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MF0013– Internal Audit and Control

MF0013– Internal Audit and Control

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Published by Ankur Bhavsar

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Published by: Ankur Bhavsar on Sep 25, 2011
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05/12/2014

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Q.1Criticallyevaluate the qualities of an Auditor in the wake of recent scams.Answer:
An auditor renders a professional service to his client. He should not only possess theprescribedstatutory qualifications but also certain personal qualities. Some of thosepersonal qualities are mentionedbelow:
1.Common sense:
According to Spicer and Pegler, ”the auditor should have afull shareof that mostvaluable commodity-commonsense.” This is necessary todistinguish betweenimportant and not soimportant information.
2.Independence:
Expression of opinion is a prime duty of an auditor. Aninfluenced andbiased personcannot form an independentopinion. Hence, independence in true sense is an utmost quality of anauditor.
3.Honesty and Integrity:
Like any other professional viz. Doctors, Lawyers etc. auditorshould possessa high moral character. In a way, he is a public servant. He mustnot knowingly, misinterpret any factor sign any document under undue pressure.
4.Objectivity:
Independence of an auditor depends on his ability to act withobjectivity. Forexample,the auditor of XYZ Company believes that closing stock has notbeen properlyvalued but accepts acertificate from the management as to its valuation. Inthis case, the auditors
 judgment lacksobjectivity.
5.Communication:
He should be able to communicate effectively, both orally andin writing.Particularly in the matter of report writing, he should be able to conveyhis messageclearly andunambiguously.
6.Tactfulness:
He should be firm, yet diplomatic with his client and staff.He should be tactful enoughto obtain necessary written as well as oral evidencefrom hisclient, so that he can form a reasonableopinion.
7.Awareness of latest developments:
An auditor should keep his knowledge upto daterelated tohisaudit worklikes changes in laws,changes in professionalstandards, latestdevelopment in technicalguidelines etc.
Q.2What is social audit? Is social audit taken seriously by the corporate world?Giveexamples ofcorporateundertaking social audit.Answer:
Social audit
The social audit isalso called social responsibility audit. A businessorganization existsin society.Hence, it owes certain responsibilities toward society at large. As Lord Denninghas observed:The directors of a great company should owe a duty to those who are employed by thecompany to seethat their conditions of service are proper.
 
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They should owe a duty tothe customers, to the people to whom the goods are supplied, a public dutyperhaps, notto expect excessiveprices. Theyshould owe a duty alsoto the community in which they live,notto make the placeof production hideous or a nuisance to those who live around.Social audit is mainly concerned with social accounting. It may be noted that socialaccounting is still inearly stage and so social auditalso.Socialaudit also called Social Responsibility Auditis mainly concerned withsocial accounting. Acontinuous audit is basically a perpetual audit, where auditors and hisstaff constantly engaged inchecking the accounts throughout the year. Annual audit isdone at the end of the financial year whenfinalization of accounts has been completedand books of accounts closed. A Balance Sheet audit ismainly concerned with theverifications of items appearing in the Balance Sheet such as share capital,reserve andsurplus, current liabilities, fixed assets, current assets, investments etc in detail.
Q.3Explain the Code of Ethics for Internal Auditor. Explain them in context withblacklisting Price Waterhouse Coopers in Satyam Scam.Answer:
Code of Ethics for Internal Auditor
In his book “Practical Guide for Internal Audit” R.S. Adukia has scholarlyexplained aboutthe code ofethics for internal auditor which is as follows:“This code of ethics sets the minimum requirements for the performance and conduct ofinternalauditors.This code applies to all internal auditors but does not supersedeorreplacetherequirementonindividualtocomplywithethicalcodesissuedbyprofessionalinstitutesofwhichtheyaremembersorstudentmembersandanyorganizational codes of ethics or conduct.”There are four main principles:
1.Integrity:
The internal auditor should demonstrate integrity in all aspects of theirwork. Their integrityestablishes an environment of trust, which provides the basis forreliance on all activities carried outby the internal auditors.
2.Objectivity:
Objectivityisastateofmindthathasregardtoallconsiderationsrelevant to the activityor process being examined without being unduly influencedby personalinterest or the views ofothers.Internalauditorsshoulddisplayprofessionalobjectivitywhenprovidingopinions, assessmentsand recommendations.
3.Confidentiality:
Internal auditors must safeguard the information they receive incarrying out theirduties. There must not be any unauthorized disclosure ofinformation unlessthere is a legal orprofessional requirement to do so.
4.Competency:
The internal auditor should make use of his/her knowledge, skillsand practicalexperience necessary for auditor’s activityperformance. Theyshould not accept or perform work thatthey are not competent toundertake, unlessthey have received adequate training and support tocarry out the work to anappropriatestandard.Achievingcompliance with code of ethics:
i)Security integrity:
The internal auditor should:a)Perform his/her job honestly, diligently and with responsibility.b)Perform his/her profession in harmony with the acts and other generallybinding regulations.
 
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c)Avoid anyillegal activity and performing any activity discrediting the internalauditor’sprofession.d)Respect the legal and ethical objectives of the organizations.e)Take care that his/her integrity should not be compromised.
ii)Objectivity:
The internal auditor should:a)Avoid taking part in activities or relations which may damage, or might beunderstood asdamaging his/her unbiased assessment including activities or relations which may beinconflict with public interests.b)Avoid accepting anything that may damage or might be understood asdamaginghis/her objective professional assessment.c)Protect his/her objectivity against political influence.d)Discloseallsubstantialfactsknowntohim/herthatbeingundisclosedmightmisrepresent theconclusions on activities or events assessed.
iii)Observing Confidentiality:
The internal auditor should:a)Becarefulwhen using and protecting information he/she gathered when auditing.b)Avoid disclosing and making use of the information obtained during theauditor’s activitiesperformance in order to damage the interests of other person or organization.c)Avoidmakinguseoftheinformationobtainedduringtheauditor’sactivitiesforpersonalenrichment or in a way which would be in conflict with the law or whichwould damagelegitimate and ethical interests of the organization.
iv)Demonstrating Competence:
a)It is a pre-requisite that all internal audit staff is aware of and understand:1.The organization’s aims objectives, risks and governance arrangements.2.The purpose, risks and issues affecting the service area to be audited.3.The terms of reference for theaudit assignment so that there is a properappreciation ofthe parameters within which the review be conducted.4.The relevant legislation and other regulatory arrangement that relate to theservice areato be audited.b)The internal auditor should keep educating himself constantly in order to have agoodcommandof internal audit techniques and auditor standards necessary forobtaining,examiningand evaluating the information.
v)Maintaining Audit Independence:
Internal auditors should be independent oftheactivitiesthey audit. Internal auditors are considered independent when they cancarryouttheir work freelyandobjectively.Independencepermits internal auditors torender theimpartialand unbiased judgments essentialtothe proper conduct of audits.Thisis achieved through organizationalstatus andobjectivity. Independence stands for an internal auditor being able to take astandandreportonmaterialityissues,uninfluencedbyanyfavorscoercionorundueinfluence.
Q.4As a senior audit assistant of M/s. Asutosh Associates, you are in charge ofinternal auditteam of M/s Rajesh Technologies involved in the manufacture ofplastic tubes. From theinformation you obtained you find the company isfacing liquidityproblem forthe last two years.You are required to prepareworking paperindicating the internal audit problems you wouldexpect to face andhow youplan to overcome them.Answer:
As a senior audit assistant of M/s. Asutosh Associates, I need to prepareworking paperindicating theinternal audit problems are as follows:

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