Types of audit

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Types of audit
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DEFINITION OF AUDIT

• Definition by International Auditing Practices
  Committee
• The independent examination of financial
  information of any entity, whether profit
  oriented or not, and irrespective of its size, or
  legal form, when such an examination is conducted
  with a view to expressing an opinion thereon.

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• Another definition - Concerned with the
  verification of accounting data, with determining
  the accuracy and reliability of accounting
  statements and reports.
• Auditing, therefore
• Verifies accounting data and
• report on accuracy and reliability of accounting
  statements.

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• Verification involves
• evaluation of evidence in support of transactions
• Internal evidence, e.g. the records, vouchers,
  books of accounts
• External evidence, e.g. Confirmation of balances
  as from Bank, data from other department/agencies.
  
• Includes assessment and evaluation of relevant
  system in the organisation.

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• Audit is not limited to only financial and
  accounting records.
• It also includes review of costing records,
  operational and managerial performance, HR
  policies, issues of corporate governanace, etc.

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Types of CAGs Audit

• Propriety Audit
• Certification Audit/Account Audit
• Propriety Audit can again be divided into two
  categories
• Compliance/Regularity audit
• Performance Audit/3E Audit/VFM Audit

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Compliance Audit

• A compliance audit is a comprehensive review of
  an organization's adherence to laws, statutes,
  rules and regulatory guidelines.
• Each transactions is audited separately in
  isolation to verify compliance with rules and
  regulations affecting that particular transaction
• What, precisely, is examined in a compliance
  audit will vary depending upon the nature of
  transaction

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• It involves examination of transactions relating
  to receipts and expenditure, assets and
  liabilities of government companies and
  corporations to ensure compliance with all
  applicable laws, rules and regulations and
  procedures. (Compliance/Regularity Audit)
• It also involves the evaluation of transactions
  for observance of principles of financial
  propriety. (Propriety Audit)

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• Various statutes require compliance of relevant
  provisions. In each case, the organization must
  be able to demonstrate compliance by producing an
  audit trail, often generated by data from records
  (manual or electronic).
• E.g.- GFR, internal rules/circulars of
  department, rules of financial prudence,
  Companies Act, Environmental laws, Factory Act,
  Minimum Wages Act, Contractual obligations, etc.
• Organisations need not only to comply with the
  provisions of laws/rules but also to keep records
  to show the compliance.

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Principles of Financial propriety

• (a) Expenditure should not be prima facie more
  than what the occasion demands.
• (b) to apply the same vigilance on public
  expenditure as on expenditure from personal
  funds.
• (c) sanction of expenditure should not result in
  financial advantage to sanctioning authority.
• (d) public money not to be spent for the benefit
  of a particular person or a section or a
  community.
• (e) allowances should not be a source of personal
  profit.

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Performance Audit

• Performance audit is an independent assessment or
  evaluation of an entitys programme or activity
  with reference to the laid down goals, objectives
  and targets, taking into account relevant
  criteria for assessment of efficiency, economy
  and effectiveness of operations.
• This is done for government departments as well
  as PSUs
• In case of Central PSUs, this is done mainly
  through the Audit Board mechanism, chaired by the
  Deputy Comptroller and Auditor General
  (Commercial), with senior officers of the CAG
  and two technical experts inducted as special
  invitees, if necessary.

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Performance Audit (contd..)

• Main objective - to assist peoples
  representatives in exercising effective
  legislative control and oversight over the policy
  objectives and their implementation.
• Performance audit involves understanding the
  activities of the organisation, risk assessment,
  systems and controls, and brings out systemic
  deficiencies, absence of controls or their
  ineffective functioning and compliance failures.
• The Audit probe goes into the root causes of the
  problems and suggests constructive
  recommendations to the executives for improvement.

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Certification Audit

• As per the provisions of the Companies Act, 1956
  read with Section 19 of the Comptroller and
  Auditor Generals (Duties, Powers and Conditions
  of Service) Act, 1971 and the CAGs Regulations
  2007, the CAG is vested with audit of the
  financial statements of all the Government
  companies.

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Certification Audit (Contd..)

• Section 19 of CAGs (DPC) Act, 1971
• (1) duties and powers of CAG for audit of
  accounts of Govt Companies, in accordance with
  provisions of Companies Act, 1956.

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Certification Audit (Contd..)

• SEC 617 Definition of government company
• SEC 619 Application of Sections 224 to 233
  (relating to audit)
• (2) Auditors to be appointed and re-appointed by
  the CAG.
• (3) CAG shall have power
• (a) to direct the manner in which the companys
  accounts shall be audited by the statutory
  auditors.
• (b) to conduct a supplementary or test audit of
  the companys accounts by such person(s) as he
  may authorise in this behalf and for the purpose
  of such audit, to require information in such
  form as CAG directs.
• (4) Auditor to submit report to CAG. CAG may
  comment upon or supplement the audit report in
  such manner as he may think fit.
• (5) Such comments or supplement to the audit
  report to be placed before AGM along with the
  audit report.

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Certification Audit (Contd..)

• Thus, in order to discharge this responsibility,
  he is empowered to appoint the auditors as well
  as issue directions to the auditors specifying
  the manner in which the accounts of government
  companies are to be audited, keeping in view his
  overall responsibility of ensuring public
  accountability.

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Certification Audit (Contd..)

• As the Supreme Audit Institution of the country,
  the CAG plays an oversight role ensuring that
  the statutory auditors discharge their assigned
  responsibilities with due diligence on his behalf
  by exercising the power to supplement or comment
  upon the statutory auditors report.

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CAGs Audit Framework (contd..)

• By conducting audit of PSEs by three frameworks
  viz. financial audit, performance audit and
  transaction audit, which are interlinked and
  complementary to one another, CAG prepares three
  distinct audit reports on the functioning of the
  PSEs, commenting upon their state of financial
  affairs, operational efficiency, governance and
  compliance issues.
• These reports are placed in the Parliament and
  the selected reports are discussed
  comprehensively by COPU recommending remedial
  measures for improvement.

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Certification Audit Steps

• Appointment of Auditors by CAG
• Issuing directions/sub-directions by CAG to SAs
• Preparation of financial statements by management
• Audit by statutory auditors
• Boards approval of audited accounts
• Supplementary audit by CAG under section
  619(3)(b) of Companies Act
• Comments on accounts/certificate by CAG

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Ensuring public accountability by oversight audit
of financial statements

• Appointment of independent statutory auditors
  with proven track record and credentials
• Issuing general directions and industry specific
  sub-directions to statutory auditors
• Overall responsibility being vested upon CAG, he
  should not only guide, direct, monitor, oversee,
  review, supplement and complement the financial
  attestation functions of the statutory auditors
  but also safeguard the independence of auditors
  against unethical practices and conflicting
  demands from the management.

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• The supplementary audit by CAG has withstood
  years of criticism but so far deterred the
  management frauds like Satyam.
• The supplementary audit by the CAG has deterrent
  effects on companys management and statutory
  auditor as well.

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• The significance of CAGs supplementary audit
  can be gauged from the fact that every year
  several PSEs revise their accounts after
  supplementary audit and comments are issued to
  number of PSEs.
• In 2006-07, twelve Central PSEs revised their
  accounts after supplementary audit and comments
  were issued in respect of 72 Central PSEs besides
  number of state government PSEs as well.

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Audit Process

• Audit Planning
• Audit Execution
• Reporting
• Follow up
• (Governed by CAGs Auditing Standards)

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Audit Planning

• Collection of information about the Auditee
• Activities/operations/projects/Plans/revenue and
  expenditure details/targets vs.
  achievements/previous audit results and
  outstanding audit objections/internal
  controls/etc.
• Risk Assessment
• materiality/topicality/internal
  controls/criticality/etc.
• Audit Plan
• Categorization of audit entities based on risk
  assessment/periodicity/allocation of mandays)
• Quarterly audit programme
• allocation of mandays and party personnel
• Audit entity wise audit planning
• High risk areas/methodolgy/sampling/ records for
  scrutiny/inspection/etc.

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Audit Execution

• Field audit (auditing at the premises of auditee)
• Audit work programme
• Compliance testing to ensure reliance on
  internal controls
• Direct substantive testing for detailed test
  check of records
• Issue of audit memo
• Reply from management and evaluation thereof
• Settlement/Inclusion of audit observation in
  Audit Inspection Report

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Audit Execution

• Audit report is finalised at the respective HQ
  offices
• Issue of lack of considered reply by audited
  entity
• Mechanism of ACM (Audit Committee Meetings)
• Conversion of IR/LAR para into Factual Note (FN)/
  Potential Draft Para (PDP)
• Conversion of FN into Draft Para (DP)

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Audit Reporting

• Standard formats of reporting have been
  established
• The views or explanation of the audited entity is
  invariably incorporated
• Chapter-1 generally gives the overall situation
  of the government in respect of the aspects
  covered in that particular report e.g. Financial
  situation, overview of all PSUs, overview of
  receipts etc.

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• THANK YOU

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