audit handout

7/30/2019 Audit Handout

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2012

BES 2012 Batch notes

Prof.CA.Nitant Trilokekar

3/10/2012

Government Audit


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Table of ContentsGovernment Audit ........................................................................................................... 4

Q. What is Government Audit ...................................................................................... 4

Q. What is C&AG ......................................................................................................... 5

Q. What is the jurisdiction of the C&AG ....................................................................... 8

Audit of Government Companies (Commercial Audit) .............................................. 8

Audit Board Setup in Commercial Audit ................................................................... 8

Nature of Audit ......................................................................................................... 9

Regularity Audit (Compliance).................................................................................. 9

Performance Audit ................................................................................................... 9

Regularity Audit (Financial) ...................................................................................... 9

Action on Audit Reports ........................................................................................... 9

Public Accounts Committee ................................................................................... 10

Committee on Public Undertakings ........................................................................ 10

CAG's Role ............................................................................................................ 11

Local Bodies Audit ................................................................................................. 11

UNION AUDIT REPORTS ..................................................................................... 11

How is the independence of the C&AG ensured? ..................................................... 12

Appointment ........................................................................................................... 12Removal from office ............................................................................................... 12

Q. Role of C&AG in PSU today (D type question) .................................................. 13

Internal Audit ................................................................................................................. 15

International standard setting bodies and/or auditors' associations ....................... 15

Role in internal control ........................................................................................... 16

Role in risk management ....................................................................................... 16

Role in corporate governance ................................................................................ 17

Nature of the internal audit activity ......................................................................... 18

Internal audit reports .............................................................................................. 18

Difference between internal and external audit ...................................................... 19

Management Audit ........................................................................................................ 21

Q: What is Management Audit? ............................................................................. 21


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Management Audit Explanation ............................................................................. 21

Q: What is Corporate Governance ......................................................................... 22

Management Audit Checklist ................................................................................. 23

Q: How does one go about drafting a Management Audit checklist? (D type

question) ................................................................................................................ 23

Q: Can you illustrate with a Financial Management Checklist? .............................. 24

Q: Give a Management Checklist? ......................................................................... 26

Some corporate scams leading to demand for Corporate Governance ........................ 28

Enron Scam ............................................................................................................... 28

WorldCom Scam........................................................................................................ 29

Bankruptcy ............................................................................................................. 30

Post-bankruptcy ..................................................................................................... 30

Control in Special Sectors:- Scrap control-Control of R&D-Project Control-Administrative Cost Control-Audit-Efficiency Audit- Internal Audit-Government CostAudit-Management Audit.Financial reporting to management under conditions of price level change. Objectivesand methodology.


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Government Audit

Q. What is Government Audit

The Indian Audit and Accounts Department, functioning under the Comptroller and

Auditor General, derives its authority and the powers for performance of its duties on his

hebalf under the provisions of Section of 21 of the CAG's DPC Act, 1971. Under the

directions given by the Comptroller and Auditor General of India, the Accountants

General and other offices and establishments of the Indian Audit and Accounts

Department perform such duties and functions as are imposed on or undertaken by the

CAG under the provisions of the Constitution of India, or of any law made by

Parliament.

Major auditorial functions of Pr.Accountant General (Civil Audit)

1. Aud i t of expendi ture condu cted und er Sect ion 13 of the Act, includes

Audit against provision of funds

This audit is aimed at ascertaining whether the moneys shown in the Accounts as spent

were legally available for and applicable to the service or purpose to which they had

been applied or charged.

Regularity Audit

The objective of this audit is to see whether the expenditure conforms to the authority

which governs it.

Propriety Audit

Propriety Audit is directed towards examining the propriety of executive action beyond

the formality of expenditure to its wisdom, faithfulness and economy.

Efficiency-cum-performance or value for money Audit

It is a comprehensive appraisal of the progress and efficiency of the execution ofdevelopment and other programmes and schemes wherein an assessment is made as

to whether these are executed economically and whether they are producing the results

expected of them.


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Systems Audit

The concept of the Systems Audit is that if an an in-depth analysis of the mechanics of

the system reveals that it is designed with appropriate controls, checks and balances to

safeguard errors, frauds, etc. Audit can reasonably assume without the necessity of a

detailed examination of the individual transactions, that the results produced by thesystem would be fairly accurate.

2. Audi t of Grants and Loans to var ious Bodies and Author i t ies under

Sect ions 14 and 15 of the Act

This Audit is undertaken on the accounts of authorities and bodies receiving financial

assistance in the form of grants and or loans from Government of India or a State or

Union Territory, subject to certain conditions specified in those sections.

3. Aud i t under Sect ion 20

This section deals with audit of bodies or authorities which have not been entrusted to

the CAG by or under any law made by Parliament, he shall, if requested so to do by the

President or the Governor of a State or the Administrator of a Union territory having a

Legislative Assembly, as the case may be, undertake the audit of the accounts of such

body or authority on such terms and conditions as may be agreed upon between him

and the concerned Government.

Q. What is C&AG

Comptroller and Auditor General of India

(C&AG) is an important authority created

by the Constitution of India. It is mainly

responsible for controlling the financial

system of the country at the Union as well

as the State levels. He has to see to it that

the diverse authorities act in regard to all

financial matters in accordance with the Constitution and the laws and rules framed

there under. Public audit ensures parliamentary control over expenditures voted by the

legislature and renders public authorities accountable for the public moneys raised and

spent by them to implement policies and programmes approved by the legislature.

Accountability and transparency, the two cardinal principles of good governance in a

democratic set-up, depend for their observance, to a large extent, on how well the

public audit function is discharged. It is for this reason that the C&AG has been given


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special status by the Constitution in articles 148 to 152. It is his responsibility to

ensure that money is spent and revenue rises not only in accordance with the

law, but also with due regard to economy, efficiency and effectiveness. The C&AG is

the constitutional authority entrusted with the high responsibility of maintaining probity in

the use of public funds.

Article 148 of the Constitution of India provides for a Comptroller and Auditor-General of

India who shall be appointed by the Indian Presidentby warrant under his hand and

seal. His term of office is six years or up to the age of 65 years.

Independence of the office of C&AG

To ensure the independence of this office from the executive government of the day, it

has been provided that the Comptroller and Auditor General shall not be removed fromhis office except on grounds of proved misbehaviour or incapacity, on an address

passed by each of the two Houses of Parliament by two thirds majority of those present

and voting and a majority of the total membership of each House being presented to the

President in the same manner as applicable to the judges of the Supreme Court of India

under article 124(4). Also, the Comptroller and Auditor General has been made

ineligible for any other office under the Government of India or any State Government.

His salary etc. is left to be determined by Indian Parliament by law.

The salary, etc. of Comptroller and Auditor General have been equated with the judges

of the Supreme Court of India. The service conditions of those serving in the Audit and

Accounts Department and the administrative powers of the Comptroller and Auditor

General are to be laid down by the President by rules framed after consultation with the

Comptroller and Auditor General. The administrative expenses of the office of the

Comptroller and Auditor General are to be charged upon the Consolidated Fund of

India.

Functions of C&AG

As the most important instrument of accountability, the Comptroller and Auditor General

has a dual role to perform- as an agency on behalf of the Legislature to ensure that the

executive complies with the various laws passed by the Legislature in letter and spirit,

and secondly, on behalf of the Executive to ensure compliance by subordinate

authorities with the rules and orders issued by it. He is empowered to make rules for

carrying out the provisions relating to the maintenance of accounts; make regulations

for carrying out the provisions relating to the scope and extent of audit, including lying

down for the guidance of the Government departments the general principles of
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Government accounting and the broad principles in regard to audit of receipts

and expenditure; requisitioning of all records of the auditee

departments/organisations; access the computer systems of the auditees and to

download and use electronic data either in site or off site; review the development of

computer systems of auditees and suggest/enforce controls; the appointment of

external auditors engaged by the auditees for meeting any statutory requirements but

only with reference to Government companies; to supervise and regulate external

auditors` work under the Indian Companies Act; dispense with, when circumstances so

warrant, any part of detailed audit of any accounts or class of transactions and to apply

such limited check in relation to such accounts or transactions as he may determine.

While fulfilling his constitutional obligations, the Comptroller and Auditor General of

India conducts the following types of audit: Financial Audit, Compliance Audit,

Performance Audit and EDP Audit. Further, the Comptroller and Auditor General of

India undertake Special Audit at the request of the Government.

Thus it can be seen how the Comptroller and Auditor General of India enhances the

accountability of the Parliament and State Legislatures of India by carrying out audits n

the public sector organisations.


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Q. What is the jurisdiction of the C&AG

Audit Jurisdiction

The organisations subject to the audit of the Comptroller and Auditor General of India

are:-

All the Union and State Government departments and offices including the

Indian Railways and Posts and Telecommunications.

About 1200 public commercial enterprises controlled by the Union and State

governments, i.e. government companies and corporations.

Around 400 non-commercial autonomous bodies and authorities owned or

controlled by the Union or the States.

Over 4400 authorities and bodies substantially financed from Union or Staterevenues

Audit of Government Companies (Commercial Audit)

There is a special arrangement for the audit of companies where the equity

participation by Government is 51 percent or more. The auditors of government

companies are appointed or re-appointed by C&AG in terms of provisions of section

619(2) of the Companies Act., 1956 in view of Companies Amendment Act,2000, who

gives the auditors directions on the manner in which the audit should be conducted bythem. He is also empowered to comment upon the audit reports of the primary auditors.

In addition, he conducts a supplementary audit of such companies and reports the

results of his audit to Parliament and State Legislatures.

Audit Board Setup in Commercial Audit

A unique feature of the audit conducted by the Indian Audit and Accounts Department is

the constitution of Audit Boards for conducting comprehensive audit appraisals of the

working of Public Sector Enterprises engaged in diverse sectors of the economy.

These Audit Boards associate with them experts in disciplines relevant to the

appraisals. They discuss their findings and conclusions with the managements of theenterprises and their controlling ministries and departments of government to ascertain

their view points before finalisation.

The results of such comprehensive appraisals are incorporated by the Comptroller and

Auditor General in his reports


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Nature of Audit

While fulfilling his Constitutional obligations, the Comptroller & Auditor General

examines various aspects of Government expenditure. The audit done by C&A G is

broadly classified into Regularity Audit and Performance Audit.

Regularity Audit (Compliance) Audit against provision of funds to ascertain whether the moneys shown as

expenditure in the Accounts were authorised for the purpose for which they

were spent.

Audit against rules and regulation to see that the expenditure incurred was in

conformity with the laws, rules and regulations framed to regulate the procedure

for expending public money.

Audit of sanctions to expenditure to see that every item of expenditure was

done with the approval of the competent authority in the Government forexpending the public money.

Propriety Audit which extends beyond scrutinising the mere formality of

expenditure to it wisdom and economy and to bring to light cases of improper

expenditure or waste of public money.

While conducting the audit of receipts of the Central and State Governments,

the Comptroller & Auditor General satisfies himself that the rules and

procedures ensure that assessment, collection and allocation of revenue are

done in accordance with the law and there is no leakage of revenue which

legally should come to Government.

Performance Audit

Performance audit to see that Government programmes have achieved the desired

objectives at lowest cost and given the intended benefits. For a complete list of

Performance Appraisals since 1983

Regularity Audit (Financial)

In regularity (financial) audit and in other types of audit when applicable, auditors

should analyse the financial statements to establish whether acceptable accountingstandards for financial reporting and disclosure are complied with. Analysis of financial

statements should be performed to such a degree that a rational basis is obtained to

express an opinion on financial statements.

Action on Audit Reports

The scrutiny of the Annual Accounts and the Audit Reports thereon by the Parliament

as a whole would be an arduous task, considering their diverse and specialised nature,


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besides imposing excessive demands on the limited time available to the

Parliament for discussion of issues of national importance. Therefore the

Parliament and the State Legislatures have, for this purpose, constituted specialized

Committees like the Public Accounts Committee (PAC) and the Committee on Public

Undertakings (COPU), to which these audit Reports and Annual Accounts automatically

stand referred.

Public Accounts Committee

The Public Accounts Committee satisfies itself:-

a.that the moneys (shown in the accounts) were disbursed legally on the service or

purpose to which they were applied.

b.that the expenditure was authorised.

c.that re-appropriation (i.e. distribution of funds.

It is also the duty of the PAC to examine the statement of accounts of autonomous and

semi-autonomous bodies, the audit of which is conducted by the Comptroller & Auditor

General either under the directions of the President or by a Statute of Parliament.

Committee on Public Undertakings

The Committee on Public Undertakings exercises the same financial control on the

public sector undertakings as the Public Accounts Committee exercises over the

functioning of the Government Departments. The functions of the Committee are:-

a.to examine the reports and accounts of public undertakings.

b.to examine the reports of the Comptroller & Auditor General on public undertakings.

c.to examine the efficiency of public undertakings and to see whether they are being

managed in accordance with sound business principles and prudent commercial

practices.

The examination of public enterprises by the Committee takes the form of

comprehensive appraisal or evaluation of performance of the undertaking. It involves a

thorough examination,including evaluation of the policies, programmes and financial

working of the undertaking.

The objective of the Financial Committees, in doing so, is not to focus only on the

individual irregularity, but on the defects in the system which led to such irregularity, and

the need for correction of such systems and procedures.


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CAG's Role

The Comptroller & Auditor General of India plays a key role in the functioning

of the financial committees of Parliament and the State Legislatures. He has come to be

recognised as a 'friend, philosopher and guide' of the Committee. His Reports generally

form the basis of the Committees' working, although they are not precluded from

examining issues not brought out in his Reports. He scrutinises the notes which the

Ministries submit to the Committees and helps the Committees to check the correctness

submit to the Committees and helps the Committees to check the correctness of facts

and figures in their draft reports.

The Financial Committees present their Report to the Parliament/ State Legislature with

their observations and recommendations. The various Ministries / Department of the

Government are required to inform the Committees of the action taken by them on the

recommendations of the Committees (which are generally accepted) and the

Committees present Action Taken Reports to Parliament / Legislature.

In respect of those cases in Audit Reports, which could not be discussed in detail by the

Committees, written answers are obtained from the Department / Ministry concerned

and are sometimes incorporated in the Reports presented to the Parliament / State

Legislature. This ensures that the audit Reports are not taken lightly by the

Government, even if the entire report is not deliberated upon by the Committee.

Local Bodies Audit

With the introduction of the third tier of government in the pursuance of the 73rd

Ammendement of the

UNION AUDIT REPORTS

The Union Audit Reports of the Comptroller and Auditor General of India, contain the

findings of transaction audit and performance audit in the areas of:

Civil Audit

Audit of Autonomous Bodies

Defense Services

Railways

Receipts of the Government

Central Commercial

The Audit of the CAG is bifurcated into two streams namely Performance Audit and

Regularity (Compliance) Audit.


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While audit of the Civil Departments, Railways and Defense are conducted as

per the direct mandate in the constitution and relevant provisions of the DPC

Act, the Commercial Audit is conducted under the provisions of Company Act.

Autonomous Bodies are audited as per the mandate in the act establishing the body.

The reports of the CAG are deliberated upon by the Public Accounts Committee(PAC) of the parliament, save the commercial reports which are examined by the

Committee on Public Undertakings (COPU).

How is the independence of the C&AG ensured?

The Comptroller and Auditor General (CAG) of India is an authority, established by the

Constitution of India, who audits all receipts and expenditure of the Government of India

and the state governments, including those of

bodies and authorities substantially financed by the

government. The CAG is also the external auditorof

government-owned companies. The reports of the

CAG are taken into consideration by the Public

Accounts Committees, which are special

committees in the Parliament of India and the state

legislatures . The CAG of India is also the head of

the Indian Audit and Accounts Department, which

has over 58,000 employees across the country.

The current CAG of India is Vinod Rai, who was

appointed on 7 January 2008. He is the 11th CAG

of India.

Appointment

The Constitution of India [Art.148] provides for an independent office to the CAG of

India. He/she is the head of Indian Audit and Accounts Department. His/her duty is to

uphold the constitution of India and laws of the Parliament in the field of financial

administration.

The Comptroller and Auditor-General of India is appointed by the President of India[1]following a recommendation by the Prime Minister. On appointment, he/she has to

make an oath of affirmation before the President of India.

Removal from office

The CAG cannot be removed from office other than through a procedure of

impeachment similar to what is applicable to a Judge of the Supreme Court of India.
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Q. Role of C&AG in PSU today (D type question)Where autonomous bodies are created under a specific act, the statute

setting them provides for the audit arrangement. There are a number of corporations,

particularly in financial sector such as nationalised banks , IDBI, IFCI, LIC which have

been kept outside the ambit of C&AG's audit . This is possibly on the ground that

government audit is not suitable and hamstrungs their commercial operations. Audit ofpublic enterprises by C&AG has always remained a controversial issue. In the 50's

when PSU's were being set-up first time, there were attempts to bar C&AG's jurisdiction

but the then C&AG resisted and the matter was resolved by amending the Companies

Act and providing for supplementary audit of government companies by C&AG.

Subsequently in the 70's, as a result of recommendation of Administrative Reforms

Commission, an Audit Board system was introduced to provide commercial type audit

for PSU's. In the wake of current privatisation programme, government is making policy

pronouncements that government portion of equity will be brought down to a level of 49

or 26 percent. This is ostensibly being done to free them from government controlincluding audit as they would no longer fall within the definition of government company.

Will this not tantamount to evasion of public accountability as by retaining sizable share-

holding government could still exercise policy control over these companies but will not

be answerable to Parliament?

There is an opposite view that government control and agencies such as CBI,

CVC, and CAG hampers decision making and risk taking necessary for a commercial

organisation and largely responsible for their poor performance. Public enterprise

managers and experts argue that in an era of globalisation and liberalisation wherecompetition is the new mantra government companies have to be provided the same

level field as their compeers in private sector if they have to survive the market forces.

They should therefore be given autonomy and supplementary audit by CAG be done

away with.

In U.K nationalised industries were kept outside C&AG's audit from the

beginning. However, British practice was more of an exception. France and Italy which

have large public enterprises including banks fall within the jurisdiction of state audit. InUSA under the Corporation Control Act, financial transactions of wholly owned

corporations are audited by General Accounting Office.


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2012



3/10/2012

Internal Audit


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representing 165 countries, including approximately 65,000 Certified

Internal Auditors.

The IFAC's IAASB is the independent standard setting body which issue external

auditing, review, other assurance related services and quality control standards

to be applied by the global external auditing profession. Some standards target

the internal auditing practices, cf. the International Standards on Auditing 40X

and 610.

The IRCA International Register of Certificated Auditors, formed in 1984, is a

division of the Chartered Quality Institute. Based in the UK it claims 14,750

members in 150 countries.

Role in internal control

Internal auditing activity is primarily directed at

improving internal control. Under the COSO

Framework, internal control is broadly defined 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 in the following internal control categories:

Effectiveness and efficiency of operations.

Reliability of financial reporting.

Compliance with laws and regulations.

Management is responsible for internal control.

Managers establish policies and processes to help theorganization achieve specific objectives in each of

these categories. Internal auditors perform audits to

evaluate whether the policies and processes are designed and operating effectively and

provide recommendations for improvement.

In the United States, internal auditors may assist management with compliance with the

Sarbanes-Oxley Act (SOX).

Role in risk management

Internal auditing professional standards require the function to monitor and evaluate the

effectiveness of the organization's Risk management processes. Risk management

relates to how an organization sets objectives, then identifies, analyzes, and responds

to those risks that could potentially impact its ability to realize its objectives.

Under the COSO enterprise risk management (ERM) Framework, risks fall under

strategic, operational, financial reporting, and legal/regulatory categories. Management

COSO

The Committee of Sponsoring

Organizations of the Treadway

Commission (COSO) is a voluntary

private-sector organization,

established in the United States,

dedicated to providing thought

leadership to executive management

and governance entities on critical

aspects of organizational governance,

business ethics, internal control,

enterprise risk management, fraud,

and financial reporting. COSO has

established a common internal control

model against which companies and

organizations may assess their controlsystems.


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performs risk assessment activities as part of the ordinary course of business

in each of these categories. Examples include: strategic planning, marketing

planning, capital planning, budgeting, hedging, incentive payout structure, and

credit/lending practices. Sarbanes-Oxley regulations also require extensive risk

assessment of financial reporting processes. Corporate legal counsel often prepares

comprehensive assessments of the current and potential litigation a company faces.

Internal auditors may evaluate each of these activities, or focus on the processes used

by management to report and monitor the risks identified. For example, internal auditors

can advise management regarding the reporting of forward-looking operating measures

to the Board, to help identify emerging risks.

In larger organizations, major strategic initiatives are implemented to achieve objectives

and drive changes. As a member of senior management, the Chief Audit Executive

(CAE) may participate in status updates on these major initiatives. This places the CAE

in the position to report on many of the major risks the organization faces to the Audit

Committee, or ensure management's reporting is effective for that purpose.

Internal auditors may help companies establish and maintain Enterprise Risk

Management processes. Internal auditors also play an important role in helping

companies execute a SOX 404 top-down risk assessment. In these latter two areas,

internal auditors typically are part of the risk assessment team in an advisory role.

Role in corporate governance

Internal auditing activity as it relates to corporate governance is generally informal,

accomplished primarily through participation in meetings and discussions with members

of the Board of Directors. Corporate governance is a combination of processes andorganizational structures implemented by the Board of Directors to inform, direct,

manage, and monitor the organization's resources, strategies and policies towards the

achievement of the organizations objectives. The internal auditor is often considered

one of the "four pillars" of corporate governance, the other pillars being the Board of

Directors, management, and the external auditor.

A primary focus area of internal auditing as it relates to corporate governance is helping

the Audit Committee of the Board of Directors (or equivalent) perform its responsibilities

effectively. This may include reporting critical internal control problems, informing the

Committee privately on the capabilities of key managers, suggesting questions or topicsfor the Audit Committee's meeting agendas, and coordinating carefully with the external

auditor and management to ensure the Committee receives effective information.


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Nature of the internal audit activity

Based on a risk assessment of the organization, internal auditors, management and oversight

Boards determine where to focus internal auditing efforts (the focus prioritization is part of the

annual/multi-year audit planning; usually, the audit plan is proposed by the ChiefInternal Audit (sometimes with several options or alternatives) to the approval of the

Audit Committee or Board of Directors). Internal auditing activity is generally conducted

as one or more discrete assignments. A typical internal audit assignment involves the

following steps:

1. Establish and communicate the scope and objectives for the audit to appropriatemanagement.

2. Develop an understanding of the business area under review. This includes

objectives, measurements, and key transaction types. This involves review ofdocuments and interviews. Flowcharts and narratives may be created ifnecessary.

3. Describe the key risks facing the business activities within the scope of the audit.4. Identify control procedures used to ensure each key risk and transaction type is

properly controlled and monitored.5. Develop and execute a risk-based sampling and testing approach to determine

whether the most important controls are operating as intended.6. Report problems identified and negotiate action plans with management to

address the problems.7. Follow-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.

By analyzing and recommending business improvements in critical areas, auditors help

the organization meet its objectives. In addition to assessing business processes,

specialists called Information Technology (IT) Auditors review information technology

controls.

Internal audit reports

Internal auditors typically issue reports at the end of each audit that summarize their

findings, recommendations, and any responses or action plans from management. An

audit report may have an executive summary; a body that includes the specific issues or

findings identified and related recommendations or action plans; and appendix

information such as detailed graphs and charts or process information. Each audit


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finding within the body of the report may contain five elements, sometimes

called the "5 C's":

1. Condition: What is the particular problem identified?2. Criteria: What is the standard that was not met? The standard may be a

company policy or other benchmark.3. Cause: Why did the problem occur?4. Consequence: What is the risk/negative outcome (or opportunity foregone)

because of the finding?5. Corrective action: What should management do about the finding? What have

they agreed to do and by when?

The recommendations in an internal audit report are designed to help the organization

achieve its goals, which may relate to operations, financial reporting or legal/regulatory

compliance. They may relate to effectiveness (i.e., whether goals were met or

compliance with standards was achieved) or efficiency (i.e., whether the outputs were

generated with minimum inputs).

Audit findings and recommendations also relate to particular assertions about

transactions, such as whether the transactions audited were valid or authorized,

completely processed, accurately valued, processed in the correct time period, and

properly disclosed in financial or operational reporting, among other elements.

Difference between internal and external audit

Internal auditors are often confused with external auditors, but there are significant

differences between the two groups. Internal auditors look at all the risks facing anorganisation and what is being done to manage these risks. External auditors on the

other hand look at financial accounts. So internal audits role is broader and might, for

example, include auditing the reputational risk that a company could be damaged by

using cheap labour in foreign countries. It could also include auditing operational risks

such as poor health and safety procedures, or strategic risks such as the board

stretching company resources by producing too many products.


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2012



3/10/2012

Mana ement Audit


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Management Audit

Q: What is Management Audit?

A detailed audit that concentrates on analysis and evaluation of managementprocedures and the overall performance of an organization. A management audit is

undertaken to discover weaknesses and to institute improvements within the

organization. Also called operational audit,performance audit.

A systematic assessment ofmethods and policies of an organization's management in

the administration and the use of resources, tactical and strategic planning, and

employee and organizational improvement.

The objectives of a management audit are to

(1) establish the current level ofeffectiveness,

(2) suggest improvements, and

(3) lay down standards forfuture performance.

Management auditors (employees of the company or independent consultants) do not

appraise individual performance, but may critically evaluate the senior executives as a

management team. See also performance audit.

A management audit can be defined as an audit which analyzes the effectiveness of themanagement team of a company. The purpose of this is seven-fold: understand current

practices, relate these to company financials, suggest new procedures which will

improve the efficiency of managers, present a financial gain related to these new

procedures, and create benchmarks and projections for the future. A management

audit letter is the final piece of material shared with the client; it is a report of the

findings.

Management Audit Explanation

The management audit process can be explained by the auditing of both the

management method as a whole as well as key management staff. This is important toestablish the effectiveness of both the leaders of the department as well as how it

performs as a team. In this way, it can fill the purpose of a staff audit or performance

audit, depending on the scope of the company.
http://www.businessdictionary.com/definition/systematic.htmlhttp://www.businessdictionary.com/definition/assessment.htmlhttp://www.businessdictionary.com/definition/method.htmlhttp://www.businessdictionary.com/definition/policy.htmlhttp://www.businessdictionary.com/definition/organization.htmlhttp://www.businessdictionary.com/definition/management.htmlhttp://www.businessdictionary.com/definition/administration.htmlhttp://www.businessdictionary.com/definition/resource.htmlhttp://www.businessdictionary.com/definition/tactical.htmlhttp://www.businessdictionary.com/definition/strategic-planning.htmlhttp://www.businessdictionary.com/definition/organizational.htmlhttp://www.businessdictionary.com/definition/improvement.htmlhttp://www.businessdictionary.com/definition/objective.htmlhttp://www.businessdictionary.com/definition/establish.htmlhttp://www.businessdictionary.com/definition/current.htmlhttp://www.businessdictionary.com/definition/effectiveness.htmlhttp://www.businessdictionary.com/definition/improvements.htmlhttp://www.businessdictionary.com/definition/future-performance.htmlhttp://www.businessdictionary.com/definition/auditor.htmlhttp://www.businessdictionary.com/definition/employee.htmlhttp://www.businessdictionary.com/definition/company.htmlhttp://www.businessdictionary.com/definition/independent.htmlhttp://www.businessdictionary.com/definition/consultant.htmlhttp://www.businessdictionary.com/definition/appraise.htmlhttp://www.businessdictionary.com/definition/individual.htmlhttp://www.businessdictionary.com/definition/performance.htmlhttp://www.businessdictionary.com/definition/senior-executive.htmlhttp://www.businessdictionary.com/definition/team.htmlhttp://www.businessdictionary.com/definition/performance-audit.htmlhttp://www.businessdictionary.com/definition/performance-audit.htmlhttp://www.businessdictionary.com/definition/team.htmlhttp://www.businessdictionary.com/definition/senior-executive.htmlhttp://www.businessdictionary.com/definition/performance.htmlhttp://www.businessdictionary.com/definition/individual.htmlhttp://www.businessdictionary.com/definition/appraise.htmlhttp://www.businessdictionary.com/definition/consultant.htmlhttp://www.businessdictionary.com/definition/independent.htmlhttp://www.businessdictionary.com/definition/company.htmlhttp://www.businessdictionary.com/definition/employee.htmlhttp://www.businessdictionary.com/definition/auditor.htmlhttp://www.businessdictionary.com/definition/future-performance.htmlhttp://www.businessdictionary.com/definition/improvements.htmlhttp://www.businessdictionary.com/definition/effectiveness.htmlhttp://www.businessdictionary.com/definition/current.htmlhttp://www.businessdictionary.com/definition/establish.htmlhttp://www.businessdictionary.com/definition/objective.htmlhttp://www.businessdictionary.com/definition/improvement.htmlhttp://www.businessdictionary.com/definition/organizational.htmlhttp://www.businessdictionary.com/definition/strategic-planning.htmlhttp://www.businessdictionary.com/definition/tactical.htmlhttp://www.businessdictionary.com/definition/resource.htmlhttp://www.businessdictionary.com/definition/administration.htmlhttp://www.businessdictionary.com/definition/management.htmlhttp://www.businessdictionary.com/definition/organization.htmlhttp://www.businessdictionary.com/definition/policy.htmlhttp://www.businessdictionary.com/definition/method.htmlhttp://www.businessdictionary.com/definition/assessment.htmlhttp://www.businessdictionary.com/definition/systematic.html


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Q: What is Corporate Governance?

Corporate governance is "the system by which companies are directed and controlled"

(Cadbury Committee, 1992). It involves a set of relationships between a companys

management, its board, its shareholders and other stakeholders; it deals with

prevention or mitigation of the conflict of interests of stakeholders.

Ways ofmitigating or preventing these conflicts of interests include the processes, customs,

policies, laws, and institutions which have impact on the way a company is controlled.

An important theme of corporate governance is the nature and extent of accountability

of people in the business, and mechanisms that try to decrease the principalagent

problem.

Corporate governance also includes the relationships among the many stakeholders

involved and the goals for which the corporation is governed. In contemporary business

corporations, the main external stakeholder groups are shareholders, debtholders, trade

creditors, suppliers, customers and communities affected by the corporation's activities.Internal stakeholders are the board of directors, executives, and other employees. It

guarantees that an enterprise is directed and controlled in a responsible, professional,

and transparent manner with the purpose of safeguarding its long-term success. It is

intended to increase the confidence of shareholders and capital-market investors.

There has been renewed interest in the corporate governance practices of modern

corporations since 2001, particularly due to the high-profile collapses of a number of

large corporations, most of which involved accounting fraud. Corporate scandals of

various forms have maintained public and political interest in the regulation of corporate

governance. In the U.S., these include Enron Corporation and MCI Inc. (formerlyWorldCom). Their demise is associated with the U.S. federal government passing the

Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate

governance. Comparable failures in Australia (HIH, One.Tel) are associated with the

eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries

stimulated increased regulatory interest (e.g., Parmalat in Italy).


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Management Audit Checklist

Q: How does one go about drafting a Management Audit checklist? (D type

question)

A management audit checklist is a set of guidelines and methodologies that a

company's internal audit department provides to staff members who review corporateprocesses and procedures. This checklist usually adheres to industry practices, top

leadership's recommendations, regulatory criteria and generally accepted auditing

standards, or GAAS. An audit checklist also helps internal auditors perform tasks

adequately.

Learn about Control Envir onment

An internal auditor reviews a company's control environment to learn about factors

influencing operating activities. There are two types of factorsexternal and internal.

Internal elements may relate to senior leadership's ethical qualities and management

style, human resources policies, training guidelines and the company's mission andvision. External factors relate to competitors, economic trends and regulatory initiatives.

For instance, an insurance company's internal factors may relate to hiring practices and

performance evaluation processes. Its external factors may include rules that the

Securities and Exchange Commission (SEC), the Public Company Accounting

Oversight Board (PCAOB) and the Financial Industry Regulatory Authority (FINRA)

promulgate.

Test I nternal Controls

An auditor tests internal controls to ensure conformity to GAAS as well as SEC and

PCAOB rules. A control is a set of guidelines that senior management establishes toprevent operating losses arising from technology systems breakdowns, fraudulent

activity, neglect and error. An auditor also tests financial reporting controls to ensure

they are adequate, functional and adhere to generally accepted accounting principles,

or GAAP. An adequate control provides clear instructions on how to perform duties and

report problems to senior leadership. A functional or effective control provides

appropriate solutions to internal problems.

Rank Contr ols and Risks

An internal auditor ranks risks and controls after testing them. He usually rates such

risks as "high," "medium" and "low," based on the loss expectation. Often, a companymay hire a specialist, such as a certified public accountant or a certified internal auditor,

to aid in assessing and ranking internal risks. An auditor also reviews "risk and control

self-assessment" (RCSA) reports that segment managers periodically prepare. An

RCSA is a document in which staff members list all risks and controls in a business unit,

a department or a segment.


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I ssue Final Report

An internal auditor usually discusses "high" and "medium" risks with senior

management because such risks may cause a firm significant operating losses and

material misstatements in financial reports. In accounting parlance, a material

misstatement means a significant error that can change an investor's decision if known

publicly. Materially misstated financial statements do not conform to GAAP and

international financial reporting standards. Top leaders usually ask department heads to

provide corrective measures for "high" and "medium" risks. Segment employees usually

find mitigating or corrective solutions for "low" risks.

Q: Can you illustrate with a Financial Management Checklist?

The list below is a set of questions to test the financial strength (Value) of you and your

organisation. The checklist is aimed at managers and directors not at their

accountants.

The questions do not relate only to financial issues but also to issues that have abearing on the Intangible Assets and hence the future strength of the organisation. The

list may also be regarded as an action list for the future.

The questions may be marked between 110. 1 means no / little: 10 means strongly

or excellent. A high mark is the target but questions should be realistically answered. A

high mark may also include danger areas for improvement

Financial

Do you have free assets in your balance sheet which can be used for future

lending ?

Do you make a profit / surplus ?

Do you generate cash consistently without increased lending or share capital?

Do you require additional loans each year to survive (negative 1-10) ?

Has your business attracted money from outside shareholders / would they

invest more ?

Have the bank said that they will lend more to you (even if you have said that you

do not need it)?

Do you have a good relationship with the bank ?

If your present bank or shareholders said no to providing more money, are otherbanks or shareholders prepared to help?

Have you produced a business plan which has successfully attracted additional

loans or shares?

Do you create a budget or internal business plan for control purposes ?

If yes are these reports in publishing language or in statutory accounts format ?

Do you meet your forecasts in terms of:


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sales targets ?

cash targets ?

publication dates ?

costs ?

Do you understand all the financial reporting supplied to you ? Are you actively involved in designing financial reports and systems with your

accountant ?

Do you monitor cashflow based on commitments or just on invoices received ?

Financial Understanding

Do you and your team appreciate the needs for all team members to have a

basic commercial understanding ?

How many members of your management team have a sound commercial

understanding

What is the average payback on new titles

What is the average return on a typical title ?

What is your Working Capital as a percentage of turnover ?

How long in months does it take for a typical print run to sell out (in schools,

shops, etc.): 1-6 months; 7-12 months; 1318 months; 19 months +?

Marketing

Are you actively involved in the marketing of your products?

Do you know who your ultimate customers are? Do you know them personally?

Do you use several distributors or only one?

Are your distributors efficient in selling throughout the country / reaching most of

the population?

Do you carry out regular market research (even though this may be very

difficult)?

Does your organisation have a strong brand image:

o with ministries ?

o with distributors ?

o with the ultimate consumers ?

Do you encourage and receive feedback from your ultimate customers Do your products make a profit for

distributors ?

retailers ?

What percentage of time is spent on promoting and selling products

o by you ?

o by your organisation ?


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Team

Do you or your board colleagues (and staff) have a record of successful

commercial success prior to working for the present organisation?

Are you and your team well connected in

Commercial circle Cultural circles (1-5 only)

Does your Board include a financial specialist?

Does your board include a banking or commercial figure (as an advisor / director)

Do all the board understand the need to make a profit / surplus and to generate

cash?

Does all your board members understanding the financial side of business and

how to create a financially successful organisation?

Do you have all the data that you need internally to run the organisation

effectively ? Can you access the necessary information quickly ?

Q: Give a Management Checklist?

The firm may also conduct an audit of the firms inventory planning and monitoring systems. Some of the

possible areas to look out for are the following:

Description Yes No Remarks

ON INVENTORY LEVELS

1. Is too much money tied up in your inventory?

2. Do frequent shortages in inventory occur?

3. Does an excessive inventory discrepancy occur?

4. Is there are a lot of obsolete and/or non-moving items onstock?

ON INVENTORY INFORMATION / POLICIES

1. Does the company have realistic safety stock levels?

2. Does the company have realistic reorder point levels?

3. Does the company have realistic inventory lead times?

4. Are inventory control policies and procedures adequatelydocumented and communicated to all concerned


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departments?

INVENTORY MONITORING

1. Are inventory records kept up- to-date for all materials?

2. Are inventory records regularly verified by actual count?

3. Are incoming and outgoing materials / goods properlychecked, authorized and logged in/out?

4. Are surplus and scrap items properly recorded and controlled?

(This coverage is too short. Discuss this in class)


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Some corporate scams leading to demand forCorporate Governance

Enron ScamThe Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the

Enron Corporation, an American energy company based in Houston, Texas, and the

dissolution ofArthur Andersen, which was one of the five largest audit and accountancy

partnerships in the world. In addition to being the largest bankruptcy reorganization in

American history at that time, Enron was attributed as the biggest audit failure.

Enron was formed in 1985 by Kenneth Lay after merging Houston Natural Gas and

InterNorth. Several years later, when Jeffrey Skilling was hired, he developed a staff of

executives that, through the use of accounting loopholes, special purpose entities, and

poor financial reporting, were able to hide billions in debt from failed deals and projects.

Chief Financial OfficerAndrew Fastow and other executives not only misled Enron's

board of directors and audit committee on high-risk accounting practices, but also

pressured Andersen to ignore the issues.

Shareholders lost nearly $11 billion when Enron's stock price, which hit a high of US$90

per share in mid-2000, plummeted to less than $1 by the end of November 2001. The

U.S. Securities and Exchange Commission (SEC) began an investigation, and rival

Houston competitorDynegy offered to purchase the company at a fire sale price. The

deal fell through, and on December 2, 2001, Enron filed for bankruptcy under Chapter

11 of the United States Bankruptcy Code. Enron's $63.4 billion in assets made it the

largest corporate bankruptcy in U.S. history until WorldCom's bankruptcy the following

year.

Many executives at Enron were indicted for a variety of charges and were later

sentenced to prison. Enron's auditor, Arthur Andersen, was found guilty in a United

States District Court, but by the time the ruling was overturned at the U.S. Supreme

Court, the firm had lost the majority of its customers and had shut down. Employees

and shareholders received limited returns in lawsuits, despite losing billions in pensions

and stock prices. As a consequence of the scandal, new regulations and legislation

were enacted to expand the accuracy of financial reporting for public companies. One

piece of legislation, the Sarbanes-Oxley Act, expanded repercussions for destroying,

altering, or fabricating records in federal investigations or for attempting to defraud

shareholders. The act also increased the accountability of auditing firms to remain

unbiased and independent of their clients.
http://en.wikipedia.org/wiki/Houston,_Texashttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Big_Four_auditorshttp://en.wikipedia.org/wiki/Audithttp://en.wikipedia.org/wiki/Accountancyhttp://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Kenneth_Layhttp://en.wikipedia.org/wiki/Houston_Natural_Gashttp://en.wikipedia.org/wiki/InterNorthhttp://en.wikipedia.org/wiki/Jeffrey_Skillinghttp://en.wikipedia.org/wiki/Special_purpose_entityhttp://en.wikipedia.org/wiki/Andrew_Fastowhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Dynegyhttp://en.wikipedia.org/wiki/Fire_salehttp://en.wikipedia.org/wiki/Chapter_11http://en.wikipedia.org/wiki/Chapter_11http://en.wikipedia.org/wiki/Bankruptcy_in_the_United_Stateshttp://en.wikipedia.org/wiki/WorldComhttp://en.wikipedia.org/wiki/Arthur_Andersen_LLP_v._United_Stateshttp://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttp://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Sarbanes-Oxley_Acthttp://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttp://en.wikipedia.org/wiki/Supreme_Court_of_the_United_Stateshttp://en.wikipedia.org/wiki/Arthur_Andersen_LLP_v._United_Stateshttp://en.wikipedia.org/wiki/WorldComhttp://en.wikipedia.org/wiki/Bankruptcy_in_the_United_Stateshttp://en.wikipedia.org/wiki/Chapter_11http://en.wikipedia.org/wiki/Chapter_11http://en.wikipedia.org/wiki/Fire_salehttp://en.wikipedia.org/wiki/Dynegyhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/United_States_dollarhttp://en.wikipedia.org/wiki/Andrew_Fastowhttp://en.wikipedia.org/wiki/Special_purpose_entityhttp://en.wikipedia.org/wiki/Jeffrey_Skillinghttp://en.wikipedia.org/wiki/InterNorthhttp://en.wikipedia.org/wiki/Houston_Natural_Gashttp://en.wikipedia.org/wiki/Kenneth_Layhttp://en.wikipedia.org/wiki/Partnershiphttp://en.wikipedia.org/wiki/Accountancyhttp://en.wikipedia.org/wiki/Audithttp://en.wikipedia.org/wiki/Big_Four_auditorshttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Houston,_Texas


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WorldCom Scam

CEO Bernard Ebbers became very wealthy from the rising price of his

holdings in WorldCom common stock. However, in the year 2000, the

telecommunications industry entered a downturn and WorldComs

aggressive growth strategy suffered a serious setback when it wasforced by the US Justice Department to abandon its proposed merger

with Sprint in mid 2000. By that time, WorldComs stock price was

declining and Ebbers came under increasing pressure from banks to

covermargin calls on his WorldCom stock that was used to finance

his other businesses (timber and yachting, among others).During

2001, Ebbers persuaded WorldComs board of directors to provide

him corporate loans and guarantees in excess of $400 million to

cover his margin calls.The board hoped that the loans would avert the need for Ebbers

to sell substantial amounts of his WorldCom stock, as his doing so would put further

downward pressure in the stock's price. However, this strategy ultimately failed and

Ebbers was ousted as CEO in April 2002 and replaced by John Sidgmore, formerCEO

ofUUNET Technologies, Inc.

Beginning modestly in mid-year 1999 and continuing at an accelerated pace through

May 2002, the company (under the direction of Ebbers, Scott Sullivan (CFO), David

Myers (Comptroller) and Buford "Buddy" Yates (Director of General Accounting)) used

fraudulent accounting methods to mask its declining earnings by painting a false picture

of financial growth and profitability to prop up the price of WorldComs stock.

The fraud was accomplished primarily in two ways:

Booking line costs (interconnection expenses with other telecommunication

companies) as capital on the balance sheet instead ofexpenses.

Inflating revenues with bogus accounting entries from "corporate unallocated

revenue accounts".

In 2002, a small team of internal auditors at WorldCom worked together, often at

night and in secret, to investigate and unearth $3.8 billion in fraud. Shortly thereafter,

the companys audit committee and board of directors were notified of the fraud and

acted swiftly: Sullivan was fired, Myers resigned, Arthur Andersen withdrew its auditopinion for 2001, and the U.S. Securities and Exchange Commission (SEC) launched

an investigation into these matters on June 26, 2002 (see accounting scandals). By the

end of 2003, it was estimated that the company's total assets had been inflated by

around $11 billion.
http://en.wikipedia.org/wiki/Bernard_Ebbershttp://en.wikipedia.org/wiki/Margin_callhttp://en.wikipedia.org/wiki/John_W._Sidgmorehttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/UUNEThttp://en.wikipedia.org/wiki/Scott_Sullivan_%28executive%29http://en.wikipedia.org/wiki/Comptrollerhttp://en.wikipedia.org/wiki/Capital_expenditurehttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Accounting_scandalshttp://en.wikipedia.org/wiki/Accounting_scandalshttp://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commissionhttp://en.wikipedia.org/wiki/Arthur_Andersenhttp://en.wikipedia.org/wiki/Expensehttp://en.wikipedia.org/wiki/Capital_expenditurehttp://en.wikipedia.org/wiki/Comptrollerhttp://en.wikipedia.org/wiki/Scott_Sullivan_%28executive%29http://en.wikipedia.org/wiki/UUNEThttp://en.wikipedia.org/wiki/Chief_executive_officerhttp://en.wikipedia.org/wiki/John_W._Sidgmorehttp://en.wikipedia.org/wiki/Margin_callhttp://en.wikipedia.org/wiki/Bernard_Ebbers


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Bankruptcy

On July 21, 2002, WorldCom filed for Chapter 11 bankruptcy protection in the largest

such filing in United States history at the time (since overtaken by the collapses of both

Lehman Brothers and Washington Mutual in a span of eleven days in September 2008).

The WorldCom bankruptcy proceedings were held before U.S. Federal Bankruptcy

Judge Arthur J. Gonzalez who simultaneously heard the Enron bankruptcy proceedings

which were the second largest bankruptcy case resulting from one of the largest

corporate fraud scandals. None of the criminal proceedings against WorldCom and its

officers and agents was originated by referral from Gonzalez or the Department of

Justice lawyers.

On April 14, 2003, WorldCom changed its name to MCI and moved its corporate

headquarters from Clinton, Mississippi, to Dulles, Virginia.

Under the bankruptcy reorganization agreement, the company paid $750 million to the

SEC in cash and stock in the new MCI, which was intended to be paid to wrongedinvestors.

In May 2003, the company was given a no-bid contract by the United States

Department of Defense to build a cellular telephone network in Iraq. The deal has been

criticized by competitors and others who cite the company's lack of experience in the

area.

The SEC and Worldcom reached a deal in which Worldcom agreed to pay a civil

penalty of $2.25 billion. The deal was approved by federal judge Jed Rakoff in July

2003. In a sweeping consent decree, the SEC and Rakoff essentially took control ofWorldcom. Rakoff appointed former former SEC chairman Richard C. Breeden to

oversee Worldcom's compliance with the SEC agreement. Breeden actively involved

himself in the management of the company, and prepared a report for Rakoff, titled

Restoring Trust, in which he proposed extensive corporate governance reforms, as part

of an effort to "cast the new MCI into what he hoped would become a model of how

shareholders should be protected and how companies should be run."

Post-bankruptcy

The company emerged from Chapter 11 bankruptcy in 2004 with about $5.7 billion in

debt and $6 billion in cash. About half of the cash was intended to pay various claimsand settlements. Previous bondholders ended up being paid 35.7 cents on the dollar, in

bonds and stock in the new MCI company. The previous stockholders' stock was

cancelled, making it totally worthless.

It had yet to pay many of its creditors, who had waited for two years for a portion of the

money owed. Many of the small creditors included former employees, primarily those
http://en.wikipedia.org/wiki/Chapter_11_bankruptcy_protectionhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Lehman_Brothershttp://en.wikipedia.org/wiki/Washington_Mutualhttp://en.wikipedia.org/wiki/Arthur_Gonzalezhttp://en.wikipedia.org/wiki/Enronhttp://en.wikipedia.org/wiki/Clinton,_Mississippihttp://en.wikipedia.org/wiki/Dulles,_Virginiahttp://en.wikipedia.org/wiki/No-bid_contracthttp://en.wikipedia.org/wiki/United_States_Department_of_Defensehttp://en.wikipedia.org/wiki/United_States_Department_of_Defensehttp://en.wikipedia.org/wiki/Cellular_telephonehttp://en.wikipedia.org/wiki/Iraqhttp://en.wikipedia.org/wiki/Jed_Rakoffhttp://en.wikipedia.org/wiki/Richard_C._Breedenhttp://en.wikipedia.org/wiki/Chapter_11http://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Stockhttp://en.wikipedia.org/wiki/Bond_%28finance%29http://en.wikipedia.org/wiki/Chapter_11http://en.wikipedia.org/wiki/Richard_C._Breedenhttp://en.wikipedia.org/wiki/Jed_Rakoffhttp://en.wikipedia.org/wiki/Iraqhttp://en.wikipedia.org/wiki/Cellular_telephonehttp://en.wikipedia.org/wiki/United_States_Department_of_Defensehttp://en.wikipedia.org/wiki/United_States_Department_of_Defensehttp://en.wikipedia.org/wiki/No-bid_contracthttp://en.wikipedia.org/wiki/Dulles,_Virginiahttp://en.wikipedia.org/wiki/Clinton,_Mississippihttp://en.wikipedia.org/wiki/Enronhttp://en.wikipedia.org/wiki/Arthur_Gonzalezhttp://en.wikipedia.org/wiki/Washington_Mutualhttp://en.wikipedia.org/wiki/Lehman_Brothershttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/Chapter_11_bankruptcy_protection


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who were laid off in June 2002 and whose severance and benefits were withheld when

WorldCom filed for bankruptcy.

On August 7, 2002, the exWorldCom 5100group was launched. It was composed of

former WorldCom employees with a common goal of seeking full payment of severance

pay and benefits based on the WorldCom Severance Plan. The "5100" stands for thenumber of WorldCom employees laid off on June 28, 2002 before WorldCom filed for

bankruptcy.

On February 14, 2005, Verizon Communications agreed to acquire MCI for $7.6 billion.

On March 15, 2005 Bernard Ebbers was found guilty of all charges and convicted of

fraud, conspiracy and filing false documents with regulatorsall related to the $11

billion accounting scandal at the telecommunications company he founded. He was

sentenced to 25 years in prison. Other former WorldCom officials charged with criminal

penalties in relation to the company's financial misstatements include former CFO ScottSullivan (entered a guilty plea on March 2, 2004 to one count each of securities fraud,

conspiracy to commit securities fraud, and filing false statements),former comptroller

David Myers (pleaded guilty to securities fraud, conspiracy to commit securities fraud,

and filing false statements on September 27, 2002), former (pleaded guilty to

conspiracy and fraud charges on October 7, 2002), and former and Troy Normand

(both pleading guilty to conspiracy and securities fraud on October 10, 2002).

On July 13, 2005 Bernard Ebbers received a sentence that would keep him imprisoned

for 25 years. At time of sentencing, Ebbers was 63 years old. On September 26, 2006,

Ebbers turned himself in to the Federal Bureau of Prisons prison at Oakdale, Louisiana,the Oakdale Federal Corrections Institution to begin serving his sentence.

In March 2005, 16 ofWorldCom's 17 former underwriters reached settlements with the

investors.Citigroup settled for $2.65 billion on May 10, 2004.

In December 2005, the Microsoft corporation announced that MCI will join it by

providing Windows Live Messenger customers "Voice Over Internet Protocol" (VOIP)

service to make telephone calls. This was MCI's last new productcalled "MCI Web

Calling". After the merger, this product was renamed "Verizon Web Calling".
http://en.wikipedia.org/wiki/Verizon_Communicationshttp://en.wikipedia.org/wiki/Bernard_Ebbershttp://en.wikipedia.org/wiki/Bureau_of_Prisonshttp://en.wikipedia.org/wiki/Oakdale,_Louisianahttp://en.wikipedia.org/wiki/WorldComhttp://en.wikipedia.org/wiki/Citigrouphttp://en.wikipedia.org/wiki/Citigrouphttp://en.wikipedia.org/wiki/Windows_Live_Messengerhttp://en.wikipedia.org/wiki/VOIPhttp://en.wikipedia.org/wiki/VOIPhttp://en.wikipedia.org/wiki/Windows_Live_Messengerhttp://en.wikipedia.org/wiki/Citigrouphttp://en.wikipedia.org/wiki/WorldComhttp://en.wikipedia.org/wiki/Oakdale,_Louisianahttp://en.wikipedia.org/wiki/Bureau_of_Prisonshttp://en.wikipedia.org/wiki/Bernard_Ebbershttp://en.wikipedia.org/wiki/Verizon_Communications


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2012



3/10/2012

Cost Audit


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Cost Audit

Definition

An internal audit used for enterprise governance to assess operational efficiencies and

resource management. Special attention is given to verification of cost records and

adherence to acceptable cost accounting procedures.

Cost Audit is the process of ascertaining whether the production, marketing and sales

processes as well as other aspects of a business are managed in the most cost

effective way. This is essentially an Internal Audit and is done as a tool for optimising

management efficiency. The most important benefit is the location of unseen leaks inrevenues or unproductive or under- productive employment of resources

It is mandatory if the Business is under scrutiny by a financial institution or regulator on

the basis of complaints of mismanagement. It is always desirable to have a Cost audit

done periodically, to prevent the situation getting out of control, and to help the

management to take prompt action where necessary.

Meaning of cost audit -

(a) It means verification of cost records.

(b) Examination of these records to ensure that they adhere to cost accounting

principles, plans, objectives and procedures.

Appointment -

As per section 233 B , a cost auditor shall be appointed by the BOD of the company and

with the previous approval of CG. Further it has been provided that before appointment

of any cost auditor is made by the board a written certificate shall be obtained by the

board from that auditor that the appointment if made will be in accordance with the

provisions of sub section ( 1B ) of section 224.

Qualification of Cost Auditor -

(a) Holding appointment as statutory auditor under section 224 of the act.

(b) He should not be an employee of the company.

(c) Should not hold securities of the company.


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Types of cost audit -

(a) On behalf of management -

1. Establishing accuracy of cost data.2. Determining proper overheads rates.

3. Fixation of contract price.

4. Determing unit cost of production.

5. Improving quality of cost accounting system.

(b) On behalf of customer -

For cost plus contract.

(c) On behalf of government -

For subsidies, etc. It may be conducted to determine fair price.

Exemption from cost audit -

1. Situation for Exemption -

(a) Temporary closure of company / product.

(b) Negligible ( Too small ) production activity.

2. Fees

Companies having Authorizes capital Amount of fees

Less than 25 laks Rs 500

25 Lakhs but less than 5 crore Rs 1000

5 crore or above Rs 2000

Mandatory cost audit

The Ministry of Corporate Affairs has issued two circulars in May 2011 making cost

audit mandatory for some selected industries. All listed companies and companies with

net worth exceeding Rs five crores or turnover exceeding Rs 20 crores, operating in any


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of the following industries, will be covered under mandatory cost audit effective from

April 1, 2011: Bulk drugs, Formulations, Fertilisers, Sugar, Industrial alcohol, Electricity,

Petroleum and Telecommunication. Similarly, all listed companies and companies with

turnover exceeding Rs 100 crores, operating in any of the following industries will be

covered under mandatory cost audit effective from April 1, 2011: Cement, Tyres and

Tubes, Steel Plant, Steel Tubes and Pipes, Paper and Insecticides. This is a clear

departure from the earlier government policy of directing cost audit of certain selected

companies covered under Cost Accounting Record Rules issued from time to time by

the government.


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2012



3/10/2012

Statutor /Financial Audit


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CA Jayadeep Shah

President 2012

Statutory/Financial Audit

In simple terms statutory audit in India is equated with Audit under the Companies Act.

Every company incorporated under the companies act is required to get its accounts

audited by a Chartered Accountant in Practice to ensure true and fair view of theaccounts. Further, the auditor has to ensure compliance with various provisions of the

Companies Act. Statutory Audit ensures reliability of annual

accounts of the company for various consumers of

Accounts of the Company like government, shareholders,

debtors, creditors, bankers etc.

Statutory Auditor is the term referred to the external certified

public accountant, i.e. external auditors, in most countries.

He is an external service supplier; in charge of certifying the

Financial Statements according to specific professionalauditing standards. In India, membership of the Institute of

Chartered Accountants is a must along with the Certificate

of practice.

The principal objectives of the Statutory Audit is to ensure that the

financial statements i.e. the Balance Sheet, Profit & Loss Account and

Cash Flow Statement give a true & fair view and are free from any

material misstatements.

Difference between Internal Audit and Statutory Audit

1. Appointment: The management of the organization makes the

appointment of an internal auditor. The statutory auditor is appointed by

different authorities. First statutory auditors are appointed by the

shareholders in the annual general meeting.

2. Qualification: Qualifications of the statutory auditor are prescribed in the

companies act, 1956. Essentially a person should be a practicing

chartered accountant to be appointed as a statutory auditor. There are no

fixed qualification for the position of an internal auditor.

3. 3. Objects: The main object of the statutory audit is to form an opinion on

the financial statement of the organization auditor has to state that

whether the financial statements are showing the true and fair view of the

affairs of the organization or not. The main object of the internal audit is to

detect and prevent the errors and frauds.

4. Scope: The scope of the statutory audit is fixed by the companys act

1956. it can not be changed by mutual consent between the auditor and


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the management of the audited business unit. The scope of the internal

audit is fixed by the mutual consent of the auditor and the management of

the unit under audit.

5. Remuneration: Remuneration of the statutory auditor is fixed by the

appointing authority, I e in case of first auditors, the auditors the directors

fix the Remuneration in case of the subsequent auditors the company in

its general meeting fixes the remuneration. In case of internal auditor the

management who appoints him fixes his Remuneration.

6. Report: The statutory auditor submits his report to the shareholder of the

company in its general meeting. The internal auditor submits his report to

the management of the company who is also his appointing authority.

7. Removal: The procedure of removal of the statutory auditor is very

complex. Only the company in the general meeting can remove the

auditor. It also has to take the permission of the central government. The

management of the entity can remove internal auditor.


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Sample Statutory Audit Report

AUDITORS REPORT

To,

The Members ofXYZ (India) LTD.

1. We have audited the attached Balance Sheet ofXXXX YYYY Pvt Ltd.. As at 31stMarch 2012 and also the Profit and Loss Account for the year ended on that dateannexed thereto. These financial statements are the responsibility of the Companys

management. Our responsibility is to express an opinion on these financialstatements based on our audit.

2. We have conducted our audit in accordance with auditing standards generallyaccepted in India. Those Standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion.

3. As required by the Companies (Auditors Report) Order,2003 and amendmentsthereto issued by the Central Government of India in terms of Sec 227(4A) of TheCompanies

Act 1956, we annex hereto a statement on the matters specified in the paragraphs 4 and

5 of the said order, to the extent applicable to the Company.

4. We further report that :

(i) We have obtained all the information and explanations which to the best ofour knowledge and belief were necessary for the purposes of our audit;


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(ii) In our opinion, proper books of account as required by law have been keptby the company so far as appears from our examination of those books;

(iii) The Balance Sheet and Profit and Loss Account dealt with by this report

are in agreement with the books of account;

(iv) In our opinion, the Balance Sheet and Profit and Loss account dealt with by thisreport comply with the accounting standards referred to in sub-section (3C) of

section 211 of the Companies Act, 1956;

(v) On the basis of written representations received from the directors, as on 31stMarch 2008, and taken on record by the Board of Directors, we report that none of

the directors is disqualified as on 31st

March 2012 from being appointed as adirector in terms of clause (g) of sub-section(1) of section 274 of the Companies

Act, 1956;

(vi) In our opinion and to the best of our information and according to theexplanations given to us, the said accounts give the information requiredby the Companies Act, 1956, in the manner so required and give a trueand fair view in conformity with the accounting principles generallyaccepted in India:

(i) in the case of the Balance Sheet of the state of affairs of the Companyas at 31st March 2012; and

(ii) in the case of Profit and Loss Account, of the Profit for the year endedon that date.

For Nitant P. Trilokekar & Co.Chartered Accountants

Firm No. 126874W

CA. Nitant TrilokekarMem No.: 37415

Place: Mumbai

Date: .


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Annexure to Auditors Report

Annexure referred to in paragraph 2 of the auditors report to the members of XXXXYYYY Pvt Ltd. for the year ended 31st March, 2012

As required by the companies (Auditor Report) Order , 2003 and amendments theretoand according to the information and explanations given to us during the course of theaudit and on the basis of such checks of the books and records as were consideredappropriate we report that:

(i) a) The company has maintained proper record showing full particulars includingquantitative details and situations of fixed assets.

b) All the assets have been physically verified by the management in accordance witha phased programme of verification, which in our opinion is reasonable, considering thesize and the nature of business. The frequency of verification is reasonable and nomaterial discrepancies have been noticed on such physical verification.

c) The assets disposed during the year are not significant and therefore do not affectthe on going concern assumptions.

(ii) a) The inventories have been physically verified by the management during theyearat reasonable intervals.

b) The procedure of physical verification of the inventories followed by the managementis reasonable and adequate in relation to the size of the company and the nature of itsbusiness.

c) The Company has maintained proper records of inventories and discrepanciesnoticed on physical verification of inventories as compared to books records were notmaterial.

(iii) a) The company has not granted unsecured loan to party covered in the registermaintained under section 301 of the Companies Act, 1956.


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b) In view of our comments in Para (iii) (a) above, clauses 4 (iii) (b) (c) and (d) of thesaid order are not applicable to the company.

c) The company has taken unsecured loan from two parties covered in the registermaintained under section 301 of the Companies Act, 1956 on all basis. The Maximumamount outstanding during the year was Rs. 420800/- and Rs. 120000 the year endedbalance was Rs. 560800/-.

d) The other terms and conditions on which the loans have been taken are primafacie, not prejudicial to the interest of the company;

e) In view of our comments in para (iii) (c) and (d) above, clause (iii) (g) of the saidorder is not applicable to the company

(iv) There are adequate internal control systems commensurate with the size of thecompany and the nature of its business with regard to purchase of inventories, fixedassets and for the sale of goods and services. During the course of our audit no majorweakness has been observed in the internal control system.

(v) a) The transactions made in pursuance of contract or arrangements that need tobe entered into the register maintained under section 301 of the Companies Act, 1956has been recorded in the register.

b) The transactions made in pursuance of contract or arrangements that need tobe entered into the register maintained under section 301 of the Companies Act, 1956has been recorded in the register.

(vi) The company

audit handout

Documents