A PROJECT REPORT ON

INTERNAL AUDIT V/S EXTERNAL AUDIT

SUBMITTED BY
MISS MANALI. RAMCHAND. GODHIA,
ROLL NO: 166011
M.Com. SEM- III
(ADVANCE ACCOUNTANCY)
ACADEMIC YEAR: 2016-17

Under the guidance of PROJECT GUIDE

PROF. NIKHIL KARKHANIS.

SUBMITTED TO UNIVERSITY OF MUMBAI

MULUND COLLEGE OF COMMERCE
S N ROAD, MULUND (WEST)
MUMBAI - 400080
 Declaration from the Student

I, MANALI GODHIA ROLL. No. 166011 Student of Mulund College Of Commerce, S. N.

Road, Mulund (West) 400080, studying in M.Com Part- II hereby declare that I have completed

the project on INTERNAL AUDIT V/S EXTERNAL AUDIT under the guidance of project

guide Prof. Nikhil Karkhanis during the academic year 2016-17. The information submitted is

true to the best of my knowledge.

Date:

Signature:

Place:
 CERTIFICATE

I, Prof. NIKHIL KARKHANIS, hereby certify that Miss MANALI GODHIA. ROLL. No.

166011 of Mulund College of Commerce, S. N. Road,Mulund (West), Mumbai -400080 of

M.com Part II (Advanced Accountancy) has completed her project on INTERNAL AUDIT V/S

EXTERNAL AUDIT during the academic year 2016-17. The information submitted is true and

original to the best of my knowledge.

____________________ ___________________

Project Guide External guide

_____________________ ___________________

Co-coordinator Principal

Date:
 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to Principal of Mulund College of

Commerce DR. (Mrs.)ParvathiVenkatesh, Course - Coordinator Prof. Rane and our project

guide Prof. NIKHIL KARKHANIS, for providing me an opportunity to do my project

work on INTERNAL AUDIT V/S EXTERNAL AUDIT. I also wish to express my

sincere gratitude to the non - teaching staff of our college. I sincerely thank to all of

them in helping me to carrying out this project work. Last but not the least, I wish to

avail myself of this opportunity, to express a sense of gratitude and love to my friends

and my beloved parents for their mutual support, strength, help and for everything.

PLACE:

Signature:

DATE:
Introduction:
An audit is a systematic and independent examination of books, accounts, statutory records,
documents and vouchers of an organization to ascertain how far the financial statements as well
as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure
that the books of accounts are properly maintained by the concern as required by law. Auditing
has become such a ubiquitous phenomenon in the corporate and the public sector that academics
started identifying an "Audit Society". [1] The auditor perceives and recognises the propositions
before him/her for examination, obtains evidence, evaluates the same and formulates an opinion
on the basis of his judgement which is communicated through his audit report.[2]

Any subject matter may be audited. Audits provide third party assurance to
various stakeholders that the subject matter is free from material misstatement. The term is most
frequently applied to audits of the financial information relating to a legal person. Other areas
which are commonly audited include: secretarial & compliance audit, internal controls, quality
management, project management, water management, and energy conservation.

As a result of an audit, stakeholders may effectively evaluate and improve the effectiveness of
risk management, control, and the governance process over the subject matter.

The word audit is derived from a Latin word "audire" which means "to hear". [3][4] During the
medieval times when manual book-keeping was prevalent, auditors in Britain used to hear the
accounts read out for them and checked that the organisation's personnel were not negligent or
fraudulent.
Significance:
Internal audit:

Internal audits provide a number of important services to company management. These include
detecting and preventing fraud, testing internal control, and monitoring compliance with
company policy and government regulation. Smaller companies may require these functions
even more than large companies. A small business simply cannot afford employee fraud, waste,
or a government fine. Establishing an internal audit function provides a vital step in the growth
of a small business.

Fraud

Small businesses lose millions of dollars every year to employee theft. Types of fraud committed
by employees include skimming payments from customers, check tampering, cash theft and
misuse of company credit cards, and improper payroll transactions. Many small-business owners
may believe they lack the staff to create an internal audit policy or carry out audits to combat
these problems. However, even with a small staff, a small business may create a program for
monitoring employees and their behavior. An announced policy of internally auditing financial
transactions for fraud may inhibit an employee from misusing company resources.

Monitoring Internal Controls

A formal internal audit policy, even if conducted part time by individuals normally assigned
other duties, performs other tasks besides detecting fraud. Examining policies and procedures on
a regular basis ensures that the company minimizes its exposure to fraud and other losses.
Extension of credit to customers provides one such area of loss prevention. If you have
formulated a policy regarding extension of credit, internal audits test compliance with that
policy. Designing a credit policy with the intention of reducing bad debt does no good if not
followed.
Operational Audit

Operational audits examine the practices of a company, rather than its finances. Is your business
operating at maximum efficiency? Ineffective operations add to overhead without increasing
profit. An operational audit may reveal these inefficiencies or point to unnecessary paperwork. Is
your business following applicable regulations? Finding out you do not comply with a
government regulation before the government discovers that fact avoids fines or other legal
actions. A rapidly expanding business needs to monitor compliance with human resource laws as
new employees join the company. Internal audit performs a vital service in reviewing these
functions.

Planning Your Internal Audit

Your small business likely cannot afford to create an internal audit department, but with careful
planning, you can create a system for checking up on your company and its employees. This less
formal system, using people you already have, can still provide the information you need to
improve your operations and financial controls. Such an internal audit requires two people
working as a team. This avoids personality conflicts and prevents the auditor from simply
checking his own work. It also provides an opportunity for the team members to discuss results
and prepare an objective report to ownership. An informal process helps employees understand
that the internal audit function provides an opportunity for the company to thrive and grow.

External audit:

Companies often hire external auditors in addition to auditing themselves. External auditors are
accountants who work independently of a particular company. They examine company records
and operations to ensure financial statements are accurate. External auditors are important to
establishing your small business' credibility and to ensuring compliance with tax laws.

Ensures Compliance

External auditors help you determine whether your small business is in compliance with all
applicable Internal Revenue Service rules. An external auditor is not affiliated with your
company and thus can redirect your company's behavior without fear of repercussions if you
don't like what he has to say. An external auditor can catch small problems before they become
serious and help your business get back on track.

Provides Credibility

Your financial statements will be more credible if an external auditor evaluates them and agrees
that they are accurate. Credibility is important to small businesses, especially during their first
few years of business, when they are trying to build positive reputations. Because external
auditors don't work directly for your company, they are less biased. Thus, an external auditor's
approval of your financial statements is more credible than that of an internal auditor.

Critique Internal Processes

Internal auditors can't effectively critique the company's internal processes because they are part
of the company. External auditors, however, can observe operations from the outside and
determine where the company is wasting time or money. External auditors often critique
accounting practices and general operations. They can recommend behaviors to the company to
reduce waste or promote greater efficiency in general as well as tighten accounting practices.

Double-Check Internal Audit

Internal auditors may be too close to the business because of their positions within the company.
Some internal auditors also don't have enough accounting experience to accurately audit their
company's financial statements. External auditors can look at the same factors as internal
auditors and double-check their work. They can also train internal auditors in accounting
principles by explaining how their analysis differs from the analysis the internal auditor
performed.
Statement Of Problems:
Internal audit problems:

Quality and risk management systems include internal audits to assess compliance against policy,
procedures, systems and processes. The aim is to identify gaps between what is expected versus
what is actually occurring so that quality improvements occur. From our experience of
reviewing many quality systems and implementation of internal audit programmes we have
identified the five most common problems with internal auditing.

1) Linking with KPIs and quality measurement. Quality plans

often identify and link to internal auditing as part of the monitoring process. Key performance
indicators are often established for internal audit results, however results of internal audits are
often never compared with the KPIs or reviewed as part of the annual quality review.

2) Priorities for auditing the right things . Annual Audit plans or

schedules shouldnt remain stagnant. Are 30 - 40 internal audits necessary or is a smaller scope
with greater depth that covers key areas of service delivery more effective? It is important that
the internal audits support the organisations purpose/direction.

3) Internal audit tools dont align with Policy and Procedure.

Many times you will see audit tools being developed that assess areas such as medication
management and documentation requirements. However the criterion being measured in the
audit tools do not always align with documented procedure.

4) Lack of Independence. Using an example from aged care, one often sees the
cook completing an internal audit on the kitchen and the registered nurse completing an internal
audit on care plans. However, internal audits should be completed by independent staff wherever
possible.
5) Lack of depth for the audit sample . Many audit tools developed are
basic, generally lacking in scope or depth. Some tools consistently get a 100% result when
completed and often this perfect result is due to an audit tool that lacks depth rather than the
service being perfect. If you find that your audit results are consistently perfect or 100%, maybe
the scope of the tool needs to be reviewed. Or perhaps this area of the service isnt really a
priority for audit. Internal audit tools should be aiming for a high standard of service delivery.

External audit problem:

1. Inadequate internal controls

a. Issue Management is tasked with maintaining internal controls of a level necessary to

provide reasonable assurance that stated balances and amounts are properly documented,
processed, and reported.

b. Recommended resolution Implement policies and procedures which ensure all balances and
amounts are properly documented, and regularly reviewed and reconciled.

2. Reserve for tuition carry-over was improperly calculated

a. Issue Budget basis reserves reported by the institution on the Summary Budget Comparison
and Surplus Analysis Report must be properly documented, validated, and appropriate.

b. Recommended resolution Management should ensure all information presented as part of its
financial statements, including budgetary amounts required by state accounting regulations, is
maintained in an accurate manner along with appropriate supporting documentation.

3. SEFA information did not agree with federal expenditure

activity reflected in accounting records
a. Issue The Schedule of Expenditures of Federal Awards reported by institutions to the
Georgia Department of Audits and Accounts must be properly presented, and supported by the
institutions accounting records.

b. Recommended resolution Management should regularly review the financial data produced
by its official accounting systems, and regularly reconcile federal award data to reported amounts
to ensure these figures agree.

4. Inadequate accounting procedures

a. Issues Management must establish, maintain, and monitor internal controls for the purpose
of ensuring the fair presentation of all accounting and other financial statements.

b. Recommended resolution Implement policies and procedures focused on strengthening the

accounting and financial reporting processes, to include regular review and reconciliation, and
appropriate segregation of duties as needed.

5. Inadequate controls over financial reporting

a. Issue Adequate controls were not in place to ensure all required activity was included in the
financial statement presented for audit, including ledgers other than the general ledger.

b. Recommended resolution Management must implement and maintain a system of internal

control as part of the preparation of the financial statement so that it is presented in accordance
with generally accepted accounting principles.
Review of literature
1) CONNIE L. BECKER,MARK L. DEFOND,JAMES JIAMBALVO,K.R. SUBRAMANYAM,
March 1998, This study examines the relation between audit quality and earnings management.
Consistent with prior research, we treat audit quality as a dichotomous variable and assume that
Big Six auditors are of higher quality than non-Big Six auditors. Earnings management is
captured by discretionary accruals that are estimated using a cross-sectional version of the Jones
1991 model. Prior literature suggests that auditors are more likely to object to management's
accounting choices that increase earnings (as opposed to decrease earnings) and that auditors are
more likely to be sued when they are associated with financial statements that overstate earnings
(as compared to understate earnings). Therefore, we hypothesize that clients of non-Big Six
auditors report discretionary accruals that increase income relatively more than the discretionary
accruals reported by clients of Big Six auditors. This hypothesis is supported by evidence from a
sample of 10,379 Big Six and 2,179 non-Big Six firm years. Specifically, clients of non-Big Six
auditors report discretionary accruals that are, on average, 1.5-2.1 percent of total assets higher
than the discretionary accruals reported by clients of Big Six auditors. Also, consistent with
earnings management, we find that the mean and median of the absolute value of discretionary
accruals are greater for firms with non-Big Six auditors. This result also indicates that lower
audit quality is associated with more accounting flexibility.
Foot note: Canadian Academic Accounting Association, The Effect of Audit Quality on Earnings
Management

2) Biao Xiea, Wallace N Davidson III, a, , Peter J DaDaltb, , 15 January 2002,

We examine the role of the board of directors, the audit committee, and the executive committee
in preventing earnings management. Supporting an SEC Panel Report's conclusion that audit
committee members need financial sophistication, we show that the composition of a board in
general and of an audit committee more specifically, is related to the likelihood that a firm will
engage in earnings management. Board and audit committee members with corporate or
financial backgrounds are associated with firms that have smaller discretionary current accruals.
Board and audit committee meeting frequency is also associated with reduced levels of
discretionary current accruals. We conclude that board and audit committee activity and their
members' financial sophistication may be important factors in constraining the propensity of
managers to engage in earnings management.

Foot note: Department of Finance, J. Mack Robinson College of Business, Georgia State
University, 35 Broad St., Atlanta, GA 30303-3087, USA, Earnings management and corporate
governance: the role of the board and the audit committee

3) William L. Felix, Jr., Audrey A. Gramling,Mario j. Maletta, December 2001, Despite

extensive research on the determinants of external audit fees, there is little empirical evidence on
the effect of internal audit contribution on the external audit fee. Using a cross-sectional
regression model based on prior audit fee research, this study provides evidence that internal
audit contribution is a significant determinant of the external audit fee. Further, a second model
that provides evidence on the determinants of internal audit contribution is developed and tested.
This second model indicates that internal audit contribution is influenced by internal audit
quality and, conditional on the level of inherent risk, the availability of internal audit and the
extent of coordination between internal and external auditors. These results are based on a unique
data-set comprised of publicly available data matched with survey responses from internal and
external auditors affiliated with 70 non-financial services Fortune 1000 firms. The sample
includes all of the former Big 6 international accounting firms and clients from twenty-nine
different industries.
Foot note: University of Chicago on behalf of the Institute of Professional Accounting, 2001, The
Contribution of Internal Audit as a Determinant of External Audit Fees and Factors Influencing
This Contribution

4) Jenny Goodwin-Stewart,Pamela Kent, 18 August 2006, This study examines whether the
existence of an audit committee, audit committee characteristics and the use of internal audit are
associated with higher external audit fees. Higher audit fees imply increased audit testing and
higher audit quality. We find that the existence of an audit committee, more frequent committee
meetings and increased use of internal audit are related to higher audit fees. The expertise of
audit committee members is associated with higher audit fees when meeting frequency and
independence are low. These findings are consistent with an increased demand for higher quality
auditing by audit committees, and by firms that make greater use of internal audit.
Footnote: Griffith Business School, Griffith University, Gold Coast, 9726, Australia, Relation
between external audit fees, audit committee characteristics and internal audit

5) Jayanthi Krishnan, August 2004; I examine the association between audit committee quality
and the quality of corporate internal control. While information on the quality of internal control
is not generally available, companies changing auditors are required to disclose any internal
control problems that were pointed out by their predecessor auditors. The empirical results are
based on a comparison of companies disclosing such internal control problems with a control
sample of companies changing auditors but not disclosing internal control problems. Audit
committee quality is measured in three dimensions: its size, its independence, and its expertise.
The internal control problems are observed at two levels of increasing seriousness: reportable
conditions and material weaknesses. The sample time period precedes the effective dates of
recent policy changes regarding audit committees. The results indicate that independent audit
committees and audit committees with financial expertise are significantly less likely to be
associated with the incidence of internal control problems. This is true for both levels of internal
control problems. The results are consistent with recent policy emphasis on audit committee
independence and expertise.

Footnote: emple University., Audit Committee Quality and Internal Control: An Empirical
Analysis
6) Douglas F. Prawitt, Jason L. Smith, David A. Wood, December 2008; Internal auditors
perform work that is relevant to their host entities' financial reporting processes; yet, little
research attention has focused on the effects of internal auditing on companies' external financial
reporting. Using a unique and previously unavailable data set, we investigate the relation
between internal audit function (IAF) quality and earnings management. We measure IAF quality
using a composite measure comprising six individual components of IAF quality based on SAS
No. 65, which guides external auditors in assessing the quality of an IAF with respect to its role
in financial reporting. Earnings management is measured using two separate proxies: (1)
abnormal accruals and (2) the propensity to meet or barely beat analysts' earnings forecasts. We
find evidence that IAF quality is associated with a moderation in the level of earnings
management as measured by both proxies.
Foot note: University of Nevada, Las Vegas. Internal Audit Quality and Earnings Management

7) Lawrence J. Abbotta, Susan Parkerb, Gary F. Petersc, and Dasaratha V. Ramad, December 2006;
This study extends current literature related to nonaudit services by investigating internal audit
outsourcing to the external auditor. We posit that certain types of internal audit outsourcing (i.e.,
those which are nonroutine, and thus tend to be nonrecurring in nature) are unlikely to lead to
economic bonding, while offering significant potential for improvements in audit coverage and
scope when provided by the external auditor. Alternatively, outsourcing routine internal audit
tasks is more likely to lead to economic bonding, as well as potentially threatening internal
auditor independence. Our results are consistent with firms with independent, active, and expert
audit committees being less likely to outsource routine internal auditing activities to the external
auditor. However, the outsourcing of nonroutine internal audit activities such as special projects
and EDP consulting are not negatively related to effective audit committees. Additionally,
outsourcing of either type of internal audit activity to an outside service provider other than the
external auditor is not related to effective audit committees. Collectively, we interpret these
findings as supportive of an effective audit committee's ability to monitor the sourcing of the
firm's total (i.e., internal and external) audit coverage, while simultaneously exhibiting concern
for external auditor independence.

Footnote: University of Arkansas, Corporate Governance, Audit Quality, and the SarbanesOxley
Act: Evidence from Internal Audit Outsourcing

8) Marco Allegrini,Giuseppe DOnza , 14 November 2003, This paper aims at achieving an

overall view regarding the state of the art of internal auditing in large Italian companies. Mainly,
it is focused on risk assessment practices and on the execution of a risk-based approach in the
audit process.

The research is based on a survey carried out on the Top100 companies listed at the Italian
Stock Exchange.

Survey results reveal that practices vary significantly among three different models:

1A few companies (25%) carry out mainly traditional compliance activities and they
generally follow an audit-cycle approach for the annual audit planning;
 2In most companies (67%), internal auditors adopt the COSO model and perform mainly
operational auditing. Risk-based approach is applied predominantly at macro level.
3Finally, it is possible to identify a very few large companies (8%), in which auditors are
applying a risk-based approach both at macro and micro level.
Footnote: Information Systems Risk and Audit Planning
Objective :
Basic objective of auditing is to prove true and fairness of results presented by profit and loss
account and financial position presented by balance sheet. Its objectives are classified into two
groups which are given below:

A. Primary Objectives Of Audit

The main objectives of audit are known as primary objectives of audit. They are as follows:
i. Examining the system of internal check.
ii. Checking arithmetical accuracy of books of accounts, verifying posting, costing, balancing
etc.
iii. Verifying the authenticity and validity of transactions.
iv. Checking the proper distinction of capital and revenue nature of transactions.
v. Confirming the existence and value of assets and liabilities.
vi. Verifying whether all the statutory requirements are fulfilled or not.
vii. Proving true and fairness of operating results presented by income statement and financial
position presented by balance sheet.

B. Subsidiary Objectives Of Audit

These are such objectives which are set up to help in attaining primary objectives. They are as
follows:
i. Detection and prevention of errors
Errors are those mistakes which are committed due to carelessness or negligence or lack of
knowledge or without having vested interest. Errors may be committed without or with any
vested interest. So, they are to be checked carefully. Errors are of various types. Some of them
are:
* Errors of principle
* Errors of omission
* Errors of commission
* Compensating errors

ii. Detection and prevention of frauds

Frauds are those mistakes which are committed knowingly with some vested interest on the
direction of top level management. Management commits frauds to deceive tax, to show the
effectiveness of management, to get more commission, to sell share in the market or to maintain
market price of share etc. Detection of fraud is the main job of an auditor. Such frauds are as
follows:
* Misappropriation of cash
* Misappropriation of goods
* Manipulation of accounts or falsification of accounts without any misappropriation

iii. Under or over valuation of stock

Normally such frauds are committed by the top level executives of the business. So, the
explanation given to the auditor also remains false. So, an auditor should detect such frauds
using skill, knowledge and facts.

iv. Other objectives

* To provide information to income tax authority.
* To satisfy the provision of company Act.
* To have moral effect

Objective of Internal Audit:

With the main objective of the internal audit unit in any organization is to contribute to
achieving the overall objectives of this organization, the internal auditors are seeking
primarily to achieve the following objectives:
1. Review and evaluation of internal control systems.
2. Determine the extent of the commitment of project personnel policies and procedures.
3. Protect the assets of the project
4. Prevent fraud and error detection if they occur.
5. Determine the extent of reliance on a system of accounting and financial reporting, and
make sure that the information contained therein accurately reflect the reality.
6. Audits to be conducted regularly and periodically for the various activities, and report
findings and recommendations to senior management.
7. Determine the extent of compliance of the project requirements of governmental social
development.
8. Evaluate the performance of individuals in general.
9. Cooperation with the External Auditor to identify areas of external audit.
10. Participate in programs to reduce costs and establish procedures for them.

Objective of external audit

An independent audit is an appraisal conducted by a third party with the aim of establishing and
assessing a company's accounts, business transactions and finance records. Independent auditors,
also known as external auditors, are not employees of the company -- they are accounting
professionals contracted for their services. Companies often use independent auditors instead of
internal auditors to avoid potential conflict-of-interest situations. The goals and objectives of an
independent audit process vary with different companies. However, most audits are geared
toward the same end.

Examine Financial Statements

One of the primary goals of an independent auditor is to examine the company's financial
statement to ensure the financial books are accurate and compliant with fiscal laws and
regulations. Independent auditors inspect the accounting system and account books of a company
for accuracy. Auditors also compare their financial assessment with a company's corporate
financial reports. External auditors are permitted to publicly release the results of their
evaluation.
Make Recommendations
During an independent audit, auditors are given free access to all of the company's financial
statements. Because of this, most auditors become very familiar with their client's accounting
and management policies. This gives them a clearer picture of the company's possible financial
flaws. Based on this, auditors can offer recommendations on how a company can improve its
accounting methods.
Attestation Engagement
Another common objective behind an independent audit process is an attestation engagement, a
scenario where a company hires auditors to evaluate an earlier report or analysis conducted by
the company. The auditors' report is then presented in the form of a written or sometimes oral
report. After the evaluation is complete, the auditors' final report must comply with the
Statements on Standards for Attestation Engagements set by the American Institutes of CPAs.
Specialized Objectives
Companies may hire independent auditors to achieve specialized goals. For instance, some
independent auditors specialize in risk management, where their primary goal is to determine the
accuracy of a financial document, while others specialize in assurance services, where the
objective is to review, confirm and improve the information the management board already has.
Auditors may focus on tax matters or forensic accounting. Companies may also contract an
independent audit to investigate suspicion of fraud or embezzlement.
Research Methodology:
Scope of audit:

In ancient period, there was limited scope of audit because there was no development of
business. Generally, auditor used to check cash transactions if there were suspected frauds. But
in the recent years, scope of audit has increased. Now-a-days auditing is related to the
examination of books of account, evidence, bills, stock and its physical verification etc.

Now-a-days, it is not possible to go through the books of account. So, an auditor applies test
check. But such test is possible in such organization where effective internal check system is
applied. An auditor should analyse the suspected frauds so as to find out the fact but an auditor
should depend on the information provided by the concerned officer.

An auditor should prepare and present report after the examination of profit and loss account and
balance sheet. Auditor does not only check the books of account on the basis of evidence but also
has to check the authenticity of documents. An auditor should set his mind in that area where he
is not satisfied with the records. Despite having above facts, attention of audit can be set up as
follows:
i. Checking of books of accounts so as to find out the truth and fairness.
ii. Verification of assets and liabilities after its detail checking.
iii. Checking of books of accounts on the basis of available evidence.
iv. Checking arithmetical accuracy of books of accounts.
v. Expressing independent opinion about the financial statements.
vi. Preparing and presenting fair report to the concerned officer or owners.

Scope of Internal Audit

Internal audit involves five major functions or areas of operation. They are as below:
1. Reliability and Integrity of Information: The internal auditor should
review the reliability and integrity of financial and operating information and examine the
effectiveness of the means used to identify, measure, classify, and to report such information.

2. Compliance with Policies and Procedures: The systems and

procedure also.have considerable impact on the operation of the business enterprise. The internal
auditor should gauge the effectiveness and impact of such systems and report thereon.

3. Safeguarding the Assets: The internal auditor should review the existing system
for safeguarding the assets and if necessary should verify the existence of such assets.

4. Economical and Efficient Use of Resources : The internal auditor

should also appraise the economy and efficiency with which the resources are employed. Further
the internal auditor should identify the conditions, which would prevent the economical use of
resources. They are as follows:
1. Under utilization of capacity.
2. Non-productive work.
3. Procedures, which are not cost, justified.
4. Over staffing or under staffing.

5. Accomplishment of the Established Objectives and Goals:

The internal auditor should make a review of the operations or programmes of the enterprise and
should ascertain whether the results are not inconsistent with the established goals and objectives
of the enterprise. He should also ascertain whether the programmes are carried out as per plan

Scope of external audit:

External auditors play a critical role in validating company financial information. Potential
lenders and investors often require externally audited financial statements before doing business
with a company. If a party discovers that an auditor failed to detect material misstatements, it
reflects poorly on the firm and the profession in general. For that reason, various accounting
bodies release auditing standards and expectations to define the role of external audit firms.

1. Providing an Opinion on Financial Statements

Some managers assume external audit firms will create their financial statements, when that
actually is the job of company managers. External audit firms are responsible for providing
reasonable assurance that the financial statements are free from material misstatements and
prepared according to an accounting framework. External auditors are not there to fix the
problems, although many will issue recommendations to management. External audit firms also
are not responsible for providing absolute assurance of perfect financial statements; they only
test enough data to provide reasonable assurance.

2.Understanding the Entity and Its Environment

Although accounting is typically seen as number crunching, auditors recognize that financial
statements don't exist in a vacuum. External auditors are charged with obtaining a through
understanding of their client's environment, operations and internal controls. To do this, auditors
will perform an initial risk assessment of the company. External auditors will often examine the
electronic accounting information system to ensure that the data aren't being compromised.
They'll compare the company to others in the industry to identify any irregularities that could
stem from incorrect financial reporting.

3.Obtaining Sufficient Evidence to Form an Opinion

External auditors base a huge portion of their opinion on the evidence they examine during the
audit. To ensure they've collected the sufficient amount of evidence, auditors should rate the
riskiness of the client. The higher risk the client is, the more evidence they should collect before
issuing an opinion. The quality of the evidence is also crucial. Some evidence must be obtained
from reliable third-party sources, such as banks and lenders, to corroborate the client's financial
information.

4.Independence

The audit firm is responsible for maintaining an independent attitude and an appearance of
independence from the client. A lack of independence means that the auditor might fail to
address audit problems, which lowers the credibility and assurance of an external audit. The
auditor should not serve as an officer for the client or participate in management of the client's
company. Audit firms also shouldn't have any sort of financial interest in the client. Audit firm
partners should ensure that none of their auditors have joint ventures or significant investments
in the client before auditing the client.
DATA COLLECTION:
Definition of primary Data.

Data used in research originally obtained through the direct efforts of

the researcher through surveys, interviews and direct observation. Primary data is more costly to
obtain than secondary data, which is obtained through published sources, but it is also more
current and more relevant to the research project.

Meaning Of Primary data

Primary data is that which is collected by sociologists themselves during their own research
using research tools such as experiments, survey questionnaires, interviews and observation.

Primary data can take a quantitative or statistical form, e.g. charts, graphs, diagrams and tables. It
is essential to interpret and evaluate this type of data with care. In particular, look at how the data
is organised in terms of scale. Is it organised into percentages, hundreds, thousands, etc.? Is it a
snapshot of a particular year or is it focusing on trends across a number of years?

Primary data can also be qualitative, e.g. extracts from the conversations of those being studied.
Some researchers present their arguments virtually entirely in the words of their subject matter.
Consequently the data speaks for itself and readers are encouraged to make their own
judgements.

Definition Of Secondary Data

Data that has previously been collected (primary data) that is utilized by a person other than the
one who collected the data. Secondary data is often used in social and economic analysis,
especially when access to primary data is unavailable. For example, a survey of a group
of economists (primary data) cannot be repeated, so its results are used in
subsequent research projects. Or, data collected by the Department of Labor (primary data) that
is used in economic analysis.

Meaning Of Secondary Data

Secondary data are the Second hand informations. The data which have already been collected
and processed by some agency or persons and are not used for the first time are termed as
secondary data. According to M. M. Blair, Secondary data are those already in existence and
which have been collected for some other purpose. Secondary data may be abstracted from
existing records, published sources or unpublished sources.

Advantages of Secondary data

It is economical. It saves efforts and expenses.

It is time saving.

It helps to make primary data collection more specific since with the help of secondary data, we
are able to make out what are the gaps and deficiencies and what additional information needs to
be collected.

It helps to improve the understanding of the problem.

It provides a basis for comparison for the data that is collected by the researcher.

Disadvantages of Secondary Data

Secondary data is something that seldom fits in the framework of the marketing research factors.
Reasons for its non-fitting are:-

Unit of secondary data collection-Suppose you want information on disposable income, but the
data is available on gross income. The information may not be same as we require.
This Project is totally based on Secondary data.
Limitation
Internal Audit

1. Internal audits are not full proof in the sense that it cannot eliminate or catch all the frauds and
therefore some chances of frauds happening even after internal audit is done is always there.

2. Since internal audit is done by the professionals who are outsiders chances are they have little
or zero attachment towards the company and hence they will do it the work for money rather
than for betterment of company.

3. Internal audit reports are not accepted by shareholders and therefore it is for only management
use and company has to conduct external audit irrespective of fact whether it has conduct
internal audit or not, therefore it results in additional costs for the company for hiring internal
auditors.

External Audit
The only disadvantage of an audit can be the expenses concerned because you have to pay the
auditors and also guarantee that you preserve comprehensive records of all the interactions which
engage a lot of expenses

External examines contributors may be secluded from the relaxed networks of the organization,
putting them at a weakness when navigate the surroundings. External service providers do not
offer a systematic internal recruiting ground for future senior managers.

The education curve for external examine providers can be steep. An insufficient considerate of
the organization may gravely obstruct the service provider's helpfulness.

Discretion might be violated if external individuals have access to susceptible in rank.

A significant potential disadvantage of the private audit firms is the fact that an Auditor General
may have more experience in auditing public sector organizations and may therefore have an
audit approach that is more in line with the different objectives and values that govern these.
The operations of the organizations continue to be more similar to those of national public

As appealing also private sector auditors to bid would likely augment the number of bids
received and the diversity between these, the evaluation and selection process would become
longer and possibly more complex both for the secretariat and for the Finance Committee, which
may be considered a disadvantage
 Analysis
Definations:
By Internal Audit, we mean that an unbiased and systematic appraisal function, performed within
the business organization, with the purpose of reviewing the day to day activities of the business
and providing necessary suggestions for the improvement.

Internal audit performs a wide spectrum of activities such

as:

Evaluating the accounting and internal control system.

Examining the routine operational activities.

Physical verification of inventory at regular intervals.

Analyzing financial and non-financial information of the organization.

Detection of frauds and errors.

The main aim of the internal audit is to increase the value of an organizations operation and to
monitor the internal control, internal check and risk management system of the entity. An
Internal audit is conducted by the internal auditors who are the employees of the organization. It
is a separate department, within the organization where a continuous audit is performed
throughout the year.

The periodic, systematic and independent examination of the financial statements of the
company conducted by a third party for specific purposes, as required by statute is known as
External Audit. The main aim of external audit to publicly express an opinion on:
 The truthfulness and fairness of the financial statement of the company

The accounting records are complete in all respects and prepared as per the policies
outlined by GAAP (Generally Accepted Accounting Principles) or not.

All material facts are disclosed in the annual accounts.

For carrying out an external audit, the auditor is appointed by the members of the company. He
should be independent, i.e. he should not be connected to the organization in any way so that he
can work in an impartial way without any influence. The auditor has the right to access books of
accounts to obtain necessary information and provide his opinion to the members by way of the
audit report. The report is of two types:

Unmodified

Modified

o Qualified

o Adverse

o Disclaimer

Key Differences Between Internal Audit and External

Audit

The following are the major differences between internal audit and external audit:

1. Internal Audit is a constant audit activity performed by the internal audit department of
the organization. External Audit is an examination and evaluation by an independent body, of the
annual accounts of an entity to give an opinion thereon.

2. Internal Audit is discretionary, but the External audit is compulsory.

3. Internal Audit Report is submitted to the management. However, the External Audit
Report is handed over to the stakeholders like shareholders, debenture holders, creditors,
suppliers, government, etc.

4. Internal Audit is a continuous process while the External Audit is conducted on a yearly
basis.

5. The purpose of Internal Audit is reviewing the routine activities of the business and give
suggestions for improvement. Conversely, External Audit aims at analyzing and verifying the
accuracy and reliability of the financial statement.

6. Internal Audit provides an opinion on the effectiveness of operational activities of the

organization. On the other hand, External Audit gives an opinion of the true and fair view of the
financial statement.

7. The scope of internal audit is decided by Those Charged With Governance (TCWG). As
opposed to external audit, whose scope is determined by law.

8. Internal Auditors are the employees of the organization as they are appointed by the
management itself, whereas External Auditors are not the employees, they are appointed by the
members of the company.
Recommendation:
Internal audit:

A typical internal audit assignment[12] involves the following steps:

1. Establish and communicate the scope and objectives for the audit to appropriate
management.

2. Develop an understanding of the business area under review. This includes objectives,
measurements, and key transaction types. This involves review of documents and
interviews. Flowcharts and narratives may be created if necessary.

3. Describe the key risks facing the business activities within the scope of the audit.

4. Identify management practices in the five components of control used to ensure each key
risk is properly controlled and monitored. Internal Audit Checklist [13] can be a helpful
tool to identify common risks and desired controls in the specific process or industry
being audited.

5. Develop and execute a risk-based sampling and testing approach to determine whether
the most important management controls are operating as intended.

6. Report issues and challenges 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.
In addition to assessing business processes, specialists called Information Technology (IT)
Auditors review Information technology controls.

External audit:
External auditors are independent audit professionals who audit the fi nancial statements of a
company, legal entity or organization. They are expected to express an opinion on whether an
entitys fi nancial statements are free of material misstatements and are a true and fair
representation of actual fi nancial position.

The external auditors primary responsibilities are to:

1. identify items that have a reasonable possibility of causing the fi nancial statements to be
materially misstated;

2. design and execute tests to determine whether such misstatements have occurred; and

3. in certain public company audits, test the effectiveness of internal control over fi nancial
reporting.
Conclusion:
Iternal audit and External audit are not opposed to each other. Instead, they complement each
other. External auditor may use work of the internal auditor if he thinks fit, but it does not reduce
the responsibility of the external auditor. Internal audit act as a check on the activities of the
business and assists by advising on various matters to gain operational efficiency.

On the other hand, external audit is entirely independent in which a third party is brought to the
organization tp carry out the proceduce. It checks the accuracy and validity of the annual
accounts of the organization.
Biblography:
http://asq.org/learn-about-quality/auditing/

https://www.grantthornton.com/~/media/content-page-files/audit/pdfs/ACH-guides/ACH-
Guides-Planning-External-Audit-WEB1.ashx

https://en.wikipedia.org/wiki/Internal_audit

https://en.wikipedia.org/wiki/External_auditor

https://scholar.google.co.in/scholar?hl=en&q=internal+vs+external+audit&btnG=

http://www.skillsportal.co.za/content/introduction-auditing

http://accounting-simplified.com/audit/introduction/types-of-audits.html