Management Audit

Audit and Reports

Concept of Audit

An audit is an objective examination and evaluation of the financial statements of an

organization to make sure that the records are a fair and accurate representation of the
transactions they claim to represent. It can be done internally by employees of the
organization, or externally by an outside firm.

The Internal Revenue Services (IRS) can perform audits to verify the accuracy of a taxpayer’s
returns or other transactions. When an audit is being performed by the IRS, it usually carries a
negative connotation and is seen as evidence of some type of wrongdoing by the taxpayer.

Basic objective of auditing is to prove true and fairness of results presented by profit and loss
account and financial position presented by balance sheet. Its objectives are classified into two
groups which are given below:

A. Primary Objectives of Audit

The main objectives of audit are known as primary objectives of audit. They are as follows:

i. Examining the system of internal check.

ii. Checking arithmetical accuracy of books of accounts, verifying posting, costing, balancing etc.

iii. Verifying the authenticity and validity of transactions.

iv. Checking the proper distinction of capital and revenue nature of transactions.

v. Confirming the existence and value of assets and liabilities.

vi. Verifying whether all the statutory requirements are fulfilled or not.

vii. Proving true and fairness of operating results presented by income statement and financial
position presented by balance sheet.

B. Subsidiary Objectives of Audit

These are such objectives which are set up to help in attaining primary objectives. They are as
follows:
i. Detection and prevention of errors

Errors are those mistakes which are committed due to carelessness or negligence or lack of
knowledge or without having vested interest. Errors may be committed without or with any
vested interest. So, they are to be checked carefully. Errors are of various types. Some of them
are:

* Errors of principle

* Errors of omission

* Errors of commission

* Compensating errors

ii. Detection and prevention of frauds

Frauds are those mistakes which are committed knowingly with some vested interest on the
direction of top level management. Management commits frauds to deceive tax, to show the
effectiveness of management, to get more commission, to sell share in the market or to
maintain market price of share etc. Detection of fraud is the main job of an auditor. Such frauds
are as follows:

* Misappropriation of cash

* Misappropriation of goods

* Manipulation of accounts or falsification of accounts without any misappropriation

iii. Under or over valuation of stock

Normally such frauds are committed by the top level executives of the business. So, the
explanation given to the auditor also remains false. So, an auditor should detect such frauds
using skill, knowledge and facts.

iv. Other objectives

* To provide information to income tax authority.

* To satisfy the provision of company Act.

* To have moral effect

Process of Audit
An audit is a formal check of financial accounts of an individual, business or organization. An
internal audit is conducted by members of the same organization or business, and an external
audit may be conducted by a regulatory agency or governmental agency. There are six specific
steps in the audit process that should be followed to ensure a successful audit.

Requesting Documents

After notifying the organization of the upcoming audit, the auditor typically requests
documents listed on an audit preliminary checklist. These documents may include a copy of the
previous audit report, original bank statements, receipts and ledgers. In addition, the auditor
may request organizational charts, along with copies of board and committee minutes and
copies of bylaws and standing rules.

Preparing an Audit Plan

The auditor looks over the information contained in the documents and plans out how the
audit will be conducted. A risk workshop may be conducted to identify possible problems. An
audit plan is then drafted.

Scheduling an Open Meeting

Senior management and key administrative staff are then invited to an open meeting during
which the scope of the audit is presented by the auditor. A time frame for the audit is
determined, and any timing issues such as scheduled vacations are discussed and handled.
Department heads may be asked to inform staff of possible interviews with the auditor.

Conducting Fieldwork

The auditor takes information gathered from the open meeting and uses it to finalize the audit
plan. Fieldwork is then conducted by speaking to staff members and reviewing procedures and
processes. The auditor tests for compliance with policies and procedures. Internal controls are
evaluated to make sure they're adequate. The auditor may discuss problems as they arise to
give the organization an opportunity to respond.

Drafting a Report

The auditor prepares a report detailing the findings of the audit. Included in the report are
mathematical errors, posting problems, payments authorized but not paid and other
discrepancies; other audit concerns are also listed. The auditor then writes up a commentary
describing the findings of the audit and recommended solutions to any problems.

Setting Up a Closing Meeting

The auditor solicits a response from management that indicates whether it agrees or disagrees
with problems in the report, a description of management's action plan to address the problem
and a projected completion date. At the closing meeting, all parties involved discuss the report
and management responses. If there are any remaining issues, they're resolved at this point.

Meaning of an Internal Audit and Essentials of an Internal Audit

What is Internal Audit? Internal audit is an appraisal activity within an organization to review
accounting, financial and other operations. Internal audit is a part of internal control. Internal
audit is mandatory for listed companies in every country. The management wants to know the
effectiveness of accounting and control system. The size of business changes due to the
successful working of management. The introduction of the computer  in business accounting
has changed the activities of staff for handling data. Modern management wants to check their
performance. The latest techniques applied by the management can provide best results in
business. The external auditors can rely on the abilities of the internal auditor. The area of
working in internal audit is larger than an external audit. An employee of the company can be
asked to examine the accounting and operational activities independently. Internal audit is a
type of control that works for measurement and evaluation of other types of control. In fact,
internal audit is a tool in the hands of management to compete in the business world by
overcoming their weaknesses.

DEFINITION OF INTERNAL AUDIT

Walter B. Meigs says that internal auditing consists of a continuous, critical review of financial
and operating activities by a staff of auditors functioning as full-time salaried employees.

According to The British Institute of Chartered Accountants defines internal audit as a

review of operations and records, sometimes continuous, ‘undertaken within a business by
specially assigned staff.

The American Institute of Internal Auditors defines internal auditing as an independent

appraisal activity within an organization for review of accounting, financial and other operations
as a basis for service to management. It is a managerial control. which functions by measuring
and evaluating the effectiveness of other controls.

According to International Standards on Auditing internal an appraisal activity established

within an entity as a service to the entity. Its functions include, amongst other things,
examining, evaluating and monitoring the adequacy and effectiveness of the accounting and
internal control systems. It is clear that internal auditing is an appraisal activity established
within an entity as a service to the entity.

ESSENTIALS OF INTERNAL AUDIT

1. PLANNING: Planning is an essential feature of internal audit. The auditor can plan to check
the accounting system. The plan may relate to accounting functions like purchases, sales,
income, expenses, and shares. The planning includes the degree of risk and extent of an audit.
It also states the nature of audit work.

2. CONTROLLING: Controlling is an essential feature of internal audit. The auditor can

examine. The operations of an accounting system. He can control audit work through audit
programme. The whole audit work is distributed among the audit staff.

3. RECORDING: Recording is an essential feature of internal audit. The auditor can record
the facts and figures in order to express his views on business activities. The audit notebook
and audit working papers are used to record the information.

4. INDEPENDENCE: Independence is an essential element of internal’ audit. An employee of

the company does the work of internal audit.   Management must not influence him. He must
be free in developing audit programme, audit investigation, an audit report.

5. STAFFING: Staffing is an essential part of the internal audit. The reasonable number of
persons can perform the work of examination.  The inadequate and untrained staff cannot
serve the purpose of checking the efficiency of managers.

6. TRAINING: The internal audit staffs are needed to conduct the internal audit. In order to
achieve better results, there is a need for trained audit staff. Proper arrangements should be
made to provide training to internal audit staff.

7. RELATIONSHIP: The internal audit staff must have friendly relations with management,
external audit staff, and consultants. There is a need for harmony among various groups of
people.

8. EVIDENCE: Evidence is an essential part of internal audit the must be reliable relevant and
coefficient: The business source of entries in accounting books and record. The reliability can be
seen through signatures of manager the relevant documents show the name of concern,

9. DUE CARE: Due core is an essential part of the internal audit, the auditor must use skill,
care and judgment, He should have technical knowledge, honesty and integrity.

10.REPORTING: Reporting is an essential part of the internal audit, The auditor can inform
the management through audit report It may be long or short report, The findings of the
auditor are put before the management, The management should act upon the advice of
internal auditor for better results.

Cost Audit its Objectives and Advantages

Cost Audit

It is an audit process for verifying the cost of manufacture or production of any article, on the
basis of accounts as regards utilization of material or labour or other items of costs, maintained
by the company. In simple words the term cost audit means a systematic and accurate
verification of the cost accounts and records and checking of adherence to the objectives of the
cost accounting.

As per ICWA London’ “cost audit is the verification of the correctness of cost accounts and of
the adherence to the cost accounting plan.”

The ICWAI defines cost audit as “system of audit introduced by the government of India for the
review, examination and appraisal of the cost accounting records and attendant information
required to be maintained by specified industries"

From above definition of cost audit, it is clear that cost audit is a systematic examination of cost
accounts to verify correctness of cost accounting records.

As per the section 233 B of Company Law 1956, there is the provision for cost audit. Under this
section, cost audit is compulsory for all the public and govt. companies which are associated
with the processing and production. If there aggregate value of net worth exceeds 5 crores or
total sale exceeds 20 crores, the cost audit is must.

Objectives of Cost Audit

The following are some of the objectives for which cost audit is under taken:

1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy
of cost accounting entries in the books of accounts.
2. To ensure that cost accounting principles are governed by the management objectives and
these are strictly adhered in preparing cost accounts.

3. To ensure that cost accounts are correct and also to detect errors, frauds and wrong practice
in the existing system.

4. To check up the general working of the costing department of the organization and to make
suggestions for improvement.

5. To help the management in taking correct decisions on certain important matters i.e. to
determine the actual cost of production when the goods are ready.

6. To reduce the amount of detailed checking by the external auditor if effective internal cost
audit system is in operation.

Advantages of Cost Audit: 

To The Management

1. Cost audit helps in detection of errors and frauds.

2. The management gets accurate and reliable data based on which they can make day-to-day
decisions like price fixation.

3. It helps in cost control and cost reduction.

4. It facilitates the system of standard costing and budgetary control.

5. It helps the management in inter-unit / firm comparison.

6. It enables the management to identify loss making propositions.

To The Government

1. Cost audit ensures efficient functioning of the industry. This in turn, nurtures a healthy
competition among the different companies and paves a path for fast progress.

2. It helps in identification of sick units and enables the Government to make relevant decisions.

3. It helps in fixing prices in the case of essential commodities and checking undue profiteering.

4. It enables to take decisions as to granting of subsidies, incentives and protection to various
industries.

5. It helps to take decisions as to levies, duties and taxes.

To the Society

1. Cost audit enables the Government to fix prices of essential commodities. This safeguards
the interests of the society.

2. Cost audit enables the Government to keep a check on undue profiteering by the
manufacturers and avoids artificial price rise due to monopolistic tendencies.

To the Shareholders

1. Cost audit reveals whether any of the products of the company are making losses. Thus
though the company making an overall profit, a loss making line may eat up the company’s
profits. This is brought to the notice of the shareholders and the management is forced to take
remedial measures, thereby making optimum utilization of resources.

2. Cost audit ensures that the shareholders get a fair return on their investments.

Disadvantages of Cost Audit: 

1. Holding a Cost Audit can be expensive. This is because a company will often bring in an
independent auditor who are normally charging higher price.
2. A Cost Audit can be a long process which will likely involve more time. This extra time and
effort can impact an employee's day to day routine work.

3. If a Cost Audit is carried out in order to find fraudulent activity it can take a long time by
which time people stealing could have covered their tracks.

4. Cost Audits involve a large amount of estimation and so there is the possibility that figures
will be incorrect and if record keeping from the company is not good to start with then
inaccuracies will be arises. 

Management Audit

What is Management Audit?

“Management audit can be defined as an objective and independent appraisal of the effectiveness
of managers and the effectiveness of the corporate structure in the achievement of company
objectives and policies. Its aim is to identify existing and potential management weaknesses
within an organization and to recommend ways to rectify these weaknesses”. – CIMA Official
Terminology.

Management Audit is the systematic and dispassionate examination, analysis and appraisal of
management’s overall performance. It is a form of appraisal of the total performance of the
management by means of an objective and comprehensive examination of the organization
structure, its components such as department, its plans and policies, methods of process or
operation and controls, and its use of physical facilities and human resources.

Management Audit is an important tool for the continuous appraisal and evaluation of the
methods and performance of an enterprise. The prime objective of Management Audit is to
locate defects of irregularities in the areas covered by the audit and to suggest possible
improvements. It assists the management in managing the operations of an undertaking in the
most efficient manner practicable.

Economic outlook, the adequacy of the organization structure, compliance with policies and
procedures, reliability of the system of control, adequate protective methods, causes of
variances, effective utilization of manpower and equipment, efficiency of the method of
operation etc., all come under the purview of management audit.

Thus Management Audit is concerned with evaluation and appraisal of the control system and
information in the entire or in various segments of the organizations. Its scope has been
widened to appraise in detail the systems and subsystems, procedures, job separation,
authorization, accountability, quality of personnel, quality of information generation etc.

Management audit is a systematic evaluation of the functioning performance and effectiveness

of management of an organization. It a thorough-going, critical and constructive review of the
quality of management. It is generally conducted at the instance of the management.

Definition of Management Audit

British Institute of Management defines Management Audit as,

“The purpose of management audit is to assess whether the integrated management system
which are required to fulfill the agreed and legal obligations of the company to its customers
and community are being effectively implemented and the true and fair presentation of results
of such an examination. It also aims at knowing

1. The efficiency with which all aspects or process of management are being carried out with a
view to ensure management that it is getting the assigned job properly done,

2. The control systems introduced are functioning properly, and

3. The management itself is discharging its functions properly. It tells the management the
areas where these are to be strengthened.

5.5.1 Scope of Management Audit

The scope of management audit is very wide. Jackson Martindell of the American Institute of
Management identified ten areas of management audit. They are:
 (a) The suitability, practicability and present compliance or otherwise of the organization with
its designated objects and aims.

(b) The current reputation of the organization in relation to the general public and within its
own particular industrial or commercial field.

(c) The rate of return on investors’ capital – whether poor, adequate or above average.

(d) Relationship of the business with its own shareholders and the investing public in general.

(e) The ratios of operating returns and the rate of return on capital projects.

(f) The relationship between management and staff within the business.

(g) The aims and effectiveness of management at its various levels such as top level, middle
level and operational level.

(h) Financial policies and control relating to production, sales and distribution and in other
functions of the organization.

Advantages of Management Audit

The main advantages of management audit are as follows:

1 It takes a total view of the management process which helps to identify present and potential
deficiencies in management. This will enable the management to make major structural
improvements.

2. It helps to improve communication system by keeping the whole management team under
constant review.

3 It facilitates the improvement of control system also.

4. Constant review of various aspects of organization helps to improve performance and

thereby to protect the organization from deceits.

5. It provides opportunities for continuous innovations based on the environmental changes.

6. It helps to improve co-ordination and to evaluate the performance of control mechanisms.

5.5.3 Disadvantages of Management Audit

Management audit suffers from the following disadvantages:

1. Management Audit does not have a well-defined scope. There are no standard techniques of
management audit.

2. Management Audit may create complexity in authority-responsibility relationships.

3. Management may object vehemently the critical appraisal of its policies and actions.

5.5.4 The weaknesses that a Management Audit might reveal may include:

The weaknesses that a Management Audit might reveal may include:

(a) Weaknesses among the members of the Board of Directors.

(b) A lack of awareness among directors and managers of the objectives of the organization and
the extent to which these are being achieved, failure to define clearly the objectives and
responsibilities of individual managers.

(c) Inadequate steps taken to provide adequate finance.

(d) Lack of technical competence of managers.

(e) Retaining authority by managers for matters which ought to have been delegated.

(f) Lack of clear and identifiable management style in the organization.

(g) Lack of proper staff/management training.

(h) Failure on the part of managers to measure and assess the performance of their subordi-
nates.

(i) Inadequacy of the management information system.

(j) Lack of enforcement of procedures and too much wastage of time in enforcing such
procedures.

Weaknesses revealed by Management Audit should be studied in detail to ascertain the real
causes and proper remedial action may be taken by the top management to eliminate such
weaknesses.