Auditing and Financial Reporting

AUDITING
To ascertain the validity and reliability of information. To provide an assessment of a system's internal control. To express an opinion on the person / organization / system (etc.) in question, under evaluation based on work done on a test basis. Audits should always be an independent evaluation that will include some degree of quantitative and qualitative analysis.

whereas, an assessment infers a less independent and more consultative approach.

safety, Financial Systems & Financial Records security, information systems performance, & environmental concerns

AUDITING

Financial Reporting
supported by good governance, high quality standards and sound regulatory framework is the key. providing essential financial information about the company to its shareholders and other stakeholders. Needs to be reliable, free from bias and should enable comparison on the basis of common benchmarks.

Uniform across borders so that there is comparability on the basis of common benchmarks.

Audit and Types of Auditor

The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. Audits are performed to ascertain the validity and reliability of information; also to provide an assessment of a system's internal control. As a general rule, audits should always be an independent evaluation that will include some degree of quantitative and qualitative analysis

Types of Auditor
1. External auditor / Statutory auditor: External auditors, though engaged and paid by the company being audited, are regarded as independent auditors. 2. Internal auditors: Employed by the organization they audit. The most used Internal Audit standards are those of the Institute of Internal Auditors

Types of Auditor
Consultant auditors: External personnel contracted by the firm to perform an audit following the firm's auditing standards. The level of independence is therefore somewhere between the internal auditor and the external auditor.

Advantages
1. Judges the correctness of financial statements.
2. Detect Errors and Mistakes. 3. Prevent Errors and Frauds.

Judges the correctness of the financial statements

Independent opinion on accounts. Reliability on financial statements and supporting documents. Defalcations. Assessment of the degree of adequacy and efficiency of the internal control. Evaluation of the accounting system.

Detect and Prevent errors and mistakes

1. Clerical errors
a. b. c. d. e. Error of Omission. Error of Commission. Error of Duplication. Compensatory Errors. Trail Balance Errors

2. Error of Principle
a. b. c. d. e. Incorrect Allocation Omission of outstanding assets and liabilities. Inadequate valuation of assets. Wrong provision for bad and doubtful debts. Overvaluation or undervaluation of closing stock.

Prevent errors and frauds

Misappropriation and defalcation.
Misappropriation of Cash Misappropriation of Goods

Misrepresentation of accounts.
Fraudulent Manipulation or falsification of accounts.

Limitations of Auditing
Collusion may conceal frauds and errors Cunningly and purposely prepared documents may not be uncovered Sample audit Has to depend on some other professionals opinion Inadequate information Incorrect information Rely on certificates of management

Audit commitee
operation and disclosure of the work of an Audit Committee are: (a)The Board should establish an Audit Committee. (b)There should be written terms of reference dealing clearly with the Audit Committee's authority and duties. (c)The Committee should be appointed from amongst the non-executive directors of the Board only and consist of a minimum of three members a majority of whom, including the chairman, should be independent.

Contd..
(d)Audit Committee meetings should be adequately planned and prepared for, held at appropriate times and attended by relevant persons. (e)The principal duties of the Audit Committee should include the monitoring of the companys financial reporting process, internal controls and risk management.

Duties
The duties of the Committee shall be: (a)to consider the appointment of the external auditor, the audit fee, and any questions of resignation or dismissal; (b)to discuss with the external auditor before the audit commences, the nature and scope of the audit, and ensure co-ordination where more than one audit firm is involved

Contd..
c)to review the interim and annual financial statements before submission to the Board, focusing particularly on: (i)any changes in accounting policies and practices; (ii)major judgmental areas; (iii)significant adjustments resulting from the audit; (iv)the going concern assumption; (v)compliance with accounting standards; and (vi)compliance with stock exchange and legal requirements.

Contd..
(d)to review the external auditors management letter and managements response; (e)to review the companys statement on internal control systems (where one is included in the annual report) prior to endorsement by the Board

Contd..
f)(where an internal audit function exists) to review the internal audit programme, ensure co-ordination between the internal and external auditors, and ensure that the internal audit function is adequately resourced and has appropriate standing within the company;

Contd..
(g)to consider the major findings of internal investigations and management's response; and (h)to consider other topics, as defined by the Board.

TEN WAYS TO ENHANCE THE EFFECTIVENESS OF THE AUDIT COMMITTEE

1. Have a position description for, and assess the performance of, the audit committee chairs 2. Audit committee members must understand the rationale for managements choices and the implications for financial manipulation 3. Ensure that audit committee independence is real as well as perceived

Contd..
4. Recruit, orient, educate and retire your audit committee members carefully 5. Have agenda mapping and effective committee documentation and reporting from the audit committee to the board 6. Have proper reporting relationships between management and the audit committee

Contd..
7. Have effective risk management oversight by the audit committee 8. Have a strong internal audit function reporting directly to the audit committee 9. Make effective use of in camera or executive sessions with the audit committee 10. Regularly assess the effectiveness and contribution of the audit committee

The five concepts for good financial management

1. The scope of the information provided clearly matches the requirements of the Board. 2. Financial information presented to the Board meets the level required to effectively run the organization 3. Financial information is of sufficient quality to be trusted by the Board.

Contd..
4. The presentation of financial management information is easily understood by the Board. 5. The financial information presented engages the members of the Board

Role of Financial Reporting & Disclosures in Corporate Governance

Background Accounting and disclosure requirements mechanism for companies in India Convergence of Indian accounting standards with IFRS Roadmap for convergence of Indian accounting standards with IFRS

Accounting Standards and responsible corporate governance

Conclusion

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