Management Auditor And Qualities Of A Management Auditor

In this tutorial, we will learn about the management auditor and qualities of a management auditor not prescribed by law also hence, and a company is free to take its own decision regarding the appointment and selection of a management auditor.

The board of directors or the shareholders of the company can be appointed of practicing Chartered Accountants to undertake the management audit. Such a decision will, of course, depend upon the circumstances of a particular case. It is argued that the internal auditor is fit enough to conduct a management audit and is familiar with the management procedures and performance.

Further, it is also suggested that management audit work should be entrusted to the O&M (organization and method study) personnel with an analytical bent of mind regarding the organizational structure and methods of operations. Much will depend upon each case circumstances, but a note should be made of the technical efficiency needed for conducting the management audit.

QUALITIES OF A MANAGEMENT AUDITOR:

No specific qualities can be narrated for a management auditor. As his task is related to investigating and appraising the business objectives about the activities of the management, he must be capable enough to put all his professional skills in the task of evaluating and advising the board members on the various aspects of all operations. Some of the qualities of a management auditor are as follows:

He should have the ability to understand the purposes and problems of the organization.
He should have a good understanding of the nature and objects of the organization and also of its area of operations.
He should be competent enough to assess the progress of the organization.
He should have a thorough knowledge of different internal control devices and modern techniques of job analysis.
He should know the techniques and devices of making effective and efficient use of modern office equipment, including flow charts, work schedules, computers, etc.
He should see that the plans as prepared by the management are suitable and practicable to achieve the objectives set forth by the administration.
He should be conversant with the nature of production activities in the organization.
He should have the ability to assess the adequacy and efficacy of controls in use in the organization.
He should be well familiar with the personnel procedures and the personnel development program to ensure the proper allocation of duties has been made to the staff aptitudes.
He should be humble pleasing, and cooperative.
He should be conversant with different types of laws relevant to the functioning of a business concern.
He should be an expert in drafting various reports to be presented to the management.

WHAT IS PROPRIETY AUDIT:

‘Kohler’ has defined propriety as that which meets the test of public interest commonly accepted customs and standards of conduct and mainly as applied to the professional performance, requirements of government regulations and professional codes. A propriety audit would mean whether the transactions have done conform with established rules, principles, and some established standards. The propriety audit would involve the verification of the following main aspects to find out whether:

The proper recording has done inappropriate books of accounts
The assets have not been misused and have adequately safeguarded.
The concern is yielding the expected results.

The propriety audit system is applied in respect of the government company’s government departments because public money and public interest are therein involved. It is an essential function of the review to bring to light not only the cases of apparent irregularity but also every matter which is just judgmental appears to involve improper expenditure or waste of public money and stores even though the accounts themselves may be insufficient to see that sundry rules or orders of competent authority have observed.

WHAT IS EFFICIENCY AUDIT:

Inefficiency indicates how well an organization uses its resources to produce goods and services. It focuses on resources (inputs), goods and services (outputs), and the rate (productivity) at which data uses to produce or deliver the outputs. To understand the meaning of “efficiency,” it is necessary to understand the following terms:

Inputs are resources, such as human, commercial equipment, material, facilities, information, energy, and land) used to produce outputs.
Outputs are the goods and services provided to meet client needs. Outputs are defined in terms of quantity and quality and delivered within parameters relating to the service level.
Supply refers to the amount, volume, or several outputs produced.
Condition refers to various attributes and characteristics of productions such as reliability and accuracy, timeliness, service courtesy, safety, and comfort.
Productivity is the ratio to the number of acceptable goods and services produced to the amount of the resources used to create them. Richness is expressed in the form of a rate such as a cost or time per unit of output.

Efficiency is a relative concept. It is measured by comparing achieved productivity with a desired norm, target, or standard. Output quantity and quality made and the level of service provided is also compared to objectives or rules to determine the extent to which they have caused changes inefficiency. Efficiency is improved when more outputs of a given quality produced with the same or fewer resource inputs or when the same amount of production is produced with fewer resources.

An efficiency audit refers to comparing the actual results with the desired or projected results. It is directed towards the measurement of whether plans have expertly executed. It is concerned with the utilization of the resources in an economical and most remunerative manner to achieve the objectives of the concern.

Advantages or merits of auditing

In this tutorial, we will learn about the advantages or merits of auditing, which offers assurances to the owners, investors, shareholders, etc.

It is no more controversial that accounting is a necessity while auditing is a luxury. People now get their accounts audited by a qualified auditor so that they may be sure of the smooth running of their business and the validity of the investment that they have made therein.

It is of the utmost importance to get accounts audited in a proprietary concern to see that the business is running efficiently in a partnership firm to ensure healthy relations among partners and especially to decide question like valuation of goodwill at the time of entry retirement and death of a partner and in a joint-stock company in which shareholders invest their money and presume their capital intact if some qualified auditor audits the accounts of such company. The shareholders of a company have virtually no direct stake in its day-to-day administration. Various advantages of audit can be grouped into the following three categories:

For business itself
For the owners of the business
For others

For Business Itself:

An independent and qualified auditor can examine the accounts of a business and its financial position.
Errors and fraud are located very quickly at an early date, and chances of their further occurrence are reduced to the minimum.
The auditing of accounts makes the clerks who maintain them alert, careful and vigilant, and more so they prepare reports very carefully in the future and keep them up to date.
An audit is useful in case the business is managed by some agent or representative of its owner.
The auditor, if he audits a business regularly, can come into close touch with the irking of that business and hence can give concrete suggestions to improve it if he asked to do so.
Money can be easily borrowed from banks and other money lenders based on adequately audited accounts.
The business itself enjoys a better reputation if an independent auditor audits its accounts.

For The Owners Of The Business:

If a sole trader owns the business, he can rely thoroughly on the audited accounts and his accounts clerks responsible for the maintenance of accounts.
If the business is organized as a partnership firm, its partners can utilize audited accounts to settle their disputes regarding the adjustment of capital and valuation of goodwill at the time of admission, retirement, or death of a partner.
If the business is constituted as a joint-stock company, its shareholders who reside at places distant from the head office of the company can rely on audited accounts. They can be sure of their investment being safe with the company.
If it is a trust, its trustees can easily make their position clear before others by getting the accounts audited by outside and impartial auditor.

For Others:

The audited accounts of the previous year are helpful in the settlement of claims by the insurance company in case of fire.
The taxation authorities can rely on the audited accounts to impose sales, income, wealth and expenditure tax, etc.
The audited accounts of a business can be produced in support of a legal case before the court. It forms a basis to determine action in bankruptcy and insolvency cases.
The purchaser of a business can easily calculate the amount of purchase consideration based on its audited accounts.

Advantages And Disadvantages Of Internal Audit

In this tutorial, we will learn about the advantages and disadvantages of internal audit is helpful to have sufficient control over business activities.

The significant advantages and disadvantages of internal audit can be studied as follows:

Proper Accounting System:

The benefit of an internal audit is that an appropriate system of accounting is introduced. The accounting system is a chain of activities in an entity by which transactions processed for maintaining financial records. There is a need for orderly devices to achieve desirable results.

Better Management:

The benefit of internal audits is that there is better management of business concerns. The auditor can achieve the goals of the business can be achieved if there is a proper internal control, internal check, and internal audit.

Effective Control:

An environmental audit is helpful to have sufficient control over business activities. Power is the management function, which is related to the supervision and direction of ongoing operations. The manager concerned can remove the difficulties for the smooth working of the business.

Progressive Review:

An internal audit is beneficial to review the progress of a business concern. The figures for the previous year compared with this year. Moreover, similar companies’ performance results can analyze to determine the progress made by the entity. The management can review the progress for internal control.

No Error And Fraud:

The internal audit uses to protect accounting records from errors and fraud. Accounting and auditing go side by side when accounting work is over; the review will start. In situation errors and fraud committed by the accounting, staff will easily be detected and rectified.

Investigation:

Internal audit is helpful to investigate the business matters. An internal auditor can ask to examine the facts and figures to confirm or clear any doubt in case of doubt. The internal auditor can investigate the matter in any manner.

Fixing Responsibilities:

The internal audit uses to set the responsibility of people having poor performance. Establish management performance standards. The internal auditor can evaluate the result of all persons. The people can be held responsible for below standard work, and action can be taken against them.

Performance Improves:

An internal auditor helps improve the performance of the organization. The achievements of the previous year are the basis for preparing the budget for the next years. The projected income statement and balance sheet are drawn up. An attempt is made to get a positive result.

Helps External Auditing:

An internal auditor’s work performance can help external auditors carry out the audit. The audit procedure of internal and external inspection is almost the same. The auditor can go through the internal audit report at the time of starting audit work. Anyhow external auditor is responsible for the external audit.

Division Of Work:

The internal audit is helpful to apply the division of labor. The division of labor is necessary to watch the activities of employees, including management. The auditor can suggest the way and means improve the performance of a business.

Proper Use Of Resources:

An internal audit uses to check the appropriate use of resources. The misuse of funds can increase the cost of the organization. The optimum use of resources can be determined to control the value of output. In this way, an internal audit is a tool to use the funds in the business’s best interest.

Limitations Or Disadvantages Of Internal Audit:

The various limitations of internal audit are as follows:

Staff Shortage:

The weakness of internal audit is the staff shortage. There may be a need for reasonable audit staff to examine the record. The lack of staff is a hurdle to get the benefit of an internal audit.

Time Lag:

The limitation of internal audit is that it starts when accounting ends. Thus there is a time lag between recording and checking of entries.

An audit program is a set of instructions that are to follow for the proper execution of audits. A detailed written audit program containing the various steps and procedures shall require after the development of the audit plan. The audit program includes the measures that are generally employed to determine what and how much evidence must be collected and evaluated.

It also lays down the responsibilities for the whole audit team for carrying out different tasks. The prepared audit program may be revised if needed by the prevailing circumstances. An audit plan largely depends on the size of the organization and other relevant factors. Minimum essential work to be done in the standard method and rest is according to the circumstances. The audit program is documented in the audit working papers, which are the official records which contain the planning and execution of the audit agreement.

Auditing Features and Objectives – Primary and Secondary

This post explains Auditing features. The audit is a systematic and scientific examination of the books of accounts of the business. The Audit is done by an independent person or group of people qualified to do Audits.

Auditing Features – Attributes of Auditing

An audit is the verification of the results shown by profit and loss accounts and the state of affairs confirmed by the balance sheet.

The audit is a critical review of the system of accounting and internal control.

The audit is done with the help of the vouchers, documents, information, and explanations received from the authorities.

The critical responsibility of Auditor is to ensure that the financial statements and reports are authentic and show a fair view of the state of affairs.

An auditor investigates, analyzes, reviews examines the documents supporting the transactions.

He examines the minute books of Directors, shareholders, memorandum of associations to ascertain the correctness of the books of accounts.

Various methods and procedures are used for performing the audit.

The audit is not only limited to an examination of financial records, but it also includes other areas like operational audit, process audit, tax audit, secretarial audit, efficiency audit, social audit and more.

It involved reporting by the auditor on the accounts examined by him and prepared as per GAAP (Generally Accepted Accounting Principles) principle and present accurate and fair view.

Objectives of Auditing

There are two main objectives of Auditing. Primary and Secondary objective, let us understand both the objectives one by one.

Primary Objective

The main objective of an auditor is to report to owners that the financial accounts give an accurate view of the situation of the company’s activities.

Secondary Objective

The secondary objective is also known as incidental objective as it is related to the fulfillment of the primary purpose.

The incidental objectives of auditing are as follows:

Detection and prevention of scams
Discovery and prevention of mistakes

Detection of material frauds and errors as an incidental objective of independent financial auditing flows from the primary aim of determining whether or not the financial statements give an accurate and fair view.

Frauds can take place due to the manipulation of accounts, and it is essential for the auditor to find the fraud so it can be prevented in the future.

Errors refer to an accidental mistake in the commercial data arising due to ignorance of accounting procedures.

Auditing Origin and Evolution – History of Auditing

In the early stages of civilization, the methods of maintaining accounts were very unrefined. The person used to listen to the accounts read over by an accountant to check them, he was known as the auditor.

History of Auditing

Auditing is as old as accounting, and there are signs of its existence in all ancient cultures such as Mesopotamia, Greece, Egypt, Rome, UK, and India.

Arthashastra by Kautilya detailed rules for accounting and auditing of public finances.

In olden days the key purpose of audits was to gain information about the financial system and records of the business.

However, recently auditing has begun to include non-financial subject areas such as safety, security, information system performance and environmental concerns.

With the non-profit organization and government agencies, there has been an increasing need for performing an audit, examining their success in satisfying mission objectives of the business.

Auditing Origin and Evolution

The auditing origin can be traced back to the 18th century, when the practice of large scale production developed as a result of the Industrial Revolution.

Systems of checks and counter checks were implemented to maintain public accounts as early as the days of ancient Egyptians, Greeks and Romans.

The last decade of the 15th century was a crucial period during which a great impetus was given to trade and commerce by Renaissance in Italy, and the principles of double entry bookkeeping were evolved and published in 1494 at Venice in Italy by Luca Paciolo.

This system of accounts was quite capable of recording all types of mercantile transactions.

The Industrial Revolution of England was another landmark in the history of trade and commerce.

The industrial revolution led to a significant expansion in the volume of trading transactions which compelled the use of more money, and the ordinary trader was enforced to combine with the partnership with others.

Consequently, a big enterprise was framed in the form of partnership firms and joint-stock companies.

This growth of business enterprises before and after the revolution accompanied an improved accounting system.

Besides British Companies made stockholders realize that an independent and impartial audit could well protect their interest.

Such developments had a direct effect on the evolution of the practice of auditing, but the audit of business accounts could not be standard until the 19th century.

A Royal Charter incorporated the Institute of Chartered Accountants in England and Wales on May 11, 1880. The key purpose of this incorporation was to prepare Auditors.

In January 1923, the British Association of Accountants and Auditors got established, and a person could be fully competent to work as a professional auditor after clearing this exam.