Every organization has financial stuff that needs to be managed transparently and examined periodically by a professional to check on its soundness. Examining or inspecting the financial account of a firm or any sort of institution is technically termed an ‘audit’.
The process is mandatory to keep a check on how accurately a company or an institution is furnishing its financial details.
Description Of An Audit
The completion of the procedure of an audit can be done either by the employees of the company or by the heads of some specific departments of the firm. This is also termed as ‘internal audit’ in technical terms. When the procedure is carried out by an auditor outside the firm, the auditing process is then termed as ‘external audit’.
Having the financial position and transparency of an organization, form or institution checked externally helps in verifying the correctness of the financial details submitted by the firm and its employees.
The problem of fraud happening or the delivery of incorrect accounts’ information by the firm’s employees is reduced substantially when the audit is done externally. Public companies are mandated to get their accounts’ audit done by an external auditor. This needs to be done before declaring the results of a quarter.
Who Can Perform An Audit?
Audits are performed by experts or professionals who may belong to the firm or maybe some independent person depending upon whether the audit is internal or external. In India, audits are done by a chartered accountant from The Institute of Chartered Accountants of India. CAs belonging to this organization are accountable to hold autonomous audits of a firm.
The process of conducting an audit completes itself in four steps.
The very 1st step deals with the determination of the job of the auditor. The firm, that is the client, in this case, signs a term or contract with the auditor. The letter has the various phrases of engagement mentioned in it.
The 1st step is then followed by the next which deals with planning the audit.
The plan contains all the minor and major details like the deadline of the conduction of the audit and the various bureaus the audit will cover.
The audit can cover a single department or multiple ones at a time. It usually takes a day to complete an audit. However, in some cases, the audit can last for as long as a week.
The third and very crucial step is the compilation of all the info from the detailed audit done. The info is usually put in a report that is made by the auditor after the completion of the audit. The auditor has to mention all the necessary and crucial information from the audit in the report in a well-structured manner.
The final-most step is bringing forth the results of the audit.
What Is A Statutory Audit?
A statutory audit is done to check the correctness of financial accounts and details submitted by a firm or government. Statutory audit is done to check whether transparency is maintained while any firm or the government has submitted their accounts and finance related information like their bank balance, their accounts, their bookkeeping records and monetary marketing’s.
How A Statutory Audits Work
A statute is an act or regulation that has been enforced by a law-making government body in an area. The phrase statutory indicates that a statute requires the audit. A statute’s effect can be up to various levels. It can be at the central leave, the state level or the local level.
In the terms of business, a statute is defined as an act or law that governs the working of a particular organization or company. There are members or board directors of the company that usually formulates the rules related to the firm’s governance.
A statutory audit will make the auditor aware of how correct the submitted financial records of a company are. Everything, whether it is the company’s earnings or profits, expenditure, investment returns, and all other finance-related items are covered as ‘under-check’ during the procedure of an audit.
Importance of Statutory Audit
All public and private limited corporations are required by law (or stature) to conduct a statutory audit of their financial papers and filings, according to the Companies Act 2013 and Companies (Audit and Auditors) Rules, 2014. In fact, in the case of the statutory audit, the business turnover and nature of the business of public and private limited firms make no difference.
Only LLP (Limited Liability Partnership) firms are required to conduct a statutory audit:
The annual turnover exceeds Rs 40 lakh, or the capital contribution exceeds Rs 25 lakh.
In the event of statutory audit non-compliance, the government can levy a punishment ranging from Rs 25,000 to Rs 5,00,000. The failing officer might face a year in prison and a fine ranging from Rs 10,000 to Rs 1,00,000, or both
What Is A Management Audit?
A sound company always has sound management. The more the competitiveness of the managing potential of a company the more likely the company is to make great profits. Thus, a management audit is done to check how sound and competitive is the managing health of a firm.
The audit does not restrict itself to checking out the effectiveness of the executive but works on assessing the effectiveness of the managing team members about their objectives. The auditor checks how well the managing team works in the interest of the shareholders, how well are the relations they maintain with them and the other employees and whether or not they have some standards of working.
How a Management Audit Works
The director’s board of a firm is not furnished with a separate management auditing team. When the compensation team is sat over by the board of directors itself, they review the quality of the working of the executive and other managing directors. They do this by gaining some quantitative and factual info which comprises margins, operating cash flows, EPS and unquantifiable or intangible elements like efforts toward acquisition integration.
If that is not the case, the board members can even employ a separate auditor to conduct the management audit. The auditor conducts a thorough check on the management goals and effectiveness of the imaging team.
The various questions that a management audit answers are:
- Checking the administrative hierarchy and configuration erected by the management.
- The protocols and methods of the financial faction and how often are the protocols complied by.
- The effectiveness of the recent hazard-management gauges.
- The condition of associations between the employees of the association.
- The putting together of the annual financial budget of the firm by the management.
- The upgrading of the firm’s information technology systems.
- The responsiveness of the management faction to the shareholders.
- The effectiveness of the procedure of employee recruitment and retention.
- Existing training programs for current employees.
- The assurance of the company being a decent corporate citizen by the management faction.
- The strategic guidance of the firm to its developmental goals by the management faction.
Importance of Management Audit
1) It assists management in developing plans, objectives, and policies in order to efficiently achieve the management’s specified objectives by coordinating with staff
2) It aids in the formulation of budgets and the most efficient use of resources.
To assist in the coordination of many departments in order to achieve the most effective internal organization possible. It could show flaws in the Board of Directors’ members as well as managerial incompetence.
3) It also aids in determining whether the organisation lacks a clear and identifiable management style.
4) To determine the management information system’s insufficiency.
It aids in the evaluation of all five primary functional areas: procurement, production, sales, personnel, and finance/accounting
It is important to note that conducting a management audit for any entity is not a legal requirement, but it is an important tool for the continuous appraisal and evaluation of an enterprise’s methods and performance, which will ultimately lead to increased efficiency, meeting targets, and thus profit.
Statutory Audit VS Management Audit
A statutory audit is done to check the correctness of the financial accounts and records of a firm. The audit is legally mandated and must be done by a company every quarter. The audit is necessitated by a government law(called statute) and must be done positively every quarter by an external auditor.
On the other hand, a management audit has nothing to do with the financial accounts and the financial information of the firm. It is done to check the soundness of the management faction of the company. It reviews whether the management can give justice to the various goals of the executive members in the firm.
The whole article summarized what an audit means for a business. The condition of the statutory and management audits is necessary to check the quality of the financial accountability and transparency of a firm and to check the competitiveness of the managing group of the company.