Question

You have recently been appointed as an audit assistant for MKZ Auditing LLC, a popular auditing firm based in Al Ain. Your line manager spoke to you two weeks ago to inform you that you have been assigned with another senior auditing staff to undertake a visit and audit a client called SMC Hotels LLC.

Your line manager has tasked you to liaise with the senior auditing staff to prepare a presentation to be delivered to the senior management on how you propose to investigate and plan the audit of SMC Hotels LLC.

Required

Briefly identify the principles of control separation of functions, authorization, recording custody, vouching and verification applicable to SMC Hotels LLC 

Answer 1

The person conducting the audit is known as the Auditor. To be an auditor, the person should be professionally qualified. For example, under the Companies Act, 2013, only Chartered Accountants who are professionally qualified and possess certificate of practice which is valid and are allowed to conduct the audit of the accounts of the companies.A successful auditor must possess the following qualities:(i) An auditor should have a sound knowledge of various disciplines associated with the audit suchas accountancy, economics, mathematics etc.(ii) As per SA-200 on Basic Principles Governing an Audit issued by ICAI (CA) an auditor must possess theintegrity and be objective and independent in his approach to the audit work.(iii) The auditor must have the knowledge of the general principles of the Law governing the auditeeenterprise. For example, while auditing a company the knowledge of the Companies Act, 2013 is necessary. If anenterprise is governed by some special statue as in case of Banking Companies,the knowledge of that special statue (Banking Regulation Act in case of Banking Companies) is also imperative.(iv) An auditor should also have an understanding of the special features which are peculiar to a particular business. SA 300 (Revised) and SA 310 issued by ICAI (CA) lay down principles in this regard.(v) Though technical knowledge is necessary to conduct an audit, only those persons whose technical knowledge is backed by basic human qualities can prove to be successful auditors.(vi) In the case of London & General Bank, Lord Justice Lindley said that “an auditor must be honest, that is, he must not certify what he does not believe to be true and must take reasonable careand skill before he believes that what he certifies is true.
An efficient internal control system should provide the followings;i. For proper division of functional responsibilities.ii. For proper authorization and assignment of duties to perform and record the transactions.iii. For adoption of proper practices for adherence with management policies.iv. For proper review and authorization of all transactions before they are recorded in the books of accounts and safeguard all business assets.v. Proper internal checksvi. Proper internal audit system.

The Institute of Internal Auditors defines scope of internal auditing as ‘examination and evaluation of the adequacy and effectiveness of organisation’s system of internal control and the quality of actual performance’. Therefore, internal auditing is concerned with an evaluation of both internal control as well as the quality of actual performance. According to the Institute, the scope of internal audit involves the following:i. Review the reliability and integrity of financial and operating information and the means to locate, identify measure, classify and report such information.ii. Appraise the economy and efficiency with which resources are employed.iii. Review the systems established to ensure compliance with those policies, plans, procedures, laws and regulations which could have a significant effect and impact on operations and report, and should determine whether the organization is in compliance.iv. Review the means of safeguarding assets and as appropriate verify the existence of such assets.v. Review operations or programs to ascertain whether results are consistent with established objectives and goals and whether the operations or programs are being carried out as planned.vi. Internal auditing, therefore, is a function distinct from authorization and recording. It is concerned not only with examination of the transaction as recorded in the books of accounts but also with appraisal or procedure with a view to effecting change for better efficiency, where possible

vouching and verification

voucher- meaning A voucher is a piece of substantiating evidence, in the form of a written record of expenditure,disbursement, or completed transaction.Examples of types of vouchers: Cash Memo, Sale Invoice, Purchase Requisition Slip, Purchase Invoice,Gate Keeper’s Note, Bank Paying Slip, Bank Statements, Minutes Book, etc.Types of Vouchersi. Original and Collateral Vouchers:Original vouchers are called primary vouchers, and their copies or supporting documents are called collateral vouchers.ii. Internal and External Vouchers:Vouchers may generate inside the company (internal vouchers) or outside the company (externalvouchers).iii. Missing Vouchers:(a) A missing voucher can be any of the following: missing Cash Memo, missing page in a Cash Collection Statement, missing inward challan for goods received, missing Inspection Report formaterial, missing TDS Certificate for tax deductions at source, missing Resolution to authorize increase in borrowing power by the company, missing Bank Statement for a day or a month, etc.(b) A voucher could become missing due to:i. Wrong or careless filing of document. E.g., missing Bank Statement for a day or a month, missing TDS Certificate.ii. Unintentional non-awareness of statutory requirements. E.g., missing Resolution to authorize increase in borrowing power by the company, or accidental fire, or lost otherwise.iii. Intention to hide the misappropriation by a person. E.g., non-recording of Purchas Invoices received later for goods received and taken in stocks, missing Cash Memo, etc. (c) The auditor should be careful and should carry out cross verification processes from other sources and documents to be able to form a firm opinion in the case of missing vouchers. (d) The auditor should qualify his report or give a Disclaimer of Opinion in this case, or may give an adverse report with reasoning on a particular issue depending upon the materiality of themissing voucher as necessary evidence on the issue.VOUCHING“Vouching is the examination by the auditor of all documentary evidences, which are available tosupport the authenticity of the transaction entered in the client’s record.” - Spicer and Pegler.The act of examining all documentary evidences (vouchers) is referred to as vouching. Its basic objective is to establish the authenticity of the transactions recorded in the primary books of account.Vouching is said to be “the essence of auditing”or may be termed as the “backbone of auditing”