Auditing is a systematic examination of financial statements through a collection of sufficient and appropriate evidence with an intention of expressing an opinion whether the financial statement give a true and fair picture or not.
Due to the strong intention of humans to mis-state information, auditing and due diligence have become a legal requirement in most countries.
All audits are not the same. They are different based on to whom it is to be reported and on which area it is to be reported. For e.g. Statutory audit is conducted by government authority and it is them to whom it is to be reported.
There are different types of audit some of them are as follows:-
Statutory audit:–Statutory audits are conducted in order to report the state of a company’s finance and accounts to the government. The audit report of a statutory audit is made in the form prescribed by the government agency. This audit is to be calculated by a qualified and independent auditor.
Internal Audit:-This audit is conducted by the own management of the company. We can say the internal audit is a preparation for other independent audits. But the main intention of internal audit is to check the status of finance and operational efficiency of the company. This audit can be conducted by an independent party or by a company’s own staff. The report of internal audit is to be submitted to management.
Tax Audit:- Tax Audit is required u/s 44AB of the income tax act, 1961.This section mandates that every person whose business turnover exceeds INR 1 crore and every person working in a professional with gross receipts exceeding INR 25 lacs must have their accounts audited by an independent chartered accountant. The Tax audit report is to be obtained by September 30thafter the end of the previous fiscal year. Non-compliance attracts a penalty of 0.5% of turnover or INR 1 Lacs whichever is lower.
System Audit:-System means collection or unification of activities, instruments, material, and people to achieve a specific goal. For e.g. Information system is a collection of hardware and software acting together to serve a common purpose of providing information. When we talk about a system audit we most specifically refer to management system audit. A system audit is an audit of system/subsystem against system requirement. The main purpose of this audit is to check whether the system/subsystem is working according to the prescribed requirement or not.
Due Diligence:-Due diligence is a process of thorough and objective examination that is undertaken before corporate entities enter into any major transactions such as mergers and acquisitions, issuing new securities, project financing, debt-securitization amongst others.Due diligence assists the purchaser or investor in gathering all the necessary information about the organization he is acquiring or investing in prior to completion of the transaction including critical success factor as well as strength and weakness.
Due diligence can be sub classified as follows:-
Commercial or operational due diligence
Financial due diligence
Tax due diligence
Information systems due diligence
Legal due diligence
Environmental due diligence
Personal due diligence
Operational due diligence involves an evaluation from commercial, strategic or operational perspective. For e.g. Whether proposed merger will create operational synergies or not. On the other hand financial due diligence is performed on the books of accounts and other information directly related to financial matters to obtain information about the financial health of the organization. In addition, legal due diligence may be required where legal aspects of the functioning of the entities are reviewed. For e.g. legal aspects of property owned by the entity or compliances with various statutory requirements under various laws. Environmental and personal due diligence is also carried out in order to establish whether various propositions with regards to environment and personnel of the enterprises under review are appropriate.
Let us examine a little more about Audit & Assurance Services
Error and mistake is a part of human life. We as a human are bound to make mistakes as it shapes us for future. But sometimes these mistakes are intentional. These intentional mistakes known as fraud are done with an intention to gain an advantage over others. Economic gain is the most important driving force for committing fraud. As economy developed money became the most important thing for a human and with an intention to earn more and more money people started to follow malpractices prejudicial to the interest of others. The impact of these malpractices had severe effects. To mitigate such activities and protect the interest of all a systematic examination is conducted. This process is called auditing. Auditing is not only for detection of fraud and errors. The main purpose of auditing is to check whether financial information represented by the financial statement is true and fair or not. Auditing does not assure that all the information is correct and accurate.