Assignment Internal Audit Essay Example for Free

Assignment Internal examine EssayQ.1 Critic exclusivelyy evaluate the qualities of an he ber in the wake of recent scams Ans- What should be the qualities of Internal Audit force play? There is no universal answer to this question. We can only generalize about the qualities of cozy Audit Personnel. It has been observed that innate take stockors and independent examineors often belong to the same master copy organization and are subject to the same master key regulations. Hence apart from professional qualification and friendships, the qualities of analyze force should be same. The Institute of Chartered Accountants of India (ICAI) has issued SA-220-Quality Control for Audit Work with an objective to establish standards on quality swear as to the policies and procedures reckoning of an visit sign for audit bet generally, and procedures regarding the practice delegated to assistants on an idiosyncratic audit. The standard is equally applicable to an interior(a) audit part also. The head of internal audit department should regularly review the quality of audit movement based on the standard menti onenessd below. Important extract of SA 220 are given below.Important termsa) The touch oner means the person with final responsibility for the audit. b) Audit Firm mean either the partners of a firm providing audit emoluments or sole practician providing audit services. c) Personnel means all partners and professionals staff engaged in the audit practice of the firm. d) Assistant means personnel elusive in an individual audit other than the listener.Audit firm1. The audit firm should implement quality control policies and procedures designed to ensure that all audits are conducted in unison with the standards on auditing. 2. The objectives of the quality control policies to be adopted by an audit firm will ordinarily incorporate the following a) Professional requirements Personnel in the firm are to adhere to theprinciples of independence, integrity, objectivity, confidentiality and professional behavior. b) Skills and competence The firm is to be staffed by personnel who have attained and maintain the technical standards and professional competence required to enable them to fulfill their responsibilities with due care. c) Assignment Audit work is to be assign to personnel who have the degree of technical training and advance required in the circumstances.d) Delegation There is to be sufficient direction, supervision and review of work at all levels to provide reasonable authorization that the work performed meets appropriate standards of quality. e) Consultation Whenever necessary, consultation within or outside the firm is to occur with those who have appropriate expertise. f) Monitoring The continued adequacy and operational potence of quality control policies and procedures is to be monitored. 3. The firms general quality control policies and procedures should be communicated to its personnel in a mode tha t provides reasonable assurance that the policies and procedures are unders tood and implemented.Individual audits4. The auditor should implement those quality control procedures which are, in the context of the policies and procedures of the firm, appropriate to the individual audit. 5. The auditor, and assistants with supervisory responsibilities, will consider the professional competence of assistants performing work delegated to them when deciding the extent of direction, supervision and review, appropriate for each assistant. 6. Any delegation of work to assistants would be in a manner that provides reasonable assurance that such work will be performed with due care by persons having the degree of professional competence required in the circumstances. electric charge7. Assistants to whom work is delegated need appropriate direction. Direction involves informing assistants of their responsibilities and the objectives of the procedures they are to perform. It also involves inform ing of matters, such as the nature of the entitys business and possible invoice or auditing problems that may affect the nature, timing and extent of audit procedures with which they are involved. 8. Audit programme is an significant tool for the communications of audit directions. Time budgets and the general audit plans also helpful in communicating audit directions.Supervision9. Supervision is closely related to both direction and reviews and may involve elements of both. 10. Personnel carrying out supervisory responsibilities perform the following functions during the audit a) Monitor the progress of the audit to consider whetheri) Assistants have the necessary skills and competence to carry out their assigned tasks ii) Assistants understand the audit directions and iii) The work being carried out in accordance of rights with the overall audit plan and the audit programme. b) Become informed of and address meaning(a) accounting and auditing questions raised during the audit , by assessing their significance and modifying the overall audit plan and the audit programme as appropriate and c) Resolve any differences of professional nous between personnel and consider the level of consultation that is appropriate. Review11. The work performed by each assistant needs to be reviewed by personnel of at least equal competence to consider whether a) The work has been performed in accordance with the audit programme b) The work performed and the results obtained have been qualifiedly documented c) All remarkable audit matters have been resolved or are reflected in audit conclusions d) The objectives of the audit procedures have been achieved e) The conclusions expressed are consistent with the results of the work performed and assume the audit opinion. 12. The following need to be reviewed on a timely basisa) Overall audit plan and the audit programme b) Assessment of inherent and control risks including the results of tests of control and the modifications, if any, made to the overall audit plan and the audit programme as a result of tests of control c) Documentation of the audit evidence obtained from significant procedures and the conclusion drawn there from, including the results of consultations and d) Financial statements, proposed adjustments in financial statements arising out of theauditors examination, and the auditors proposed observations/report.ConclusionThe personnel qualities required of the internal audit personnel can be summarized as follows 1. They should possess required qualifications, training, experience and competence. 2. They should have a continuing awareness of development in the field of accounting and auditing particularly internal auditing. 3. They should perform their duties with due professional care, redeeming due attention to the role assigned to them by the management. 4. They should maintain their professional independence.5. They should be completely fair and unbiased in their reporting. 6. They should possess highest quality of ethics and integrity. Q.2 What is favorable audit? Is social audit taken seriously by the corporate world? urinate examples of corporates undertaking social audit. Ans- The social audit is also called social responsibility audit. A business organization exists in society. Hence, it owes certain responsibilities toward society at large. As Lord Denning has observed the directors of a corking go with should owe a occupation to those who are employed by the gild to see that their conditions of service are proper. They should owe a duty to the customers, to the stack to whom the goods are supplied, a public duty perhaps, not to expect excessive prices. They should owe a duty also to the community in which they live, not to commit back the place of production hideous or a nuisance to thosMF0013 Internal Audit and Control Set1 Q2Q.2 What is social audit? Is social audit taken seriously by the corporate world? Give examples of corporate undertak ing social audit.Ans thoroughly-disposed Audit-The social audit is also called social responsibility audit. A business organization exists in society. Hence, it owes certain responsibilitiestoward society at large.As Lord Denning has observedThe directors of a great ac accompany should owe a duty to those who are employed by the company to see that their conditions of service are proper. They should owe a duty to the customers, to the people to whom the goods are supplied, a public duty perhaps, not to expect excessive prices. They should owe a duty also to the community in which they live, not to make the place of production hideous or a nuisance to those who live around.Social audit is mainly concerned with social accounting. It may be note that social accounting is still in early stage and so social audit also.Social audit also called Social Responsibility Audit is mainly concerned with social accounting. A continuous audit is basically a perpetual audit, where auditors and hi s staff constantly engaged in checking the accounts throughout the year. yearbook audit is done at the end of the financial year when finalization of accounts has been completed and books of accounts closed. A Balance Sheet audit is mainly concerned with the verifications of items show in the Balance Sheet such as share capital, reserve and surplus, current liabilities, fixed assets, current assets, investments etc in detail.Importance of the Social PolicyThe phenomenal growth of socially Responsible Funds (now 20% of funds invested in the US), the growing difficulty to attract qualified employees, and the rise of non-governmental organizations able to sue or boycott unethical businesses, demonstrate the vital importance for any business of a well designed Social Policy.The Ethics Policies will attract semipermanent investors, add market shares for the ethical product, strengthen partnerships, and make the employees proud. The Labor Policies will attract and keep a qualified work force, and growth productivity, objet dart opening new-fangled markets (ethnic minority customers are sensitive to the anti-discrimination policies in the work place).The Environmental Policies will attract customers interested in the protection of the environment, and investors who fear the risks linked to bad environmental practices, while sometimes reducing the costs with cost-effective modifications of production processes. As for most other components of the Social Policy, serious Environmental Policies will attract Socially Responsible Funds and a qualified workforce (nobody likes polluters).The Human Rights Policies, also, will attract Socially Responsible Funds and a qualified workforce. Its most important role, however, is defensive to pr all the samet boycotts or campaigns of protest that could seriously tarnish the reputation of the company acc apply of practicing (or being an accomplice of) human rights abuses, and the resulting falling stock prices, exhalation of ma rket shares, and low-moral work force.The Community Policies will not only create roots in a local base for the company, it will also increase the productivity of the work force involved in the projects (by developing their leadership and customerservice skills, building pride and loyalty with the feeling of being useful).The Society (or Extra-Community) Policies boost not only the products linked with the policy but also the image of the company. Cause Related Marketing is extremely appreciated by customers because it makes them feel good (allowing them to support charities without spending their time or money), as long as the charities are well chosen and the percentage is not too small (or the ceiling too low).The Compliance Policies are part of the Social Policy for two reasons. First, by complying with the law, the co. demonstrates it is socially responsible. More importantly, Compliances Policies often go beyond the legal requirements, in devote to show concerns for social ma tters (health, labor, environment, etc.). In many cases, companies build their social image by doing only slightly more(prenominal) than what is required by the law.Creation of a Social PolicyMost companies (if not all) already have elements of Social Policy. Often, these are independent pieces of regulation and practices. Most of the time, they are not part of a unique strategy, they are not managed by powerful senior executives, they are not reviewed before any business decisions are made, and they are not used in ways that would produce their full benefits.The first step is to have an Independent Social Audit, either Defensive (to prevent lawsuits and boycotts), or Productive (to increase productivity, market shares and long term investment). The audit will identify the stakeholders clarify the components of a Social Policy that would address the concerns of these stakeholders at either the Defensive or Productive level, or make recommendations on the necessary measures to build the Social Policy.The company must be summarisely involved in the Audit. The Independent Social Audit is neither an inspection (for which the company would dissimulate important pieces) nor is it a situation where the Auditor brings his one size fits all solutions. The Auditor is only the prepare of a team, composed of senior executives of the company who are working at gathering the data and finding solutions. The Auditor provides the directions, merges the information to create a livelong picture of the social situation, and gives advice on the method used by the company to build its Social Policy and on its different aspects. Ultimately, it is the leadership of a company who builds its Social Policy, and then decides on the best way to run the policy (for instance, nomination of a person or creation of a department give to Social Policy issues).Scope of a Social AuditThe identification of the stakeholders is generally the first task of an audit. However, a Social Auditor do es not admit each group of stakeholders separately. Stakeholders have to be considered as a whole, because their concerns are not limited to the defense of their immediate interest. As a result, the Social Auditor will work on the components of a companys Social Policy (Ethics, Labor, Environmental, Community, Human Rights, etc.), andfor each subject, the Social Auditor will analyze the expectations of all stakeholders.The scope of the audit generally includes the following policies Ethics values the company vows to respect. Policies include the pledge not to participate in (nor engage in business with people involved in) a series of activities that are deemed dispatchensive. This list of unacceptable activities often includes exploitation of children, unethical treatment of animals, damage to the environment, and dealings with undemocratic regimes or with bad computerized tomography industries (fur, tobacco,guns, etc.).Labor creation of a working environment allowing all employe es to develop their potential. Policies include training, career planning, remunerations and advantages, rewards linked to merit, balance between work and family life, as well as mechanisms that ensure non-discrimination and non-harassment. Environment monitoring and reduction of the damage caused to the environment. For instance, policies of reduction of emissions and waste. Human Rights making sure the company does not violate human rights nor appears as supporting human rights violators.Community investment in its local community. Policies include partnerships with voluntary local organizations, with financial donations, donations in kind (computers for upbringing, food and c potentiometerhes for the poor), and employees involvement. The company may initiate or participate to a major project such as the regeneration of a poor neighborhood plagued with unemployment, poverty, low education and racial tensions.Society investment or partnership beyond the community. For instance, Ca use Related Marketing (partnership with a charity to market a product while giving a small percentage of the sales to the charity).Compliance Identification of all legal obligations and of the means to comply. Policies must deal with ever-changing rules related to its work force (Labor), its products (Health, Environment, Intellectual property, specific regulations), its administration (Business, Tax), its dealings (supplier andcustomer liability, Criminal actions).MF0013 Internal Audit and Control Set1 Q3Q. 3 Explain the Code of Ethics for Internal Auditor. Explain them in context with blacklisting Price Waterhouse Coopers in Satyam Scam.AnsCode of Ethics for Internal AuditorIn his book Practical Guide for Internal Audit R.S. Adukia has erudite explained about the code of ethics for internal auditor which is as follows This code of ethics sets the minimum requirements for the performance and conduct of internal auditors. This code applies to all internal auditors but does not supe rsede or replace the requirement on individual to comply with ethical codes issued by professional institutes of which they are members or pupil members and any organizational codes of ethics or conduct.There are four main principles1. Integrity The internal auditor should demonstrate integrity in all aspects of their work. Their integrity establishes an environment of trust, which provides the basis for reliance on all activities carried out by the internal auditors.2. Objectivity Objectivity is a state of mind that has regard to all considerations germane(predicate) to the bodily function or process being examined without being unduly influenced by personal interest or the views of others. Internal auditors should display professional objectivity when providing opinions, assessments and recommendations.3. Confidentiality Internal auditors must safeguard the information they receive in carrying out their duties. There must not be any unauthorized apocalypse of information unles s there is a legal or professional requirement to do so.4. Competency The internal auditor should make use of his/her knowledge, skills and practical experience necessary for auditors activity performance.They should not accept or perform work that they are not competent to undertake, unless they have received adequate training and support to carry out the work to an appropriate standard.Achieving compliance with code of ethicsi) Security integrity The internal auditor shoulda) Perform his/her rent out honestly, diligently and with responsibility. b) Perform his/her profession in harmony with the acts and other generally binding regulations. c) revoke any illegal activity and performing any activity discrediting the internal auditors profession. d) Respect the legal and ethical objectives of the organizations. e) Take care that his/her integrity should not be compromised.ii) Objectivity The internal auditor shoulda) Avoid taking part in activities or relations which may damage, or might be understood as damaging his/her unbiased assessment including activities or relations which may be in conflict with public interests. b) Avoid accepting any issue that may damage or might be understood as damaging his/her objective professional assessment. c) Protect his/her objectivity against political influence. d) Disclose all substantial facts known to him/her that being undisclosed might misrepresent the conclusions on activities or events assessed.iii) Observing Confidentiality The internal auditor should a) Be careful when using and protecting information he/she gathered when auditing. b) Avoid disclosing and making use of the information obtained during the auditors activities performance in order to damage the interests of other person or organization. c) Avoid making use of the information obtained during the auditors activities for personal enrichment or in a way which would be in conflict with the law or which would damage legitimate and ethical interests of th e organization.iv) Demonstrating Competencea) It is a pre-requisite that all internal audit staff is aware of and understand 1. The organizations aims objectives, risks and governance musical arrangements. 2. The purpose, risks and issues affecting the service area to be audited. 3. The terms of file name extension for the audit assignment so that there is a proper appreciation of the parameters within which the review be conducted. 4. The relevant legislation and other regulatory arrangement that relate to the service area to be audited. b) The internal auditor should keep educating himself constantly in order to have a good command of internal audit techniques and auditor standards necessary for obtaining, examining and evaluating the information.v) Maintaining Audit Independence Internal auditors should be independent of the activities they audit. Internal auditors are considered independent when they can carry out their work freely and objectively. Independence permits interna l auditors to render the impartial and unbiased judgments essential to the proper conduct of audits. This is achieved through organizational status and objectivity. Independence stands for an internal auditor being able to take a stand and report on materiality issues, uninfluenced by any favors coercion or undue influence.Satyams auditors-So what were the auditors, PricewaterhouseCoopers, doing? There was no cash within the companys banks and yet the auditors went ahead and signed on the balance sheets saying that the money was there.Not just the cash, even they even signed off on the non-existent interest that accrued on the non-existent bank balanceAuditors do bank reconciliation to check whether the money has hence come or not. They check bank statements and certificates. So was this a total lapse in supervision or were the bank statements forged? No one knows yet. The cops have already raided the PwC office in Hyderabad, but details of what they have found are yet to emerge.Th e company officials said they relied on data from the reputed auditors. tho PricewaterhouseCoopers, stung by this insinuation hit back at Satyam. In a statement to the media, the firm said The audits were conducted by Price Waterhouse in accordance with applicable auditing standards and were supported by appropriate audit evidence. Given our obligations for client confidentiality, it is not possible for us to comment upon the alleged irregularities. Price Waterhouse will richly meet its obligations to cooperate with the regulators and others. (Extracted from Rediffmail.com).MF0013 Internal Audit and Control Set1 Q4Q.4 As a senior audit assistant of M/s. Asutosh Associates, you are in charge of internal audit team of M/s Rajesh Technologies involved in the manufacture of plastic tubes. From the information you obtained you find the company is facing liquidity problem for the last two long time. You are required to prepare working paper indicating the internal audit problems you wou ld expect to face and how you plan to overcome them.AnsThere have been many accounting scandals over the years which resulted in more traders showing interest in learning how to analyze a companys financial statements. When companies do declare bankruptcy, it is ordinarily because they cannot pay their debts. So lets take a look at the importance of corporate debt and go over how an investor can analyze a companys liquidity.Economic theory says that the mix of debt and equity in a companys capital structure is irrelevant, that the value of a firm should be independent of its debt ratio. In the real world, companies and investors have to worry about things like taxes and the risk of default, so a companys capital structure can be relevant to its long-term survival.Long -term creditors can also put restrictions on the company such as preventing it from taking on additional debt or paying highdividends. Most public companies have at least some debt, and the biggest reason to take on debt is to leverage the equity (much like buying stock on margin). Return on equity is rattling important to investors. But the greater the proportion of debt to equity on the balance sheet, the higher the business risk.Since a lot of corporate debt tends to be shortsighted-term, there can be a real risk to the company if investors lose confidence in it. It is not unlike a run on a bank, where liabilities (loans) have a longer duration than their assets (deposits). If everyone suddenly wants their money now, the bank will not be able to meet the demand and be forced to close. That is why it is important to look at a companys debt and liquidity.Liquidity in the option markets refers to the volume of contracts changing hands in a day. There is lots of liquidity in the options of companies such as IBM and Microsoft, since there are many buyers and sellers. However, liquidity means something very different at the company level. Here we are referring to whether or not the company has, or can generate, enough cash to keep operating if they had to pay off short-term debt quickly.Banks use liquidity analysis to assess the risk of a company not being able to repay them in the short term. Agencies rate a companys debt according to the perceived threat of default. Still, crises periodically seem to emerge from almost nowhere to cause the sudden get it of companies that seemed solid only weeks before. Once investors lose confidence, as companies such as Enron, Qwest and WorldCom l earn, liquidity can mean the difference between survival and death. That is why investors should always take a little time to check debt and liquidity ratios before entering any trading position.Most investors are familiar with the corporate obligate market. When a ratings agency such as Moodys or Standard and Poors downgrades a companys debt, this certainly causes the companys bond holders some distress, as the value of the bonds will drop. Still, since corporate bonds are primarily long-t erm debt, this is not usually the source of liquidity problems (unless a largeamount just happens to be nearing expiration). No, it is usually a companys short-term debt that gets them in trouble.When a company runs into financial problems, their debt rating is usually quickly downgraded. Investors demand a higher premium to lend to the company. If they lose confidence altogether they will simply refuse to lend at any price. If the company does not have liquid assets available, even temporary cash flow problems can quickly become life threatening.Of course, the banks most companies up in the short term. Before investors will buy commercial paper, they usually require a commercial paper back-up facility with a bank. This gives them a bit more security that they will be paid. However, this facility is not meant to be used, and drawing on it is an admission the company is having severe liquidity problems. This is what happened to Qwest about two years ago.When Qwest had trouble borrowi ng in the commercial paper markets, they had to draw down their $4 billion credit line with banks. It was a stop-gap measure that put off a financial reckoning for a few months, but credit agencies responded by cutting the rating on its outstanding bonds to near junk status. $4 billion is a lot of money to come up with in short time. By comparison, their market capitalization was $16.4 billion at the time, they had annual revenue of about $20 billion, and a loss of $4 billion the previous year.So one of the first ratios an investor should look at is the companys debt to its total capital. Total capital is all their debt plus equity. This ratio should be compared with what is normal in their industry and not simply against all other businesses.The next thing to look at is a companys ability to meet its debt payments. This is measured by a ratio called times interest earned. Times interest earned is a companys earnings divided by their total interest cost. For the earnings number you could choose to use EBIT (earnings before interest and taxes), or the more aggressive EBITDA (which adds back thenon-cash costs of depreciation and amortization).