Auditing the Auditors: How much Responsibility is Too Much Responsibility

Auditing typically refers to financial statement audits or an objective examination and evaluation of a company’s financial statements – usually performed by an external third party. Audits can be performed by internal parties and a government entity, such as the Internal Revenue Service (IRS). Importance of Auditing Audit is an important term used in accounting that describes the examination and verification of a company’s financial records. It is to ensure that financial information is represented fairly and accurately. Also, audits are performed to ensure that financial statements are prepared in accordance with the relevant accounting standards.

The three primary financial statements are: Income statement Balance sheet Cash flow statement Financial statements are prepared internally by management utilizing relevant accounting standards, such as International Financial Reporting Standards (IFRS) or Generally Accepted Accounting Principles (GAAP). They are developed to provide useful information to the following users: Shareholders Creditors Government entities Customers Suppliers Partners Financial statements capture the operating, investing, and financing activities of a company through various recorded transactions.

Because the financial statements are developed internally, there is a high risk of fraudulent behaviour by the preparers of the statements. Without proper regulations and standards, preparers can easily misrepresent their financial positioning to make the company appear more profitable or successful than they actually are. Auditing is crucial to ensure that companies represent their financial positioning fairly and accurately and in accordance with accounting standards. Types of Audit The different types of audit can be classified on the basis of Ownership, Time, and Objectives. Let’s look at these types of audit categories in detail in the following section: On the basis of Ownership Audit of Proprietorship The owner himself takes the decision to get the statements and accounts audited.

It is upon the sole trader to decide about the scope of audit and the appointment of auditor. Audit of Partnership The Partnership Deed on mutual agreement between the partners shall provide for audit of financial statements. Subsequently, an auditor is appointed by the mutual consent of all the partners. Audit of Companies The audit of the accounts of the companies in India is compulsory as per the provisions of the Companies Act. For that, a professionally qualified chartered accountant is required to audit the accounts of the companies.

Audit of Trusts As the income of the trust is distributed among the beneficiaries, there are more chances of frauds and misappropriation of incomes. Hence, audit of trusts has been made compulsory as per the provisions of the trust deed as well as the Public trust Act. Audit of Accounts of Cooperative Societies As per the Cooperative Societies Act 1912, the audit of accounts of cooperative societies is mandatory as well.

The auditor of the cooperative society should be an expert of the particular act under which the cooperative society is functioning. Government Audit A separate department is maintained by the government of India for auditing government offices and departments. It is known as the Accounts and Audit Department, which is headed by the Comptroller and Auditor General of India. On the basis of Time Interim Audit When an audit is connected between two annual audits, such an audit is unknown as an interim audit. It may involve complete checking of accounts for a part of the year. Continuous Audit The continuous audit is conducted throughout the year or at regular short intervals of time. Final Audit It takes place when the audit work is conducted after the closing of the financial year.

A final audit is generally considered to be an audit that is not commenced until after the end of the financial period and is then carried on until completed. Balance Sheet Audit The balance sheet audit means to verify various items of the balance sheet such as assets, liabilities, reserves and surplus, provisions, and profit and loss balance.

On the basis of Objectives Internal Audit It implies the audit of accounts by the internal staff of the business. Internal audit is an appraisal activity within an organization for reviewing the accounts, finances, and other operations for protective and constructive service to the management. Cost Audit It is the verification of the accuracy of the cost accounts and adherence to the cost accounting plans. Cost accounting involves detailed scrutiny of the costing system, techniques, and accounts to verify the accuracy of the accounts. Secretarial Audit It is concerned with the verification compliance by the company of various provisions of the Companies Act and other relevant laws.

Secretarial audit report includes: Whether the books are maintained as per the Companies Act Whether necessary approvals are required from the central government, company law board, and other relevant authorities Tax Audit  This kind of audit has become very important to ascertain the accuracy of tax documents.

Tax audit mostly covers income returns, invoices, debit and credit notes, and various current and fixed assets. Independent Audit It is conducted by an independent qualified auditor. The objective of independent audit is to see whether financial statements give a true and fair view of financial position and profits. Subsidiary objectives Detection and prevention of fraud: It is one of the foremost subsidiary objectives of auditing. As, fraud refers to the intentional misrepresentation of financial information.

Fraud can involve: Manipulation, falsification, or alteration of financial record Misappropriation of assets Misapplication of    accounting policies Recording transactions without proofs Suppression of effect of transactions from records Detection and prevention of errors:

It is another important objective of auditing. The act of auditing ensures that there is no misrepresentation of the financial statements. Such errors can be ascertained by checking and vouching thoroughly the books of accounts, vouchers, ledger accounts, etc. Current Aspects of Auditors Statutory auditors, who certify the financial soundness of a firm, typically exercise a great deal of discretion in the course of their work, including badgering corporate management with awkward inquiries.

However, it appears that they are taking off their gloves in an effort to evade regulatory penalties similar to those that the former auditors of the collapsed infrastructure lender IL&FS faced. Adani Ports and SEZ notified the stock exchanges at about the same time that Deloitte, its statutory auditor since 2017 who was reappointed in 2022, had quit. According to reports, Deloitte expressed concerns about several of the transactions that were highlighted in the Hindenburg Research study on the group and about the company’s lack of a broader audit mandate for other listed group firms. The Adani Group company stated that the audit committee of its board of directors believed that Deloitte’s resignation reasons were “not convincing or sufficient to warrant such a move.”

The conflict between the auditees and the auditors did not end with the initial declarations; in the first and third situations, it continued for a few days. Read more: Deloitte Resigns from Adani Ports as Statutory Auditors over Concerns Flagged by Hindenburg Auditors are now even more cautious as a result of a Supreme Court ruling in May of this year that permitted the Serious Fraud Investigation Office to reopen criminal proceedings against BSR & Associates LLP and Deloitte Haskins & Sells LLP, the former auditors of IL&FS Financial Services, for their roles in financial irregularities. Since the National Financial Reporting Authority (NFRA) was established in 2018, there has been a greater emphasis on auditor regulation. Its latest circulars and instructions further demonstrate that it is closely monitoring auditors. For example, in October of this year, it issued eighteen different orders against DHFL branch auditors, imposing a total financial penalty of Rs 18 lakh as well as a six- to one-year debarment “for professional misconduct.”

Read more: NFRA Takes Firm Action: 18 Auditors of DHFL Debarred and Penalized for Audit Lapses  Also : NFRA imposes 1 Crore Penalty on Auditors of Cafe Coffee Day Subsidiary on Failure to Detects Fraudulent Diversion of Funds of Rs. 2,448.23 crores  Conclusion The goal of an audit is to form and express an opinion on financial statements.

The audit is performed to get reasonable assurance on whether the financial statements are free of material misstatement. An audit also includes assessing the accounting principles used and the significant estimates made by the management.

Audit conclusions and reporting are one of the principles governing an audit. Reporting is the last procedure of the process of an audit.

The auditor discusses his observations with those charged with governance, such as the audit committee of the company, before finalising the report.

The auditor should be firm in his opinion, and exercise his independence at this level. This part of the audit is critical, and calls for resilience on the part of the auditor. An audit report, being a public document, should be drafted skilfully. The code of conduct prohibits an auditor from divulging any information received by him in the course of his professional assignment, unless legally required so to do.

Therefore, the auditor shouldn’t hesitate to take the help of a legal expert on whether to include certain comments in his report.

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