Internal Audit & Control-Set2 Doc

8/6/2019 Internal Audit & Control-Set2 Doc

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Q 1. Explain the objectives and key sections of SOX

Ans.Objective of SOX

Provides confidence and trust to investors and public in the post-Enron era.

Requires management accountability focus on rapid identification &

correction of internal control weaknesses along with additional financial

disclosure requirements.

Holds external auditors to higher attestation standards.

Key Sections of SOX

Section 302 requires .the CEO (Chief Executive Officer) and CFO (Chief

Financial Officer) of a company to sign on a quarterly basis on financialstatement of that quarter, attesting fairness and internal control effectiveness.

They also must report any significant changes in internal controls since their

last evaluation.

Section 404 requires a separate management report on internal control

effectiveness and audit by the organizations external financial statement

auditor.

Section 906 is required to Section 302 and 404, and requires that CEOs and

CFOs ensure all financial reporting (including annual and periodic reports)

fairly presents, in all material respects, the financial condition and results ofoperations of the issuer. It also provides for significant criminal penalties for

no-compliances.

Section 201 prohibits a registered public accounting firm from peformig both

audit and non-audit services.

Section 301 requires an audit committee to establish whistleblower

procedures to allow the confidential and anonymous submission of concerns

regarding questionable accounting or auditing matters.

Section 409 requires disclosure to the public on rapid and current basis

additional information concerning material changes in the financial condition

or operations of the issuer.


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2 A. Bring out the importance of financial audit to companies.

B. How does audit help in preventing frauds and errors?

Ans. Financial Audit is required and important in many ways:

a) To meet the needs to diverse stakeholders

Financial statements are ordinary prepared and presented annually and are directed

toward the common information needs or a wide range of users.

Some such users are:

1. Shareholders

2. Investors/Stock Exchange

3. Financial Institutions4. Government

5. General Public

Many of these users rely on the financial statement as their major source of

information because they do not have the power to obtain additional information to

meet their specific information needs.

The objective of an audit of financial statements is to enable the auditor to express an

opinion whether the financial statements are prepared in accordance with an identified

financial reporting framework (Like Accounting Standards).

Thus auditors opinion enhances the credibility of financial statements by providing a

high, but not absolute, level of assurance.

B. Goal conflict in Companies

We have already studied in earlier units how goal conflict might result in weakness in

internal controls. Managers may try to cash on immediate opportunities by neglecting

long term health of the company.

In these situations audit is a guard or control that tries to prevent such tendency of thedirectors managers of the business to neglect the long term goals of the company.


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B. How does audit help in preventing frauds and errors?

Ans.

The audit is generally aimed at preventing frauds or errors. An organization wereaudit is regularly conducted is less-prone to fraud.

Though audit does not guarantee fraud-free or error-free financial statements. It at

least minimizes the chance of future frauds. Because, if the accounts are audited every

year, the person who intends to commit fraud may become apprehensive of

committing such fraud lest he might be caught by auditors.

Helps in effective decision making

Because audit is based on Standards, there will be uniformity and quality in the

financial statement over the long run. Thus comparison between two sets or auditedfinancial statements is more meaningful than between two non-audited financial

statements.

This ultimately helps in effective decision-making by mangers of these businesses

As well as by any other stakeholders.


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3. What are the mandatory standards of ICAI?

Ans. Types of standards issued by ICAI

Auditing and Assurance standards by the ICAI include the following standards:

Auditing and Assurance Standards (AAS)

Statements on Auditing

General Clarifications of on AAS

Guidance Notes

Technical Guides

Each of them has different scope and authority attached to them.

Authority attached to AAS, statements on Auditing and General Clarifications onAAS.

Auditing and Assurance Standards, Statements on Auditing and General

Clarifications on AAS are mandatory in nature.

AAS codify the existing best practices in the area of auditing. AASs are critical for

the proper discharge of functions as auditor. Statements on Audit are issued for

compliance by Members. General Clarifications to AAS are also issued in matter

where doubts exist.

Accordingly. While discharging their attest function, it will be the duly of themembers of the ICAI to ensure that these are followed I the audit of financial

information covered by their audit reports.

The nature of these Standards require members to exercise professional judgement in

applying them, for example, a member may judge it necessary to dpart from an

essential procedure laid down in these Standards to achieve more effectively the

objective of engagement.

If, for any reason, a member has not been able to perform an audit in accordance with

such Standards, his report should draw attention to the material departures there from.

Authority Attached to Guidance Notes

Guidance Notes are designed primarily to provide guidance to members on

matters which may arise in the course of their professional work and on which

they may desire assistance in resolving issues which may pose difficulty.

Guidance Notes are recommendatory in nature. A member should ordinarily

follow recommendations in a Guidance Note excepts where he is satisfied that

in the circumstances of the case, it may not be necessary to do so.

If the recommendations in a Guidance Note have not been followed the

member should consider whether keeping in view the circumstances of thecase, a disclosure in this report is necessary.


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Technical Guides, Studies and other papers published by ASB

AASB may also publish Technical Guides, Studies and other papers.

Technical Guides are ordinarily aimed at imparting broad knowledge about aparticular aspect or an industry to the members.

Studies and other papers are aimed at promoting discussion or debate or creating

awareness on issues relating to quality control, auditing, assurance and related service,

affecting the profession.

They do not establish any basic principles or essential procedures to be followed in

audit, assurance or related services engagements.


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Internal Audit & Control-Set2 Doc