An introduction to Internal and Statutory Audit

Auditing is a systematic examination of the books and records of a business or other organisation in order to ascertain or verify and to report upon the facts regarding its financial operation and the results thereof.
R.B. Bose has defined as ‘audit may be said to be verification of the accuracy and correctness of the books of accounts by an independent person qualified for the job and not in any way connected with the preparation of such accounts.

Auditing is the verification of the correctness of accounts and reliability of accounting system, date and information. An auditing, therefore, includes verification of correctness of the accounts, statements, reports, data, etc. and finally checking these data to see that they adhere to accounting principles, plans, procedures and objectives.

Internal Auditing

Internal auditing is a part of the internal control system. It is a perpetual verification of accounting books, bills, vouchers, cash receipt, payments, bank reconciliation, utmost utilization of assets, safety and control assets, control of bad debts, etc. They are responsible for accounting procedure, finding budget variances, ensuring organization principles, policies, etc. It possible either its organization can have its own employees or appoint an outside agency to perform the duties of internal auditing. Small organizations generally do not have separate audit department not arrange any outside agency. The internal auditor will head the department and report to General Manager / Chief Accountant / Director.

An Internal Auditing is an expensive affair and the small organizations do not find it viable to have their accounts audited internally. But the larger companies find it very essential to have internal auditors. It helps in improving the financial positions and cost efficiency of the business

External Auditing

It is a compulsory audit done by outside agency at least once, at the end of the financial year.
As per SEBI guidelines, public limited companies are required to have the companies accounts audited after every three months. Only registered Chartered Accountant Auditors are authorised to audit the accounts and sign it.

Auditing conducted according to statutes is called ‘Statutory Audit’. The statutory
Auditor starts his work by studying the nature of the business and its organization, the books of accounts maintained the procedure in use, the principles of accounting systems adopted and the nature and extent of the various internal checks and control exercised.

Advantages of Auditing

An auditing is not only useful to the management but it also ensures socio-economic benefits.

Benefits to the management

1. It detects the errors and frauds.
2. It keeps employees more alert.
3. It reduces the wear and tear of assets and also helps in better utilization of assets.
4. It increases profitability.
5. It reduces the cost due to better management, efficiency and control.
6. It points out management’s weakness and recommends better accounting.

Benefit to Share Holders and General Public

1. This tells the public whether it is making sufficient profit or not.
2. In its reports, it gives the information like earning per share, cash earnings per share, debt-equity ratio, comparative balance sheets, comparative income expenditure income statements, etc. This helps public and shareholders in deciding whether to invest in the company or not.
3. The public gets goods and services at reasonable price.

Benefits to the Government

1. The bills at cost plus profit submitted to the government are settled without dispute.
2. The government can fix the price of essential commodities.
3. The subsidies can be decided after studying the cost and selling price government wants to fix.
4. It helps in fixing the export price for commodities.
5. The income tax and other tax authorities accept the reports submitted by the auditors.

Though auditing has many advantages but the effectiveness of this department depends on the following limitation:

1. Qualification: The auditors must be well qualified and they must know their job perfectly.
2. Experience: The prior experience of auditing is very essential to audit the accounts accurately.
3. Independence: The auditors must be extended independence. That is why usually they are hired from outside. Even if internal auditor/employee are to be used then he must not work under accounts department. In fact he should report to General Manager or the Director of the company.
4. Access to Records: The auditors must have an authority to have any or all the documents, files, etc. for the purpose of auditing.
5. Safety: The auditors must not feel unsafe for submitting adverse report on the organization in general or any department in particular.
6. Adequate Staff: There should be adequate number of persons to carry out the work.