Explain and illustrate with one example differences between 3 forms of internal audit- Financial, Operational & Management

Financial

Audit-Financial Audit is a historically oriented, independent evaluation performed by internal auditor or external auditor for the purpose of attesting to the fairness, accuracy and reliability of the financial data, providing protection for the entity's assets; evaluating the adequacy and accomplishment of the system (internal control) designed,

provide for the aforementioned Fairness and Protection, Financial data, while not being the only source of evidence, are the primary evidential source. The evaluation performed on a planned basis rather than a request".is

Institute of Internal

Auditor:-Financial audit takes care of the protective aspect of the business and it does not normally carry out constructive appraisal function of the business operations. It helps in detection and prevention of fraud. It also verifies whether documentation and flow of activities arc in conformity with the internal control system introduced and developed within the organization. It helps coordinating with statutory auditor to help them in proper discharge of their function. Besides, financial audit also ensures compliance with statutory laws especially in financial and accounting

matters.

Objectives of Financial Audit:

-To see that established accounting systems and procedures have been complied with

-To see that proper records have been maintained for the fixed assets of the Concern to look into correctness of the financial data and records along with correctness of the accounting procedure followed.

-To see whether scrap, salvage and surplus materials have been properly accounted for etc.

-To see that internal control system has been working properly.

-To see that any abrupt variation in sales, purchases etc.; with respect to immediate previous year are not due to any irregularity

-To see that the credit control has been strictly followed.

-To see that all payments have been made with proper authorization and approval. .

-To see that preparation of salary and wage pay roll has been properly done.

budgetary control system, if any scope and performance of internal audit, if any, suggestions for improvements in performance, if any, and improved inventory policies.

The opinion expressed by the auditors shall be based on verified data, reference to ich shall also be made here and, if practicable, included after the company has been forded on opportunity to comment on them.

Management Audit

It is a complex task closely related with the process of management. It is highly result oriented. It requires inter/multi-disciplinary approach as it involves examination, review and appraisal of various policies and actions of management on the basis of certain norms/standards.

It undertakes comprehensive and critical review of all organizational activities with wider perspective.

It goes beyond conventional audit and audits the efficacy of the management itself.

Definition:

It's a comprehensive and constructive examination of an organization, the structure of a company, institution or branch of government or of any components thereof, such as division or department and its plans, objectives, its means of operations and its use of human and physical facilities.

William P. Leonard

It's an investigation of a business from the higher level downwards in order to ascertain whether sound management prevails throughout, thus facilitating the most effective relationship with the outside world and the most efficient and smooth running internally.

Leslie Howard

It is an audit performed with the object of examining the efficacy of the

institution/control systems, management procedures towards the achievement of enterprise goals.

Churchill & Cyert

It is an objective and independent appraisal of the effectiveness of managers and the effectiveness of the corporate structure in the achievement of company objectives and policies. Its aim is to identify existing and potential management weaknesses within an organization and to recommend ways to rectify these weaknesses.

Chartered Institute of Management Accountants London

Thus it can be seen that management audit is an examination, review and appraisal of the various policies and actions of the management. It is a tool for the evaluation of methods and performance in all the areas of the enterprise.

Objectives:

1. To ascertain the provision of proper control at different levels, their effectiveness I in accomplishing management goals.

2. Ascertain objectives of the organization are properly communicated and understood at all levels.

3. To reveal defects or irregularities in any of the elements examined and to indicate what improvements are possible to obtain the best results of the operations of the company.

4. To assist the management to achieve the most efficient administration of its operations.

5. To suggest to the management the ways and means to achieve the objectives if the management of the organization itself lacks the knowledge of efficient management.

6. It aims to achieve the efficiency of management and assess the strength and weaknesses of the organization structure, its management team and its corporate culture.

7. To ascertain the provision of proper control at different levels, their effectiveness in

accomplishing management goals.

8. Ascertain objectives of the organization are properly communicated and understood at all levels.

9. To reveal defects or irregularities in any of the elements examined and to indicate what improvements are possible to obtain the best results of the operations of the company.

10. To assist the management to achieve the most efficient administration of its operations.

11. To suggest to the management the ways and means to achieve the objectives if the

management of the organization itself lacks the knowledge of efficient management.

weaknesses of the organization structure, its management team and its corporate culture.

13. To help the management at all levels in the effective and efficient discharge of their duties and responsibilities.

The auditor must apprise managerial performance at all levels of the organization. The audit starts right at the top level of the management. It studies the managerial performance at all the levels of management. The audit has to study the decision-making system of the organization and also the level of autonomy granted to the managers at different levels of the organization. The authority and responsibility given at the different levels of the management. One of the most important things that the audit must study is that the mangers at various levels use the authority.

Conducting Management Audit

Management audit requires an interdisciplinary approach since it involves a review of all aspects of management functions. It has to be conducted by a team of experts because this requires 3 varieties of skills, which one individual may not possess.

The team may consist of management experts, accountants, and the operation research specialists, the industry experts and even social scientists.

The auditors must have analytical mind and ability to look at a management function form the point of view of the organization as a whole. They therefore have to be properly trained in this aspect. They need to have through knowledge of the management science and they should be acquainted with the salient features of various functional areas.

Under financial audit, the entire emphasis is on macro-aspect, the individual transactions being- scrutinized for check of the aggregates. It is concerned with examination of transactions recorded in the books of account. It reviews the procedure and internal checks, and scrutinizes individual transactions for the purpose of verification, of Profit and Loss Account and Balance Sheet. Financial audit is not concerned with ~ avoidance of profiteering motive. It indicates the financial position and over~ performance of the business, regardless of its performance in various segments. Financial audit is applicable to all classes of companies and industries irrespective of size and Dan of operations.

Instead of serving the interest of the management and the Government, it serves interest of shareholders. Financial audit is organization - oriented. It is conducted under Sections 224 - 232 of the Companies Act 1956.

Financial Audit Management Audit It is concerned with financial aspects of

business transactions of the year under audit

It is concerned with the review of the past

Performance to ascertain whether it is in tune with the objectives, policies and procedures of the enterprise.

The auditor examines the past financial records to report his opinion on the truth and fairness of the representations made a particular period and suggest ways to remedy the deficiencies, including modification of objectives, policies etc.

Past year '(Financial) transactions are Covered Enterprises such as companies, trust and societies etc.

No limit as to the period to be covered

Financial audit is compulsory in the case of certain enterprises such as companies,

Q.5 Explain briefly various stages of management control process citing salient