Accounting-Finance

Learning Materials For Accounting, Management , Finance And Economics.

Sunday, February 12, 2012

Differences Between Internal Audit And Statutory Audit

auditing , Business
An internal audit is conducted by the permanent staff of the same office to detect weakness in system, procedures and for the improvement. But statutory audit is the act of checking books of accounts as per the provision of company act. Both of them check books of account, detect errors and frauds even though they have certain differences which are as follows:

1. Appointment

An internal auditor is generally appointed by the management but statutory auditor is appointed by the shareholders or Annual General Meeting.

2. Legal Requirement

Internal audit is the need of management but it is not legal obligation but statutory audit is the legal requirement.

3. Qualification

An internal auditor does not required specific qualification as per the provision of law but qualification of statutory auditor is specified.

4. Conducting Of Audit

Internal audit is of regular nature but final audit is conducted after the preparation of final account.

5. Status

An internal auditor is a staff who is appointed by the management but statutory auditor is an independent person appointed by the shareholders.

6. Scope Of Work

Internal audit is related to the examination of books of accounts and other activities of an organization but statutory audit checks the books of accounts and related evidential documents. So, scope of internal audit is vague but scope of statutory audit is limited.

7. Removal

Internal auditor can be removed by the management but statutory auditor can be removed by the annual general meeting only.

8. Remuneration

Internal auditor is appointed by the management; so remuneration is fixed by the management but remuneration of statutory auditor is fixed by the shareholders.

9.Report

Internal auditor needs to give suggestions to improve weakness but no need to present report but statutory auditor requires to prepare report after the completion of work on the basis of facts found during the course of audit and present such report to the appointing authority.
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Concept Of Routine Checking, Its Advantages And Disadvantages

Accounting , auditing
Routine Checking

Regular checking of all the daily transactions is known as Routine Checking. Routine checking incorporates the following tasks:

* Checking of record in primary books, costing, transfer etc.

* Checking transfer of transactions from original books of accounts to ledger account.

* Checking debit and credit side of various accounts.

* Checking transfer of balances of various accounts to other pages or accounts or statements.

Various signs are used while conducting routine check. Such signs provides the proof of routine checking of transactions.
Signs which are used in audit should be small and clear. Generally red or pink color is used while conducting routine check. But green color is used while conducting final audit.

Advantages Of Routine Checking

Following benefits can be obtained from the routine checking:

1. All the original entries will be checked; so all the errors and frauds can be detected easily.

2. All the entries and posting will be tested.

3. Routine checking helps to conduct final audit because all the balancing and totals have already been checked.

4. Separate and specific staffs are not needed because it is a regular process.

Disadvantages Of Routine Checking

Followings are the limitations of routine checking:

1. Routine checking is a mechanical test, so the staff who performs this work does not have inspiration. So, there are chances of leaving errors and frauds.

2. Routine checking can only detect small errors and frauds but not the planned frauds.

3. Routine checking is not needed where self balancing system is applied.

4. Routine checking cannot detect principle and compensating errors.
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Concept Of Test Check, Its Advantages And Disadvantages

Accounting , auditing
What Is Test Check ?

Big business houses have a lot of transactions. So, it is very difficult to check all the transactions in detail. An auditor needs to prepare and present report in short period of time. So, an auditor checks the sample transactions and prepares and presents report to the concern authority which is known as 'Test Check'. An auditor checks the books of accounts of a particular time or area if there is no any doubt, s/he proves the account as true and fair, otherwise auditor checks in detail where s/he has doubts.
But if any errors or frauds are left out due to random sampling, auditor will be responsible for such losses. So, an auditor applies test check if internal check is effective in the organization.

Following points are to be taken into consideration while applying test check:

1. Sample should be selected from the various books of account and of different times.

2. Transactions related to beginning and ending period of particular year should be checked in detail.

3. Transaction related to cash and stock should be checked in detail.

4. Sample selection is to be made in random basis, not in planned way.

5. Detail check of Bank Reconciliation Statement is necessary.

Advantages Of Test Check

Following advantages can be obtained while applying test check:

1. Test check helps an auditor to complete work in less time because test of few transactions can be made.

2. An auditor can complete the work of audit of various organizations within stipulated time.

3. Test check saves labor, time and cost of man auditor. So, an auditor can check in detail the specific items rather than checking similar items.

4. Test check give assurance of accuracy and reliability of transactions to some extent.

5. Accounting staffs remain alert and careful because auditor checks the transactions of various times in random basis.

Disadvantages Of Test Check

1. There are chances of living errors and frauds because transactions with frauds may be left out from audit.

2. Result presented by income statement may be incorrect and report presented to the management may not be true due to the use of test check.

3. Test check increases the responsibility of auditor because an auditor should be responsible for the undetected errors and frauds due to application of test check.

4. Test check is not suitable method for the audit of small organizations.
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Concept Of Internal Control And Its Advantages

Accounting , auditing
What Is Internal Control ?

Internal control is the plan of organization and all of the coordinated methods and procedures adopted within a business to safeguard its assets, check the accuracy and reliability of its accounting data, promote operational efficiency and encourage adherence to the prescribed managerial policies. We can say that internal control is a broad term with a wide coverage. Its scope extends beyond those matters which related directly to the functions of accounting and financial departments.

Previously internal check and control was taken as the same term but nowadays owners and managers are separate and different. So, it is taken as a separate term. Internal control incorporates inspection, internal audit and other factors of control. Nowadays, it is essential for the smooth operation of accounting, cash and other transactions of business.

Advantages Of Internal Control

Application of internal control provides the following benefits to the various parties:

1. Internal control helps to protect the assets of the business from misuse, theft, accident etc.

2. Internal control helps to implement management policies to attain corporate goals.

3. Internal control helps the auditor in his/her work detecting all the errors and frauds which are committed in the books of accounts.

4. Internal control helps to increase the accuracy and reliability of financial statement and books of accounts.

5. Internal control helps to regulate the work of staffs through division of work among the staffs in a scientific manner which helps to make the daily works of staffs effective.

6. Internal control helps the management to prepare and implement effective plans by providing correct and fact information.

7. Internal control helps to put moral pressure on staffs.
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Disadvantages Of Internal Check System

auditing , Business
Internal check system is useful to every stakeholder of the business even though it has some disadvantages which are as follows:

1. Under internal check system, every staff wants to complete her/his work in time. So, s/he performs work in hurry which leads errors.

2. Under internal check system, once work is checked by the another staff, the latter detects errors and frauds. So, there are chances of conflict between or among the staffs.

3. Staffs may form a group for personal benefits which leads to delay in work and increases errors and frauds.

4. Small organizations cannot use internal check system because it needs more staffs which increases the cost.
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Saturday, February 11, 2012

Advantages Of Internal Check System

Accounting , auditing
Internal check system is useful to number of parties which are as follows:

1. Advantages To An Auditor

If internal check system is effective, an auditor can apply test check rather than checking the books of accounts in details. So, auditor can save his time and labor which simultaneously saves the cost.

2. Advantages To Businessman

Following advantages can be achieved by the businessperson from internal check system:

* Internal check detects errors and frauds which increase the morale of honest staffs. It helps to increase the production and reduce the cost. So, it helps to increase sales and profitability.

* Staffs know the real position of the business. So, it helps to maintain good relation between staffs and managers.

* Internal check system assures the owners in the accuracy and reliability of books of accounts.

3. Advantages To Business

Internal check system is beneficial to the business also. So, the advantages which can be achieved by the business are as follows:

* Right, responsibility and duties of staffs are clearly defined under the internal check system. So, they perform work whole heartedly which reduces the chances of errors and frauds and increases profit.

* Internal check system is based on the principle of division of labor. So, the work of business can be completed easily at minimum cost.

* Work of every staff is checked automatically. So, the staffs remain honest which increases the profitability of business.

* Every book of accounts remains correct, so final account can be prepared in less time, cost and labor.
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Essential Characteristics Of Internal Check System

Accounting , auditing
Certain qualities are needed to make an internal check system more effective and efficient. Such qualities are known as features or characteristics of internal check system which are as follows:

1. Division Of Work

Before applying test check it is necessary to divide the entire tasks among the staffs in such a way so that work can be checked automatically by the another staff. Like, when staff takes the responsibility of purchase, then another staff should make its payment.

2. Provision Of Check

An organization should set up such provision, so that work can be checked by the another staff. An officer can check the work of one staff by transferring to the staffs and again.

3. Use Of Devices

In this modern world, various devices can be used to do various function like use of time record machine, wage determination machine etc. An organization should use such machines which help to make work of internal check easier.

4. Self-balancing System

An organization can use self-balancing ledger accounts which helps to make the work of internal check easier. Its effectiveness depends on its management.

5. Change In Work

An organization needs to transfer the staffs from one place to another place so that the work of previous staffs can be checked by the later staff which helps to make the internal check system effective.

6. Specialization

Another characteristic of internal check system is specialization. Every staff may not have such specialized knowledge to maintain accounts properly. So, an organization should give training to increase their skill so that internal check can be made more effective.

7. Control

There is more chance of frauds where there is direct contact of consumer or public. So, a manager can keep eyes in those works so that internal check system can be made more effectively.
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