AUDITING INTRODUCTION

INTRODUCTION TO AUDITING.

The practice of auditing existed even in the Vedic period. Historical records show that Egyptians, Greeks and Roman used to get this public account scrutinized by and independent official. Kautaly in his book “arthshastra” has stated that “all undertakings depend on finance, hence foremost attention should be paid to the treasury”.

Auditing as it exists today can be associated with the emerging a joint stock company during the industrial revolution. The company’s act of 1956 gives regulations regarding the audit work.

Meaning of Audit:

The word audit is derived from the Latin word “AUDIRE” which means to hear. Initially auditor was a person appointed by the owners to check account whenever the suspected fraud, he was to hear explanation given by the person responsible for financial transactions. Emergence of joint stock companies changed the approach of auditing as ownership was pestered from management. The emphasis now is clearly on the verification of accounting date with a view on the reliability of accounting statement.

Definition:

Spicer and Peglar define auditing as “An examination of the books, accounts and vouchers of a business’s shall enable the auditor to satisfy himself whether or not the balance sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs of the business according to his best of the information given to him and as shown by the book.

Mautz: defines auditing as being “Concerned with the verification of accounting data with determining the accuracy and reliability of accounting statements and reports.”

The international auditing practices committee defines auditing as “the independent examination of financial information of any entity whether profit oriented or not and irrespective of size/legal form when such an examination is conducted with a view to express an opinion thereon”.

Scope of Audit.

The scope of audit is increasing with the increase in the complexities of the busines. It is said that long range objectives of an audit should be to serve as a guide to the management future decisions.

Today most of the economic activities are largely conducted through public finance. The auditor has to see whether these larger funds are properly used. The scope of audit encompasses verification of accounts with a intention of giving opinion on its reliability. Hence it covers cost audit, management audit, social audit etc. It should be remembered that an auditor just expressed his opinion on the authenticity of the account. He has no power to take action against anybody, in this regard its said that “an auditor is a watch dog but not a blood hound”.

Objectives of Auditing.

Auditors are basically concerned with verifying whether the account exhibit true and fair view of the business. The objectives of auditing depends upon the purpose of his appointment.

Primary Objective.

The primary objective of an auditor is to respect to the owners of his business expressing his opinion whether account exhibits true and fair view of the state of affairs of the business. It should be remembered that in case of a company, he reports to the shareholders who are the owners of the company and not tot the director. The auditor is also concerned with verifying how far the accounting system is successful in correctly recording transactions. He had to see whether accounts are prepared in accordance with recognized accounting policies and practices and as per statutory requirements.

Secondary Objective:

The following objectives are incidental to the main objective of audting.

1.      Detection and prevention of errors: errors are mistakes committed unintentionally because of ignorance, carelessness. Errors are of many types:

a.       Errors of Omission: These are the errors which arise on account of transaction into being recorded in the books of accounts either wholly partially. If a transaction has been totally omitted it will not affect trial balance and hence it is more difficult to detect. On the other hand if a transaction is partially recorded, the trial balance will not agree and hence it can be easily detected.

b.      Errors of Commission: When incorrect entries are made in the books of accounts either wholly, partially such errors are known as errors of commission. Eg: wrong entries, wrong Calculations, postings, carry forwards etc such errors can be located while verifying.

c.       Compensating Errors: when two/more mistakes are committed which counter balances each other. Such an error is know an Compensating Error. Eg: if the amount is wrongly debited by Rs 100 less and Wrongly Credited by Rs 100 such a mistake is known as compensating error.

d.      Error of Principle: These are the errors committed by not properly following the accounting principles. These arise mainly due to the lack of knowledge of accounting. Eg: Revenue expenditure may be treated as Capital Expenditure.

e.       Clerical Errors; A clerical error is one which arises on account of ignorance, carelessness, negligence etc.

Location of Errors: It is not the duty of the auditor to identify the errors but in the process of verifying accounts, he may discover the errors in the accounts. The auditor should follow the following procedure in this regard.

1.      Check the trial balance.

2. Compare list of debtors and creditors with the trial balance.
3. Compare the names of account appearing in the ledger with the names of accounting in the trial balance.
4. Check the totals and balances of all accounts and see that they have been properly shown in the trial balance.
5. Check the posting of entries from various books into ledger.

2.      Deduction and Prevention of Fraud: A fraud is an Error committed intentionally to deceive/ to mislead/ to conceal the truth/ the material fact. Frauds may be of 3 types.

a.       Misappropriation of Cash: This is one of the majored frauds in any organisation it normally occurs in the cash department. This kind of fraud is either by showing more payments/ less receipt.

The cashier may show more expenses than what is actually incurred and misuse the extra cash. Eg: showing wages to dummy workers. Cash can also be misappropriated by showing less receipts

Eg: not recording cash sales. Not allowing discounts to customers. The cashier may also misappropriate the cash when it is received. Cash received from 1st customer is misused when the 2nd customer pays it is transferred to the 1st customer’s account. When the 3rd customer pays it goes forever. Such a fraud is known as “Teaming and Lading”. To prevent such frauds the auditor must check in detail all books and documents, vouchers, invoices etc.

b.      Misappropriation of Goods: here records may be made for the goods not purchase not issued to production department, goods may be used for personal purpose. Such a fraud can be deducted by checking stock records and physical verification of goods.

c.       Manipulation of Accounts: this is finalizing accounts with the intention of misleading others. This is also known as “WINDOWS DRESSING”. It is very difficult to locate because its usually committed by higher level management such as directors. The objective of WD may be to evade tax, to borrow money from bank, to increase the share price etc.

to conclude it cab be said that, it is not the main objective of the auditor to discover frauds and irregularities. He is not an insurance against frauds and errors. But if he finds anything of a suspicious nature, he should probel it to the full.

ADVANTAGES OF AUDIT:

1.      Audited account are detected as an authentic record of transaction.

2.      Errors and frauds are detected and rectified.

3.      It increases the morale of the staff and thus it prevents frauds and errors.

4.      Because of his expertise the auditor may advise on various matters to his clients.

5.      An auditor acts as a trustee of his shareholders. Hence he safeguards their financial interest.

6.      For taxation purpose auditing of account is amust.

7.      In case of any claim is to be made from the insurance company only audited account should be submitted.

8.      Even in case of partnership firm auditing of accounts helps in the settlement of claim at the time of retirement/death of a partner.

9.      Auditor account helps in managerial decisions.

10.  They are useful to secure loan at the of amalgamation, absorption, reconstruction etc.

11.  Auditing safeguards the interest of owners, creditors, investors, and workers.

12.  It is useful to take certain financial decisions like issuing of shares, payment of dividend etc.

TYPES OF AUDIT:

1.      Statutory Audit: any audit carried on as per the requirement of law is called as a statutory audit. eg: all companies have to get their accounts audited as per the provision of the company’s Act of 2002.

2.      Periodical/ Annual Audit: it is a kind of audit where the auditor verifies the account at the end of the financial year. He starts the audit work after the closure of financial year. This is a common audit and is mostly used by small organizations.

3.      Interium audit: its an audit conducted in the middle of the accounting year before the accounts are closed. In other words any audit conducted between two financial audit is known s interium audit. The objective is to get periodical results, to declare interium dividend.

4.      Partial Audit: when an auditor is asked to audit only a part of the account system. Its called partial audit. Eg: he may be asked to audit only the payment side of cash book.

5.      Balance sheet audit: it’s a kind of partial audit and is concerned with the verification of only those items appearing in the Balance Sheet. It is more popular in the USA. Infact while verifying BS items the auditor verifies/ checks all related items/accounts.

6.      Cost audit: cost audit is defined as the verification of cost accounting records. Data and techniques for its accuracy and authenticity. It gets as effective managerial tool for the detection of errors and frauds in cost accounting records. The companies act implies the central government to order cost audit incase of specifies companies.

7.      Management audit: Management audit may be defined as a comprehensive examination of an organizational structure of a company, institution/government and its plans and objectives it means of operations and use of human and physical facilities. The main objective of mgt audit is to see how far the objectives of mgt are fulfilled. It aims to ascertain whether sound mgt prevails throughout the organisation and evaluates its efficiency in the system of its operation.

8.      Continuous audit: a continuous audit is one in which the auditor visits his clients office at regular intervals through out the year to verify the account. The objective of CA may be-

a.       To get final account audited immediately after the closure of accounting year.

b.      When the business is very large.

c.       When interval control system is into effective.

d.      When regular final accounts are required.

ADVANTAGES:

1.      Errors and frauds are discovered and rectified quickly.

2.      The chances of fraud are reduced.

3.      The workers will be careful in their work.

4.      Continuous audit acts as a valuable morale check on the staff.

5.      Final audit becomes easier and faster.

6.      If the company wants to declare interium dividend its easier to prepare interium account.

7.      It increases the efficiency and accuracy in the accounts.

DISADVANTAGES:

1.     After the auditor’s visit is over, alternative may be made.

2.     It affects the regular work.

3.     Its not suitable for small organizations.

4.     The auditor may loose the line of work if he does not complete his work in a visit.

Precautions to be taken for continuous audit:

1.      He should record important balances, totals etc and verify the same in his next visit.

2.      Strict instructions should be given prohibiting the alteration of figures after checked by the auditor.

3.      For each visit special ticks should be used.

4.      Its always better to verify the nominal account at the end of the year.

5.      An exhaustive audit programme must be prepared.

6.      He should ensure that normal working is not affected.

7.      As far as possible, he should pay surprise visits.

Preparation before commencement of the audit:

An auditor after receiving the appointment letter should communicate his acceptance/otherwise in writing to the company. The following steps are necessary to commence the audit work:

1.      If it is not a statutory audit, he should find out the exact nature and scope of his duties i.e., whether he has to audit the account/prepare accounts also.

2.      He should inform his clients to close all the books of account and keep them ready for verification.

3.      He should acquaint himself with the nature of his client business.

4.      He should examine the efficiency of the internal control system.

5.      He should obtain the names of directors their power duties etc.

6.      He should obtain a complete list of all books and documents maintained by the clients.

7.      He should obtain a copy of previous year’s audit report.

8.      He should go through various documents like MOA, AOA, prospectus etc.

Audit Programme: before commencing the audit he should plan his work so that is over without delay. For this purpose the auditor chalks out a detailed programme explaining the procedure to be followed for audit. It explains the work to be done by the audit staff. an audit programme is defined as “a detailed plan of the auditing work to be performed, specifying the procedure to be followed in verification of each item in the financial statements, and giving the estimated time required’.

Hence an audit programme is a statement giving instructions and guidance to the audit staff as to the audit procedure. It arranges and distributes the work among the audit staff.

ADVANTAGES:

1.      It provides the audit staff clear instructions about their duties.

2.      It promotes division of work in a well organized manner.

3.      It helps the auditor to monitor the progress of the work.

4.      It will be easier to fix responsibilities for omissions and commissions.

5.      It serves as a valuable evidence for the work done.

6.      It serves as a guide for future audit.

7.      It ensures that audit process in a systematic manner.

8.      It eliminates inefficiency and saves time.

9.      Incase if any audit assistant goes on leave, his work can be easily continued by others.

10.  It avoids duplication of work.

Disadvantages of Audit Programme.

1.      The audit work becomes mechanical.

2.      It kills the creativity of the audit staff.

3.      Chances of work not done properly/ high as the scope is to be completed within a scheduled time.

4.      A rigid programme may not be suitable for all kinds of business.

The above disadvantages can be minimized if the audit programme is made more flexible and audit staff encourages to go beyond the work mentioned in the audit programme. The auditors should also periodically review the programme in the light of experiences gained in the previous year. He should impress upon the audit staff. The audit programee is only guidance and they should use their initiatives, intelligence and comman sense at all times during the course of the audit.

Audit Note Book: an audit note book is one of the most important document maintained by the auditor. It is defined as a record used mainly in recording audit, containing data on work done and comments made. Audit Note book contains information regarding the day to day work performed by the audit staff, notes about errors, explanations required etc. the auditor can use it as an authentic evidence in the court if there is any case against him.

Contents of Audit Note Book:

1.      Nature of business and important documents such as MOA, AOA, Partnership deed etc.

2.      List of books of accounts.

3.      List of officials, their duties and responsibilities.

4.      Copy of the audit programme.

5.      Information on missing receipts, vouchers etc.

6.      Details of errors discovered.

7.      Explanations sought from the officials.

8.      Points to be included in the audit report.

An audit note book should be preserved by the auditor as it contains valuable information in respect of the work done by its staff.

Audit Working Papers:

Audit working papers are those papers which contain essential facts about accounts, which are being audited. Its defined as the file of analysis, summaries, comments and correspondence build up by the auditor during the course of audit.

The auditor maintains papers as supporting evidence to the audit work. The institute of chartered accountants of India states that “an auditor is expected to maintain evidence of work done by him and his staff”.

Usually, audit working papers contains a copy of the trial balances, schedule of debtors and creditors, reconciliation statements important correspondence etc.

Purpose of maintaining working paper:

1.      They show the extent to which accounting principles and auditing standards have adhered to.

2.      They provide the required support for the auditors report.

3.      They also reveal the efficiency with which the audit work was done.

4.      They can be used as evidence in the court to defend himself against negligence in his duty.

5.      They help the auditor in finalizing his report quickly.

6.      They help the auditor to understand the efficiency of the accounting system, internal check system etc.

Working papers should be clear complete, and contain the necessary information so that they may be of maximum utility. They should be properly organized, documented and signed. In this regard its said hat “an auditor is often judged by the quality of the working paper prepared by him under his guidance”.

working papers are confidential documents hence he should not disclose the facts to others. Doing so results in professional misconduct. Working papers should be preserved properly because they are important documents.

OWNERSHIP OF WORKING PAPERS:

The auditor who collects information through working papers for his audit work. Usually claims that he is the owner of the working papers. On the other hand the company claims that the auditor was appointed by and he only acts as its agent. Hence, all the documents that the auditor had collected should belong to the company several cases have been referred to the courts regarding the ownership in one of the cases it was decided that the working papers belong to the auditor because he was an independent professional and not an agent of the client. In another case also, it was held that the working papers belong to the auditor.

Auditors Lien:

The auditors if has into been paid his audit fees has the right to keep the books of accounts and other related documents in his possession till his dues are paid. Such a right is known as Auditors Lien.

Differences between Accounting and Auditing.

Accounting	Auditing
1.      It’s a continuous process carried out throughout the year.	1.It’s a one time activity after the closure of accounting year.
2.       No prescribed qualification is required to be an accountant.	2. He must be the member of Institute of Chartered Accountants of India to become an auditor.
3.      An accountant is a employee of the company.	3. An auditor is an independent professional.
4.      An accountant gets regular salary for his work.	4. He gets remuneration for his professional work. Audit fees.
5.      Accounting is concerned with recording of business transactions systematically. 6.      Accounting precedes, auditing.	5. Its concerned with verification of accounts prepared by the accountant. 6. Auditing succeeds accounting.

Usually an auditor confines his work only to the verification of accounts. In small organizations he may also be asked to finalize accounts. In this case he acts both as an accountant and as an auditor but the audit work commences only when the accounting work is over. Hence, its said that “Audit begins where accounting ends”.

INTERNAL CHECK.

The term internal check implies that the work of various members of the staff is allocated in such a way that the work done by one person is automatically checked by another. It is defined as “such an arrangement of book keeping routine where in errors and frauds are likely to be prevented or discovered by the very occupation of book keeping itself’.

Internal check is a system under which accounting methods and details of an establishment are laid out that the accounts and procedures are not under the absolute and independent control of any one person or the contrary the work of one employee is complementary to that of another.

The system of IC is based upon the principle of division of labor, where in performance of each individual is automatically checked by another. This is possible by properly allocation the work and integration of function of the employees in such a manner their work complements each others.

OBJECTIVES OF INTERNAL CHECK:

1.      Eliminates frauds and errors to prevent misappropriation of goods in cash.

2.      To encourage specialization of labor.

3.      To reduce the time spent on a particular work.

4.      To exercise moral pressure over staff members.

5.      To make accounting system more reliable.

Points to be Considered in Framing a Good Internal Check.

1.      No single employee should have independent control over any important aspect of the business. In other words the work of employed should be automatically received by another.

2.      The duties of the employees should be changed from time to time without prior notice.

3.      Employees who control physical assets should not have assets to goods of account.

4.      It’s better to follow a system of self balancing ledger.

5.      Account must be periodically verified.

6.      The allocation of work must be carefully done and the position must be reviewed periodically.

7.      While stock taking the pricing and evaluation of stock should be done by the people who are not connected to stores department.

8.      A cashier should not be in charge of maintaining accounts complete bank transactions etc.

Internal check and the Auditor:

The auditor before starting audit work evaluates the system of internal check. If it is efficient he may avoid detailed checking of the transactions and he can carry out a few test check of the transactions to what extent should an auditor rely upon the system of internal check will depend upon the degree of effectiveness with which, the system is followed as well as the size of the business. If the internal check system is inefficient, he had to check in detail all transactions. It should be remembered that even if the internal check system is efficient he should still test its existence and efficiency.

Efficient internal check system reduces his work but not his responsibility. If in the process of examination of accounts if he finds any weakness in his system, he should report it to his client. Thus the existence of a good internal check system may help an auditor to a great extent, but does not reduce his legal liability. If any fraud is discovered subsequently he may be held quietly of negligence. He can’t defend himself saying that he relied upon the efficient internal check system that existed in the business.

Internal check regarding CASH SALES.

Sales over the counter. The following is the internal check system regarding sales over the counter.

1.      Each counter should have a separate salesman.

2.      Each salesman should be given a separate sales memo book. Usually different color is used for different counters,

3.      Sales memo should be prepared by the salesman in 4 copies.

4.      The sales memo is checked by another clerk before being handed it over to customer. A copy is retained by the clerk.

5.      Payment is made at the cash counter.

6.      One copy of cash memo is returned to the internal duly stamped as cash paid 2 copies are return the cashier.

7.      The cashier records days total sales in cash sales register.

8.      Every salesman should prepare total sales summary of the respective counters. At the end of the day total sales as recorded by salesman, total cash received and total sales as per register must agree with each other.

Postal Sales:

A separate register should be maintained to record details of postal sales. Cash may be received either with order (cwo) or at the time of delivery (cod). Proper records will be made in this regard for cash received and due. Usually, goods are sent by VPP (value payable post). The sales register must be checked in detail by a senior officer.

Sales by Traveling Agents:

1.      Traveling salesman should not be allowed to issue final receipts to customers.

2.      Amount received must be remitted to H.O. account on daily basis.

3.      Salesman should not be allowed to deduct their expenses or commission from the sale proceeds.

4.      The salesman should submit periodical sales report which must be examined in detail.

Internal check regarding Wages:

In a large organization, expenses on wages with form one of the major portions of expenses. The chances of frauds are also high in this regard. In this background, a good system of internal check assumes significance.

a.       frauds might be in the form of recording more wages than actually paid.

b.      Payment of wages to dummy/ghost workers.

c.       Recording wages for which no payment has been made etc.

The design of internal check system should try to prevent the above fraud. The following internal check system is suggested in this regard.

1.      Maintaining Time Records: A department is in charge of recording the time spent by the workers should be constituted as far as possible. Manual system of time keeping must be avoided. This brings down the fraud regarding the payment of wages for which no work is done.

The time keeping check and the foremen should separately prepare the time recorded sheet recording the name of the worker, time of entry, names of absentees etc.

In case if the workers are paid on piece rate system proper system of time booking must be followed each worker should be given a job and counter assigned by the supervisor.

In case if workers work overtime, the overtime slips must be issued which is authorized by the concerned official. No worker should be allowed to work Over Time if he is not authorized to do so.

2.      Preparation of Wage Sheets:

Large scale organizations should evolve in an internal check system in such a manner that the chances of over payment, under payment, wrong payment to workers are minimized and prevented. Preparation of wage sheets should be the responsibility of a separate department. Separate wage sheets should be maintained for workers under time rate system and price rate system.

Two clerks should examine the time and price wage records. Over time records etc another clerk should be in charge of preparing wage sheets of individual works. The 4^th clerk checks the calculations deduct amount for PF, IT, etc to arrive at net amount to be paid to workers. All officials involved in the process, should sign the statements which will be approved by the work manager/ the production manager.

Payment of Wages: a person is not involved either in maintaining time records preparation of wage sheets should be in charge of payment of wages. Usually the cashier in the accounts department will allot the wages, according to the information given by the wage sheet. As far as possible wages should be distributed personally to the workers who sign the Wage Register. Absentee workers should be paid through others workers only after written authorization is received. A list of unpaid wages should be prepared after the distribution of wages. If there are casual workers, payment should be made to them separately on a different day.

Internal Check as Regards Purchase.

The purchase dept, will be responsible for proper control over purchases as far as possible. Purchases must be centralized for the purpose of internal check. The purchase process may be divided as:

1.      Purchase.

2.      Storage.

3.      Issues of Materials.

1. Internal Check regarding Purchase of Materials: The concerned dept, head will send requisition letter to the purchase dept, for each dept, a separate file must be maintained for requisitions. Based on the requisition the purchase committee, purchase dept, calls for tenders from approved suppliers. These tenders must be opened by the purchase committee and the least bidder will be chosen.

Purchase order has to be sent to the selected suppliers. Usually, purchase order will be prepared by the purchase dept, a copy of which will be sent to the supplier, second to the stores, third to the accounting dept,  and the fourth is retained by the purchase dept.

When goods are received the stores keeper inspects them and compared with the purchase order. If goods are acceptable he enters them in goods inward book and issues the acceptance letter. A copy of the acceptance letter will go to the accounts dept, which will again compare goods approved letter with the purchase order. The accounts manager if satisfied authorizes for its payment.

2. Internal Check Over Storage of Goods: The stores keeper should maintain proper records, regarding storage of goods. He usually maintains bin cards and stores ledger surprise.
3. Internal Check as regards to issue of Materials: Materials should always be issued against material requisition note. After each issue, and purchase proper record must be made in bin cards and stores ledger.

Internal Control:

Internal control is a broad term which is normally used to control financial and non-financial activities. It involves a number of checks and controls exercised in a business to ensure efficient and economic working.

Definition:

Internal Control is defined as “the whole system of controls, financial and otherwise established by the management in the conduct of a business including internal check internal audit and other forms of control.

Objective advantages of Internal Control:

1.      From the clients point of view.

a.       Internal control system provides authentic and reliable data useful to take business decisions.

b.      It safeguards the physical and non-physical assets in the form of records, documentation etc.

c.       It promotes operational efficiency, by preventing waste, duplication of work and inefficient use of resources.

d.      A good system of internal control provides that the company follows the procedures and rules as required by the law.

2.      From auditors point of view.

An auditor evaluates a system of control before commencing an audit work his work becomes easier if the control system is efficient. He can also decide whether detail verification is necessary or not.

Disadvantages of Internal Control:

1.      It involves expenditure which may not be affordable by the small organizations.

2.      Internal control is concerned with routine transactions many times unusual transactions may be over looked.

3.      The system of internal control may be weakened due to inefficiency in handling of the system.

4.      There are chances of diverse objectives among employees in the departments and staff in charge of internal control.

5.      Management may manipulate the operation of internal control system.

Elements, features characteristics principles of a good Internal Control System:

An effective internal control system should have the following factors:

1.      Competent and trust worthy staff: people in charge of internal control system must be reliable and highly competent about the work. Lack of knowledge and dishonesty will spoil the efficiency of the system.

2.      Records of financial and other organizational plans: A good internal control system must have good documentation system. Filing, recording, classifying, etc will help in this regard.

3.      Segregation of duties: normally, there should be a separate department for internal control this reduces frauds, bias etc. normally, a clerk in charge of accounting function should not be in charge of assets also.

4.      Supervision: proper reviewing of the operations of the company regularly makes the control system effective.

5.      Authorization: all transactions must be properly authorized. In other words, the authority of each person should be well defined.

6.      Sound practices: the company should have well established procedures, policies, delegations organizational manuals etc.

7.      Internal Audit: it’s a part of internal control and it should be independent of internal check.

8.      Accounting Controls: proper accounting information systems should be established so that the information relating to accounts is properly collected, recorded and accounts prepared.

Scope of Internal Control or Areas of Internal Control:

1.      General financial Control: It’s concerned with control over all finance functions i.e., planning, acquiring and investing funds and management of profits. It deals with accounting supervision recording etc of the finance department.

2.      Cash Control: it’s concerned with proper control over receipts payments and balance of cash. The control system must ensure that misappropriation of cash is prevented.

3.      Control over wages: this includes maintenance of time records, wage records, and payment to workers. The main area of concern in this regard is the check payment to wages for the work not done and misappropriations of cash.

4.      Control over purchases: the system of internal control regarding purchases should be developed in such a manner that purchasing accounting, handling and issuing of goods are properly controlled.

Internal Audit:

Large scale organizations usually develop a system to review their activities to identify areas of non performances. Internal audit is a tool used in this regard.

Definition:

Internal auditing involves a continuous critical review of financial and operating activities by a staff of auditors functioning as full time salaried employees.

Objective of Internal Audit:

1.      To comment of the effectiveness of the internal control system in force and means of improving it.

1.      To verify correctness accuracy and authenticity of the records presented to management.

2.      To facilitate early detection of errors and frauds.

3.      To ensure that standard accounting practices are followed.

4.      To ensure that assets are properly acquired, safeguarded and accounted for.

5.      To investigate in the areas as requested by the management.

6.      To see that exhibited liabilities are valid.

Advantages of Internal Audit:

1.      Internal Audit makes the system of internal control more effective and efficient.

2.      It makes the auditor’s work more simple.

3.      Errors and Frauds are detected early.

4.      It increases the morale of the employees.

5.      Employees will be more careful as their work will be audited immediately.

Disadvantages of Internal Audit:

1.      Small organizations cannot afford to have internal audit system as it’s expensive.

1.      The regular work of the organization will be affected.

2.      Internal auditor acts as a staff manager hence there are chances of differences of opinion between the internal auditor and the employees of the company.

Difference between Internal and Independent Audit:

Internal	Independent.
1. An internal auditor is a regular employee of the company.	1. He is a professional auditor appointed by the company who is not an employee.
2. His duties, rights and responsibilities are determined by management.	2. The scope of audit work liabilities, duties etc are explained by concerned statutes.
3. He is appointed by the management.	3. He is appointed either by shareholders or by govt.,
4. It’s not compulsory.	4. It is compulsory for all companies.
5. Internal auditor acts as an advisor to the management.	5. He is independent of the management.
6. To become an internal auditor professional qualification is not necessary.	6. An independent auditor must have professional qualification as per the act.
7. Internal Auditor ensures that the system of accounting is efficient.	7. the internal auditor comment on the true and fair view of business.
8. An internal auditor reports to the management.	8. The Internal Auditor reports to the shareholders.
9. Internal audit is a continuous process.	9. It’s a periodic process.

To conclude, it can be said that “the internal auditor’s responsibility is to the management and he is not a servant of the independent auditor. His scope will be decided by the management and eh should be free to communicate to the external auditor but should not involve himself with the work of independent auditor.

Difference between internal checks and internal audit:

Internal Check	Internal Audit.
1. It is an arrangement of duties allocated in such a way that the work of one person is automatically checked by another.	1. It is independent appraisal of operation and records of the company.
2. The purpose of IC is to prevent minimize possibilities of errors and frauds.	2. The purpose is to detect errors and frauds that are already committed.
3. IC doesn’t require separate staff. It represents only the arrangement of duties.	3. It requires separate staff employed only for this purpose.
4. IC is a continuous process.	4. The Internal auditor has to report periodically about various inefficiencies and suggest improvements.
5. IC begins along with the recording of transactions.	5. It begins when the accounting process ends.
6. It is devices of doing the work.	6. It is a device for monitoring the work.
7. Scope of Internal Check is limited especially to the accounting department.	7. The scope of internal audit goes on beyond accounting department.

Internal check in a Department Store:

A department store is a large scale retail organisation working on self service basis selling the daily requirements of the customers. These are centrally located and attract customers.

Operation of Department Stores:

As the name itself suggests a dept., store is divided into many small departments, each department offering a specific product line. These depts., are headed by supervisors assisted by stock assistants. While the accounting departments, takes care of recording all transactions, in the cash dept, will be in charge of receipts and payments of cash. As it operates on self service basis cash is paid by the customer at the counter.

Internal Check as regards Purchase.

Goods are to be purchased as per the order of the G.M. The General Manager prepares purchase order based on the requisition notes sent by the supervisor. No supervisor should be given independent charge of purchase. A copy of the purchase order is sent to the accounting department and stores dept., when once the goods are received the store keeper verifies them with the order and approves for payment. The accounts department makes the payments after verifying the Purchase order and goods.

Internal Check regarding Cash Receipts.

usually the cash counters are computerized which brings down the human errors. The customers make the payments directly at the counter. The counter clerk prepares the bill and receives the cash. Chances of error and fraud are less as goods are coded and price is mentioned against codes.

As far as petty cash expenses are concerned, the cashier should be in charge of petty cash expenses, which are recorded on daily basis. The goods are delivered after verifying the bill.