undefined | unit 5 recent trends in auditing

UNIT V

Recent trends in Auditing

Q1) What is cost audit?

A1) Cost audit may be defined as “the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures and the continuing relevance of such procedures.”

Smith and Day in their book ‘Advanced Cost Accountancy’ define it, “the term ‘Cost Audit’ is meant the detailed checking of the costing system, technique and accounts to verify their correctness and to ensure adherence to the objective of cost accountancy.”

A cost audit, therefore, includes verification of correctness of cost accounts, cost statements, cost reports, cost data and costing techniques applied and finally checking these data to see that they adhere to cost accounting principles, plans, procedures and objectives.

Q2) What are the features of cost audit?

A2) The following are the main features of cost audit:

It detects the errors and saves an organization from frauds

It examines and verifies the cost accounts.

It controls the unwanted practices in the organization.

It ensures the level of efficiency at which an organization may effectively operate.

Q3) Why is cost audit important?

A3) The following are the main reasons why a cost audit is an important aspect of a company:

PROFIT ANALYSIS

It helps an organization to evaluate what costs are helping in profit creation and what is not. Hence, a company can understand in what areas it should spend its costing.

2. FORMULATE FUTURE STRATEGIES

Pre planning is one of the crucial aspects of every company as they do it always. But your planning is incomplete without having an understanding of the financial state of your company which is possible when you are aware of all costs, where to spend and where to not. Cost audit helps to keep a check on the increasing costs as well as to remove all those sections which are not profitable even when the cost is applied.

3. EASY BUDGETING

No business can move towards success without budgeting. The cost accounts report of past years helps you to create your future budget plans. Hence, proper budgeting can be done in a company by using a cost audit.

4. IDENTIFICATION OF BREAK EVEN POINT

Earning profit is a key reason to start a business but earning profits is not easy in the starting days. In the beginning they have to reach their break-even point. Cost audit can give the exact calculation of all the expenditures which you can compare with your profits.

5. REDUCE OVERHEAD COSTS

By evaluating the overhead costs with cost audit, these costs can be reduced as per the requirement.

Q4) What is tax audit?

A4) Tax Audit is an independent audit by a chartered accountant in full-time practice concerning the matters related to Taxation only and a report confirming that there is no concealment of income by the taxpayer and that there is no non-payment of tax liability and the same has been paid on due dates. The tax audit is a statutory obligation on the part of the taxpayer and is applicable on all cases where the turnover or the gross receipts during the previous year is more than the limit prescribed under section 44AB for the respective assessment year. The due date for filing the tax audit report is 30th September of the assessment year. In case the audit report is not submitted within its due date then the taxpayer is required to pay a penalty of an amount equal to 1.5% of the gross receipts/turnover, however, subject to a maximum fine of Rs. 1.5 lakhs.

Q5) Who can conduct tax audit under section 44AB of Income Tax Act?

A5) Tax audit can be conducted by a Chartered Accountant who holds the certificate of practice and is in full-time practice. However certain classes have been defined who cannot conduct tax audit under section 44AB. The tax auditor (CA) carries out a systematical examination of books of account as per the formats prescribed by the department.

Q6) Who should get tax audit done under section 44AB of Income Tax Act?

A6) Every person who derives income by way of Business or profession and maintains books of accounts and has not opted for computation of income on presumptive basis under section 44AD, 44ADA or 44AE of the Income-tax Act, 1961 has to get tax audit done provided his income exceeds the prescribed threshold limit. The following person are required to get tax audit done in the given cases.

1. A person carrying on business if the total sales/ turnover exceeds Rs. 1 crore during the previous year relevant to assessment year.

2. A person carrying on profession if the Gross receipts exceeds Rs. 50 lakhs during the previous year relevant to assessment year.

Also, the person who has opted for computing profits and gains of business on presumptive basis under section 44AD earlier and 5 years have not lapsed since then but the assessed has opted out of such presumptive income and his income exceeds the ceiling for chargeability of income tax, is also required to get tax audit done.

Further where a person has opted for presumptive scheme under section 44ADA and he claims his income lower than the deemed profits and his income exceeds the ceiling for chargeability of income tax, is also required to get tax audit done.

Tax audit is also mandatory for the assesses opting for presumptive scheme under section 44AE, 44BB and 44BBB and claiming income lower than the deemed profits.

However, if the assessed is liable/ required to get his books of accounts audited under any other law (let’s say Statutory audit as per the provisions of Companies Act, 2013), in such a case, he is also required to get tax audit done because When an Act requires a person to get his accounts audited, it does so with an objective. The audit carried out under any Act (e.g., a statutory audit under Companies Act) does not provide the confirmation if provisions of the Income-tax Act have been properly complied with. The Income-tax Authorities need confirmation whether the tax provisions have been properly applied by an assessed, and it can be done only through a tax audit.

Q7) What are the objectives of tax audit?

A7) Objectives of the Tax Audit:-

It is a special of tax audit that it depends on the basis of income tax law provisions more than it depends on accounting standards. The main objective for tax audit, it is to compute the taxable income according to the income tax law, and there are some other objectives:-

Tax audit ensures that the books of accounting and other records are properly maintained.

Tax audit helps to show the income of the taxpayer correctly.

Claims for deduction are correctly made

Tax audit indicates and checks fraudulent practices in final accounts.

It would facilitate the administration of tax laws by a proper presentation of the accounts before the tax authorities, thus, saving time of the assessing officers in carrying out routine verifications like checking total, verifying entries with vouchers.

The time saved of the Assessing officers, thus, could be utilized for attending to more important investigation aspects of the work.

It checks from the income tax act point of view the allowable and disallowable expenses taxable and exempt income which facilitates the work of the revenue authorities.

To ensure the compliance and reliability of various income tax provisions.

To encourage taxpayer for voluntary compliance with the law and regulation.

To assist both the taxpayer and the tax gatherer to arrive at correct due tax.

Q8) What is Management Audit?

A8) A management audit is an analysis and assessment of the competencies and capabilities of a company’s management in carrying out corporate objectives. The purpose of a management audit is not to appraise individual executive performance but to evaluate the management team in its effectiveness to work in the interests of shareholders, maintain good relations with employees and uphold reputational standards.

Q9) Who conducts management audit?

A9) A company’s Board of Directors does not have a formal management audit committee. Instead, board members sit on the compensation committee and assess the performance of individual executives using quantitative information (organic sales, EBIT margins, segment margins, operating cash flows and EPS) and unquantifiable or intangible elements (e.g. effort towards acquisition integration).

The BOD would hire an independent consultant to conduct a management audit. The scope of audit may be narrow, but in most cases, it is comprehensive including many key aspects of the responsibilities of the management team.

Q10) State any two differences between cost audit and management audit.

A10)

Cost Audit	Management Audit
Cost audit may be defined as “the verification of cost records and accounts and a check on the adherence to the prescribed cost accounting procedures and the continuing relevance of such procedures.”	A management audit is an analysis and assessment of the competencies and capabilities of a company’s management in carrying out corporate objectives. The purpose of a management audit is not to appraise individual executive performance but to evaluate the management team in its effectiveness to work in the interests of shareholders, maintain good relations with employees and uphold reputational standards.
Cost Audit is conducted by cost accountant appointed by the Board.	A company’s Board of Directors does not have a formal management audit committee. Instead, board members sit on the compensation committee and assess the performance of individual executives using quantitative information (organic sales, EBIT margins, segment margins, operating cash flows and EPS) and unquantifiable or intangible elements (e.g. effort towards acquisition integration).

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