PK Chopra & Co. Chartered Accountants since 1963. Auditing, taxation & advisory services for businesses in India & abroad. Visit us on https://pkchopra.com/
Transfer pricing audit in India is setting a uniform price within a multi-divisional organization, particularly regarding cross-border transactions. When goods are transferred from one company to another or even within a company but a foreign subsidiary, some factors affect the division of profit within the company. This has led to the rise of transfer pricing regulations as governments seek to stem the flow of taxation revenue overseas, making the issue of great importance for multinational corporations
Professional companies help comply with the complex requirements of the multiple tax jurisdictions. If done without expert advice this could lead to waste of time and loss of funds.
Transfer pricing involves a lot of complex and dynamic issues. It involves planning to improve tax efficiency and defense posture, resolution of global controversies and strategic documentation.
PK Chopra ensures smooth transactions and that proper documentation is done. This is a process of high-involvement which has to be done meticulously and according to the specifications. Planning needs to be done to reduce tax burdens. Keeping in mind the changing scenario and the multiplicity and complexity of laws and regulations an expert opinion is a must. .Sometimes the pricing policy has to be defended and justified.
PK Chopra has a professionally managed team with proven expertise in the field of Transfer Pricing Audit in Delhi who have been providing advice to wide range of companies with respect to complex accounting procedures in a quick, timely and efficient manner.
A comprehensive commercial and market due diligence service in India is required when there is a plan to take over another company. Commercial and market due diligence services typically deals with collecting and analyzing the comprehensive review of the company’s business plan in the context of projected market conditions and the industry/competition. Acquisitions have to be made judiciously and wisely At PK Chopra we give you a solution for all the challenges faced by you during acquisitions. A study has to be made about the technology, the buyers, potential customers and the emerging new geographic markets. A complete review of the company’s proposed expansion and business plan is made. It is then studied in context to the projected market conditions and the industry.
PK Chopra with their team of specialists help you in Due Diligence Service in Delhi:
-By giving you the realistic value of the target market you intend to acquire. We make you understand and critically analyze its qualities that make it stand apart.
-We offer a comprehensive understanding of the consumer taste and preferences, technologies, potential buyers and the best and most reasonable way to approach the target market.
-We help you sustain in a competitive environment and reduce risk and uncertainty by a better decision making process and also empowering cost efficiency.
-We always keep the investors, and other advisors informed of information developments as they arise to ensure that all the information you receive, accurately reflects the market and industry dynamics.
Internal audits are an integral element of any
organization's operations. They aid in assessing the overall performance of a
company as well as identify areas that need improvement, and make sure that the
company is in standards. If your business will be subject to one, it's crucial
to know the procedure to ensure a pleasant audit experience. This article will
talk about the things to expect when conducting an internal audit. We'll also
give step-by-step instructions to assist you in preparing.
Introduction
Internal audits play a crucial function in helping
organizations reach their goals. They help evaluate the effectiveness of an
organization's control, risk management, and governance practices. Internal
audits are performed by internal auditors who are impartial and independent
people or teams within an organization.
This article we'll explain what you can expect from an internal
audit. We'll also give you a step to assist you in preparing for it.
What is an Internal
Audit?
Internal audits are a systematic and impartial evaluation of
a company's processes control, operations, and procedures. The goal for an
audit conducted internally is to give assurance that the processes of the
company are running efficiently, effectively and in line with all applicable
laws and regulations.
Internal audits are carried out by internal auditors who are
impartial and independent members or teams within the company. Internal
auditors aid the organization to attain its goals by offering assurance
regarding controls, risk management, and governance procedures.
Why are Internal
Audits Important?
Internal audits are crucial due to a number of reasons. They
help companies find areas in need of improvements. They also provide assurance
that the processes of the company are functioning efficiently, effectively and
in line with all applicable legislation and rules. Thirdly, they assist
companies achieve their goals through ensuring the risk management, control and
governance procedures.
Types of Internal
Audits:
There are many kinds of internal audits each with a distinct
function. The most popular kinds of internal audits comprise:
Audits of Financials:
These reviews examine the credibility of financial statements as well as ensure
that they are following accounting standards as well as regulations.
Audits of Operational
Quality: These audits evaluate the efficiency and effectiveness of
processes in operation and pinpoint areas for improvement.
Compliance Audits The audits make sure that the business is
following all applicable legislation and rules.
Audits of Information
Technology: These reviews assess the technology used by an organization and
verify that they are secure, reliable and comply with any applicable laws and
regulations.
Preparing for an
Internal Audit:
The preparation for
an internal audit is crucial for ensuring a smooth audit experience. Here are
some tips to assist you in preparing for internal audits:
Determine the nature
of the audit: Define the areas to be inspected and the nature that the audit
will cover.
Examine previous audit reports Examine audit reports from
the past and find areas in need of improvements.
Conduct a
self-assessment: Perform an assessment of your own procedures and controls
to find the potential for problems.
Create relevant
documents: Prepare all the relevant documents that an auditor might
require.
Designate duties and roles as well as responsibility to
staff members who are part of this auditing process.
Plan the audit:
Plan the audit with the internal auditor.
Step-by-Step Guide
for an Internal Audit:
Fieldwork
It is also the most crucial part of the internal audit. In
this stage the auditor is required to collect evidence and details to analyse
the effectiveness of the company's procedures and controls. The steps in the
fieldwork stage:
Conduct interviews Auditors conduct interviews with
employees to be aware of their roles and responsibilities, as well as collect
information on the company's processes and procedures.
Auditor review documents Auditors review documents like
financial statements as well as policies, procedures as well as other relevant
documents, to collect evidence.
Audit controls Auditors will evaluate the effectiveness of
an organization's controls by selecting a small sample of transactions and test
the operation of the controls.
Recognize problems the auditor will highlight problems and
areas of improvement based upon the data that was gathered in the fieldwork.
Closing Meeting
A closing session is the last gathering between audited and
auditor. At this time the auditor will be able to present their findings and
make recommendations for the auditor. The following are the steps to follow
during the closing meeting:
Discuss findings
Discuss findings: The auditor will share the findings with the auditor and
provide any problems or areas that could be improved.
Offer suggestions Auditors will make suggestions to address
the issues identified and to enhance the efficiency of the company's processes
and procedures.
Adopting actions:
The audited will come to an agreement on steps to address the issues identified
and enhance the efficiency of the organization's procedures and controls.
After the Internal Audit
Following having completed the audit internally, it's
important to take steps to address the problems identified and to improve the
company's processes and controls. Here are a few steps to do following the
internal audit
Implement the recommendations made by the auditor to address
identified issues and to improve the processes and controls of the
organization.
Track the progress of your work Monitoring progress is the
best way to make sure that the recommended actions are being implemented and
work.
Conduct follow-up audits Follow-up audits are conducted to
ensure that identified issues are solved as well as the procedures and controls
are improved.
Conclusion
In the end internal audits are a must for any organization
to evaluate the effectiveness of its procedures and controls, effectiveness as
well as efficiency and compliance with the applicable laws and regulations. It
is crucial to plan the internal audit in order to make sure that the experience
is smooth. This step-by-step guide in this article will assist in preparing for
internal audits, and also understand what to expect throughout the process.
FAQs
An internal audit is what it sounds like? Internal audits
are an objective and systematic assessment of an organization's procedures
control, operations, and processes.
What is the importance of internal audits? Internal audits
are vital to determine areas that need improvements, as well as assure that the
business's procedures are functioning effectively efficiently and in line with
the relevant laws and regulations, and aid organizations in reaching their
goals.
What are the different types that are internal audits? The
most commonly used types of internal audits comprise operational audits,
financial audits, compliance audits and audits of information technology.
What can I do to make myself ready for an audit at the
internal level? For internal audit preparation, you must determine what the
purpose of auditing, read the audit reports from previous years, conduct
self-assessment, write relevant documents, delegate the roles and
responsibilities, and plan the audit.
What happens following the internal audit? Following an
audit conducted internally it is crucial to implement a plan to correct the
issues that were identified and improve the effectiveness of the procedures and
controls through making recommendations, evaluating the progress and performing
additional audits.
In response to the large corporate financial scandals like energy firm Enron Corp, telecommunications giant WorldCom and Tyco International, Sarbanes-Oxley Act (SOX) was introduced, in the USA, in year 2002.
Purpose of the Act was to improve accuracy of financial reporting by establishing formalized system of checks and balances and protect shareholders/ general public from fraudulent practices in the companies.
The SOX is mandatory and applies to all US-based public companies. These companies are required to maintain both good financial practices and data security standards. The Section 404 of the Act mandates rules on “management’s report on internal control over financial reporting”. The section requires all financial reports to include an Internal Control Report. The report provides assurance that the company’s financial data is accurate and adequate controls are in place to safeguard financial data.
To align with the requirements of the SOX, the PCAOB (U.S. Public Company Accounting Oversight Board) provided an updated standard AS 5, in May 2007.The Standard was about “Audit of Internal Controls over Financial Reporting integrated with Audit of Financial Statements”.
The SOX measures seek to govern financial operations and disclosures of the corporate entities. A major part of the SOX regulations is related to the information technology systems. SOX reporting involves IT departments as those departments are responsible for creating corporate records and maintaining archives.
To align with SOX regulations, companies are required to develop and implement comprehensive data security strategy. The strategy should be able to protect financial data prepared, used and stored during normal operations. IT departments must become familiar with the security, access, privilege and log management standards applicable to them.
The security teams use data classification to enforce and monitor corporate policies for data handling. Depending upon sensitivity and applicable regulations data may be encrypted, compressed or saved in a different file format. With the proper policies in place corporations can prevent unauthorized users from viewing regulated data. The security solutions have the ability to safeguard shared data.
Section 302 and 404 of the SOX prevent fraudulent agents (whether internal or external) from tampering with sensitive financial information.
Section 302: Corporate Responsibility for Financial Reports Section 302 states that the CEO and CFO are directly responsible for documentation, accuracy and submission of all financial reports as well as the internal control structure,
to the SEC (Security Exchange Commission of U.S.A.).
The Commission requires, for each company filing periodic reports under section 13(a) or 15(d) of the Securities Exchange Act of 1934, that the principal executive officer or officers and the principal financial officer or officers, or persons performing similar functions, certify in each annual or quarterly report filed under either such section of such Act that —
1. the signing officer has reviewed the report;
2. based on the officer’s knowledge, the report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading;
3. based on such officer’s knowledge, the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of the issuer as of, and for, the periods presented in the report;
4. the signing officers–
a. are responsible for establishing and maintaining internal controls;
b. have designed such internal controls to ensure that material information relating to the issuer and its consolidated subsidiaries is made known to such officers by others within those entities, particularly during the period in which the periodic reports are being prepared;
c. have evaluated the effectiveness of the issuer’s internal controls as of a date within 90 days prior to the report; and
d. have presented in the report their conclusions about the effectiveness of their internal controls based on their evaluation as of that date;
5. the signing officers have disclosed to the issuer’s auditors and the audit committee of the board of directors or persons fulfilling the equivalent function–
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the issuer’s ability to record, process, summarize, and report financial data and have identified for the issuer’s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal controls; and
6. the signing officers have indicated in the report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Section 404: Internal Control Report The section 404 requires all annual financial reports to include an Internal Control Report. The report states that management is responsible for an adequate internal control structure and includes an assessment by the management of the effectiveness of the control structure. Any shortcomings in these controls must be reported. In addition, registered external auditors must attest to the accuracy of the management assertion that internal accounting controls are in place, operational and effective.
(a) Rule: The rules prescribed by the Commission, require each annual report submittedunder section 13(a) or 15(d) of the Securities Exchange Act of 1934, to contain an internal control report, which shall —
i. state responsibility of the management for establishing and maintaining an adequate internal control structure and procedures for financial reporting; and
ii. contain an assessment, as of the end of the most recent fiscal year of the issuer, of the effectiveness of the internal control structure and procedures of the issuer for financial reporting.
(b) Internal Control Evaluation and Reporting: With respect to the internal control assessment required under subsection (a), each registered public accounting firm that prepares or issues the audit report for the issuer shall attest to, and report on, the assessment made by the management of the issuer.
An attestation under this subsection shall be made in accordance with the standards for attestation engagements issued or adopted by the Board.
SOX Documentation While adopting rules to implement Section 404, the SEC expressly declined to prescribe scope of assessment or extent of testing and documentation required by the management. The scope and process of the assessment should be reasonable and assessment including testing should be supported by a reasonable level of evidences. Each company should use informed judgment in documenting and testing its controls to fit its operations, risks and procedures. Management should use their own experience and informed judgment in designing an assessment process that fits needs of that company. Management should not allow the goal and purpose of the internal control over financial reporting provisions which is “production of reliable financial statements”, to be overshadowed by the process.
The key business processes, material transactions and related controls are to be documented. Management should maintain sufficient documentation so that a person with reasonable knowledge can understand the process, how key controls are operating, who is performing controls, time and frequency of operating controls, evidence that the controls were performed and the reports used while applying those controls.
It’s important to establish a change management process which will ensure that the documentation is kept up-to-date as processes and controls change in a business.
The external auditor should agree on the documentation of controls.
SOX Audits The SOX mandates companies to complete yearly audits and make the results available to stakeholders. Companies hire independent auditors to conduct SOX audit, which must be separate from any other audit, to prevent a conflict of interest.
For audit under section 404, a company must meet the following requirements:
Management accepts responsibility for effectiveness of the controls
Controls are suitably designed and implemented to achieve control objective i.e. reliability of financial reporting, using established criteria
Control objectives and related controls are documented
Management assesses effectiveness of internal control over financial reporting and reports on design & operating effectiveness of the control.
Auditors compare past financial statements with the current year and may interview personnel to verify if compliance controls are effective. The auditors check with the staff whether their duties match their job descriptions and that they have adequate training to access financial information in a secured manner.
SOX audit process involves the following steps:
1. Define Scope of audit using a Risk Assessment Approach For performing risk assessment, a top-down approach is recommended. The auditor focuses on entity-level controls and works down to significant accounts, their disclosures and relevant assertions.
The purpose is to help auditor identify potential risks and sources, their impact on the business and whether internal controls will provide reasonable assurance that a material fraud/error will be prevented or detected.
2. Determine Risks related to Material Accounts & Processes The auditor will:
Identify material items in the financial statements.
Determine locations having material account balances.
Review financial statements of those locations.
Verify details of the transactions in material account balances. Check how transactions occurred and how they were recorded. Auditor may also meet with the concerned persons such as process owners, financial controller etc.
Identify financial reporting risks for material accounts and the possible impact they may have on the account balances.
3. Identify SOX Controls During materiality analysis auditor should identify & document SOX controls which can detect or prevent transactions from incorrect recording. Those are the key controls. The auditor should differentiate key controls from non-key controls and also identify manual and automated controls.
4. Test Key Controls Testing key controls validates design and operating effectiveness of the controls in place. Controls testing involve inspection of documentation, evaluation, observation, inquiries with process owners, walkthrough the transaction and re-performance of the process etc.
5. Perform Fraud Risk Assessment An effective system of internal controls is in place where internal controls reduce the opportunity to commit a fraud and also help with the assessment of possible frauds. Examples of effective internal controls are segregation of duties, reconciliation of bank accounts at regular intervals, investigation of employees’ expenses reimbursements etc.
6. Manage Documentation of Processes and Controls Key operating processes and controls should be properly documented.
7. Assessing Deficiencies During testing auditor may come across deficiency or gap in the sample selected. The deficiency/gap should be identified & corrected. The auditor should also review whether the deficiency/gap was due to design failure or operational failure of the control.
8. Deliver Management’s Report on Controls A large amount of data and information is collected during testing of SOX controls.
The information gathered is useful for the management’s report on internal controls.
Auditing IT Systems During SOX audit, review of internal controls related to IT assets such as computers, network, hardware and other electronic equipment that the financial data passes through, form a major part of the audit.
While auditing IT systems auditors review following internal controls:
i. Access: Access includes both physical controls such as doors, badges, locks on file cabinets and electronic controls like login policies, least privilege access and permission audits. Least privilege access model is an excellent example of access control which means each user only has the access necessary to do his/her job. The function of the user and not his/her identity, controls assignment of access rights.
Another good control is Permission audit. Permission audits are about review of permissions e.g. who has permissions to what, basis of getting that permission and whether the person is acting in a responsible manner. Auditors examine if current permissions are recorded & any changes to the permissions are verified and recorded.
ii. Security: Security controls ensure that the company has protection against data breaches.
iii. Data Backup: Maintaining off-site backups of all financial records is a SOX compliance requirement.
iv. Change Management: is having defined processes to add and maintain users, install new software and make any changes to database or applications which manage company’s financial information.
SOX compliance checklist SOX compliance checklist is a tool for evaluation of compliance with SOX, reinforcing information technology & security controls and to uphold legal financial practices. A SOX compliance checklist includes the following steps:
1. To prevent data tamperinga system is in place which tracks user logins and detects suspicious login attempts into the systems used for financial data.
2. To record timelines for key activities company has systems which can apply timestamps to all financial & other related data. The data is encrypted if required and stored at a remote, secure location.
3. Establish verifiable controls to track data access i.e. a system that can receive data messages from virtually unlimited number of sources including files, FTP transfers and databases and tracks who accessed or modified the data.
4. To ensure that safeguards are operational systems are implemented which can issue & distribute daily reports to selected officials in the organization, confirming that the SOX control measures are working properly.
5. Report periodically on effectiveness of safeguards implement system which generates reports periodically, on data, including report of all messages, critical messages, alerts and uses a ticketing system that archives security incidents occurred and how they were addressed.
6. To detect Security Breaches security system is in use which can analyze data in real-time, identify signs of a security breach and generate meaningful alerts, automatically updating incident management system.
7. To disclose security breaches company has a system which is capable of detecting and logging security breaches and allow security staff to record their resolution of each incident.
8. To disclose security safeguards to the auditor systems should be in place which can provide role-based access to the auditor, allowing him/her to view data and reports without making any changes.
9. A system to disclose failure of security controls to the SOX auditor. The system should enable auditor to view reports having details of the security control failure incidents, the incidents resolved successfully and the ones which could not be resolved.
Protecting the whistleblower SOX encourages disclosure of corporate frauds by protecting employees who report fraud and testify in court against their employers. Companies are not allowed to change the terms and conditions of their employment. They can’t reprimand, fire, or blacklist the employee. Whistleblowers can report any corporate retaliation against them. SOX makes it a crime for a person to knowingly retaliate against a whistleblower for disclosing truthful information to a law enforcement officer. It authorizes the Department of Justice to criminally charge those responsible for the retaliation.
Firms conducting SOX Audits The SOX also regulates accounting firms which conduct SOX audits. The PCAOB has set standards for the audit reports. It requires all auditors of public companies to register with them. The PCAOB inspects, investigates, and enforces compliance of these firms. It prohibits accounting firms from doing business consulting with the companies they are auditing. They can still act as tax consultants but the lead audit partners must rotate off the account after five years.
The purpose of auditing internally is to supply insight into an organization’s culture, policies, procedures, and aids board and management oversight by verifying internal controls like operating effectiveness, risk mitigation controls, and compliances with relevant laws or regulations.
Reasons why there’s an importance of Auditing Internally Internal auditing programs are critical for monitoring and assuring that each one of the business assets are properly secured and safeguarded from threats. it’s also important for verifying that business processes reflect documented policies and procedures.
Let’s take a glance at five reasons why internal auditing is critical and their purpose keep your organization compliant with the common frameworks and regulations.
1. Provides Objective Insight You can’t audit your own work without having a selected conflict of interest. Your auditor, or internal audit team, cannot have any operational responsibility to know this objective insight. In situations where smaller companies don’t have extra resources to devote to this , it’s acceptable to cross-train employees in several departments to be able to audit another department. By providing an independent and unbiased view, the inside audit function adds value to your organization.
2. Improves Efficiency of Operations By objectively reviewing your organization’s policies and procedures, you’ll receive assurance that you simply simply do what your policies and procedures say you’re doing, which these processes are adequate in mitigating your unique risks.
By continuously monitoring and reviewing your processes, you’ll identify control recommendations to reinforce the efficiency and effectiveness of these processes. In turn, allowing your organization to be enthusiastic to processes, rather than people.
3. Evaluates Risks and Protects Assets An internal audit program assists management and stakeholders by identifying and prioritizing risks through a scientific risk assessment. A risk assessment can help to identify any gaps within the environment and permit for a remediation plan to happen.
Your internal audit program will assist you to trace and document any changes that are made to your environment and confirm the mitigation of any found risks.
4. Assesses Controls Internal auditing is beneficial because it improves the control environment of the organization by assessing efficiency and operating effectiveness. Are your controls fulfilling their purpose? Are they adequate in mitigating risk?
5. Internal Audits Ensure Compliance with Laws and Regulations By regularly performing an indoor audit, you’ll ensure compliance with any and every one relevant laws and regulations. It also helps provide you with peace of mind that you simply are prepared for you next external audit. Gaining client trust and avoiding costly fines related to non-compliance makes internal auditing a crucial and worthwhile activity for your organization.
Inventory audit or stock audit refers to physical verification of a corporation or institution’s inventory assets. There are several sorts of stock audits depending upon the aim and each stock audit would require a special approach. Every business institution a minimum of must perform a stock audit once during a year to update and assure that the physical stock and therefore the computed stock is correctly matched. A stock audit helps to correct discrepancies between the physical stock and therefore the book stock. The stock audit helps to trace the quantity of physical assets remaining and make necessary arrangements to order new stock. If the corporate is handling different suppliers and vendors, a stock audit will make the inventory management process easier.
Why Stock Audit?
Records accurate level of inventory and help to avoid shortage or overstocking of materials.
It helps to detect inventory losses caused thanks to wastage, damage or theft.
It disclose obsolete raw materials and incorrect orders supplied to customers.
Analyze the particular quantity of stock against that noted on the accounting records.
Avoid unnecessary investment on raw materials and may help to save lots of money.
Enable the business owners to know truth financial status of the company.
Helps to seek out out discrepancies within the packaging and warehouse procedures.
It is very essential to conduct inventory audits to take care of inventory accuracy, spot causes of shrinkage, and make sure that one always have the proper quantity of stock at the proper time. an honest understanding of stock flow also will help make sure the business runs smoothly.
Inventory audit checklist The inventory audits have three phases: planning, execution, and analysis. Inventory is one among the important areas for any business where chances of fraud are more as it’s a department where thefts and damages occur. Having effective controls, appropriate processes, proper checklist and regular stock audit is important for this function. Following is that the checklist for Inventory audit:
Evaluate which items to audit: Higher-risk inventory items should be assessed more frequently. it’s also referred to as ABC Analysis. High-value items are given the grouping of products A, mid-tier are B, and low values are C. ABC analysis also can help to manage a stockroom better and save time. you’ll sort inventory out by SKU (Stock keeping units) or Universal Product Code , then prioritize. Check Stock valuation process, components of cost of inventory, method of valuation.
Create an audit schedule: map an auditing schedule. Unfortunately, conducting a listing audit can disturb the regular business flow. we would like to settle on times that are least effective for the business, but also happen at an honest frequency to make sure those high-value items are going to be accounted for. The policies and procedures of shopping for and shipping items also can affect the schedule of your audit.
Physical verification of Inventory: It is that the process of counting each item of inventory. Firstly, we schedule this before time because it’ll likely be an inconvenience to normal business flow. Also, think about using technology, sort of a Universal Product Code scanner, to assist physically count each item and reconcile the counted inventory with ledger .
Collect the required documentation: Get out any important documents before time and confirm they’re easily accessible, but secure. Categorized inventory in High, Medium and Low value stock.
Conduct the inventory audit: There are different numbers of audit which will be essential, counting on the character of your business. Check Inventory lying with third parties, i.e. for paperwork , in third party warehouse.
Record the findings: Stock related MIS format and contents. the most purpose of an audit is to get gaps in compliance and appearance at opportunities to repair the deficit and improve operational processes.
Reconciling items investigation:If there are inconsistency between inventory counts as per company’s records and therefore the actual amounts on the warehouse shelves then find out why there are differences between these two amounts and make adjustments to the records to reflect this analysis. Inventory reconciliation is extremely important a part of cycle counting.
Inventory stop Process Cut off process is an important process in Inventory valuation. When inventory is physically counted and inwards (receipts) and outwards (issues) movement of inventory isn’t stopped, it’s going to cause many difficulties within the counts. this is often why near of the date of inventory counting day, stop the movement of stock. If during this era stock is moved for any reason, it’s likely to affect the inventory count. Auditor requires studying the stop process of management and ensuring it’s adequate.
Fixed assets, in an organization represent the long-term tangible assets which are used,
-to produce and deliver its products or services, and
-to manage its operations.
They are assets held for the purpose of providing or producing goods or services and are not meant for sale in the normal course of business. Therefore, an asset can be classified as a fixed asset or otherwise, depending upon the use to which it is put or intended to be put.
In many capital-intensive industries such as manufacturing, power generation and healthcare, fixed assets represent the largest item on the balance sheet. Historically, fixed assets have received little audit scrutiny and, as a result, some major financial frauds have been perpetrated through significant misstatements of fixed asset balances in the financial statements of public companies.
When asked if fixed assets are represented accurately in year-end financial statements, most organizations will answer with “yes.” However, audits may yield a different answer. Although many organizations do not perform an inventory of current fixed assets and a corresponding reconciliation, these steps provide an essential internal control for the financial reporting of fixed assets.
Moreover, fixed assets need attention to ensure the organization’s records are accurate and its controls provide effective oversight of this area. As with other asset classes, best practices enhance proper accounting, valuations and financial reporting.
Internal Controls over Fixed Assets Fixed-asset transactions typically represent the acquisition and disposal of assets and the allocation of related costs to reporting periods through depreciation expense. The internal controls over the acquisition of fixed assets include the following:
Issuance and approval of a purchase order
Receipt of assets and preparation of a receiving report
Receipt of an invoice from a vendor
Reconciliation of the vendor invoice to the related receiving report and purchase order
Authorization of the payment of the vendor invoice
Issuance of a check for payment of the vendor invoice
Posting of the entry in the equipment sub-ledger
Posting of the equipment sub-ledger activity to the related general ledger control accounts
Reconciliation of the general ledger control accounts
Audit of Fixed Assets External Auditors of most manufacturing organizations usually scope in Property, Plant & Equipment (PPE) as a risk area during their annual audit due to its materiality. A combination of controls testing and substantive testing is usually adopted when obtaining audit assurance on PPE.
An auditor should review the system of internal controls relating to fixed assets, particularly the following:
Verification under audit Verification of fixed assets consists of examination of related records and physical verification. The auditor should normally verify the records with reference to the documentary evidence and by evaluation of internal controls. Physical verification of fixed assets is primarily the responsibility of the management.
Verification of Records
The opening balances of the existing fixed assets should be verified from records such as the schedule of fixed assets, ledger or register balances.
Acquisition of new fixed assets and improvements in the existing ones should be verified with reference to supporting documents such as orders, invoices, receiving reports and title deeds.
Self-constructed fixed assets, improvements and capital work-in-progress should be verified with reference to the supporting documents such as contractors’ bills, work-order records and independent confirmation of the work performed.
The auditor should scrutinize expense accounts (e.g. Repairs and Renewals) to ascertain that new capital assets and improvements have not been included therein.
Where fixed assets have been written-off or fully depreciated in the year of acquisition/ construction, the auditor should examine whether these were recorded in the fixed assets register before being written-off or depreciated.
In respect of fixed assets retired, i.e., destroyed, scrapped or sold, the auditor should examine
(a) whether the retirements have been properly authorized and appropriate procedures for invitation of quotations have been followed wherever applicable;
(b) whether the assets and depreciation accounts have been properly adjusted;
(d) whether the resulting gains or losses, if material, have been properly adjusted and disclosed in the Profit and Loss Account.
It is possible that certain assets which were destroyed, scrapped or sold during the year have not been recorded. The auditor may use the following procedures to ascertain such omissions:
Review work orders/physical verification reports to trace any indicated retirements.
Examine major additions to ascertain whether they represent additional facilities or replacement of old assets, which may have been retired.
Make enquiries of key management and supervisory personnel.
Obtain a certificate from a senior official and/or departmental managers that all assets scrapped, destroyed or sold have been recorded in the books.
The ownership of assets, like land and buildings should be verified by examining title deeds. In case, the title deeds are held by other persons, such as solicitors or bankers, confirmation should be obtained directly by the auditors through a request signed by the client.
Concluding Remarks In order to help the auditors undertake quality audits and adhere to the audit compliance standards, ICAI has released guidelines advising auditors with regards to conditions that may arise due to COVID-19 pandemic, how they can carefully examine specific circumstances while undertaking audit and assess the risk accordingly. For auditors, it is majorly “remote” auditing, going through virtual data, but continuing to comply with the requirements of standards on auditing.
The COVID-19 outbreak may affect the useful life and residual life of fixed assets which requires management review. In case the expectations differ from previous estimates, then change in estimate should be accounted for in accordance with Ind AS 8, Accounting Policies, Changes in Accounting Estimates and Errors.
It is imperative to ensure that appropriate level of disclosures are done in the financial statements (which in most cases is a judgment call, depending on the facts and circumstances of each case) for the users of the financial statements to understand the impact of pandemic on the company as assessed by the management, Board of Directors and Audit committees.
