AUDIT Audit is the examination and verification of records and other evidences by an individual or a body of persons so as to confirm whether

the records and other evidences present a true and fair picture of whatever they are supposed to reflect. Audits can be categorized basically into two types- Financial audit and nonfinancial audit. Financial audit is a statutory audit that helps in monitoring the financial performance of the company. Non-financial audit is non-statutory and serves two purposes. Firstly, it checks a companys compliance to standards and secondly, determines whether a product or service satisfies customers' demands in terms of features and quality Though financial and non-financial audits differ greatly, there are some similarities, too. Both the audits are conducted to measure compliance to a set of standards. Both generate performance data that can be used for benchmarking and performance analysis and both identify opportunities for performance improvement.

BENEFITS OF AUDIT
Audit yields multiple benefits. Some of these benefits are the following:

Identify Opportunities for Improvement

Audits can help managers identify job priorities by showing which changes would have the highest impact on overall performance. Audit can be used as a tool for identifying the gap between the desired and actual performance and help the management take steps for the improvement of performance.

Reality Check
Companies prepare formal plans before executing them, but in many cases these plans do not get executed as supposed because the assumptions made by the executives may not have been correct. Systematic collection of data and comparing reality with manager's assumption help companies to be more resilient when faced with change.

Identify Outdated Strategies

When there is a change in the organization's strategy, processes that support the strategy do not evolve automatically. Regular audits of management processes help managers understand when the strategy becomes outdated and needs to be changed.

Increase Managements Ability to Address Concerns

The compilation of audit information increases the managements ability to address issues arising from increasing regulation and litigation, and to clarify queries by outside stakeholders in the business. Auditing is a systematic way of clarifying and prioritizing the information.

Enhances Teamwork
Systematic collection and sharing of audit information enhances the ability of the various segments of an organization to work in coordination. The breaking of barriers between the different parts of an organization enables a company to respond more quickly and effectively to the demands of customers and other stakeholders.

Increase Commitment to Change

The audit process increases the commitment of the employees of an organization to change. Audit results may succeed in convincing the management about the need to re-order its priorities.

LIMITATIONS OF AUDIT
Audit has its limitations, too. It is not a cure for all kinds of management problems. Given here are some of the issues that cannot be solved through audit. An audit can neither help in prioritizing changes nor in allocating resources. At the most, it can provide certain clues regarding changes that are most important. Audit cannot mobilize people to take action. Though audit identifies various problems that exist in the organizational systems and processes, it cannot help the management bring about changes to solve these problems. In order to bring about such changes, there is need for commitment and support from all the people within the organization. Audit cannot generate better data than the measures used to gather those. For example, if a questionnaire used during audit for collecting data has a flaw, then the results of the audit will also be faulty. Hence, it is important to plan on proper audit tools to be used in the audit. An audit, by itself, cannot improve performance. Since an audit brings out the weaknesses in the system and identifies opportunities for improvement, it should not be conducted unless there is a strong commitment to improve or strengthen the process being studied. Audit should not be used for wrongful purposes. It should not be used for personal indictment and to justify improper actions.

Table 14.1: Financial versus Non-financial Audit

Financial Audits Relies primarily on standards set externally (by government or by professional standards groups). Procedures are formalized and consistent from company to company. Compliance with procedures adds credibility to the audit. Standards are essentially the same from audit to audit Focus is on complying with standards set by external groups Audience is often primarily external, with audit standards used as a way of building credibility Generally conducted yearly Focuses on measures that affect only financial performance.

Non Financial Audits Relies primarily on standards set internally on the basis of customer and competitor information. Procedures are fluid and should be adapted by each company. Measures should be created that suit the companys needs Standards should change as performance improves. Focus is on exceeding standards set internally or by industry competitors. Audience is generally internal, with data being used primarily to improve performance. Conducted, on average, every 18 to 24 months. Focuses on a broad range of functions that contribute to the success or failure of a particular process.

MANAGEMENT AUDIT
With the continuous growth of firms, the importance of control has increased. Decentralization in organizations is responsible for the fact that control has assumed more importance. The growth of organizations should not lead to laxity in controls. An efficient manager understands the need for an impartial analysis of the firms operations and conducts a management audit. A management audit is defined as an examination of the conditions and a diagnosis of deficiencies with recommendations for correcting them. According to John C Burton, In a management audit, the auditor will see whether management is getting information relevant to the decisions and actions which it must take. This will require a much more intensive analysis of information needs and the efficiency of the existing system in meeting them. The auditor will not have to decide whether management is making the right strategic and operative decisions but rather whether management has available to it and is using the relevant information and techniques necessary to evaluate rationally the various alternatives that exist.

Objective of a Management Audit

The main aim of conducting a management audit is to critically analyze and evaluate management performance. Apart from this, it is conducted to detect and overcome existing managerial deficiencies and resulting operational problems. Management audit helps to evaluate the methods and processes used by the management to accomplish its organizational objectives; it helps to determine the effectiveness of management in planning, organizing, directing, and controlling the organizations activities. It also helps to ascertain the appropriateness of the management's decisions for achieving the organization objectives.

Development of Management Audit

The very concept of management audit came into being due to the limitations of financial audit. Theo Haimann in his book Professional management, writes about the need for independent appraisal of management performance. He discusses the importance of management audit and how it can help in overcoming the limitations of financial audit. He was of the opinion that management audit can help in assessing the operations of an enterprise from multiple angles. According to Haimann, management audit would become compulsory like the financial audit due to three major reasons. Increasing number of professional managers Increasing separation between management and owners Wider distribution of stockholders

Benefits of Management Audits

As the approach to management auditing is proactive, it provides an early warning signal of managerial problems and related operational difficulties. It can be used as a source of information in assisting the organization to accomplish the desired objectives. It helps to objectively and impartially evaluate organizational plans, structure, and the directions that management gives in the form of strategies and management processes in planning, organizing, directing and controlling the organizational resources.

Types of Management Audit

Management audit can be categorized into six types: Complete management audit

 Compliance management audit Program management audit Functional management audit Efficiency audit Propriety Audit Complete management audit Complete management audit evaluates the firms current activities, and measures the gaps between its existing policies and objectives, and its actual activities. In case its actual practice does not conform to the firms policies corrective action is proposed. If the auditor comes across some weaknesses in the policies and objectives, he may suggest changes in them, regardless of the degree of conformation. Complete management audit is however, not designed to punish the inefficient or reprimand people who make honest mistakes. Complete management audit is conducted from a positive, and not a negative viewpoint, that is when weaknesses in operations or people are uncovered, non-vindictive suggestions are given with the hope of improving operational performance and the productivity of the personnel concerned. Compliance management audit According to compliance audit, auditors are asked to identify the gaps between the companys existing policies and objectives, and its actual practice. However, in this case, the auditors do not make any recommendations for improvements. They simply present their observations to the top management. The top management consults its personnel to decide whether, what, or how corrective action should be taken. This type of audit eliminates the fear of directives being imposed on the firm by an outside party. However, the disadvantage of this type of audit is that it fails to utilize the knowledge and experience of the auditors. It also does not avail of the possible benefits of observations made by the trained specialists from outside the organization. Program management audit Program management audit is similar to complete management audit and compliance audit; the only difference being the fact that it focusses on a specific program. Program management audit is designed to appraise performance within a specified program and it does not disturb other operations of the firm. Functional management audit Functional audit measures the difference between the actual performance of an organization and its objectives, with emphasis on a particular function. For example, manufacturing firms may regularly hold an audit of their quality control function. Such an audit will help the firm to regularly check the efficiency of internal controls over the quality of its products. Efficiency audit Efficiency audit is conducted to ensure that money is so utilized as to generate handsome returns. The objectives of efficiency audit are: To invest the capital in areas that generate optimum returns To plan and invest judiciously in various functions Propriety audit Propriety audit is conducted to examine the effect of the management's decisions and actions on the society and public. While conducting this audit, the auditor examines all transactions of the company to find out whether any of the transactions has negatively affected public interests. The audit of public sector companies conducted by the Comptroller and Auditor General of India is a type of propriety audit. The objective of this kind of audit is to identify the loopholes in administrative rules and regulations, and to suggest methods for improving the execution of future plans and projects.

Organizing the Management Audit

The management's approval is essential for establishment of a general program for management audit. If the proposal does not receive the total support of the management, it may face enormous difficulties at later stages. Devising the statement of policy The managements support should be reflected clearly and categorically in the company's highest policy statement. The statement should be specific in nature. It should clearly describe the scope and status of the management/operational auditing within the enterprise, its authority to hold audits, issue reports, make recommendations, and evaluate corrective action. The statement of policy should lay down very clearly the scope of activities to be undertaken by the management auditor. The statement must give the auditor the extent of authority he needs, but it should not assign to him any task that he cannot conceivably take care of. The statement must categorically state that the management auditor is authorized to review administrative and management controls on any activity within the company. Depending upon the size and nature of their business, organizations set up a separate audit department, the head of which reports directly to the top executive. In certain cases, the audit group may be a part of the management the administrative control department or some other unit of the organizations. However, some analysts feel that the audit function should be free from pressures of various groups in the enterprise. The greater its independence, the greater is its capability to function to work effectively. Therefore, it is necessary to place the audit department in a considerably high position in the organization. The auditing unit should report only to an officer whose status is such that he can command prompt and proper consideration of the auditor's opinion and recommendations. The management auditor's goal therefore, is to attain such a level of operational independence, which will prevent him from having to compromise with his audit objectives. Allocation of personnel Everyone placed in the audit unit should have good understanding of the theory of auditing, thorough knowledge of the fundamentals of both the organization and the management, the principles and effective methods of control, and requirements for scientific appraisal. The management auditor is expected to evaluate operational performance and non-monetary operational controls. He should possess basic knowledge of the technology and commercial practices of the enterprise, an inquisitive, analytical, pragmatic and imaginative approach and thorough understanding of the control system. The management auditor should also have basic knowledge of commerce, law, taxation, cost accounting, economics, quantitative methods and EDP systems. Those who have a sound background in accounting along with knowledge of other relevant disciplines are best suited for this job. The individuals to whom this job is assigned should have an inclination towards analysis, a high degree of imagination and an ability to write and express themselves clearly and logically. Staff training program A continuous training program is necessary to achieve quality in performing audit assignments. An effective training program enables the staff to assume additional responsibilities in the organization. Training programs act as an incentive for drawing capable people into the department and retaining them. Time and other aspects The time required to complete a management audit varies, depending upon the extent and nature of the assignment. The time and cost will vary for each assignment, depending upon the nature of the assignment, the number of auditors assigned to perform the work, and whether more specialists in a particular field are required.

Frequency The frequency of conducting audits depends on the organization. When the organization is subject to rapid change or the total resources utilized are expensive, the frequency of management auditing should be greater than when it does not undergo rapid changes or the resources employed are not high in value. In essence, management audits should be conducted often enough to provide protection against growing problems. On the other hand, they should not be so frequent as to lead to repetitious results.

Conditions for Successful Management Audit

A major aspect of a management audit, is related to the selection of the audit personnel. The auditors must be competent, have clear idea about the subject, experience, and professional ability. In addition, they must possess an ability to deal successfully with human relations issues. They must be able to objectively appraise other's actions without generating undue suspicion. Almost every employee's attitude towards an audit is defensive. This attitude must be avoided. For this to happen, auditors should establish a pre-audit condition, expressing their willingness to discuss their observation with the affected personnel before it is reported to the top management. In many cases, this will evolve into a negotiation-discussion process, whereby those concerned begin to view audit as a way in which weaknesses of the system may be pinpointed and their performance be improved. Finally, the willingness of the firms employees to accept change is essential for the success of an audit. Several people in managerial positions, particularly those who have risen through many ranks, feel that the current way of running business is good enough. They may be allowed to retain this belief only if the audit supplements it with facts. However, this is rarely the case. The good enough syndrome would eventually destroy all desires for continual improvement. Audits are meant to highlight the strengths and weaknesses of the firms operations. It is up to the management at all levels to reward employees or to take corrective action. If no action is taken in response to the auditor's findings, then his effort is wasted. Systems

INTERNAL AUDIT
Internal audit can be viewed from two different perspectives-the traditional perspective and the modern perspective. Viewed from a traditional perspective, internal audit is found to play the following roles: Check whether the existing controls are effective and adequate Check whether the financial reports and other records show the actual results of the company Check whether the sub-units of the organization are following the policies and procedures laid down by the management. The traditional concept of internal auditing has a narrow scope whereas the modern concept has wider scope. The fact that the modern internal auditing is wider is reflected in the new definition of internal auditing given by the rol Systems Institute of Internal Auditors, "An independent appraisal function established within an organization to examine and evaluate its activities as a service to the organization. The objective of internal auditing is to assist members of the organization in the effective discharge of their responsibilities. To this end, internal audit furnishes them with analyses, appraisals, recommendations, counsel and information concerning the activities reviewed." This definition implies that an internal auditor has to go beyond checking the books of account and related records. He has to appraise the various operational functions of an organization and provide recommendations about these. Thus, according to the modern concept of internal auditing, the internal auditor is involved in conducting a review of operations, and internal audit and operational audit are almost synonymous.

Need for Internal Auditing

The need for an internal audit is determined by the increasing size and complexity of organizational operations. Many organizations operate in a number of countries and therefore have a large number of employees. In order to avoid discrepancies from creeping into their systems, processes, and

operations, such organizations appoint a team of specialists called internal auditors to monitor, track and report such discrepancies, inefficiencies of personnel in the concerned departments.

FINANCIAL AND COST AUDIT

Financial audit is defined as an exploratory critical review by an independent public accountant of the underlying controls and accounting records of a business enterprise that leads to an opinion of the propriety of the financial statements of the enterprise. It is conducted to examine the correctness of financial statements, and to establish whether they present a true and fair picture of the company's financial position on a particular date. Financial audit is a statutory audit and should be definitely conducted by an independent statutory auditor at the end of every financial year. The statutory auditor has to certify that financial statements have been prepared without violating the accounting rules and principles of accounting. Cost audit is also a statutory audit conducted to report the cost of production of a particular product to the government. A cost and works accountant performs a cost audit of routine operations. A cost audit report follows a prescribed format, and does not offer the much needed flexibility to the professionals to use it as control mechanism.