Unit 3

Special Areas of Audit

Q1) What is cost audit?

A1) Cost Audit is mainly a preventive measure, a guide for management policy and decisions, in addition to being the barometer of performance.

Cost Audit is an audit of efficiency of minute details of expenditure while the work in progress and not a post mortem examination.

Cost audit can be defined as verification of correctness of cost accounts and a check on adherence to the cost accounting principles, plans and procedures.

According to Institute of Cost Accountants of India cost audit is “a system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information, required to be maintained by specified industries.”

According to (CIMA) Chartered Institute of Management Accountant, London, “Cost audit is verification of the correctness of cost accounts and cost accounting plans.”

Q2) What are the advantages of cost audit to management?

A2) The advantages of cost audit to management are-

1.   It provides necessary information for prompt decision decisions.
2. It helps management to regulate production.
3. Errors, omission, fraud, and mistakes can be detected and prevented due to the effective auditing of cost accounts.
4. It reduces the cost of production through plugging loopholes relating to wastage of material, labor, and overheads.
5. It can fix the responsibility of an individual wherever irregularities or wastage are found.
6. It improves the efficiency of the organization as a whole and costing system in particular by constant review, revision, and checking or routine procedures and methods.
7. It helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
8. It also enables comparison among different units of the factory to find out the profitability of the different units.
9. It exercises a moral influence on employees, which keeps them efficient and alert.
10. It ensures that the cost accounts have been maintained under the principles of costing employed in the industry concerned.
11. It ensures effective internal control.
12. It helps to increase the overall efficiency of productivity.
13. Inefficiency can be eliminated by suitable corrective actions.
14. It facilitates cost control and cost reduction.
15. It assists in the valuation of stock of materials, works in progress, and finished goods.
16. It ensures maximum utilization of available resources,
17. It enables the management to choose economic methods of operations and thus earn profits to satisfy the shareholders and the investing public.
18. It enables the management to chalk out the future policy based on the report by the cost auditor, especially regarding labor, raw material, plant, etc. to maximize production and reduce the cost of production.
19. It tests the effectiveness of cost control techniques and to evaluate their advantages to the enterprise.

Q3) What are the advantages of cost audit to the shareholders, society, customers and government etc?

A3) The advantages of cost audit to the shareholders, society, customers and government are-

Advantages to the shareholders

1. It ensures that proper records are maintained as to purchases, utilization of materials, and expenses incurred on various items i.e., wages and overheads, etc. It also makes sure that the industrial unit has been working efficiently and economically.
2. It enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.
3. It ensures a true picture of the company’s state of affairs. It reveals whether resources like plant and machinery are properly utilized or not.
4. It creates an image of the creditworthiness of the concern.

Advantages to society

1. It tells the true cost of production. From this, the consumer may know whether the market price of the article is fair or not. The consumer is saved from exploitation.
2. It improves the efficiency of industrial units and thereby assists in the economic progress of the nation.
3. Since the price increase by the industry is not allowed without justification as to an increase in the cost of production, consumers can maintain their standard of living.

Advantages to the customers

• Helps in Fixation of Fair price
• Timely and proper Information

Advantages to the government

1. It assists the tariff board in deciding whether tariff protection should be extended to a particular industry or not.
2. It helps to ascertain whether any particular industry should be given any subsidy to develop that industry.
3. It provides reliable data to the government for fixing up the selling prices of the various commodities.
4. It helps in fixing contract prices in a cost-plus contract.
5. It determines whether differential pricing within the industry is desirable.
6. It helps the government to take necessary measures to improve the efficiency of sick industrial units.
7. It can reveal the fraudulent intentions of the management.
8. Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.
9. It facilitates settlement of trade disputes of the companies.
10. It imposes an automatic check on inflation.
11. It assists the Tariff Board to consider the extension or removal of protection.

Q4) What is Tax Audit? How to conduct Tax Audit?

A4) Now-a-days tax audit has become very important to ascertain the accuracy of tax related documents. Tax audit mostly covers income returns, invoices, debt and credit notes and various current and fixed assets. Tax audit is an innovation of 21st century. It has added one more chapter to the procedure of auditing. Tax audit ensures the validity and credibility of tax related documents.

The financial statements are certified by the auditor for truth and fairness of operating results and financial position of the business. These are meant for general purpose being used by the owners, creditors, banks and other interested parties. Sometimes a specific information my required by certain people which may not be available in these statements

Under Income Tax Act, profits shown by profit and loss A/c have to be adjusted as per the provisions of the Act. In this way profits for accounting and profits for taxation are not the same. These profits differ due to various reasons. Profits for accounting are ascertained As per accounting policies and standards but profits for the tax purpose are computes as per the provisions and rules of Income Tax Act.

The Income Tax Department cannot verify each and every detail of provisions compiled by the assessee. In this regard expertise of auditors is utilized, who certify the compliance of the provisions of Income Tax Act.

1. How to conduct tax Audit
   1. The tax auditor shall be guided by the auditing standards and guidance notes as issued from time to time by Institute of Chartered Accountants of India.
   2. Obtaining books of accounts, financial statements and other statements of particulars duly authenticated.
   3. Evaluation of internal control system on the basis of which extent of vouching and verification can be determined.
   4. While conducting tax audit the provisions and objectives of sec, 44 AB shall be kept in mind.
   5. The auditor shall have thorough knowledge of taxation provisions and judicial pronouncements.
   6. The Central Government has notified the following ‘accounting Standards’ in respect of audit of financial statements under section 44 AB.

Q5) What are the provisions relating to compulsory audit under Section 44(AB) of income Tax Act?

A5) Following are provisions relating to compulsory audit under Section 44(AB) of income Tax Act.

I. Tax audit is compulsory for a business if its total sales, turnover or gross receipts in a previous year exceed Rs 1 crore.

II. In case of a profession, Tax audit is compulsory if gross receipt exceed Rs. 25 lakhs.

III. If the profits of a business are determined on presumptive basis, the audit of accounts shall be on compulsory basis if he assessee claims that their profits are less then profits computed under the following sections.

A. Sec 44 (AD) –profit from any business (whether it is retail trading or civil

Construction or any other business)

Provisions are as follows

• Assessee should be resident individual or resident HUF or resident partnership
• Assessee has not claimed exemption under section 10 (A), 10 (AA), 10 (B), 10 (BA), 80 (HH) or 80 (RRB)

The following persons are not eligible

a. Person carrying on profession under [section 44 (AA) (1)]

b. The person earning commission or brokerage or carrying on agency business or plying, hiring or leasing goods carriage.

c. Turnover/gross receipt in the previous year should not exceed 1 crore

B. Profit from the business of carriage of goods [section 44 (AE)]

This sec is applicable to only those persons who are engaged in plying, hiring or leasing goods carriages and own not more than 10 such goods carriages.

C. Profit and gains of a non-resident from shipping business [sec. 44 (B)]

A sum equal to 7.5% of the aggregate receipts in India shall be deemed to be the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

D. Profit and gain of business of Oil exploration of non-resident assessee [sec. 44 (BB)]

A sum equal to 10% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

E. Profit and gains of business of operation of Aircraft by Non- resident [ sec. 44 (BBA)]

A sum equal to 5% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

F. Profit of Foreign Company Engaged in Business of civil Construction or Erection of plant and machinery or/and Commission thereof [ sec. 44 (BBB)]

A sum equal to 10% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

Iv. If Gross receipts or sales or turn over exceed a specified amount in a business only then audit is required.

v. Persons covered under section 44 (AB)

a. The persons who are not covered by Income Tax Act need to get their accounts audited for the purpose of this section like a person having agricultural income exceeding 40 lakhs.

b. The persons who are covered by this section but their income is exempted shall get their accounts audited as in case of charitable Trust, co-operative societies etc.

c. Persons, who are covered under this section, having income below the taxable limit, they have to get their accounts audited if the specified limit under section 44 AB has exceeded.

d. In case of non-resident assessee, if his global or receipts exceed the specified limit, then h has to get Indian operations accounts audited.

Vi. Persons not covered under section 44 AB

a. A non-resident assessee carrying business of operation of ship U/S 44 B.

b. A Non-Resident assessee having income from operation of aircraft u/s 44 BBA

Vii. Specified date

The audit of accounts must be conducted and audit report must be submitted by the assessee by October 31.

VIII Penalty sec. 271 B

If any person fails to get his accounts audited as required u/s 44 AB, the

Assessing officer may direct such person shall pay a penalty equal to or .5% total sales, turnover or gross receipts in business or gross receipts in profession or Rs. 100000, whichever is less.

Q6) What is Management Audit? What are the objectives of management audit?

A6) Management audit is attempt made to evaluate various management functions and process. A detailed and critical review of all the objectives, policies, procedures and functions of management is made with a view to bring about an overall improvement in managerial efficiency.

According to Leslie R. Howard, “An investigation of a business from the highest level downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with outside world and the most efficient organization and smooth running of internal organization.”

According to W.P. Leonard, “A comprehensive and constructive examination of an organization structure of a company, institution or a branch of government or of any component thereof such as division or department, and its plans and objectives, its means of operations, and its uses of human and physical facilities.”

Thus, it can be simply stated that management audit, on the basis of established standards, examines, reviews and appraises the various policies and actions of management.

Objectives/Aims of management Audit

1. To ensure that sound objectives are set by the management.

2. To reveal any irregularity or defect in the process of management and to suggest improvements to obtain the best results.

3. To ensure that the management objectives are achieved.

4. To help various levels of management in the effective discharge of their duties.

5. To assist management in achieving coordination among various departments.

6. To help to achieve the efficiency of management.

7. To assist management in establishing good relations with the employees and to elaborate duties, rights and liabilities of entire staff.

8. To evaluate the performance by comparing inputs with outputs (human and physical both).

9. To ensure most effective relationship with the outsiders and the most efficient internal organization.

10. To recommend changes in the policies and procedure for a better future.

Q7) What are the advantages of management audit?

A7) The advantages of management audit are-

1. It helps management in preparation of plans, objectives and policies and their efficient achievement.

2. It helps management in taking vital decisions for maximization of profits.

3. It helps the management in strengthening its communication systems within and outside the business.

4. It helps in evaluating the performance of management in various areas and measures to improve it.

5. It can help management in preparation of budgets and resource management.

6. It can help management in training of personnel and marketing policies.

Q8) What are the importance of management audit?

A8) The statutory auditor is not required to examine the policies of management and their implementation or whether any improvement in the efficiency of management can be made. In these days a report on all these matters is very important to the business. The management auditors are appointed to advise the management on various matters related to management. These persons examine the various aspects of management and evaluate the actual performance by comparing it with predetermined standards. Such auditors may or may not be from the field of accountancy. They advise management on the matters relating to performance of various departments as well as of the organization as a whole.

The management may conduct management audit periodically to review the efficiency of managers. The results may be used to provide incentives to staff.

The management audit reveals irregularities and defects in the working of management and suggests the ways to improve the efficiency of management. It concentrates on the results and does not examine whether procedures have been followed or not.

The government may ask for management audit of sick industrial units with a view to examine the efficiency of management. It may be conducted to find whether the sickness is due to functioning of management or the circumstances beyond the control of management. On the basis of report of management auditor, the government may decide to take over to sick units.

It can be said that management audit is a guide which helps in improving the efficiency of management

Q9) Write a short note on appointment of Management Auditor?

A9) A team of experts should be appointed to conducted management audit. It can’t be expected that an individual can possess expertise in all management’s fields; therefore, an expert in each field of management should be included in the team of management auditors. Such team should have full cooperation from the top-level management to enable it to conduct the audit smoothly.

The members of management audit team should have a proper training and expert knowledge of science of management. A wide experience of actual work situations will be added to the advantage. The audit of the management involves an appraisal of activities of organization; the auditor must study the organization and its plan in detail.

The internal auditors may be regarded as suitable persons for conduct of management audit because they are familiar with the internal workings of management. Sometimes it is desirable to have O & M experts as management auditors. All will depend on the scope of management audit which the management has to decide.

Q10) What are the qualities of a management auditor?

A10) The area of activities of management audit is wide; no specific qualities can be narrated for management auditor. He must possess enough qualities to fulfil his professional obligations. Some of the qualities of the management auditor can be described as follows.

1. He should have a good knowledge of managerial functions.

2. He should be familiar with the various principles of management, planning, control, management by objectives, and management by exception.

3. He should have a good understanding of financial statements and their preparations.

4. He should understand the working of organization and its problems.

5. He should be able to understand the objectives of organization.

6. He should be able to assess and critically examine the internal control systems.

7. He should be able to understand the nature of the product and its production process.

8. He should understand plans, budgets, rules and the procedures applied in the organization.

9. He should have a good knowledge of financial statement analysis techniques like standard costing, budgetary control, ratio analysis, fund flow statements etc.

10. He should be familiar with the human resources accounting, social accounting, etc.

11. He should have a good knowledge of economics, business laws, etc.

Management Auditor’s Report

In the end, the management auditor prepares a report. On the basis of findings and definite information, the auditor prepares a report making suggestions for improvement in the working of the management. His report should give a correct assessment of the working of organization. He should not hesitate in criticizing the management. His recommendations should be constructive and not merely condemning in nature. His report may include the following matters:

1. Whether the management; and the staff relations are healthy.

2. Whether the return to shareholders is adequate.

3. Whether the methods of production are out-dated.

4. Comparison of operating efficiency of the organization with other concerns.

5. Rate of the return on investment.

Q11) What are the points needed to conduct Management Audit?

A11) Following points need careful attention before conducting Management Audit-

1. The auditor should ensure that various objectives and goals are properly established which are likely to help to achieve the desired results.
2. He should see that the plan laid down by management is practicable and helpful to achieve objectives.
3. He should see that whether the organization has a well-defined structure, authority lines and responsibility areas are clear, decision making is centralized or decentralized.
4. He should verify the efficiency of information system operating in the organization.
5. To collect necessary information, he should prepare a questionnaire such as:

1. Whether the resources are efficiently employed,
2. Whether plans, policies, procedures and systems are strictly followed
3. Whether the objectives are split up into target of each department.
4. Whether management by exception is possible.
5. Whether the planned and actual performance are compared at regular intervals of time.
6.    Whether irregularities arise frequently, if so, who is responsible?
7. Whether the methods used in organization are satisfactory.

6. The information obtained with the help of above questions should be counter checked from the various records and statements available in the organization.

7. To arrive at definite conclusions, the management audit has to correlate the information collected through various means.

Q12) Explain the recent trends in auditing.

A12) The term technology never gives up to change the way we do things. It has transformed how we think, how we interact and how we do business. No one can refuse that technology has made a remarkable impact in the finance and accounting industry. Accounting and finance professionals can now perform tasks faster and with greater accuracy. With these developments in the industry, auditors have also utilized the latest technological advancements to improve their service offerings.

1.Artificial intelligence and Robotic process automation- The adoption of smart automation and machine-learning artificial intelligence in accounting has led to a tremendous overall improvement in the accounting process. Accountants can now shift to more difficult tasks by motorizing time-consuming tasks, tighten controls with the help of advanced software and produce high-end results. As more tasks are performed with these innovative tools, internal audit should be able to identify, control and evaluate the risk that comes with these tools.

2. Cyber and data security- Even before the Facebook- Cambridge Analytical scandal, the world has been moving towards better data and cyber security. Businesses have been working on regulatory compliance with different countries on varying cybersecurity requirements and data management directives. Auditor’s must keep up with these updates to make sure that the company’s cyber data are well protected and secure, at the same time, monitor that data collection, processing and management by the company are in accordance with data privacy regulations such as the EU’s GDPR.

3. Data Analytics- Modern business operations are now heavily relying on data to optimize product or service lines. From time to time, data are collected by companies to identify process bottlenecks and reduce unnecessary costs. To help them in audit process, audit professionals also harness the capabilities of data analytics software. Data analysis helps auditors to check irregularities in data trends or patterns and identify errors that the company may have made during their processes.

4. Technology and Talent development- All these technological trends have conduct to the necessity for professional to develop proficiency and have a keen understanding of the latest technological tools and software. The top audit firms have invested in the skills development of their people to catch up with the new trends in auditing, with new but competitive audit players following this practice.

5. Organizational structure for accountability and transparency- Today’s environment calls for greater collaboration and strong relationship between the auditor and auditee at all levels. The trend, therefore is moving towards developing a structure that facilitates healthy environment. This will encourage free flow of information regarding any issues or concern between the auditee and the auditor. The organization has to be structured in a way that facilitates accountability i.e., not limited to only the Audit Committee.

6. Shift away from SOX compliance towards risk-based auditing- Out of necessity, internal auditors have been devoting their time, energy and resources in recent years primarily to SOX compliance activities. Now, it is time for internal auditors to revaluate its activities and sharpen its focusses on stakeholder expectations and risk-based auditing. Enterprise-wide risk management and fraud are also gaining precedence.

7. Upgrading audit infrastructure and technological advancement- large companies, especially with complex auditing requirements that span not just financial audits but also audits, assessments and inspections related to operations, quality, safety, suppliers and IT are upgrading the technology infrastructure used to carry out auditing from risk assessments and audit universe creating and planning to audit data collection, reporting and remediation. Companies are migrating from their legacy systems, point applications and paper-based procedures to a web-based integrated audit management system. The technological advancement allows the CAE to streamline and strengthen the internal audit function enabling it to deliver more strategic value while lowering its costs of operations.

Q13) What is Electronic Data Processing?

A13) EDP is the present-day approach for processing statistics. The statistics is processed through a pc. Data and a hard and fast of commands are given to the pc as input, and the pc robotically tactics the statistics in keeping with the given set of commands. This pc is likewise called a digital statistics processing device. Electronic statistics processing is the quickest and excellent approach available, with the best reliability and accuracy. This approach makes use of a pc, so the generation used is as much as date. The range of employees required is minimal. The method may be finished thru numerous applications and a hard and fast of predefined rules. It is nearly not possible to method huge quantities of statistics with excessive precision, and its miles the excellent form of statistics processing available. For example, in an automated instructional environment, scholar effects are created thru a pc. At banks, customers' money owed are maintained (or processed), together with thru computers.

EDP ​​is a manner to method, store, retrieve, share, and keep records electronically. There are many approaches to method the statistics. The maximum not unusual place approach of processing statistics is a device gaining knowledge of approach referred to as classification. It may be used to perceive troubles withinside the statistics, locate patterns, and expect outcomes. EDP ​​is an automated statistics processing machine that automates the collection, storage, manipulation, and retrieval of statistics. Text mining entails the method of classifying, expressing, and reading huge quantities of textual content to extract beneficial records. There are many blessings of digital statistics processing. Electronic statistics processing enables lessen improvement and renovation charges for maximum commercial enterprise operations.

Electronic statistics processing has many blessings over different codes because of its excessive speed, accuracy, reliability, and flexibility. The e-trade industry, banking services, document keeping, transactional statistics processing, and real-time statistics processing businesses all use digital statistics processing. Every statistics processing machine includes 4 fundamental components, together with hardware, software, procedures, and employees.

Q14) What are the electronic facts processing technique?

A14) There are many one-of-a-kind strategies and sorts of facts processing, however there are a few very famous strategies with regards to automatic facts processing. These strategies are extensively followed in nearly each industry. EPD structures are extensively used to satisfy the various desires of groups engaged in facts analysis. Depending on the character of your requirements, including facts storage, processing strategies, manipulate principles, laptop equipment, facts analysis, and facts processing, a number of the maximum not unusual place strategies of digital facts processing are defined below.

1. Share time
2. Real-time processing
3. Online processing
4. Multiprocessing
5. Multitasking
6. Interactive processing
7. Batch processing
8. Distributed processing

Each kind is in brief defined below.

1. Time-sharing: With this technique, many nodes linked to the CPU accessed the principal laptop. The multi-person processing gadget controls the time allocation for every person. Each person can assign a time slice in a chain of principal processing units. The person has to whole the assignment at some point of the allocated time slice. If the person is not able to finish the assignment, the person can whole the assignment at some point of any other assigned time slice.
2. Real-time processing: Providing correct and up to date records is the principal cause of real-time processing. This is viable while the laptop techniques the acquired facts. It will react immediately to what can also additionally happen. Affects upcoming events. Reserving seats on trains and planes is a exceptional instance of real-time processing.

If a seat is reserved, the reservation gadget will replace the reservation file. Real-time processing is a near-on the spot method for purchasing the output of records. This technique saves as much as the most time it takes to get the output.

c.     Online processing: With this processing technique, the facts are processed immediately. Communications hyperlinks assist join your laptop at once to the facts access unit. Data access can also additionally encompass community terminals or on-line enter devices. Online processing is basically used for gaining knowledge of and recording records.

d.    Multiprocessing: Multiprocessing is the processing of more than one duty at the identical laptop that use one-of-a-kind processors on the identical time. It is viable on community servers and mainframes. In this method, the laptop can also additionally encompass more than one unbiased CPUs. This makes facts processing a whole lot faster.

Adjustments can be made on a multiprocessing gadget. In this method, one-of-a-kind processors proportion the identical memory. Processors get records from one-of-a-kind components of an application or one-of-a-kind programs.

e.     Multitasking: This is an essential function of facts processing. Operating one-of-a-kind processors on the identical time is known as multitasking. In this method, one-of-a-kind duties proportion the identical processing resources. The running gadget for multitasking techniques is a time-sharing gadget.

f.       Interactive processing: This technique consists of 3 sorts of features. The sorts of features are as follows

Peak detection

Integration

Quantification

This is a smooth manner to function your laptop. The strategies of this method can war with every different.

g.    Batch processing: Batch processing is a way of processing prepared facts into divided companies. This technique lets in you to divide the processed facts into companies over the desired time period. The batching technique lets in the laptop to carry out one-of-a-kind priorities for interactions. This technique could be very particular and beneficial for processing.

Distributed Processing: This technique is generally used for far off workstations due to the fact the far-off pc is hooked up to a big pc. Customers get higher carrier from this method. This method lets in agencies to distribute their geographic laptop usage. ATM is the exceptional instance of this dispensed processing technique. ATM is hooked up to the banking gadget.

Q15) What are the elements of digital facts processing?

A15) Electronic facts processing (EDP) is the method of recording records and processing it for financial, legal, or different commercial enterprise purposes. EDP ​​facts are utilized by groups to evaluate overall performance and make boom decisions.

There are many methods to method facts. Data processing is the method of doing something with facts, and there are numerous methods to do it. The advantages of digital facts processing encompass the subsequent features: Ensure dependable facts. Improves the velocity and performance of your organization. Reduce costs. Electronic facts processing may be used to growth productivity, performance, and profitability with the aid of using growing the usefulness of records.

Hardware, software program, tactics and employees are the simple factors. In the hardware section, scanners, information garage gadgets, barcode scanners, coins registers, private computers, scientific gadgets, servers, video and audio system are factors of digital information processing. In the software program section, accounting software program, information access, scheduling software program, analysis, and software program are factors of digital information processing. In the system section, sorting, analysis, reporting, transformation, information collection, and aggregation are the factors of EDP.

In HR, programmers use digital information processing to create additives and spreadsheets. Data access professionals use it to test barcodes. The significance of information processing is now understood in all areas. Today, industries are specializing in what works exceptional for them and the way they reap more profits. EDP ​​structures are as broadly used as control facts structures.

Q16) What are the blessings of digital information processing?

A16) The blessings of a digital information processing are-

1. Data control prices are reduced. Helps with selection making and information garage.
2. Processing information reduces office work and is steeply-priced to control files, which facilitates lessen prices.
3. It assists in record control and allows using included procedures and included structures.
4. The capacity to look files saves time. In addition to this, inner and outside collaboration is improved.
5. Well-recognized software program merchandise including Ms. Office use the idea of digital information processing. EDP ​​has the capacity to lessen duplication of work, repetitive input, and selection making.
6. It gives powerful control, complements information safety, manages facts assets, and creates powerful workflows.

Q17) What are the disadvantages of digital information processing?

A17) The disadvantages of digital information processing are-

1. Data in digital layout is prone to hacking attempts. As the quantity of cybercrime increases, it turns into crucial and vital to consider information safety and get entry to control. When diverse gadgets in a facts machine are related to a network, defects or loopholes in a single a part of the machine can have an effect on the complete network.
2. You may also want to hold your information in encrypted form. This is particularly crucial whilst processing touchy information and storing it withinside the information center, because the information is dispatched over the network.

EDP ​​example: Used through vendors to layout invoices and calculate usage-primarily based totally charges. The faculty makes use of EDP to hold scholar records. In supermarkets its miles used for recording, however in hospitals its miles used to screen the development of patients.

In addition, its miles used to screen lodge reservations, studying establishments and financial institution transactions. Departments including police, cybercrime, and chemistry use digital information processing to report entries. This allows massive corporations to accumulate facts and system information. Electronic information processing also can be used as video and audio system. It may be used as a barcode scanner.

Q18) What is Application control testing?

A18) At this point, the auditor identifies all of the agency's finance and finance-related application systems, determines which systems are important, gains an understanding and documentation of internal control procedures, and which systems Determine if trusted, which controls will be tested, and meet with the EDP audit section to discuss work coordination.

As a general rule, the auditor intends to rely on the application system, so if you want to reduce the amount of substantive testing of details before giving an opinion on financial statements, the important application controls that need to be tested are: It is as follows. a) Data accuracy, (b) Table maintenance, (c) User access, and (d) Data backup. Other steps, such as processing control, can be added to this list as needed. Control tests can be circulated at the discretion of the auditor.

The audit auditor has the overall responsibility to test the application control of the audit, and the EDP auditor is responsible for providing technical assistance as needed. Application control is either a user procedure or a programmed procedure. User procedures related to application systems such as reconciliation should be tested by the accounting auditor. Programmed procedures, such as editing data accuracy, consist of internal computer processing and external evidence of its effectiveness. The accounting auditor should review external evidence of the effectiveness of the control, and the EDP auditor should provide professional support whenever it is necessary to directly investigate internal computer processing.

Q19) What are the application controls that should be considered important if the auditor intends to rely on the application system?

A19) The application controls that should be considered important if the auditor intends to rely on the application system are:

Data integrity-This is a collection of procedures designed so that the user enters each transaction only once, the transaction completely updates the database, and the output report contains all the appropriate data. Common integrity management procedures include batch totals and adjustments. Testing this control is very similar to the auditing procedure used when auditing the surroundings of a computer. When this control is working effectively, it strongly supports integrity assertions from the time data is entered into the system to the output report.

Data Accuracy-These are controls that ensure that the user enters the most important data elements correctly and the system maintains them correctly. Account numbers and amounts are usually the most important data elements to enter. Controlling the accuracy of account numbers includes table lookups, check digits, and visual validation. Controlling the accuracy of monetary amounts includes batch summing and key regeneration for validation. When these controls are working effectively, they provide strong support for assessment and occurrence assertions.

Table Maintenance-These are controls that ensure that the tables used in financial calculations contain accurate and timely values, such as converting item counts to prices. These tables should only be updated by authorized user department personnel. Once updated, you will need to create and review an audit trail. The table should be independent of computer programs and programmers. When these controls are working effectively, they provide strong support for assessment assertions.

User Access-This control ensures that only authorized persons can record, modify, or delete data, and that the digital signature used to approve the transaction is valid. Testing this control involves ensuring that the security software is functioning properly and that the security rules reflect the intent of the administrator and provide proper segregation of duties. Testing this control is usually a collaborative effort between the financial auditor and the EDP auditor. When this control is working effectively, it provides strong support for presence and occurrence assertions.

Data Backup-This control ensures that your system can be restored in the event of a disaster destroying your primary data files. To be effective, the backup data files should be stored in a safe offsite location and include all important files. The frequency of backups determines how much data you need to re-enter because you need to recapture all the data that was entered between the last backup and the disaster. If this control is not working effectively, all assertions are at risk.

The auditor needs to determine whether the design of the critical application control supports management's financial statement assertions and whether the control is working effectively. In doing this, the auditor must integrate the testing of the application control with other controls in the appropriate audit area.

Q20) What are the objectives of cost audit?

A20) The objectives of cost audit are-

1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy of cost accounting entries in the books of accounts.
2. To ensure that cost accounting principles are governed by the management objectives and these are strictly adhered to in preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect errors, frauds, and wrong practice in the existing system.
4. To check up the general working of the cost department of the organization and to make suggestions for improvement.
5. To help the management in taking correct decisions on certain important matters
6. To determine the actual cost of production when the goods are ready.
7. To reduce the amount of detailed checking by the external auditor, its effective internal cost audit system is in operation.
8. To find out whether each item of expenditure involved in the relevant components of the goods manufactured or produced has been properly incurred or not.

Unit 3

Special Areas of Audit

Q1) What is cost audit?

A1) Cost Audit is mainly a preventive measure, a guide for management policy and decisions, in addition to being the barometer of performance.

Cost Audit is an audit of efficiency of minute details of expenditure while the work in progress and not a post mortem examination.

Cost audit can be defined as verification of correctness of cost accounts and a check on adherence to the cost accounting principles, plans and procedures.

According to Institute of Cost Accountants of India cost audit is “a system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information, required to be maintained by specified industries.”

According to (CIMA) Chartered Institute of Management Accountant, London, “Cost audit is verification of the correctness of cost accounts and cost accounting plans.”

Q2) What are the advantages of cost audit to management?

A2) The advantages of cost audit to management are-

1.   It provides necessary information for prompt decision decisions.
2. It helps management to regulate production.
3. Errors, omission, fraud, and mistakes can be detected and prevented due to the effective auditing of cost accounts.
4. It reduces the cost of production through plugging loopholes relating to wastage of material, labor, and overheads.
5. It can fix the responsibility of an individual wherever irregularities or wastage are found.
6. It improves the efficiency of the organization as a whole and costing system in particular by constant review, revision, and checking or routine procedures and methods.
7. It helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
8. It also enables comparison among different units of the factory to find out the profitability of the different units.
9. It exercises a moral influence on employees, which keeps them efficient and alert.
10. It ensures that the cost accounts have been maintained under the principles of costing employed in the industry concerned.
11. It ensures effective internal control.
12. It helps to increase the overall efficiency of productivity.
13. Inefficiency can be eliminated by suitable corrective actions.
14. It facilitates cost control and cost reduction.
15. It assists in the valuation of stock of materials, works in progress, and finished goods.
16. It ensures maximum utilization of available resources,
17. It enables the management to choose economic methods of operations and thus earn profits to satisfy the shareholders and the investing public.
18. It enables the management to chalk out the future policy based on the report by the cost auditor, especially regarding labor, raw material, plant, etc. to maximize production and reduce the cost of production.
19. It tests the effectiveness of cost control techniques and to evaluate their advantages to the enterprise.

Q3) What are the advantages of cost audit to the shareholders, society, customers and government etc?

A3) The advantages of cost audit to the shareholders, society, customers and government are-

Advantages to the shareholders

1. It ensures that proper records are maintained as to purchases, utilization of materials, and expenses incurred on various items i.e., wages and overheads, etc. It also makes sure that the industrial unit has been working efficiently and economically.
2. It enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.
3. It ensures a true picture of the company’s state of affairs. It reveals whether resources like plant and machinery are properly utilized or not.
4. It creates an image of the creditworthiness of the concern.

Advantages to society

1. It tells the true cost of production. From this, the consumer may know whether the market price of the article is fair or not. The consumer is saved from exploitation.
2. It improves the efficiency of industrial units and thereby assists in the economic progress of the nation.
3. Since the price increase by the industry is not allowed without justification as to an increase in the cost of production, consumers can maintain their standard of living.

Advantages to the customers

• Helps in Fixation of Fair price
• Timely and proper Information

Advantages to the government

1. It assists the tariff board in deciding whether tariff protection should be extended to a particular industry or not.
2. It helps to ascertain whether any particular industry should be given any subsidy to develop that industry.
3. It provides reliable data to the government for fixing up the selling prices of the various commodities.
4. It helps in fixing contract prices in a cost-plus contract.
5. It determines whether differential pricing within the industry is desirable.
6. It helps the government to take necessary measures to improve the efficiency of sick industrial units.
7. It can reveal the fraudulent intentions of the management.
8. Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.
9. It facilitates settlement of trade disputes of the companies.
10. It imposes an automatic check on inflation.
11. It assists the Tariff Board to consider the extension or removal of protection.

Q4) What is Tax Audit? How to conduct Tax Audit?

A4) Now-a-days tax audit has become very important to ascertain the accuracy of tax related documents. Tax audit mostly covers income returns, invoices, debt and credit notes and various current and fixed assets. Tax audit is an innovation of 21st century. It has added one more chapter to the procedure of auditing. Tax audit ensures the validity and credibility of tax related documents.

The financial statements are certified by the auditor for truth and fairness of operating results and financial position of the business. These are meant for general purpose being used by the owners, creditors, banks and other interested parties. Sometimes a specific information my required by certain people which may not be available in these statements

Under Income Tax Act, profits shown by profit and loss A/c have to be adjusted as per the provisions of the Act. In this way profits for accounting and profits for taxation are not the same. These profits differ due to various reasons. Profits for accounting are ascertained As per accounting policies and standards but profits for the tax purpose are computes as per the provisions and rules of Income Tax Act.

The Income Tax Department cannot verify each and every detail of provisions compiled by the assessee. In this regard expertise of auditors is utilized, who certify the compliance of the provisions of Income Tax Act.

1. How to conduct tax Audit
   1. The tax auditor shall be guided by the auditing standards and guidance notes as issued from time to time by Institute of Chartered Accountants of India.
   2. Obtaining books of accounts, financial statements and other statements of particulars duly authenticated.
   3. Evaluation of internal control system on the basis of which extent of vouching and verification can be determined.
   4. While conducting tax audit the provisions and objectives of sec, 44 AB shall be kept in mind.
   5. The auditor shall have thorough knowledge of taxation provisions and judicial pronouncements.
   6. The Central Government has notified the following ‘accounting Standards’ in respect of audit of financial statements under section 44 AB.

Q5) What are the provisions relating to compulsory audit under Section 44(AB) of income Tax Act?

A5) Following are provisions relating to compulsory audit under Section 44(AB) of income Tax Act.

I. Tax audit is compulsory for a business if its total sales, turnover or gross receipts in a previous year exceed Rs 1 crore.

II. In case of a profession, Tax audit is compulsory if gross receipt exceed Rs. 25 lakhs.

III. If the profits of a business are determined on presumptive basis, the audit of accounts shall be on compulsory basis if he assessee claims that their profits are less then profits computed under the following sections.

A. Sec 44 (AD) –profit from any business (whether it is retail trading or civil

Construction or any other business)

Provisions are as follows

• Assessee should be resident individual or resident HUF or resident partnership
• Assessee has not claimed exemption under section 10 (A), 10 (AA), 10 (B), 10 (BA), 80 (HH) or 80 (RRB)

The following persons are not eligible

a. Person carrying on profession under [section 44 (AA) (1)]

b. The person earning commission or brokerage or carrying on agency business or plying, hiring or leasing goods carriage.

c. Turnover/gross receipt in the previous year should not exceed 1 crore

B. Profit from the business of carriage of goods [section 44 (AE)]

This sec is applicable to only those persons who are engaged in plying, hiring or leasing goods carriages and own not more than 10 such goods carriages.

C. Profit and gains of a non-resident from shipping business [sec. 44 (B)]

A sum equal to 7.5% of the aggregate receipts in India shall be deemed to be the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

D. Profit and gain of business of Oil exploration of non-resident assessee [sec. 44 (BB)]

A sum equal to 10% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

E. Profit and gains of business of operation of Aircraft by Non- resident [ sec. 44 (BBA)]

A sum equal to 5% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

F. Profit of Foreign Company Engaged in Business of civil Construction or Erection of plant and machinery or/and Commission thereof [ sec. 44 (BBB)]

A sum equal to 10% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

Iv. If Gross receipts or sales or turn over exceed a specified amount in a business only then audit is required.

v. Persons covered under section 44 (AB)

a. The persons who are not covered by Income Tax Act need to get their accounts audited for the purpose of this section like a person having agricultural income exceeding 40 lakhs.

b. The persons who are covered by this section but their income is exempted shall get their accounts audited as in case of charitable Trust, co-operative societies etc.

c. Persons, who are covered under this section, having income below the taxable limit, they have to get their accounts audited if the specified limit under section 44 AB has exceeded.

d. In case of non-resident assessee, if his global or receipts exceed the specified limit, then h has to get Indian operations accounts audited.

Vi. Persons not covered under section 44 AB

a. A non-resident assessee carrying business of operation of ship U/S 44 B.

b. A Non-Resident assessee having income from operation of aircraft u/s 44 BBA

Vii. Specified date

The audit of accounts must be conducted and audit report must be submitted by the assessee by October 31.

VIII Penalty sec. 271 B

If any person fails to get his accounts audited as required u/s 44 AB, the

Assessing officer may direct such person shall pay a penalty equal to or .5% total sales, turnover or gross receipts in business or gross receipts in profession or Rs. 100000, whichever is less.

Q6) What is Management Audit? What are the objectives of management audit?

A6) Management audit is attempt made to evaluate various management functions and process. A detailed and critical review of all the objectives, policies, procedures and functions of management is made with a view to bring about an overall improvement in managerial efficiency.

According to Leslie R. Howard, “An investigation of a business from the highest level downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with outside world and the most efficient organization and smooth running of internal organization.”

According to W.P. Leonard, “A comprehensive and constructive examination of an organization structure of a company, institution or a branch of government or of any component thereof such as division or department, and its plans and objectives, its means of operations, and its uses of human and physical facilities.”

Thus, it can be simply stated that management audit, on the basis of established standards, examines, reviews and appraises the various policies and actions of management.

Objectives/Aims of management Audit

1. To ensure that sound objectives are set by the management.

2. To reveal any irregularity or defect in the process of management and to suggest improvements to obtain the best results.

3. To ensure that the management objectives are achieved.

4. To help various levels of management in the effective discharge of their duties.

5. To assist management in achieving coordination among various departments.

6. To help to achieve the efficiency of management.

7. To assist management in establishing good relations with the employees and to elaborate duties, rights and liabilities of entire staff.

8. To evaluate the performance by comparing inputs with outputs (human and physical both).

9. To ensure most effective relationship with the outsiders and the most efficient internal organization.

10. To recommend changes in the policies and procedure for a better future.

Q7) What are the advantages of management audit?

A7) The advantages of management audit are-

1. It helps management in preparation of plans, objectives and policies and their efficient achievement.

2. It helps management in taking vital decisions for maximization of profits.

3. It helps the management in strengthening its communication systems within and outside the business.

4. It helps in evaluating the performance of management in various areas and measures to improve it.

5. It can help management in preparation of budgets and resource management.

6. It can help management in training of personnel and marketing policies.

Q8) What are the importance of management audit?

A8) The statutory auditor is not required to examine the policies of management and their implementation or whether any improvement in the efficiency of management can be made. In these days a report on all these matters is very important to the business. The management auditors are appointed to advise the management on various matters related to management. These persons examine the various aspects of management and evaluate the actual performance by comparing it with predetermined standards. Such auditors may or may not be from the field of accountancy. They advise management on the matters relating to performance of various departments as well as of the organization as a whole.

The management may conduct management audit periodically to review the efficiency of managers. The results may be used to provide incentives to staff.

The management audit reveals irregularities and defects in the working of management and suggests the ways to improve the efficiency of management. It concentrates on the results and does not examine whether procedures have been followed or not.

The government may ask for management audit of sick industrial units with a view to examine the efficiency of management. It may be conducted to find whether the sickness is due to functioning of management or the circumstances beyond the control of management. On the basis of report of management auditor, the government may decide to take over to sick units.

It can be said that management audit is a guide which helps in improving the efficiency of management

Q9) Write a short note on appointment of Management Auditor?

A9) A team of experts should be appointed to conducted management audit. It can’t be expected that an individual can possess expertise in all management’s fields; therefore, an expert in each field of management should be included in the team of management auditors. Such team should have full cooperation from the top-level management to enable it to conduct the audit smoothly.

The members of management audit team should have a proper training and expert knowledge of science of management. A wide experience of actual work situations will be added to the advantage. The audit of the management involves an appraisal of activities of organization; the auditor must study the organization and its plan in detail.

The internal auditors may be regarded as suitable persons for conduct of management audit because they are familiar with the internal workings of management. Sometimes it is desirable to have O & M experts as management auditors. All will depend on the scope of management audit which the management has to decide.

Q10) What are the qualities of a management auditor?

A10) The area of activities of management audit is wide; no specific qualities can be narrated for management auditor. He must possess enough qualities to fulfil his professional obligations. Some of the qualities of the management auditor can be described as follows.

1. He should have a good knowledge of managerial functions.

2. He should be familiar with the various principles of management, planning, control, management by objectives, and management by exception.

3. He should have a good understanding of financial statements and their preparations.

4. He should understand the working of organization and its problems.

5. He should be able to understand the objectives of organization.

6. He should be able to assess and critically examine the internal control systems.

7. He should be able to understand the nature of the product and its production process.

8. He should understand plans, budgets, rules and the procedures applied in the organization.

9. He should have a good knowledge of financial statement analysis techniques like standard costing, budgetary control, ratio analysis, fund flow statements etc.

10. He should be familiar with the human resources accounting, social accounting, etc.

11. He should have a good knowledge of economics, business laws, etc.

Management Auditor’s Report

In the end, the management auditor prepares a report. On the basis of findings and definite information, the auditor prepares a report making suggestions for improvement in the working of the management. His report should give a correct assessment of the working of organization. He should not hesitate in criticizing the management. His recommendations should be constructive and not merely condemning in nature. His report may include the following matters:

1. Whether the management; and the staff relations are healthy.

2. Whether the return to shareholders is adequate.

3. Whether the methods of production are out-dated.

4. Comparison of operating efficiency of the organization with other concerns.

5. Rate of the return on investment.

Q11) What are the points needed to conduct Management Audit?

A11) Following points need careful attention before conducting Management Audit-

1. The auditor should ensure that various objectives and goals are properly established which are likely to help to achieve the desired results.
2. He should see that the plan laid down by management is practicable and helpful to achieve objectives.
3. He should see that whether the organization has a well-defined structure, authority lines and responsibility areas are clear, decision making is centralized or decentralized.
4. He should verify the efficiency of information system operating in the organization.
5. To collect necessary information, he should prepare a questionnaire such as:

1. Whether the resources are efficiently employed,
2. Whether plans, policies, procedures and systems are strictly followed
3. Whether the objectives are split up into target of each department.
4. Whether management by exception is possible.
5. Whether the planned and actual performance are compared at regular intervals of time.
6.    Whether irregularities arise frequently, if so, who is responsible?
7. Whether the methods used in organization are satisfactory.

6. The information obtained with the help of above questions should be counter checked from the various records and statements available in the organization.

7. To arrive at definite conclusions, the management audit has to correlate the information collected through various means.

Q12) Explain the recent trends in auditing.

A12) The term technology never gives up to change the way we do things. It has transformed how we think, how we interact and how we do business. No one can refuse that technology has made a remarkable impact in the finance and accounting industry. Accounting and finance professionals can now perform tasks faster and with greater accuracy. With these developments in the industry, auditors have also utilized the latest technological advancements to improve their service offerings.

1.Artificial intelligence and Robotic process automation- The adoption of smart automation and machine-learning artificial intelligence in accounting has led to a tremendous overall improvement in the accounting process. Accountants can now shift to more difficult tasks by motorizing time-consuming tasks, tighten controls with the help of advanced software and produce high-end results. As more tasks are performed with these innovative tools, internal audit should be able to identify, control and evaluate the risk that comes with these tools.

2. Cyber and data security- Even before the Facebook- Cambridge Analytical scandal, the world has been moving towards better data and cyber security. Businesses have been working on regulatory compliance with different countries on varying cybersecurity requirements and data management directives. Auditor’s must keep up with these updates to make sure that the company’s cyber data are well protected and secure, at the same time, monitor that data collection, processing and management by the company are in accordance with data privacy regulations such as the EU’s GDPR.

3. Data Analytics- Modern business operations are now heavily relying on data to optimize product or service lines. From time to time, data are collected by companies to identify process bottlenecks and reduce unnecessary costs. To help them in audit process, audit professionals also harness the capabilities of data analytics software. Data analysis helps auditors to check irregularities in data trends or patterns and identify errors that the company may have made during their processes.

4. Technology and Talent development- All these technological trends have conduct to the necessity for professional to develop proficiency and have a keen understanding of the latest technological tools and software. The top audit firms have invested in the skills development of their people to catch up with the new trends in auditing, with new but competitive audit players following this practice.

5. Organizational structure for accountability and transparency- Today’s environment calls for greater collaboration and strong relationship between the auditor and auditee at all levels. The trend, therefore is moving towards developing a structure that facilitates healthy environment. This will encourage free flow of information regarding any issues or concern between the auditee and the auditor. The organization has to be structured in a way that facilitates accountability i.e., not limited to only the Audit Committee.

6. Shift away from SOX compliance towards risk-based auditing- Out of necessity, internal auditors have been devoting their time, energy and resources in recent years primarily to SOX compliance activities. Now, it is time for internal auditors to revaluate its activities and sharpen its focusses on stakeholder expectations and risk-based auditing. Enterprise-wide risk management and fraud are also gaining precedence.

7. Upgrading audit infrastructure and technological advancement- large companies, especially with complex auditing requirements that span not just financial audits but also audits, assessments and inspections related to operations, quality, safety, suppliers and IT are upgrading the technology infrastructure used to carry out auditing from risk assessments and audit universe creating and planning to audit data collection, reporting and remediation. Companies are migrating from their legacy systems, point applications and paper-based procedures to a web-based integrated audit management system. The technological advancement allows the CAE to streamline and strengthen the internal audit function enabling it to deliver more strategic value while lowering its costs of operations.

Q13) What is Electronic Data Processing?

A13) EDP is the present-day approach for processing statistics. The statistics is processed through a pc. Data and a hard and fast of commands are given to the pc as input, and the pc robotically tactics the statistics in keeping with the given set of commands. This pc is likewise called a digital statistics processing device. Electronic statistics processing is the quickest and excellent approach available, with the best reliability and accuracy. This approach makes use of a pc, so the generation used is as much as date. The range of employees required is minimal. The method may be finished thru numerous applications and a hard and fast of predefined rules. It is nearly not possible to method huge quantities of statistics with excessive precision, and its miles the excellent form of statistics processing available. For example, in an automated instructional environment, scholar effects are created thru a pc. At banks, customers' money owed are maintained (or processed), together with thru computers.

EDP ​​is a manner to method, store, retrieve, share, and keep records electronically. There are many approaches to method the statistics. The maximum not unusual place approach of processing statistics is a device gaining knowledge of approach referred to as classification. It may be used to perceive troubles withinside the statistics, locate patterns, and expect outcomes. EDP ​​is an automated statistics processing machine that automates the collection, storage, manipulation, and retrieval of statistics. Text mining entails the method of classifying, expressing, and reading huge quantities of textual content to extract beneficial records. There are many blessings of digital statistics processing. Electronic statistics processing enables lessen improvement and renovation charges for maximum commercial enterprise operations.

Electronic statistics processing has many blessings over different codes because of its excessive speed, accuracy, reliability, and flexibility. The e-trade industry, banking services, document keeping, transactional statistics processing, and real-time statistics processing businesses all use digital statistics processing. Every statistics processing machine includes 4 fundamental components, together with hardware, software, procedures, and employees.

Q14) What are the electronic facts processing technique?

A14) There are many one-of-a-kind strategies and sorts of facts processing, however there are a few very famous strategies with regards to automatic facts processing. These strategies are extensively followed in nearly each industry. EPD structures are extensively used to satisfy the various desires of groups engaged in facts analysis. Depending on the character of your requirements, including facts storage, processing strategies, manipulate principles, laptop equipment, facts analysis, and facts processing, a number of the maximum not unusual place strategies of digital facts processing are defined below.

1. Share time
2. Real-time processing
3. Online processing
4. Multiprocessing
5. Multitasking
6. Interactive processing
7. Batch processing
8. Distributed processing

Each kind is in brief defined below.

1. Time-sharing: With this technique, many nodes linked to the CPU accessed the principal laptop. The multi-person processing gadget controls the time allocation for every person. Each person can assign a time slice in a chain of principal processing units. The person has to whole the assignment at some point of the allocated time slice. If the person is not able to finish the assignment, the person can whole the assignment at some point of any other assigned time slice.
2. Real-time processing: Providing correct and up to date records is the principal cause of real-time processing. This is viable while the laptop techniques the acquired facts. It will react immediately to what can also additionally happen. Affects upcoming events. Reserving seats on trains and planes is a exceptional instance of real-time processing.

If a seat is reserved, the reservation gadget will replace the reservation file. Real-time processing is a near-on the spot method for purchasing the output of records. This technique saves as much as the most time it takes to get the output.

c.     Online processing: With this processing technique, the facts are processed immediately. Communications hyperlinks assist join your laptop at once to the facts access unit. Data access can also additionally encompass community terminals or on-line enter devices. Online processing is basically used for gaining knowledge of and recording records.

d.    Multiprocessing: Multiprocessing is the processing of more than one duty at the identical laptop that use one-of-a-kind processors on the identical time. It is viable on community servers and mainframes. In this method, the laptop can also additionally encompass more than one unbiased CPUs. This makes facts processing a whole lot faster.

Adjustments can be made on a multiprocessing gadget. In this method, one-of-a-kind processors proportion the identical memory. Processors get records from one-of-a-kind components of an application or one-of-a-kind programs.

e.     Multitasking: This is an essential function of facts processing. Operating one-of-a-kind processors on the identical time is known as multitasking. In this method, one-of-a-kind duties proportion the identical processing resources. The running gadget for multitasking techniques is a time-sharing gadget.

f.       Interactive processing: This technique consists of 3 sorts of features. The sorts of features are as follows

Peak detection

Integration

Quantification

This is a smooth manner to function your laptop. The strategies of this method can war with every different.

g.    Batch processing: Batch processing is a way of processing prepared facts into divided companies. This technique lets in you to divide the processed facts into companies over the desired time period. The batching technique lets in the laptop to carry out one-of-a-kind priorities for interactions. This technique could be very particular and beneficial for processing.

Distributed Processing: This technique is generally used for far off workstations due to the fact the far-off pc is hooked up to a big pc. Customers get higher carrier from this method. This method lets in agencies to distribute their geographic laptop usage. ATM is the exceptional instance of this dispensed processing technique. ATM is hooked up to the banking gadget.

Q15) What are the elements of digital facts processing?

A15) Electronic facts processing (EDP) is the method of recording records and processing it for financial, legal, or different commercial enterprise purposes. EDP ​​facts are utilized by groups to evaluate overall performance and make boom decisions.

There are many methods to method facts. Data processing is the method of doing something with facts, and there are numerous methods to do it. The advantages of digital facts processing encompass the subsequent features: Ensure dependable facts. Improves the velocity and performance of your organization. Reduce costs. Electronic facts processing may be used to growth productivity, performance, and profitability with the aid of using growing the usefulness of records.

Hardware, software program, tactics and employees are the simple factors. In the hardware section, scanners, information garage gadgets, barcode scanners, coins registers, private computers, scientific gadgets, servers, video and audio system are factors of digital information processing. In the software program section, accounting software program, information access, scheduling software program, analysis, and software program are factors of digital information processing. In the system section, sorting, analysis, reporting, transformation, information collection, and aggregation are the factors of EDP.

In HR, programmers use digital information processing to create additives and spreadsheets. Data access professionals use it to test barcodes. The significance of information processing is now understood in all areas. Today, industries are specializing in what works exceptional for them and the way they reap more profits. EDP ​​structures are as broadly used as control facts structures.

Q16) What are the blessings of digital information processing?

A16) The blessings of a digital information processing are-

1. Data control prices are reduced. Helps with selection making and information garage.
2. Processing information reduces office work and is steeply-priced to control files, which facilitates lessen prices.
3. It assists in record control and allows using included procedures and included structures.
4. The capacity to look files saves time. In addition to this, inner and outside collaboration is improved.
5. Well-recognized software program merchandise including Ms. Office use the idea of digital information processing. EDP ​​has the capacity to lessen duplication of work, repetitive input, and selection making.
6. It gives powerful control, complements information safety, manages facts assets, and creates powerful workflows.

Q17) What are the disadvantages of digital information processing?

A17) The disadvantages of digital information processing are-

1. Data in digital layout is prone to hacking attempts. As the quantity of cybercrime increases, it turns into crucial and vital to consider information safety and get entry to control. When diverse gadgets in a facts machine are related to a network, defects or loopholes in a single a part of the machine can have an effect on the complete network.
2. You may also want to hold your information in encrypted form. This is particularly crucial whilst processing touchy information and storing it withinside the information center, because the information is dispatched over the network.

EDP ​​example: Used through vendors to layout invoices and calculate usage-primarily based totally charges. The faculty makes use of EDP to hold scholar records. In supermarkets its miles used for recording, however in hospitals its miles used to screen the development of patients.

In addition, its miles used to screen lodge reservations, studying establishments and financial institution transactions. Departments including police, cybercrime, and chemistry use digital information processing to report entries. This allows massive corporations to accumulate facts and system information. Electronic information processing also can be used as video and audio system. It may be used as a barcode scanner.

Q18) What is Application control testing?

A18) At this point, the auditor identifies all of the agency's finance and finance-related application systems, determines which systems are important, gains an understanding and documentation of internal control procedures, and which systems Determine if trusted, which controls will be tested, and meet with the EDP audit section to discuss work coordination.

As a general rule, the auditor intends to rely on the application system, so if you want to reduce the amount of substantive testing of details before giving an opinion on financial statements, the important application controls that need to be tested are: It is as follows. a) Data accuracy, (b) Table maintenance, (c) User access, and (d) Data backup. Other steps, such as processing control, can be added to this list as needed. Control tests can be circulated at the discretion of the auditor.

The audit auditor has the overall responsibility to test the application control of the audit, and the EDP auditor is responsible for providing technical assistance as needed. Application control is either a user procedure or a programmed procedure. User procedures related to application systems such as reconciliation should be tested by the accounting auditor. Programmed procedures, such as editing data accuracy, consist of internal computer processing and external evidence of its effectiveness. The accounting auditor should review external evidence of the effectiveness of the control, and the EDP auditor should provide professional support whenever it is necessary to directly investigate internal computer processing.

Q19) What are the application controls that should be considered important if the auditor intends to rely on the application system?

A19) The application controls that should be considered important if the auditor intends to rely on the application system are:

Data integrity-This is a collection of procedures designed so that the user enters each transaction only once, the transaction completely updates the database, and the output report contains all the appropriate data. Common integrity management procedures include batch totals and adjustments. Testing this control is very similar to the auditing procedure used when auditing the surroundings of a computer. When this control is working effectively, it strongly supports integrity assertions from the time data is entered into the system to the output report.

Data Accuracy-These are controls that ensure that the user enters the most important data elements correctly and the system maintains them correctly. Account numbers and amounts are usually the most important data elements to enter. Controlling the accuracy of account numbers includes table lookups, check digits, and visual validation. Controlling the accuracy of monetary amounts includes batch summing and key regeneration for validation. When these controls are working effectively, they provide strong support for assessment and occurrence assertions.

Table Maintenance-These are controls that ensure that the tables used in financial calculations contain accurate and timely values, such as converting item counts to prices. These tables should only be updated by authorized user department personnel. Once updated, you will need to create and review an audit trail. The table should be independent of computer programs and programmers. When these controls are working effectively, they provide strong support for assessment assertions.

User Access-This control ensures that only authorized persons can record, modify, or delete data, and that the digital signature used to approve the transaction is valid. Testing this control involves ensuring that the security software is functioning properly and that the security rules reflect the intent of the administrator and provide proper segregation of duties. Testing this control is usually a collaborative effort between the financial auditor and the EDP auditor. When this control is working effectively, it provides strong support for presence and occurrence assertions.

Data Backup-This control ensures that your system can be restored in the event of a disaster destroying your primary data files. To be effective, the backup data files should be stored in a safe offsite location and include all important files. The frequency of backups determines how much data you need to re-enter because you need to recapture all the data that was entered between the last backup and the disaster. If this control is not working effectively, all assertions are at risk.

The auditor needs to determine whether the design of the critical application control supports management's financial statement assertions and whether the control is working effectively. In doing this, the auditor must integrate the testing of the application control with other controls in the appropriate audit area.

Q20) What are the objectives of cost audit?

A20) The objectives of cost audit are-

1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy of cost accounting entries in the books of accounts.
2. To ensure that cost accounting principles are governed by the management objectives and these are strictly adhered to in preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect errors, frauds, and wrong practice in the existing system.
4. To check up the general working of the cost department of the organization and to make suggestions for improvement.
5. To help the management in taking correct decisions on certain important matters
6. To determine the actual cost of production when the goods are ready.
7. To reduce the amount of detailed checking by the external auditor, its effective internal cost audit system is in operation.
8. To find out whether each item of expenditure involved in the relevant components of the goods manufactured or produced has been properly incurred or not.

Unit 3

Special Areas of Audit

Q1) What is cost audit?

A1) Cost Audit is mainly a preventive measure, a guide for management policy and decisions, in addition to being the barometer of performance.

Cost Audit is an audit of efficiency of minute details of expenditure while the work in progress and not a post mortem examination.

Cost audit can be defined as verification of correctness of cost accounts and a check on adherence to the cost accounting principles, plans and procedures.

According to Institute of Cost Accountants of India cost audit is “a system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information, required to be maintained by specified industries.”

According to (CIMA) Chartered Institute of Management Accountant, London, “Cost audit is verification of the correctness of cost accounts and cost accounting plans.”

Q2) What are the advantages of cost audit to management?

A2) The advantages of cost audit to management are-

1.   It provides necessary information for prompt decision decisions.
2. It helps management to regulate production.
3. Errors, omission, fraud, and mistakes can be detected and prevented due to the effective auditing of cost accounts.
4. It reduces the cost of production through plugging loopholes relating to wastage of material, labor, and overheads.
5. It can fix the responsibility of an individual wherever irregularities or wastage are found.
6. It improves the efficiency of the organization as a whole and costing system in particular by constant review, revision, and checking or routine procedures and methods.
7. It helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
8. It also enables comparison among different units of the factory to find out the profitability of the different units.
9. It exercises a moral influence on employees, which keeps them efficient and alert.
10. It ensures that the cost accounts have been maintained under the principles of costing employed in the industry concerned.
11. It ensures effective internal control.
12. It helps to increase the overall efficiency of productivity.
13. Inefficiency can be eliminated by suitable corrective actions.
14. It facilitates cost control and cost reduction.
15. It assists in the valuation of stock of materials, works in progress, and finished goods.
16. It ensures maximum utilization of available resources,
17. It enables the management to choose economic methods of operations and thus earn profits to satisfy the shareholders and the investing public.
18. It enables the management to chalk out the future policy based on the report by the cost auditor, especially regarding labor, raw material, plant, etc. to maximize production and reduce the cost of production.
19. It tests the effectiveness of cost control techniques and to evaluate their advantages to the enterprise.

Q3) What are the advantages of cost audit to the shareholders, society, customers and government etc?

A3) The advantages of cost audit to the shareholders, society, customers and government are-

Advantages to the shareholders

1. It ensures that proper records are maintained as to purchases, utilization of materials, and expenses incurred on various items i.e., wages and overheads, etc. It also makes sure that the industrial unit has been working efficiently and economically.
2. It enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.
3. It ensures a true picture of the company’s state of affairs. It reveals whether resources like plant and machinery are properly utilized or not.
4. It creates an image of the creditworthiness of the concern.

Advantages to society

1. It tells the true cost of production. From this, the consumer may know whether the market price of the article is fair or not. The consumer is saved from exploitation.
2. It improves the efficiency of industrial units and thereby assists in the economic progress of the nation.
3. Since the price increase by the industry is not allowed without justification as to an increase in the cost of production, consumers can maintain their standard of living.

Advantages to the customers

• Helps in Fixation of Fair price
• Timely and proper Information

Advantages to the government

1. It assists the tariff board in deciding whether tariff protection should be extended to a particular industry or not.
2. It helps to ascertain whether any particular industry should be given any subsidy to develop that industry.
3. It provides reliable data to the government for fixing up the selling prices of the various commodities.
4. It helps in fixing contract prices in a cost-plus contract.
5. It determines whether differential pricing within the industry is desirable.
6. It helps the government to take necessary measures to improve the efficiency of sick industrial units.
7. It can reveal the fraudulent intentions of the management.
8. Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.
9. It facilitates settlement of trade disputes of the companies.
10. It imposes an automatic check on inflation.
11. It assists the Tariff Board to consider the extension or removal of protection.

Q4) What is Tax Audit? How to conduct Tax Audit?

A4) Now-a-days tax audit has become very important to ascertain the accuracy of tax related documents. Tax audit mostly covers income returns, invoices, debt and credit notes and various current and fixed assets. Tax audit is an innovation of 21st century. It has added one more chapter to the procedure of auditing. Tax audit ensures the validity and credibility of tax related documents.

The financial statements are certified by the auditor for truth and fairness of operating results and financial position of the business. These are meant for general purpose being used by the owners, creditors, banks and other interested parties. Sometimes a specific information my required by certain people which may not be available in these statements

Under Income Tax Act, profits shown by profit and loss A/c have to be adjusted as per the provisions of the Act. In this way profits for accounting and profits for taxation are not the same. These profits differ due to various reasons. Profits for accounting are ascertained As per accounting policies and standards but profits for the tax purpose are computes as per the provisions and rules of Income Tax Act.

The Income Tax Department cannot verify each and every detail of provisions compiled by the assessee. In this regard expertise of auditors is utilized, who certify the compliance of the provisions of Income Tax Act.

1. How to conduct tax Audit
   1. The tax auditor shall be guided by the auditing standards and guidance notes as issued from time to time by Institute of Chartered Accountants of India.
   2. Obtaining books of accounts, financial statements and other statements of particulars duly authenticated.
   3. Evaluation of internal control system on the basis of which extent of vouching and verification can be determined.
   4. While conducting tax audit the provisions and objectives of sec, 44 AB shall be kept in mind.
   5. The auditor shall have thorough knowledge of taxation provisions and judicial pronouncements.
   6. The Central Government has notified the following ‘accounting Standards’ in respect of audit of financial statements under section 44 AB.

Q5) What are the provisions relating to compulsory audit under Section 44(AB) of income Tax Act?

A5) Following are provisions relating to compulsory audit under Section 44(AB) of income Tax Act.

I. Tax audit is compulsory for a business if its total sales, turnover or gross receipts in a previous year exceed Rs 1 crore.

II. In case of a profession, Tax audit is compulsory if gross receipt exceed Rs. 25 lakhs.

III. If the profits of a business are determined on presumptive basis, the audit of accounts shall be on compulsory basis if he assessee claims that their profits are less then profits computed under the following sections.

A. Sec 44 (AD) –profit from any business (whether it is retail trading or civil

Construction or any other business)

Provisions are as follows

• Assessee should be resident individual or resident HUF or resident partnership
• Assessee has not claimed exemption under section 10 (A), 10 (AA), 10 (B), 10 (BA), 80 (HH) or 80 (RRB)

The following persons are not eligible

a. Person carrying on profession under [section 44 (AA) (1)]

b. The person earning commission or brokerage or carrying on agency business or plying, hiring or leasing goods carriage.

c. Turnover/gross receipt in the previous year should not exceed 1 crore

B. Profit from the business of carriage of goods [section 44 (AE)]

This sec is applicable to only those persons who are engaged in plying, hiring or leasing goods carriages and own not more than 10 such goods carriages.

C. Profit and gains of a non-resident from shipping business [sec. 44 (B)]

A sum equal to 7.5% of the aggregate receipts in India shall be deemed to be the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

D. Profit and gain of business of Oil exploration of non-resident assessee [sec. 44 (BB)]

A sum equal to 10% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

E. Profit and gains of business of operation of Aircraft by Non- resident [ sec. 44 (BBA)]

A sum equal to 5% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

F. Profit of Foreign Company Engaged in Business of civil Construction or Erection of plant and machinery or/and Commission thereof [ sec. 44 (BBB)]

A sum equal to 10% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

Iv. If Gross receipts or sales or turn over exceed a specified amount in a business only then audit is required.

v. Persons covered under section 44 (AB)

a. The persons who are not covered by Income Tax Act need to get their accounts audited for the purpose of this section like a person having agricultural income exceeding 40 lakhs.

b. The persons who are covered by this section but their income is exempted shall get their accounts audited as in case of charitable Trust, co-operative societies etc.

c. Persons, who are covered under this section, having income below the taxable limit, they have to get their accounts audited if the specified limit under section 44 AB has exceeded.

d. In case of non-resident assessee, if his global or receipts exceed the specified limit, then h has to get Indian operations accounts audited.

Vi. Persons not covered under section 44 AB

a. A non-resident assessee carrying business of operation of ship U/S 44 B.

b. A Non-Resident assessee having income from operation of aircraft u/s 44 BBA

Vii. Specified date

The audit of accounts must be conducted and audit report must be submitted by the assessee by October 31.

VIII Penalty sec. 271 B

If any person fails to get his accounts audited as required u/s 44 AB, the

Assessing officer may direct such person shall pay a penalty equal to or .5% total sales, turnover or gross receipts in business or gross receipts in profession or Rs. 100000, whichever is less.

Q6) What is Management Audit? What are the objectives of management audit?

A6) Management audit is attempt made to evaluate various management functions and process. A detailed and critical review of all the objectives, policies, procedures and functions of management is made with a view to bring about an overall improvement in managerial efficiency.

According to Leslie R. Howard, “An investigation of a business from the highest level downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with outside world and the most efficient organization and smooth running of internal organization.”

According to W.P. Leonard, “A comprehensive and constructive examination of an organization structure of a company, institution or a branch of government or of any component thereof such as division or department, and its plans and objectives, its means of operations, and its uses of human and physical facilities.”

Thus, it can be simply stated that management audit, on the basis of established standards, examines, reviews and appraises the various policies and actions of management.

Objectives/Aims of management Audit

1. To ensure that sound objectives are set by the management.

2. To reveal any irregularity or defect in the process of management and to suggest improvements to obtain the best results.

3. To ensure that the management objectives are achieved.

4. To help various levels of management in the effective discharge of their duties.

5. To assist management in achieving coordination among various departments.

6. To help to achieve the efficiency of management.

7. To assist management in establishing good relations with the employees and to elaborate duties, rights and liabilities of entire staff.

8. To evaluate the performance by comparing inputs with outputs (human and physical both).

9. To ensure most effective relationship with the outsiders and the most efficient internal organization.

10. To recommend changes in the policies and procedure for a better future.

Q7) What are the advantages of management audit?

A7) The advantages of management audit are-

1. It helps management in preparation of plans, objectives and policies and their efficient achievement.

2. It helps management in taking vital decisions for maximization of profits.

3. It helps the management in strengthening its communication systems within and outside the business.

4. It helps in evaluating the performance of management in various areas and measures to improve it.

5. It can help management in preparation of budgets and resource management.

6. It can help management in training of personnel and marketing policies.

Q8) What are the importance of management audit?

A8) The statutory auditor is not required to examine the policies of management and their implementation or whether any improvement in the efficiency of management can be made. In these days a report on all these matters is very important to the business. The management auditors are appointed to advise the management on various matters related to management. These persons examine the various aspects of management and evaluate the actual performance by comparing it with predetermined standards. Such auditors may or may not be from the field of accountancy. They advise management on the matters relating to performance of various departments as well as of the organization as a whole.

The management may conduct management audit periodically to review the efficiency of managers. The results may be used to provide incentives to staff.

The management audit reveals irregularities and defects in the working of management and suggests the ways to improve the efficiency of management. It concentrates on the results and does not examine whether procedures have been followed or not.

The government may ask for management audit of sick industrial units with a view to examine the efficiency of management. It may be conducted to find whether the sickness is due to functioning of management or the circumstances beyond the control of management. On the basis of report of management auditor, the government may decide to take over to sick units.

It can be said that management audit is a guide which helps in improving the efficiency of management

Q9) Write a short note on appointment of Management Auditor?

A9) A team of experts should be appointed to conducted management audit. It can’t be expected that an individual can possess expertise in all management’s fields; therefore, an expert in each field of management should be included in the team of management auditors. Such team should have full cooperation from the top-level management to enable it to conduct the audit smoothly.

The members of management audit team should have a proper training and expert knowledge of science of management. A wide experience of actual work situations will be added to the advantage. The audit of the management involves an appraisal of activities of organization; the auditor must study the organization and its plan in detail.

The internal auditors may be regarded as suitable persons for conduct of management audit because they are familiar with the internal workings of management. Sometimes it is desirable to have O & M experts as management auditors. All will depend on the scope of management audit which the management has to decide.

Q10) What are the qualities of a management auditor?

A10) The area of activities of management audit is wide; no specific qualities can be narrated for management auditor. He must possess enough qualities to fulfil his professional obligations. Some of the qualities of the management auditor can be described as follows.

1. He should have a good knowledge of managerial functions.

2. He should be familiar with the various principles of management, planning, control, management by objectives, and management by exception.

3. He should have a good understanding of financial statements and their preparations.

4. He should understand the working of organization and its problems.

5. He should be able to understand the objectives of organization.

6. He should be able to assess and critically examine the internal control systems.

7. He should be able to understand the nature of the product and its production process.

8. He should understand plans, budgets, rules and the procedures applied in the organization.

9. He should have a good knowledge of financial statement analysis techniques like standard costing, budgetary control, ratio analysis, fund flow statements etc.

10. He should be familiar with the human resources accounting, social accounting, etc.

11. He should have a good knowledge of economics, business laws, etc.

Management Auditor’s Report

In the end, the management auditor prepares a report. On the basis of findings and definite information, the auditor prepares a report making suggestions for improvement in the working of the management. His report should give a correct assessment of the working of organization. He should not hesitate in criticizing the management. His recommendations should be constructive and not merely condemning in nature. His report may include the following matters:

1. Whether the management; and the staff relations are healthy.

2. Whether the return to shareholders is adequate.

3. Whether the methods of production are out-dated.

4. Comparison of operating efficiency of the organization with other concerns.

5. Rate of the return on investment.

Q11) What are the points needed to conduct Management Audit?

A11) Following points need careful attention before conducting Management Audit-

1. The auditor should ensure that various objectives and goals are properly established which are likely to help to achieve the desired results.
2. He should see that the plan laid down by management is practicable and helpful to achieve objectives.
3. He should see that whether the organization has a well-defined structure, authority lines and responsibility areas are clear, decision making is centralized or decentralized.
4. He should verify the efficiency of information system operating in the organization.
5. To collect necessary information, he should prepare a questionnaire such as:

1. Whether the resources are efficiently employed,
2. Whether plans, policies, procedures and systems are strictly followed
3. Whether the objectives are split up into target of each department.
4. Whether management by exception is possible.
5. Whether the planned and actual performance are compared at regular intervals of time.
6.    Whether irregularities arise frequently, if so, who is responsible?
7. Whether the methods used in organization are satisfactory.

6. The information obtained with the help of above questions should be counter checked from the various records and statements available in the organization.

7. To arrive at definite conclusions, the management audit has to correlate the information collected through various means.

Q12) Explain the recent trends in auditing.

A12) The term technology never gives up to change the way we do things. It has transformed how we think, how we interact and how we do business. No one can refuse that technology has made a remarkable impact in the finance and accounting industry. Accounting and finance professionals can now perform tasks faster and with greater accuracy. With these developments in the industry, auditors have also utilized the latest technological advancements to improve their service offerings.

1.Artificial intelligence and Robotic process automation- The adoption of smart automation and machine-learning artificial intelligence in accounting has led to a tremendous overall improvement in the accounting process. Accountants can now shift to more difficult tasks by motorizing time-consuming tasks, tighten controls with the help of advanced software and produce high-end results. As more tasks are performed with these innovative tools, internal audit should be able to identify, control and evaluate the risk that comes with these tools.

2. Cyber and data security- Even before the Facebook- Cambridge Analytical scandal, the world has been moving towards better data and cyber security. Businesses have been working on regulatory compliance with different countries on varying cybersecurity requirements and data management directives. Auditor’s must keep up with these updates to make sure that the company’s cyber data are well protected and secure, at the same time, monitor that data collection, processing and management by the company are in accordance with data privacy regulations such as the EU’s GDPR.

3. Data Analytics- Modern business operations are now heavily relying on data to optimize product or service lines. From time to time, data are collected by companies to identify process bottlenecks and reduce unnecessary costs. To help them in audit process, audit professionals also harness the capabilities of data analytics software. Data analysis helps auditors to check irregularities in data trends or patterns and identify errors that the company may have made during their processes.

4. Technology and Talent development- All these technological trends have conduct to the necessity for professional to develop proficiency and have a keen understanding of the latest technological tools and software. The top audit firms have invested in the skills development of their people to catch up with the new trends in auditing, with new but competitive audit players following this practice.

5. Organizational structure for accountability and transparency- Today’s environment calls for greater collaboration and strong relationship between the auditor and auditee at all levels. The trend, therefore is moving towards developing a structure that facilitates healthy environment. This will encourage free flow of information regarding any issues or concern between the auditee and the auditor. The organization has to be structured in a way that facilitates accountability i.e., not limited to only the Audit Committee.

6. Shift away from SOX compliance towards risk-based auditing- Out of necessity, internal auditors have been devoting their time, energy and resources in recent years primarily to SOX compliance activities. Now, it is time for internal auditors to revaluate its activities and sharpen its focusses on stakeholder expectations and risk-based auditing. Enterprise-wide risk management and fraud are also gaining precedence.

7. Upgrading audit infrastructure and technological advancement- large companies, especially with complex auditing requirements that span not just financial audits but also audits, assessments and inspections related to operations, quality, safety, suppliers and IT are upgrading the technology infrastructure used to carry out auditing from risk assessments and audit universe creating and planning to audit data collection, reporting and remediation. Companies are migrating from their legacy systems, point applications and paper-based procedures to a web-based integrated audit management system. The technological advancement allows the CAE to streamline and strengthen the internal audit function enabling it to deliver more strategic value while lowering its costs of operations.

Q13) What is Electronic Data Processing?

A13) EDP is the present-day approach for processing statistics. The statistics is processed through a pc. Data and a hard and fast of commands are given to the pc as input, and the pc robotically tactics the statistics in keeping with the given set of commands. This pc is likewise called a digital statistics processing device. Electronic statistics processing is the quickest and excellent approach available, with the best reliability and accuracy. This approach makes use of a pc, so the generation used is as much as date. The range of employees required is minimal. The method may be finished thru numerous applications and a hard and fast of predefined rules. It is nearly not possible to method huge quantities of statistics with excessive precision, and its miles the excellent form of statistics processing available. For example, in an automated instructional environment, scholar effects are created thru a pc. At banks, customers' money owed are maintained (or processed), together with thru computers.

EDP ​​is a manner to method, store, retrieve, share, and keep records electronically. There are many approaches to method the statistics. The maximum not unusual place approach of processing statistics is a device gaining knowledge of approach referred to as classification. It may be used to perceive troubles withinside the statistics, locate patterns, and expect outcomes. EDP ​​is an automated statistics processing machine that automates the collection, storage, manipulation, and retrieval of statistics. Text mining entails the method of classifying, expressing, and reading huge quantities of textual content to extract beneficial records. There are many blessings of digital statistics processing. Electronic statistics processing enables lessen improvement and renovation charges for maximum commercial enterprise operations.

Electronic statistics processing has many blessings over different codes because of its excessive speed, accuracy, reliability, and flexibility. The e-trade industry, banking services, document keeping, transactional statistics processing, and real-time statistics processing businesses all use digital statistics processing. Every statistics processing machine includes 4 fundamental components, together with hardware, software, procedures, and employees.

Q14) What are the electronic facts processing technique?

A14) There are many one-of-a-kind strategies and sorts of facts processing, however there are a few very famous strategies with regards to automatic facts processing. These strategies are extensively followed in nearly each industry. EPD structures are extensively used to satisfy the various desires of groups engaged in facts analysis. Depending on the character of your requirements, including facts storage, processing strategies, manipulate principles, laptop equipment, facts analysis, and facts processing, a number of the maximum not unusual place strategies of digital facts processing are defined below.

1. Share time
2. Real-time processing
3. Online processing
4. Multiprocessing
5. Multitasking
6. Interactive processing
7. Batch processing
8. Distributed processing

Each kind is in brief defined below.

1. Time-sharing: With this technique, many nodes linked to the CPU accessed the principal laptop. The multi-person processing gadget controls the time allocation for every person. Each person can assign a time slice in a chain of principal processing units. The person has to whole the assignment at some point of the allocated time slice. If the person is not able to finish the assignment, the person can whole the assignment at some point of any other assigned time slice.
2. Real-time processing: Providing correct and up to date records is the principal cause of real-time processing. This is viable while the laptop techniques the acquired facts. It will react immediately to what can also additionally happen. Affects upcoming events. Reserving seats on trains and planes is a exceptional instance of real-time processing.

If a seat is reserved, the reservation gadget will replace the reservation file. Real-time processing is a near-on the spot method for purchasing the output of records. This technique saves as much as the most time it takes to get the output.

c.     Online processing: With this processing technique, the facts are processed immediately. Communications hyperlinks assist join your laptop at once to the facts access unit. Data access can also additionally encompass community terminals or on-line enter devices. Online processing is basically used for gaining knowledge of and recording records.

d.    Multiprocessing: Multiprocessing is the processing of more than one duty at the identical laptop that use one-of-a-kind processors on the identical time. It is viable on community servers and mainframes. In this method, the laptop can also additionally encompass more than one unbiased CPUs. This makes facts processing a whole lot faster.

Adjustments can be made on a multiprocessing gadget. In this method, one-of-a-kind processors proportion the identical memory. Processors get records from one-of-a-kind components of an application or one-of-a-kind programs.

e.     Multitasking: This is an essential function of facts processing. Operating one-of-a-kind processors on the identical time is known as multitasking. In this method, one-of-a-kind duties proportion the identical processing resources. The running gadget for multitasking techniques is a time-sharing gadget.

f.       Interactive processing: This technique consists of 3 sorts of features. The sorts of features are as follows

Peak detection

Integration

Quantification

This is a smooth manner to function your laptop. The strategies of this method can war with every different.

g.    Batch processing: Batch processing is a way of processing prepared facts into divided companies. This technique lets in you to divide the processed facts into companies over the desired time period. The batching technique lets in the laptop to carry out one-of-a-kind priorities for interactions. This technique could be very particular and beneficial for processing.

Distributed Processing: This technique is generally used for far off workstations due to the fact the far-off pc is hooked up to a big pc. Customers get higher carrier from this method. This method lets in agencies to distribute their geographic laptop usage. ATM is the exceptional instance of this dispensed processing technique. ATM is hooked up to the banking gadget.

Q15) What are the elements of digital facts processing?

A15) Electronic facts processing (EDP) is the method of recording records and processing it for financial, legal, or different commercial enterprise purposes. EDP ​​facts are utilized by groups to evaluate overall performance and make boom decisions.

There are many methods to method facts. Data processing is the method of doing something with facts, and there are numerous methods to do it. The advantages of digital facts processing encompass the subsequent features: Ensure dependable facts. Improves the velocity and performance of your organization. Reduce costs. Electronic facts processing may be used to growth productivity, performance, and profitability with the aid of using growing the usefulness of records.

Hardware, software program, tactics and employees are the simple factors. In the hardware section, scanners, information garage gadgets, barcode scanners, coins registers, private computers, scientific gadgets, servers, video and audio system are factors of digital information processing. In the software program section, accounting software program, information access, scheduling software program, analysis, and software program are factors of digital information processing. In the system section, sorting, analysis, reporting, transformation, information collection, and aggregation are the factors of EDP.

In HR, programmers use digital information processing to create additives and spreadsheets. Data access professionals use it to test barcodes. The significance of information processing is now understood in all areas. Today, industries are specializing in what works exceptional for them and the way they reap more profits. EDP ​​structures are as broadly used as control facts structures.

Q16) What are the blessings of digital information processing?

A16) The blessings of a digital information processing are-

1. Data control prices are reduced. Helps with selection making and information garage.
2. Processing information reduces office work and is steeply-priced to control files, which facilitates lessen prices.
3. It assists in record control and allows using included procedures and included structures.
4. The capacity to look files saves time. In addition to this, inner and outside collaboration is improved.
5. Well-recognized software program merchandise including Ms. Office use the idea of digital information processing. EDP ​​has the capacity to lessen duplication of work, repetitive input, and selection making.
6. It gives powerful control, complements information safety, manages facts assets, and creates powerful workflows.

Q17) What are the disadvantages of digital information processing?

A17) The disadvantages of digital information processing are-

1. Data in digital layout is prone to hacking attempts. As the quantity of cybercrime increases, it turns into crucial and vital to consider information safety and get entry to control. When diverse gadgets in a facts machine are related to a network, defects or loopholes in a single a part of the machine can have an effect on the complete network.
2. You may also want to hold your information in encrypted form. This is particularly crucial whilst processing touchy information and storing it withinside the information center, because the information is dispatched over the network.

EDP ​​example: Used through vendors to layout invoices and calculate usage-primarily based totally charges. The faculty makes use of EDP to hold scholar records. In supermarkets its miles used for recording, however in hospitals its miles used to screen the development of patients.

In addition, its miles used to screen lodge reservations, studying establishments and financial institution transactions. Departments including police, cybercrime, and chemistry use digital information processing to report entries. This allows massive corporations to accumulate facts and system information. Electronic information processing also can be used as video and audio system. It may be used as a barcode scanner.

Q18) What is Application control testing?

A18) At this point, the auditor identifies all of the agency's finance and finance-related application systems, determines which systems are important, gains an understanding and documentation of internal control procedures, and which systems Determine if trusted, which controls will be tested, and meet with the EDP audit section to discuss work coordination.

As a general rule, the auditor intends to rely on the application system, so if you want to reduce the amount of substantive testing of details before giving an opinion on financial statements, the important application controls that need to be tested are: It is as follows. a) Data accuracy, (b) Table maintenance, (c) User access, and (d) Data backup. Other steps, such as processing control, can be added to this list as needed. Control tests can be circulated at the discretion of the auditor.

The audit auditor has the overall responsibility to test the application control of the audit, and the EDP auditor is responsible for providing technical assistance as needed. Application control is either a user procedure or a programmed procedure. User procedures related to application systems such as reconciliation should be tested by the accounting auditor. Programmed procedures, such as editing data accuracy, consist of internal computer processing and external evidence of its effectiveness. The accounting auditor should review external evidence of the effectiveness of the control, and the EDP auditor should provide professional support whenever it is necessary to directly investigate internal computer processing.

Q19) What are the application controls that should be considered important if the auditor intends to rely on the application system?

A19) The application controls that should be considered important if the auditor intends to rely on the application system are:

Data integrity-This is a collection of procedures designed so that the user enters each transaction only once, the transaction completely updates the database, and the output report contains all the appropriate data. Common integrity management procedures include batch totals and adjustments. Testing this control is very similar to the auditing procedure used when auditing the surroundings of a computer. When this control is working effectively, it strongly supports integrity assertions from the time data is entered into the system to the output report.

Data Accuracy-These are controls that ensure that the user enters the most important data elements correctly and the system maintains them correctly. Account numbers and amounts are usually the most important data elements to enter. Controlling the accuracy of account numbers includes table lookups, check digits, and visual validation. Controlling the accuracy of monetary amounts includes batch summing and key regeneration for validation. When these controls are working effectively, they provide strong support for assessment and occurrence assertions.

Table Maintenance-These are controls that ensure that the tables used in financial calculations contain accurate and timely values, such as converting item counts to prices. These tables should only be updated by authorized user department personnel. Once updated, you will need to create and review an audit trail. The table should be independent of computer programs and programmers. When these controls are working effectively, they provide strong support for assessment assertions.

User Access-This control ensures that only authorized persons can record, modify, or delete data, and that the digital signature used to approve the transaction is valid. Testing this control involves ensuring that the security software is functioning properly and that the security rules reflect the intent of the administrator and provide proper segregation of duties. Testing this control is usually a collaborative effort between the financial auditor and the EDP auditor. When this control is working effectively, it provides strong support for presence and occurrence assertions.

Data Backup-This control ensures that your system can be restored in the event of a disaster destroying your primary data files. To be effective, the backup data files should be stored in a safe offsite location and include all important files. The frequency of backups determines how much data you need to re-enter because you need to recapture all the data that was entered between the last backup and the disaster. If this control is not working effectively, all assertions are at risk.

The auditor needs to determine whether the design of the critical application control supports management's financial statement assertions and whether the control is working effectively. In doing this, the auditor must integrate the testing of the application control with other controls in the appropriate audit area.

Q20) What are the objectives of cost audit?

A20) The objectives of cost audit are-

1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy of cost accounting entries in the books of accounts.
2. To ensure that cost accounting principles are governed by the management objectives and these are strictly adhered to in preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect errors, frauds, and wrong practice in the existing system.
4. To check up the general working of the cost department of the organization and to make suggestions for improvement.
5. To help the management in taking correct decisions on certain important matters
6. To determine the actual cost of production when the goods are ready.
7. To reduce the amount of detailed checking by the external auditor, its effective internal cost audit system is in operation.
8. To find out whether each item of expenditure involved in the relevant components of the goods manufactured or produced has been properly incurred or not.

Unit 3

Special Areas of Audit

Q1) What is cost audit?

A1) Cost Audit is mainly a preventive measure, a guide for management policy and decisions, in addition to being the barometer of performance.

Cost Audit is an audit of efficiency of minute details of expenditure while the work in progress and not a post mortem examination.

Cost audit can be defined as verification of correctness of cost accounts and a check on adherence to the cost accounting principles, plans and procedures.

According to Institute of Cost Accountants of India cost audit is “a system of audit introduced by the government of India for the review, examination and appraisal of the cost accounting records and attendant information, required to be maintained by specified industries.”

According to (CIMA) Chartered Institute of Management Accountant, London, “Cost audit is verification of the correctness of cost accounts and cost accounting plans.”

Q2) What are the advantages of cost audit to management?

A2) The advantages of cost audit to management are-

1.   It provides necessary information for prompt decision decisions.
2. It helps management to regulate production.
3. Errors, omission, fraud, and mistakes can be detected and prevented due to the effective auditing of cost accounts.
4. It reduces the cost of production through plugging loopholes relating to wastage of material, labor, and overheads.
5. It can fix the responsibility of an individual wherever irregularities or wastage are found.
6. It improves the efficiency of the organization as a whole and costing system in particular by constant review, revision, and checking or routine procedures and methods.
7. It helps in comparing actual results with budgeted results and points out the areas where management action is more needed.
8. It also enables comparison among different units of the factory to find out the profitability of the different units.
9. It exercises a moral influence on employees, which keeps them efficient and alert.
10. It ensures that the cost accounts have been maintained under the principles of costing employed in the industry concerned.
11. It ensures effective internal control.
12. It helps to increase the overall efficiency of productivity.
13. Inefficiency can be eliminated by suitable corrective actions.
14. It facilitates cost control and cost reduction.
15. It assists in the valuation of stock of materials, works in progress, and finished goods.
16. It ensures maximum utilization of available resources,
17. It enables the management to choose economic methods of operations and thus earn profits to satisfy the shareholders and the investing public.
18. It enables the management to chalk out the future policy based on the report by the cost auditor, especially regarding labor, raw material, plant, etc. to maximize production and reduce the cost of production.
19. It tests the effectiveness of cost control techniques and to evaluate their advantages to the enterprise.

Q3) What are the advantages of cost audit to the shareholders, society, customers and government etc?

A3) The advantages of cost audit to the shareholders, society, customers and government are-

Advantages to the shareholders

1. It ensures that proper records are maintained as to purchases, utilization of materials, and expenses incurred on various items i.e., wages and overheads, etc. It also makes sure that the industrial unit has been working efficiently and economically.
2. It enables shareholders to determine whether or not they are getting a fair return on their investments. It reflects managerial efficiency or inefficiency.
3. It ensures a true picture of the company’s state of affairs. It reveals whether resources like plant and machinery are properly utilized or not.
4. It creates an image of the creditworthiness of the concern.

Advantages to society

1. It tells the true cost of production. From this, the consumer may know whether the market price of the article is fair or not. The consumer is saved from exploitation.
2. It improves the efficiency of industrial units and thereby assists in the economic progress of the nation.
3. Since the price increase by the industry is not allowed without justification as to an increase in the cost of production, consumers can maintain their standard of living.

Advantages to the customers

• Helps in Fixation of Fair price
• Timely and proper Information

Advantages to the government

1. It assists the tariff board in deciding whether tariff protection should be extended to a particular industry or not.
2. It helps to ascertain whether any particular industry should be given any subsidy to develop that industry.
3. It provides reliable data to the government for fixing up the selling prices of the various commodities.
4. It helps in fixing contract prices in a cost-plus contract.
5. It determines whether differential pricing within the industry is desirable.
6. It helps the government to take necessary measures to improve the efficiency of sick industrial units.
7. It can reveal the fraudulent intentions of the management.
8. Cost statements may be helpful to authorities in imposing tax or duty at the cost of finished products.
9. It facilitates settlement of trade disputes of the companies.
10. It imposes an automatic check on inflation.
11. It assists the Tariff Board to consider the extension or removal of protection.

Q4) What is Tax Audit? How to conduct Tax Audit?

A4) Now-a-days tax audit has become very important to ascertain the accuracy of tax related documents. Tax audit mostly covers income returns, invoices, debt and credit notes and various current and fixed assets. Tax audit is an innovation of 21st century. It has added one more chapter to the procedure of auditing. Tax audit ensures the validity and credibility of tax related documents.

The financial statements are certified by the auditor for truth and fairness of operating results and financial position of the business. These are meant for general purpose being used by the owners, creditors, banks and other interested parties. Sometimes a specific information my required by certain people which may not be available in these statements

Under Income Tax Act, profits shown by profit and loss A/c have to be adjusted as per the provisions of the Act. In this way profits for accounting and profits for taxation are not the same. These profits differ due to various reasons. Profits for accounting are ascertained As per accounting policies and standards but profits for the tax purpose are computes as per the provisions and rules of Income Tax Act.

The Income Tax Department cannot verify each and every detail of provisions compiled by the assessee. In this regard expertise of auditors is utilized, who certify the compliance of the provisions of Income Tax Act.

1. How to conduct tax Audit
   1. The tax auditor shall be guided by the auditing standards and guidance notes as issued from time to time by Institute of Chartered Accountants of India.
   2. Obtaining books of accounts, financial statements and other statements of particulars duly authenticated.
   3. Evaluation of internal control system on the basis of which extent of vouching and verification can be determined.
   4. While conducting tax audit the provisions and objectives of sec, 44 AB shall be kept in mind.
   5. The auditor shall have thorough knowledge of taxation provisions and judicial pronouncements.
   6. The Central Government has notified the following ‘accounting Standards’ in respect of audit of financial statements under section 44 AB.

Q5) What are the provisions relating to compulsory audit under Section 44(AB) of income Tax Act?

A5) Following are provisions relating to compulsory audit under Section 44(AB) of income Tax Act.

I. Tax audit is compulsory for a business if its total sales, turnover or gross receipts in a previous year exceed Rs 1 crore.

II. In case of a profession, Tax audit is compulsory if gross receipt exceed Rs. 25 lakhs.

III. If the profits of a business are determined on presumptive basis, the audit of accounts shall be on compulsory basis if he assessee claims that their profits are less then profits computed under the following sections.

A. Sec 44 (AD) –profit from any business (whether it is retail trading or civil

Construction or any other business)

Provisions are as follows

• Assessee should be resident individual or resident HUF or resident partnership
• Assessee has not claimed exemption under section 10 (A), 10 (AA), 10 (B), 10 (BA), 80 (HH) or 80 (RRB)

The following persons are not eligible

a. Person carrying on profession under [section 44 (AA) (1)]

b. The person earning commission or brokerage or carrying on agency business or plying, hiring or leasing goods carriage.

c. Turnover/gross receipt in the previous year should not exceed 1 crore

B. Profit from the business of carriage of goods [section 44 (AE)]

This sec is applicable to only those persons who are engaged in plying, hiring or leasing goods carriages and own not more than 10 such goods carriages.

C. Profit and gains of a non-resident from shipping business [sec. 44 (B)]

A sum equal to 7.5% of the aggregate receipts in India shall be deemed to be the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

D. Profit and gain of business of Oil exploration of non-resident assessee [sec. 44 (BB)]

A sum equal to 10% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

E. Profit and gains of business of operation of Aircraft by Non- resident [ sec. 44 (BBA)]

A sum equal to 5% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

F. Profit of Foreign Company Engaged in Business of civil Construction or Erection of plant and machinery or/and Commission thereof [ sec. 44 (BBB)]

A sum equal to 10% of amount payable in India or outside India to assessee shall be deemed to the profit

If the assessee does not opt for the above scheme, he will have to get accounts audited.

Iv. If Gross receipts or sales or turn over exceed a specified amount in a business only then audit is required.

v. Persons covered under section 44 (AB)

a. The persons who are not covered by Income Tax Act need to get their accounts audited for the purpose of this section like a person having agricultural income exceeding 40 lakhs.

b. The persons who are covered by this section but their income is exempted shall get their accounts audited as in case of charitable Trust, co-operative societies etc.

c. Persons, who are covered under this section, having income below the taxable limit, they have to get their accounts audited if the specified limit under section 44 AB has exceeded.

d. In case of non-resident assessee, if his global or receipts exceed the specified limit, then h has to get Indian operations accounts audited.

Vi. Persons not covered under section 44 AB

a. A non-resident assessee carrying business of operation of ship U/S 44 B.

b. A Non-Resident assessee having income from operation of aircraft u/s 44 BBA

Vii. Specified date

The audit of accounts must be conducted and audit report must be submitted by the assessee by October 31.

VIII Penalty sec. 271 B

If any person fails to get his accounts audited as required u/s 44 AB, the

Assessing officer may direct such person shall pay a penalty equal to or .5% total sales, turnover or gross receipts in business or gross receipts in profession or Rs. 100000, whichever is less.

Q6) What is Management Audit? What are the objectives of management audit?

A6) Management audit is attempt made to evaluate various management functions and process. A detailed and critical review of all the objectives, policies, procedures and functions of management is made with a view to bring about an overall improvement in managerial efficiency.

According to Leslie R. Howard, “An investigation of a business from the highest level downward in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with outside world and the most efficient organization and smooth running of internal organization.”

According to W.P. Leonard, “A comprehensive and constructive examination of an organization structure of a company, institution or a branch of government or of any component thereof such as division or department, and its plans and objectives, its means of operations, and its uses of human and physical facilities.”

Thus, it can be simply stated that management audit, on the basis of established standards, examines, reviews and appraises the various policies and actions of management.

Objectives/Aims of management Audit

1. To ensure that sound objectives are set by the management.

2. To reveal any irregularity or defect in the process of management and to suggest improvements to obtain the best results.

3. To ensure that the management objectives are achieved.

4. To help various levels of management in the effective discharge of their duties.

5. To assist management in achieving coordination among various departments.

6. To help to achieve the efficiency of management.

7. To assist management in establishing good relations with the employees and to elaborate duties, rights and liabilities of entire staff.

8. To evaluate the performance by comparing inputs with outputs (human and physical both).

9. To ensure most effective relationship with the outsiders and the most efficient internal organization.

10. To recommend changes in the policies and procedure for a better future.

Q7) What are the advantages of management audit?

A7) The advantages of management audit are-

1. It helps management in preparation of plans, objectives and policies and their efficient achievement.

2. It helps management in taking vital decisions for maximization of profits.

3. It helps the management in strengthening its communication systems within and outside the business.

4. It helps in evaluating the performance of management in various areas and measures to improve it.

5. It can help management in preparation of budgets and resource management.

6. It can help management in training of personnel and marketing policies.

Q8) What are the importance of management audit?

A8) The statutory auditor is not required to examine the policies of management and their implementation or whether any improvement in the efficiency of management can be made. In these days a report on all these matters is very important to the business. The management auditors are appointed to advise the management on various matters related to management. These persons examine the various aspects of management and evaluate the actual performance by comparing it with predetermined standards. Such auditors may or may not be from the field of accountancy. They advise management on the matters relating to performance of various departments as well as of the organization as a whole.

The management may conduct management audit periodically to review the efficiency of managers. The results may be used to provide incentives to staff.

The management audit reveals irregularities and defects in the working of management and suggests the ways to improve the efficiency of management. It concentrates on the results and does not examine whether procedures have been followed or not.

The government may ask for management audit of sick industrial units with a view to examine the efficiency of management. It may be conducted to find whether the sickness is due to functioning of management or the circumstances beyond the control of management. On the basis of report of management auditor, the government may decide to take over to sick units.

It can be said that management audit is a guide which helps in improving the efficiency of management

Q9) Write a short note on appointment of Management Auditor?

A9) A team of experts should be appointed to conducted management audit. It can’t be expected that an individual can possess expertise in all management’s fields; therefore, an expert in each field of management should be included in the team of management auditors. Such team should have full cooperation from the top-level management to enable it to conduct the audit smoothly.

The members of management audit team should have a proper training and expert knowledge of science of management. A wide experience of actual work situations will be added to the advantage. The audit of the management involves an appraisal of activities of organization; the auditor must study the organization and its plan in detail.

The internal auditors may be regarded as suitable persons for conduct of management audit because they are familiar with the internal workings of management. Sometimes it is desirable to have O & M experts as management auditors. All will depend on the scope of management audit which the management has to decide.

Q10) What are the qualities of a management auditor?

A10) The area of activities of management audit is wide; no specific qualities can be narrated for management auditor. He must possess enough qualities to fulfil his professional obligations. Some of the qualities of the management auditor can be described as follows.

1. He should have a good knowledge of managerial functions.

2. He should be familiar with the various principles of management, planning, control, management by objectives, and management by exception.

3. He should have a good understanding of financial statements and their preparations.

4. He should understand the working of organization and its problems.

5. He should be able to understand the objectives of organization.

6. He should be able to assess and critically examine the internal control systems.

7. He should be able to understand the nature of the product and its production process.

8. He should understand plans, budgets, rules and the procedures applied in the organization.

9. He should have a good knowledge of financial statement analysis techniques like standard costing, budgetary control, ratio analysis, fund flow statements etc.

10. He should be familiar with the human resources accounting, social accounting, etc.

11. He should have a good knowledge of economics, business laws, etc.

Management Auditor’s Report

In the end, the management auditor prepares a report. On the basis of findings and definite information, the auditor prepares a report making suggestions for improvement in the working of the management. His report should give a correct assessment of the working of organization. He should not hesitate in criticizing the management. His recommendations should be constructive and not merely condemning in nature. His report may include the following matters:

1. Whether the management; and the staff relations are healthy.

2. Whether the return to shareholders is adequate.

3. Whether the methods of production are out-dated.

4. Comparison of operating efficiency of the organization with other concerns.

5. Rate of the return on investment.

Q11) What are the points needed to conduct Management Audit?

A11) Following points need careful attention before conducting Management Audit-

1. The auditor should ensure that various objectives and goals are properly established which are likely to help to achieve the desired results.
2. He should see that the plan laid down by management is practicable and helpful to achieve objectives.
3. He should see that whether the organization has a well-defined structure, authority lines and responsibility areas are clear, decision making is centralized or decentralized.
4. He should verify the efficiency of information system operating in the organization.
5. To collect necessary information, he should prepare a questionnaire such as:

1. Whether the resources are efficiently employed,
2. Whether plans, policies, procedures and systems are strictly followed
3. Whether the objectives are split up into target of each department.
4. Whether management by exception is possible.
5. Whether the planned and actual performance are compared at regular intervals of time.
6.    Whether irregularities arise frequently, if so, who is responsible?
7. Whether the methods used in organization are satisfactory.

6. The information obtained with the help of above questions should be counter checked from the various records and statements available in the organization.

7. To arrive at definite conclusions, the management audit has to correlate the information collected through various means.

Q12) Explain the recent trends in auditing.

A12) The term technology never gives up to change the way we do things. It has transformed how we think, how we interact and how we do business. No one can refuse that technology has made a remarkable impact in the finance and accounting industry. Accounting and finance professionals can now perform tasks faster and with greater accuracy. With these developments in the industry, auditors have also utilized the latest technological advancements to improve their service offerings.

1.Artificial intelligence and Robotic process automation- The adoption of smart automation and machine-learning artificial intelligence in accounting has led to a tremendous overall improvement in the accounting process. Accountants can now shift to more difficult tasks by motorizing time-consuming tasks, tighten controls with the help of advanced software and produce high-end results. As more tasks are performed with these innovative tools, internal audit should be able to identify, control and evaluate the risk that comes with these tools.

2. Cyber and data security- Even before the Facebook- Cambridge Analytical scandal, the world has been moving towards better data and cyber security. Businesses have been working on regulatory compliance with different countries on varying cybersecurity requirements and data management directives. Auditor’s must keep up with these updates to make sure that the company’s cyber data are well protected and secure, at the same time, monitor that data collection, processing and management by the company are in accordance with data privacy regulations such as the EU’s GDPR.

3. Data Analytics- Modern business operations are now heavily relying on data to optimize product or service lines. From time to time, data are collected by companies to identify process bottlenecks and reduce unnecessary costs. To help them in audit process, audit professionals also harness the capabilities of data analytics software. Data analysis helps auditors to check irregularities in data trends or patterns and identify errors that the company may have made during their processes.

4. Technology and Talent development- All these technological trends have conduct to the necessity for professional to develop proficiency and have a keen understanding of the latest technological tools and software. The top audit firms have invested in the skills development of their people to catch up with the new trends in auditing, with new but competitive audit players following this practice.

5. Organizational structure for accountability and transparency- Today’s environment calls for greater collaboration and strong relationship between the auditor and auditee at all levels. The trend, therefore is moving towards developing a structure that facilitates healthy environment. This will encourage free flow of information regarding any issues or concern between the auditee and the auditor. The organization has to be structured in a way that facilitates accountability i.e., not limited to only the Audit Committee.

6. Shift away from SOX compliance towards risk-based auditing- Out of necessity, internal auditors have been devoting their time, energy and resources in recent years primarily to SOX compliance activities. Now, it is time for internal auditors to revaluate its activities and sharpen its focusses on stakeholder expectations and risk-based auditing. Enterprise-wide risk management and fraud are also gaining precedence.

7. Upgrading audit infrastructure and technological advancement- large companies, especially with complex auditing requirements that span not just financial audits but also audits, assessments and inspections related to operations, quality, safety, suppliers and IT are upgrading the technology infrastructure used to carry out auditing from risk assessments and audit universe creating and planning to audit data collection, reporting and remediation. Companies are migrating from their legacy systems, point applications and paper-based procedures to a web-based integrated audit management system. The technological advancement allows the CAE to streamline and strengthen the internal audit function enabling it to deliver more strategic value while lowering its costs of operations.

Q13) What is Electronic Data Processing?

A13) EDP is the present-day approach for processing statistics. The statistics is processed through a pc. Data and a hard and fast of commands are given to the pc as input, and the pc robotically tactics the statistics in keeping with the given set of commands. This pc is likewise called a digital statistics processing device. Electronic statistics processing is the quickest and excellent approach available, with the best reliability and accuracy. This approach makes use of a pc, so the generation used is as much as date. The range of employees required is minimal. The method may be finished thru numerous applications and a hard and fast of predefined rules. It is nearly not possible to method huge quantities of statistics with excessive precision, and its miles the excellent form of statistics processing available. For example, in an automated instructional environment, scholar effects are created thru a pc. At banks, customers' money owed are maintained (or processed), together with thru computers.

EDP ​​is a manner to method, store, retrieve, share, and keep records electronically. There are many approaches to method the statistics. The maximum not unusual place approach of processing statistics is a device gaining knowledge of approach referred to as classification. It may be used to perceive troubles withinside the statistics, locate patterns, and expect outcomes. EDP ​​is an automated statistics processing machine that automates the collection, storage, manipulation, and retrieval of statistics. Text mining entails the method of classifying, expressing, and reading huge quantities of textual content to extract beneficial records. There are many blessings of digital statistics processing. Electronic statistics processing enables lessen improvement and renovation charges for maximum commercial enterprise operations.

Electronic statistics processing has many blessings over different codes because of its excessive speed, accuracy, reliability, and flexibility. The e-trade industry, banking services, document keeping, transactional statistics processing, and real-time statistics processing businesses all use digital statistics processing. Every statistics processing machine includes 4 fundamental components, together with hardware, software, procedures, and employees.

Q14) What are the electronic facts processing technique?

A14) There are many one-of-a-kind strategies and sorts of facts processing, however there are a few very famous strategies with regards to automatic facts processing. These strategies are extensively followed in nearly each industry. EPD structures are extensively used to satisfy the various desires of groups engaged in facts analysis. Depending on the character of your requirements, including facts storage, processing strategies, manipulate principles, laptop equipment, facts analysis, and facts processing, a number of the maximum not unusual place strategies of digital facts processing are defined below.

1. Share time
2. Real-time processing
3. Online processing
4. Multiprocessing
5. Multitasking
6. Interactive processing
7. Batch processing
8. Distributed processing

Each kind is in brief defined below.

1. Time-sharing: With this technique, many nodes linked to the CPU accessed the principal laptop. The multi-person processing gadget controls the time allocation for every person. Each person can assign a time slice in a chain of principal processing units. The person has to whole the assignment at some point of the allocated time slice. If the person is not able to finish the assignment, the person can whole the assignment at some point of any other assigned time slice.
2. Real-time processing: Providing correct and up to date records is the principal cause of real-time processing. This is viable while the laptop techniques the acquired facts. It will react immediately to what can also additionally happen. Affects upcoming events. Reserving seats on trains and planes is a exceptional instance of real-time processing.

If a seat is reserved, the reservation gadget will replace the reservation file. Real-time processing is a near-on the spot method for purchasing the output of records. This technique saves as much as the most time it takes to get the output.

c.     Online processing: With this processing technique, the facts are processed immediately. Communications hyperlinks assist join your laptop at once to the facts access unit. Data access can also additionally encompass community terminals or on-line enter devices. Online processing is basically used for gaining knowledge of and recording records.

d.    Multiprocessing: Multiprocessing is the processing of more than one duty at the identical laptop that use one-of-a-kind processors on the identical time. It is viable on community servers and mainframes. In this method, the laptop can also additionally encompass more than one unbiased CPUs. This makes facts processing a whole lot faster.

Adjustments can be made on a multiprocessing gadget. In this method, one-of-a-kind processors proportion the identical memory. Processors get records from one-of-a-kind components of an application or one-of-a-kind programs.

e.     Multitasking: This is an essential function of facts processing. Operating one-of-a-kind processors on the identical time is known as multitasking. In this method, one-of-a-kind duties proportion the identical processing resources. The running gadget for multitasking techniques is a time-sharing gadget.

f.       Interactive processing: This technique consists of 3 sorts of features. The sorts of features are as follows

Peak detection

Integration

Quantification

This is a smooth manner to function your laptop. The strategies of this method can war with every different.

g.    Batch processing: Batch processing is a way of processing prepared facts into divided companies. This technique lets in you to divide the processed facts into companies over the desired time period. The batching technique lets in the laptop to carry out one-of-a-kind priorities for interactions. This technique could be very particular and beneficial for processing.

Distributed Processing: This technique is generally used for far off workstations due to the fact the far-off pc is hooked up to a big pc. Customers get higher carrier from this method. This method lets in agencies to distribute their geographic laptop usage. ATM is the exceptional instance of this dispensed processing technique. ATM is hooked up to the banking gadget.

Q15) What are the elements of digital facts processing?

A15) Electronic facts processing (EDP) is the method of recording records and processing it for financial, legal, or different commercial enterprise purposes. EDP ​​facts are utilized by groups to evaluate overall performance and make boom decisions.

There are many methods to method facts. Data processing is the method of doing something with facts, and there are numerous methods to do it. The advantages of digital facts processing encompass the subsequent features: Ensure dependable facts. Improves the velocity and performance of your organization. Reduce costs. Electronic facts processing may be used to growth productivity, performance, and profitability with the aid of using growing the usefulness of records.

Hardware, software program, tactics and employees are the simple factors. In the hardware section, scanners, information garage gadgets, barcode scanners, coins registers, private computers, scientific gadgets, servers, video and audio system are factors of digital information processing. In the software program section, accounting software program, information access, scheduling software program, analysis, and software program are factors of digital information processing. In the system section, sorting, analysis, reporting, transformation, information collection, and aggregation are the factors of EDP.

In HR, programmers use digital information processing to create additives and spreadsheets. Data access professionals use it to test barcodes. The significance of information processing is now understood in all areas. Today, industries are specializing in what works exceptional for them and the way they reap more profits. EDP ​​structures are as broadly used as control facts structures.

Q16) What are the blessings of digital information processing?

A16) The blessings of a digital information processing are-

1. Data control prices are reduced. Helps with selection making and information garage.
2. Processing information reduces office work and is steeply-priced to control files, which facilitates lessen prices.
3. It assists in record control and allows using included procedures and included structures.
4. The capacity to look files saves time. In addition to this, inner and outside collaboration is improved.
5. Well-recognized software program merchandise including Ms. Office use the idea of digital information processing. EDP ​​has the capacity to lessen duplication of work, repetitive input, and selection making.
6. It gives powerful control, complements information safety, manages facts assets, and creates powerful workflows.

Q17) What are the disadvantages of digital information processing?

A17) The disadvantages of digital information processing are-

1. Data in digital layout is prone to hacking attempts. As the quantity of cybercrime increases, it turns into crucial and vital to consider information safety and get entry to control. When diverse gadgets in a facts machine are related to a network, defects or loopholes in a single a part of the machine can have an effect on the complete network.
2. You may also want to hold your information in encrypted form. This is particularly crucial whilst processing touchy information and storing it withinside the information center, because the information is dispatched over the network.

EDP ​​example: Used through vendors to layout invoices and calculate usage-primarily based totally charges. The faculty makes use of EDP to hold scholar records. In supermarkets its miles used for recording, however in hospitals its miles used to screen the development of patients.

In addition, its miles used to screen lodge reservations, studying establishments and financial institution transactions. Departments including police, cybercrime, and chemistry use digital information processing to report entries. This allows massive corporations to accumulate facts and system information. Electronic information processing also can be used as video and audio system. It may be used as a barcode scanner.

Q18) What is Application control testing?

A18) At this point, the auditor identifies all of the agency's finance and finance-related application systems, determines which systems are important, gains an understanding and documentation of internal control procedures, and which systems Determine if trusted, which controls will be tested, and meet with the EDP audit section to discuss work coordination.

As a general rule, the auditor intends to rely on the application system, so if you want to reduce the amount of substantive testing of details before giving an opinion on financial statements, the important application controls that need to be tested are: It is as follows. a) Data accuracy, (b) Table maintenance, (c) User access, and (d) Data backup. Other steps, such as processing control, can be added to this list as needed. Control tests can be circulated at the discretion of the auditor.

The audit auditor has the overall responsibility to test the application control of the audit, and the EDP auditor is responsible for providing technical assistance as needed. Application control is either a user procedure or a programmed procedure. User procedures related to application systems such as reconciliation should be tested by the accounting auditor. Programmed procedures, such as editing data accuracy, consist of internal computer processing and external evidence of its effectiveness. The accounting auditor should review external evidence of the effectiveness of the control, and the EDP auditor should provide professional support whenever it is necessary to directly investigate internal computer processing.

Q19) What are the application controls that should be considered important if the auditor intends to rely on the application system?

A19) The application controls that should be considered important if the auditor intends to rely on the application system are:

Data integrity-This is a collection of procedures designed so that the user enters each transaction only once, the transaction completely updates the database, and the output report contains all the appropriate data. Common integrity management procedures include batch totals and adjustments. Testing this control is very similar to the auditing procedure used when auditing the surroundings of a computer. When this control is working effectively, it strongly supports integrity assertions from the time data is entered into the system to the output report.

Data Accuracy-These are controls that ensure that the user enters the most important data elements correctly and the system maintains them correctly. Account numbers and amounts are usually the most important data elements to enter. Controlling the accuracy of account numbers includes table lookups, check digits, and visual validation. Controlling the accuracy of monetary amounts includes batch summing and key regeneration for validation. When these controls are working effectively, they provide strong support for assessment and occurrence assertions.

Table Maintenance-These are controls that ensure that the tables used in financial calculations contain accurate and timely values, such as converting item counts to prices. These tables should only be updated by authorized user department personnel. Once updated, you will need to create and review an audit trail. The table should be independent of computer programs and programmers. When these controls are working effectively, they provide strong support for assessment assertions.

User Access-This control ensures that only authorized persons can record, modify, or delete data, and that the digital signature used to approve the transaction is valid. Testing this control involves ensuring that the security software is functioning properly and that the security rules reflect the intent of the administrator and provide proper segregation of duties. Testing this control is usually a collaborative effort between the financial auditor and the EDP auditor. When this control is working effectively, it provides strong support for presence and occurrence assertions.

Data Backup-This control ensures that your system can be restored in the event of a disaster destroying your primary data files. To be effective, the backup data files should be stored in a safe offsite location and include all important files. The frequency of backups determines how much data you need to re-enter because you need to recapture all the data that was entered between the last backup and the disaster. If this control is not working effectively, all assertions are at risk.

The auditor needs to determine whether the design of the critical application control supports management's financial statement assertions and whether the control is working effectively. In doing this, the auditor must integrate the testing of the application control with other controls in the appropriate audit area.

Q20) What are the objectives of cost audit?

A20) The objectives of cost audit are-

1. To establish the accuracy of costing data. This is done by verifying the arithmetical accuracy of cost accounting entries in the books of accounts.
2. To ensure that cost accounting principles are governed by the management objectives and these are strictly adhered to in preparing cost accounts.
3. To ensure that cost accounts are correct and also to detect errors, frauds, and wrong practice in the existing system.
4. To check up the general working of the cost department of the organization and to make suggestions for improvement.
5. To help the management in taking correct decisions on certain important matters
6. To determine the actual cost of production when the goods are ready.
7. To reduce the amount of detailed checking by the external auditor, its effective internal cost audit system is in operation.
8. To find out whether each item of expenditure involved in the relevant components of the goods manufactured or produced has been properly incurred or not.