AUDIT IN DETAIL

NATURE OF AUDIT TEST

Decision about the nature of audit test are related to the auditors choices about the type of evidence that they collect to support an opinion. There are three common type of audit procedures :

- Risks assesment procedures that are designed to help the auditor assess the risk of material maisstatement in an assertion, wether performed early in the audit engagement or in the response to new information. Recall that the auditor uses risk assessment procedures to obtain evidence about inherent risks and the risk of fraud.

- Test of Control that are designed to provide evidence about the operating effectiveness of various aspect of internal control. Tests of control provide evidence to support control risk assessment below the maximum.

- Substantive test that are designed to provide evidence about to fair presentation of management's assertions in the financial statements. Substantive test include :

1. Initial procedures that involve understanding the economic substance of the account balance or transaction being audited and agreeing on detailed information about an account to general ledger (such as comparing an accounts receivable subsdiary ledger to the general ledger)

2. Substantive analytic procedures that involve the use of comparisons to assess the fairness of an assertion. For example, the auditor might evaluate sales per square foot or retail space in testing the reasonableness of revenues.

3. Test of detail transactions that involve examining documentary support for transactions. For example, an auditor might inspect sales orders and a bill of landing behind a recorded sales invoice.

4. Test of details of balance that involved examining support for a general ledger balance. For example, the auditor might send confirmations to customers to obtain an evidence that they owe receivables.

5.  Test of detail accounting estimates that involve obtaining evidence in support of the client's estimations process and ensuring that the estimation process is applied consistently from period to period.

6. Test of details of disclosures that involve examining support for financial statement disclosures. For example, the auditor might read a loan contract to ascertain the maturity schedule and debt covenants for the loan

Substantive test provide the evidence that allows the auditor to achieve the desired detection risk and ensure that overall audit risk and ensure that overall audit risk is reduced to an appropriately low level.

Recall the risk assessment, for example. For assertion 1, the existence of inventory, the nature of auditor's evidence would include significant test of controls (testing of effectiveness of the client's perpetual inventory system) as well as some limited substantive test (direct observation of inventory). For assertion 2, the valuation of inventory, auditor would perform few test of controls because controls are not expected to be effective. However, the auditor would plan to obtain significant evidence by testing the pricing of inventory to underlying vendor's invoices (substantive test of balances). In addition, the auditor would obtain evidence about sales price after years-end to support a conclusion about the lower of cost of market objective (substantive test of an accounting estimate).

OVERVIEW OF THE AUDIT PROCESS

The overall objective of a financial statement audit is the expressions of an opinion on whether the client’s financial statement are presented fairly, in all material respect, in conformity with GAAP. The diagnostic process of making judgments about the accounts likely to contain material misstatement and obtaining reasonable assurance about fair presentation in the financial statements involves six distinct phrases.

1. Perform risk assessment procedures.

2. Assess the risk of material misstatement.

3. Respond to assessed risks.

4. Perform further audit procedures.

                                                     5. Evaluate audit evidence.

                                                                6. Communicate audit findings.

TYPES OF AUDIT

Financial Statement Audit

A financial statement audit involves obtaining and evaluating evidence about an entity’s presentation of its financial position, result of operation, and cash flows for the purpose of expressing an opinion on whether they are presented fairly in conformity with established criteria-usually generally accepted accounting principles (GAAP).

Compliance Audit

A compliance audit involves obtaining and evaluating evidence to determine whether certain financial or operating activities of an entity conform to specified conditions, rules, or regulations

Operational Audit

An operational audit involves obtaining and evaluating evidence about the efficiency and effectiveness of an entity’s operating activities in relation to specified objectives.


TYPES OF AUDITORS

1. Independent Auditors

Independent auditors are usually CPA’s who are either individual practitioners or members of public accounting firms who render professional auditing services to clients. In general, licensing involves passing the uniform CPA examination and obtaining practical experience in auditing.

2. Internal Auditors

Internal auditors are employees of the organization they audit. This type of auditors is involved in an independent evaluation of evidence, called internal auditing, within an organization as a service to the organization. The objectives of internal auditing is to assist the management of organization in the effective discharge of its responsibilities.

3. Government Auditors

Government auditors are employed by various local local, state, and federal governmental agencies. At the federal level, the three primary agencies are are the General Accounting Offices (GAO), the Internal Revenue Services (IRS), and the Defense Contract Audit Agency )(DCAA).



LIMITATIONS OF AN AUDIT

A financial statement audit is subject to a number of inherent limitations. One constraint is that the auditor works within fairly restrictive economic limits. Following are two important economic limitations.

Reasonable cost. A limitations on the cost of an audit results in selective testing or sampling, of the accounting records and supporting data. In addition, the auditor may choose to test internal controls and may obtain assurance from a well functioning system of internal controls.

Reasonable lenght of time. the auditor's report on many public companies is usually issued three or five weeks after the balance sheet date. This time constraint may affect the amount of evidence that can be obtained concerning events and transactions after the balance sheet date that may have an effect on the financial statements. Moreover, there is a relatively short time period available for resolving uncertaintes existing at the statement date.

Another significant limitations is the established accounting framework for preparing financial statements. Following are two important limitations associated with the established accounting framework.

Alternative accounting Principles. Alternative accounting principles are permitted under GAAP. Financial statement users must be knowledgeable about a company's accounting choices and their effect on financial statements.

Accounting Estimates. Estimates are an inherent part of the accounting process, and no one, including auditors, can foresee the outcome of uncertainties. Estimate range from the allowance for doubtfull accounts and an inventory obsolescence reserve to impairment tests of fixed assets and goodwill. An audit can not add exactness and certainly to financial statements when these factors do not exist.

AUDIT PROCEDURES

AUDIT PROCEDURES ARE THE METHODS OR TECHNIQUE THE AUDITOR USES TO GATHER AND EVALUATE AUDIT EVIDENCE. THE AUDITORS PERFORMS AUDIT PROCEDURES TO ACCOMPLISH THE FOLLOWING OBJECTIVES :

1. To obtain an understanding of the entity and its environment, including its internal control, to asses the risk of material misstatement at the financial statement level and at the level (risk assessment procedures).

2. To test the operating effectiveness of control in preventing or detecting material misstatement at the assertions level (test of control). Test of control are required when the auditor plans to assess control risk below the maximum and below the maximum and develop an audit strategy that assumes the operating effectiveness of internal control.

3. To support an assertions or detect material misstatement at the assertions level (substantive test). The auditor plans and performs substantive test that are responsive to assessed risk.

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COST ACCOUNTING: MEANING OBJECTIVE AND OTHER DETAILS

Meaning of Cost Accounting:

As the term itself suggests that cost accounting deals with cost. Cost is the amount of resources given up in exchange for some goods or services. The resources given up are money or money’s worth expressed in monetary terms.

The Chartered Institute of Management Accountants, London (CIMA) defines cost as “the amount of expenditure (actual or notional) incurred on, or attributable to a specified thing or activity.” When the term is used as a verb it means ‘to ascertain the cost of a specified thing or activity’.

However, the process or technique of ascertaining cost of activities, processes, products, or services is termed as costing. This technique consists of a body of principles and rules, which govern the procedure of ascertaining costs. The process of costing is the day-to-day routine of ascertaining costs, whatever the costs ascertained may be and by whatever means these costs are determined.

The official terminology of CIMA defines cost accounting as “the process of accounting for costs from the point at which the expenditure is incurred or committed to the establishment of its ultimate relationship with cost centers and cost units. In its widest usage, it embraces the preparation of statistical data, the application of cost control methods and the ascertainment of the profitability of activities carried out or planned.” It is a formal mechanism by means of which costs of products or services are ascertained and controlled. It provides information to the management for taking all sorts of managerial decisions.

Objectives of Cost Accounting:

Objectives of cost accounting are ascertainment of cost, fixation of selling price, proper recording and presentation of cost data to management for measuring efficiency and for cost control and cost reduction, ascertaining the profit of each activity, assisting management in decision making and determination of break-even point.

The aim is to know the methods by which expenditure on materials, wages and overheads is recorded, classified and allocated so that the cost of products and services may be accurately ascertained; these costs may be related to sales and profitability may be determined. Yet with the development of business and industry, its objectives are changing day by day.

Following are the main objectives of cost accounting:

1. To ascertain the cost per unit of the different products manufactured by a business concern;

2. To provide a correct analysis of cost both by process or operations and by different elements of cost;

3. To disclose sources of wastage whether of material, time or expense or in the use of machinery, equipment and tools and to prepare such reports which may be necessary to control such wastage;

4. To provide requisite data and serve as a guide for fixing prices of products manufactured or services rendered;

5. To ascertain the profitability of each of the products and advise management as to how these profits can be maximised;

6. To exercise effective control if stocks of raw materials, work-in-progress, consumable stores and finished goods in order to minimise the capital locked up in these stocks;

7. To reveal sources of economy by installing and implementing a system of cost control for materials, labour and overheads;

8. To advise management on future expansion policies and proposed capital projects;

9. To present and interpret data for management planning, evaluation of performance 

and control;

10. To help in the preparation of budgets and implementation of budgetary control;

11. To organise an effective information system so that different levels of management may get the required information at the right time in right form for carrying out their individual responsibilities in an efficient manner;

12. To guide management in the formulation and implementation of incentive bonus plans based on productivity and cost savings;

13. To supply useful data to management for taking various financial decisions such as introduction of new products, replacement of labour by machine etc.;

14. To help in supervising the working of punched card accounting or data processing through computers;

15. To organise the internal audit system to ensure effective working of different departments;

Cost Accounting - Elements of Cost

Direct or Indirect Materials

The materials directly contributed to a product and those easily identifiable in the finished product are called direct materials. For example, paper in books, wood in furniture, plastic in water tank, and leather in shoes are direct materials. They are also known as high-value items. Other lower cost items or supporting material used in the production of any finished product are called indirect material. For example, nails in shoes or furniture.

Direct Labor

Any wages paid to workers or a group of workers which may directly co-relate to any specific activity of production, supervision, maintenance, transportation of material, or product, and directly associate in conversion of raw material into finished goods are called direct labor. Wages paid to trainee or apprentices does not comes under category of direct labor as they have no significant value.

Overheads

Indirect expenses are called overheads, which include material and labor. Overheads are classified as:

• Production or manufacturing overheads
• Administrative expenses
• Selling Expenses
• Distribution expenses
• Research and development expenses

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ACCOUNTING CONCEPTS, AUDIT & TAX PLANNING

ACCOUNTING CONCEPTS

Accounting is very old concepts - as old as money. A description of proper keeping Accounts is also found in "Arthashastra" written by Kautilya. However, it has developed with the passage of time to meet the requirement and challenges of ever growing city. The modern day Accounting Concepts based of double entry system was originated by Luco Pacioli  in Italy.

Though the Accounting Concepts is very old, in recent times it has acquired special significance because of rapidly growing economy, cu-throat competition, expanding market and increasing production and changes in technology.

Accounting concepts tells us to recording, classifying and summarising. 

Branches of accounting:- The main function of accounting is its Cost Accounting.

→Cost Accounting:- Cost accounting is a type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step of production as well as fixed costs such as depreciation of capital equipment. Cost accounting will first measure and record these costs individually, then compare input results to output or actual results to aid company management in measuring Financial Performance.

AUDIT

An audit is a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organisation to ascertain how far the financial statements as well as non-financial disclosures present a true and fair view of the concern. It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditing has become such a ubiquitous phenomenon in the corporate and the public sector that academics started identifying an "Audit Society". The auditor perceives and recognises the propositions before them for examination, obtains evidence, evaluates the same and formulates an opinion on the basis of his judgement which is communicated through their audit report.

Any subject matter may be audited. Audits provide third party assurance to various stakeholders that the subject matter is free from material misstatement. The term is most frequently applied to audits of the financial information relating to a legal person. Other areas which are commonly audited include: secretarial & compliance audit, internal controls, quality management, project management, water management, and energy conservation.

INCOME TAX

An income tax is a tax imposed on individuals or entities (taxpayers) that varies with the income or profits (taxable income) of the taxpayer. Details vary widely by jurisdiction. Many jurisdictions refer to income tax on business entities as companies tax or corporate tax. Partnerships generally are not taxed; rather, the partners are taxed on their share of partnership items. Tax may be imposed by both a country and subdivisions. Most jurisdictions exempt locally organized charitable organizations from tax.

Income tax generally is computed as the product of a tax rate times taxable income. The tax rate may increase as taxable income increases (referred to as graduated rates). Taxation rates may vary by type or characteristics of the taxpayer. Capital gains may be taxed at different rates than other income. Credits of various sorts may be allowed that reduce tax. Some jurisdictions impose the higher of an income tax or a tax on an alternative base or measure of income.

Steps to file ITR 1 Online:

Prepare and Submit ITR1/ITR 4S Online

You have the option to submit ITR 1/ITR 4S forms by uploading XML or by online submission

• Login to e- Filing application
• Go to 'e File' 'Prepare and Submit ITR Online'
• Select the Income Tax Return Form ITR 1/ITR 4S and the assessment year.
• Fill in the details and then click the submit button
• After submission, acknowledgement detail is displayed.
• Click on the link to view or generate a printout of acknowledgement/ITR V form

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THE GOLDEN RULES OF ACCOUNTING

1. Debit the Receiver, Credit the Giver.
    

   Ex. When a person gives something to other any person or organisations, it becomes an  inflow and therefore the person must be Credited to the organisation's or person's account.

2. Debit what comes in. Credit what goes out.

   Ex. Its only refers to Real Account. Its included Land, Machinery, Building and all Tangible Assets. If we purchase Land or add in to our books so Land will be Debited in our Books of Accounts or if we sale it to others so it will be Credited.

3. Debit all the Expenses and losses, Credit all the Income and Gains.

   Ex. Its only refers to Nominal Account. If we have profit from our businesses and other sources so this profit will be show in Credit site of Profit and loss account. And if we have losses and expenses from our businesses so it will be show in Debit site of profit and loss account.


                                      The Graphically shows the Golden Rules with their linked Accounts.

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TAX PLANNING AND MANAGEMENT

TAX

• A charge or a sum of money levied on personor property for the benefit of state.
• It is a payment to Government.
• It is a kind or charge imposed by the stateupon the citizens.
• Profit = Revenue – Expenses.

Types of Taxes:

Taxes are of two distinct types, direct and indirect taxes. The difference comes in the way these taxes are implemented. Some are paid directly by you, such as the dreaded income tax, wealth tax, corporate tax etc. while others are indirect taxes, such as the value added tax, service tax, sales tax, etc.

1. Direct Taxes

2. Indirect Taxes

But, besides these two conventional taxes, there are also other taxes that have been brought into effect by the Central Government to serve a particular agenda. ‘Other taxes’ are levied on both direct and indirect taxes such as the recently introduced Swachh Bharat Cess tax, Krishi Kalyan Cess tax, and infrastructure Cess tax among others.

1) Direct Tax:

Direct tax, as stated earlier, are taxes that are paid directly by you. These taxes are levied directly on an entity or an individual and cannot be transferred onto anyone else. One of the bodies that overlooks these direct taxes is the Central Board of Direct Taxes (CBDT) which is a part of the Department of Revenue. It has, to help it with its duties, the support of various acts that govern various aspects of direct taxes.

Some of these acts are:

• Income Tax Act:

This is also known as the IT Act of 1961 and sets the rules that govern income tax in India. The income, which this act taxes, can come from any source like a business, owning a house or property, gains received from investments and salaries, etc. This is the act that defines how much the tax benefit on a fixed deposit or a life insurance premium will be. It is also the act that decides how much of your income can you save through investments and what the slab for the income tax will be.

• Wealth Tax Act:

The Wealth Tax Act was enacted in 1951 and is responsible for the taxation related to the net wealth of an individual, a company or a Hindu Unified Family. The simplest calculation of wealth tax was that if the net wealth exceeded Rs. 30 lakhs, then 1% of the amount that exceeded Rs. 30 lakhs was payable as tax. It was abolished in the budget announced in 2015. It has since been replaced with a surcharge of 12% on individuals that earn more than Rs. 1 crore per annum. It is also applicable to companies that have a revenue of over Rs. 10 crores per annum. The new guidelines drastically increased the amount the government would collect in taxes as opposed the amount they would collect through the wealth tax.

• Gift Tax Act:

The Gift Tax Act came into existence in 1958 and stated that if an individual received gifts, monetary or valuables, as gifts, a tax was to be to be paid on such gifts. The tax on such gifts was maintained at 30% but it was abolished in 1998. Initially if a gift was given, and it was something like property, jewellery, shares etc. it was taxable. According to the new rules gifts given by family members like brothers, sister, parents, spouse, aunts and uncles are not taxable. Even gifts given to you by the local authorities is exempt from this tax. How the tax works now is that if someone, other than the exempt entities, gifts you anything that exceeds a value of Rs. 50,000 then the entire gift amount is taxable.

• Expenditure Tax Act:

This is an act that came into existence in 1987 and deals with the expenses you, as an individual, may incur while availing the services of a hotel or a restaurant. It is applicable to all of India except Jammu and Kashmir. It states that certain expenses are chargeable under this act if they exceed Rs. 3,000 in the case of a hotel and all expenses incurred in a restaurant.

• Interest Tax Act:

The Interest Tax Act of 1974 deals with the tax that was payable on interest earned in certain specific situations. In the last amendment to the act it was stated that the act does not apply to interest that was earned after March 2000.

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