Believe me or not with every breaking news with respect to fraud/misappropriation/ or untamed demands of different government authorities relating to earlier years the most effected and harassed person you will find is the auditor or the auditing firm who has carried out audit of that particular year. Even unconcerned professionals in the field of audits also think for a while about their past completed professional assignments and future uncertainties they are going to pass through. Today’s auditor is like an army man who joins his job with certainty but is uncertain about his survival.
During recent past we have observed that even after completing the audit assignment in number of cases events have occurred which if incorporated in the final accounts would have disastrous impact on the declared numbers. These events can be categorized as under:
- Willful misappropriation or hiding of the information by the management.
- Willful misappropriation or hiding of the information by the management and the auditor.
- Failure to detect misdeeds of an employee and or employees both by the management and the auditors.
- Unknown huge demands received from different authorities.
1. Any information willfully held back by the management is very difficult to detect. Effectiveness of an audit is dependent on the verification of evidence and in case evidence is created it will be difficult for the auditor to question the authenticity of such transactions. There is basic difference between improper/defective evidence and created evidence. Improper/defective evidence helps in detection of a mistake because available papers as evidence are not complete or does not comply with the laws of the land but on the other hand created evidences being willfully created are apparently correct and satisfy the test of law. On the basis of created evidence the possibility of detection of fraud/misappropriation is very difficult.
2. Second case can be holding some important information effecting accounting figures with the consent of auditor. These types of misappropriations have started to crop up in the recent past and are not curable unless reported otherwise.
3. Major problem, so far as management is concerned, is misappropriations and frauds being committed by the employees. Sometimes the execution of such frauds is so meticulous which makes detection next to impossible. Usually such things happen in organizations where there are no defined processes/procedures or processes/procedures are weak or there are employees carrying their assignments without honoring such processes/procedures. The detection of frauds is easy if committed by departing from laid down processes/procedures. MIS, if thoughtfully created and strictly implemented, can help to control such happenings to a great extent.
4. There is need to overhaul the business laws in such a way that no room is left for interpretations being made in a way most favorable to the user. It is a common practice to interpret a law in the most favorable way to have no or less impact on the organizational results. This legitimate practice leads to huge demands at a later stage or at the assessment stage due to divergence of opinion taken by the management and the concerned authorities. Such types of demands when adjusted play havoc with the organization’s financial health. In the process we lose the confidence of effected/concerned parties on the management and the auditors. Laws need to be simple and drawn in a manner which has least or no possibilities of multi interpretation.
Now the question is how an auditor can ensure that the techniques he has been learning through various means are enough to insulate him against any adverse findings at a later stage. There are certain qualifications/statements which auditors use while commenting on the accounts before signing the final accounts but are such qualifications/statements enough to absolve an auditor from his responsibilities. To lessen the chances of mistakes being committed and to bring more efficiency in our working we can think of taking some steps listed as under.
- Audit working papers are of immense help if something goes wrong at a later stage. Emphasis must be given for storing and creation of quality audit working papers. It is not mandatory to maintain records in physical form, we can keep records in soft form to make best use of present day limited office space as well as make retrieval of records easy and quick. The review of audit by seniors should be made more meaningful/efficient and effective to ensure that the chances of committing errors are minimized.
- Present day audits have become so complicated due to adoption of latest software, technologies and frequent changes in the law, quick growth of business houses, takeovers, mergers etc. It is of immense importance to keep oneself updated with the changes taking place. Keeping in view the size of majority of our audit firms it is very difficult to ensure that we are updated in all the subjects expected to practice while carrying our jobs. Subject specialization is the demand of the hour and it is universally true that a person cannot be expected to be having expert knowledge of all the subjects. To overcome this problem we can either merge small audit firms or pool our resources or we can create local resource centers jointly by sharing the expenses. A good and updated study material will help us to keep abreast with the latest changes.
- Audit staff must be educated about the accounting software the client is using and the types of reports which can be created. Operating the software is not important but knowledge of various reports particular software can generate is of utmost importance as this will be helpful in verifying all sorts of transactions/accounts/reconciliations etc. Using software for creating variety of reports especially in multi location, multi product huge business houses save a lot of time in completion of the audit assignment.
- Analytical reviews which used to be very difficult in the past can be carried out in much efficient and easier ways with the help of ERP software. An auditor must verify the reasons of variations while comparing current year figures with the previous years. Customized auditing guidelines may be documented with respect to every client to enable auditing staff to have some idea about the accounting of a particular client and the area requiring special attention during the audit. It will be appreciable if we document guidelines about the process to be adopted for conducting audit of the all the clients based on the nature of their business and our past experience.
- Continuous up gradation of knowledge through sharing and discussions, attending seminars and training should be made part of the office planning and organization. Quality service not only will minimize mistakes but will increase efficiency in the job delivery system resulting in higher professional earnings.
The above discussion is not an exhaustive but is just a beginning to understand the need in adopting good auditing practices to ensure our professional safety in a world where the instances of corruption are on the rise.
DILIP K RAINA –Chartered Accountant
B.Com; FCA (ICAI); PGDFM; PGDCA; DBM; Cert. IFRS (ICAEW); Microsoft Certified IT Professional: Application for Microsoft Dynamics NAV AXAPTA.
