Auditing Assignment.

Name - Yohann Lobo, Roll no. 21, UID no. 226646, Class – SYBAF.
Q1. Define internal control and explain objectives along with inherent limitations
of internal control.
ANS: Meaning.
SA 400 issued by the Institute of Chartered Accountants of India (ICAI) deals
study and evaluation of Internal Control in connection with an audit. It defines
Internal Control as “all the policies and procedures adopted by the management
of a concern to ensure the orderly and efficient conduct of its business.”
Objectives.
The main objective of internal control is ensuring the orderly and efficient
conduct of business. This includes the following sub-objectives of ensuring:
1. adherence to management policies,
2. safeguarding of assets,
3. prevention and detection of fraud and error,
4. accuracy and completeness of accounting records;
5. timely preparation of reliable financial information;
6. determining whether other internal controls are well designed and properly
operated through internal audit, which is a separate component of internal
control.
Inherent Limitations.
All the objectives of internal control, listed above, may not be actually achieved,
because of its following limitations.
1. Costs
Cost of implementing a control procedure may be much more than its benefits.
2. Human Error
A control procedure may not prove effective due to human errors e.g.,
carelessness of employees, mis-understanding of instructions, wrong judgements
etc.
3. Collusion
Even if duties are divided among different employees, they may collude (work
together fraudulently).
4. Misuse
An employee responsible for a particular function may misuse his authority.
5. Manipulation by Management
Manipulation and misappropriation by top management will defeat the very
purpose of internal control.

Q2. Elaborate basic principles of internal audit.

ANS. Following are the basic principles governing internal audit:
1. Integrity
Objectivity and Independence The internal auditor should be straight forward,
honest and sincere in his approach to professional work. He should be fair and
unbiased. He should be impartial in his attitude. The management should not
interfere with the work of the internal auditor. He should be provided an
environment to enable him to discharge his responsibilities independently.
2. Confidentiality
The internal auditor should maintain confidentiality of the information acquired
during the course of audit. He should not disclose this information to any
employee of the organization without specific authority from the management. It
should be ensured that there are well laid down policies and controls to protect
confidentiality of the information.
3. Professional Care, Skills and Competence
The internal auditor should exercise due professional care, competence and
diligence while carrying out internal audit work. Due professional care implies
that the internal auditor exercises reasonable care in carrying out the work
entrusted to him. The internal auditor should obtain such skills and competence
acquired through education, technical knowledge which are necessary to carry
out the internal audit work.
4. Work Performed by Others
The internal auditor may delegate work to assistants. He has to carefully direct.
supervise and review the work delegated to assistants. The internal auditor may
be required to depend on the work performed by others or experts, he should
ascertain their competence and skills and also evaluate their work. If he
ascertains that the others or experts have exercised reasonable assurance that the
work performed by other experts is adequate for his purpose, he should be
satisfied that there is no reason to believe that he should not have relied on the
work of others. The reliance placed on the work of others; the internal auditor
will continue to be responsible for forming his opinion on the work done by
others.
5. Documentation
The internal auditor should document matters which are important in providing
evidence that the audit was carried out in accordance with the standards on
internal audit and support his findings. In addition, the working papers provide
evidence to support the work performed.
6. Planning
The internal auditor should plan his work to enable him to conduct his work in an
effective manner. This is to ensure that appropriate attention is provided to
significant areas of audit. The internal audit plan should be based on the
knowledge of business of the entity. The internal audit plan should cover the
following aspects:
i) Knowledge of regulatory framework.
ii) Knowledge of accounting system and internal control
iii) Effectiveness of the internal control procedures
iv) Identification of the activities warranting special focus.
v) Allocation of staff to each activity.
vi) Nature, timing and extent of procedures to be performed
vii) Setting the time budget for each activity.
viii) Identification of reporting responsibilities.
ix) Benchmarking
The audit plan once prepared should be reviewed periodically to bring it in line
with the audit universe.
7. Evidence
Based on professional judgement the auditor should obtain sufficient and
appropriate evidence in order to enable him to draw reasonable conclusions on
which basis he frames his opinion.
8. Internal Control and Risk Management Systems
The internal auditor is to suggest improvements to the systems. For this purpose,
he should obtain an understanding of the risk management system and internal
control system. He should take steps and assess the adequacy of the framework.
He should perform risk-based audit on the basis of risk assessment process.
9. Reporting
The auditor should carefully review and assess the conclusions drawn from the
audit evidence obtained on the basis of his findings and suggest remedial action.
In case the internal auditor comes across the actual or suspected fraud or
misappropriation of assets it is appropriate for him, to bring this fact to the notice
of the management.
10. Effective Date
This standard on audit is effective for all internal auditors w.e.f. the date notified.

Q3. Write distinguish between internal audit and external audit.

Point Internal Audit External Audit
1. Meaning It is an ongoing audit It is an audit performed by
function performed within an independent body which
an organization by the is not part of an
internal auditor. organization.
2. Objective To provide suggestions for To verify financial
improvement. statements of a company.
3. Conducted by May be an employee. Third person qualified as per
the law.
4. Appointment Appointment of auditor is Appointment of auditor is
made by the management. made by members.
5. Users of report Management is the user of Stakeholders are the users of
report. report.
6. Opinion Opinion is given on the Opinion is given on true and
 effectiveness of
organizational activities.
7. Scope It is decided by the
management.
8. Obligation It is not obligatory except
certain companies.
9. Period It is a continuous process.
10. Checks It checks operational
efficiency of the company.
11. Responsibility Internal auditor is
responsible to the
management.
12. Remuneration It is fixed by the
management.
13. Removal Management can remove
Internal auditor.
fair view of the financial
statements of a company.
It is decided by the law.
It is obligatory for all the
companies.
It is conducted once a year.
It checks accuracy and
validity of financial
statements of the company.
External auditor is
responsible to the members.
It is fixed by the
shareholders.
Shareholders can remove in
the AGM.

Internal Audit and External Audit are not opposed to each other. Instead, they
complement each other. External auditor may use the work of the internal auditor
if he thinks fit. However, it does not reduce the responsibility of the external
auditor. Internal audit acts as a check on the activities of the organization and
assists by advising on various matters to increase operational efficiency. On the
other hand, external audit is entirely independent as it is done by a third party. It
checks the accuracy and validity of the annual accounts of the organization.