Unit 3- Special Areas of Audit

Q. What do you mean by Cost Audit? Discuss its

specialfeatures.
Ans.

Cost Audit means the audit of cost records. It

involves verification of the correctness of cost accounts and of
the adherence to the cost accounting plan. In thewords of
Smith and Day, cost audit is "the detailed checking
of the costing system, techniques and accounts to
verifytheir correctness and to ensure adherence to the
objectives of cost accounting"
OBJECTIVES
1. General Objectives: These are as follows:
To ascertain whether cost accounts have been properly maintained and corn piled
according to the
company's cost accounting system.
To ensure that the prescribed cost accounting procedures are duly adhered to.
To detect errors and fraud.
To determine inventory valuation.
To facilitate fixation of prices of goods/services.
To reconcile cost accounts and financial accounts.
To ensure optimum utilization of the company's resources.
To detect abnormal loss of materials.
To inculcate cost consciousness.
To advise management on areas wherein performance requires improvement.
SocialObjectives: These include:
To improve productivity of resources.
To provide cost date as regard contracts containing escalation clauses.
To facilitate settlement of bills in the case of cost-plus contracts of the Government.
To pinpoint areas of inefficiency and mismanagement for the benefit of shareholders, consumers, etc.
Q What are constitutional provisions regarding Tax Audit? Discuss objectives of the Tax Audit and
appointment of Tax Auditor.

Ans.

Income Tax Act, 1961, specifically provides that allcompanies: may be trading or non-trading public charitable
trust are liable to Audit their accounts. The provision of Act under Section 12(A), 35(D),35(E), 44(AB) 80(HHB),
80(i)and 142(2A) determines correct taxable and the same be audited by competent auditor.

TAX AUDIT IS CONDUCTED BY

accountants who is
According to Section 44 AB of Income Tax Act, the accounts can be audited by competent
company Act, 2013, section 141
according to Chartered be Accountant Act, 1944 under Section 288(2) and
should be a practicing
defines the person who can audit tax. For the tax audit it is not necessary that he
accountant. Such accountant should be
Chartered Accountant. Thus, non-practicing person is a competent
audit of Cooperative societies, it is not
aware of related laws/rules, forms and documents. For example: for the
necessary that the auditor should be Chartered Accountant.
LIMIT OFTAX AUDIT ASSIGNMENTS
companies, but the provisions of company
A chartered Accountant firm shall not accept Audit of more than 45 Act section: 44AD,
decision of ICAI council: Income Tax
Act, 2013, Section 139 be taken care. According to the
sections are excluded from the above limit.
44AE and 44AF persons doing businessas per the above
OBJECTIVES OF TAX AUDIT
 Unit 3- Special Areas of Audit
Management audit generally covers the following aspects:
Whether the basic aims and objectives of the entity are being fulfilled in practice;
Whether the entity is being successtul in adapting itself to technological changes;
Whether the management structure is suitable to meet its short-term, medium-term and long-term
objectives;
Whether efficiency and economy are practical at all levels;
Whether policies about staff recruitment and training are adequate, and whether staff morale is high
enough,
Whether there is aproper communication system, both upwards and downwards,throughout the
entity, including a proper management information system,
Whether return on the capital employed is adequate;and compares wellwith other com panies in
same industry;
Whether the entity's market share is stable or increasing, and how it compares with its main
competitors; and
Whether its relationships with the outside world are effective, and whether its corporate image is
satisfactory in the eyes of the stakeholders.
Q. Define EDP Environment or Auditing in Computer Information System (CIS). Write its features and
advantages.
Ans.
organisations has been revolutionized due to
The functioning of both business organisations and non-business
auditors need to acquire adequate knowledge of
the increasing use of information technology, in this age, the
Processing (EDP)to perform their jobs efficiently.
the computer-based accounting system and Electronic Data
MEANING AND NATURE
more
System (CIS) exists when any organization uses one or
EDP or Auditing in computer Information statements. The overall objective and scope of audit
computer(s)of any type or size for preparation of financial of computers on
However, the auditor needs to assess the effect
does not change in the EDP environment.
transmissicn of financial information.
processing, storage, retrieval and
environment are as follows:
The basic features of EDP
Personal
hardware, operating systems and application software.
EDP Infrastructure: This consists of processing and
1
remote linked PCs, distributed data
computer (PC), Local Area Network (LAN),
constitute the hardware.
Electronic Data Interchange (EDI) LINUX,
may be Windows, Microsoft (MS) Office, Disc. Operating System (DOS),
Operating Systems processor and its magnetic
communication data between the computer
etc. These oversee the Software isa set of all
management of filesand programs on the discs. Application
discs and the specially developed accounting
software) including
(such as TALLY which is a system to
computer programs programs which enable a computer
packages and user
operating system, compilers,
operate. transaction trail consisting of a
Transaction Trail: In manualaCcounting there is such trail in
2 Lack of Documents and ledger, etc. But there exists no
books of account, posting in documents and transaction trail
voucher, entry in the original computer. Lack of physical
directly fed into the availability of data (a)
EDP. The data are Therefore, the auditor has to consider the
error. the
increases the risk of hidden
data files, and (c) generated for outputs. In some cases,
retained in
entered in the computer (b) data for examination.
to request the client to retain any fewpersons
auditor may have
Processing in Few Hands: In EDP environment only a systems. The
3. Concentration of Information may use their exclusive control over EDP
Sometimes they
process the entire information.
increases.
possibility of fraud, therefore,
 Unit 3- Special Areas of Audit
4
Possibility of Errors: EDP reduces therisk of human errors such as
totalling errors, etc. But any error in programming mnay lead to calculation mistakes, post
These errors may remain hidden for long in the incorrect processing or au uasd
absence of continuous check which extstS e
manual system. Possibility of errors increases when
changes in the stored data. persons not authorised to access adla o
5.
Greater Supervision: EDP enables management to review and sunenise business
neip or Several analytical tools, more effective internal control system can be
operations. With the
can also use computerised auditing tools for developed. The auditor
examination.
ADVANTAGES OF EDP SYSTEMS IN AUDITING
EDP systems facilitate auditing in the
following ways:
I. More Reliable: A computer works as programmed. It is more reliable and consistent than the manual
System. The auditor has to see that the internal control programme is effective. Only unusual
transactions have to be checked.
2. In-Built Control Procedures: An EDP system with built in control procedures will itself
indicate overdue
payments, inventory levels falling below the prescribed levels, and other unusual transactions.
Password prescribed controls in EDP system protects the data against unauthorised person.
3.
Automatic Updating: Feeding of a single transaction in the computer willupdate the relevant records
in allfiles. For example, purchase of raw materials from asupplier will update the accounts of the
supplier, purchases and inventory. EDP system automatically performs certain tasks. For example,
monthly accounts of credit customers can be generated without human intervention.

11.12.5 Computer Assisted Audit Techniques

(CAATS)
Computer Assisted Audit Techniques (CAATs) are computer
auditor uses as part of theaudit procedures to process programs and data that the
an entity's information systems. The data of audit significance, contained in
when an audit is conducted in a
overall objectives and scope of an audit do not change
Computer Information Systems (CIS) environment. The
application of auditing procedures however, the auditor is toconsider
Computer Assisted Techniques (CAATs) that use the computer as an audit techniques known as
the effectiveness and efficiency of audit tool tor enhancing
procedures.
B. Advantages of CAATS
(i) CAATs allowthe auditor to give access to datawithout dependence on the
client, test the
reliability of audit software and perform audit tests more efficiently.
(ii) CAATsmay be used in performing audit procedures such as
(a) Test of details of transactions and balances, for examples, the use of
audit software for recal.
culating interest or the extraction of invoices over a certain value from
computer records.
(b) Analytical procedures, for example, identify inconsistencies or
(c) Sampling programs to extract data for audit testing.
significant fiuctuations.
(d) Re-performing calculations performed by the entity's
accounting systems.
C. Uses of CAATs
CAATS may be used in performing various auditing procedures,
(i) Tests of details of transactions and
including the following
balances, for example, the use of audit software tor
recalculating interest or the extraction of invoices over acertain value from
records. computer
(iü) Analytical procedures, for example,
(iüi) Tests of general controls, for example,identifying inconsistencies or significant functions
testing the set-up or configuration of the operat
system or access procedures to the program libraries or by using code comparis
software to check that the version of the pprogram in use is the
management. version approved bv
(iv) Sampling programs to extract data for
(v) Tests of application controls, for audit testing.
control and. testing the functioning of a programmed
example,
(vi) Re-performing calculations
performed by the entity's accounting systems.
D. Some Techniques of CAAT
(i) Test Data Approach
(a) Auditor prepares transaction data (test data, also called test pack) and processesit
on the client's processing system
under his control.
 Other Thrust Areas 11.55
b) Ifresults of
all the
processing match with the pre-determined output, this
applications and general controls are functioning indicates that
(c) Test data should test each control on which he wishes to properly.
(d) Aduantages: Reliable, easy to use rely.
and
(e) Disadvantages: Additional work for thelong-term economies.
high initialcost.
auditor, difficulty in designing test data and
(i) Integrated Test Data Approach
(a) The auditor creates fictitious entries within the
client's actual data.
(b) Hypothetical data for fictitious transactions are, thus, integrated with
data and processed. actual client
(c) Subsequently, it is removed by reversing journal entries or through programme
commands and then financial reports are compiled.
(d) Adoantages: Provides assurance that the program being tested by the auditor, have
actually been used by the client, long-term economies and can be precisely targeted
for specific procedures within the program.
(e) Disadvantages: Difficult to ensure that fictitious transactions do not impact actual
results, errors may be detected but not well laid frauds difficult to detect and high
initial cost.
(iii) Generalised Audit Software (GAS)
software profes
(a) Audit programms are designed by computer manufacturers,
sionals and largefirm of auditors.
GAS include:
(b) The functions that can be performed with
auditor's criteria
Examination and revieww of records based on
Selecting and printing audit samples
comparisons
Testing calculations and making
Comparing data on separate files
analysis
Summarising data and performing records
client's
Comparing audit datawith and substantive procedures.
auditor to carry out compliance
(c) Advantages: Assist and reliability.
examines each transaction availability of client's data, auditor's ingenuity and
by the
(a) Disadvantages: limited
internal control system.
strength of client's
 Wnat do you mean by Auditing and Assurance Standards (AAS)or Standard on Auditing (SAJ?
different AAS/SA (or SAP). Discuss
Ans.

Auditing standards represent a codification of the best practices of the profession, which are already
existing.
Auditing standards help the members in proper and optimum discharge of their profession duties. Auditing
standards also promote uniformity in practice as also comparability. In India, the auditing and Assurance
Standards Board of the Institute of Chartered Accountants of India (1CAI) formulates the auditing standards
The ICAI has issued thirty-five auditing standards corresponding to the Engagement Standards issued by the
IAASB of the IFAC and three auditing standards are in the pipeline. A brief description is given below.
1. AAS-1: Basic Principals governing an Audit: This Auditing and Assurance Standard was the first
standard onauditing issued by the Institute. As the name suggests, it seeks to lie down and briefly
explain the basic principies which govern the auditor's professional responsibities and wthich shouid
be complied with whenever an audit is carried out These principles are, namely, integrity, objectivity
and independence, confidentiality, skills and competence work performed by others, documentation,
planning, audit evidence, accounting system and internal control, and finally, audit conclusions and
reporting. This Auditing and Assurance Standard becomes operative for all audits relating to
accounting periods beginning on or after April 1, 1985.
2. AAS-2: Objective and Scope of the Audít of Financial Statements: In second auditing and assurance
standard, objective and scope of audit of financial statement has been explained. All the audit of
balance sheet and profit and loss account willhave specific objectives and scope. AAS-2 becomes
operative for all audits relating to accounting periods beginning on or after April 1, 1985.
3. AAS-3: Documentation: Documentation refers to the working papers prepared or obtained by the
auditor and retained by him, in connection with the performance of the audit. AAS-3 states that the
auditor should document matters which are important in providing evidence that the audit was
carried out in accordance with the generally accepted auditing standards in India. The Standard
explains as to what constitute working papers,need for working papers. AAS-3 becomes operative for
all audits relating to accounting periods beginning on or after July 1, 1985.
5
Unit 3- Special Areas of Audit
4.
AAS-4 (Revised): The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial
Statements: AAS-4 establishes standards on the auditor's responsibility to consider fraud and error in
an audit of financial statements. Scope of AAS-4 includes fraud and error and their characteristics,
responsibility of those charged with governance, responsibility of management, responsibility of the
auditor, indication of possible misstatement, evaluation and disposition of misstatements. The
appendices to the AAS contain examples of risk factors relating to misstatements resuiting from
fraud/erro, examples of modifications in auditor's procedures, and indicators of possible fraud or
error. AAS-4 is effective for all audits relating to accounting period beginning on or after April 1, 2003.
S. AAS-S: Audit Evidence: According toAAS-5, the auditor should obtainsufficient appropriate audit
evidence through compliance and substantive procedures to enabie him to draw reasonable
concdusions there from on which to base his opinion on the financial information. It also explains the
concept of sufficient appropriate audit evidence, factors affecting it and various types of assertions.
AAS-S also points out the methods of obtaining evidence. This Auditing and Assurance Standard
becomes operative for all audits relating to accounting periods beginning on or after January 1, 1989.
6. Revised AAS-6 (Risk Assessment and Internal Control): AAS- 6 establishes Standards on the procedures
to be followed to obtain an understanding of the accounting and internal control systems and on audit
risk and its components: inherent risk, control risk and detection risk. This Auditing and Assurance
Standard becomes operative for all audits related to accounting period beginning on or after April 1,
2002.
Q. What are trends in auditing? Or What are the recent changes in the audit industry?

Ans.

Technology never fails to change the way we do things. It has transformed how we think, how we
interact, and how we do business. No one can deny 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 precision. With these developments in the industry, auditors have also utilized the
latest technological advancements to improve their service offerings. As we begin the second half of
2020, here are the audit trends that are continuously shaping the audit industry.

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 complex
tasks by automating time- consuming tasks, tighten controls with the aid of advanced software, and
eventually produce high- end results. As more tasks are performed with these innovative tools, internal
audit should be able to identify, monitor, and evaluate the risks that come with these tools.

Audit professionals need to have an understanding of how these systems are designed and how they
affect business operations, administration, and the structure of the organization as a whole.

2. Cyber and data security:

Even before the Facebook-Cambridge Analytica Scandal, the world has been moving towards better data
and cybersecurity. Businesses have been working on regulatory compliance with different countries on
varying cybersecurity requirements and data management directives. The roll-out of the European
Union's GDPR has signaled sweeping changes in the way businesses handle data and information
Auditors must keep up with these updates to ensure 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 and/or service lines.
From time to time, data are collected by companies to identify process bottlenecks and reduce
unnecessary costs. To help them in the 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. Data analytics tools are also of
tremendous help for auditors, especially when it is necessary for them to look at the bulk of data
collected and processed by their organization. Finally, like other professionals in different industries,
auditors have been able to produce smarter, faster, and better results.

4. Technology and Talent Development:

All these technological trends have led to the necessity for professionals 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
As we continue with the second stretch of 2018, we can only expect to see more technological trends
dictating the future of the audit industry. Audit firms around the world are innovating on how the
practice adjusts to the adoption of sophisticated business processes such as robotic process automation,
artificial intelligence, and blockchain technology. If anything, the recent audit trends above only show
the increasing importance of technology in audit and the necessity for firms to

5. Organizational structure accountability and transparency:

Today's environment calls for greater collaboration and strong relationship between the auditor and the
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 reevaluate its activities and
sharpen its focus on stakeholder expectations and risk-based auditing. Enterprise- wide risk management
and fraud are also gaining precedence. Moreover, the modern day, technology savvy companies require
additional focus on risk assessment, particularly because these risks have the potential to impact
organizations more rapidly. Activities relating to fraud detection and auditing IT security are also
generating more responsibility for internal audit.