COMPANY INTRODUCTION

Jain & Vaidya Associates, Chartered Accountants is a financial consulting and

Accounting firm. It was started by the two partners Mr. Lalit P. Jain and Mr.
Vaidya. It has eight assistant chartered accountants.

Today there is a high demand for professionalism, knowledge, integrity and

leadership in the field of Accounts. Therefore they provide accounting and audit
services. They are professional chartered accountants, practitioners of accountancy
which is the measurement, disclosure or provision of assurance about financial
information that helps managers, investors, tax authorities and other decision
makers make resource allocation decisions.

They provide internal audit services of financial statements that are the review of
the financial statements of a company, whether or not those financial statements
are relevant, accurate, complete, and fairly presented. The goal is to determine
whether these statements have been prepared in conformity with GAAP’s.

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 PROJECT INTRODUCTION
Finance is one of the most primary requisites of a business and the modern
management obviously depends largely on the efficient management of the
finance.

Financial statements are prepared primarily for decision making. They play a
dominant role in setting the frame work of managerial decisions. The finance
manager has to adhere to the five R’s with regard to money. This right quantity of
money for liquidity consideration of the right quality, whether owned or borrowed
funds at the right time to preserve solvency from the right sources and at the right
cost of capital.

The term, audit of financial statements is the review of the financial statements of a
company, whether or not those financial statements are relevant, accurate,
complete, and fairly presented.

The main purpose of audit of financial statements is to ascertain the validity and
reliability of the statements. Effective recording of financial transactions, deterring
and investigating fraud, safeguarding assets, whether statements are free from
material error and compliance with laws and regulations with the goal of
highlighting organizational problems and recommending solutions.

An effective audit of the financial statements of a company will provide

information about the position, performance and changes in financial position of an
enterprise that is useful to a wide range of users in making economic decisions.

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 NEED FOR THE STUDY
1. To analyze the different approaches used by a company to identify
inefficiencies, in order to evaluate the ways to overcome such issues in the
future financial statements.

2. To identify the most common problems occurring while auditing a financial

statements.

OBJECTIVES OF THE STUDY

1. To study how the process of ‘internal audit of financial statements’ that
helps to overcome the inadequacies in order to achieve an adequate financial
report.

2. To understand the significance of ‘internal audit of financial statements’ in

order to see the impact on the organization.

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 LITERATURE REVIEW

AUDIT IN ACCOUNTING

Audits are performed to ascertain the validity and reliability of information; also to
provide an assessment of a system's internal control. Audit seeks to provide only
reasonable assurance that the statements are free from material error.

The term ‘audit may be used to describe not only work done by accountants in
examining financial reports but also work done in reviewing (a) compliance with
applicable laws and regulations, (b) efficiency and economy of operations, and (c)
effectiveness in achieving program results.

Audit is a vital part of accounting. Traditionally, audits were mainly associated

with gaining information about financial systems and the financial records of a
company or a business. However, recent auditing has begun to include other
information about the system, such as information about security risks, information
systems performance (beyond financial systems), and environmental performance.
As a result, there are now professions conducting security audits, IS audits, and
environmental audits.

INTERNAL AUDIT

Internal auditing is a profession and activity involved in helping organizations

achieve their stated objectives. It does this by using a systematic methodology for
analyzing business processes, procedures and activities with the goal of
highlighting organizational problems and recommending solutions.

Internal Auditing is an independent, objective assurance and consulting activity

designed to add value and improve an organization's operations. It helps an
organization accomplish its objectives by bringing a systematic, disciplined
approach to evaluate and improve the effectiveness of risk management, control,
and governance processes.

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It is the process of reviewing business activities to identify inefficiencies, reduce
costs and achieve organizational objectives. Internal audits may investigate
potential theft or fraud and ensure compliance with applicable regulations and
policies. They also assist in risk management.

Internal auditors of internal control are employed by the organization they audit.
Internal auditors perform various audit procedures, primarily related to procedures
over the effectiveness of the company's internal controls over financial reporting.

The scope of internal auditing within an organization is broad and may involve
topics such as the efficacy of operations, the reliability of financial reporting,
deterring and investigating fraud, safeguarding assets, and compliance with laws
and regulations.

Internal auditing frequently involves measuring compliance with the entity's

policies and procedures. However, internal auditors are not responsible for the
execution of company activities; they advise management and the Board of
Directors regarding how to better execute their responsibilities. As a result of their
broad scope of involvement, internal auditors may have a variety of higher
educational and professional backgrounds.

Internal Auditors are well – disciplined in their skills and subscribe to a

professional code of ethics. They are diverse and innovative; committed to
growing and enhancing their skills; continually on the lookout for emerging risks
and trends in the profession; good thinkers. To effectively fulfill all their roles,
internal auditors must be excellent communicators who listen attentively, speak
effectively and write clearly.

Role in internal control:

Internal auditing activity is primarily directed at improving internal control.

Internal control is designed to achieve the following objectives:-

 Effectiveness and efficiency of operations.

 Reliability of financial reporting.
 Compliance with laws and regulations.

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Management is responsible for internal control. Managers establish policies and
processes to help the organization achieve these objectives. Internal auditors
perform audits to evaluate whether the policies and processes are designed and
operating effectively and provide recommendations for improvement.

The internal auditors are expected to provide recommendations for improvement in

those areas where opportunities or deficiencies are identified. While management
is responsible for internal controls, the internal audit activity provides assurance to
management that internal controls are effective and working as intended.

Role in risk management:

Internal auditing professional standards require the function to monitor and

evaluate the effectiveness of the organization's Risk management processes.
Internal auditors should evaluate the risks identified and advise management to set
objectives, analyze, and respond to those risks.

Internal auditors may help companies establish and maintain Risk Management
processes and help identify emerging risks.

Role in corporate governance:

Internal auditing activity as it relates to corporate governance is generally informal,

accomplished primarily through participation in meetings and discussions with
members of the Board of Directors. Corporate governance is a combination of
processes and organizational structures implemented by the Board of Directors to
inform, direct, manage, and monitor the organization's resources, strategies and
policies towards the achievement of the organizations objectives.

A primary focus area of internal auditing as it relates to corporate governance is

helping the management perform its responsibilities effectively. This may include
reporting critical internal control problems and providing suggestions respectively.

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 THE INTERNAL AUDIT PROCESS: -

1. Develop an understanding of the business area under review. Establish and

communicate the scope and objectives for the audit to appropriate
management.

2. Describe the key risks facing the business activities within the scope of the
audit.

3. Identify control procedures used to ensure each key risk and transaction type
is properly controlled and monitored.

4. Develop and execute a risk-based sampling and testing approach to

determine whether the most important controls are operating as intended.

5. Report problems identified and negotiate action plans with management to

address the problems.

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 INTERNAL AUDIT REPORTS

Internal auditors typically issue reports at the end of each audit that summarize
their findings, recommendations, and any responses or action plans to the
management and owners. Each audit finding within the body of the report may
contain five elements, sometimes called the "5 C's":

1. Condition: What is the particular problem identified?

2. Criteria: What is the standard that was not met? The standard may be a
company policy or other rules and regulations.
3. Cause: Why did the problem occur?
4. Consequence: What is the risk/negative outcome (or opportunity foregone)
because of the finding?
5. Corrective action: What should management do about the finding? What
have they agreed to do and by when?

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 AUDIT OF FINANCIAL STATEMENTS

An audit of financial statements is the review of the financial statements of a

company, whether or not those financial statements are relevant, accurate,
complete, and fairly presented. The goal is to determine whether these statements
have been prepared in conformity with GAAP’s. Professionals called internal
auditors are accountants employed by organizations to perform the auditing
activity.

It determines (a) whether financial operations are properly conducted, (b) whether
the financial reports are presented fairly, and (c) whether the entity has complied
with applicable laws and regulations.

An accountant is a practitioner of accountancy, which is the measurement,

disclosure or provision of assurance about financial information that helps
managers, investors, tax authorities and other decision makers make resource
allocation decisions.

The audit is designed to reduce the possibility that a material misstatement is not
detected by audit procedures. A misstatement is defined as false or missing
information, whether caused by fraud or error. "Material" is very broadly defined
as being large enough or important enough to cause stakeholders to alter their
decisions.

Internal audit of financial statements is performed before the release of the

financial statements, typically on an annual basis before the end of the fiscal year.

Financial statement:

A financial statement (or financial report) is a formal record of the financial

activities of a business, person, or other entity. The term refers to the statements
which the accountants prepare at the end of a period. It is often referred to as an
account, although the term financial statement is also used, particularly by
accountants.

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For a business enterprise, all the relevant financial information, presented in a
structured manner and in a form easy to understand, are called the financial
statements.

For large corporations, these statements are often complex and may include an
extensive set of notes to the financial statements and management discussion and
analysis. The notes typically describe each item on the balance sheet, income
statement and cash flow statement in further detail. Notes to financial statements
are considered an integral part of the financial statements.

The objective of financial statements is to provide information about the financial

position, performance and changes in financial position of an enterprise that is
useful to a wide range of users in making economic decisions.

They typically include four basic financial statements:-

1. Balance sheet:

It is a statement of financial position, a summary of the financial balances of a sole

proprietorship, a business partnership or a company. A balance sheet is often
described as a "snapshot of a company's financial condition". A standard company
balance sheet has three parts:

Assets which mainly includes current assets:- Cash , Inventories, Accounts

receivable, Prepaid expenses and fixed assets:- Property, plant and equipment,
Intangible assets.

Liabilities: - Accounts payable, Provisions.

Ownership equity: - Par value of shares

The difference between the assets and the liabilities is known as equity or the net
assets or the net worth or capital of the company and according to the accounting
equation, net worth must equal assets minus liabilities.

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Another way to look at the same equation is that assets equal liabilities plus
owner's equity. Looking at the equation in this way shows how assets were
financed: either by borrowing money (liability) or by using the owner's money
(owner's equity). Balance sheets are usually presented with assets in one section
and liabilities and net worth in the other section with the two sections "balancing.

2. Income statement:

Income statement, also referred as profit and loss statement (P&L), earnings
statement, operating statement or statement of operations, is a company's financial
statement that indicates how the revenue (money received from the sale of
products and services before expenses are taken out)is transformed into the net
income (the result after all revenues and expenses have been accounted for). It
displays the revenues recognized for a specific period, and the cost and expenses
charged against these revenues, including write-offs (e.g., depreciation and
amortization of various assets) and taxes. The purpose of the income statement is
to show managers and investors whether the company made or lost money during
the period being reported.

3. Statement of retained earnings:-

The Statement of Retained Earnings (also known as Equity Statement, Statement

of Owner's Equity for a single proprietorship, Statement of Partner's Equity for
partnership, and Statement of Retained Earnings and Stockholders' Equity for
corporation) is one of the basic financial statements as per Generally Accepted
Accounting Principles, and it explains the changes in a company's retained
earnings over the reporting period. It breaks down changes affecting the account,
such as profits or losses from operations, dividends paid, and any other items
charged or credited to retained earnings. A retained earnings statement is required
by Generally Accepted Accounting Principles (GAAP) whenever comparative
balance sheets and income statements are presented. It may appear in the balance
sheet, in a combined income statement and changes in retained earnings statement,
or as a separate schedule.

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Therefore, the statement of retained earnings uses information from the income
statement and provides information to the balance sheet. Retained earnings are part
of the balance sheet(another basic financial statement) under "stockholders equity,"
and is mostly affected by net income earned during a period of time by the
company less any dividends paid to the company's owners / stockholders. The
retained earnings account on the balance sheet is said to represent an
"accumulation of earnings" since net profits and losses are added/subtracted from
the account from period to period.

4. Statement of cash flows:

In financial accounting, a cash flow statement, also known as statement of cash

flows or funds flow statement, is a financial statement that shows how changes in
balance sheet accounts and income affect cash and cash equivalents, and breaks the
analysis down to operating, investing, and financing activities. Essentially, the cash
flow statement is concerned with the flow of cash in and cash out of the business.
The statement captures both the current operating results and the accompanying
changes in the balance sheet. As an analytical tool, the statement of cash flows is
useful in determining the short-term viability of a company, particularly its ability
to pay bills.

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 Purpose of financial statements:-

 Owners and managers require financial statements to make important

business decisions that affect its continued operations. Financial analysis is
then performed on these statements to provide management with a more
detailed understanding of the figures. These statements are also used as part
of management's annual report to the stockholders.
 Prospective investors make use of financial statements to assess the viability
of investing in a business for making investment decisions.
 Financial institutions (banks and other lending companies) use them to
decide whether to grant a company with fresh working capital or extend debt
securities (such as a long-term bank loan or debentures) to finance expansion
and other significant expenditures.
 Government entities (tax authorities) need financial statements to ascertain
the propriety and accuracy of taxes and other duties declared and paid by a
company.
 Vendors who extend credit to a business require financial statements to
assess the creditworthiness of the business.

STANDARDS AND REGULATIONS

Different countries have developed their own accounting principles over time,
making international comparisons of companies difficult. To ensure uniformity and
comparability between financial statements prepared by different companies, a set
of guidelines and rules are used. Commonly referred to as Generally Accepted
Accounting Principles (GAAP), these set of guidelines provide the basis in the
preparation of financial statements.

Generally Accepted Accounting Principles (GAAP) is a term used to refer to the

standard framework of guidelines for financial accounting used in any given
jurisdiction which are generally known as Accounting Standards. GAAP includes
the standards, conventions, and rules accountants follow in recording and
summarizing transactions, and in the preparation of financial statements. Financial
statements should be understandable, relevant, reliable and comparable.

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 FINANCIAL RATIOS

A financial ratio (or accounting ratio) refers to the numerical or quantitative

relationship between two variables value taken from an enterprise's financial
statements. Often used in accounting, there are many standard ratios used to try to
evaluate the overall financial condition of a corporation or other organization.
Financial ratios may be used by managers within a firm, by current and potential
shareholders (owners) of a firm, and by a firm's creditors. Security analysts use
financial ratios to compare the strengths and weaknesses in various companies.

Sources of data for financial ratios:

Values used in calculating financial ratios are taken from the balance sheet, income
statement, statement of cash flows or (sometimes) the statement of retained
earnings. These comprise the firm's "accounting statements" or financial
statements. The statements' data is based on the accounting method and accounting
standards used by the organization.

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 SIGNIFICANCE OF ANALYSING RATIOS IN AUDIT

Ratio analysis is a powerful tool of financial analysis useful for measuring the
performance of an organization. Ratio analysis is a process of comparison of one
accounting variable against the other, which makes a ratio to make proper analysis
about the strengths and weaknesses of the operations of an enterprise.

It helps in evaluating the firm’s performance:

With the help of ratio analysis conclusion can be drawn regarding several aspects
such as financial health, profitability and operational efficiency of the undertaking.
Ratio points out the operating efficiency of the firm i.e. whether the management
has utilized the firm’s assets correctly, to increase the investor’s wealth. It ensures
a fair return to its owners and secures optimum utilization of firm’s assets.

It helps in inter-firm comparison:

Ratio analysis helps in inter-firm comparison by providing necessary data. An

inter-firm comparison indicates relative position. It provides the relevant data for
the comparison of the performance of different departments. If comparison shows
a variance, the possible reasons of variations may be identified and if results are
negative, the action may be initiated immediately to bring them in line.

It simplifies financial statement:

The information given in the basic financial statements serves no useful Purpose
unless it s interrupted and analyzed in some comparable terms. The ratio analysis is
one of the tools in the hands of those who want to know something more from the
financial statements in the simplified manner.

It helps in determining the financial position of the concern:

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Ratio analysis facilitates the management to know whether the firm’s financial
position is improving or deteriorating or is constant over the years by setting a
trend with the help of ratios The analysis with the help of ratio analysis can know
the direction of the trend of strategic ratio may help the management in the task of
planning, forecasting and controlling.

It is helpful in budgeting and forecasting:

Accounting ratios provide a reliable data, which can be compared, studied and
analyzed. These ratios provide sound footing for future prospectus. The ratios can
also serve as a basis for preparing budgeting future line of action.

Liquidity position:

With help of ratio analysis conclusions can be drawn regarding the Liquidity
position of a firm. The liquidity position of a firm would be satisfactory if it is able
to meet its current obligation when they become due. The ability to met short term
liabilities is reflected in the liquidity ratio of a firm.

Long term solvency:

Ratio analysis is equally for assessing the long term financial ability of the Firm.
The long term solvency is measured by the leverage or capital structure and
profitability ratio which shows the earning power and operating efficiency,
Solvency ratio shows relationship between total liability and total assets.

Operating efficiency:

Yet another dimension of usefulness or ratio analysis, relevant from the View point
of management is that it throws light on the degree efficiency in the various
activity ratios measures this kind of operational efficiency.

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 CLASSIFICATION OF RATIOS:

Financial ratios quantify many aspects of a business and are an integral part of
financial statement analysis. Financial ratios are categorized according to the
financial aspect of the business which the ratio measures. Different ratios are used
for different purpose these ratios can be grouped into various classes according to
the financial activity. Ratios are classified into four broad categories:-

1. Liquidity Ratio

2. Leverage Ratio

3. Profitability Ratio

4. Activity Ratio

1. Liquidity Ratio: Liquidity ratio measures the firm’s ability to meet its
current obligations i.e. ability to pay its obligations and when they become
due. Commonly used ratios are:

Current ratio:

Current ratio is the ratio, which express relationship between current asset and
current liabilities. Current asset are those which can be converted into cash within
a short period of time, normally not exceeding one year. The current liabilities
which are short- term maturing to be met.

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 Current Assets

Current Ratio =

Current liabilities

Acid test ratio:

It is often referred to as quick ratio because it is a measurement of firm’s ability to

convert its current assets quickly into cash in order to meet its current liabilities.

Quick asset

Acid test ratio =

Quick liabilities

2. Leverage or capital structure ratio: Leverage or capital structure ratios are

the ratios, which indicate the relative interest of the owners and the creditors
in an enterprise. It indicates financial structure of the organization, i.e. the
proportion of debts as compared to owner’s fund.

Debt –equity ratio:

Debt -equity ratio which expresses the relationship between debt and
equity. This ratio explains how far owned funds are sufficient to pay outside
liabilities. It is calculated by following formula:

Long term +short term debts +current liabilities

Debt equity ratio =

Net worth

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 3. Profitability ratio: Profitability ratio are the best indicators of overall
efficiency of the business concern, because they compare return of value
over and above the value put into business with sales or service carried on
by the firm with the help of assets employed. Profitability ratio can be
determined on the basis of:
 Sales
 Investment

1. Profitability ratios related to sale:

Gross profit to sales ratio:

The gross profit to sales ratio establishes relationship between gross profit and
sales to measure the relative operating efficiency of the firm to reflect pricing
policy.

Gross Profit

Gross profit to sales ratio = * 100

Net Sales

Net profit margin:

The net margin indicates the management’s ability to earn sufficient profit on sales
to earn sufficient profit on sales not only to cover all revenue operating expenses of
the business, the cost of borrowed funds and the cost of goods or servicing, but
also to have sufficient margin to pay reasonable comparison to shareholders on
their contributions to the firm.

Net profit after tax

Net profit margin = *100

Net Sales

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 2. Profitability ratios related to investments of capital employed:

Return on capital employed:

The profitability ratio here measures the relationship between net profit and the
total capital employed/ investment.

Net profit after tax

Return on Capital employed=

Capital employed

4. Activity ratio: Activity ratios are sometimes called efficiency ratios.

Activity ratios are concerned with how efficiency the assets of the firm are
managed. These ratios express relationship between level of sales and the
investment in various assets inventories, receivables, fixed assets etc.

The important activity ratios are as follows:

Inventory turnover ratio:

Cost of the goods sold

Inventory turnover ratio =

Average stock

Debt turnover ratio:

This ratio shows how quick debtors are converted into cash.

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 Total sales

Debt turnover ratio=

Debtors

Average collection period ratio:

This ratio indicates the credit period extended to the customers.

Days in a year

Debtor’s turnover

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RESEARCH METHODOLOGY
THE RESEARCH PROCESS
1.Define the Research
Objectives

2. Develop the Research the

Plan

3. Collect the information

4. Analyze the Information

5. Present the Findings

6. Make the Decision

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 The research process involves the six steps:

STEP1: Define the Research objectives:

1. To find the reasons why an organization should audit its financial

statements.

2. To find the difference between external and internal audit and their relation.

3. To find the role of audit of financial statements in Risk management.

4. To find the auditors role in preventing, detecting and investigating fraud.

5. To find the standard guide lines followed by the auditors.

6. To find out the most common issues or errors occurring while auditing the
financial statements of small scale industries and the ways to solve them.

7. To find the role of audit in Ratio analysis.

STEP2: Develop the Research Plan:

DATA SOURCES

The research involves Primary Data Collection by interviewing the chartered

accountants (auditors) in the Jain & Vaidya Associates. In order to sense the
importance of this topic and then a formal research instrument has been developed
to carry it in the company’s operations.

RESEARCH APPROACHES

The primary data was collected through survey method.

RESEARCH INSTRUMENTS

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The instrument used for the collection of Primary Data was through
Questionnaires. The questionnaire was carefully developed and tested before
administering on a large scale. The questionnaire consisted of 6 questions. The
questions were formed choosing an appropriate form, wording and sequence.
These questions are all open-ended questions.

SAMPLING PLAN

After deciding the Research Approach and Instrument, the Sampling Plan was
designed. While designing a Sampling Plan following decisions were made:

1. Sampling Size:

The Research target sample was the chartered accountants in the Jain & Vaidya
Associates. The Research was conducted on 4 chartered accountants, mainly the
two partners of the company, Mr. Lalit P. Jain and Mr. Vaidya. The two
assistant chartered accountants: Mr. Bhushan and Mr. Vishal working for the
company.

CONTACT METHODS

Once the sampling plan was determined, it was decided that the respondents be
contacted by an arranged personal interview, because it is the most versatile
method. Where we can ask more questions and make observations of the
respondents.

STEP 3: COLLECT THE INFORMATION

The questionnaire was filled and collected in few hours. After collecting the
questionnaire it was immediately checked so that no questions were left
incomplete.

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STEP 4: ANALYZE THE INFORMATION

The next step in the process was to analyze the findings from the collected data.

STEP 5: PRESENT THE FINDINGS:

The last step was to present the findings that are relevant to the major decisions
facing management.

Q. 1. Why should an organization have internal auditing of financial

statements?

Mr. Lalit P. Jain : ‘Internal auditing bridges the gap between the company’s
financial statements and the standards set i.e. GAAP, assesses the ethical climate
and the effectiveness and efficiency of transactions, and serves as an organization’s
safety for compliance with rules, regulations, and overall best business practices’.

Mr. Vaidya: A dedicated and effective internal audit activity assists the
management in fulfilling their responsibilities by bringing a systematic disciplined
approach to assessing the effectiveness of the design and execution of the system
of internal controls and risk management processes.

Mr. Vishal: Because internal auditors are experts in understanding organizational

risks and internal controls available to mitigate these risks, they assist management
in understanding these topics and provide recommendations for improvements.

Mr. Bhushan: Because of its unique and objective perspective, in-depth

organizational knowledge, and application of sound audit and consultation, a well
functioning, fully resourced and independent internal audit activity is well
positioned to provide valuable support and assurance to an organization.

Q. 2. What standards guide the work of internal audit professionals?

Mr. Lalit P. Jain: Accounting standards vary from country to country. In India the
Institute of Chartered Accountants of India (ICAI) has formed Accounting
Standards Board (ASB) in 1977, upon which the responsibility was set to develop
accounting standards to be issued and revised in the country from time to time.
They developed GAAP which refers to Generally Accepted Accounting

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Principles. There are total 32 accounting standards. These are guidelines or set of
rules for financial accounting and reporting, encompassing conventions, traditions
and procedures followed in accounting industry. ASB also provides explanation
and guidance on issues arising from standards.

Q. 3. What is internal auditing role in preventing, detecting, and investigating

fraud?

Mr. Lalit P. Jain: Internal auditors support management's efforts to establish a

culture that embraces ethics, honesty, and integrity. They assist management with
the evaluation of internal controls used to detect fraud, evaluate the organization's
assessment of fraud risk, and are involved in any fraud investigations.

Q. 4. What is Enterprise Risk Management (ERM) and what role in it does

internal auditing play?

Mr. Vaidya: Enterprise Risk Management is a structured and coordinated

governance approach to identify, quantify, respond to, and monitor the
consequences of potential events. Enterprise risk management is defined as a
process, to identify potential events that may affect the entity; and manage risk to
be within its risk appetite to provide reasonable assurance regarding the
achievement of entity objectives.

Mr. Lalit P. Jain: ERM deals with risks and opportunities affecting the creation or
preservation of organizational value. Management has the primary responsibility
for identifying and managing risk and for implementing ERM in a structured,
consistent, and coordinated approach.

Implemented by management, ERM is evaluated by the internal auditors for

effectiveness and efficiency. Internal auditors play a key role in evaluating the
effectiveness of and recommending improvements to ERM.

Q. 5. How do internal and external auditors differ and how should they
relate?

Mr. Lalit P. Jain: Internal auditors are integral to the organization and provide
ongoing monitoring and assessment of all activities. On the contrary, external

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auditors are independent of the organization, and provide an annual opinion on the
financial statements. The work of the internal and external auditors should be
coordinated for optimal effectiveness and efficiency.

Mr. Bhushan: Internal and external auditors have mutual interests regarding the
effectiveness of internal financial controls. Both professions adhere to codes of
ethics and professional standards set by the professional associations. There are,
however, major differences with regard to their relationships to the organization,
and to their scope of work and objectives.

The internal auditors focus on future events as a result of their continuous review
and evaluation of controls and processes. They also are concerned with the
prevention of fraud in any form.

Mr. Vaidya: The primary mission of the external auditors is to provide an

independent opinion on the organization's financial statements, annually. Their
approach is historical in nature, as they assess whether the statements conform to
generally accepted accounting principles, whether they fairly present the financial
position of the organization.

Q. 6. What are the most common issues or errors occurring while auditing the
financial statements of small scale industries and the ways to solve them?

Mr. Vishal: There are many such issues, but the most common issues or errors are:

1. Bank reconciliation: Comparing and matching figures from the accounting

records against those shown on a bank statement.

2. Ledgers scrutiny: Comparing and matching the sales figures with the
debtors and purchase figures with the creditors in order to tally the closing
balance.

3. Vat audit: VAT (Value added tax) is a sales tax levied on the sale of goods
and services. We have to check whether 12.5% VAT on Sales is being paid
to the government.

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4. Sales return: Most of the times there is return of sales due to defective or
damaged goods. To set off the return goods amount we make credit note on
the debtors A/c.

RATIO ANALYSIS OF MAGGI ENTERPRISIS

Profit & loss A/c (08-09)

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Profit & loss A/c (09-10)

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Balance sheet (08-09)

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Balance sheet (09-10)

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 PRINCIPAL RATIOS:

2008-09 2009-10

1. Current ratio= 0.66:1 Current ratio= 1.03:1

2. Quick ratio= 0.15:1 Quick ratio= 0.94:1

3. Debt/ Equity= 4.15:1 Debt/ Equity= 1.63:1

4. Gross Profit= 16.26% Gross Profit= 19.03%

5. Net profit= 3.41% Net profit= 15.09%

6. Operating cost= 96.59% Operating cost= 84.91%

7. Debt collection period= Debt collection period=

7.24 days 207.08 days

8. Return on investment= Return on investment=

24.77% 73.70%

9. Return on working Return on working

capital= 59.21% capital= 814.97%

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 COMMENTS ON RATIO ANALYSIS
1. The current ratio is increased from 0.66:1 to 1.03:1. Its shows efficiency in
order to meet the standard ratio and indicates stronger financial position. The
standard ratio should be 2:1 but now a day’s even 1.33:1 is considered.

2. The quick ratio is increased from 0.15:1 to 0.94:1. The standard ratio should
be 1:1. It shows efficiency and stronger financial position.

3. Debt-equity ratio is decreased from 4.15:1 to 1.63:1. This indicates the

company has successfully repaid their debts.

4. Gross profit ratio has increased from 16.26% to 19.03%. It indicates the
efficiency of production and operations.

5. Net profit ratio has increased from 3.41% to 15.09%. It indicates the overall
efficiency of the business.

6. Operating cost ratio has decreased from 96.59% to 84.91%. It indicates

company’s efficiency in controlling operating expenses.

7. Debt collection period has increased from 7.24 days to 207.08 days. It
indicates the company’s inefficiency in recovery of debts from debtors.

8. Return on investment has increased from 24.77% to 73.70%. It indicates

efficiency in earning capacity and optimum utilization of funds.

9. Return on working capital has increased from 59.21% to 814.97%. It

indicates the efficiency of the company in earning capacity and optimum
utilization of the assets.

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 CONCLUSION
1. The conduct of internal audit of financial statements helps the organization
prepare financial statements in compliance with the rules and regulations set
by the ICAI.
2. Internal audit helps to identify the errors in the financial statements and
applies different approaches to solve them.
3. It helps to eliminate the inefficiencies in the financial statements in order to
get an adequate financial report.
4. It also helps the organization to identify the emerging risks key risks
involved in its future events and recommends solutions to manage the risks.

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 BIBLIOGRAPHY
Name of the book: Financial management

Author: Arvind A. Dhond

Edition: Second Edition.

Name of the book: Marketing management

Author: Philip Kotler, Kevin Lane Keller

Edition: Twelfth Edition.

35
 WEBLIOGRAPHY

www.google.co.in

www.wikipedia.com

www.icai.com

36
 APPENDIX
UNIVERSITY 100 MARKS PROJECT QUESTIONNAIRE

ST. Francis Institute of Management & Research

MMS 2009-2011

NAME: JOB TITLE:

Q. 1. Why should an organization have internal auditing?

Q. 2. What standards guide the work of internal audit professionals?

Q. 3. What is internal auditing role in preventing, detecting, and investigating

fraud?

Q. 4. What is Enterprise Risk Management (ERM) and what role in it does internal
auditing play?

Q. 5. How do internal and external auditors differ and how should they relate?

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Q. 6. What are the most common issues or errors which come across in Auditing of
small scale industries and the ways to solve them?

38