Soundarya Word

A STUDY ON INTERNAL AUDIT AND ITS IMPACT ON FINANCIAL REPORTING QUALITY WITH
SPECIAL REFERENCE TO “AINO MANAGEMENT CONSULTANCY PVT LTD”
CHAPTER – 1
INTRODUCTION
1.1 INTRODUCTION TO AUDITING:
The word audit is derived from the Latin word „audire‟ which means to hear. It is an
important tool of management. It is concerned with making an analytical and critical analysis
of the books of accounts, checking and verification of evidence in support of entries
appearing in the books of accounts and ascertaining the authenticity of the financial
statements. It is also concerned with the examination of accounting data to determine the
extent of an audit examination is too made on the basis of evidential document such as
invoice, money receipts and other records by the authorized representative of the client.
Auditor has used to send for the accountants and hear whatever they had to say in connection
with the accounts. The auditor has to look into the facts behind figures and he must certify
their accuracy. Auditing is to ascertain the balance sheet and profit and loss account that they
show a true and fair view of the financial state of affairs of a concern. The Institute of
Chartered Accountants of India has issued a number of statements of standard auditing
practices and accounting standards for guidance of Auditor of India. The audit is an
intelligent and critical examination of the books of accounts of the business. Auditing is done
by the independent person or body of persons qualified for the job with the help of
statements, papers, information and comments received from the authorities so that the
examiner can confirm the authenticity of financial accounts prepared for a fixed term and
report that: The balance sheet exhibits an accurate and fair view of the state of affairs of
concern; The profit and loss accounts reveal the right and balanced view of the profit and loss
for the financial period; The accounts have been prepared in conformity with the law. Thus, it
will be seen that the duty of an auditor is much more than a mere comparison of the balance
sheet and accounts with the books. But, apart from doing this, he has to satisfy himself
according to his information and the explanations given to him.
1.1.1MEANING OF AUDITING:
Auditing is a systematic and independent examination of data, statements, records, operations

and performances (financial or otherwise) of an enterprise for a stated purpose. In any
ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 1

auditing situation, the Auditor perceives and recognizes the propositions before him for
examination, collects evidence, evaluates the same and on this basis, formulates his judgment
which is communicated through his audit report.
1.1.2 DEFINITION OF AUDITING:
“An audit is an examination of accounting records undertaken with a view of establishing

whether they correctly and completely reflect the transactions to which the purport to relate.”
–Lawrence R. Dickey.
“Audit is defined as an investigation of some statements of figures involving examination of

certain evidence, so as to enable an auditor to make a report on the statement.” –Taylor and
Perry.
1.1.3 OBJECTIVES OF AUDITING:
The objective of an audit is to express an opinion on financial statements. The auditor has to
verify the financial statements and books of accounts to certify the truth and fairness of the
financial position and operating results of the business. Therefore, the objectives of audit are
categorized as primary or main objectives and secondary objectives.

1.1.4 PRIMARY OBJECTIVES:
The primary or main objective of auditing is as follows:
1. To Examine the Accuracy of the Books of Accounts
An auditor has to examine the accuracy of the books of accounts, vouchers and other records
to certify that Profit and Loss Account discloses a true and fair view of profit or loss for the
financial period and the Balance Sheet on a given date is properly drawn up to exhibit a true
and fair view of the state of affairs of the business. Therefore, the auditor should undertake
the following steps:
 Verify the arithmetical accuracy of the books of accounts.

 Verify the existence and value of assets and liabilities of the companies.
 Verify whether all the statutory requirements on maintaining the book of accounts has
been complied with.
2. To Express Opinion on Financial Statements
After verifying the accuracy of the books of accounts, the auditor should express his expert
opinion on the truthfulness and fairness of the financial statements. Finally, the auditor
should certify that the Profit and Loss Account and Balance Sheet represent a true and fair
view of the state of affairs of the company for a particular period.
SECONDARY OBJECTIVES
Secondary objectives of auditing are as follows:
1. Detection and prevention of Errors
The Institute of Chartered Accountants of India defines an error as, “an unintentional
mistake in the books of accounts.” Errors are the carelessness on the part of the person
preparing the books of accounts or committing mistakes in the process of keeping accounting
records. Errors which take place in the books of accounts and the duty of an auditor to locate
such errors.

2. Detection and prevention of Frauds
Fraud is the intentional or willful misrepresentation of transactions in the books of accounts

by the dishonest employees to deceive somebody. Thus, detection and prevention of fraud is
of great importance and constituents an important duty of an auditor.
1.1.5 TYPES OF AUDITING:

Types of auditing are as follows:
 Compliance Audit
 Construction Audit
 Financial Audit
 Information Systems Audit
 Internal Audit
 Investigative Audit
 Operational Audit
 Tax Audit
The above-mentioned types can be explained below:
1. Compliance Audit
A compliance audit is an examination of the policies and procedures of an entity or
department, to see if it is in compliance with internal or regulatory standards. This audit is
most commonly used in regulated industries or educational institutions.
2. Construction Audit
This is an analysis of the costs incurred for a specific construction project. Activities may
include an analysis of the contracts granted to contractors, prices paid, overhead costs
allowed for reimbursement, change orders, and the timeliness of completion. The intent is to
ensure that the costs incurred for a project were reasonable.

3. Financial Audit
A financial audit is an analysis of the fairness of the information contained within an entity‟s
financial statements. It is conducted by a CPA firm, which is independent of the entity under
review. This is the most commonly conducted type of audit, and is required for all publicly-
held companies.
4. Information Systems Audit
An information systems audit involves a review of the controls over software development,
data processing, and access to computer systems. The intent is to spot any issues that could
impair the ability of IT systems to provide accurate information to users, as well as to ensure
that unauthorized parties do not have access to the data.
5. Internal Audit
An internal audit is usually conducted by an in-house audit team, and is focused on control
assessments, process assessments, legal compliance, and the safeguarding of assets. The
team‟s reports are sent to management and the organization‟s audit committee, and may
result in recommended changes being implemented.
6. Investigative Audit
An investigative audit is an investigation of a specific area or individual when there is a
suspicion of inappropriate or fraudulent activity. The intent is to locate and remedy control
breaches, as well as to collect evidence in case charges are to be brought against someone.
7. Operational Audit
An operational audit is a detailed analysis of the goals, planning processes, procedures, and
results of the operations of a business. The audit may be conducted internally or by an
external entity. The intended result is an evaluation of operations, likely with
recommendations for improvement. It is an essential element of a campaign to increase
efficiencies and reduce costs.
8. Tax Audit
A tax audit is an analysis of the tax returns submitted by an individual or business entity, to
see if the tax information and any resulting income tax payment is valid. These audits are
usually targeted at returns that result in excessively low tax payments, to see if an additional
assessment can be made. If the taxpayer disagrees with the outcome of a tax audit, there is an

appeal process that may overturn the initial finding Internal Audit is a department or an
organization of people within a company that is tasked with providing unbiased, independent
reviews of systems, business organizations, and processes. The role of Internal Audit is to
provide senior leaders and governing bodies of an organization an objective source of
information regarding the
organization‟s risks, control environment, operational effectiveness, and compliance with
applicable laws and regulations.
1.2 INTERNAL AUDIT AND ITS IMPACT ON FINANCIAL

REPORTING QUALITY:
Internal auditing is a vital aspect of all organizations for the efficient and effective
management of resources, addition of value and improvement of operations for them to
realize their financial goals. The internal audit department is a neutral source of information
for smooth management
of resources; thus, stakeholders have a level of confidence in the financial reports of the firm
which reflect the quality of the department
The main objective of financial reporting is to provide high quality financial information
about economic entities that is useful for economic decision making. According to
International Accounting Standard Board (IASB), (2008), high quality financial reporting is
critical to investors and other stakeholders in making investment, credit and similar decision.
An important variable of financial reporting that is usually used as a yardstick of financial
reporting quality is accounting earnings, as it is reported in the published financial report of
firms is expected to provide a timely and reliable input to potential investors, shareholders,
creditors, employees, management, financial analysts, regulators and other stakeholders for
efficient economic decisions.
Background to the Study
The Internal audits constitute an independent appraisal function which review the internal
control system of the organization established. Auditing ensures the effective, proper, and
economic use of resources in the organisation through the objective examination, evaluation
and reporting on the adequacy of internal control. The effectiveness of the auditing functions
lies on its independence; The independence in terms of organisational status and personal
objectivity of the internal auditor facilitates the proper and effective performance of his duties

.It is therefore essential that the internal audit unit be appropriately staffed with people with
the right qualification and given the training necessary.
The internal auditor must constructively align its functions with the management policy and
maintain a good working relationship and mutual understanding with management, external
auditors, and other review and exercise due care in executing its function of planning,
controlling and recording of work. The internal control system must be properly evaluated to
ensure its adequacy and effectiveness. The evidence obtained in the audit function should
constitute the auditor‟s report which must be communicated to the management for
appropriate action. It is also the auditor‟s role to ensure that all recommendations and
conclusions are monitored to determine that action has been taken on them. The organisation
terms of reference for the internal audit function should be clearly specified to enhance the
auditor‟s independence in the execution of his legitimate functions.
A crucial function of internal auditing is to facilitate management in the creation of value for
money. through economic, efficient and effective use of resources. Consequently, the auditor
must be objective in the presentation of its report to management. So as to exercise
judgement, express opinions and present recommendations with impartiality. The problem
confronting the research therefore is to determine the impact of internal audit efficiency on
the financial performance of companies.
1.2.1 MEANING OF INTERNAL AUDIT:

Internal audit is the dependent appraisal of activity within an operation for the review of
accounting, financial and other business practices as a protective and constructive arm of
management. It is a type of control which functions by measuring and evaluating the
effectiveness of other type of control.
Internal Audit is a department or an organization of people within a company that is tasked
with providing unbiased, independent reviews of systems, business organizations, and
processes. The role of Internal Audit is to provide senior leaders and governing bodies of an
organization an objective source of information regarding the organization‟s risks, control
environment, operational effectiveness, and compliance with applicable laws and regulations.

1.2.2 DEFINATION OF INTERNAL AUDIT:

According to Prof. Walter.B. Meigs of America “Internal Auditing consists of continuous
critical review of financial and operating activities by a staff of auditors functioning as full-
time salaried employees”.
1.2.3 ADVANTAGES OF INTERNAL AUDIT:
1] More Effective Management

One of the biggest benefits of an 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 chances of achieving their goals.
2] On going Review
The process of internal audit gives the organization a unique opportunity to conduct a review
of the performances in the ongoing year itself.
They do not have to wait for the end of the year to review the company‟s performance. This
also means that if they are not on the correct path, this will help them change course and
correct their mistakes immediately.
3] 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.
4] Ensures Optimum Use of Resources
One other benefit of the process of internal control is that it 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 then these can be corrected. It will help control the costs and
expenses of the company.

5] Division of Work
Internal audit helps promote the division of labor. It is important to keep a check on and
observe the activities of all the departments and all of their employees. Division of labor will
help in achieving this.
1.2.4 LIMITATIONS OF INTERNAL AUDIT:

Now let us move on to the limitations of internal audit. Like every good thing has a flip side,
there exist some concerns about these limitations of internal audit. Let us take a look.
1] Shortage of Qualified Staff

The work of an audit requires years of study and experience. An inexperienced auditor can
cause more damage than good. So usually, the company will find it somewhat difficult to find
enough qualified staff members for the process of an internal audit.
2] Time Lag
There will always be a time lag between accounting and auditing. Internal audit cannot begin
till the accounting is complete. They cannot be done simultaneously. So if the accounting
process is delayed, so is the internal audit.
3] Ignorance of Management
Unlike a statutory audit, the findings of an internal audit are not published or made available
to all. Their findings are only forwarded to the management.
1.2.5 TYPES OF INTERNAL AUDIT:

The types of Internal Audits are as follows:
 Compliance Audits
 Environmental Audits
 Information Technology Audits
 Operational Audits
 Performance Audits
The above-mentioned types can be explained below

 Compliance Audits evaluate compliance with applicable laws, regulations,

policies and procedures. Some of these regulations may have a significant impact on
the company‟s financial well-being. Failure to comply with some laws, such as the
Foreign Corrupt Practices Act (FCPA) or General Data Protection Regulation
(GDPR), may result in millions of dollars in fines or preclude a company from doing
business in certain jurisdictions.
 Environmental Audits assess the impact of a company‟s operations on the

environment. They may also assess the company‟s compliance with environmental
laws and regulations.
 Information Technology Audits may evaluate information systems and the

underlying infrastructure to ensure the accuracy of their processing, the security and
confidential customer information or intellectual property. They will typically include
the assessment of general IT controls related logical access, change management,
system operations, and backup and recovery.
 Operational Audits assess the organization‟s control mechanisms for their overall
efficiency and reliability.
 Performance Audits evaluate whether the organization is meeting the metrics set
by management in order to achieve the goals and objectives set forth by the Board of
Directors.

1.2.6 PROCEDURE / PROCESS OF INTERNAL AUDIT:
An internal audit should have four general phases of activities Planning, Fieldwork,
Reporting, and Follow-up. The following provides a brief synopsis of each phase
 Planning: During the planning process, the internal audit team will define the scope
and objectives, review guidance relevant to audit (e.g., laws, regulations, industry
standards, company policies and procedures, etc.), review the results from previous
audits, set a timeline and budget for the audit, create an audit plan to be executed,
identify the process owners to involve, and schedule a kick-off meeting to commence
the audit.
 Fieldwork: Fieldwork is the actual act of auditing. Throughout this phase, the audit
team will execute the audit plan. This usually includes interviewing key personnel to
confirm an understanding of the process and controls, reviewing relevant documents
and artifacts for an example execution of the controls, testing the controls for a

sample over a period of time, documenting the work performed, and identifying
exceptions and recommendations.
 Reporting: The report should be written clearly and succinctly to avoid
misinterpretation and to encourage the intended audience to actually read and
understand the report. Findings should be accompanied by recommendations that are
actionable and lead directly to process improvements. The process of issuing an
internal audit report should include drafting the report, review the draft with
management to ensure the accuracy of findings, and issuance and distribution of the
final report.
 Follow-up: The final stage is an important one that is often overlooked and
neglected. Following up is critical to ensure that the recommendations have been
implemented to address the findings identified. This process should include
appropriate follow-up with process owners needing to implement the
recommendations as well as Board oversight of the company‟s overall status in
addressing findings identified by internal audit. If an organization fails to follow-up
on the implementation of recommendations, it is unlikely that the changes will be
made.
1.2.7 MEANING OF FINANCIAL REPORTING:
Financial reporting refers to standard practices to give stakeholders an accurate depiction of a

company‟s finances, including their revenues, expenses, profits, capital, and cash flow, as
formal records that provide in-depth insights into financial information. The process of
producing statements that disclose a business‟s financial status to management, investor and
the government is known as Financial Reporting, external financial statements (income
statement, statement of comprehensive income, balance sheet, statement of cash flows, and
statement of stockholders‟ equity).
1.2.8 DEFINITION OF FINANCIAL REPORTING:
Financial reporting refers to the communication of financial information, like financial

statements, to the financial statement users, like investors and creditors. Financial reporting is
typically viewed as companies issuing financial statements.

1.2.9 BENEFITS OF FINANCIAL REPORTING:
i. Statutory purposes
The government is always around to collect taxes and keeps changing tax regimes to make
the process simpler. To adhere to tax reforms and laws, financial management must plan to
pay its taxes on a timely basis. Financial management is an important skill of every small
business owner or manager. Every decision that an owner makes has a financial impact on the
company, and he has to make these decisions within the total context of the company‟s
operations.
ii. Financial management in normal operations
Usually, a company provides a product or service, sells to its customer, collects the money
and the process is repeated again. Financial management is moving cash efficiently through
this cycle. This means that managing the turnover ratios of raw materials and finished goods
inventories, selling to customers and collecting the receivables on a timely basis and starting
over by purchasing more raw materials. While this is happening, the business must also
ensure that it pays suppliers and employees, regularly. All of this must be done with cash, and
it takes astute financial management to make sure that these funds flow efficiently. Even
though economies have a long-term history of going up, occasionally they will also
experience sharp declines. Businesses must plan to have enough liquidity to weather these
economic downturns, otherwise they may need to close their doors for lack of cash.
iii. Operation evaluation
When a business starts its operations, it comes with an upfront cost. And as the business
grows, these costs go up for obvious reasons. Setting up a sound structure for financial
management helps business owners evaluate the operational changes that impacted the
overall financial health of the business. Financial reporting which is done on an income
statement generates results about sales, expenses and profit or losses.
iv. Decision-making, planning and forecasting
When key decisions are to be taken by a business owner, careful analysis of financial
statements is imperative. One simple look at the value of the assets that a business currently
holds and managers can instantly decide, if they can afford to purchase more or not.

Conversely, when the value of assets is severely depreciated, managers can decide if they
need to be sold off. Financial management also help is creating various strategies for
optimum use of stock-at-hand and resources that will ultimately result in better cash flow.
v. Mitigate errors
Accurate financial reporting can help businesses catch grave mistakes and inter errors early in
the process that could cost the business a hefty amount. There is no better way to detect
illegal financial activities than catch discrepancies in financial statements. Through a
reconciliation process, errors that have been made can be found. Companies spend a lot of
time reconciling their books of accounts and verifying each journal entry, so they can find if
an accounting error has occurred or if anyone has tampered with any part of the business.
1.2.10 TYPES OF FINANCIAL REPORTING:
Below are the financial reports that help business owners a great deal in running their
company seamlessly:
 External financial statements (income statement, statement of comprehensive income,

balance sheet, statement of cash flows, and statement of stockholders‟ equity)
 Notes to the financial statements
 Communication regarding quarterly earnings and related information through press
releases and conference calls
 Quarterly and annual reports to stockholders
 Financial information posted on a business‟s website
 Financial reports to governmental agencies including quarterly and annual reports to
the Securities and Exchange Commission (SEC)
 Documentation pertaining to the issuance of common stock and other securities.
1.2.11 OBJECTIVES OF FINANCIAL REPORTING:
The primary objective of financial reporting is to track, analyze and report your business‟
income. These reports are then used to examine the resource usage, cash flow, business
performance which help assess the financial health of the business. Financial reporting is a
way of following standard accounting practices to give an accurate depiction of a company‟s
finances, including:

 Revenues
 Expenses
 Profits
 Capital
 Cash flow
1.2.12 INTERNAL AUDIT EXECUTION
A typical internal audit assignment involves the following steps:
 Establishing and communicating the scope and objectives of the audit to appropriate
members of management.
 Developing an understanding of the business area under review – this includes
objectives, measurements & key transaction types and involves interviews and a
review of documents – flowcharts and narratives may be created, if necessary.
 Describing the key risks facing the business activities within the scope of the audit.
 Identifying management practices in the five components of control used to ensure
that each key risk is properly controlled and monitored. An internal audit checklist can
be a helpful tool to identify common risks and desired controls in the specific process
or specific industry being audited.
 Developing and executing a risk-based sampling and testing approach to determine
whether the most important management controls are operating as intended.
 Reporting issues and challenges identified and negotiating action plans with the
management to address these problems.
 Following-up on reported findings at appropriate intervals. Internal audit departments
maintain a follow-up database for this purpose.
Audit assignment length varies based on the complexity of the activity being audited and
internal audit resources available. Many of the above steps are iterative and may not all
occur in the sequence indicated. In addition to assessing business processes, specialists
called information technology (IT) auditors review information technology controls.
Quality of internal audit report
 Objectivity – The comments and opinions expressed in the report should be

objective and unbiased.

 Clarity – The language used should be simple and straightforward.

 Accuracy – The information contained in the report should be accurate.
 Brevity – The report should be concise.
 Timeliness – The report should be released promptly immediately after the audit
is concluded, within a month.
1.2.13 STRATEGY
Internal audit functions may also develop functional strategies described in multi-year
strategic plans. Professional guidance on building an Internal Audit strategic plan was issued
by the Institute of Internal Auditors in July 2012 via a Practice Guide called Developing the
Internal Audit Strategic Plan. A key aspect of developing IA strategy is understanding the
expectations of stakeholders, such as the audit committee and top management. This helps
guide the IA function in its mission of helping the organization address the risks it faces.
Specific topics considered in IA strategic planning include:
 Scope and emphasis: An IA function may be involved in addressing risks

related to financial reporting, operations, legal and regulatory compliance, and the
company strategy. There may also be special topics of interest to stakeholders that
change considerably year-to-year.
 Portfolio of services: IA functions may provide traditional audit assurance

across the risk spectrum as well as consulting project support in a variety of areas
such as project management, data analysis, and monitoring of major company
initiatives. Larger audit functions may establish specialty areas to handle their
service portfolio.
 Competency development: The stakeholder expectations around scope and

service portfolio determine what competencies the function needs, which drives
decisions regarding hiring of specific skills and training programs. The internal
audit function is often used as a "management training ground" to provide
employees with a deeper knowledge of the company's operations before they are
rotated into a management position.
 Technology: IA functions use a variety of technology tools/software to support

audit process workflow, statistical analysis, and obtaining data from systems.

Building the IA strategy may involve a variety of strategic management concepts

and frameworks, such as strategic planning, strategic thinking, and SWOT
analysis.
 Measuring the internal audit function

The measurement of the internal audit function can involve balanced
scorecard approach. Internal audit functions are primarily evaluated based on the quality of
counsel and information provided to the audit committee and top management. However, this
is primarily qualitative and therefore difficult to measure. "Customer surveys" sent to key
managers after each audit engagement or report can be used to measure performance, with an
annual survey to the audit committee. Scoring on dimensions such as professionalism, quality
of counsel, timeliness of work product, utility of meetings, and quality of status updates are
typical with such surveys. Understanding the expectations of senior management and the
audit committee represent important steps in developing a performance measurement process,
as well as how such measures help align the audit function with organizational priorities.
Independent peer reviews are part of the quality assurance process for many internal audit
groups as they are often required by standards. The resulting peer review report is made
available to the audit committee.
 Reporting of critical findings
The chief audit executive (CAE) typically reports the most critical issues to the audit
committee quarterly, along with management's progress towards resolving them. Critical
issues typically have a reasonable likelihood of causing substantial financial or reputational
damage to the company. For particularly complex issues, the responsible manager may
participate in the discussion. Such reporting is critical to ensure the function is respected, that
the proper "tone at the top" exists in the organization, and to expedite resolution of such
issues. It is a matter of considerable judgment to select appropriate issues for the audit
committee's attention and to describe them in the proper context.

 Audit philosophy
Some of the philosophy and approach of internal auditing is derived from the work of
Lawrence Sawyer. His philosophy and guidance on the role of internal audit was a
forerunner of the current definition of internal auditing. It emphasized assisting
management and the board in achieving the organization's objectives through well-
reasoned audits, evaluations, and analyses of operational areas. He encouraged the
modern internal auditor to act as a counsellor to management rather than as an
adversary. Sawyer saw auditors as active players influencing events in the business
rather than criticizing all degrees of errors and mistakes. He also foresaw a more
desirable auditor future involving a stronger relationship with members of audit
committee and the board and a divorce from direct reporting to the chief financial
officer. Sawyer often talked about “catching a manager doing something right” and
providing recognition and positive reinforcement. Writing about positive observations
in audit reports was rarely done until Sawyer started talking about the idea. He
understood and forecast the benefits of providing more balanced reporting while
simultaneously building better relationships. Sawyer understood the psychology of
interpersonal dynamics and the need for all people to receive acknowledgment and
validation for relationships to prosper. Sawyer helped make internal auditing more
relevant and more interesting through a sharp focus on operational or performance
auditing. He strongly encouraged looking beyond financial statements and financial-
related auditing into areas such as purchasing, warehousing and distribution, human
resources, information technology, facilities management, customer service, field
operations, and program management. This approach helped catapult the chief audit
executive into the role of a respected and knowledgeable adviser who was thought to
be reasonable, objective, and concerned about helping the organization achieve the
stated goals.

1.2.14 BENEFITS OF INTERNAL AUDIT
If you want confidence that your organization is meeting its core business goals, you
need internal audits. If you want to save your organization time and money and keep
everything running like a well-oiled machine, internal audits will help you get there. If you
want to protect your enterprise against fraud and prevent fraudulent practices, internal audits
are key. If you want to reduce risks to your operations, finances, cybersecurity, and other
areas of concern, internal audits will tell you what you need to do and how to do it. If you
want to make sure you‟re following the laws, regulations, and standards that apply to your
organization and reduce your costs and hassle when external auditors test your compliance,
you‟ll want regular internal audits. If you want to be able to tell your board of directors and
audit committee with confidence that the entity‟s internal controls and business processes are
functioning as they should, ask your internal auditor. Effective internal audits offer so many
business benefits that we could write an entire book about them. Suffice to say that, aside
from the cost of paying an auditor and these highly trained, certified professionals don‟t come
cheap there really is no downside. And by automating, you can even reduce your costs.
1. Strong internal controls: Evaluating your enterprise‟s control environment is

your internal auditor‟s number-one task. Internal audits evaluate your internal
controls, which comprise actions, systems, and processes including monitoring to
ensure that they are well designed and implemented and that they are working as they
should be no matter who serves in which role.
The COSO framework Internal Control-Integrated Framework defines “internal

control” as “a process, effected by an entity‟s board of directors, management, and
other personnel, designed to provide reasonable assurance regarding the achievement
of objectives relating to operations, reporting, and compliance.”
2. Efficiency: Internal audits spot redundancies in your business practices and

procedure and your governance processes and come with recommendations on how to
streamline, saving time and money.
3. Security: Internal audits scrutinize your cybersecurity environment, counting all

your digital devices, for instance, and examining whether they are secured in line with

your policies. They also look for vulnerabilities in your digital systems and networks
and advise on how to close gaps.
4. Integrity: Headline-grabbing of fraud at the turn of the 21st century fraud involving
major companies including Enron were the impetus behind the COSO framework. As
a result of the scandal, Enron went bankrupt. Caveat emptor: People aren‟t always
honest. Also: to err is human. Internal audits analyse and scrutinize your financial
statements and verify their accuracy and integrity.
5. Reduced risk: Internal audits consider all the identified risks to your enterprise and
analyse whether your risk mitigations are working as they should. Where they aren‟t,
audit reports will tell you what you need to do to resolve the issue.
6. Improved compliance: Internal audits check the laws, regulations, and industry
standards with which your organization needs to comply and determine whether you
are, in fact, compliant. Where you miss the mark, auditors recommend how to remedy
the problem.

CHAPTER – 2
RESEARCH DESIGN
INRODUCTION
A research design is the set of methods and procedures used in collecting and analysing
measures of the variables specified in the problem research. The design of a study defines the
study type (descriptive, correlational, semi-experimental, experimental, review, meta-
analytic) and sub-type (e.g., descriptive-longitudinal case study), research problem, hypotheses,
independent and dependent variables, experimental design, and, if applicable, data collection
methods and a statistical analysis plan. A research design is a framework that has been
created to find answers to research questions. A research design is a framework or blueprint
for conducting the marketing research project. It details the procedures necessary for
obtaining the information needed to structure or solve marketing research problems. In
simple words it is the general plan of how you will go about your research.
2.1 TITTLE OF THE STUDY
“A STUDY ON INTERNAL AUDIT AND ITS IMPACT ON FINANCIAL REPORTING

QUALITY WITH SPECIAL REFERENCE AINO MANAGEMENT CONSULTANCY
PVT. LTD.”
2.2 STATEMENT OF THE PROBLEMS
The private sector is that part of the economy not under direct government control. It entails
production and distribution that is in private hands. It serves as a complement to the public
sector since increased public sector efficiency results from improvement and places
government in a better position to focus on the objectives, conduct and performance of those
enterprises that remain in the public sector. Despite this enormous role, the sector has been
beclouded with problems such as: financial impropriety, lack of auditing control, lack of
independence of the internal control, incomplete recording of business transaction, over blow
expenses to reckless spending, non-compliance and adherence to accounting standards and
guide lines, mismanagement of scarce funds. There are some other challenges faced in
financial

reporting, such as:

(1) Cooking the Books: Financial reporters may be asked to “cook the books” when poor
documentation has been kept of expenditures and asset value.
(2) Cute Accounting: This term describes the practice of stretching or bending standards set
by the accountancy profession to the limit.
(3) Conflicts of Interest: A conflict of interest can result when an employee receives an
inappropriate personal benefit as the result of any actions performed in his official role as a
financial reporter.
(4) Breach of Confidentiality: Insider trading is an easy example of breach of
confidentiality in financial reporting.
2.3 REVIEW OF LITERATURE

A literature review is a scholarly paper that presents the current knowledge including
substantive findings as well as theoretical and methodological contributions to a particular
topic. Literature reviews are secondary sources and do not report new or original experimental
work. Most often associated with academic-oriented literature, such reviews are found
in academic journals and are not to be confused with book reviews, which may also appear in
the same publication. Literature reviews are a basis for research in nearly every academic
field. A narrow-scope literature review may be included as part of a peer-reviewed journal
article presenting new research, serving to situate the current study within the body of the
relevant literature and to provide context for the reader. In such a case, the review usually
precedes the methodology and results sections of the work. Producing a literature review may
also be part of graduate and post-graduate student work, including in the preparation of
a thesis, dissertation, or a journal article. Literature reviews are also common in a research
proposal or prospectus (the document that is approved before a student formally begins a
dissertation or thesis).
2.4 STUDYTING TO FOREIGN CONTEXT:

1. Gajevszky
The essential principle of assessing the financial reporting quality is related to the
faithfulness of the objectives and quality of disclosed information in a company‟s
financial reports. These qualitative characteristics enhance the facilitation of assessing
the usefulness of financial reports, which will also lead to a high level of quality. To

achieve this level, financial reports must be faithfully represented, comparable, verifiable,
timely, and understandable. Thus, the emphasis is on having transparent financial reports,
and not
having misleading financial reports to users; not to mention the importance of preciseness
and predictability as indicators of a high financial reporting quality (Gajevszky, 2015).
2. Downen.T
Reliability as a quality of financial reporting used to be considered as the primary factor
of accounting information. In FASB „s old framework, reliability was the primary
quality, and it was comprised of representational faithfulness, neutrality, and verifiability.
However, in the new framework, faithful representation becomes the primary and the
fundamental quality, instead of reliability. Moreover, faithful representation is comprised
of completeness, neutrality, and accuracy. FASB also believes that reliability is one of the
critical qualities to accounting information (Downen, 2014).
3. Matoke and omwenga
Audit quality and financial execution of state recorded organisations. None of these
examinations have taken a look at the impacts of internal review quality on financial
execution of listed companies. With this, there exists a gap that should have been filled by
this investigation on the impacts of internal audit on the financial permeance of recorded
state organisations.
4. Usman, S. H.
Investors and users are interested in achieving a high quality of financial information, and
this quality can be derived from having a high quality of earnings that is known as one of
the most important indicators of capital market efficiency. This notion is one of the major
concerns in assessing the financial health of entities to signify the level of reliability of
reported earnings (Usman, 2013).
5. Zang, Kim, Benjamin& Dan
In the literature, audit committees have contributed to enhancing the quality of financial
reporting. The more independent, more capable, and more qualified the audit committees
are, the better their ability to detect material misstatements in the financial information,
and the better their ability to deter any opportunities for managements to manipulate
reporting. Thus, the audit committee attributes have fundamental impacts on both
financial reporting quality and audit inputs. Furthermore, changes in the audit committee

governance are associated with enhancements of financial reporting quality (Zang, Kim,
Benjamin& Dan, 2013).
2.5 OBJECTIVES OF THE STUDY:
 To study the internal audit function, improve the control environment will be reflected
in the quality of financial reporting to reduce the reporting error.
 The study is to know the areas of risk in the area being audited.
 The study is to examine the system of internal check, checking accuracy of posting,
casting, balancing, etc.
 The study is to examine resource usage, cashflow, business performance and the
financial health of the business.
 The is to help company and the investors to make informed decisions about how to
manage the business.
2.6 OPERATIONAL DEFINITIONS OF THE CONCEPTS:
 Independent Appraisal: Independent Appraisal means a document executed by an

Independent Appraiser setting forth the Appraised Value of the item of equipment
being appraised and the data and explanation, all in reasonable detail, supporting such
Appraised Value.
 Stakeholders: A stakeholder is a party that has an interest in a company and can
either affect or be affected by the business. The primary stakeholders in a typical
corporation are its investors, employees, customers, and suppliers.
 IASB: The International Accounting Standards Board is the independent, accounting
standard-setting body of the IFRS Foundation. The IASB was founded on April 1,
2001, as the successor to the International Accounting Standards Committee.
 FCPA: The Foreign Corrupt Practices Act (FCPA, the Act) is a United States law that
prohibits U.S. firms and individuals from paying bribes to foreign officials to further
business deals. … The anti-bribery provisions. The books, records, and internal
control provisions, which speaks to accounting practices.

 GDPR: The General Data Protection Regulation 2016/679 is a regulation in EU law

on data protection and privacy in the European Union and the European Economic
Area. It also addresses the transfer of personal data outside the EU and EEA areas.
 Stock-on-hand: It is the abbreviation for SOH, the amount of goods, such as parts,
materials, and finished products, that a company has available at a particular time:
They are depleting their stock on hand before ordering new inventory.
 SEC: Securities and Exchange Commission is a large independent agency of the
United States federal government, created in the aftermath of the Wall Street Crash of
1929. The primary purpose of the SEC is to enforce the law against market
manipulation
2.7 SCOPE OF THE STUDY:
 The study is aimed towards the internal audit of Aino management consultancy
private limited and the various methods adopted by them. To avoid an eliminate the
risk associated with internal audit.
 The scope of the study mainly focuses on how the internal audit impacts on the
financial reporting quality of the company. The study deals with how internal audit
positively affect the quality of financial reporting of the company.
2.8 SOURCES OT DATA COLLECTION:
 PRIMARY SOURCES: The primary data is collected through questionnaires. The

company details are collected Directly from the company and collected questionnaires
from their employees.
 SECONDARY SOURCES: The present study data was mainly collected from
secondary sources like
 Text books
 Internet
 Company website.

2.9PLAN OF ANALYSIS:
The simple statistical tool used for the purpose of analysis of study is simple percentage
technique. After the collection of data through the personal interviews, conversion was done
carefully based on the responses of the samples, tables were prepared. The data collected
were analysed and interpreted with the tables and figures.
 Graphs
 Tables
 Charts
2.10 LIMITATIONS OF THE STUDY:
 The study is confined only to Aino management consultancy private limited.

 Due to COVID-19 a detailed study could not be undertaken.
 Analysis of the study depends upon the information supplied by the company.
2.11 CHAPTER SCHEME:
 CHAPTER 1: INTRODUTION
This chapter includes the basic information and brief introduction about the
various types of internal audit used in the company and covers the theoretical
aspects of internal audit impacts financial reporting quality by the company.
 CHAPTER 2: RESEARCH DESIGN
This chapter contains the research design, tittle of the study review of
literature, detailing the statement of the problem, scope of study, objectives of
the study, methodology of the study, source of data collection and limitation of
the study.
 CHAPTER 3: COMPANY PROFILE
This chapter includes the history of the company, vision and mission
statement, organisation structure, types of internal audit, audit report, financial
statements, facilities provided and overall view of the company.

 CHAPTER 4: DATA ANALYSIS AND INTERPRETATION

This chapter deals with the objectives wise inferences drawn from the data
collected by presenting them in tables and graphs.
 CHAPTER 5: SUMMARY FINDINGS, CONCLUSION AND
SUGGESTIONS
This chapter covers the summary findings, conclusions and suggestions
offered based on the study conducted.
BIBLIOGRAPHY
ANNEXURES

CHAPTER – 3
COMPANY PROFILE
3.1 INTRODUCTION TO AINO MANAGEMENT CONSULTANCY PVT

LTD:
AINO is an accounting & management consultant-based company situated in Bangalore,

India, that was established under company‟s act 1956 and commenced its operations in the
year 2011.AINO consists of more than 100+ committed professionals with specialized skills,
servicing a range of business needs, believing strongly in creating and adding value for
clients. AINO has been rendering service to over 500+ clients spread across a broad spectrum
of Companies & Individuals and industries ranging to Manufacturing, Trading, Infrastructure,
Construction, BPO/KPO and Information Technology etc. AINO have experienced and a
professionally focused team of staff in Bangalore, who are dedicated to providing efficient
services in a consistent manner. AINO offers services that are designed to address multi-
pronged business Imperatives of the modern-day like Chief Financial Officer (CFO). AINO
as

Trusted partner enables you and your organization to focus on your core business, Ensuring
an effective partnership through governance and process excellence.
3.2 VISION AND MISSION:
 VISION:
To be the most admired professional services like business start- up, accounting, payroll,
income tax, financial advisors, Indirect Taxation Matter, auditing serving clients worldwide
under single roof.
 MISSION:
To enhance our client‟s competitiveness, help client realize their aspirations and contribute to
the business through innovation and entrepreneurship development with dynamic and focused
client-oriented services.
3.3 EXPERTISE:
AINO offers tailor made Financial Accounting Services, including expert Accounting
Services to our clients. Our Accounting & Book Keeping Services and Payroll Services are
ideal for sustainable growth of business organizations as the Impact of our services include
substantial cost savings and increased process efficiency among others. Our Financials KPO
services are designed to provide Hassle free and live information to our clients to meet their
business challenges, while ensuring total data safety and security.
3.4 WHY AINO:
1. Value for Money
2. No Hidden Costs
3. Integrity, Transparency & Confidentiality
4. Thousands of Happy Clients
5. Promise of Quality & Commitment.

3.5 SERVICES:
 Business set up & allied services in India

 Accounting system set-up and financial services
 Financial reporting and consolidation
 Registration under GST, PT, PF, ESI, IEC, Trade Mark, and Patent etc.
 Incorporation of companies
 Project report preparation
 Management consultancy services
 Contract staffing
 Payroll preparation (including e payroll)
 Preparing and filing of tax returns (including company‟s bulk returns)
 Implementation of proper internal control system
 RBI related assignments
 System analysis/ audit
 ROC matters/ policies and procedures.

3.6 AINO OFFER:
Start-up Services -
1. Start Private Limited Company

2. Start Public Limited Company
3. Start Limited Liability Partnership
4. Start-up Registration
5. Start One Person Company
6. Start NGO/Section 8 Company
7. Proprietorship
8. Partnership
Accounting and Bookkeeping Services –
1. Manage the Accounting of daily transaction in books of accounts

2. Conduct a monthly review of books of accounts
3. Avail services for Reconciliation/ Review of Advances/ Loans/ Travel Settlements
4. Bookkeeping Services
5. Accounts Receivable Services
6. Accounts Payable Services
Statutory Compliance –
1. GST filing
2. Business Tax Filing
3. ETDS and PT Return Filing
4. Start-up Registration
Taxation Services –
1. Avail organized tax strategy analysis and planning.

2. Get timely reports of services such as tax payments, tax return filing and employee
salary relaxed tax deductions.
3. Get regular updates on Government levied tax rates and slabs.
4. Guaranteed financial data security and taxation plan confidentiality.

Payroll Services –
1. Complete security and confidentiality of salary information of employees throughout

the payroll process.
2. Timely review of norms and laws related to payroll and statutory compliances so as to
ensure employees are given their due.
3. High-tech infrastructure and state-of art technology to help maintain accuracy of
payroll processing.
4. Comprehensive payroll and benefits administration by experienced and qualified
payroll accounting team.
Secretarial Compliance –
1. Maintaining Books of Accounts

2. Preparing Financial Statements of the Company
3. Appointing Auditor for the Company
4. Statutory Audit of Private Limited Company Financial Statement
5. Conducting Annual General Meeting
6. Annual Filing of the Company.
MIS –
1. Inventory Reports
2. Accounts Receivable/ Accounts Payable (AR/AP)
3. Bank Reconciliation
4. Cash and Check Registers
5. Custom Reports
6. Annual Filing of the Company
3.7 LIST OF CLIENT AREAS:
Over all the clients to whom we have on hand professional services like Foreign Companies
having subsidiary in India, Foreign Companies having Branch Liaison-Representative Offices
in India, Non- Resident Indians- Taxation and FEMA matters, FMCG, Import & Export,
Public Relations, Medical devices Pharmaceutical- Healthcare, Textile, Joint Venture
Advisory Services, Software and IT enabled companies, Education and Welfare,

Manufacturing and Trading, Banks, Cosmetics and beauty products, Bio Technology-
Research, Construction, Etc.
CLIENTELE
 MOTOROLA SOLUTIONS: Motorola Solutions, Inc., is an American data

communications and telecommunications equipment provider that succeeded
Motorola, Inc., following the spinoff of the mobile phone division into Motorola
Mobility in 2011. The company is headquartered in Chicago, Illinois.
 ICICI BANK: Industrial Credit and Investment Corporation of India Bank

The bank was founded as the Industrial Credit and Investment Corporation of India
Bank, before it changed its name to ICICI Bank.

 TTK SERVICES: TTK Services Private Limited is committed to safeguarding your

privacy. This Privacy Statements explains our privacy practices regarding Personal
Information that we may collect, use, process, share, and retain personal information
about you. Throughout this Privacy Statement, "TTK" refers to TTK Services Private
Limited.
 EURO KIDS: Euro Kids is an Indian Education company founded in 2001. In 1997,
The company Started its operation with a Joint venture with Egmont Group
(Denmark) & Indian Express Group. ... In 2009, Euro Kids started their K-12
initiative Euro Schools for providing the continuity of education at higher grades.
 EMPLOYEES PROVIDENT FUND ORGANIZATION: The Employees

Provident Fund Organization (EPFO) is a statuary body which assists Central Board
in administering compulsory contributory Provident Fund Scheme, Pension Scheme
and Insurance Scheme for the workforce engaged in the organized sector in India.
 ACE: Ace Hardware, headquartered in Oakbrook, Illinois, is a leading home

improvement retailer with 4,000 stores spanning across 50 US states and 60 countries.
The stores are supported by 14 distribution centers and six freight consolidation
centers, supplying over 65,000 products. Like any company moving fright around the
world, Ace was seeking greater visibility and control of across its global operations to
help reduce overall freight costs, but they didn‟t have the right solutions in place to
get them there.
 ACN HEALTHCARE: ACN Healthcare was established to assist medical billing

companies reduce their ongoing costs. By leveraging our domain expertise and our
cost-effective onshore / offshore model, ACN Healthcare became the ideal partner.
 QUIVER DIGITAL SOLUTIONS: Quiver Digital Solutions India Private

Limited is a Private incorporated on 28 September 2012. It is classified as Non-
government company and is registered at Registrar of Companies, Bangalore.

 VALCO MELTON: Valco Melton Engineering India Private Limited”, are the
leading manufacturer and exporter of an optimum range of Digital Regulator, Injector
Nozzle, Metal Valve, Spot Gluing Machine and many more.
 LIFE HOSPITAL: Life Care Hospital (LCH) Located in the heart of the Bangalore
City (BTM Layout), Is one of the Multi-Specialty Hospital with 50 Bed Capacity. We
Have been delivering healthcare services since 2009, spanning from basic facilities in
preventive health with Multi Specialty Disciplines, in an ethical, transparent and
patient friendly environment by competent team of medical professionals & a
compassionate support staff round the Clock.
 CIRCUTOR: specialized in Electrical Energy Efficiency business and one of the

leading European manufacturers in this kind of products.
3.8 PORTFOLIO:
Portfolio of work spans through a gamut of services to cater to today‟s contemporary Human
Resource and Finance & Accounting consultancy needs. Whether a small firm or a Fortune
500 company, sure to find services useful and most suitable. While globalization has opened
up opportunities for business organizations, today‟s fast changing economic and business
scenario also pauses many growth challenges to them. These include economic uncertainty,
increased competition, rapidly changing technology and constantly evolving markets and
customers. Companies which negotiate these hurdles and leverage the opportunities provided
by a globalized world will have a greater chance of emerging stronger in coming years.

3.9 DATA SECURITY AND CONFIDENTIALITY:
AINO understand the importance of maintaining the confidentiality and security of client‟s
data. They have physical, administration and technical safeguards in place to ensure data
security and confidentiality.
3.10 HEAD OFFICE:
AINO Management Consultancy Pvt Ltd., No. 202, 1st Floor, JJ Residency No. 372/90, 18th
Cross, M.C. Layout Vijayanagar, Bangalore – 560040, KA, India Tel No: 080-41286264
Mob No: 900581819 / 7353444111
Email: info1@ainoglobal.com
Web: www.ainoglobal.com

3.11 OFFICES AT:
SHANTHINAGAR KR PURAM NAGARBHAVI

18/1, 1st floor, Jain Bhavan, No.3, 5th Cross, Jnana #52, Ground Floor, 3rd cross,
Shanti Nagar, Bengaluru, Bhavan, Banashankari 9th main, Suvarna Layout,
Karnataka 560027 Layout, Bhattrahalli, Nagarbhavi, Bengaluru-
Krishnarajapuram, 560072
Bengaluru-560049
Land Mark: Land Mark: Land Mark:

Behind Axis Bank Behind Sathya Sai Nagarbhavi Circle
Orthopedic Hospital
Contact: Contact: Contact:

Mr. Chittaranjan G Gokhale Mr. T Harinadha Reddy Mr. Sudheer Javali
Tel. No: 080-22222143 Tel. No: 080-22222143 Tel. No: 080-41158620

Mob No: 9986640964 Mob No: 9880801080 Mob No: 7353444222

CHAPTER – 4
DATA ANALYSIS AND INTERPRETATION
4.1 INTRODUCTION:
Data analysis means the categorizing, ordering, manipulating and summarizing questions.
Interpretation is concerned with summarizing questions. Interpretation is concerned with
relationships within the collected data, particularly overlapping analysis. Interpretation also
extends beyond the data of the study include the results of other research, theory and
hypothesis.
THERE ARE 4 MAJOR STAGES INVOLVED IN DATA ANALYSIS AND

INTERPRETATION-
 Collection of data
 Presentation of data
 Analysis of data
 Interpretation of data
4.2 MEANING OF DATA ANALYSIS:
Data analysis is a process of inspecting, cleansing, transforming and modeling data with the
goal of discovering useful information, suggestions, conclusion and supporting decision
making.
4.3 MEANING OF DATA INTERPRETATION:
Data interpretation is the process of reviewing data through some predefined processes which
will help assign some meaning to the data and arrive at a relevant conclusion. It involves
taking the result of data analysis. Data analysis is the process of ordering, categorizing,
manipulating, and summarizing data to obtain answers to research questions. It is usually the
first step taken towards data interpretation. It is evident that the interpretation of data is very
important, and as such needs to be done properly. Therefore, researchers have identified some
data interpretation methods to aid this process.

4.4 DATA ANALYSIS AND INTERPRETATION:
The primary data collected from existing managers, accountants and auditors of “Aino
Management Consultancy PVT LTD”, the following data is analyzed and interpreted. The
total respondents of the study were 67 existing employees. Frequency tables and graphs are
used to study responses.

1) Do you consider the auditor's behaviour correct?
Yes, the auditor‟s behaviour is correct. Because the auditor has the ultimate responsibility to
express an opinion on the financial statements, judgments about assessments of inherent and
control risks, the materiality of misstatements, the sufficiency of tests performed. The auditor
should exhibit professional behaviour during the performance of their audit activities
including being open minded, diplomatic, observant, sincere, honest, etc.
4.5 A TABLE
The below table shows the respondents view towards behaviour of Auditor
is correct or not.
OPTIONS NO. OF RESPONDENTS RESPONSES IN %
Yes 58 86.57
No 0 0.00
Maybe 9 13.43
TOTAL 67 100.00
ANALYSIS:
The above table indicates that, the no. of responses responded by the people of AINO
MANAGEMENT CONSULTANCY PVT LTD with their view point, this table clearly states
that the above statement is highly sorted by „YES‟. Which means the auditor‟s behavior is
correct.

4.5 B GRAPH
Graph showing the respondents view towards behaviour of Auditor is

correct or not.
160
140
120 86.57
100
80
60
40 58
13.43
20 9
0.00
0
0
Yes No Maybe
NO. OF RESPONDENTS RESPONSES IN %
INTERPRETATION:
From the above graph we can say that most of them i.e. 87% of them were said Yes, 13% of
the respondents have said Maybe and Nobody has said No to the behaviour of Auditor.
OUTCOME:
It is understood that many of the respondents have said Yes the auditor‟s behaviour is correct.

2) Do you think Audit helps on the company’s processes improvement and

quality of Financial Reporting?
Yes, audit helps on company‟s processes improvement and Quality of Financial Report.
Audit provides credibility to a set of financial statements and gives the confidence to the
shareholders that the accounts are true and fair. Audit determines whether an organization‟s
processes are working within established limits. It measures conformance to any
predetermined or as well as the effectiveness of any instructions.
4.6 A TABLE
The below table shows the respondents view towards audit usefulness to
improve the organization and quality of Financial Reporting.
Yes 61 91.04
No 2 2.99
Maybe 4 5.97
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by 'YES'. Which means audit helps on the
company‟s process improvement and Quality of Financial Report.

4.6 B GRAPH
The below graph shows the respondents view towards audit’s usefulness to
improve the organization and quality of Financial Reporting.
3%
6%
Yes
No
Maybe
91%
INTERPRETATION:
From the above graph it is clear that 91% of the respondents have said yes, 6% of the
respondents have said MAYBE and remaining 3% of the respondents have said NO to the
performance of audits can improve the efficiency of organization.
OUTCOME:
It is clear that many of the respondents have said Yes, the audit helps on the company‟s
processes improvement.

3) Do you consider the communication during audit process is ethic and

professional?
Yes, the communication during audit process is ethic and professional. Because
communication develops the relationship with management and also communication helps in
understanding the matters relating to audit. Here ethic specifies the fundamental principles to
be respected by Auditor‟s and accountants namely: integrity, objectivity, confidentiality and
professional behaviour.
4.7 A TABLE
The below table shows the respondents view towards communication

during audit process is ethic and professional.
Yes 48 71.64
No 5 7.46
Maybe 14 20.90
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „YES‟. Which means the communication during
audit process is ethic and professional.

4.7 B GRAPH
The below graph shows the respondents view towards communication
80 71.64
70
60
48
50
40
30 20.90
20 14
7.46
5
10
0
Yes No Maybe
during audit process is ethic and professional.
INTERPRETATION:
From the above graph it can be said that 71.64% of the respondents were said Yes, the
communication during audit process is ethic and professional and 7.46% of the respondents
were said No and remaining 20.90% of the respondents were not really sure about it.
OUTCOME:
It is understood that many of the respondents have said Yes, the communication during audit
process is ethic and professional.

4) Do you think that audit helps in fraud detection and prevention while
preparing Financial Report?
Yes, audit helps in fraud detection and prevention while preparing financial report. Every
Organization faces the risk of financial loss due to fraud, but maintaining an effective audit
function can help reduce that risk. The auditor has the responsibility for the prevention,
detection and reporting of fraud, other illegal acts and errors is one of the most controversial
issues in auditing.
4.8 A TABLE
The below table shows respondents view on audit’s usefulness towards

detection and prevention of frauds while preparing Financial Reporting.
Yes 48 71.64
No 0 0.00
Maybe 19 28.36
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „YES‟. Which means they agree that audit helps
jn fraud detection and prevention.

4.8 B GRAPH
The below graph shows respondents view on usefulness towards detection

and prevention of frauds.
Maybe
28%
No
0%
Yes
72%
INTERPRETATION:
The above graph shows that 72% of the respondents have said Yes, the audit helps in fraud
detection and prevention and remaining 28% of the respondents said audit may help in fraud
detection and prevention.
OUTCOME:
It is understood that many of the respondents have Yes, the audit helps in fraud detection and
prevention.

5) Do you consider that audit is an added value process in the

organization?
Yes, the audit is a value- added process in the organization because audit improves the
“control environment” of the organization. The internal audit adds value to the organization
when it provides objective and relevant assurance, and contributes to the effectiveness and
efficiency of governance, risk management and control processes. Internal Auditing adds
value by evaluating and making recommendations for business risks, cost and waste
reduction opportunities and quality effectiveness.
4.9 A TABLE
The below table shows the respondents view towards audit is an added
value process in the organization.
Yes 56 83.58
No 1 1.49
Maybe 10 14.93
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „YES‟. Which means they consider audit as a
value- added process in the organization.

4.9 B GRAPH
The below graph shows respondents view towards audit is an added value
process in the organization.
90 83.58
80
70
56
60
50
40
30
14.93
20 10
10 1 1.49
0
Yes No Maybe
INTERPRETATION:
The above graph shows that the audit is an added value process in the organization 84% of
the respondents have said Yes and 15% of the respondents have said Maybe and remaining
1.5% said No the audit is not a value- added process in the organization.
OUTCOME:
It is understood that many of the respondents have said Yes, the audit is an added value

6) Do you consider that audit skill and knowledge are sufficient on the field
they audit?
Yes, the Audit skill and knowledge are sufficient on the field they audit, Auditing skills are
the abilities that allow auditing professionals to examine and verify a company‟s financial
information. The auditor should also have the required knowledge on accounting, business
and taxation law. It is also necessary that the auditor has computer operation skill because
most of the operations will require one. Knowledge of management systems will also be an
added advantage.
4.10 A TABLE
The below table shows respondents view towards Auditor’s skill and
knowledge are sufficient on the fields they audit.
Yes 50 74.63
No 1 1.49
Maybe 16 23.88
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „YES‟. Which means the auditor has sufficient
knowledge and skill in the field they audit.

4.10 B GRAPH
The below graph shows respondents view towards Auditor’s skill and
Chart Title
80
70
60
50
40
30
20
10
0
Yes No Maybe
knowledge are sufficient on the fields they audit
INTERPRETATION:
The above graph shows the Auditor‟s skill and knowledge are sufficient on the field they
audit. 75% of the respondents have agreed auditor‟s skill and knowledge are sufficient and
24% of the respondents said Maybe and remaining 1% said No the auditor‟s knowledge and
skill is not sufficient.
OUTCOME:
It is understood that many of the respondents have said Yes, the auditor‟s skills and
knowledge are sufficient on the field they audit.

7) Do you think that documents selection process is a random one without

any selection criteria?
The documents selection process is a random one without any selection criteria. The auditor
must evaluate companies‟ financial statements, documentation, accounting entries and data.
They may gather information from the company reporting systems, balance sheets, tax
returns, control system, income documents, invoices, billing procedures and account balance.
These are the criteria for document selection process during audit.
4.11 A TABLE
The below table shows the respondents view towards documents selection
process is a random one without any selection criteria.
Yes 33 49.25
No 17 25.37
Maybe 17 25.37
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „YES‟. Which means they agree that the
documents selection process is a random one there is no any criteria for selection.

4.11 B GRAPH
The below graph shows the respondents view towards document selection
process is a random one without any selection criteria.
Maybe 17 25.37
No 17 25.37
Yes 33 49.25
INTERPRETATION:
From the above graph it is clear that 49% of the respondents have said Yes, 25% of the
respondents have said Maybe remaining 25% of the respondents have said No the document
selection process is a random one without any selection criteria.
OUTCOME:
It is understood that many of the respondents have said Yes, the document selection process
is a random one without any selection criteria.

8) Do you think that follow up process is as much important as a normal

Audit?
Yes, the follow up process is much important as normal Audit to evaluate the effectiveness of
a corrective action that is officially closed after all findings are recommended for closure
through the follow-up audit process. The follow-up audits allow internal auditors to clearly
see whether recommendations were fully implemented in the field. Internal auditors also will
be able to assess the strength and practically of previous recommendations. Follow-up
process is implemented to monitor the disposition of Audit results and ensure that action
plans have been effectively implemented.
4.12 A TABLE
The below table shows follow up process is as much important as a normal

Audit.
Yes 53 79.10
No 4 5.97
Maybe 10 14.93
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „YES‟. Which means they agree that the follow
up process is important as normal Audit.

4.12 B GRAPH
The below graph shows follow up process is as much important as a normal

Audit.
79.10
80
70
60 53
50
40
30
20 14.93
10
5.97
10 4
0
Yes No Maybe
INTERPRETATION:
By looking at the above graph we can interpret that the follow up process is as much
important as a normal Audit. Most of the respondents i.e. almost around 79% of the
respondents have said Yes, 15% of the respondents said Maybe and remaining 6% of the
respondents said No.
OUTCOME:
It is understood that many of the respondents have said Yes the follow up process is as much
important as a normal Audit.

9) Do you think that audit helps on the improvement of the internal control
system of the auditees?
Audit helps in the improvement of internal control system of the auditees. The internal
control reduces the risk of asset loss and helps to ensure that plan information is complete and
accurate financial statements are reliable. To improve the internal control system the auditor
should maintain adequate supporting documentation and also provide adequate training to
staff. However, the auditors evaluate the effectiveness of the internal control structure of a
business organization and determine whether the business policies and activities are followed
properly. The communication network helps an effective internal control structure in
execution.
4.13 A TABLE
The below table shows respondents view towards audit helps on the
improvement of internal control system of the auditees.
Yes 56 83.58
No 0 0.00
Maybe 11 16.42
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „YES‟. Which means they agree that the audit
helps on the improvement of internal control.

4.13 B GRAPH
The below graph shows the respondents view towards audit helps on the
improvement of internal control system of the auditees.
Yes No Maybe
16%
0%
84%
INTERPRETATION:
The above graph can be interpreted as 84% of the respondents have said Yes, the audit helps
on improvement of internal control system of auditees and remaining 16% of the respondents
have said Maybe.
OUTCOME:
It is understood that many of the respondents have agreed that audit helps on the
improvement of the internal control system of the auditees.

10) Is auditee’s opinion always taken into consideration through their

comments on the draft report?
The auditee‟s opinion will always take into consideration through their comments on the draft
report. Meanwhile the auditor gives opinion based on the audit report which is modified and
unmodified report. Modified report is issued based on the audit and evidence, finds out that
the financial statements contain a degree of material misstatements.
4.14 A TABLE
The below table shows the respondents view towards Auditee’s opinion
always taken into consideration through their comments on the draft
report.
Strongly Agree 40 59.70
Agree 23 34.33
Neutral 3 4.48
Disagree 0 0.00
Strongly Disagree 1 1.49
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „Strongly Agree‟. Which means they agree that
the auditee‟s opinion is always taken into consideration through their comments on the draft
report.

4.14 B GRAPH
The below table shows the respondents view towards Auditee’s opinion
always taken into consideration through their comments on the draft
Strongly
Disagree
Neutral Disagree
4% 0%2%
Agree
34%
Strongly Agree
60%
report.
INTERPRETATION:
From the above graph we can interpret that 60% of the respondents have strongly agreed,
34% of the respondents have agreed, 4% are Neutral and remaining 2% of the respondents
have strongly disagreed.
OUTCOME:
It is clearly understood that many of the respondents have strongly agreed that the auditee‟s
opinion always taken into consideration through their comments on the draft report.

11) Are audit reports written in a clear and concise way?
Audit reports written in a clear and concise way. However, the audit report should be
complete but concise and it should be specific with both the requirement and evidence.
4.15 A TABLE
The below table shows the respondents view towards audit report written
in a clear and concise way or not.
Agree 28 41.79
Neutral 8 11.94
Disagree 0 0.00
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted „Strongly Agree‟. Which means they agree that the
audit reports are written in clear and concise way.

4.15 B GRAPH
The below graph shows the respondents view towards audit reports written
in a clear and concise way or not.
50
45
46.27
40 41.79
35
30
25 NO. OF RESPONDENTS
20 RESPONSES IN %
15
10 11.94
5
0.00 0.00
0
Strongly Agree Neutral Disagree Strongly
Agree Disagree
INTERPRETATION:
From the above graph we can interpret that 46% of the respondents said they strongly agree,
42% of the respondents have said agree and remaining 12% of the respondents have said
Neutral. Nobody has said disagree.
OUTCOME:
It is understood that many of the respondents have Strongly Agreed that the audit reports are
written in clear and concise way.

12) Are you or your Staffs interviewed sufficiently during the Audit?
Interviews are extremely important because they help to look beyond the documented
process. Interviews also give auditors an opportunity to see how well people are being made
aware of their responsibilities and a sense of their process understanding and level of
commitment.
4.16 A TABLE
The below table shows respondents view towards whether the staffs
interviewed sufficiently during the audit.
Agree 22 32.84
Neutral 9 13.43
Disagree 3 4.48
TOTAL 67 100
ANALYSIS:
the staffs are interviewed sufficiently during the audit.

4.16 B GRAPH
The below table shows respondents view towards whether the staffs
interviewed sufficiently during the audit.
80
70
60 47.76
50
40 32.84
30
20 32 13.43
22
10 4.48
9
3 1.49
1
0
Strongly Agree Agree Neutral Disagree Strongly Disagree
INTERPRETATION:
From the above graph we can understand that the staffs are interviewed sufficiently during
the audit. 48% of the respondents strongly agreed, 33% of the respondents agreed, 13% of the
respondents said Neutral, 4.48% of the respondents said Disagreed and remaining 1.5% of the
respondents strongly disagreed.
OUTCOME:
It is understood that many of the respondents have strongly agreed that staffs interviewed
sufficiently during the audit.

13. Are the identified issues clearly expressed based on facts / working
papers will give quality financial report?
The issues which are identified by the auditor can be clearly expressed based on facts or
working papers.
4.17 A TABLE
The below table shows the respondents opinion towards the identified
issues in auditing are clearly expressed and based on facts / working papers
will give a quality Financial Report.
Agree 21 31.34
Neutral 6 8.96
Disagree 1 1.49
TOTAL 67 100
ANALYSIS:
the identified issues are clearly expressed based on facts and working papers.

4.17 B GRAPH
The below graph shows the respondents opinion towards the identified
issues in auditing are clearly expressed and based on facts / working papers
will give a quality Financial Reporting.
2% 0%
9%
31%
58%
Strongly Agree Agree Neutral Disagree Strongly Disagree
INTERPRETATION:
The above graph says the identified issues can be expressed clearly in the audit report 58% of
the respondents have Strongly Agreed, 31% of the respondents have agreed, 9% of the
respondents said Neutral reaming 2% of the respondents have disagreed.
OUTCOME:
The auditors typically state the specific reasons and areas where the issues are present so that
the company can fix them.

14) Are the actions left in audit reports achievable? Incase if not achieved
to then does it affect the quality of Financial Report?
Yes, the actions left in the audit reports are achievable and in case it is not achieved it may
affect the financial reporting quality.
4.18 A TABLE
The below table shows respondents view towards the actions left in audit
reports achievable? Incase if it’s not achieved then does it affect the quality
of Financial Report.
Agree 26 38.81
Neutral 12 17.91
Disagree 1 1.49
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „Strongly Agree‟. Which means they agree
actions left in audit reports can be achieved.

4.18 B GRAPH
The below graph shows respondents view towards the actions left in audit
reports achievable? Incase if it’s not achieved then does it affect the quality
of Financial Reporting.
RESPONSES IN % NO. OF RESPONDENTS
0.00
Strongly Disagree
0
1.49
Disagree
1
17.91
Neutral
12
38.81
Agree
26
41.79
Strongly Agree
28
INTERPRETATION:
The above graph shows 42% of the respondents have Strongly Agreed, 39% of the
respondents have Agreed, 18% of the respondents have said Neutral and remaining 1.5% of
the respondents have disagreed.
OUTCOME:
The actions left in the audit report can be achieved. Anyhow the actions left in audit report
should be achieved then only the audit report will be a quality report.

15) Have you ever had the opinion that the audit is a tendentious process in
order to catch the employees in errors?
Yes, the audit is a tendentious process it helps to find the errors which the employees do in
the organization.
4.19 A TABLE
The below table shows respondents view whether the audit is a tendentious
process in order to catch the employees in errors.
Agree 27 40.30
Neutral 6 8.96
Disagree 4 5.97
TOTAL 67 100
ANALYSIS:
that the above statement is highly sorted by „Strongly Agree‟. Which means they had the
opinion that the audit is a tendentious process in order to catch the employees in errors.

4.19 B GRAPH
4.4.15 The below graph shows respondents view whether the audit is a
tendentious process in order to catch the employees in errors.
80
70
60
43.28
50 40.30
40
30
20 29 27
8.96
10 5.97
6 4 1.49
1
0
Strongly Agree Agree Neutral Disagree Strongly
Disagree
INTERPRETATION:
From the above graph it is clear that 43% of the respondents have strongly agree, 40% of the
respondents have agreed, 9% have said Neutral, 6% of the respondents disagreed and
remaining 1.5% have strongly disagreed.
OUTCOME:
The high percentage in agree and strongly agree column it clearly says the audit is a
tendentious process in order to catch the employees in errors.

CHAPTER – 5
SUMMARY FINDINGS, CONCLUSION AND SUGGESTION
5.1 SUMMARY OF FINDINGS:
 It is observed that 87% of the respondents are extremely satisfied with the Auditor‟s
behavior.
 It is found that 91% of the respondents feel that the audit helps on company‟s
processes improvement and Quality of Financial Report.
 It is found that 72% of the respondents are agree that the communication during audit
process is ethic and professional.
 It is noticed that 72% of the respondents think that audit helps in fraud detection and
prevention while preparing the Financial Report.
 It is found that 84% of the respondents have agreed that the audit is an added value

 It is identified that 75% of the respondents are satisfied with the skill and knowledge
of an auditor.
 It is observed that 49% of the respondents feel that the selection process is a random
one without any selection criteria.
 It is found that 79% of the respondents are telling that follow up process is as much as
normal Audit.
 It is noticed that 84% of the respondents have agreed that the audit helps on the
improvement of internal control system of auditees.
 It is identified that 60% of the respondents are strongly agree that the opinion taken
into consideration through the comment on the draft report.
 It is noticed that 46% of the respondents are telling that the audit reports are written in
clear and concise way.
 It is identified that 48% of the respondents feel that the staffs are interviewed
sufficiently during the audit.
 It is noticed that 58% of the respondents are strongly agreed that the identified issues
in auditing are clearly expressed and based on facts or working papers which will give
a quality financial report.
 It is observed that 42% of the respondents are telling the actions left in audit reports
are achievable.
 It is identified that 43% of the respondents are agreeing that the audit is a tendentious
process in order to catch the employees in errors.

5.2 CONCLUSION:
The Internal Auditor should verify whether proper operating standards and procedures have
been established for cost control and reduction. It should be complete and detailed enough to
be known with determined operating authority and should be efficient of being used by
operating personnel for observe and assess their performance.
The internal auditor should analyze the methods of establishing the operating standards and
procedures. He should carefully inspect the assumptions made while setting the standards to
ensure that they are proper and required.
The variances should be examined to evaluate whether or not the standards and norms are
practical. Where there is a wide divergence between actual performance and the
corresponding standards, reasons may be looked into. The system of identification and
analysis of deviations from standards should be examined.
The internal auditor should examine whether analysis of variances is communicated to those
concerned in time. He should also examine whether in communicating the variances serious
matters are highlighted and whether exceptional variances are communicated more
expeditiously than is done in the normal course.

5.3 SUGGESTIONS:
 Auditor should review the work of accountant on the quarterly or annual basis.
 High priority should be given to the completion and rolling out of the risk
management policy and updated balance sheet continuity plan in the current financial
year.
 The structure of audit operations could be more efficient.
 Information must be gathered on how the organization or the company is operating.
 Internal auditor‟s report should be written clearly based on policies and procedures.
 Before selecting an audit, the assessment against each selection criteria should be
documented.
 The auditor should select the document with the selection criteria.
 Highlight the areas of weakness and suggest course of remedial action.
 Some of respondents have said audit report is not written clear and cover ways. So,
the auditor should more focus on the report as well.
 Auditor has to verify the process inputs and outputs.
 Auditors must use standardized checklists.

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A STUDY ON INTERNAL AUDIT AND ITS IMPACT ON FINANCIAL REPORTING QUALITY WITH

SPECIAL REFERENCE TO “AINO MANAGEMENT CONSULTANCY PVT LTD”

1.1 INTRODUCTION TO AUDITING:

Auditing is a systematic and independent examination of data, statements, records, operations

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 1

1.1.2 DEFINITION OF AUDITING:

“An audit is an examination of accounting records undertaken with a view of establishing

“Audit is defined as an investigation of some statements of figures involving examination of

1.1.3 OBJECTIVES OF AUDITING:

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 2

1.1.4 PRIMARY OBJECTIVES:

The primary or main objective of auditing is as follows:

1. To Examine the Accuracy of the Books of Accounts

 Verify the arithmetical accuracy of the books of accounts.

2. To Express Opinion on Financial Statements

Secondary objectives of auditing are as follows:

1. Detection and prevention of Errors

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 3

2. Detection and prevention of Frauds

Fraud is the intentional or willful misrepresentation of transactions in the books of accounts

1.1.5 TYPES OF AUDITING:

The above-mentioned types can be explained below:

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 4

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 5

1.2 INTERNAL AUDIT AND ITS IMPACT ON FINANCIAL

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 6

1.2.1 MEANING OF INTERNAL AUDIT:

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 7

1.2.2 DEFINATION OF INTERNAL AUDIT:

1.2.3 ADVANTAGES OF INTERNAL AUDIT:

1] More Effective Management

4] Ensures Optimum Use of Resources

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 8

1.2.4 LIMITATIONS OF INTERNAL AUDIT:

1] Shortage of Qualified Staff

1.2.5 TYPES OF INTERNAL AUDIT:

The above-mentioned types can be explained below

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 9

 Compliance Audits evaluate compliance with applicable laws, regulations,

 Environmental Audits assess the impact of a company‟s operations on the

 Information Technology Audits may evaluate information systems and the

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 10

1.2.6 PROCEDURE / PROCESS OF INTERNAL AUDIT:

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 11

1.2.7 MEANING OF FINANCIAL REPORTING:

Financial reporting refers to standard practices to give stakeholders an accurate depiction of a

1.2.8 DEFINITION OF FINANCIAL REPORTING:

Financial reporting refers to the communication of financial information, like financial

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 12

1.2.9 BENEFITS OF FINANCIAL REPORTING:

ii. Financial management in normal operations

iii. Operation evaluation

iv. Decision-making, planning and forecasting

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 13

1.2.10 TYPES OF FINANCIAL REPORTING:

 External financial statements (income statement, statement of comprehensive income,

1.2.11 OBJECTIVES OF FINANCIAL REPORTING:

ST. TERESA‟S DEGREE COLLEGE FOR WOMEN 14

1.2.12 INTERNAL AUDIT EXECUTION

A typical internal audit assignment involves the following steps:

Quality of internal audit report

 Objectivity – The comments and opinions expressed in the report should be