Auditing

Audit can be defined as an independent examination of financial statements and records. It is considered as an impartial evaluation of books of accounts. It is a deep analysis into the affairs of the company. It is an official inspection of accounts of the company, which are conducted voluntary and in some cases are mandated by law. The audits which are compulsory required by law to be conducted are also called as statutory audit.

Audit is conducted to check upon the books of accounts, records, financial statements etc. it is planned to ensure assets are properly safeguarded. It also takes into consideration whether the rules, regulations and policies framed by the top management are implemented and followed properly. It is done to detect and prevent frauds and errors. Different types of audit are conducted for a particular purpose. The audit can be organized by the corporation or firm either on their own motion and in some cases, it can be conducted as an obligation. There are multiple categories of audit i.e., statutory, and voluntary audit.

Audit can only be conducted by an independent professional. A person who performs audit is considered as an auditor. The company or organization on which audit is being conducted are bound to provide assistance to the auditor at every stage of audit. Auditor is appointed not with a view that there is something wrong in the company. In the case of [i]Kingston cotton mills co, it was held that auditors are not detectives. They are watch dogs and not blood hounds. There main aim is to examine that the books of accounts present a true and fair view or not. Auditors’ role is not to advise the directors or company. In case of [ii]London and general bank, it was held that auditors are not advisers. Their aim is to report on the correctness or otherwise of the financial statements only.

Audits are usually conducted for fulfilling a particular purpose. Each type of audit seeks a different motive. The various classes of audit are- internal audit, cost audit, secretarial audit, insider trading audit, corporate social responsibility audit, corporate governance audit, environment audit, cyber audit, labor law audit, takeover audit, forensic audit, social audit, information system audit etc. all these kinds of audits are conducted for achieving a specific objective.

[iii]Kinds of Audit

Internal Audit-

Internal audit of an organization is usually conducted by the internal auditor of the company which can be an individual or firm. It is performed mainly to check on the compliance of various policies, rules, procedures formulated by the top management. It is conducted to identify threats and risk faced by an organization. The main aim behind conducting an internal audit is to monitor internal controls.

Internal audit provides a clear picture to the organization about how well are the internal controls are established and necessary improvements which are required to be made. It is a part of management by system. Audit helps in ensuring compliance of accounting policies and procedures.

Cost Audit-

Detailed checking and analysis of cost accounts and records are known as cost audit. Cost records are maintained by the organization only if it is mandated by the government in India. Only the maintenance of cost accounts is not sufficient. To ascertain the true and accurate cost of products and services, it is necessary to ensure that the records are correct. The nature of cost records to be maintained should be of labor, material, and other such items of cost.

Cost audit should only be conducted by a cost accountant. No other professional can perform the work of cost accountant. Only a cost accountant in practice or a firm of cost accountants can be appointed as a cost auditor. The company including all its officers must provide necessary assistance and facilities to the cost auditor.

Corporate Governance Audit-

Corporate governance is an activity which ensures that all the necessary acts and procedures which are required for directing and controlling the business is implemented accurately. It implies that the affairs of the company are carried on in such a way that it is beneficial to maximum number of stakeholders.

The audit is conducted to gather insight at what extent company is successful in complying with the provisions of good corporate governance and to check whether the board is committed in managing the company in transparent manner. The scope of corporate governance is very wide. It includes financial and non- financial information, rights of stakeholders, controls, risk management, strategic plans, and procedures etc.

Corporate Social Responsibility Audit-

Corporate social responsibility is a much-used term nowadays. Every organization is realizing the importance of conducting various social initiatives on their part for the betterment of social environment. CSR is nothing but all the guidelines related to environment and social aspects which the corporates are expected to follow.

When any organization wants to build a strong connection with marketplace usually indulge in social and welfare programs. Such initiatives can include educational program, health care program, environment related program etc. the audit of CSR is conducted to check whether corporates are complying with the CSR requirements. It is done to evaluate internal control and governance framework.

Cyber Audit-

Cyber audit is considered as the most underrated audit. With passage of time, it is gaining importance. The day is not far away when this kind of audit will become the most conducted audit of all times. This can also be due to the ongoing covid crises. There is a rise in cyber fraud in this situation. As every single activity is shifted from physical platform to virtual platform from board meetings to training sessions. There is an increase in online/technology related fraud.

Cyber audit is conducted to analyze whether cyber laws and procedures are followed accurately in the organization or not. This kind of audit is planned to detect, protect, recover activities to the board. The scope of cyber audit is very wide. It involves awareness training, asset management, recover planning etc. cyber security audit checks upon everything connected with IT systems from personnel who are managing the systems/process to physical procedures. Analyses of accounts and password management are also a part of cyber security audit.

Environment Audit-

Environment audit is usually done to ascertain the effects of business and its activities, if any on the environment. It is a general term. It is done with an intention to analyze, to check compliance with various environment laws and to identify, manage, implement gaps along with taking related corrective actions. Each organization is required to follow rules, procedures, standards which are framed by the government from time to time.

The government expects from the corporates that they will indulge in ethical practices. The acts or projects performed by them will be such that which cause no harmful effect on the surroundings. Environmental audit is conducted to verify, detect compliance of acts applicable on an organization. The main aim is to improve environmental performance. To analyze impact of its activities on the environment etc.

Information Systems Audit-

Information systems audit or sometimes called the system audit. It is a kind of audit done to analyze whether the computer systems can safeguard assets, maintains data integrity, and allow organizational objectives to be achieved effectively. Nowadays everything is getting automated. The computer systems play an important role in the overall functioning of business. It is necessary to establish controls. The evidence is collected, and controls are evaluated by performing systems audit.

The scope of IT audit is- backup and restore, anti-virus and anti-malware, database access controls, security controls, IT privileged controls, logging and auditing systems and process.

Forensic Audit-

Forensic audit is a kind of audit in which auditors check and analyses the financial statements of an organization. It is done to check whether corporates are misleading financial reporting framework or not. The evidence collected by the auditors can be used in the court of law. That is why it is called a forensic audit. As forensic means which is suitable for use in the court of law.

In forensic audit techniques of science and investigating skills are applied to gather evidence. This kind of audit is a strategic tool in fighting corruption, financial crimes, and frauds etc. this type of audit is conducted in two phases- investigation services and litigation services. Usually, forensic auditing is done in following areas- criminal investigation, professional negligence cases, arbitration cases, dispute settlement etc.

[iv]Due Diligence

Auditing usually involves analysis of financial statements or books of accounts. Due diligence on the other hand, is the detailed analysis of legal, financial, operational aspects that are necessary before entering in a business transaction. Due diligence can also be defined as a process in which legal, financial confidential or other material information can be exchanged, reviewed, and appraised by the parties to a business transaction which are done prior to a business transaction.

It is always suggested that before entering into a transaction. Detailed checking of every aspect which is directly or indirectly related to a business must be checked. Due diligence is the risk assessment of the forthcoming business transaction. It is considered as a background check. To be double sure that the information provided by the party is true and all the necessary information which is required to proceed with the transaction is made available.

Due diligence process is conducted in three stages- The first stage is Pre-due diligence. In this stage necessary approvals are taken; documents are signed including non-disclosure agreement and data room is created in stage one. The second stage is Diligence. In this stage, diligence is conducted. All the observations are compiled in the form of report which is called a DD report. The last stage is of the Post diligence. If any non-compliances, errors, frauds etc. are found while conducting diligence. They are corrected or rectified in the final stage.

There are various types of due diligence including business, financial and legal due diligence. Each type of due diligence comes with a special purpose. They are incurred to gather detailed information about the target organization. The more is the information, the more it is beneficial to the acquirer. The information helps the acquirer in improving its bargaining position. It helps in identifying strength and to uncover threats and weakness. With the help of due diligence material information is collected from the target company.

[v]Transactions which require Due Diligence

• Merger, Acquisitions and Amalgamations.
• Strategic alliances
• Joint venture
• Partnering agreements
• Business coalitions
• Venture capital investment
• Public offer

[vi]Comparative analysis

• Auditing is limited to analysis of financial aspects related to a business. In due diligence detailed analysis is done not only of financial matters but also of legal issues, future positions, corporate structure etc.
• Due diligence covers views on future growth. Auditing is based upon past or historical data.
• Conduction of due diligence depends upon the transaction. Conduction of auditing is mandatory.
• Due diligence is required for taking future decisions. Auditing is considered as a postmortem analysis.
• Process of due diligence differs according to the nature of transaction. Auditing is nevertheless consistent.
• Due diligence is an infrequent event. Auditing is a frequent event.
• The main aim of due diligence is risk identification if any i.e., it provides negative assurance. The main aim of auditing is to detect true and fair view of financial statements i.e., it provides a positive assurance.

Frequently asked questions

Why are auditing standards important?

An auditing standard is a form of benchmark. Due to auditing standards, it is ensured the work done is of high quality. These are the standards through which actual performance can be compared and corrective actions can be taken. It provides guidance to the auditor on performance of audit, tools, techniques to be used etc.

What is due diligence?

The detailed investigation, analysis incurred before entering into a transaction is called due diligence. It helps in gathering material information about the target company. It is done to identify defect in the deal and thus helps in avoiding bad business transactions.

Reference

[i] Csanoopjain, secretarial audit, compliance and due diligence, December 2019

[ii] Ibid

[iii] The Institute of Company Secretaries of India, secretarial audit, compliance and due diligence, December 2018

[iv] Ibid

[v] Ibid

[vi] Ibid