Understanding the importance of Audit

Well this was too much on ma minds these days.., so many days planning to write in detail about it., I've had not much of the opportunities to conduct internal Audits.. but Corbus for sure helped me to understand the methodology better.

First let us understand the basic concepts of ‘Audit’.




AAS – 1 defines Audit as an Independent Examination of the financial information, including financial statements, of an enterprise, irrespective of its size and legal form, with a view to expressing an opinion thereon.



We come across 3 phrases in the above definition that answer 3 basic question?

1. What is an audit ? an Independent Examination

2. What to audit ? financial information

3. What is the purpose of an audit ? expressing an opinion



The Concept of “Independent Examination”

In any audit, our work is to examine various aspects of the Financial Information, that we are auditing.



Examination implies reviewing, analyzing and testing the accuracy of something.



Independent Examination implies that we are in no way related to the subject that is being examined, i.e., the outcome of the examination should not affect our interests in any way and also that at the time of conducting the examination, we should be free from all kinds of bias and prejudices.



For example, suppose, you have been asked to examine whether a dish prepared by your close relative is tasty or not. Here, even if the food is not tasty, there is a risk that you may say that the food is tasty just to make your relative feel good.



However, if the same food had been prepared by a person, with whom you are not concerned in any way, you would have said the truth that the food is not good, without any glitches.



Independence also implies that we should not audit any information that has been prepared by us.



In the above example, if you yourself had prepared the dish, you would have always felt that the food is good, no matter how bad it really is.



In the field of audit too, the above example holds good. If we conduct the audit of an entity with whom we are related, we may overlook certain important issues to preserve the interests of the entity. Hence there is a risk of issuing a wrong audit opinion. This risk can be overcome by ensuring independence.





Independence in built in the laws:

Section 224 of the Companies Act, together with the Chartered Accountants Act, 1949 and the various notifications issued by the ICAI, ensure the independence of the auditors.



What to audit?

The kinds of audit Chartered Accountants do are related only to Financial Information. Common examples financial information audited by Chartered Accountants are:



1. Financial statements, i.e., Balance sheet, Profit and loss account, Cash Flow Statements, etc.



2. Quarterly Results of listed Companies



3. Financial Information relating to Taxes, both direct and indirect.



4. Specific financial information relating to certain areas.



5. Over all financial performance of the Company (performed more in the field of Internal Audit)



What is the objective of an audit?

The ultimate objective of any audit is to express an opinion on the Financial Information audited.



What is the opinion?

The opinion that we issue takes the form of an audit report in which we state, whether in our opinion the information audited by us reflect a true and fair view of the state of affairs.



Additionally, various statutes require us to report on certain specific matters. In such cases, there is additional onus on the auditors to do the same. Examples of such statutory requirements are CARO by the Companies Act, Form 3CD by the Income Tax Audit, relevant forms of VAT Act, etc.



Statutes may also require us to issue an opinion as to whether the financial information are true and correct. In such cases, the responsibility of the auditor increases as he has to vouch for the accuracy of the information. An example of such an audit is tax audit conducted under section 44AB of the Income Tax Act.



What is the difference between ‘true and fair’ and ‘true and correct’?

It is very difficult for an auditor to vouch for the accuracy of any financial information, mainly because we cannot check 100% information and we have to rely on test checks and there is always a possibility that we may miss out on possible cases of errors and frauds. Also, compilation of financial information involves the use of estimates in certain areas and estimates can never be accurate.



Hence, if we were to say that the financial information audited by us is ‘true and correct’, it would not be entirely justified, as the inherent limitations of audit do not allow us form such an accurate opinion.



However, it is our duty to ensure that our audit procedures are designed in such a way so that no major errors and frauds go undetected and we get a reasonable assurance that there are no ‘material misstatements’ in the financial information audited by us. We also have to ensure that the estimates used are reasonable and not absurd. When we achieve the above mentioned objectives, we are in a position to express an opinion that what we have audited does give a reasonably correct picture of the real scenario, though it may not be 100% accurate. The words ‘true and fair’ are used to express such an opinion.



What is material misstatement?

A misstatement means a mistake contained in the financial information caused either due to fraud (intentional) or due to error (non intentional). When such mistakes, individually or in aggregate with other mistakes, assumes such proportion that the picture presented by the financial information no longer gives a reasonably correct view of the real scenario, we say that the financial information is materially misstated.



Materiality is a relative term. What may be material for one entity may not be material for another entity. For example, let us consider a Company like Reliance having an annual turnover in excess of 1 lakh crores. On the other hand, let us consider a smaller Company X, having a turnover of 500 crores. In the given scenario a mistake of 10 crores shall be immaterial for RIL but shall be quite material for Company X.



It is essential that before we start any audit, we define the materiality limits for the audit, so that we know what matters to ignore and what matters to lay emphasis on.



The various details about materiality shall be discussed later.



Why Audit?

We audit because the people who use the financial information need an assurance that the financial information being used by them is reliable and not misleading and since it is not possible for each user to check the validity of the financial information separately, the onus is placed upon us to do the same on behalf of the all the users.



Who are the users of the financial information?

i. Shareholders : In corporate environment, the management and the ownership functions are separate. The funds of the owners of the Company (Shareholders) are placed in the hands of the Management (Directors and other officers of the Company), for efficient and profitable utilization. The shareholders need an assurance that their money is being managed properly and is not being siphoned away by the management. They use the financial information in the capacity of owners to find out how the funds have been utilized by the management.



ii. Lenders : Whenever any person (banks, FI’s, other lenders) lends money to an entity, he uses the financial information to ensure the credibility of the Company before extending the loan. Even after sanctioning the loan, he uses the financial information to ensure that the funds provided by him are being used for correct purposes, and to ensure that the entity is in a position to service and repay the debt.



iii. Government : The Government uses the Financial Information mainly for collection of various levies and taxes and also for ensuring compliance of various other stipulations. The Government also needs such information to compile statistical data for analysis purposes.



iv. Public, at large : Any entity is a social system, being a part of the society. Hence, various other people are interested in the working of the Company for various other reasons and they can know about it by perusal of Financial Information. Eg; A prospective shareholder deciding whether to buy a share or not.



In order to protect the interests of all the above mentioned users, it is our duty to conduct the audit diligently and properly.



What are the consequences if we do not carry out the audit properly?

The Institute of Chartered Accountants of India requires all its members to be very careful and diligent in performing audits. If a member is found guilty of being negligent, he shall be liable to punishment, which may take the form temporary suspension of the membership and if it is an extreme case of negligence, then his membership can be terminated for life as well. The Companies Act also lays down certain liabilities of members who are grossly negligent in the performance of the audit function.



Even members, who are not signing the audit report, but who have been involved in the audit are liable to punishment, if negligence is proved on their part.



I will continue writing about it in my next few posts!

Things I wanna do before I Die

1. Have a big portrait of us painted

2 Skydive

3.Learn to speak a foreign language and make sure I use it

4 Use CPA in my signatures ;)

5 Spend a whole day eating choclate truffle without feeling guilty of gaining weight ;p

6 Write a blog of the entire story of my life.. :)

7 enjoy a holiday in Singapore with someone who promised.

8 To have the world's best daughter , my beti.

9 Learn how to take a compliment.

10 Give my mumma a dozen red roses and tell her that I love her.

11 Sing a song for him while sharing stage with Shahrukh

12 Shower in a waterfall.

13 See a lunar eclipse

14 Experience weightlessness. lol being in  a perfect shape ;)

15 Sleep under the stars for a whole night with the one I love

16 Take a ride on the highest roller coaster in the World

17 Shop without thinking of how much money I am left with  ;p

18 Find a job I love

19 Overcome my fear of failure.

20 Look into my kid's eyes, see myself, and smile.

Lyf goes another way... I jst dnt deserve d trends !!

Another day passes by,

another night at work,

all looks so usual , all looks so dull...

got some time to stand beside d window....

A long dark night, all very quite.

Looked a lil up n here I saw my life....

bright cheerful happy just making his ways right.

It always reminds me of someone...

 

The same way I can see him but is far away...

 

Bright cheerful happy just making his ways right.

Job Discription of a 'Leader'

To be a leader means to invoke challenges. Each challenge actually brings forth some hidden strength, some latent power. The one who is able to understand this, is able to face and in fact invoke challenges. Such a person with constant and unshaken faith moves on towards victory. Such a person becomes an inspiration for many and thus is a true leader. When we know the art of facing and learning from challenges, we are able to remain fearless in spite of the several challenges. Much more than that, we are able to actually have the courage to invoke challenges understanding the fact that challenges makes us stronger.

Famous sayings by Chanakya

I came across some sayings by Chanakya which has given food to my mind and captureed my thoughts for a while...feel like posting it here..., it can make our lives better to an extend.. if we follow n implement them the right way..

1) "Learn from the mistakes of others... you can't live long enough to make them all yourselves!!"
2)"A person should not be too honest. Straight trees are cut first and Honest people are screwed first."
3)"Even if a snake is not poisonous, it should pretend to be venomous."
4)"The biggest guru-mantra is: Never share your secrets with anybody. It will destroy you."
5)"There is some self-interest behind every friendship. There is no friendship without self-interests. This is a bitter truth."
6)" Before you start some work, always ask yourself three questions - Why am I doing it, What the results might be and Will I be successful. Only when you think deeply and find satisfactory answers to these questions, go ahead."
7)"As soon as the fear approaches near, attack and destroy it."
8)"The world's biggest power is the youth and beauty of a woman."
9)"Once you start a working on something, don't be afraid of failure and don't abandon it. People who work sincerely are the happiest."
10)"The fragrance of flowers spreads only in the direction of the wind. But the goodness of a person spreads in all direction."
11)"God is not present in idols. Your feelings are your god. The soul is your temple."
12) "A man is great by deeds, not by birth."
13) "Never make friends with people who are above or below you in status. Such friendships will never give you any happiness."
14) "Treat your kid like a darling for the first five years. For the next five years, scold them. By the time they turn sixteen, treat them like a friend. Your grown up children are your best friends."
15) "Books are as useful to a stupid person as a mirror is useful to a blind person."
16) "Education is the best friend. An educated person is respected everywhere. Education beats the beauty and the youth."

Basics of six sigma

I have prepared a ppt on the basics of Six sigma. I am a six sigma GB and working for BB certification. I wanna write some of the important points of "Six sigma basics" here on ma blog which may help some of ma friends :)

Introduction to Six Sigma :

What is Six Sigma?

• It is a highly disciplined process.
• Helps us focus on

> Developing; and
> Delivering.

• Near – perfect Products & Services.
• It is a management philosophy.
• Customer based approach realizing that defects are expensive.
• Fewer defects > Lower Cost > leads to >Improved Customer Loyalty.
• Way to achieve strategic business results.
• Six Sigma is statistics.
• Produce less than 3.4 defects per million opportunities.
• Organizations do not achieve this, indicating – there is still Opportunity.
• To implement and achieve the six sigma level of 3.4 defects per million opportunities or less, a Process is required and used.
• Sigma – A statistical term, measuring how far a given process deviates from perfection.
• The central idea is to measure defects in a process.
• Then, eliminating defects and get as close to “Zero - Defect” as possible.

Six Sigma is:

• The structured application of tools and techniques.
• Applied on project basis to achieve sustained strategic results.

Six Sigma - Key Concepts
At its core, Six Sigma revolves around a few key concepts.


Critical to Quality: Attributes most important to customer.


Defect: Failing to deliver what the customer wants.

Process Capability: What your process can deliver.

Variation: What the customer sees and feels.


Stable Operations: Ensuring consistent, predictable processes to improve Variations.

Design for Six Sigma: Designing to meet customer needs and process capability.
 
The Six Sigma Methodology
Six Sigma has two key methodologies:

D M A I C: Define, Measure, Analyze, Improve, Control.
It consists of following five steps:

1.Define the process improvement goals that are consistent with customer demands and enterprise strategy.
2. Measure the current process and collect relevant data for future comparison.
3.Analyze to verify relationship and causality of factors. Determine what the relationship is, and attempt to ensure that all the factors have been considered.

4. Improve or optimize the process based upon the analysis using various techniques.
5.Control to ensure that any variances are corrected before they result in defects. Set up pilot runs to establish process capability, transition to production and thereafter continuously measure the process and institute control mechanisms.



 


D M A D V: Define, Measure, Analyze, Design, Verify. It also consists of following five steps:

1.Define the process improvement goals that are consistent with customer demands and enterprise strategy.

2.Measure and identify CTQ’s (Critical to Qualities), product & production capabilities and risk assessments
3.Analyze to develop and design alternatives, create high – level design and evaluate design capability.

4. Design details, optimize the design, and plan for design verifications. This phase may require simulations.
5.Verify the design, set up pilot runs, implement production processes and handover to process owners.



Roles for implementing Six Sigma
To implement Six Sigma in an organization, the following roles are instrumental:


CHAMPIONS

• Drawn from Upper Management.
• Responsible for Six Sigma implementation.
• Act as mentors to Black Belts.

Master Black Belts

• Identified by Champions.
• Act as in-house expert coach.
• Guide Black and Green belts.

Black Belts

• Operate under Master Black Belts.
• Devote 100 % of their time to Six Sigma.
• Focus on Project Execution.

Green Belts

• Employees who take up Six Sigma implementation along with their other job responsibilities.
• Operate under the guidance from the Black belts.

Green and Black belts are empowered to initiate, expand, and lead projects in their area of responsibility.

So wishing you all a zero defect process management n conrol :)

Loving the funnier side of me!!!

I always wanted to have someone to Hold, someone to love. And now that you've come into my life...

I've changed my mind.

I must admit, you brought religion into my life...

- I never believed in Hell until I met you.

As the days go by, I think how lucky I am....

That you're not here to ruin it for me.

Congratulations on your promotion. Before you go....

Will you take the knife from my back? You'll probably need it again.

Happy Birthday! You look great for your age....

Almost lifelike!

When we were together, you said you'd die for me...

- Now we've broken up, I think it's time to keep your promise.

Congratulations on your new bundle of joy....

- Did you ever find out who the father was?

You are such a good friend. If we were on a sinking ship and there was only one life jacket...

- I'd miss you terribly and think of you often .

Your friends and I wanted to do something special for your birthday...
So we're having you put to sleep.

Looking back over the years that we have been together, I can't help but wonder.....

What the hell was I thinking

I'm so miserable without you...

It's almost like you're still here.

Thank you for being part of my life....

I never knew what evil was until I met you!

Congratulations on your wedding day!...

Too bad no one likes your husband.

How can I say this....

Your cooking kills me

Hooray.....

- You're divorced.

I just want you to know that I'm sorry for what happened...

- Especially since you survived.

Congrats on getting married...

It's not everyday you decide to ruin your life.

Someday I hope to marry...

Someone other than you.

We have been dating each for a very long time...

What do you say we stop?