Q1. Discuss in brief the advantages and limitations of auditing. Answers: Advantages of Financial Audit 1.

Statutory financial audit gives the owners of a company and other stakeholders the assurance that annual financial reports give true and rational view about the companys financial performance. 2.Tax audit viz., the audit of financials of the company based on which taxable incomes determined and tax paid is mandatory. Tax auditors report has to be filed with the taxreturn. 3. Internal financial audit assists the CEO and his team of operating managers regularly and much more frequently in understanding the financial performance of the company and taking corrective actions necessary. 4. Financial audit is an invaluable tool for prevention and early detection of fraud and errors. 5. Audited financial report together with the auditors report is necessary for companying sourcing funds from banks and other financial institutions. 6. The audited balance sheet of a company read with the auditors report is often the base document for valuation of companies in case mergers, acquisitions or outright sales. Limitations of Financial Audits per SA 200A issued by The Institute of Chartered Accountants of India, the objective of an audit is to express an opinion as to the true and fair view of the financial statements. The audit gives no assurance on the future viability of the enterprise or the efficiency or effectiveness with which the management has conducted the affairs of the enterprise. It should also be understood that audit of accounts does not guarantee the detection of all the errors. These conceptual restrictions arise due to following inherent limitations of auditing: 1. It is a post-mortem: The annual statutory audit is not a concurrent activity, but starts only after the year is over. Naturally, the auditor has to rely on explanations given to him by the accountant for activities that happened quite a while ago. The essential truth behind some of the figures may therefore still remain undiscovered. 2. It is a test check: The auditor cannot examine all the transactions given the time and cost constraints. He applies test checks using statistical sampling techniques. The inherent weaknesses of such methods carry an element of uncertainty or risk. Thus, auditing only reduces and does not eliminate the possibilities of error or fraud.3. Inherent limitations of internal control system: An auditor largely relies on the internal controls of the enterprise as he cannot check everything. Internal controls are the inbuilt checks and balances in the companys accounting and administration. But these internal controls themselves are subject to some limitations :(a) Certain levels of management may override control and make exceptions to procedures.(b) Persons operating the internal control and employees or outside parties may collude and render the controls ineffective.(c) There is also human error that may escape the controls.

Q2. Discuss the scope and objectives of internal audit Answers: Management Audit as a Subset of Internal Audit Internal audit is audit with clear management and operations focus. It is therefore increasingly believed that internal audit should not only verify financial records, calculations and clerical operations but also appraise operations and management functions for their efficacy and efficiency. Rather than go for a separate management audit or operations audit, it is seen that better results can be achieved with re-orientation of internal auditing to include management audit. Under financial audit the following activities may be included: 1. A continuous review of internal accounting control; 2. The scrutiny of reports and statements, financial or operating, as prepared for management purposes; 3. The ascertainment of the extent to which the assets of the organization are accounted for and safeguarded from losses or damages; 4. The examination of balance sheet items, tests of balances and transactions as to their faithfulness through appropriate tests; etc. Under operational audit following activities may be included: 1. The study and assessment of operating practices to promote increased efficiency and economy; 2. The carrying out of audits to determine whether operating objectives, targets and associated control procedures are properly instituted and the degree to which the desired results are achieved; 3. The examination and the ascertainment of the extent to which established policies, plans and procedures are complied with; 4. The assessment of budgetary standard setting; 5. The assessment of the level of performance in successfully discharging duties and responsibilities assigned. The objectives of a good internal audit are: 1. Evaluation of accounting controls: Ensuring that the checks and balances in the accounting processes are effective and provide the required accounting controls.

2. Compliance with policies and procedures: Verifying compliance with the policies and procedures laid down for key activities and reporting acts of omission and commission. 3. Protection and optimal utilization of business assets: Ensuring physical availability and usefulness of fixed assets as per companys records, and checking utilization of major assets vis--vis plan. 4. Testing the reliability of Management Information Systems (MIS): Reviewing the management reporting structure and the utility of reports flowing out of the system. Internal audit is often considered a part of the finance function of the enterprise since the technical expertise required to do the audit function is available only with the Finance & Accounts professionals. While this is natural, it may be a short-sighted approach. The internal auditor should be free to review and if necessary investigate all management areas, and by making him report to finance this freedom might be compromised. The following extract from the internal audit manual of a public undertaking gives a good.

Q3. Explain the role of internal auditor as an integral part of management. Answers: Role of Internal Auditor: The specific contributions that an internal auditor can make include:
1. Review of internal control systems: The internal auditor should review the internal control systems of the organization. He should determine whether the existing control systems are appropriate and commensurate with the objectives, size, etc. of the organization. For example a small company cannot afford a separate credit controldepartment and so it wil need strong controls in the sales accounting process tominimize customer payment default.2. Review of safeguards for assets: The auditor should regularly review the adequacyof insurance covers for fixed assets and complete accounting of all transactions relatingto fixed assets, etc.3. Review of compliance with policies, plans, procedures and regulations: The internalauditor should include a regular checklist of compliances by different functions of laiddown procedural requirements. When a non-observance is spotted, he should inquireand ascertain the reason for the deviation, and report the event together with theProposed solution.4. Review of organisation structure: A well-designed organization structure is the basicrequirement for the smooth functioning of any organisation. Organisation structuredefines the authorities and responsibilities of executives. The internal auditor shouldevaluate the organisation structure from the following dimensions:a. Simplicity and lack of ambiguity.b. Clear definition of authority and responsibility at each level.c. Balance of power, to ensure there is no undue dominance of any function.d. Balance of responsibility, to ensure proper unity of command and span of control.e. Effective communication of the organisation chart to all concerned.5. Review of deployment of

resources: The internal auditor reviews utilisation ofresources deployed for the business men, machines, money, materials andmanagement to identify deviations both by way of excessive use of resources andresources that are under-utilised. He would be able to do this vis--vis the planned