UNIT 5 - Recent Trends in Auditing
UNIT 5 - Recent Trends in Auditing
UNIT 5 - Recent Trends in Auditing
Cost Audit
It is an audit process for verifying the cost of manufacture or production of any article, on the
basis of accounts as regards utilisation of material or labour or other items of costs, maintained
by the company.
In simple words the term cost audit means a systematic and accurate verification of the cost
accounts and records and checking of adherence to the objectives of the cost accounting.
• To The Government
1. Cost audit ensures efficient functioning of the industry. This in turn, nurtures a healthy
competition among the different companies and paves a path for fast progress.
2. It helps in identification of sick units and enables the Government to make relevant
decisions.
3. It helps in fixing prices in the case of essential commodities and checking undue profit
earning.
4. It enables to take decisions as to granting of subsidies, incentives and protection to various
industries.
5. It helps to take decisions as to levies, duties and taxes.
• To the Society
1. Cost audit enables the Government to fix prices of essential commodities. This safeguards
the interests of the society.
2. Cost audit enables the Government to keep a check on undue profiteering by the
manufacturers and avoids artificial price rise due to monopolistic tendencies.
• To the Shareholders
1. Cost audit reveals whether any of the products of the company are making losses. Thus
though the company making an overall profit, a loss making line may eat up the
company’s profits. This is brought to the notice of the shareholders and the management
is forced to take remedial measures, thereby making optimum utilisation of resources.
2. Cost audit ensures that the shareholders get a fair return on their investments.
Tax Audit
• Tax audit, is aimed at evaluating whether an individual or company has accurately filed
the income tax returns of an assessment year. An external agency is mandated to assess
returns filed from income, deductions and expenditures and other rules as mentioned
by the Income Tax Act, 1961. The tax audit process simplifies the computation of tax
returns.
Now-a-days tax audit has become very important to ascertain the accuracy of tax related
documents. Tax audit mostly covers income returns, invoices, debt and credit notes and various
current and fixed assets. Tax audit is an innovation of 21st century. It has added one more
chapter to the procedure of auditing. Tax audit ensures the validity and credibility of tax related
documents.
The financial statements are certified by the auditor for truth and fairness of operating results
and financial position of the business. These are meant for general purpose being used by the
owners, creditors, banks and other interested parties. Sometimes a specific information my
required by certain people which may not be available in these statements
MANAGEMENT AUDIT
Meaning and Definition
Management audit is attempt made to evaluate various management functions and process. A
detailed and critical review of all the objectives, policies, procedures and functions of
management is made with a view to bring about an overall improvement in managerial
efficiency.
According to Leslie R. Howard, “ An investigation of a business from the highest level
downward in order to ascertain whether sound management prevails throughout, thus
facilitating the most effective relationship with outside world and the most efficient
organization and smooth running of internal organization.”
According to W.P. Leonard, “A comprehensive and constructive examination of an
organization structure of a company, institution or a branch of government or of any
component thereof such as division or department, and its plans and objectives, its means of
operations, and its uses of human and physical facilities.”
Thus it can be simply stated that management audit, on the basis of established standards,
examines, reviews and appraises the various policies and actions of management.
4. No qualification has been fixed for the 4. The statutory auditor must be a Chartered
management auditor. accountant and emphasis is on independent
report on financial matters.
5. The management audit is an aid to
management. 5. It is a check on management. 6. It is
conducted for a particular accounting
6. The management audit may cover more
than
Scope of Management Audit
The scope of Management Audit has no limitations. The areas of review depend on the
objectives of the business and may include :-
(a) The suitability, practicability and present compliance or otherwise of the
organization with its designated objects and aims.
(b) The current reputation of the organization in relation to the general public and within
its own particular industrial or commercial field.
(c) The rate of return on investors’ capital – whether poor, adequate or above average.
(d) Relationship of the business with its own shareholders and the investing public in
general.
(e) The ratios of operating returns and the rate of return on capital projects.
(f) The relationship between management and staff within the business.
(g) The aims and effectiveness of management at its various levels such as top level,
middle level and operational level.
(h) Financial policies and control relating to production, sales and distribution and in
other functions of the organization.