Definition of The Traditional Instruments of Control in Organisations - Auditing

Meaning and Objectives of Auditing

An Audit is an examination of accounting records of a business concern. Auditing is done with a view to check whether the books of accounts correctly and truly reflect the transactions to which they purport to relate. Thus Auditing refers to checking of books of accounts of a firm in order to ensure their reliability and the reliability of the income statements made from them.

In the words of Montgomery “ Auditing is a systematic examination of the books and records of a business or other organization, in order to ascertain or verify to report upon the facts regarding its financial operations and the result thereof ”

Objectives of Auditing

The objectives for carrying out Auditing can be discussed under three heads. They are:

Primary objectives

Secondary objectives

Specific objectives.

Primary objectives are to check truthfulness of the books of accounts. That is to see whether they reflect the true and fair view of state of affairs of the business concern. Therefore the primary objectives to determine whether the financial statements depict the true and impartial view of financial position and working results of an organization.

Secondary objective is aimed at detection and prevention of errors and fraud and also check the Misrepresentation of accounts.

Specific objective is fixed depending up on the nature and subject matter of the Audit. For example in a Management Audit the Specific objective is to promote the operational efficiency of the managerial functions, also identify the areas of weakness.

Internal Control

Internal control refers to the entire system of control employed by the management in order to carry on the business of the organization in an orderly and efficient way, by using an automatic check and balance all the transactions. It has in itself internal check, internal audit and other tools of control. Internal control system gives assurance to the management that the information it receives is both reliable and accurate. It also ensures that assets are secure and policies of the management are being followed properly. It not only guarantees management on the reliability of accounting information, the independent auditors also rely on system of internal control in determining the timing, nature, and extent of their audit work.

Definition of Internal Control

The American Institute of Certified Public Accountants (AICPA) has defined internal control as “The plan of organization and all the coordinate methods and measures adopted within a business to safeguard its assets, check the accuracy and the reliability of its accounting data, promote operational efficiency and encourage adherence to prescribed managerial policies. A system of internal control extends beyond those matters which relate directly to the functions of the accounting and financial departments”.

According to The Institute of Chartered Accountants of England and Wales (ICAEW) “Internal Control means not only internal check or internal audit, but the whole system of control, financial and otherwise, established by the management in order to carry on the business of the company in an orderly manner, safeguard its assets and secure as far as possible accuracy and reliability of its records”.

From the above two definitions it is clear that internal control is a broad term with a wide area of operation. It includes a number of methods and measures, which are exercised by the management to ensure smooth and economic functioning of business entity. It aids management in the performance of various functions. Internal control facilitates the external audit also as it assures the external auditors that the information supplied to them is accurate and reliable.

Difference between Internal Audit and Internal Control

The points of difference between internal audit and internal control can be stated as under:

Internal audit. It is an appraisal activity carried out within an organization to review the operations and records so as to serve the management and is done by specially assigned staff.

Internal control. By internal control, it means not only internal check and internal audit but the whole system of controls—financial and otherwise, established by the management in the conduct of a business in an orderly manner, safeguard its assets and maintains the accuracy and reliability of its operations and records.

Thus it is clear that internal control comprehensive in nature and it includes internal check and internal audit in itself.

Objectives of Internal Control

The internal control system aims at providing reasonable assurance to the clients that:

Records are valid, complete, and accurate.

Recorded transactions are duly authorized.

Transactions are properly classified and valued.

Transactions are recorded at proper time.

Transactions are properly posted to the ledger accounts, and correctly summarized.

Advantages of Internal Control System

The presence of an efficient system of internal control can be of great help to the management as well as to the auditor because it has the following advantages:

Gives Assurance to the management on the accuracy and reliability of all the financial and operating information it receives.

Minimizes the occurrence of frauds and errors.

Safeguards assets against any misuse.

Promotes operational efficiency and prevents wastages.

Judges operating efficiency and highlights weaknesses.

Encourages adherence to the established managerial policies.

Forms of Internal Control

The definition of internal control given by The American Institute of Certified Public Accountants (AICPA) indicates that internal control goes beyond the accounting functions of the organization and incorporates both accounting and administrative controls.

Accounting controls. Accounting control concerned with thecontrols related to the accounting system, i.e., checking transactions as per the prescribed procedures and safeguarding the assets.

Accounting control consists of the following:

Budgetary control

Standard costing and deviation analysis

Internal check

Internal audit

Bank reconciliation

Self-balancing ledgers, etc.

Administrative control

Administrative control comprises the following:

Time studies

Motion studies

Quality control

Performance appraisal

Statistical analysis, etc.

Requisites of Good Internal Control

A properly designed accounting system is required to be in operation. Financial and accounting operations must be separated. Different persons must be entrusted with the responsibility of handling cash and the recording of the movement of cash.

Presence of well designed organization structure is important. So that Responsibility for the performance of the job can be clearly stated, hence there remains no room for doubt or confusion. Too much confidence should not be pinned in one individual. Nearly all frauds are committed by ‘trusted’ officials or employees.

Rotation principle relating to transfer of an employee from one job to another should be the inflexible guiding rule. This is an effective safeguard against collusion and is recognized as an important canon of sound organization.

Mechanization of the work wherever possible can be adopted. Mechanical devices such as cash register, recording time clocks, calculation machines, etc. should be introduced.

The work should be so arranged that work done by one employee could be promptly checked by another independent employee. Such continuous and constant checking stimulates moral control and also the errors and the frauds cannot go undetected.

A written record of work done by each employee should be maintained and the work should pass through several hands in a well-defined manner.

Clear and well-defined rules should be laid down and practically followed relating to dealing of the cash, ordering, receiving and issuing goods, etc. Instructions should be in writing in the form of accounting manuals.

Employees must be in bond so that the tempted employee will be deterred from committing fraud and employer be protected.

Although not a substitute for protective financial internal control, yet existence of an efficient internal auditing staff is an important element of an effective internal control system.

Internal Control and the Auditor

The auditor should review the system of internal control, before starting the audit, for the following purposes:

To examine the weaknesses of system, if any.

To consider the chances using test check to during the course of audit.

Based upon the first two considerations find out exactly the amount of work to be performed so as to enable the auditor to give his opinion on the given set of accounts.

The effectiveness of the system in practice should be tested to form an opinion that whatever existed on the paper did exist in practice too. A proper and effective system of internal control offers the following advantages:

Reduces the time required to carry out audit.

Reduces the cost of conducting audit

Assures the auditor on the reliability of the financial information.

The review of the system of internal control could be done by collecting data using a questionnaire or by oral questioning in respect of each aspect of business.

The auditor should obtain a statement in writing, containing the details of internal control in practice. The presence of a good internal control reduces the work of an auditor to a greater extent, but does not reduce his liability. Dependence of the auditor on the system will be based on the circumstances of each particular case, and the efficiency of the audit will depend upon the skill, tact, experience, and above all, the skill of judgment of the auditor.

Techniques for Evaluation of Internal Control System

There are four techniques evaluating internal controls. These are:

Oral approach.Oral discussion is held to identify strengths andweaknesses.

Memorandum approach.Full notes are taken during discussionsgoverning evaluation of internal controls. Analysis of weaknesses is undertaken and suggestions are offered through management letter for improvement.

Internal control questionnaire (ICQ). An ICQ consists of questionsin respect of each element of business. Questionnaire contains close end questions.

Flow charts.A flow chart is a graphic representation of a systemin use. It depicts the various operations, control measures, and steps included in a system through graphic symbols. A flow chart provides a simple, concise and comprehensive view of what is happening within the organization. It explains what documents or information are raised, how they are treated, details on the circulation of cash and goods, and actions taken there off. Flow charts of each business activity are reviewed and internal controls are evaluated.

Internal Audit and External Audit

The internal audit is a continuous review of operations of a business concern and is done by the staff assigned for the purpose. It operates independently of the internal check system in the organization.

The Institute of Internal Auditors, USA, has defined internal audit as under:

“Internal auditing is an independent appraisal activity within an organization for the review of operations as a service to management. It is a managerial control which functions by measuring and evaluating the effectiveness of other controls.”

Scope of Internal Audit

The Institute of Internal Auditors, USA, has defined the scope of internal audit:” It involves examination and evaluation of the adequacy and effectiveness of the organization’s internal control system and the quality of performance in carrying out assigned responsibilities

Significance of Internal Audit

Generally internal auditor focus on the following areas so as to review their operations:

Reliability and integrity of information.

Compliance with policies, plans, procedures, laws and regulations.

Safeguarding of assets.

Economical and efficient use of resources.

Accomplishment of established objectives and goals for operations or programmes.

From the above one can concluded that the concept of internal audit not only covers the traditional functions of a concern but also has emphasis on new and modern areas such as reviewing the economic and efficient use of resources and watching the organizational performance.

Objectives of Internal Audit

The important objective of internal audit is early detection of errors and frauds. The following are it other objectives:

Review of operations as a service to management.

Facilitating final audit.

Ensuring systematic accounting and proper recording of transactions.

Verification of authenticity and correctness of the financial information presented to the management.

Review of system of internal check from time to time.

Reduce the chances for manipulation of accounts or misuse of property of the business.

Early finalization of annual accounts.

Highlighting the weak areas of the organization and giving suggestions to strengthen them.

Internal Auditing involves the review of the following aspects of business operations:

Evaluation of internal control

This should test the adequacy of accounting system from the following viewpoints:

Information is adequate and accurate.

Resources of business are protected against losses resulting from

Theft,

Embezzlement, or

Carelessness.

Review  of accounting  efficiency

This  should  cover  the following aspects to ensure that:

Procedures are effective.

Mechanical and electronic equipment is used.

Space is fully utilized.

Staffs are adequate.

An accredited programme is used for weeding out old records and retaining the current and relevant ones.

Appraisal of performance of organization

This includes the following aspects:

Implementation.

Compliance with procedures.

Review of individual performance.

Checking up of plan of organization.

Place of an internal auditor in the organization

Internal auditor carries out a staff function rather than a line one. Hence, an internal auditor cannot exercise direct authority over other persons. However, he is free to appraise and review policies, plans, procedures and records. He enjoys independence for ensuring objectivity. He gets support from management to perform his job efficiently and effectively.

Internal audit report

The main work of internal auditor is to prepare reports on his findings and give recommendations. The report prepared should focus on the following aspects:

The report should be carefully prepared and well written.

It should be designed to draw and hold the attention of the person to whom it is presented.

Conclusions and recommendations must be clearly and briefly written.

Main ideas are to be stated in the body of the report and supporting details can be shown as exhibits.

Rough draft of the report may be reviewed and discussed before final submission.

The report should high light Specific improvements need to be made.

Follow-up is needed to ensure action on the findings and

recommendations.

External Audit: Audit for certain organizations are formed on thebasis of a statute or Law. Such Audits are called External Audit or Statutory Audit. It is called external because it is carried out by a qualified external Auditor.

Example: Audit of a Joint Stock Company.

Generally rules and regulations for conducting audit, the appointment, powers, duties and responsibilities of the Auditor are given under the respective Acts. The duties of the Auditor cannot be restricted by the share holders or the Directors.

Difference between Internal Audit and External Audit

Appointment of Auditor: In case of Internal Audit, the Auditoris appointed by management, whereas under External audit the Auditor is appointed by the shareholders.

Nature: Internal audit is a staff function. Internal auditor may bean employee of the company. But External Audit is a line function. External Auditor is an outsider

Qualification: Internal auditor needs not possess the qualificationslaid down under Section 226 of the Companies Act; 1956.But a statutory auditor must possess those qualifications.

Major concern: Internal auditor serves the needs of management.External Auditor Complies with the statutory requirements.

Basic Functions: Internal auditor reviews the operations andinternal controls for developing improvements and ensuring compliance of policies and procedures. External Auditor expresses his opinion on the financial statements.

Scope of work: For an Internal auditor his scope of work isdetermined by Management, where as for the external Auditor it is determined by statute.

Compulsion: Internal audit is not compulsory but external orstatutory is compulsory in case of a company.

Reporting: Internal auditor reports to the management where as anexternal auditor reports to the share holders in the general meeting.

Span of Checking: Internal audit involves checking of all thetransactions but under the external audit test check may be applied.

Removal of Auditor: Internal auditor can be removed by themanagement or directors at any time but an external auditor can be removed by shareholders.

Right to attend Meeting: Internal auditor has no right to attend themeetings but a statutory auditor enjoys such right

Different Types of Audit

Auditing is a complex and detailed activity carried out for various purposes in an organization. Hence based on the objective and circumstances we can classify audits in to three broad categories. They are listed as under;

Classification based on Organizational structure.

Classification based on timing and scope of audit procedure.

Classification based on the specific objective behind the audit.

Types of Audit based on Organizational structure

Here the classification is based on the type of organization. That is, an organization can be government owned or private owned, it may be a company form of organization or a co-operative type of organization. Based on this nature of organization, the need for and requirement of audit also differs. Accordingly following are the various types of audit conducted by an auditor:

Statutory Audit

This is a compulsory audit to be carried out by all those organizations which are formed, registered and governed by some Statute. It is carried out by a qualified external auditor. It is compulsory under statute for the following organizations:

Joint Stock Companies incorporated under the Companies Act1956: Since there is divorce between ownership and control in this Joint stock Company, the Law requires that the business affairs of the company must be checked and its accounts need to be verified by an external auditor. This makes its financial information reliable for people to come and invest in such companies.

Co-operative Societies registered under the co-operatives Societies Act: These Societies are registered under Cooperative SocietiesAct 1912. The management of affairs of this society is handled by few elected members even though the capital is contributed by all members. This makes it compulsory for audits of accounts of this society by an external qualified auditor. This auditor conducts the audit and submits the report to the registrar and to the members concerned for their reference and perusal.

Banking Companies governed by the Banking Companies Act 1949.

Insurance Companies governed by the Insurance Act 1938.

Public and Charitable trust registered under the various Religious and other Endowment Acts.

Local Authorities and government undertakings established under special Laws.

Private Audit

This audit is not mandatory and it may conducted by the organizations according to their discretion. It may be of the following types;

Audit of Sole Proprietorship: It is a single man business. The auditis conducted according to the whims and fancies of the trader. The auditor conducts audit according to the requirement and expectations of the sole trader.

Audit of Partnership Firm: It is not compulsory for a partnershipfirm to get its accounts audited. The Auditor is appointed by the partners and he will conduct the audit keeping in view the following factors;

provisions in partnership Act 1932

Contents of partnership deed

Capital contributed by partners

Salary and commission to partners

Interest on capital to partners etc.

Government Audit

The government departments, offices and enterprises registered as companies need to have their accounts audited by an auditor appointed by Central government on based on the advice of comptroller and Auditor general of India.

This audit is conducted with the following objectives

Ensure that the financial transactions are carried out with the prior approval of concerned authorities.

Make sure that expenses incurred are in accordance with the allocation of funds.

Obtain maximum output from the minimum input

Ensure that the functioning of these government institutions is in the interest of the public welfare.

Make sure that public funds are not misappropriated.

Types of Audit based on Timings and scope of Audit procedure:

Continuous Audit: under this audit the books of accounts of theconcern are verified and checked continuously throughout the year at period intervals say weekly, monthly and quarterly. This frequency of auditing depends on the desire of the management and quantum of work.

Continuous audit is necessary for the following types of organizations;

Where it expected that audited accounts are to kept ready soon after the close of the accounting period

Volume transaction is high and transactions are complex in nature.

The prevailing system of internal control is not effective and satisfactory

Final accounts are needed to be prepared on monthly basis.

Merits of conducting continuous audit

Rectification of errors and frauds at an early stage

Chances for committing mistakes are minimized

Continuous audit acts as a moral check on the staffs of the organization

Leads to increased efficiency on the part of the employees of the organization

Aids in the preparation of Interim accounts

Helps in the maintenance of up to date records.

Drawbacks in conducting Continuous audit

It is suitable and economical only for large organizations

Frequent visits of Management Auditor will be of great disturbance to the conduct of routine work of the client’s staffs.

Chance for auditor to develop a favourable attitude towards some employees and he may become negligent in executing his duties.

Once the checking is carried out by the auditor the client’s staffs may alter the figures and hence the rechecking of records becomes necessary.

Internal Audit: Under this type of Audit, the auditing is carried outby an auditor who is appointed by the Management of the organization. this audit is done with a view to appraise the functioning of various departments present within the organization. Generally a separate department called internal audit department is set up in big organizations. This department examines the various operational activities of the organization like accounting and finance. Its main aim is to identify the areas of weakness and suggest remedial actions to overcome such short comings. The external auditor is assisted by the internal auditor in discharging his duties efficiently.

Objectives of internal audit

To check whether the rules, regulations, policies and procedures are followed in the organization or not.

To find out whether the existing internal controls in the organization is adequate and suitable for the size of the organization.

To assure that all assets and valuables belonging to the organization are safe against probable misuse.

Spot out the weak areas of the organization and give suggestions to strengthen such areas.

Check whether the functioning of the institution is smooth in all respects.

Interim Audit: An audit which is conducted in between two annualaudits for interim purpose is called Interim Audit. It is conducted between two regular audits. It is done for the purpose of ascertaining the reliability and accuracy of financial statements of a concern in the middle of the year. For example in case the company is desires to give interim dividend to the share holders, it cannot do so unless it makes sure that the company is at the verge of earning profits. For that it needs to check the books of accounts in the middle of the year to have an idea about the profit earned up to that date. Board of directors may get the accounts audited by an independent auditor in the form of interim audit.

Benefits of conducting interim audit:

Makes the completion of the final audit easy and quick.

Suggestions of the auditor can be incorporated easily.

Early detection and prevention of frauds and errors can be made possible.

Final audit or Periodic audit: Here the auditor carries out auditingonly towards the end of the year. Under this type of auditing, the auditing work commences only after the preparation of final accounts. Auditor visits the client organization only once at the end of the year and carry out the entire process of auditing. It is effective only in case of small concerns with limited transactions. Large concerns will have numerous business dealings and keeping record of all transactions require frequent visits on the part of the auditor. Hence the final audit is not suitable for large scale units.

Benefits of Final audit:

The auditor is able have full details before he commences the audit work.

Auditing work can be done with minimum visits to the client’s organization.

Chance for committing errors and frauds are very rare because auditing is done only at the end of the accounting year.

This type of audit is less time consuming and less expensive.

Balance sheet Audit: This audit is done with a main aim to checkand verify the items appearing in the balance sheet. Balance sheet audit originated in USA. It starts with verification of items in balance sheet and works backs to the supporting evidences and related documents. It is only a partial audit because it checks only balance sheet items such as fixed assets, current assets, liabilities, reserves and surplus etc. however; the auditor will check the accounts in the general ledger and will check items of profit and loss account which are directly related to assets. This type of audit can be effective only in those organizations where the system of internal control is strong and power full.

Suitability of balance sheet Audit.This type of audit is effective and

Effective only in the following situations:

Presence of effective internal control system in the organization.

The size of organization is big and very large volumes of transaction are carried out.

Presence of Mechanized accounting system in the organization.

Presence of professionally qualified staffs in the accounting and finance department.

Types of Audit based on Specific Objectives

Cost Audit: The audit of Cost accounting records is called as “CostAudit”. In order to ensure that cost accounting plans as laid down by the management are carried properly and to check the accuracy of cost accounting records, this cost audit is conducted.

The chartered Institute of Management Accounting of UK defines it as “Verification of Cost accounts and a check on adherence to the cost accounting plan”.

From the above one can conclude that under cost auditing,

Cost auditor examines whether the cost statements are properly drawn to exhibit the true and fair view of cost accounting system.

That the cost accounting plans are properly implemented. In India, Cost audit was introduced under 233B in the Companies Act 1956, with a main objective of verifying the accuracy of cost records. It also serves as an effective cost control.

Special Audit: The Special audit is conducted as per the order ofthe Central Government. According to section 223A of the companies Act 1956 the central government, may at any time, by order require the organization to conduct a special audit of its books of accounts. This may be conducted by an auditor appointed for the purpose or by the Company’s statutory auditor.

The following are the circumstances in which the central government can order for the conduct of special audit:

When the company does not follow sound business principles or prudent commercial practices.

When the company is managed in a manner which is detrimental to the interest of trade, industry and business pattern to which it belongs.

Financial position of the company is very poor and is expected to file insolvency petition any time.

Tax Audit: The main aim of this audit is to assist the incometax authorities to make speedy and correct assessment of tax to be paid by the organizations. The tax auditor’s main responsibility is to report on all transactions that will influence the income tax liabilities of the organization. More over the Income Tax Act 1961 provides for compulsory tax audit of the books of accounts of the business entities, whose turn over exceeds 40 lakhs. A Chartered Accountant in practice can be appointed as a Tax Auditor.

Management Audit: Management Audit has its origin fromAmerica. It means the audit of management process and functions. It refers to an appraisal activity done, within an organization for the review of the entire departmental activities. Management Audit may appear to be synonymous with Operational Audit and Internal Audit, but there lies a difference among them. Internal Audit’s aim is to find out the weak areas in the organization, its idea is to study the various activities of the organization with a view to help management in the discharge of their duties efficiently. Operational Audit concentrates on the efficiency of operation of the various functional areas of management. Management Audit is concerned with the evaluation of management process to its entirety.

The below given are the definition of Management Audit

“Management Audit is an advice of independent specialists who have made a study of how to reach a maximum efficiency in a certain field of activity.”---- T.G.Rose

According to L.R.Howard, Management Audit is “An investigation of business from the highest level downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with the outside world and the most efficient organization and smooth running internally.”

Characteristics features of Management Audit

Management Audit is concerned with the process of examining and evaluating the performance of management functions

It appraises the policies and procedures of an organization.

Provides for healthy and rapid growth of the organization.

It is both a preventive and curative activity.

It is futuristic and forward looking.

It is result oriented and dynamic activity.

It is the next higher level to internal audit.

Objectives of Management Audit

To improve organizational efficiency

Guide all members of the organization to perform their duties in efficient manner.

Assist management in managing their affairs in a better manner

Make sure that objectives and mission of the organization are met.

Proper utilization of available resources.

Suggest measures to overcome lacking in the internal control.

Improve the overall profitability of the firm.

Identify the activities which are not in agreement with the firm’s objectives.

Scope of work and duties of Management Auditor

The scope of Management Audit covers almost the entire functional areas of management. To quote some;

Finance and Accounts

Management information system

Purchasing

Inventory management

Personnel

Marketing

physical distribution

General administration.

Material management.

For want of time, all areas are not taken for investigation at a time. The functional areas of management are chosen on rotation for carrying out auditing activities.

Benefits of Management Audit

It helps to overcome managerial deficiencies.

It locates the lacking in the internal control and give ideas to overcome them.

Management Audit provides guidelines to all members of the organization for the efficient discharge of their duties.

Management Audit provides for fixing Accountability for poor performance among employees of the organization.
Management Audit helps in locating the reason for inefficiencies in the operation of public enterprises.

Management Audit helps for conservation of scarce resources and proper utilization of available resources.

Paves way for enhancement of operational efficiency and there by leading to enhancement of profitability of the organization.

Management Audit helps for the periodic appraisal of managerial cadre officers so that the decisions regarding their rewards and training needs can be easily identified.

Short comings of Management Audit

It is vague concept and has no material purpose.

Personality clashes between Management Auditor and Managers since Auditor always point out lacking in the performance of managers.

Employees are more concerned with keeping up to date records, rather than concentrating on the higher productivity and efficiency.

However these short comings are over weighed by the advantages that accrue from Management Audit. Hence Management Audit plays a vital role in assisting management in identifying areas of deficiencies and the probable remedial measures required to overcome such deficiencies.

Management Audit Process

The following are the activities involved in the conduct of Management Audit:

Preliminary survey: Management Audit begins with theascertainment of objectives and goals of the firm. Auditor must study the policies, plans and the procedures followed by the management. He will also check the efficiency of the internal control system in operation. He must be aware of the standards set and level of actual performance of the organization.

Collection of Data: auditor must collect required information forthe conduct of audit with the help of a structured questionnaire.

Examination of documents: Audit carries out detailed examinationof relevant documents and convinces himself of the authenticity of the source of such information. If required, he verifies the original source of information for clarification of facts.

Observation of work environment: Apart from collectinginformation through questionnaire, the auditor also collects data by personally observing the work environment because such observation helps him to be aware of certain problems which cannot be found in records.

Internal Auditor’s Report: Management Auditor’s work is basedon the internal auditor report. Because this report helps the Management Auditor to easily identify the problem areas where the management so for did not take any action. This also enables Management Auditor to spot out the weakness of internal control system which management is not aware previously.

Physical inspection: Management Auditor conducts the verificationof some physical activities carried out in the organization to find out the in competencies so as to suggest some remedial actions to improve such areas of efficiencies.

Transaction tracking: Management Auditor selects on randombasis some of the transactions of the organization to study the efficiency of the procedure from start to end.

Enquiry with the employees: In order to find out real picture ofthe problem Management Auditor conducts personal discussion with the concerned employees who are involved in the conduct of operation under examination.

Suggestions for improvement of performance: Finally after carryingout this detailed investigation and verification Management Auditor is in a position to provide ideas and suggestions to solve and overcome the problems. This will lead to enhancement in the productivity level of the system and employees in the organization.

Management Auditor’s Report

On the conclusion of Management Audit the auditor prepares a report of his entire activities. This report brings to light the findings and suggestions of the Management Auditor. This report has no prescribed format. The Management Auditor decides content and structure of his report.

Contents of the report: Generally the auditor’s report will state his opinion on the following matters;

Adequacy and authenticity of Internal Control system.

Whether the current rate of return is satisfactory as compared to previous year?

Whether the operating cost of this organization is as reasonable as the other organizations in the industry

Suitability of the available tools and equipment for getting optimum production.

Interpersonal relationships that exist between the employees are cordial and smooth or not.

The overall performance of the enterprise in satisfactory or not.

Operational Audit: This audit aims at improving the overallperformance efficiency of various functional areas of management so as to provide for improvement in future business operations. The internal auditor is vested with the responsibility of carrying out this audit. Because he is well acquainted with the business operations of the organization, it is carried out with the following objectives:

To evaluate the efficiency and effectiveness of the firm’s operating procedures and Methods.

To enhance the profit earning capacity of the organization.

To give suggestions for further improvement in the required areas of operation.

Help the organization to achieve its objectives relating to maintaining social responsibilities.

Marketing Audit: Marketing Audit is carried out to evaluate andcontrol the marketing activities of the organization. It is popular in USA and in European Countries. In the words of Philip Kotler “ A marketing Audit is a comprehensive, systematic, Independent and periodic examination of a company’s or business unit’s marketing environment, objectives, strategies and activities with a view to determine problem areas and opportunities and recommending a plan of action to improve the company’s marketing performance”.

It is clear from the above definition that marketing audit is concerned mainly with identifying the marketing problems faced by an organization and give suggestion for overcoming such problems by taking remedial actions.

Features of Marketing Audit:

It is comprehensive in nature

It is carried out in a systematic manner.

It is carried out by an outside consultant

Marketing Audit is carried out on a periodic basis.

Six major components of Marketing Audit:

Marketing environment audit.

Marketing Strategy audit.

Marketing organization audit.

Marketing system audit.

Marketing Productivity audit.

Marketing Function audit.

Environmental Audit: This Audit seeks to bring to light the effectsof operation of the enterprise on the economy. That is both evil and good effects, the functioning of the organization has on the economy will be studied and a report of such study will be published. It originated in USA in the year 1970 as a way of testing whether a company is adhering to the environmental laws and regulations of the country.

In the words of the confederation of British Industry “Environmental Auditing is the systematic examination of the interactions between any business operation and its surroundings. This includes all emissions to air, land, water, legal constraints, and the effect on the neighbouringcommunity, landscape and ecology, the public’s perception of the operating company in the local area”.

Objectives of Environmental Auditing:

Aim is to protect the environment for future generation.

To ensure whether the company is complying with all the regulatory and environmental performance standards.

To carry out systematic, documented and periodic review of company’s operations.

To ensue conformity with the environmental assessment requirements and test the accuracy of assessment.

Environmental Audit consists of four sub audits. They are

Environmental management system audit.

Compliance audit.

Site property audit.

Environmental Assessment audit.

To conclude one can say the environmental audit aims to evaluate how for the organization is caring for the well being and good health of the environment. It seeks to make the organization more environmental sensitive.

Social Audit: Social audit is carried out to assess how for theorganization society is oriented. The amount of weight age given to society’s values and well being. It is an attempt to find out the social performance of the concern. For success of any social audit the involvement stake holders is important. The information for conducting social audit is collected through social book keeping, surveys and case studies. This collection of data and its processing is done throughout the year continuously and the net result is produced in the form of social audit report document. This report brings to light the accountability of the organization towards its stake holders. It serves as a management tool and act as a tool for promotion, marketing and advocacy purposes.

Human Resources Audit: HR audit reviews an organisation’spolicies, procedures, practices and rules governing the management of human resources in the organization.

A HR audit generally involves the following;

personnel policies

personnel files review

Appraisal of performance

Evaluation processes

Termination processes

Unlawful harassment complaints.

Hiring and orientation procedures

Benefits and compensation review

Employee classification and status

Job description.
Benefits of HR audit:

helps the organization to identify the most needed HR Programmes to achieve its objectives

Evaluate the HR departments’ efficiency in executing such policies.

Aim for continuous improvement

Establish a close relationship between HR and Line functions of the organization.

Energy Audit: This audit aims to verify whether the energy resourceslike electricity, natural gas, fuel oil, are efficiently used in the organization. it evaluate the efficiency of all building and process system that use energy. His audit tries to identify cost and energy saving opportunities. The following are the activities included in this type of audit:

Identify all energy systems.

Estimate the conditions of such systems

Analysis of impact of improvements on those systems.

Produce energy audit report.

The energy audit can be of following types:

Preliminary audit

General audit

Investment grade audit

To conclude, the energy audit is conduct mainly with a view to conserve energy in the organization. So that unnecessary expenditures on energy can be cut off and also prioritize the use of scarce energy resources in the organization.

Different Roles of an Audit

An Auditor assumes different roles in an organization while he carries out the Auditing for that organization. Strictly speaking, audit of business concerns other than company is voluntary and not compulsory. Hence in case of a corporate, the Auditor is appointed in accordance with the provisions in the companies Act 1956. According to the expectations of the statute the Auditor plays the following Roles:

Agent of the Members: In a company the auditor is appointed bythe share holders and his main duty is to safe guard their interest. Auditor carries out auditing and submits the audit reports to the share holders. Hence agent-Principal relationship exists between the auditor and share holders.

Officer of the company: Generally, an auditor is not treatedas a regular employee of the company excepting under certain circumstances mentioned in the provisions of the Companies Act 1956.

Auditor is not an Advisor: Auditor is only entrusted with theresponsibility of checking the correctness of books of accounts maintained by the company and to see whether they reflect true and fair view of affairs of the business concern. Hence he cannot act as an advisor to the Directors of the company or to the share holders. He is not concerned with the polices of the company.

Auditor is not a Guarantor or an insurer: Auditor simply checksthe accuracy and correctness of the books of accounts and gives a report. He does not guarantee that books of the company depict true position of the company. He only certifies to the share holders on the true financial position of the firm.Auditor is not a critic of Management Decision: Auditor does notcarry out a critical analysis of the policies and decision made by management. Rather he only carries out a verification of the books maintained.

Auditor is a Watch Dog and not a Blood Haunt: Auditor onlycarries out a checking and he does that without being suspicious over everything. He is not a detective. He is watchful over detection and prevention of fraud.