statements over Rs. 50 lakhs. This is made mandatory by section 44B of the India’s Income Tax Act, 1961
Statutory audit under Companies Act, 2013 also ensures that tax audit provisions are made accessible to be availed by any entity, be it individual, partnership, or an organization. If an entity does not comply with these provisions, then that entity could attract a penalty of 0.5% of the yearly turnover, or of Rs. 1,00,000/-
Statutory audit of companies: Statutory audit of companies begins with the appointment of the third-party auditor by the company directors. For the purpose of the statutory audit of companies, auditors are appointed at the AGM of various companies. The appointed auditor will remain so, until the next AGM. Under the Companies Act, 2017, auditors can be appointed for a period of 5 years, except in individual and partnership firms where the appointment period is a maximum of one or two terms.
A third party Chartered Accountant or accounting firm can be appointed as the auditor of the company. However, the following people cannot be appointed:
- A company employee
- Partner of a company employee
- Any person who owes an amount greater that Rs. 1,000/- to the company
- Any person who holds securities or shares with the company.
Applicability:
Statutory audit applicability pertains to all companies who must have their books audited, regardless of the nature of their business, by appointing a statutory auditor. However, with certain companies, statutory audit applicability is based on certain criteria:
- Limited liability partnership: If annual turnover exceeds Rs. 40 lakhs or if paid-up capital exceeds Rs. 25 lakhs, then a statutory audit is required for the LLP.
- Proprietorship: If annual turnover exceeds Rs. 1 crore for a business or if annual gross receipts exceed 25 lakhs for a professional service, then the proprietorship is required to be audited.
- Private Company/Public Company: Statutory audit is mandatorily required regardless of profits, or losses incurred and yearly turnover.
- Individual/ HUF/ Partnership Firms: Zero statutory audit applicability for these kinds of firms.
Coverage:
The scope of statutory audit is quite extensive and includes a thorough review and analysis of the books of accounts of the company to form an opinion on the same. The report generated from the audit is to be prepared as per the norms of the Company’s Auditor’s Report Order (CARO).
The statutory auditor is responsible to review and ascertain the adequacy, authenticity, and accuracy of the information provided in the financial statements of the entity and the source for the same. They are also responsible to review the internal auditing controls and the accounting policies followed by the entity to prepare its books of accounts. They are authorized to conduct any inquiry, review, prepare questionnaire, or receive confirmations and representations from the debtors or creditors of the entity to form their opinion.
The final audit report prepared has to by duly signed and sent to the shareholders or owners of the company along with the management and to be filed with the Ministry of Corporate Affairs for verification.
Benefits of Statutory Audit:
- More Transparent: A statutory audit helps in creating more transparency and authenticity of the financial statements of the organization.
- Compliance: the management of the company is answerable to the shareholders and the owners of the company and a statutory audit ensures that all the relevant provisions of the Companies Act and accounting standards issued by ICAI are adhered to.
- Authenticity: The financial statements of the company get better authenticity and result in a better reputation for the company which can provide it an upper hand in getting any external finance whenever needed.
- Reduces Risks: A regular statutory audit reduces the risk of any errors, fraud, or mismanagement in the company.
Internal Audit
Internal Audit is a continuous examination and verification of books of account conducted by employees of a business. It is a review of systems of internal check and internal control of a business. It is a thorough evaluation of a firm’s inner workings by people qualified to evaluate the same. Its goal is to ensure accuracy and compliance with regulatory bodies, particularly in the case of public firms that report their financial situation to investors and the Securities and Exchange Commission (SEC). The Institute of Internal Auditors (IIA) defines internal auditing as an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance process.
An internal audit is conducted by a group of the firm’s employee, usually, accountants and consultants, that report loosely to the CFO or CEO of the company and directly to the audit committee of the Board of Directors. They produce reports that are independent and objective. For this reason, the company assures that its risk management practices, internal controls, and governance are operating in due form.
Applicability
Section 138 read with Rule 13 of the Companies (Accounts) Rule 2014, provides for internal audit in specified companies. The following companies shall be required to appoint an internal auditor:
- Every listed company
- Every unlisted public company having
- Paid up share capital of Rs. 50 crore or more during the preceding financial year or
- Turnover of Rs. 200 crore or more during the preceding financial year; or
- Outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crore or more at any point of time during the preceding financial year; or
- Outstanding deposits of Rs. 25 crore or more at any point of time during the preceding financial year; and
- Every private company having-
- Turnover of Rs. 200 crore or more during the preceding financial year; or
- Outstanding loans or borrowings from banks or public financial institutions exceeding Rs. 100 crore or more at any point of time during the preceding financial year;
Particulars | Listed companies | Unlisted public companies | Private limited companies |
Paid-up share capital | Internal Audit is mandatory without any threshold | Rs. 50 crores or more | Not applicable |
Turnover | Rs. 200 crores or more | Rs. 200 crores or more | |
Outstanding loans or borrowings from banks or financial institutions | Exceeding Rs. 100 crores | Exceeding Rs. 100 crores | |
Outstanding deposits | Rs. 25 crores or more | Not applicable |
For the purpose of Rule 13 –
- The internal auditor may or may not be an employee of the Company.
- The term “Chartered Accountant” or “Cost Accountant” shall mean a “Chartered Accountant” or a “Cost Accountant”, as the case may be, whether engaged in practice or not.
- 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 Internal Audit.
Coverage:
The internal audit coverage includes examining and evaluating the system of internal control’s sufficiency and dependability. Internal audit’s work is to ensure that relevant internal controls are in place throughout all of the company’s activities. The internal auditor’s work will cover the following areas:
- Review of policies and procedures for compliance: The operation of the commercial firm is influenced by the systems and processes that it implements. The internal auditor’s work includes evaluating and reporting the efficacy and impact of such systems.
- Verify the accuracy and consistency of information: The internal auditor should verify the accuracy and consistency of information used in finance and operations. The verification also needs to include an assessment of the methods for identifying, recording, classifying, estimating, measuring, and reporting such data
- Confirm the company resources have been properly used: Assessing how effectively and efficiently the resources are being used is also within the scope of an internal audit. Moreover, during this step, factors that hinder efficient resource utilisation should also be identified by the internal auditors.
- Check if the company met its objectives: An examination of the company’s activity or programs is also to be performed by an internal auditor to see if the outcomes are in line with the company’s defined goals and objectives. The auditor will also check to see if such activities or program are being performed as planned.
- Validate if the assets are well protected: The internal auditor should examine the current system for protecting assets and, if necessary, confirm their existence.
Benefits of Internal Audit:
- More effective Management: One of the biggest benefit of internal audit is that it facilitates more effective management of the organization. The internal auditor will be able to point out any weaknesses of the organization in the operations or internal controls of the company. So, the management can use these insights to better the chance of achieving their goals.
- On going review: The process of internal audit gives the organization a unique opportunity to conduct a review of the performance in the ongoing year itself. They do not have to wait for the end of the year to review the company’s performance. This means that if they are not on the correct path, this will help them change course and correct their mistakes immediately.
- Performances of Staff Improve: The staff of the company remains alert and active. This is because there is the fear of their mistakes being caught by the internal auditor almost immediately. This will help improve their efficiency and performance. Also, they do not attempt to defraud the company for the same reasons. And on the other hand, it is a good morale booster for honest employees.
- Ensures Optimum Use of Resources: The process of internal control can be used as a tool to promote the optimization of resources. It will help point out the areas in which resources are being underutilized or wasted, and it can be corrected. It will help control the costs and expenses of the company.
- Division on Work: Internal audit helps promote the division of labour. It is important to keep a check on and observe the activities of all the departments and all of their employees. Division of labour will help in achieving this.
Types of Internal Audit:
- Financial Audit: it involves the evaluation of internal control processes over revenue and expenses, and the accuracy of their reporting in accordance with laws, regulations and internally developed policies and procedures. The function’s central objective is to ensure that the financial activity of the department unit or function is completely and accurately reflected in the appropriate financial reports. Some areas on which financial audits focus include: segregation of duties, authorizations and approvals, reviews and reconciliations.
- Information system Audit: The information systems audit function develops audit programs to assess, evaluate, and make recommendations to management regarding the adequacy of internal controls inherent and the effectiveness of the associated risk management. The information system audit function assesses the extent to which automated information processing systems, technology, architecture and processes produce reliable and accurate information, and are in accordance with the policies and procedures, and applicable laws and regulations.
- Compliance Audit: A company may be required to adhere to local laws, compliance needs, government regulations, external policies, or other restrictions. To demonstrate compliance with these rules, a company may task an internal audit committee to review, compile appropriate information, and provide an overall opinion on the status of the compliance requirement.
- Operational Audit: An operational audit is most likely to occur when key personnel leaves or when new management takes over an entity. The company may want to assess how things are done and whether resources are being used more efficiently. During an operational internal audit, the auditor will review whether current staff and processes fulfil the mission statement, value, and objectives of a company.
Concurrent Audit:
Concurrent audit or bank audit can be defined as a timely and systematic examination of the entity’s financial transactions to ensure accuracy, authenticity, and compliance with relevant regulatory requirements. Since the volume of transactions is very high, it is done on a regular basis. Usually, concurrent audit is conducted for bank branches, depending upon the quantum of advances given. It also depends upon bank to bank and their risk-taking capability. Concurrent audit is conducted to monitor day-to-day bank operations so that all the compliances and security measures are being followed. Concurrent audit involves daily account opening checking, cash balance, income leakage, NPA tracking, laws compliance, RBI compliance, various authorisations and all. Now a days more and more branches are coming under review of concurrent audit due to alarming rise of NPA’s in all banks. So now banks are hiring more and more concurrent auditors to ensure their operational efficiency and profitability.
Applicability:
The following branches of banks, business activities/verticals of bank may be subject to concurrent audit:
- Branches rated high risk or above in the last Risk based Internal Audit (RBIA) or serious deficiencies found in Internal Audit
- All specialized branches like Large Corporate, Mid Corporate, exceptionally large/very large branches (ELBs/VLBs), SME.
- All Centralized Processing Units like Loan Processing Units (LPUs), service branches, centralized account opening divisions, etc.
- Any specialized activities such as wealth management, portfolio management services, Card Products Division, etc.
- Data Centres.
- Treasury/branches handling foreign exchange business, investment banking, etc. and bigger overseas branches.
- Critical Head Office Departments.
- Any other branches or departments where, in the opinion of the bank, concurrent audit is desirable.
Coverage:
The concurrent audit covers all transactions of the bank. Hence to understand how this audit needs to be conducted, an understanding of the processes of the banks is imperative. Banking functions are inclusive but not limited to the following:
- Acceptance of deposits: Acceptance of deposit is the core function of the banks; the deposits are of varied nature depending on the holder and purpose of the account. The process of acceptance of deposits can be summed up as follows:
- Collection of details
- KYC and AML norms compliance
- Creation of account in Core Banking System (CBS)
The KYC norms will differ as per the status of the holder of the accounts. Hence, the document verification must be carried on accordingly.
- Loans and Advances: The lending of funds is the other core function of the bank. The bank accepts deposits at a certain rate and lends at a higher rate. The margin is the bank’s profit. Lending function ranks higher on the risk factor as there is a possibility of the debt not being recovered. Hence, there is a great significance and need for proper documentation. There are several loans and advances that a bank offers. The documents required for loan processing will vary depending on the type of loan. The auditor must verify all the documents and ensure that they are placed safely. Post sanction, the loans and advances have to be monitored periodically for warning signs of Non- Performing Assets (NPA’s). it is the duty of the concurrent auditor to closely examine NPA management and report any discrepancies.
- Cash Management: As the banks earn interest on the rupee it lends, maintaining a high cash balance can result in interest losses. However, banks need to hold enough to fund the ATM’s. Hence, the bank must achieve a balance. As an auditor one must:
- Check the cash balance in the cash book and ensure that it is as per policy.
- Conduct surprise visits to verify the cash in hand.
- Verify the insurance cover and ensure that the cash is kept safely.
- If any expense which is sizable in nature is made in cash, the authorizations for the transaction must be verified.
- Safety Lockers: Banks hold valuables of the customers in lockers. The auditor must check the following:
- Is the locker register maintained correctly?
- Is the locker rent collected duly as per the size of the locker, any deviations should be backed up by satisfactory explanation?
- Does the rent account in CBS reflect all the transactions?
- Is the insurance policy of the locker up to date?
- Are there any suspicious transactions like multiple visits in a short duration by a customer or customer visiting only at a particular time or for a longer duration?
- Forex: For FOREX operations of a bank, the auditor must ensure the following checks:
- Rate of foreign exchange on the transaction date and correct entry in books.
- Adherence to RBI norms relating to forex.
- Correct valuation of forex held in hand at the time of the audit.
- Bill payments: This is an add on service offered by banks; wherein a customer can make payments towards public utilities through the bank. The auditor will have to verify:
- If standing instructions have been received from customers, then ensure that the same has been noted in the CBS to generate an auto payment.
- Ensure proper reconciliations of the utility accounts.
Benefits of Concurrent Audit:
- Easy to quick discovery of errors: Errors and frauds can be discovered easily and quickly as the auditor checks the accounts at regular intervals and in detail. As an auditor visits the client regularly, the errors will be detected easily and quickly.
- Knowledge of technical details: Since the auditor remains more in touch with the client, he is in a position to know its technical details and hence can be of great help to client by making valuable suggestions.
- Quick presentation of accounts: As most of the checking works are already performed during the year, the final audited accounts can be presented to the shareholders soon after the close of the financial year at the AGM.
- Keeps the clients staff alert: As the auditor visits the client at regular intervals, the clerks are very regular in keeping the accounts up-to-date. They will see that there is no in accuracy or frauds as it would be detected by the auditor at the next visit.
- In depth checking: With concurrent audit, a detailed examination of accounts is possible as the auditor gets one complete financial year for the purpose.
Tax Audit:
Tax Audit refers to the verification and inspection of the accounts of the taxpayer to ensure that the accounts are in accordance with the provisions of the Income Tax Act, 1961. The Government of India has made tax audits mandatory compliance of every tax payer.
Income Tax Act 1961, has made tax audit compulsory on the annual gross turnover/ receipts if the amount exceeds a specified limit. Chartered Accountants conducts the tax audit defined in Section 44AB of the Income Tax Act, 1961.
Applicability:
Section 44AB has made tax audit mandatory for the following persons:
- Annual Gross Turnover in Business > 10 Crore:
If the annual gross turnover of an assessee exceeds 1 crore, then he shall be liable to undergo audit as per Section 44AB of the Income Tax Act.
- Annual Gross Turnover in Business > 10 Crore:
When the Annual Gross Income in a profession exceeds Rs.50 Lacs, then the assessee is eligible for audit as per Section 44AB of the Income Tax Act.
Constituents of Tax Audit Report:
The Tax auditor presents his report in the specifies form, which could be either Form 3CA or Form 3CB, where:
- Form 3CA is presented when a person involved in business or profession already mandated to get his accounts audited under any other law.
- Form 3CB is presented when a person is involved in business or profession and does not need to get his accounts audited under any other law.
- Form 3CD is also to be filed which is the Annexure to Audit report. 3CD is a statement of particulars required to be furnished under section 44AB of the Income Tax Act.
It is necessary for any person/persons who is/ are covered under section 44AB to get their accounts audited and also obtain the audit reports on or before 30th September of that particular year, i.e., the due date of filing the return of income.
Objectives of Tax Audit:
The objectives of Tax Audit are as below:
- It ensures that the books of accounts are maintained properly and certified by a tax auditor.
- It provides the reports in regard to the recommended information such as tax depreciation, income tax law and its compliance, and so on.
- It ensures the method bound scrutiny of the books of accounts and the reports in terms of the observations or discrepancies pointed out by a tax auditor.
- It helps verify the correctness of the income tax returns which are filed with the IT department.
- It makes the task of the calculation and verification of total income, claims and deductions, and so on, easier.
Benefits of Tax Audit:
- Transparency: Audited accounts allows to reveal that the Profit and Loss Account and record of the business shows a real and honest read of the state of affairs of the business.
- Detection and interference of Errors and Frauds:once books of accounts square measure audited, errors and frauds are often detected and necessary action is often taken to forestall it.
- Third-person view: Auditors possess a knowledgeable outlook to produce an expert recommendation to the corporate on varied aspects like tax matters, internal check, control and submission of varied reports.
- Helps in partitioning Disputes:Audited accounts provide a basis for sinking disputes and conflicts among the partners within the case of partnership firm and to settle disputes with relation to bonus, wages, etc. within the case of corporations.
- Helps in getting Loan: Loans are often simply borrowed from banks and alternative monetary establishments on the premise of audited accounts because the audited accounts evidence the honesty of the books of accounts and monetary statements.
- Helps to work out Future Trends: By comparison, the audited accounts with past years, the trend of economic activities are often determined. On the premise of review, weaknesses square measure observed and policies for the longer-term amount are often determined. Audit of business on an everyday basis will increase confidence to the interested parties and general public, as result goodwill of the business is often increased.
- Bank and monetary Institutions:Banks and alternative monetary establishments grant the loan to the business on the premise of audited monetary statements.