What is the deference between internal audit and external audit? Also state its nature and field of work.?

Internal audit:

It means a continuous critical review of financial and operating matter of a business. In other words it means the audit of a business conducted by the business itself for a continuous basis. It is done by that internal staff appointed particularly for the audit purposes these are called internal auditors.

External audit:

If an independent auditor examine the books and records of the company on behalf of the shareholders it is called external audit. While auditor is called statutory auditor or external auditor.

In case of accounting matter both the auditor work largely in the same field. They have common interests in finding the error and detecting the fraud. Both want to know the correct and true financial statements.

Important differences between these two.

1.                 Appointment:

Internal auditors are appointed or nominated by the management of the company while the external auditor is appointed by the shareholders of the company.

2.                 Legal position:

Legally internal audit is not compulsory where as external auditor is compulsory.

3.                 Status of auditor:

Internal auditor is in employee of the company while the external auditor is an independent person.

4.                 Qualification:

For the internal auditor any specific qualification compulsory where as for the external auditor specific qualification is compulsory.

5.                 Submission of report:

Internal auditor has not to submit any report where as the external auditor submits report to the shareholder.

6.                 Remuneration:

Internal auditor rumination is fixed by the management of the company where as the remuneration of the external auditors is fixed by the shareholders of the company.

7.                 Nature of remuneration:

Internal auditor’s receives salary while the external auditors receives audits fee.

8.                 Nature of checking:

Internal auditors checks all truncation where as the external auditor may apply test checks.

9.                 Right if attending meeting:

Internal auditors has no right to attend the meetings of the company’s shareholders where as the external auditor has a right to attend and meeting.

10.            Kind of audit:

Internal audit is a form of continuous audit while external audit is conducted after the preparation of the final account.

11.            Guidance:

Internal auditor gives suggestions or hints to the management for the betterment of the business while the external auditor has no need to give suggestion unless he is asked.

12.            Duties:

Internal auditor’s primary duty is to find the frauds and errors while external auditors have to report about final accounts whether these are true or false.

13.            Removal:

Internal auditor can be take away by the management where as external auditor can be removed by the share holders.

Define term Internal Control. Explain its objectives and main principles? | Auditing

Internal control:

The whole system of business control organized by the management to carry on the business is called internal control, internal check, internal audit and other such forms of control are also included in it.

Objectives:

1. The errors and frauds the following of check may be prevented.
2. To prevents the cash and goods misappropriation by keeping check   on the receipts and delivery.
3. To keep correct record of all business transaction.

Principles:

There are the following important principles of internal control.

1.                 Record and books:

This should be kept up to date and it regular interval these should be balanced. Different persons should make the Handing of cash transactions. For example the cashier should not be allowed to record the cash in the accounts book. He should have no concerns with the written ledgers.

2.                 Independent checking:

Work executed by one person should be independently and automatically checked by another person.

3.                 Principles relating to staff:

Duties of each staff number should be clear and there should be no confusion and doubt in this regard. In case of any staff number absence duties arrangement should be made in advance.

4.                 Proper supervision:

For the effective internal control system management should have up to date information about the trade and financial position the company. So it should exercise proper supervision for effective operation of internal control system.

5.                 Clear rules:

All those rules relating to cash, stock receipt and issuance of goods should be very clear and well defined. It should also be checked the rules should be followed by the employees properly.

6.                 Instructions in writing:

All the instructions about the internal control system should be go to the employees in writing. In this way the internal control system can properly be followed.

7.                 Double entry system of accounting:

For the effective internal control double entry system of accounting is also very useful. No uncertainty it is comparatively expensive but it must be used for effective control.

8.                 Incentives for honest worker:

Honest and hard working person must be encouraged. He should be given same regard in the shape of promotion and cash. This principle is also very efficient in improving the internal control.

9.                 Use of machines:

For tabulation and keeping the truth or accuracy of the record various mechanical instruments like calculators and computers must be introduced.

10.            Duties performance record:

Allocated functions to the employees were performed accounting to the procedure or not. There should be ensure or proof and proper record of their performance and also it indicated that it has been checked properly.

11.            Record of goods and assets:

All the company’s assets and property record should be sustain properly. There should be also the security/measures for the property.

12.            Surety bonds:

To protect the company from frauds or illegal activities and to make the internal control more effective surety bonds can be taken from the employees. 

Internal Check or Control over Sale

There are following important points which must be kept in view in case of internal control over sales.

1.      Receipt of sales order:

All the orders from the customers should be received in written. All the particulars about the goods like name date and mode of transport should be written in the “order received book”. To dispatch departments one of the order copies should be sent.

2.      Checking of order:

Before the dispatch or discharge of goods each order should be checked with its correspondence.

3.      Sales in voice preparation:

Sales invoices should be prepared or make in triplicate when the order is executed.

4.      Invoice checking:

A responsible officer should check the calculations and prices charged. He will also initial that he had checked that work.

5.      Copies of invoice:

One copy of invoice will in sent to the buyer. In the customer account the second copy will be debit. 3rd copy is sent to the gate keeper.

6.      Properly numbered:

Successively each invoice should be numbered and before dispatch responsible officer should sign on it.

7.      Dispatch of goods:

An official should examine or check the goods before packing and compare them with the order.

8.      Entries in books:

At the gate all the packages should be entered in the “goods out ward book” by the gate keeper. Against each entry sales invoices number must be shown in the “goods outward book”.

9.      Entry of returned goods:

Some time goods are being returned by the customer due to any reason. Gatekeeper must enter such returns in the “good inward book”. Such record must be verified with the debit notes sent by the customer. In this way proper control can be maintained.

            10.    Entries from the credit notes:

From the credit notes entries must be made in the return inward book from which the customer’s accounts concerned will be credited.

11.    Collection of receipts:

In this regard there should be a strict control on the collections of customer’s accounts. Customers should be immediately informed about the difference in the balance founded any time.

12.    Access to ledgers:

The person making the sales should, have nothing to do with the office where sales ledgers are posted up, nor with the cashier’s office where the cheques in payment of customer’s accounts are received.

What are the Internal checks over purchase?

 There are following suggestions given for a proper control over the purchases.

1.      Supply of requisition:

Whenever goods are needed in any department of the company, the head or top level of the department should send the purchase requisition to the purchases department. He should mention the items quality, quantity and the time by which the goods must be supplied.

2.      Purchases order:

It should be given in writing on printed and numbered forms. It should remain with the purchases department.

3.      Copies of purchases order:

Purchase order should be three copies one copy should be sent to the supplier, one copy to the store clerk and one should remain with the purchase department.

4.      Writing note:

When goods will be received the store department will make a real inspection. After counting receiving person will write the particulars on the “goods received note” in duplicate.

5.      Comparison:

One copy of the goods received note will be sent to the purchases department. Purchases department will compare the quality and quantity with the invoice.

6.      Invoice checking:

Each invoice on receipt should be verified or checked by responsible officer with the purchases orders that price and quantity is correct.

7.      Inspection:

Before storing the goods these should be examined or inspected the quality should be tested.

8.      Purchase return:

In case of any defect it should be immediately reported to the purchase department. Purchase department may take up the case. All returns outwards should be dully authenticated as to its correctness.

9.      Invoice checking:

Each invoice should be sequence numbered and property field.

10.    Proper record:

Proper record of purchase should be maintained in writing. All the department officials and officers who are involved in the purchases their initials must be taken.

What are the Limitations of Auditing?

1.                 Frauds by management:

Auditing fails to check planned frauds. The management can play ticks to control the accounts in order to hide their inefficiencies. The frauds committed in such conditions are not disclosed. The audited accounts could not show the true and fair view.

2.                 Wrong certificate:

Auditing is based on many certificates taken from management and other persons. The certificates may not provide the true information. Auditing may fail to provide the desired results. When certificates give incorrect information, the financial statements cannot show position.

3.                 Misleading clarification:

Auditing fails to disclose correct information. The previous entries may not be clear to audit staff. The management may not provide correct clarification. The auditor is enclose to present his report even of the clarification is not true. The auditing neglect to help many persons who trust on audit report.

4.                 No true picture:

The auditing does not present cent percent true picture. The auditor is concerned with figures shown in the books of accounts. Auditing fails to disclose true picture when figures have been manipulated. The purpose of audit fails when it is unable to depict real scene of business affairs.

5.                 No correct view:

Auditing fails to present correct view. There are restrictions of accounting so figures are not facts. These figures are based on opinion. Moreover the auditor has to make judgement on various matters. The personal judgement may be wrong in certain cases. Thus auditing is not able to expose correct view.

6.                 No suggestion:

The audit is conducted to show fair view of financial statements. Auditing is not related with management policies. The auditor cannot guide or direct management for good use of capital. The auditor test what has been done? He is unable to suggest what should have been done.

7.                 Absence of honesty:

The auditing work depends upon various professional and personal qualities of an auditor. The auditor must evidence which is true. Management and other parties should not influence him. The absence of honesty means failure of audit purpose.

8.                 Bias of auditor:

The auditing fails to present fair view due to bias of an auditor. It is the quality or character of an auditor that he should be not dependent to others. The views of auditor are included in audit work when such quality is missing. The biased auditing fails to help many people.

9.                 High cost:

The audit work is competed with cost. The cost of audit should not exceed the cost of errors and frauds. The small-scale business enterprises consider it as a burden on their performance. Auditing fails to serve millions of business entities.

10.            Past action:

Auditing is nothing more than checking of past activities. It is not related with present or future. The audit fee raises the cost of business concern. Such cost does not help to improve market standing of enterprise. It fails to suggest enhance in quality and reduction in cost. 

Advantages or Importance of Auditing for business, owner, and general public

1.                 For business:

a.                 Errors are located:

The errors can be located through. It the location and correction of errors is possible through auditing. The fair and true information about business is available.

b.                 Frauds are discovered:

Auditing is helpful for business. Finding of fraud is possible through it. The guilty persons can be responsible. The audited accounts show fair view about activities.

c.                  Loans become easy:

Lenders for granting loans accept the audited accounts. The reputation of borrowers increases due to auditing. Thus audited accounts help the businessman to expand his activities.

d.                 Advice about weakness:

Auditing is useful for business. The people can search advice from auditors. The auditors are professionals and they know their work very well. They can highlight the grey area. Duty of the businessman to act upon the advice of the auditor.

e.                 High moral values:

There is moral check on management and other staff. Auditing puts the pressure of the work honestly on the staff. There is no pending work so there is less chance of errors and frauds.

f.                   Tax payments:

The tax authorities accept audited accounts for assessment of taxes. There is no more investigation from tax department. The audited accounts decrease (lessen) the worries of business people.

2.                 For owners:

a.                 Efficiency improves:

The auditing determines the efficiency of employees. The qualified and trained management is an asset for any business. Such management can play active role in framing and implementing the policies.

b.                 Dispute is settled:

The audited accounts are helpful to settle the conflict. The audited accounts become the basis of making decisions. The conflict may relate to infringement of patents or trademarks.

c.                  Improvement in internal control:

The auditor can point out the weakness of internal control system. The business management can remove these weaknesses. The impressive internal control system is essential for large-scale business.

d.                 Fluctuation in profits:

The auditor can make the detailed study to find the reasons of fluctuation in profits. There are different reasons for changes in profit. The auditor can find the true cause of such changes.

e.                 Shareholders protection:

The shareholders feel that their rights are protected through auditing. They can know the performance of the management. Audited accounts help to determine the value of the shares.

f.                      Partners satisfaction:

The sleeping partners feel satisfaction when their accounts are audited. The managing partners can use business property for their personal benefit.

g.                 Properties:

Auditing is useful for proprietors. The audited accounts help the sole proprietor that their business is going properly. Auditors point out the errors and frauds. The owners can determine the efficiency of their employees or assistants.

h.                 Beneficiary:

The author of a trust can nominates any person as trustee to look after the property of a trust. Auditing can safeguard the rights of beneficiaries. There is a moral check on the trusted to follow the by-laws of trust.

i.                   Deceased estate:

The audited accounts present true and fair view of financial statements. The family can rely on audited account for distributing the estate of deceased person.

j.                   Insolvency:

The audited accounts show true and fair view of state of affairs of sole proprietorship and partnership. The creditors can get their money back first and then owners can get refund of capital. The audited accounts help to adjust the cases of any early date.

3.                 For government:

a.                 Better performance of tax department:

Tax officers accept the audited accounts. The scrutiny order can be issued without further clarification. There is saving of time and money due to audited accounts. The performance of tax officers is enhanced.

b.                 Exact revenue amount:

The collection of revenue is possible at an early date. The people are allowed to deposit different kinds of taxes. The recovery of income is made at the opening of the year. The government can start welfare projects on the basis of total revenue growth.

c.                  Progress of economy:

The true and fair view is stated in the audited accounts. The stage or phase of economic progress can be determined. The government can take measures to increase the rate of economic growth.

d.                 Purchase of private business:

The private business houses may not work in favour of general public. Such business units can take over by government. On the audited accounts basis purchase price is decided.

e.                 Sale of government business:

The policy can be framed on the basis of audited accounts. The management comes to know the value of business. The government can sell state-owned units to private sector. The bid price is settled on the basis of audited accounts.

f.                   Inspectors:

The audited accounts show fair value of all assets. The value of assets is the basis of tax. This issue can be settled through audited accounts. The auditors are experts of their field. They know all the methods of property valuation. They can issue certificate to satisfy the government agencies for valuation of property.

4.                 For general public:

a.                 Insurers can settle claims:

The statement of fire and marine insurance claims is easy through audited accounts. The policyholders and insurance company can settle actual loss of property.

b.                 Creditors are protected:

They can know the rue performance of their debtors. The creditor can accept this surety only when feels that debtor is reliable businessman. Audited accounts provide basic information about reliability.

c.                  Bidders can offer high rate:

Audited accounts provide information about net worth of any business. The people concerned in purchasing the business can trust on such information. They can offer reasonable price through open bidding.

d.                 Better pay for employees:

They are interest in profits. Audited accounts provide true and fair view of profits. The employees can demand for higher pay, fringe benefits and participation in profits. Audit of accounts by an independent person help the employees to make settlement with their employers.

e.                 Investors can take decisions:

The audited accounts can be used to calculate the value of shares and other securities. The bargain power is given to the people who have the money and they want to earn income. They can protect their rights through reliable information.

Define Internal Audit and explain its object?

Internal audit means a continuous critical review of financial and operating matters of a business. In other words we can say that the audit of a business adopted or conducted by the business itself for a continuous basis. Internal audit is done by the inside or internal staff appointed specific or particular for the audit purpose.

Objectives of internal audit:

Though the objects of internal audit may differ from business to business but following are the important objects of internal audit.

                Removes the errors and frauds:

As the accounts of the business are checked on continuous basis by the auditors, so it removes the chances of frauds and errors.

                Preparation of annual audit:

It is very helpful or useful for the preparation of annual audit so before the annual audit mistakes can be removed.

                Provides information about the system of accounting:

Internal audit give surety to the management of the business that check and internal system of accounting is effective and properly implemented.

               Authorization of transaction:

It also examine that all transaction are properly authorized.

How to Vouching of Sales return?

The following steps should be taken to vouch the sales return book.

1.      Sales return book:

The auditor should vouch it with the credit notes issued to the debtors.

2.      Credit notes:

While checking the credit notes issued particular attention should be given to the following points.

1. Name of client.
2. Debtors name agrees with the sales return book.
3. Date falls within the financial period.
4. Whether checked by staff member & it bears his initial in token of internal checking.

3.      Allocation:

The debit to revenue account should be given in the books of client to that head of account which was previously credited.

4.      Goods received:

The entries for the goods received should be checked with the goods inward book or with gate in passes.

5.      Reason for returns:

The general reason for the debit note should be inquired in to correspondence on the subject should be carefully read, when the auditor feels doubtful about the accuracy of entries.

6.      Casts and postings:

Casts cross casts and carry forwards of the sales return book should be checked. The pasting to the general ledger and some of the posting to the debtor’s ledger should also be checked.

7.      Manipulation:

The entries in the sales return for the early part of the next period should be examined carefully. There is a possibility of manipulation account by including the fictitious sales during the year under audit and showing them as returned after the end of the accounting period.

8.      Statement of account:

A test check of amount in respect of credit notes in to the statement of accounts (if received regularly) is also suggested.