Preface

More than sixty-three per cent of India’s population resides in areas

under Gram Panchayats. Thus, the Panchayati Raj Institutions are the
most important link in the governance chain to deliver benefits at the
grass roots level. This is reflected in the progressively increasing
devolution of funds to these bodies. It is an imperative of ‘good
governance’ and ‘transparency’ that the accounts of the Panchayati
Raj Institutions are prepared in time, audited and made available in
the public domain. The auditing arrangements for Panchayati Raj
Institutions comprise of Primary Audit by Local Fund Auditors or
equivalent authorities. In addition, the CAG of India provides
‘Technical Guidance and Support’ by way of setting of auditing
standards, prescribing audit methodologies, imparting training and
by conducting transaction audit as well as supplementary audit. The
assurance on the veracity and reliability of accounts is provided to
stakeholders through Financial Audit of Panchayati Raj Institutions by
the Primary Auditors. This entails examination of their Annual
Accounts and supporting records to express an opinion as to whether
the accounts are free from material misstatements and present a
true and fair view of the activities of the entity.
Introduction
Financial Audit- An Overview Auditing of the Government and its
entities can be described as a systematic process of objectively
obtaining and evaluating evidence to determine whether information
or actual conditions conform to established criteria. This audit is of
three types: Financial Audit, Compliance Audit and Performance
Audit.
Financial Audit: focuses on determining whether an entity’s financial
information is presented in accordance with the applicable financial
reporting and regulatory framework. This is accomplished by
obtaining sufficient and appropriate audit evidence to enable the
auditor to express an opinion as to whether the financial information
is free from material1 misstatement due to fraud or error. The
purpose of an audit of financial statements is to enhance the degree
of confidence of intended users in the financial statements. This is
also known as Financial Attest Audit or Certification Audit.
Compliance Audit: focuses on whether a particular subject matter is
in compliance with the criteria. Compliance auditing is performed by
assessing whether activities, financial transactions and information
are, in all material aspects, in compliance with the applicable
authorities which include the Constitution, Acts, Laws, rules and
regulations, budgetary resolutions, policy, contracts, agreements,
established codes, sanctions, supply orders, agreed terms or the
general principles governing sound public sector financial
management and the conduct of public officials.
Performance Audit: focuses on whether interventions, programmes
and institutions are performing in accordance with the principles of
economy, efficiency and effectiveness and whether there is room for
improvement. Performance is examined against suitable criteria and
the causes of deviations from those criteria or other problems are
analysed. The aim is to answer key audit questions and to provide
recommendations for improvement.
System of Accounts in Government and PRIs
1. India presents a picture of fiscal federalism in which finance and
accounts of all the three tiers of Government are closely and
uniquely intertwined. This calls for understanding of Government
accounts as a prelude to understanding of PRI accounts.
2. PRIs receive funds from Central Government (Central Finance
Commission grants, Scheme funds), State Government (State finance
commission grants, scheme funds, other grants-in-aid, assigned
revenue). They also generate their own revenues. Table 1 and Graph
below depict the said fund flows.
3. PRIs may keep funds in treasury or in bank account as per
directions of the State Government for funds received from State
Government and in bank accounts for funds received under Central
Schemes, Central Finance Commission grants as well as for own
sources of revenue.
Legal framework for Government accounts
4. The Government accounts are prepared on the basis of following
legal framework:
a. Constitution- Article 150 of the Constitution of India envisages the
accounts of the Union and the States to be kept in such a form as the
President may prescribe on the advice of the Comptroller and
Auditor General of India.
b. Government of India has framed various statutory Rules,
Regulations and Instructions in relation to budget and accounts and
which are followed by Union and State Governments such as
Government Accounting Rules, 1990; Accounting Standards notified
under Article 150 of the Constitution; Central Treasury Rules; List of
Major and Minor Heads of Account; General Financial Rules of the
Union and each State Government (by whatever name); Account
Code for Accountant General; Budget Manual of the Union and of
each State Government; and Central/State Public Works Account
Code.
Basic Principles/Features of Government Accounts
5. The Government accounts have following basic features:
a. Cash basis of accounts: With the exception of some book
adjustments, the accounts represent the actual cash receipts and
disbursements during the account period. Physical assets and
financial assets such as investments etc., are shown at historical cost,
i.e., the value at the year of acquisition/ purchase. Physical assets are
not depreciated or amortized. Losses of physical assets at the end of
their life are not expensed or recognized. However, commercial units
under a ministry or a department may be allowed to adopt
commercial basis of accounting;
b. Distinction between revenue and capital expenditure: Revenue
expenditure is recurring in nature and is intended to be met from
revenue receipts. Capital expenditure is defined as expenditure
incurred with the object of increasing concrete assets of a material
and permanent character or of reducing permanent liabilities.
Further, as per the Indian Government Accounting Standard (IGAS)-2,
expenditure on Grants in-aid is to be classified as Revenue
expenditure regardless of end use;
c. All transactions are booked under the three parts of Government
Accounts i.e. Consolidated Fund, Contingency Fund or Public
Account. All expenditure out of Consolidated Fund requires
legislative approval through an Appropriation Act. Similarly, tax
revenues are collected on authority of legislations (Finance Act, GST
Act, VAT Act etc.)
d. The account coding system is designed to classify all transactions
according to nature of expenditure (revenue or capital), function
(police, health, education etc.), programme or scheme (National
Health Mission, MGNREGS, ICDS, Swachh Bharat Mission etc.) and
end use (salary, construction work, travel, grant-in-aid etc.).
Features of Financial Audit
It needs to be recognized that a financial audit is conducted with
reference to the assertions of the management that underline the
preparation and presentation of financial statements, which
constitute enabling audit objectives. According to Model Accounting
System (MAS) for PRIs issued jointly by the C&AG and the Ministry of
Panchayati Raj (MoPR) in 2009, the accounts of any PRI would consist
of Annual Receipt and Payment Account duly supported by a set of
prescribed forms. The assertions relating to Receipt and Payment
Accounts are as under:
Assertions for Receipt and Payment Accounts
Assertion Explanation
Completeness All transactions relevant to the year of account
have been recorded
Occurrence All recorded transactions pertain to the entity and
properly occurred (i.e. the underlying event took
place) and were relevant to the year of account.
Measurement The recorded transactions have been correctly
valued, properly allocated to the period and
measured with reliability in accordance with
established accounting policies, on acceptable and
consistence basis.
Regularity The recorded transactions are in accordance with
primary and secondary legislation and other
specific authorities required by them.
Disclosure The recorded transactions have been properly
classified, accounted for/disclosed where
appropriate.
COMPANY PROFILE
Sadat & Co. is a prominent chartered accountancy firm providing a
wide range of professional services, including auditing, management
consulting, tax advisory, accounting, and manpower management.
Operated as a professionally managed partnership, the firm is
supported by a team of expert Chartered Accountants, corporate
financial advisors, and tax consultants. With a blend of specialized
expertise, the firm delivers reliable financial guidance and
personalized, proactive services. Regular interaction with industry
professionals and other experts helps the firm stay updated with
current developments and effectively address client needs. The firm
is also engaged in advisory services, auditing, collaborating with local
consultancy firms, and serving as an independent expert.
Vision
The firm aims to become a leading provider of auditing, accounting,
tax, and business consulting services, excelling in all aspects that
matter most. Its mission is to deliver quality solutions through the
expertise of its partners and professional team, while also drawing on
specialized knowledge from its network of professionals across
various fields. The firm strives to build a relationship of trust with
clients, going beyond the conventional auditor client dynamic.
Mission
We strictly uphold client confidentiality, recognizing the importance
of protecting sensitive and proprietary information. Maintaining trust
is essential, and this principle has been the foundation of our
success. We are fully committed to earning and preserving our
clients' trust
Performance of Firm
In my experience and to the best of my understanding, I found the
organization's overall performance to be above satisfactory based on
several factors: During my 45-day internship, I observed that the
organization has a team of highly motivated and energetic
employees. Additionally, the firm is managed by chartered
accountants who are experts in finance, significantly reducing the
likelihood of financial losses. The quality of work is commendable, as
reports are thoroughly checked and verified multiple times before
being finalized and delivered to clients, ensuring accuracy and
reliability.
Terminologies
Clean Audit Outcome: The financial statements are accurate and free
from significant errors, receiving an unqualified audit opinion.
Additionally, there are no major issues regarding the reporting of
performance objectives or compliance with laws and regulations.
Financially Unqualified Audit Opinion: An unqualified opinion is the
auditor's independent assessment that a company's financial
statements accurately reflect its financial position, with no significant
issues, and comply with generally accepted accounting principles
(GAAP).
Qualified Audit Opinion: A qualified opinion occurs when there is a
limitation in the scope of the audit, a non pervasive issue found in
the financials, or insufficient disclosure in the footnotes. It means
that, overall, the financial statements are fairly presented, except for
a specific area that has been highlighted.
Adverse Audit Opinion: An adverse opinion is when an auditor
concludes that a company’s financial statements are misleading or
misstated and do not accurately represent its financial condition or
performance.
Phases of the financial audit process
The phases of the audit process in a financial audit and the main
activities against each of the phases are as under.
Planning:-
• Understanding the entity
• Risk Analysis Planning Execution Reporting
• Determing materiality
• Developing audit plan
Execution:-
• Gathering evidence
• Evaluating evidence
• Documentation
Reporting:-
• Consolidating audit findings
• Evaluating impact of material misstatements
• Deciding on Audit Opinion
Review of Literature
1. Internships in auditing provide students with a practical
understanding of auditing principles and their application in real-
world scenarios (Callanan & Benzing, 2020).
2. Hands-on experience helps interns bridge the gap between
theoretical learning and professional practice (Bauer et al., 2020).
3. Exposure to live auditing processes builds confidence and
adaptability in aspiring auditors (Knouse & Fontenot, 2021).
4. Auditing internships enhance technical skills such as financial
statement analysis and risk assessment (Messier et al., 2019).
5. They develop soft skills like communication, teamwork, and
problem-solving, essential for success in the auditing profession (BPP
Learning Media, 2021).
6. Interns gain exposure to time management and organizational
skills by working on multiple projects simultaneously (ACCA, 2020).
7. Internships focusing on internal audits improve understanding of
internal controls, compliance, and operational efficiency (Rittenberg
et al., 2020).
8. They allow interns to assist in identifying policy gaps and making
recommendations for process improvements (Protiviti, 2021).
9. Internal audit projects help interns grasp corporate governance
principles and their role in maintaining organizational integrity (COSO
Report, 2020).
10. Financial audit internships involve reviewing and verifying
financial statements, providing practical insight into accounting
standards (Hayes et al., 2021).
11. They teach the importance of detecting discrepancies, fraud
prevention, and ensuring regulatory compliance (Arens et al., 2020).
12. Interns gain familiarity with international auditing standards (ISA),
which ensure consistency and quality across audits (IFAC, 2021).
13. Understanding frameworks like COSO and Sarbanes-Oxley equips
interns to evaluate risk and control environments (COSO Report,
2020).
14. Internships offer exposure to advanced audit tools, including data
analytics software and ERP systems (Deloitte, 2020).
15. Familiarity with emerging technologies like AI, RPA, and
blockchain enhances interns' readiness for the digital audit era
(KPMG, 2021).
16. Working on technology-driven audits helps interns understand
the growing importance of cybersecurity and data integrity in audits
(EY, 2021).
17. Internship projects focusing on ESG (Environmental, Social, and
Governance) audits provide insights into sustainability reporting and
compliance (PwC, 2020).
18. These audits enable interns to understand the role of non-
financial metrics in business accountability (ACCA, 2020).
19. Interns face challenges in adapting to professional environments
and managing steep learning curves (Callanan & Benzing, 2020).
20. They must quickly familiarize themselves with industry-specific
compliance and reporting standards (Messier et al., 2019).
21. Effective mentorship during internships enhances learning
outcomes and builds confidence in interns (Bauer et al., 2020).
22. Supervisors play a critical role in helping interns understand
complex auditing concepts and methodologies (Knouse & Fontenot,
2021).
23. Interns learn the importance of clarity, accuracy, and conciseness
in audit report preparation (Hayes et al., 2021).
24. Exposure to report writing during internships improves their
ability to communicate findings to stakeholders (Arens et al., 2020).
25. Summer internships provide a platform for networking and
professional growth in the auditing field (NACE Report, 2020).
26. They often serve as a pipeline for full-time roles, with employers
assessing interns for future hiring (Protiviti, 2021).
27. Interns are introduced to ethical considerations and the
importance of objectivity and integrity in auditing (IIA, 2020).
28. Understanding ethical dilemmas prepares interns to handle
sensitive issues professionally (ACFE, 2021).
29. Interns gain a deeper understanding of business processes,
financial systems, and risk management through hands-on projects
(Rittenberg et al., 2020).
30. They develop a comprehensive view of how audits contribute to
organizational success and accountability (EY, 2021).
Research Problem:-
"Assessing the Effectiveness of Internal Audit Procedures in
Detecting Financial Misstatements in Small to Medium Enterprises
(SMEs): A Case Study Approach"
This research problem allows you to focus on the following aspects:
1. Effectiveness of Internal Audits: Investigating how well internal
audit procedures help identify and correct financial errors or fraud.
2. Financial Misstatements in SMEs: Focusing on the challenges
faced by small and medium-sized enterprises in terms of financial
reporting and compliance.
3. Case Study: Using real-world examples or case studies from your
internship organization to analyze the implementation and impact of
internal audits. This research problem is practical, aligns with
common audit tasks, and allows you to apply theoretical knowledge
in a real-world setting, making it ideal for a summer internship
project.
Research Objectives
• To assess the current internal audit practices at Sadat & Co.
• To identify areas for improvement in these practices.
• To analyse the impact of internal audits on organizational
performance.
Research Hypothesis
H0: The current internal audit procedures do not significantly
contribute to organizational performance at Sadat & Co.
H1: The current internal audit procedures significantly contribute to
organizational performance at Sadat & Co..
Research Methodology
1. Research Design:
A descriptive and analytical research design will be adopted to
evaluate the effectiveness of internal audit procedures in
detecting financial misstatements in SMEs. This will involve
both qualitative and quantitative approaches.
2. Data Collection:
Primary Data:
▪ Interviews with key personnel (auditors, internal control
managers) at the internship organization.
▪ Surveys or questionnaires distributed to auditors and other
relevant staff to understand their perspectives on internal audit
effectiveness.
Secondary Data:
▪ Review of internal audit reports, financial statements, and
documentation from the firm or SME under study.
▪ Literature review on auditing practices and previous research
studies.
3. Sampling:
The study will focus on SMEs where internal audits are regularly
conducted.
A purposive sampling technique will be used to select SMEs
based on their availability and willingness to participate in the
study.
4. Data Analysis:
Qualitative Analysis:
▪ Content analysis of interviews and open-ended survey
responses to identify recurring themes related to audit
effectiveness and challenges.
Quantitative Analysis:
 ▪ Statistical analysis of audit report accuracy, error rates, and
correlation between audit frequency and financial
misstatements.
5. Hypothesis Testing:
Hypotheses will be tested using statistical tools such as chi-
square tests and regression analysis to evaluate the relationship
between audit procedures and financial misstatements.
6. Limitations:
Time constraints may limit the sample size, and data availability
might be restricted by confidentiality agreements or firm
policies.
The study will focus on the organization where the internship is
held, which may limit generalizability. This methodology will
provide both qualitative insights and quantitative data to assess
the effectiveness of internal audits in SMEs.
Need of the study
1.Internal auditors develop a thorough, hands-on understanding of
an organization’s processes, policies, and procedures.
2.The growing focus on risk management and compliance is driving
job opportunities, especially in highly regulated sectors such as
banking, insurance, healthcare, and financial services.
3.Career paths in internal auditing offer a range of entry-level
positions, including roles like auditing specialists, risk assessment
specialists, lead internal auditors, financial analysts, internal controls
auditors, and information systems auditors.
4.The increasingly complex regulatory environment requires
businesses to balance activities that generate revenue with the need
to comply with regulations, implement new financial structures, and
manage overall institutional risk.
Data Analysis & Interpretation
1. Efficiency of Internal Audit Procedures
To measure the efficiency of the internal audit process, we
analysed the time taken at each stage of the audit cycle. The
stages included in the audit cycle were: initial planning,
fieldwork, review, and reporting.
Data:
Audit work Average Time Standard
Taken(hours) deviation(hours)
Planning 10 2
Fieldwork 40 5
Review 25 4
Reporting 15 3
Interpretation:
• Planning: The planning phase takes an average of 10 hours with a
standard deviation of 2 hours. This is a manageable time, indicating a
structured planning process.
• Fieldwork: The fieldwork phase takes the longest, with an average
of 40 hours. A high standard deviation of 5 hours suggests there may
be variations in how long audits take based on the complexity of the
cases.
• Review: The review stage averages 25 hours, with a standard
deviation of 4 hours. This indicates that the review process could be
streamlined, as it takes a significant amount of time.
• Reporting: The reporting phase averages 15 hours, indicating a
relatively quick turnaround. However, there is room for efficiency
gains, especially in the review and fieldwork stages.
2. Compliance Rate We analysed the compliance rate of audits
conducted by Sadat & Co., comparing whether the audits met
the regulatory requirements or industry standards. The data
was collected from 30 audit cases conducted in 2023
Audit Case Number Compliance status(Met/not
Met)
1 Met
2 Met
3 Not Met
4 Met
… …
30 Met
Interpretation:
Out of the 30 audit cases, 25 audits met all regulatory requirements,
while 5 did not meet compliance standards. This suggests a
compliance rate of approximately 83.33%. While this is relatively
high, the 16.67% non-compliance rate signals room for improvement,
particularly in ensuring consistency across all audit cases.
Findings
1. The audit process at Sadat & Co. is time-intensive, with
fieldwork taking the longest.
2. A significant variation in time taken during the audit cycle
suggests opportunities for process optimization.
3. Documentation quality is generally high, but a few cases
showed areas for improvement in clarity and completeness.
4. The review stage of the audit process is the most time-
consuming, suggesting potential for streamlining.
5. Audit staff training could help reduce inefficiencies and improve
the overall audit process.
6. The introduction of digital audit management tools could
improve coordination and reduce audit duration.
7. Non-compliance cases are mostly due to insufficient
documentation or missed regulatory checks.
8. Regular audits of internal audit procedures could further
enhance accuracy and effectiveness.
Conclusion
The analysis of internal auditing procedures at Sadat & Co. Chartered
Accountants revealed several key insights into the firm's audit
practices. Overall, the firm demonstrates a strong commitment to
maintaining quality and compliance in its audits. The average length
of audit stages, such as planning, fieldwork, and reporting, shows a
generally well-organized process, although the review phase could
benefit from efficiency improvements. The compliance rate was
found to be high, with 83.33% of audits meeting regulatory
standards, though there is room for improvement in ensuring
consistency across all cases.
The quality of documentation was also strong, with most audit cases
receiving a high score, indicating that the documentation process is
largely effective. However, occasional gaps in clarity and
completeness were noted, which could be addressed through
additional training or review protocols.
In conclusion, while Sadat & Co. demonstrates a solid internal audit
framework, there are opportunities to enhance the efficiency of the
audit cycle, improve consistency in compliance, and ensure the
highest standards in documentation quality. Implementing these
improvements will help the firm achieve even better audit outcomes
and maintain its reputation for reliability and compliance.
Suggestions
1. Implement audit management software to streamline and
automate audit processes.
2. Conduct regular training sessions for staff to ensure compliance
with updated regulations.
3. Improve documentation standards to ensure clarity,
completeness, and consistency across audits.
4. Standardize timeframes for each audit stage to reduce
inefficiencies.
5. Introduce a checklist system for ensuring all compliance
requirements are met in each audit.
6. Perform periodic internal audits to monitor the effectiveness of
audit procedures.
7. Use data analytics to identify potential areas of risk early in the
audit process.
8. Enhance communication between departments to expedite the
audit process.
9. Focus on improving the review phase to reduce the time taken
for audit completion.
10. Strengthen follow-up procedures to ensure
recommendations from audits are implemented.
Bibliography
1. Arens, A.A., et al. (2019). Auditing and Assurance Services. This
book provides foundational knowledge on auditing principles.
2. COSO (2017). Enterprise Risk Management Framework. Discusses
risk management frameworks applicable to internal audits.
3. IIA (2021). International Standards for the Professional Practice of
Internal Auditing. Essential standards governing internal audit
practices
4. Auditing internships enhance technical skills such as financial
statement analysis and risk assessment (Messier et al., 2019).
5. They develop soft skills like communication, teamwork, and
problem-solving, essential for success in the auditing profession (BPP
Learning Media, 2021).
6. Interns gain exposure to time management and organizational
skills by working on multiple projects simultaneously (ACCA, 2020).
7. Internships focusing on internal audits improve understanding of
internal controls, compliance, and operational efficiency (Rittenberg
et al., 2020).
8. They allow interns to assist in identifying policy gaps and making
recommendations for process improvements (Protiviti, 2021).
9. Internal audit projects help interns grasp corporate governance
principles and their role in maintaining organizational integrity (COSO
Report, 2020).
10. Financial audit internships involve reviewing and verifying
financial statements, providing practical insight into accounting
standards (Hayes et al., 2021).
11. They teach the importance of detecting discrepancies, fraud
prevention, and ensuring regulatory compliance (Arens et al., 2020).
12. Interns gain familiarity with international auditing standards (ISA),
which ensure consistency and quality across audits (IFAC, 2021).
13. Understanding frameworks like COSO and Sarbanes-Oxley equips
interns to evaluate risk and control environments (COSO Report,
2020).
14. Internships offer exposure to advanced audit tools, including data
analytics software and ERP systems (Deloitte, 2020).
15. Familiarity with emerging technologies like AI, RPA, and
blockchain enhances interns' readiness for the digital audit era
(KPMG, 2021).
16. Working on technology-driven audits helps interns understand
the growing importance of cybersecurity and data integrity in audits
(EY, 2021).
17. Internship projects focusing on ESG (Environmental, Social, and
Governance) audits provide insights into sustainability reporting and
compliance (PwC, 2020).
18. These audits enable interns to understand the role of non-
financial metrics in business accountability (ACCA, 2020).
19. Interns face challenges in adapting to professional environments
and managing steep learning curves (Callanan & Benzing, 2020).
20. They must quickly familiarize themselves with industry-specific
compliance and reporting standards (Messier et al., 2019).
21. Effective mentorship during internships enhances learning
outcomes and builds confidence in interns (Bauer et al., 2020).
22. Supervisors play a critical role in helping interns understand
complex auditing concepts and methodologies (Knouse & Fontenot,
2021).
23. Interns learn the importance of clarity, accuracy, and conciseness
in audit report preparation (Hayes et al., 2021).
24. Exposure to report writing during internships improves their
ability to communicate findings to stakeholders (Arens et al., 2020).
25. Summer internships provide a platform for networking and
professional growth in the auditing field (NACE Report, 2020).
26. They often serve as a pipeline for full-time roles, with employers
assessing interns for future hiring (Protiviti, 2021).
27. Interns are introduced to ethical considerations and the
importance of objectivity and integrity in auditing (IIA, 2020).
28. Understanding ethical dilemmas prepares interns to handle
sensitive issues professionally (ACFE, 2021).
29. Interns gain a deeper understanding of business processes,
financial systems, and risk management through hands-on projects
(Rittenberg et al., 2020).
30. They develop a comprehensive view of how audits contribute to
organizational success and accountability (EY, 2021)