Learn about the importance of Audit in accounting

Learn about the importance of Audit in accounting

1. Local Fund Audit Some Accounting Issues

2. THE ODISHA LOCAL FUND AUDIT MANUAL Auditing of accounts in general and Govt. Auditing in particular should take note of these guiding postulates so as to maintain sanctity. Correctness of financial statements. Detection of fraud and error. Plugging in the leakage of revenue. Generation and maintenance of assets. Removal of error of principle and error of commission

3. Auditees

4. CAG observations In spite of the presence of an internal auditor, important records such as registers of outstanding advances, grants-in-aid, property contractors' ledgers, measurement books, stores and suspense accounts etc. were not maintained and the receipts and payments account of grants was not prepared.

5. CAG observations It was observed that the annual audit plan prepared by the LFA for each audit district and audit party was not based on ABC analysis of units under audit, fund flow, the importance of the activities carried out by the offices and other risk factors .

6. CAG observations Pertinent topics such as excess liabilities of ULBs, unutilised grants, pending UCs, non-recovery of taxes/ licence fees, unauthorised retention of grants in the Personal Ledger Accounts (PLA), diversion of funds from PLA, loss of stock materials etc. find place in the audit reports. But actions to address them not there! No meetings were held with the local bodies/authorities by the Higher Management for ensuring early compliance to audit reports.

7. Objects and scope of financial audit Earlier the main objective was to ensure the correctness of accounting for all the receipts and payments . Now a days the main object of auditing is to ensure the correctness of accounting and detection of errors and frauds, and also to form an independent judgement, opinion about the regularity and reliability of accounting records and truth and fairness of financial state of affairs and working result.

8. Objects and scope of financial audit Thus the subsidiary objects of audit are as follows: Detection of errors Detection of frauds Prevention of errors and frauds

9. Accounting: Policies and Practices Income Accrual Cash Advances To Contractors, officials, agencies for short term To be adjusted Not done

10. Accounting: Policies and Practices Fixed Assets Recording and Registers Cost Rules of Capitalisation Acquired through grants ( Capital Contribution ) Depreciation Impairment Stock Verification Valuation: FIFO Cost: Direct Cost + Overhead

11. Accounting: Policies and Practices Provision on Doubtful Debts Age Analysis Administrative Expenses Operating and Maintenance Expenses Total : 93 crore Others: 62 crores

12. Accounting: Policies and Practices Garbage is a big business: BBSR: Jagruti /PMR/RAMKY: Payments vs Work done Bangalore: garbage scam wherein garbage contractors in connivance with health and medical officials had funnelled out Rs 60 crore by neglecting to clean the city’s streets and producing fake bills Vending Zones: Capex License Fees Advertisement Fees (Hoardings)

13. Cash Transactions: Need Extra Care Cash sales may not be recorded at all and money received on that account may be misappropriated. Record of credit sales may be omitted and money received from payer/ customers later may be pocketed. Money received from a payer/customer may be pocketed and when received from the other payer/customer, that may be shown as received from the former customer. This process may be continued for a long time and it may involve cash received from many customers.

14. Cash Transactions: Need Extra Care Cash received from sale or returns may be pocketed. Payment on account of fictitious purchases of ‘dummy’ workers may be recorded and cash on those accounts may be pocketed. Payments through Cheques not showing in the bank column of cash book but showing in the cash column thus resulting in misappropriation of cash. Self-cheque en -cashed not showing in the receipt side of the cash book.

15. Examples of internal frauds perpetrated by employees Procurement fraud (e.g. false invoicing, credit card misuse, manipulations in the procurement process or procuring low quality items, receiving kickbacks for referring contract work to related parties); Theft and skimming (e.g. removing and selling inventory, cash, consumables, or information, fraudulent acceptance of goods and services, and receiving compensation without reporting transactions);

16. Examples of internal frauds perpetrated by employees Fraudulent expenditure claims (e.g. using false receipts to claim travel and accommodation allowances); Payroll fraud (e.g. adding fake employees to the payroll or claiming overtime for hours not worked).

17. What factors can indicate fraud? The Fraud Triangle 1: Perpetrators of fraud need an incentive or pressure to engage in misconduct; 2: There must be an opportunity to commit fraud and this is often the focus area for internal auditors; 3: Perpetrators are often able to rationalize or justify their actions.

18. Indicative “Red Flags” Pressure from an external party (e.g. political structure) Legislation, policies, and procedures that are not applied equally throughout public sector organizations; Poor IT systems and lack of appropriate IT security; New programs or early stages of programs with effective controls not yet in place; No procedure in place for punishment for fraudulent activities during extensive period;

19. Indicative “Red Flags” Senior managers under intense pressure to meet high targets may resort to unethical means to achieve their goals; Presence of non-routine transactions that lack proper approval or are not supported with appropriate documentation; Disgruntled employees who convey dissatisfaction with the job, compensation, or other factors; Large volumes of related party activities undertaken outside of the normal course of operating activity.

20. Top frauds experienced by organizations diversion/theft of funds or goods Bribery and corruption Regulatory noncompliance Financial statement fraud Intellectual property fraud Internet and/ or Cyber fraud

21. reasons that can contribute to fraud Lack of an efficient internal control/ compliance system Diminishing ethical values Inadequate due diligence on employees/ third party associates Unrealistic targets/ goals linked to monetary compensations Technological advancement and shift of business to a virtual environment Senior management override of controls Inadequate redressal of reported fraud cases Increase in globalized businesses with companies venturing into new geographies

22. Accounting manipulation Financial statement manipulation – such as inflating or pre-booking revenues /inflating fixed assets / diverting loaned funds to shell companies/ diversion of stock or funds Projecting earnings better than the industry average Increase in fixed assets on balance sheet not commensurate with increase in production capacity Large Debtors in the balance sheet for a prolonged period. Movement of balances between different debtor accounts

23. Accounting manipulation High inventory levels and slow movement of raw material in stock Large number of transactions (sale/ purchase or loans) with related parties Large loans and advances made to group companies with insignificant operations Unrecorded/ concealed liabilities and expenses Advanced revenue recognition Profits not getting converted to cash

24. What is your job? Prevention Detection Investigation