Student declaration

We hereby declare that the project report titled Role of auditing in the economy and major disorders in it is executed as per the requirement for the post graduate program in management.

Place: Time:

A project report on

Role of auditing in the economy And major disorders in it

Under the guidance of Prof. Pankaj Upadhaya

Submitted to IIPM

Submitted by Shobha Richa Khemani Rohit Singh

Acknowledgement

In this project we have made an honest and dedicated attempt to make the research material as authentic as it could be and we earnestly hope that useful and workable information and knowledge to any person reading it. We would like to show my greatest appreciation to Prof. Pankaj Upadhaya. We cant say thank you enough for his tremendous support and help. We feel motivated and encouraged every time we attend his lecture. Without his encouragement and guidance this project would not have materialized.

The guidance and support received from all the members who contributed and who are contributing to this project, was vital for the success of the project. We am grateful for their constant support and help.

CHAPTER-1
1.1 Concept of Auditing
Audit is based on the generic concept of auditing. Simply put, an audit, any audit, is the comparison of actual conditions to expected conditions, and a determination as to whether one is in conformance or not in conformance. This is the same philosophy used to perform financial, quality, regulatory compliance, and systems audits. It is prudent to first review what the common elements are in order to better understand why audits are different.

There are several definitions of audit components that are common to any type of audit. ISO 14010 defines these terms for EMS audits, but they apply in other cases also. As a matter of fact, the ISO committee decided not to create auditing standards for other types of audits, such as compliance audits, although it was originally considered. The main reason for deleting the work items was because the concepts and processes defined in 14011, originally intended for EMS audits, were generic enough to be applied as is to other types of audits.

An audit is fundamentally a comparison of audit evidence to audit criteria to determine findings. The evidence is the objective information collected through interviews, visual reconnaissance, and documentation review. The audit criteria are the expectations or rules of how conditions should be. It is the criteria that distinguish one audit from the next. For example, in compliance auditing, the criteria are the regulations. With an EMS audit, the criteria would be the description of the expected system elements. In this case, the EMS criteria would be that described in ISO 14001, the specification standard.

When evidence is compared to criteria, one can determine whether the audited entity does or does not conform. This determination is a finding, and a finding can either be one of conformance, or non-conformance. Therefore, an audit will always produce findings, even if what is being audited is in full conformance with criteria.

Other key definitions to be aware of with auditing are: objectives, scope, audited, client, and auditor. The audit objective(s) is simply why you are conducting an audit; usually the reason is to demonstrate conformance to stated criteria. The audit scope is what entity is being

audited, and can be a company, a site, or unit within a site or company.

In the ISO 14000 realm, there is a clear distinction between the auditee and client. The auditee is the entity being audited. The client is the party commissioning the audit. For example, a client can be the customer, and the auditee a supplier to that customer. In ISO 14000, this distinction is important because the client sets the scope, objectives, and plan for an audit, not the auditee, although it is expected the auditee will be involved and cooperate.

The auditor is the one actually collecting evidence and determining findings. The auditor can be comprised of several individuals on a team. There are requirements in ISO 14001 that state that those performing functions within the EMS, such as the auditors, be qualified in their tasks. This means the auditors must have received training in EMS auditing. However, there may be audit team members who do not have the training, but are on the team because of some unique expertise, such as process, language, or regulatory knowledge.

The only standard in the ISO 14000 series that must be followed for third party verification (i.e. getting certified) is 14001. In that document, there is a requirement that the management system be periodically audited. Section 4.5.4 of ISO 14001 states that the organization shall establish and maintain program(s) and procedures for periodic EMS audits To be carried out in the order to.

(a) determine whether or not the EMS: Conforms to planned arrangements for environmental management including the requirements of this international standard; and has been properly implemented and maintained; and (b) Provide information on the results of the audits to management.

This requirement means that the organization shall: - Have procedures governing audits and follow-up actions - Operate a comprehensive system of audits - Plan its audits

- Document its audits - Demonstrate that EMS activities comply with planned arrangements - Determine that the EMS has been properly implemented and maintained - Schedule audits on the basis of the status and importance of the activity - Record results

This however does not convey the full requirements of ISO 14001, as many other clauses of the standard also have an impact upon the EMS. The ISO 14000 committee decided to prepare guidance standards for users describing techniques to help meet the audit requirement of ISO 14001. The resulting auditing standards.

1.2 Origin
During the 18th century industrial revolution brought in large scale production, steam power, improved facilities and better means of communication. This resulted in the origin of Joint stock form of organizations. Shareholders contribute capital of these companies but do not have control over the day to day working of the organisation. The shareholders who have invested their money would naturally be interested in knowing the financial position of the company. This originated the need of an independent person who would check the accounts and report the shareholders on the accuracy of the accounts and the safety of their investment.

The Indian Companies Act, 1913 defined the qualification, power, duties and procedure of appointment of the Auditor. The audit of Joint Stock Company made compulsory by this Act. Educational qualification certificate were issued by the central and state governments to those who undergone the prescribed course. In the year 1949, Chartered Accountants Act was passed. Companies act 1956 further elaborated the provisions related to the auditing and accounts of the companies. Now a person to do the auditing must be qualified as per the standards of the Institute of Chartered Accountants of India.

1.3 Research objective and methodology

CHAPTER-2
TOPIC INTRODUCTION 2.1 What is Audit?
The general definition of an audit is an evaluation of a person, organization, system, process, enterprise, project or product. The term most commonly refers to audits in accounting, but similar concepts also exist in project management, quality management, water management, and energy conservation In other words audit is an examination and verification of a companys financial and accounting records and supporting documents by a professional, such as Certified Public Account. An audit is an IRS examination of an individual or corporation's tax return, to verify its accuracy. There are three types of audits: correspondence audits (the IRS mails a request for additional information), office audits (an interview is conducted at a local IRS office), and field audits (an interview is conducted at a taxpayer's place of business, for a corporate tax return). Since there is always the chance of an audit, experts recommend keeping good records to support all the information in a return. The reason detailed and accurate bookkeeping is so important is that the burden of proof is on the filer, not the IRS.

2.2 Types of Auditing

Types of Audits and Reviews 1. 2. 3. 4. 5. 6. 7. Financial Audits or Reviews Operational Audits Department Reviews Information Systems Audits Integrated Audits Investigative Audits or Reviews Follow-up Audits

Financial Audit A historically oriented, independent evaluation performed for the purpose of attesting to the fairness, accuracy, and reliability of financial data. CSULB's external auditors, KPMG, perform this type of review. CSULB's Director of Financial Reporting coordinates the work of these auditors on our campus.

Operational Audit A future-oriented, systematic, and independent evaluation of organizational activities. Financial data may be used, but the primary sources of evidence are the operational policies and achievements related to organizational objectives. Internal controls and efficiencies may be evaluated during this type of review.

Department Review A current period analysis of administrative functions, to evaluate the adequacy of controls, safeguarding of assets, efficient use of resources, compliance with related laws, regulations and University policy and integrity of financial information.

Information Systems (IS) Audit There are three basic kinds of IS Audits that may be performed:

1.

General Controls Review

A review of the controls which govern the development, operation, maintenance, and security of application systems in a particular environment. This type of audit might involve reviewing a data center, an operating system, a security software tool, or processes and procedures (such as the procedure for controlling production program changes), etc.

2.

Application Controls Review

A review of controls for a specific application system. This would involve an examination of the controls over the input, processing, and output of system data. Data communications issues, program and data security, system change control, and data quality issues are also considered.

3.

System Development Review

A review of the development of a new application system. This involves an evaluation of the development process as well as the product. Consideration is also given to the general controls over a new application, particularly if a new operating environment or technical platform will be used

Integrated Audit This is a combination of an operational audit, department review, and IS audit application controls review. This type of review allows for a very comprehensive examination of a functional operation within the University.

Investigative Audit This is an audit that takes place as a result of a report of unusual or suspicious activity on the part of an individual or a department. It is usually focused on specific aspects of the work of a department or individual. All members of the campus community are invited to report suspicions of improper activity to the Director of Internal Auditing Services on a confidential basis. Her direct number is 562-985-4818.

Follow-up Audit These are audits conducted approximately six months after an internal or external audit report has been issued. They are designed to evaluate corrective action that has been taken on the audit issues reported in the original report. When these follow-up audits are done on external auditors' reports, the results of the follow-up may be reported to those external auditors.

2.3 Process of Auditing

Although every audit project is unique, the audit process is similar for most engagements and normally consists of four stages: Planning (sometimes called Survey or Preliminary Review), Fieldwork, Audit Report, and Follow-up Review. Client involvement is critical at each stage of the audit process. As in any special project, an audit results in a certain amount of time being diverted from your department's usual routine. One of the key objectives is to minimize this time and avoid disrupting ongoing activities.

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Planning During the planning portion of the audit, the auditor notifies the client of the audit, discusses the scope and objectives of the examination in a formal meeting with organization management, gathers information on important processes, evaluates existing controls, and plans the remaining audit steps.

Announcement Letter The client is informed of the audit through an announcement or engagement letter from the Internal Audit Director. This letter communicates the scope and objectives of the audit, the auditors assigned to the project and other relevant information.

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Initial Meeting During this opening conference meeting, the client describes the unit or system to be reviewed, the organization, available resources (personnel, facilities, equipment, funds), and other relevant information. The internal auditor meets with the senior officer directly responsible for the unit under review and any staff members s/he wishes to include. It is important that the client identify issues or areas of special concern that should be addressed.

Preliminary Survey In this phase the auditor gathers relevant information about the unit in order to obtain a general overview of operations. S/He talks with key personnel and reviews reports, files, and other sources of information.

Internal Control Review The auditor will review the unit's internal control structure, a process which is usually timeconsuming. In doing this, the auditor uses a variety of tools and techniques to gather and analyze information about the operation. The review of internal controls helps the auditor determine the areas of highest risk and design tests to be performed in the fieldwork section. Preparation of the audit program concludes the preliminary review phase. This program outlines the fieldwork necessary to achieve the audit objectives.

Fieldwork The fieldwork concentrates on transaction testing and informal communications. It is during this phase that the auditor determines whether the controls identified during the preliminary review are operating properly and in the manner described by the client. The fieldwork stage concludes with a list of significant findings from which the auditor will prepare a draft of the audit report.

Transaction Testing After completing the preliminary review, the auditor performs the procedures in the audit program. These procedures usually test the major internal controls and the accuracy and propriety of the transactions. Various techniques including sampling are used during the fieldwork phase.

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Advice & Informal Communications As the fieldwork progresses, the auditor discusses any significant findings with the client. Hopefully, the client can offer insights and work with the auditor to determine the best method of resolving the finding. Usually these communications are oral. However, in more complex situations, memos and/or e-mails are written in order to ensure full understanding by the client and the auditor. Our goal: No surprises.

Audit Summary Upon completion of the fieldwork, the auditor summarizes the audit findings, conclusions, and recommendations necessary for the audit report discussion draft.

Working Papers Working papers are a vital tool of the audit profession. They are the support of the audit opinion. They connect the clients accounting records and financials to the auditors opinion. They are comprehensive and serve many functions.

Audit Report Our principal product is the final report in which we express our opinions, present the audit findings, and discuss recommendations for improvements. To facilitate communication and ensure that the recommendations presented in the final report are practical, Internal Audit discusses the rough draft with the client prior to issuing the final report.

Discussion Draft At the conclusion of fieldwork, the auditor drafts the report. Audit management thoroughly reviews the audit working papers and the discussion draft before it is presented to the client for comment. This discussion draft is prepared for the unit's operating management and is submitted for the client's review before the exit conference.

Exit Conference When audit management has approved the discussion draft, Internal Audit meets with the unit's management team to discuss the findings, recommendations, and text of the draft. At this meeting, the client comments on the draft and the group work to reach an agreement on the audit findings.

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Formal Draft The auditor then prepares a formal draft, taking into account any revisions resulting from the exit conference and other discussions. When the changes have been reviewed by audit management and the client, the final report is issued.

Final Report Internal Audit prints and distributes the final report to the unit's operating management, the unit's reporting supervisor, the Vice President for Administration, the University Chief Accountant, and other appropriate members of senior University management. This report is primarily for internal University management use. The approval of the Internal Audit Director is required for release of the report outside of the University.

Client Response The client has the opportunity to respond to the audit findings prior to issuance of the final report which can be included or attached to our final report. However, if the client decides to respond after we issue the report, the first page of the final report is a letter requesting the client's written response to the report recommendations.

In the response, the client should explain how report findings will be resolved and include an implementation timetable. In some cases, managers may choose to respond with a decision not to implement an audit recommendation and to accept the risks associated with an audit finding. The client should copy the response to all recipients of the final report if s/he decides not to have their response included/attached to Internal Audit's final report.

Client Comments Finally, as part of Internal Audit's self-evaluation program, we ask clients to comment on Internal Audit's performance. This feedback has proven to be very beneficial to us, and we have made changes in our procedures as a result of clients' suggestion.

Audit Follow-Up Within approximately one year of the final report, Internal Audit will perform a follow-up review to verify the resolution of the report findings.

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Follow-up Review The client response letter is reviewed and the actions taken to resolve the audit report findings may be tested to ensure that the desired results were achieved. All unresolved findings will be discussed in the follow-up report.

Follow-up Report The review will conclude with a follow-up report which lists the actions taken by the client to resolve the original report findings. Unresolved findings will also appear in the follow-up report and will include a brief description of the finding, the original audit recommendation, the client response, the current condition, and the continued exposure to Indiana University. A discussion draft of each report with unresolved findings is circulated to the client before the report is issued. The follow-up review results will be circulated to the original report recipients and other University officials as deemed appropriate.

Internal Audit Annual Report to the Board In addition to the distribution discussed earlier, the contents of the audit report, client response, and follow-up report may also communicated to the Audit Committee of the Board as part of the Internal Audit Annual Report.

The Process: A Collaborative Effort As pointed out, during each stage in the audit process--preliminary review, field work, audit reports, and follow-up--clients have the opportunity to participate. There is no doubt that the process works best when client management and Internal Audit have a solid working relationship based on clear and continuing communication. Many clients extend this working relationship beyond the particular audit. Once the audit department has worked with management on a project, we have an understanding of the unique characteristics of your unit's operations. As a result, we can help evaluate the feasibility of making further changes or modifications in your operations.

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2.4 Advantages of Auditing

It is compulsory for all the organizations registered under the companies act must be audited. There are advantages in auditing the accounts even when there is no legal obligation for doing so. Some of the advantages are listed below. Audited accounts are readily accepted in Government authorities like income Tax Dept., Sales Tax dept., Land Revenue departments, banks etc. By auditing the accounts Errors and frauds can be detected and rectified in time. Audited accounts carry greater authority than the accounts which have not been audited. For obtaining loan from financial institutions like Banks, LIC, HUDCO, HDFC, IFCI etc., previous years audited accounts evaluated for determining the capability of returning the loan. Regular audit of account create fear among the employees in the accounts department and exercise a great moral influence on clients staff thereby restraining them from commit frauds and errors. Audited accounts facilitate settlement of claims on the retirement/death of a partner. In the event of loss of property by fire or on happening of the event insured against, Audited accounts help in the early settlement of claims from the insurance company. In case of joint Stock Company where ownership is separated from management, audit of accounts ensure the shareholders that accounts have been properly maintained, funds are utilized for the right purpose and the management have not taken any undue advantage of their position. To determine the value of the business in the event of purchase or sales of the business, audited account will be the treated as the base for the evaluation.

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 The audit of accounts by a qualified auditor also help the management to understand the financial position of the business and also it will help the management to take decision on various matters like report in internal control system of the organization or setting up of an internal audit department etc. If the accounts have been audited by an independent person, disputes between the management and labor unions on payment of bonus and higher wages can be settled amicably. In the event of admission of a new partner, audited accounts will facilitate the formation of terms and conditions for joining the new partner. Last 3 years audited accounts and balance sheet will give a general idea about the growth and financial position of the business to the new partner.

2.5 Objectives of Auditing

For a better understanding we could classify the objective of audit as: 1. Primary Objectives 2. Secondary Objectives

Primary Objectives To determine and judge the reliability of the financial statement and the supporting accounting records of a particular financial period is the main purpose of the audit. As per the Indian Companies Act, 1956 it is mandatory for the organizations to appoint a auditor who, after the examination and verification of the books of account, disclose his opinion that whether the audited books of accounts, Profit and Loss Account and Balance Sheet are showing the true and fair view of the state of affairs of the company's business. To get a true and fair view of the companies affairs and express his opinion, he has to thoroughly check all the transactions and relevant documents of the company made during the audited period. Which will help the auditor to report the financial condition and working result of the organization. While carrying out the process of audit, the auditor may come across certain errors and frauds. But detection of fraud or errors is not the primary objective of the audit. They are come under the secondary objectives of audit.

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Audit also disclose whether the Accounting system adopted in the organization is adequate and appropriate in recording the various transactions as well as the setbacks of the system.

Secondary Objectives In order to report the financial condition of the business, auditor has to examine the books of accounts and the relevant documents. In that process he may come across some errors and frauds. We may classify these errors and frauds as below:

1. Detection and prevention of Errors 2. Detection and prevention of Frauds

Detection and prevention of Errors: Following types of errors can be detected in the process of auditing. 1. Clerical Errors 2. Errors of Principle

1. Clerical Errors Due to wrong posting such errors may occur. Money received from Microsoft credited to the Semens's account is an example of clerical error. Even though the account was posted wrongly, the trial balance will agree. We can classify clerical errors as below:

i. Errors of Commission ii. Errors of Omission iii. Compensating Errors.

i. Errors of Commission: These errors are errors caused due to wrong posting either wholly or partially of in the books of original entry or ledger accounts or wrong totaling, wrong calculations, wrong balancing and wrong casting of subsidiary books. For example Rs. 5000 is paid to Microsoft for the supply of windows program and the same is recorded in the cash book. While posting the ledger the Microsoft's account is debited by Rs. 500. It may be due to the carelessness of the accountant. Most of these errors of commission are reflected in the trial balance and can be identified by routine checking of the books.

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ii. Errors of Omission: When there is no record of transactions in the books of original entry or omission of posting in the ledger could lead to such errors. Sales not recorded in the sales book or omission to enter invoices in the purchase book is examples of Errors of Omission. Errors due to entire omission will not affect the trial balance. Errors due to partial omission will affect the trial balance and can be detected.

iii. Compensating Errors: are errors committed in such a way that the net result of these errors on the debit side and credit side would be nullifying the net effect of the error. For example, Ram's account which was to be debited for Rs. 5000 was credited for Rs. 5000 and similarly, Sitas Account which was to be credited for Rs. 5000 was debited for Rs. 5000. These two mistakes will nullify the effect of each other. Unless detailed investigation is undertaken such errors are difficult to locate as both the sides of the trial balance are equally affected.

2. Errors of Principle: While recording a transaction, the fundamental principles of accounting is not properly observed, these types of errors could occur. Over valuation of closing stock or incorrect allocation of expenditure or receipt between capital and revenue are some of the examples of such errors. Such errors will not affect the trial balance but will affect the Profit and Loss account. It may occur due to lack of knowledge of sound principles of accounting or can be committed deliberately to falsify the accounts. To detect such errors, the auditor has to do a careful examination of the books of account.

Detection and Prevention of frauds: To get money illegally from the organization or from the proprietor frauds are committed intentionally and deliberately. If it remains undetected, it could affect the opinion of the auditor on the financial condition and the working results of the organization. Therefore, it is necessary for the auditor to exercise utmost care to detect such frauds. It can be committed by the top management or by the employees of the organization. Frauds could be of the following types:

1. Misappropriation of cash 2. Misappropriation of goods 3. Falsification or Manipulation of accounts 4. Window dressing 5. Secret Reserves

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Misappropriation of Cash Since the owner has very limited control over the receipt and payments of cash, misappropriation or defalcation of cash is very common especially in big business organizations. Cash can be misappropriated by various ways as mentioned below: a. Recording fictitious payments b. Recording more amount than the actual amount of payment c. Suppressing receipts d. Recording less amount than the actual amount of payment.

There should be strict control over receipts and payments of cash known as "Internal check system" to prevent such frauds. The auditor should check the Cash Book with original records, bills register, invoices, vouchers, counterfoils or receipt books, wage sheets, salesman's diary, bank statements etc. in order to discover such frauds.

Misappropriation of goods Companies handling with high value goods are pray to this kind of misappropriation. Without proper records of stock inward and stock outward, it is difficult for the auditor to find out such fraud. Periodical and surprise checking of stock and maintaining the proper record of inward and outward movement of stock can reduce the possibility of such fraud.

Falsification or manipulation of accounts In order to achieve certain specific objectives, accounts may be manipulated by those responsible persons who are in the top management of the organization. They prepare accounts such a manner that they disclosed only a fake picture not the true picture. Some of the ways used in manipulating the accounts are as follows: 1. Inflating or deflating expenses and incomes 2. Writing off of excess or less bad debts. 3. Over-valuation or under-valuation of closing stock. 4. Charging excess or less depreciation 5. Charging capital expenditures to revenue and vice-versa 6. Providing for excess or less doubtful debts. 7. Suppressing sales and purchase or showing fictitious sales and purchases etc.

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Window dressing is the way of presenting the financial data in a much better position than the original position. It is known as window dressing. Some of the reasons for doing window dressing are as follows:

1. To win the confidence of share holders 2. To obtain further credit 3. To raise the price of shares in the market by paying higher dividend so that shares held may be sold 4. To attract prospective parters or shareholders. 5. To win the confidence of shareholders.

Secret Reserves In secret reserves, accounts are prepared in such a way that they disclose worse picture than actually what they are. The objectives of preparing accounts in this way are:

1. To conceal the true position from the competitors. 2. To avoid or reduce the tax liability 3. To reduce the price of shares in the market by not paying dividend or paying lower dividend so that the shares may be bought at a much lower price.

It is very difficult to detect such frauds since these frauds are committed by those persons in the organizations who are at the top positions like directors, managers, financial controllers etc. To detect these kinds of frauds, the auditor must be vigilant and should make searching inquiries to arrive at the true position.

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2.6 Comparison between Auditing and Accounting

The role of accountancy is to record the transaction in the book of accounts, extraction of trial balance, preparation of Trading and profit and loss account and balance sheet etc. On the other hand auditing is the examination of books of account and checking the financial statement for the purpose of finding out the true and fair position and results of operation of a concern. Audit is concerned with detailed examination of the complete accounting records but it does not involve the preparation of accounts. If the auditor is asked to write the books of accounts, extract an agreed trial balance and profit and loss account and Balance sheet, he would be doing the work of an accountant and not the work of an auditor. Preparation of account is not the part of auditing. An auditor, using his appointing authority, needs to check throughly, whether the Profit and Loss account and the Balance Sheet have been properly drawn up and revel the 'true and fair view' of the state of affairs and results of operation of the concern and report it to the parties interested. Auditing without the prior existence of accounts is not possible. When the accountant finishes his work, the auditor starts his work.

2.7 Comparison between Internal Auditing and external Auditing

In order to compare and contrast the roles and responsibilities of external and internal auditors, as well as discuss the vast amount of career opportunities that comes with becoming an external or internal auditor, we must first define what they mean. The Institute of Internal Auditors (IIA) describes an internal auditor as one who performs an independent, objective assurance and consulting activity designed to add value and improve an organizations operations. An internal auditor 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. In contrast, an external auditor is defined as performing a periodic or specific purpose audit to determine, among other things, whether the accounting records provided are accurate and complete, prepared in accordance with the provisions of GAAP, and examine financial statements prepared from the accounts present fairly an organizations financial position, and the results of its financial operations. Now that we know the difference between what an external auditor does versus an internal auditor, we may begin to describe the roles and responsibilities each has in the accounting field.

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External auditors have a great influence on the audit of internal controls through their audit activities, including conferring with management and their recommendations for improvement to internal controls. They provide important feedback on the efficiency of the internal control system. Specifically, external auditors examine on a test basis, transactions and records that support accompanying financial statements and the associated disclosures. They review the accounting principles applied and considerable estimates made by management, and evaluate the overall presentation of an organizations financial statements. Before an external auditor can conduct his responsibilities, however, they must comply with the generally accepted auditing standards. The most important being the independence the auditor must have in relation to the organizations he/she is auditing, and attaining the adequate training and proficiency to perform an audit. Internal auditors, on the other hand, evaluate and provide reasonable assurance of risk management and decide if internal control systems are implemented as intended to allow the organizations goals to be met. They report on deficiencies in the internal controls, issues involving risk management, and provide recommendations on how to improve in these areas. Security is also an area of expertise an internal auditor may have when employed by an organization. An internal auditor examines the security involving sensitive information that must be kept inside the organization. Other responsibilities include communicating with management and external auditors, constantly continuing their education, and provide support to an organizations anti-fraud controls. So far, the major differences between internal and external auditors are the amount of experience and expertise each holds. Internal auditors seem to obtain knowledge specifically about the organizations to which they are employed. This knowledge and experience may be carried with them from job to job, however, different organizations employ different accounting methods that could be tremendously different than that of the one they previously worked for. External auditors have specific guidelines and laws to abide by, which requires them to obtain vast amounts of knowledge of many different types of accounting methods, controls, and more importantly, uncommon entities and environments. Upon discussing the roles and responsibilities of external and internal auditors, we can bring to light the many career opportunities that are available to both professions. First, external auditors have an immeasurable advantage over internal auditors when it comes to employment prospects. As stated earlier, external auditors seem to have the knowledge and expertise that can enable them to move from different accounting fields more easily than of an internal auditor. External auditors can become private CPAs with less difficulty, work as an internal

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auditor for a diverse amount of organizations, and progress in a firm more rapidly. These assumptions may not hold true to all external auditors, however, the roles and responsibilities involved in each profession seem to set a higher standard for external auditors. According to www.bls.gov, employment of accountants and auditors is expected to grow by 18 percent between 2006 and 2016, which is faster than the average for all occupations. This occupation will have a very large number of new jobs arise, almost 226,000 over the projections decade. An increase in the number of businesses, changing financial laws, and corporate governance regulations, and increased accountability for protecting an organizations stakeholders will drive growth. After taking a glimpse at todays economy, the previous statement may not hold much truth, but it is undoubtedly accurate in that the accounting profession will continue to grow, specifically auditing. The next statement, made by the same website, must be presented when discussing career opportunities of auditors. An increased need for accountants and auditors also will arise from changes in legislation related to taxes, financial reporting standards, business investments, mergers, and other financial events. As a result of accounting scandals at several large corporations, Congress passed the Sarbanes-Oxley Act of 2002 in an effort to curb corporate accounting fraud. This legislation requires public companies to maintain wellfunctioning internal controls to ensure the accuracy and reliability of their financial reporting. It also holds the companys chief executive personally responsible for falsely reporting financial information. The growth of the accounting industry as a whole is something that cannot be overlooked. When considering the amount of fraud that has occurred over the years, it is impossible not to project an enormous need for more auditors over the next decade. For example, the Bernie Madoff Ponzi scheme will require hours upon hours, days upon days, and months upon months to unravel the damage he and his investment firm has done. There will be a countless number of external auditors working with the internal auditors from his failed investment firm to find out what exactly happened, and to try and recover monies for the duped investors. As another example is the Texas-based Stanford Investment Firm that is now being investigated for also engaging in a Ponzi scheme. This type of fraud is the most perilous to investors due to its nature. Fraud and changes in law due to fraud are the main reasons of the enormous growth in the accounting industry, specifically auditing. It is the personal responsibility of internal and external auditors alike to actively investigate for fraud in their organization or their clients organization. To not be proactive in detecting fraud is to only do half of their job. Auditors

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are required to analyze and interpret financial statements, internal controls, and so much more, hence detecting fraud should be one of the requirements in any engagement or employment in an organization as an auditor. To emphasize the importance of detecting fraud, and its role in employment opportunities, specifically for internal auditors, the following quote is taken from an article related to a study titled, The Importance of Internal Audit in Fraud Detection by Paul Coram, Colin Ferguson, and Robyn Moroney. In recent years the importance of good corporate governance has received significant public and regulatory attention. A crucial part of an entitys corporate governance is its internal audit function. At the same time, there has been significant public concern about the level of fraud within organizations. In their study, they assess whether organizations with an internal audit function are more likely to detect fraud. Their findings suggested that internal audits add value through improving the control and monitoring environments within organizations to detect fraud, and that keeping the internal audit function within the organization is more effective than completely outsourcing that function. This study leads me to believe that the roles, responsibilities, and career opportunities for internal and external auditors will expand at a rapid pace, and there is no reason to think otherwise. With the amount of financial corruption throughout our society growing year after year, it is not incorrect to say that auditors, external and internal, are basically the financial worlds police. Basically, auditing is going be a depression-proof profession due to the nature of fraud, and the ever-expanding companies worldwide. Hopefully accounting students looking for a profession out of college look into becoming auditors, and continue to solidify the assumption that they really can police the financial world ethically and morally. In conclusion, external and internal auditors are the same in that they have an extremely important job to protect investors life savings. They are different, however, in that external auditors should have a broader range of knowledge than do the internal auditors. Regardless, accounting a quite possibly one of the greatest professions to enter into today, and auditing is only the tip of the accounting iceberg.

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2.8 Generally Accepted Auditing Standards

The term Generally Accepted Auditing Standards, often shortened to GAAS, refers to a set of ideas which serves as a framework for the various processes falling under the main activity, which is auditing. Since the reports produced after an audit may have a great impact on the future of a company, it is especially important that auditing processes are kept uniform and are conducted in a fair and systematic manner. The data and analysis must also be accurate, because any discrepancy between the report and the actual situation may lead to incorrect and potentially disastrous consequences. The GAAS helps avoid such problems by making sure that auditors are on the same page when it comes to the conduct of auditing activities. Auditors must be very familiar with the general standards of auditing, as well as comply with the standards set for fieldwork activities. This helps ensure that the kind of data collected for each company is the same. Standards are also set for the process of reporting findings. In this way, consistency and reliability, and verifiability of data are ensured. It must be noted, however, that while many auditing concepts may be similar across regions, the accepted standards may still differ in some ways from one country to another. In the United States, for instance, it is the American Institute of Certified Public Accountants which put the US GAAS in place. On the other hand, other countries use the ISA, or International Standards on Auditing, as their basis. This was developed by the auditing arm of the International Federation of Accountants.

General standards: The first three GAAS are general standards that address your qualifications to be an auditor and the minimum standards for your work product: As an auditor, you must have both adequate training and proficiency. You are independent in both fact and appearance. You exercise due professional care in performing your auditing tasks. Standards of fieldwork: The next three GAAS govern how you actually do your job: Your work is adequately planned, and all assistants are properly supervised. You gain an understanding of the client and its environment, including internal controls, to assess the risk of material misstatement in the financial statements and to plan your audit. The evidence you gather during the audit is appropriate and sufficient to evaluate managements assertions on the financial statements.

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Standards of reporting: The last four GAAS concern information you must consider prior to issuing your audit report: You have to state whether the financial statements are prepared using generally accepted accounting principles (GAAP). Just as important is to report whether GAAP are consistently applied for all financial accounting. Should this not be the case, you have to report any departures. You also have to make sure that disclosures any additional information needed to explain the numbers on the financial statements are provided. Lastly, you have to include your opinion as to whether the financial statements present fairly in all material respects the financial position of the company under audit.

2.10 Association of Audit committee members (AACM)

Need for the Association We serve the audit committees of public companies, private companies and nonprofit organizations. We are managed by current and former audit committee chairs and corporate governance experts. Public company audit committees are under increasing pressure from shareholder groups and government regulatory authorities to oversee public company management in order to prevent corporate corruption. Audit committees of public companies have been given an array of new powers and responsibilities under the Sarbanes-Oxley Act of 2002 and rules adopted or to be adopted by the Securities and Exchange Commission, the New York Stock Exchange, and the Nasdaq Stock Market. Audit committee members must not only fully understand these new powers and responsibilities, they must develop best practices in exercising them in an environment where little clear guidance exists and where new developments occur on almost a weekly basis. Audit committee members can protect themselves against personal liability by developing and implementing policies and procedures which represent national best practices. The Association of Audit Committee Members, Inc. (the AACMI), a non-profit organization, was formed to assist audit committee members in meeting these challenges through an organization independent of the public companies they serve, independent of any accounting firms, and controlled predominately by chairmen of audit committees. Nonprofit organizations are likewise being pressured by contributors and regulators to develop good corporate governance practices, including the development of effective audit committees. Accordingly, the AACMI has created a division solely for nonprofit audit committee members.

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Mission Statement The AACMI promotes the professional interests of individuals who serve as members of public company audit committees by: Developing and disseminating information of interest to audit committee members on a real-time basis; providing educational materials and initiatives to enhance the understanding of the duties and responsibilities of audit committee members; recommending policies and procedures which permit audit committee members to fulfill their duties and responsibilities and to protect themselves from personal liability; assisting members to obtain second opinions on difficult accounting and legal issues; and Fostering the development of "best practices" by facilitating the exchange of information among audit committee members and through educational materials and initiatives.

Form of Organization The AACMI is a Delaware not-for-profit entity intended to qualify under Section 501(c)(6) of the Internal Revenue Code of 1986.

Funding The principal source of funding for the organization will be member dues, which will be paid by the companies on whose audit committees AACMI members serve. Annual dues for members are $1,000 per year, per public company (includes all directors and management), and $500 per nonprofit organization (including all directors and management). Additional funding may be obtained from corporate sponsorships, sales of publications, and advertising revenue.

2.11 Role of CAG

Auditors can play an important role in helping countries deal with economic crises by suggesting mid-course corrections, comptroller and Auditing General (CAG) of India Vinod Rai said here today. These are momentous times in the histories of many nations. New paradigms are evolving in the political systems of some countries. Global economy is undergoing stressful times and nations are seeking novel solutions to critical problems. All these events pose major challenges to the supreme audit institutions (SAIs) of our countries.

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Our community of SAIs has not been a bystander while these events have been unfolding. Our reports provide an opportunity to the government to make mid course corrections and improve service delivery, Rai said while addressing the 12th Assembly of the Asian organization of supreme Audit Institutions (ASOSAI) ASOSAI is one of the regional groups of the International Organization of Supreme Audit Institutions (INTOSAI). The role of SAIs has expanded from being merely an auditor of financial transactions of the government to that of a promoter of an organizations performance and to act as a powerful trustee of public good. SAIs is a generic expression used for auditors general all over the globe.

2.12 Role of Auditing

There is a legitimate role for quality audits in todays workplace. The success of the audit depends on managements guidance of the audit, selection and training of auditors, and willingness to involve people in achieving the opportunities for improvement identified by the audit. To be effective, the audit process must be properly managed. A successful audit process is part of an overall plan for continuous improvement and can become a vehicle for recognizing excellence in an organization. In an age when organizations are empowering workers, building quality into products, and using statistical control limits to control quality, some might argue that the quality audit is no longer necessary. It is true that many organizations suffer from over-control and that poorly conducted audits contribute to this problem. Poorly managed audits instill fear in the organizations and can mislead management with inaccurate information. But if managers know why they are auditing and if they know how to manage the audit process, well-managed audits can provide a process to foster learning, communication, and internal improvements vital to an organizations ultimate success.

Audit Basics Organizations have a legitimate need for an independent, unbiased assessment of activities. In spite of the best intentions, deviations from expected procedures may occur in almost any work setting. Line managers may filter their problems from the next level of management so issues that need upper management attention may go unresolved.

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Audits also provide management with confirmation of excellent performance that can be internally benchmarked by the rest of the organization. W. Edwards Deming argued that over 85 percent of the problems in a workplace can be improved only by management improving the work systems. The audit can be a positive tool for finding the opportunities for continuous improvement. The area to be audited should be defined by management, based on what management wants to learn. Working like a photographer, the auditor enters the work area to take Snapshots of how work processes are being conducted to see whether actual performance matches expectations. The auditor seeks out accurate images of improvement opportunities and examples of excellence in the organization. An audit is an expensive investment for any organization. There is the cost of the auditor, the time that those being audited spend preparing for the audit, the cost of conducting the audit itself, and the time spent for reports and meetings to discuss audit findings. To maximize the return on such an investment, managers must carefully consider the objectives they are trying to achieve through the quality audit. The basic questions to be addressed are, what do you care about, and what do you want to know about? A general assignment that asks the auditors to roam about the organization and see if they can uncover any problems is ineffective and creates problems for the auditor and auditors alike. A well-defined audit will ask the auditor to examine how one specific practice is being conducted across a large part of an organization. Or it will instruct the auditor to examine several specific practices in one unit of the organization. Or it will instruct the auditor to examine several specific practices in one unit of the organization. In either case, there is a clear definition of mission for the auditor. In defining the auditors mission, the manager should place the highest emphasis on obtaining verification that the most vital work is being performed properly. What may be most vital will certainly vary from business to business and manager to manager. In all cases, the value of the audit will be proportional to the value that the audited area has to the organization.

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Communicating the Audit and Establishing Performance Expectations

The effectiveness of the audit will be greatly influenced by how management communicates the purpose and performance of the audit. Most people do not look forward to being audited and will probably dread the prospect. This can lead to conflict in the auditing process and an effort by auditees to divert the auditor from observing the real conditions of a work process. Proper communication of the audit and ethical conduct on the part of the auditors can go a long way to ensuring cooperation with the audit process. Effective audits begin with a statement by management that a particular work process is extremely vital to the welfare to the organization, so vital, in fact, that the organization is willing to go to added expense to have an independent review of the work performance. The purpose of the audit must be stated as an effort to gain a clear understanding of the status of a work situation to maintain and improve the process and to identify area of excellence in the organization. The emphasis on understanding, continuous improvement, and identifying excellence will help create an atmosphere in which it is permissible and nonthreatening to discuss quality problems with the auditor. Where should the expectations of performance in the workplace come from? Not the auditor! When the auditors set the performance expectations, the expectations will vary from auditor to auditor. One auditor may view a particular situation as acceptable while another may consider it a disaster. Standards for expected performance should be generated internally by the organization or through the adoption of standards agreed on within its industry. Organizations need policies and procedures that define how vital work functions will be performed. These policies and procedures should serve as the standard against which auditors which auditors will measure performance. Professional societies have labored for years to agree on standards of performance in numerous disciplines. Thousands of performance expectations have been codified into law. Auditors do not need to impose their Professionals opinion in the audit to establish performance expectations. Many organizations are using internal adaptations of the Malcolm Baldridge National Quality Award as a standard for auditing how quality is being implemented. The use of these types of consensus documents helps establish the unbiased nature of the audit process and helps the organization focus on continuous improvement and identification and recognition of excellence.

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The Auditors Role The most important action that managers take in initiating an audit is selecting the auditor. The auditor should know how to use effective listening and communication skills to find opportunities for improvement. If management selects a person who does not display these skills, the audit may do more harm than good. Ideally the auditor should be like Sergeant Joe Friday of Dragnet fame. Through his conduct and demeanor, Sergeant Friday exhibited the characteristics of an effective auditor. A Joe Friday auditor conducts the audit with a plan. This auditor knows what is supposed to be happening in the organization because he or she has taken the time to review the procedures being audited. Joe Friday prepares a checklist of specific areas to investigate and takes notes as he or she works through the list. Sergeant Friday knows how to listen and asks open-ended questions to get people to loosen up and express concerns, then follows up with specific questions to nail down the details. He or she asks to see examples of log books, files, check-sheets, or other relevant documents, and takes the time to study them to make sure they conform to requirements. Joe Friday arrives on the scene with an open mind. He or she is there to investigate the situation and report back to management. Sometimes people just need a friendly reminder about requirements or a pat on the back for doing a good job. Sometimes people need to have deviations pointed out to them. Joe knows that his or her role is to give accurate feedback, not to harass suspects or to keep on investigating until the least some minor problems is uncovered. Joe knows that the identification of excellence is just as important as the identifications of opportunities for improvement. A well-conducted audit demands that the auditor not be confined to a comfortable conference room, reading documents submitted by the auditees. Sergeant Friday went out into the field to see firsthand what was going on. Joe will play an active role in selecting documents to review instead of relying on the audited organization to feed him or her documents that may happen to comply best with the requirements. A good Joe Friday auditor will understand the difference between problems caused by special circumstances and those that are built into the system. Competent auditors understand the concepts of statistical variation and can interpret statistical control charts to help access what types of opportunities the organization may have for improvement.

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The Problem Audit

Unfortunately, not all auditors work with Joe Friday proficiency. Some act a lot more like Deputy Barney Fife from The Andy Griffith Show. When given the opportunity, Barney Fife would swell up with authority, belittle people, and throw his weight around. He was allowed only one bullet, and he had to keep that one in his shirt pocket so he would not shoot himself in the foot. When managers allow a Deputy Fife to conduct audits in their organization, they are inviting disaster for the auditor and auditee alike. The purpose of the audit is to gain important information as operations are examined through the eyes of an unbiased observer. If the auditor creates a climate of fear or intimidation, then the audit findings will be of little value of the organization. People working in the organization will distrust management for sending in such a person. Auditors need to be capable of calmly collecting information in a nonthreatening manner. If potential auditors cannot conduct themselves in this way, they should never be permitted to conduct an audit. The underlying problem with a Deputy Fife auditor is that he or she is focused inwardly instead of on the people being audited. Deputy Fife is interested in establishing his or her expertise and telling his or her own story. Deputy Fife enjoys making people squirm under the scrutiny of an audit. The only excellence Deputy Fife wants to recognize is his or her own. People who are going to audit need to be trained in how to organize for the audit and how to effectively gather information for management. They need to learn how to conduct a preaudit meeting, how to write audit findings, how to close out audits, how to write audit findings, how to close out audits, and how to write audit reports. Auditors can be trained to develop good listening and observation skills and can be coached to become good Joe Friday auditors. The audit process is too expensive for organizations to skimp on training for their auditors. A poorly trained auditor will undermine the positive attitude about continuous improvement and high quality that management desires to instill in the organization.

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Audit Follow-Up: An Orientation toward Improvement and Excellence The most important part of the audit is not what the auditor does in collecting the data, but what the manager does with the audit information. Managers must be prepared to take actions to correct audit deviations and to recognize excellence. The actions taken to make improvements must not make the situation worse. The best approach is to meet with the people involved in the deviation and ask for their ideas for improving the situation and to empower them to solve the problem. This allows them to assume ownership for the problem and for the solution. The manager must then seek commitment from people to resolve the problem within a certain time frame and make resources available to support improvements, if necessary. The worst possible scenario is for managers to use audit information to punish people. Management must drive fear out of the organization. Punishing people will condition the organization to resist audits and hide problems from management. The manager must learn to receive bad news from an audit as an opportunity for improvement and then involve staff members in resolving the issue. Often the audit will bring to light performance problems that can be solved only by upper management. Although management alone has the authority to change the system, management can usually invite the people who work in the system to help diagnose the problem, make recommendations, and implement solutions for resolving the problem. The most effective resolutions of audit findings occur when the organization has systems in place that allow for employee participation and an open climate for discussion about problems and opportunities as part of the normal business environment. Joint union-management efforts for achieving quality are ideal for addressing audit concerns. Elected councils of salaried employees, working with managers offer another good channel for addressing issues in a participative manner. An accepted method for creating cross-functional teams will provide a good vehicle for making improvements. Successful organizations are those that learn to place a high value on continuous improvement. Everyone in the organization, from the managers in the strategic center to the individual contributors, must all share a belief in the positive discussion of problems and deficiencies as a necessary first step in achieving excellence. The audit will serve as one of several tools available for identifying opportunities for improvement. It must be part of a system that includes employee suggestions, analysis of quality data, feedback from customers, suggestions from suppliers, and benchmarking of other

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organizations. An organization needs to use all these avenues to continuously improve its process, and maintain competitive position in its market. Along with identifying opportunities for improvement, the audit should identify opportunities for reward and recognition. Managers should set the expectation that auditors will identify excellence as well as opportunities. The identification of excellence must be followed up with recognition. An effective recognition program will employ such methods as internal newsletters, cash or award incentives, and meetings or banquets that focus on recognition and praise. When management links the audit process to the reward and recognition system, the audit becomes an exciting opportunity for people in the organization instead of a potentially negative event.

Improving Continuously The audit can become a powerful tool for feeding a continuous improvement process and providing recognition for excellence in any organization. Successful implementation of an audit process requires managers to set positive expectations about how audits will be conducted, select important areas for audits, provide positive communication about the purpose of the audit findings, and involve people in following up on the audit findings. The audit should be seen as a method for identifying both opportunities for improvement and areas of excellence that deserve reward and recognition.

2.13 Future role of Auditing after Crisis

There is lack of in-depth understanding among business owners, investors, managers, regulators and auditors themselves about the current role of audit and what it should be in the future. The roundtable took place on 14 September 2009 in Warsaw, Poland. ACCA initiated this discussion because of the increasing public interest in the work of auditors in current economic conditions. The roundtable included representatives of all stakeholders of the audit profession in Poland, including the Ministry of Finance, Chamber of Auditors, Commission of Financial Supervision, Union of Polish Banks, Polish Institute of Directors, Polish Confederation of Private Employers Lewiatan, and representatives of the major audit companies.

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Steve Priddy, Director of Technical Policy and Research at ACCA, who moderated the discussion, said: A strong audit function promotes trust and contributes to the working of efficient markets. The economic crisis and resulting current economic conditions raise numerous challenges for the audit profession and its stakeholders. When economies throughout the world are shaken by corporate corruption scandals, it is important to reassess what the future of audit should be, and quite importantly, how its role in economy will and should be understood by wider society. Participants of the roundtable agreed on the following key points during the heated discussion: 1. Auditors cannot be solely blamed for the financial crisis, as the responsibility lies also on accountants, managers, board members, investors and other stakeholders. The auditors role is not to predict the future but to ensure that companies financial statements give a true and fair view of the previous 12 months performance. But at the same time, financial statements do include many assumptions about the future. 2. Currently there is a lack of understanding of the role of audit an expectation gap between what wider groups of stakeholders and managers, owners of companies think of auditors, and what the actual role, function, and limitations of audit are. Companies often dont see the value added by auditors. Participants of the round table agreed that this first public debate is very important and that public debates and discussions of this kind should be held in the future with all participants expressing willingness for further cooperation. 3. Exemption from audit may not be a beneficial way to tackle administrative burdens. Increasing the current regulatory thresholds can actually lead to the potential for increased corruption, bribery, and money laundering. 4. The quality of education and professional training of finance professionals is still very important in Poland and around the world, though tremendous progress was made in last 20 years. There is clearly a need for further research into such issues as the economics of audit, the perceived value of audit, and the way in which an audit is actually conducted. The following attendees offered a series of comments: Joanna Dadacz, Director of the Department of Accounting at the Ministry of Finance, stated: Are auditors are to blame for the financial crisis? Not solely - investors could be blamed, managers, accountants - not only auditors. I would rather say that thanks to auditors, the financial crisis was first disclosed in 2007. Waldemar Majek, ACCA, CIA, Head of Audit training at BPP Professional Education, raised a number of questions, saying: Auditors work focuses on historic data, but the value of assets also depends on the prediction of future events, and there are some assumptions of the future

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in financial statements. So should an auditor look into the long-term business model of the company? Should auditors be working more closely with boards, owners of companies? Maria Rzepnikowska, Vice-president of KIBR (Polish Chamber of Auditors), said: Talking about business models, auditors should assess companies' business models from the point of view of inherent risks. The role would be not to evaluate business model itself, but rather assess results of a given business model. Wodzimierz Grudziski, Vice-president of the Union of Polish Banks, raised the issue of economics of audit: The role of audit is to fill in the gaps in information available on the market. But who is paying auditors? Should external audit be paid by the company being audited? Or maybe part of the cost should be shared by government supervision body or by clients of the bank being audited? Dagmara Wieczorek-Bartczak, Director of the Department of Financial Insurance Supervision, Commission of Financial Supervision, pointed out: Independence of auditors is very important, but also it is important to ensure rotation of auditors working for the same company for long period of time. We, at the Financial Supervision Commission, started talking more to auditors. We have set up a committee, aimed to increase cooperation between the Commission and auditors; we hold regular meetings on different topics of mutual interest. Andrzej S. Nartowski, President of the Polish Institute of Directors, Prezes, Polski Instytut Dyrektorw, particularly stressed on importance of member of audit committees to be well paid, and also informed on joint ACCA-PID initiative on preparing lists of highly-qualified audit professionals to become candidates for audit committees in companies. Daria Kulczycka, Department of Economic Analysis, Polish Confederation of Private Employers Lewiatan, pointed out: The most crucial issues in Poland are quality of finance professionals, quality and clarity of tax law. Training and education of finance professional is very important. Wrapping up the debate, Malgorzata Sawicka, Head of ACCA Poland, said: ACCA is proud to have organised this initial high-profile discussion. Following this roundtable, and based on the issues raised today, ACCA will develop a set of recommendations outlining perspectives for the development of audit profession in Poland in tight cooperation of all key stakeholders. These recommendations will be targeted for audit practitioners, government, business, educators, profession and professional bodies, and will be publicly presented on 15 October 2009, at the CFO European Summit.

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2.14 Corporate Governance

Our understanding of corporate governance has changed. Earlier we perceived corporate governance as a system that ensures that the manager (the CEO and her team) does not take decision for private gains and does not expropriate shareholders' wealth. We now understand corporate governance in a broader sense. It is now perceived as a system that ensures optimal utilization of resources for the benefit of shareholders while meeting societal expectations. For example, enterprise risk management, which includes identification, evaluation and management of enterprise risks, is an important element of the corporate governance system. Similarly, strategy audit and corporate social responsibility (CSR) are elements of a corporate governance system. Some experts use the term enterprise governance to refer to this new concept of corporate governance. Enterprise governance subsumes corporate governance, as understood earlier. Corporate financial reporting and financial audit support the corporate governance system as understood earlier. They are of immense importance to analysts and investors. Therefore, there is a need to further strengthen corporate financial reporting and financial audit. In March 2008 International Federation of Accountants (IFAC) released its report entitled Financial reporting value chain current perspectives and direction'. The financial reporting supply chain refers to the people and processes involved in the preparation, approval, audit, analysis and use of financial reports. The report is based on a global survey conducted by IFAC. The report observes "The results of this survey are clear. Participants feel that the three key areas of the financial reporting supply chain corporate governance, the process of preparing financial reports and the audit of financial reports have clearly improved in the last five years. Unfortunately, however, they do not feel that the products of this supply chain, the financial reports, have become more useful to them." In fact, the revelation that the usefulness of financial reports has not improved over the years is not new. For some years now, all the participants in the value chain are arguing in favour of simplification of accounting standards and corporate financial report. But simplification is not easy. If business models and transactions get complex, it is but natural that accounting rules

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and corporate financial report get complex. However, the moot question is have they lost relevance. The answer is no. Even today most analysts use corporate financial report as the primary source of information in the valuation of a company. This does not mean that there should be no Endeavour to simplify accounting rules and corporate financial report. In future, simplification of international financial reporting standards (IFRS) will be the greatest challenge before the International Accounting Standards Board (IASB). The IFAC report observes "Overall, respondents to the survey felt that the audit of financial reports has become better over the last five years; preparers and users were slightly less positive than other respondents" . The survey reported that auditors now are more focused on the overall risk profile of the audited company rather than on a micro review of transactions and that they enjoy greater independence than before. However, many respondents are not happy with the auditor's communication with investors. They felt that excessive oversight and litigation has lead to the compliance audit' approach and the boiler plate' audit report. Respondents expect that the financial auditor should be innovative and that they should apply their professional judgment. They look for more detailed report from the auditor. A question that needs to be examined is that whether shareholders can ask for the detailed report that the financial auditor submits to the management/audit committee. And if they ask for the report, can the board of directors deny the same. Perhaps, this is the high time that the government examines this issue, particularly in view of the fact that the financial auditor is appointed by shareholders and it is accountable to them. Cost audit, which has not received due attention has the potential to support enterprise governance. In fact investors should insist for cost audit. In India cost audit exists for over four decades. But, it has not been used to its full potential. Till date, only 44 industries/products have been covered by Cost Accounting Record Rules, and cost audit orders have been issued in about 2,500 cases, covering about 2,000 companies. In the era of price control and administered interventions, attested cost structure had a major role to play and hence the cost audit emphasized on this aspect. The cost audit had to play the

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key role of verifying and validating the cost figures in select industries before they were submitted to the government. In the changed economic environment the emphasis should shift to efficiency review. The Ministry of Corporate Affairs has constituted an Expert Group to review the existing Cost Accounting Standards and Cost Audit Report Rules. Hopefully the cost audit in its new avatar will be effective in supporting the enterprise governance. Some argue that cost audit has become irrelevant in a market economy. They are not correct. It is true that government control is unwarranted in a market economy. But, in a market economy, regulators are required to frame right regulations in the interest of the industry as a whole and also in the interest of the consumers. Cost audit, supported by cost accounting standards, can provide relevant and credible cost and revenue data to regulators to support their decisions. Moreover, cost audit can provide relevant reports to the board of directors to strengthen its oversight function. Therefore, in a market economy, cost audit with changed emphasis on efficiency is as relevant as it was in a controlled economy. In an environment where stakeholder theory' of corporate governance is still rhetoric and management focus is on capital market, cost audit will help to protect the interest of stakeholders including investors. It will also help optimal use of national resources

2.15 Auditors role and responsibility

Auditors are in the accounting field and their main duty is to verify a company's records to make sure that all the information matches up to what were provided. An auditor has to go through bookkeeper records, creditor records and tax records in order to find out if any errors have been made and if so, what needs to be done to fix them

External Auditor Duties An external auditor is either self-employed, or is employed at a firm that is hired by the company. This type of auditor comes in as an independent third party in order to check records. Their reports are used in order to help find errors, cut costs and improve general accounting.

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Internal Auditor Duties Internal auditors are employees of the company that they are auditing. Large companies often have at least one auditor on their accounting staff. The duties do not differ much from those of external auditors, but the experience of dealing with a single company's books allows internal auditors to become very efficient at going through and checking all of the facts and figures.

IRS Auditor Duties The type of auditor that most people are familiar with is the IRS auditor. They look over federal tax returns in order to make sure that the information is accurate. This often requires contact with the taxpayers or businesses in question to get complete and accurate information. This type of auditor also requires continuing education in order to keep up to date on federal tax codes.

CHAPTER-3
Auditing for Social Change 3.1 Concept and issues

Auditing for Social Change in the Context of the Not too long ago, public demands for accountability and transparency in governance were given less priority. The end of the cold war era, rising democratization of countries and emergence of strong civil societies and open media are creating new and more radical demands of transparency and accountability in the public Sector. These demands are cantered on stronger monitoring and evaluation and more rigorous audit of public expenditure. At the same time, an increasingly active citizenry is championing the cal for responsive government, for policies that foster equity and development, for a budgetary planning process which is open and subject to scrutiny, for eradication of graft and corruption, and for enhanced and demonstrated results. However, despite these recent positive trends, studies show that many developing countries perform poorly with respect to holding its government to account and in efforts to control corruption, in the equitable distribution of services and in effective

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decentralization. Managing the public sector in todays environment of constant change has become a demanding challenge for policy makers, service delivery managers, and civil servants a challenge that is especial y daunting for those in developing countries and countries with economies in transition. The current trends and challenges to which governments have to respond and to which there are no boundaries include: long-term fiscal imbalance, national security, global interdependence, changing economy, demographics, science and technology, quality of life and environment, and last but not least governance. Consequently, the challenges facing the audit profession are also constantly evolving. The United Nations, together with international financial institutions and development agencies, have for the last two decades expressed concern with the lack of governance and accountability in developing countries and have endeavoured to find responses and solutions. Although structures and mechanisms exist. Therefore, the ability of the traditional accountability mechanisms to effect change on the functioning, performance and transparency of governments are increasingly being openly debated. International efforts are focusing on issues of governance and accountability, and interventions dealing with government reform range from administrative reforms to the redesign of judicial and audit institutions. In addition, the donor community is increasingly initiating projects aimed at building the capacity of civil society and citizens at large to demand accountability from the State. The focus is on strengthening public accountability through pressure from outside of governments, especial y through civil society institutions. Indeed, donors are targeting for key reform the strengthening of parliaments, protecting the autonomy of the judiciary, improving the performance of the public sector, supporting the development of professional media, encouraging private investment, and decentralizing delivery of services. While in this context, the strengthening of Supreme Audit Institutions (SAIs) in developing countries has received some degree of attention by the donor community, not enough attention has been paid to these institutions as potential tools for promoting socio-economic and pro-poor governance. Few reform processes of SAIs have zeroed in on how the audit function could become a tool to empower citizens in furthering transparency and accountability for public spending. The United Nations Department of Economic and Social Affairs (UNDESA) proposes that SAIs and the audit community at large improve their impact by taking into account the growing voices of what have become known as alternate watchdogs, including civil society organizations and the media, with special reference to the implementation of the Mil ennium Development Goals (MDGs). The question is whether the audit function, both external and internal, can be made more open, pro-active

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and participatory, moving the function from being a technocratic and a reclusive tool of expenditure control to a more engaging tool for social change and citizen empowerment. It is UNDESAs belief that the way audit is currently conducted and the institutional framework within which audit activities are conducted provide opportunities that can make a meaningful contribution both to the accountability aspect of Auditing for Social Change in the Context of the Millennium Development Goals the public expenditure and to the core of what government initiatives are expected to achievereduce poverty, guarantee social justice and empower people. One of UNDESAs newest initiatives is to make the audit function more central to propoor governance, with the results-based audit of MDGs as a focus area. The objective is to extend the role of civil society from participation in the design of pro-poor strategies and service delivery to include in contributing to the accountability processes of the government to ensure ful , timely and quality implementation government commitments. It is to explore this potential that UNDESA organized the Expert Group Meeting Workshop on Auditing for Social Change. The workshop, among other things included the examination of successful case studies involving participatory audit and monitoring in order: (i) first, to facilitate evolution of institutions and institutional processes that are conducive to support pro-poor policies and decision-making; and (i) secondly, to assist public sector institutions and

management systems to become more results oriented, and accountable. With regard to the first, UNDESA has launched a program on engaged governance examining, promoting and advocating the concept of citizen/government dialoguing for pro-poor policies including propoor budgeting, more as a norm rather than as an ad hoc arrangement. In this endeavour, we see sets of parallel and yet complementary movements, namely, public institutions adopting a more engaging behaviour in its decision-making and the civil society organizations becoming more collegial and supportive in its dialoguing role, aiming at inter- linking issues of engagement, social justice and pro-poor development. UNDESA recently held an Expert Group Meeting on Pro-Poor Budgeting. With regard to the issue of results orientation of the public sector institutions, DESA has taken initiatives to promote systems, procedures and methodologies for results based monitoring and evaluation. In recent times, UNDESA has supported the government of Sri Lanka to develop MDG based results-indicators and to assist oversight of MDG related programs in a more transparent and accountable manner. UNDESA also held an Expert Group Meeting on aid management and explored monitoring aid within the results framework. The focus of the Expert Group Meeting/Workshop is on participatory audit experiences and

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methodology. Participatory Audit is different from Social Audit in that it refers to audit processes where stakeholders are directly or indirectly involved through a variety of audit and monitoring methods and public hearings. Social Audit refers to a process that enables an organization to assess and demonstrate its social, economic, and environmental benefits and limitations. It is a way of measuring the extent to which an organization lives up to the shared values and objectives it has committed itself to.2 Audit and the Climate of Change With the changes brought on by globalization and liberalization, access to information and indeed, the rising expectations of the citizens brought on by the increased democratization of countries and societies, impetus for change in al aspects of life including the public sector management systems have become imminent, if not already a matter of reality. In this climate of change, audit is not lagging behind. Already, state-of-the-art auditing has started to go beyond the examination of expenditure and beginning to look into the processes and procedures that influence the decisions on expenditure. For quite some time now, auditors have started to look at management processes and systems to determine the cost-effectiveness of public expenditure. The results of such examinations often lead to recommendations for improvement and change that are systemic in nature. In that context, the modern auditor is indeed becoming a catalyst for change. For example, since over a decade the concepts of managing for results, auditing for results have taken roots in many countries, making it evident that the functions of audit have undergone significant changes and the lines between audit, evaluation and monitoring are becoming less rigid. There are now a lot of complementarities among these three tools of expenditure management. In Results-based audit, the emphasis is placed on identifying the critical results or products to be achieved by a program or a process. These results may take form 2 Community Land Unit Action frameworks, Graham Boyd and Alana Albee, 2001 Comprehensive Auditing Manual, Office of the Auditor General of Canada, August 1990. Auditing for Social Change in the Context of the Millennium Development Goals of outputs produced in relation to those intended, products delivered, or immediate goals that must be achieved for the program or process to be a success. Furthermore, the audit function has also taken an interest in governance as an integral indicator of the managerial health of an organization, whether private or public. In that respect, audit standards regarding the structure, composition, role and impact of Audit Committees4 have already started to experience significant change. More research is needed to explore to what degree Audit Committees are currently being utilized to ensure proper

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scrutiny of pro-poor programs and projects, and how both governments and civil society could exploit this mechanism for greater transparency. UNDESA believes that the evolving role of audit can be taken one step further without disregarding its traditional boundaries to focus on issues that are of vital importance to a country and its citizens such as the Millennium Development Goals. It is hoped that some forms of synergic relationships between the citizens and the audit can be forged to empower the former to guide the public sector initiatives to implement the agreed goals, both national as wel as international. In other words, the overal thrust is to explore innovative ways of engaging the audit community more pro-actively in ensuring that impact is achieved for the public good not only as a result of audit recommendations, but also as a result of broader engagement in the audit process, thereby creating a better environment of ownership to and compliance of these recommendations. With the advent of performance audit that blurred the boundaries between financial and compliance audit disciplines, the auditors have already moved in a way that seek for more accountability in the auditing process. Performance audits analysis of a policy, program or project implementation almost always makes reference to policy issues. The next step, linking the beneficiaries of the public policies and programs the citizens to the audit process, holds the promise to create a much stronger climate of compliance and therefore, positive social change. The efficiency and effectiveness with which governments are using resources are in many cases not showing improvements as major public expenditures and investments turn out to be of low impact and return. There are reportedly also issues of systematic failure to collect revenues. Common causes cited are widespread corruption linked with a lack of rule of law and transparency. Poverty reduction continues to be the major development hurdle for many countries, despite decades of sustained aid. Both citizens and development experts have argued for the need to restructure the State and its functions as a response to governance and development failures. Supreme Audit Institutions (SAIs), also referred to as national audit offices, exist in most countries, as do provisions for internal audit and other control mechanisms within state institutions, but their effectiveness and independence have been at issue in many developing countries. Indeed, most SAIs receive constitutional recognition, and as watchdogs of public finances, act as critical links in providing independent oversight and thereby enforcing the accountability of executive agencies to national and state legislatures and through them to the general public.

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The effectiveness and efficiency of SAIs even in performing traditional functions has however been fairly limited in many countries as a result of several factors including: lack of independence from the executive; limited access to information; financial and legal constraints; capacity and skill s constraints; lack of timeliness and relevance; weak political clout to enable follow up; and poor communication between the SAI and the legislature hampering corrective actions; and lack of contact with citizens and civil society organizations thus hampering efforts to treat audit as an instrument of citizen empowerment. Many of these problems stem from the fact that Supreme Audit Institutions (SAIs) are made to abide by stringent legislative mandates, international and national standards, and remain confined within tradition-bound bureaucracies. In exceptional cases where complaints of massive fraud or irregularities are received, auditors may engage the citizens through some forms of surveys. But these are more exceptions than norms. Another area where audits seldom get involved is the audit of the international commitments of the governments, though thanks to the initiatives of the International Organization of Supreme Audit Institutions (INTOSAI) some countries Auditing for Social Change in the Context of the Millennium Development Goals have taken up audits of implementation of these commitments, especial y in the area of environment. Efforts such as the above and other forward looking innovations are underway, even within the limits of existing standards and constraints, to make audit more useful to legislators, decision-makers and the citizenry. For example, the success of joint, concurrent, paral el or coordinated7 audits whereby SAIs of two or more countries , the national and one or more sub-national legislative offices scrutinize a particular area or sector of common interest, reporting through their respective reporting mechanisms. Also, reporting has gone a long way both for external and internal audit, where increasingly reports are not only issued on a timelier basis, but have also become highly visible by making them public. Lately, in its quest for contributing to accountability, transparency and good governance, media is also taking increasing interest in audit.

Making Audit a Tool for Social Change The challenge facing the audit community is how to strengthen audit to make it a tool for social change. In this endeavour, the fol owing questions need to be addressed: By linking expenditure with results, can audit contribute more effectively to guide actions to results? Should audit go beyond post-facto expenditure analysis and get involved more pro-actively during the planning and the budgeting phase?

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Since public expenditure is very much about the public, are there opportunities to involve citizens into the auditing process? If so, how can this are achieved? In this, what role can the media play? What role can the civil societies play? Finally, by making audit more participatory, can it be made to function as an empowering tool for the citizens to hold the state accountable more process of check and balance? workshop, Auditing for Social Change aims to discuss some of these issues insightful y. Seen within the context of the concept of engaged governance UNDESA believes that there are real opportunities to broaden the both the operational space as wel as the process of audit. It is in this context that UNDESA has recently taken an interest in the role that the audit institutions could play through partnerships and involvement of civil society in furthering the conventions and treaties adhered to by its Member States, encapsulated in the 2000 Millennium Development Goals (MDGs). The emerging issues for public administrations were presented and deliberated at the Fourth Session of the United Nations Committee of Experts in Public Administration (CEPA) from 4 to 8 April 2005 at the United Nations headquarters One of the main themes discussed pertains to Integrity, Transparency, and Accountability (ITA), a theme which has been at the core of SAIs objectives for Decades. The overarching framework for the discussions was the achievement of the 2000 Mil ennium Development Goals (MDGs) by 2015 endorsed by al UN Member states, with focus on poverty reduction and social orientation to development (7 out of 8 goals), and on partnership for development between the private and public sectors and between Government and the citizen. The following points deliberated by CEPA are directly linked to the theme of the EGM/Workshop: Citizen demands for better delivery of services and more equity has increased, as has the demand for strong, open, and participatory monitoring, evaluation, audit, and information sharing; Many of the existing standards and norms pertaining to ITA are either outdated or not institutionalized. The flurry of recent national, regional and Capacity-Building in the Independent Audit of the United Nations 2000 Millennium Development Goals, Esther Stern, Report on the 17th UN/INTOSAI Seminar on Government Auditing, The proceedings and documents of CEPA can be accessed on UNDESAs interactive website

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Auditing for social change in the context of the Millennium Development Goals international commitments, conventions, and treaties related to ethics, corruption, and money laundering and integrity demonstrate the urgency of addressing ITA issues in many countries the adopted conventions remain to be ratified, implemented, monitored, and enforced; and 1. Information and communication technology (ICT) has created opportunities for information sharing and wider stakeholder response and participation/input in public policy and decision-making. Against this backdrop, it becomes clear that the role of an independent and responsive SAI has to evolve towards the fol owing roles: 2. Assist the legislature to carry out its constitutional responsibilities and legislative oversight; Assist in improving the performance of government; and Ensure accountability and transparency of government for the benefit of the citizens. Adopting such roles necessarily implies that SAIs cannot hide behind the past and must use their audits of past performance and activities to draw lessons for today and tomorrow. It also implies that in addition to preventing and detecting fraud, waste, and abuse, and assisting the government to become more efficient and effective, SAIs must examine the role of government, albeit within the boundaries of their mandate. Some newly created SAIs have already enshrined the latter focus in their legislation, specifying as one of their main objectives the evaluation of government policy. A modern outlook on SAIs roles would also imply that they lead by example and promote best practices by observing protocols, employ a constructive engagement approach with audited entities, and partner with fellow oversight and accountability organizations as wel as with selected good governance institutions. Most importantly, to achieve real impact for the benefit of the citizens would imply some degree of engagement of the citizens and their perspectives in the audit processes. However, in the same way that most public administration Systems remain introverted and lack inclusiveness in decision-making processes, many audit offices and their operations have remained a mystery and are shielded.

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Auditing for social change

From the public eye and scrutiny. The time may be ripe for SAIs to pro-actively engage citizens through participatory auditing. Workshop Auditing for Social Change In order to discuss in depth the implications for SAIs of moving towards participatory audit processes, UNDESA has structured the workshop auditing for social change around the fol owing themes. 1. Audit and Planning and Budgeting It is important to explore how audit can contribute to better planning and budgeting to achieve results in social programs, particularly the UN Millennium Development Goals. The following questions need to be addressed: Is there a role for people participation in the audit of budget formulation and implementation? What is the potential role of civil society organizations in demanding and fostering fiscal transparency? To what degree do government financial systems and fiscal data support a comprehensive oversight and risk-based scrutiny of public spending in the social areas, and can these be linked back to the budget?

2. Audit and Civil Society A number of experiences in participatory audit around the world indicate that audit can become a tool to empower citizens at the grassroots level, through partnering with civil society in the audit process. It is essential to discuss how participatory auditing could be mainstreamed in the audit function while adhering to the principle of independence and other professional audit standards; and to what degree civil society has had an impact on fiscal transparency and good governance, and the role that audit could play in this respect.

AuditingforSocialChangeintheContextoftheMillenniumDevelpmentGoals 3. Audit and Legislative Oversight the increasing importance of legislative oversight of the

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executive branch reflects the growing complexity of government activities and program delivery mechanisms. Parliaments are getting more engaged in overseeing the budget and its execution. Parliamentarians are also key actors in supporting pro-poor spending and programs and in furthering democracy.11 The oversight function of legislatures is essential in ensuring that governments develop and implement programs which are in the public interest, and in holding the state to account for its spending. Legislative governance systems for financial accountability and oversight vary substantial y according to the countrys constitution. However, common challenges point to the need to consolidate and share best practices and lessons learned in effective legislative financial oversight with regard to areas of governance, mandate and committee functioning. The fol owing issues need to be addressed: How can audit become a more effective tool for promoting legislative oversight and accountability for budget decisions, public spending, and government programs? How can legislative oversight committees open up to public opinion and input, media reporting and other stakeholders to establish a common understanding of public interest issues? Is there scope to engage public interest and citizen dialogue in parliamentary financial oversight, especial y in areas of pro-poor spending and taxation? Can parliamentarians be sensitized to focus on the quality of audits; and to examine the impacts achieved through audits rather than to analyze specific cases of irregularities? 4. Audit and the Media In the last decade, the world has seen the mushrooming of alternate watchdogs that often get more public attention than the audit community. Alternate watch- dogs include the media, transparency and anti-corruption bodies and think tanks. The media are interested in horror stories uncovered through audit which have great media value as opposed to reviewing impacts achieved through quality audits. It is timely to discuss what the impact of alternate watchdogs has been on fiscal transparency. Other questions that merit debate include: What role can the media play in publicizing results of audits and advocating for citizens right to information? What are the advantages and disadvantages of the audit community to adopt a media-shy attitude? How can the audit community effectively use the media through strategic communication to steer them away from mere horror stories towards the underlying causes

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and the impacts that can be achieved through audits? What are the opportunities to empower the citizens through media

involvement in publicizing audit results? 5. Audit and Pro-Poor Governance The audit, evaluation and monitoring of pro-poor governance and the United Nations Millennium Development Goals (MDGs) with a focus on outcomes present unique challenges. Special attention needs to be given to the issues of national priorities vis-vis the MDGs and the institutional framework that drive the planning, budgeting, implementation and monitoring of MDGs, as well as the role that audit can or has the potential to play in the process. In that regard, the following questions need to be deliberated: Can coordination of audit efforts amongst national, regional, local and selfgoverning bodies be achieved for comprehensive oversight of results achieved? Can audit become more engaging and an empowerment tool for the citizens to hold the state to account for the achievements of pro-poor programs and service delivery? How can audit methodology become complementary to evaluation and monitoring techniques in order to better measure results and progress towards achieving pro-poor programs, including the MDGs?

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Auditing for Social Change in the Context of the Millennium Development Goals What resultant legal and administrative changes are necessary to evaluate and audit MDG progress and impact for and by the citizens? Audit and the Millennium Development Goals (MDGs) UNDESA is in the process of exploring how results-based audit techniques could be applied to areas of socio-economic development and pro-poor governance such as the achievement of commitments to which UN member states have over the years subscribed to, and which are encapsulated in the Millennium Development Goals. In this context, it would also be useful to see how public sector policies and programs have been aligned to achieve these commitments. Currently, most audits examine public sector expenditure based on some accountability standards that are at most only regulatory and results oriented, and furthermore, very few are oriented to Millennium Declaration goals and targets. Making Audit an Integral Part of the MDG Processes Following the 2002 Monterrey Consensus, the UN and its partners have insisted on national ownership of the Goals, especial y for countries with most pressing needs and low human development, without which national programs will neither be appropriate to local conditions nor political y sustainable. National strategies for poverty reduction need to be based on specific needs, solid evidence, good data, corresponding budgeting and monitoring and auditing. To that end, over fifty developing countries have prepared Poverty Reduction Strategy Papers, (PRSPs) which provide frameworks for financing, implementing, and monitoring the strategies. Some countries are also taking initiatives to main- stream PRSP within the MDGs. These are prepared by governments but emerge from broad-based participatory processes. However, many of these participatory processes continue to remain limited to planning and to some extent budgeting, but not in monitoring and auditing, leaving an important gap in the account- ability process. In a 17 January 2005 report released by the Millennium Project, a strategy for cutting extreme poverty and disease in the poorest countries was spelled out. It is based on existing development processes, tools, and policy vehicles, but size that all these should be MDG oriented12. The report reinforces the PRSP approach, but proposes a planning horizon leading up to 2015 to align with the MDG timetable. The strategy cal s for the preparation of 10-year detailed and practical investment plans for meeting the goals. The report argues that this wil only be possible where the national government is committed to meet the goals; and that only governments wil ing to sign on to a rigorous compliance regime wil receive increased aid levels. It cal s for results-based management of foreign assistance against the quantitative targets set for 2015, with aid to be delivered in each sector against measurable interim benchmarks on a clear calendar basis. The report calls for specific compliance guidelines that include spot audits, evaluation, and

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publication of achievement of performance indicators. In this regard, it is safe to say that as far as the audit function is concerned, few initiatives exist to link public expenditure with MDGs targets; additional y minimal effort has been made to make these initiatives participatory, to assist tracking related financial flows, assess utilization of resources, adequacy of decision-making and implementation processes, or ascertain results achieved on the ground. Where donor contributions are involved, auditing, like financial reporting, usual y conforms to the specific donor requirements for audited financial statements. Where government resources are used, audits seem to be planned according to existing institutional audit regimes and are usual y sector or project based, without special regard for the targets and indicators of the MDGs. This situation is a clear indication that national ownership of the MDGs is stil not entrenched in al of the government management and oversight processes. Taking HIV/AIDS programs as a case study, UNDESA has found that legislativeauditors at national and sub-national levels, as wel as internal auditors of ministries and institutions, have in fact performed audits related to various aspects of HIV/AIDS as part of their mandate and regular cycle of audits of public expenditure items. Those audits varied widely in approach, objectives, scope, and type of audit. Similarly, donor countries and institutions have performed or requested financial audits from recipient institutions be it a ministry or implementing agency according to their own specific requirements. In general, the audits dealt with financial and material matters

AuditingforSocialChangeintheContextoftheMillenniumDevelopmentGoals and rarely focused on performance or results achieved; more importantly, the absence of the citizenrythe actual beneficiaries of public expenditure into the auditing processesequal y weakened the capacity to make audit more results oriented. The EGM highlights several citizen-based approaches in audit such as Indias report Card System where citizens are cal ed upon to rate various public services13. The practice has gone on for several years and is seen to be creating highly positive impacts in reforming both expenditure planning and its utilization. In South Africa, civil society organizations have published existing audit reports to encourage greater compliance. These and other examples indicate that there are real opportunities to

collaborate with civil society organizations to make audit more results oriented and effective. However, to make audit more MDGs oriented and participatory several changes both at the methodological as wel as at institutional level are warranted. Capacity Building As part of UNDESAs program to make the audit function central to the MDG roadmap, it has engaged in technical cooperation ventures and partnerships with audit

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institutions interested in exploring MDG related independent and results-based auditing from a national, local, regional, or interregional perspective. These technical cooperation ventures are not intended to limit SAIs in servicing the financial and other reporting requirements of multilateral donors as wel as the government but rather to become an

important stakeholder in realizing the MDGs. The objective is for SAIs, through the independence they enjoy, to assess to what degree their governments and target beneficiaries have the ownership of the policies and processes involved, to ensure transparency and accountability in the use of resources, and to ascertain key successes through evidence. Another possible area of interest to SAIs is auditing the extent the govern- ment policies reflect international agreements and treaties and their achievements.

Experts agree, however, that international agreements are not always couched in clear enough language, therefore presenting difficulties in formulating objectives and clear results expectations. However, the MDGs, while general in language, have established a set of measures and benchmarks to al ow for measuring progress.

oversight and scrutiny, such as results based monitoring and evaluation. It also highlights the importance of alternate, if not complementing watchdogs/reporter besides the professional audit community and the legislative oversight forum, such as the Public Accounts Committee of the Parliament. The audit community needs to careful y examine how the traditional boundaries of audit can be respected while the function adopts a more pro-active stance in examining national commitments to international conventions and treaties including pro-poor and socio-economic programs; and in what manner some forms of empowerment of and participation by civil society including media in the audit of public expenditures could be initiated.

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3.2 Experiences of Participatory Auditing

The public auditors and evaluators serve the societal purpose of accountability in government, and that, as such, they cannot insulate themselves from the larger political components of that purpose. The author has drawn on experience at the GAO to describe the different paths taken in PEMD to try to integrate the political and public demands of accountability, without renouncing the critical requirements for independence, objectivity and credibility within the study processes of the divisions audits and evaluations. Four efforts were made: to understand the specifics of the PEMDs political environment; to negotiate studies in such a way as to maximize their chances of technical and political success; to expand public involvement in PEMD studies and increase staff access to data; and to improve public awareness of PEMD findings through stronger dissemination strategies. This is not, however, to argue that auditors and evaluators are the only instruments of accountability, although it may sometimes seem so. To be effective, they count on legislators to ask the right questions and help them access the data they need; they count on executive branch actors to speak honestly and openly about their programs; and they count on the press to tell the public about what they are finding in their accountability studies. So auditors and evaluators are not alone in their responsibility. But the political environment in which they work can seem disorderly, confusing, complex and difficult to auditors and evaluators. And even though this world of competing political interests emerges from an Enlightenment spirit of balance and compromise, the problem is that all things cannotand should notbe balanced compromised in audits and evaluations. Findings are findings, after all, and sometimes, as Albert Hirschmann once said, It is more important to knock down false knowledge and mistaken beliefs about what is happening in government, than to achieve some sort of modus Vivendi (Hirschmann, 1994). Indeed, whether in authoritarian regimes or in ideological democratic administrations that shield their decision making and manipulate their data, the ancient art of speaking truth to power may still be the noblest task that auditors and evaluators can accomplish in their accountability role.Truth however, is not so easily arrived at, especial y in the volatile political environment that has been described. Although the emphasis here has been on integrating the audit/evaluation principle of independence with the political/public goal of accountability, it is also the case that the need to improve audit and evaluation methods is a continuing part of the quest for truth (i.e. accuracy and credibility).In this effort, auditors and evaluators can learn much from each other. In particularOnFulfillingtheAccountabilityPurposeofAuditandEvaluation

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auditors could useful y borrow from evaluators in two areas: first, by moving beyond the case study or the criteria-referenced design to include methods that can address cause-andeffect questions; and second, by much greater involvement in the assurance and confirmation of data, validity and reliability (this last being especial y critical in todays electronic environment). As for evaluators, two audit areas are ripe for Borrowing: first, more persistence and determination in achieving the kind of political consensus around evaluative independence that auditors have long since gained for their enterprise; and second, a much greater focus on costs and savings in the assessment of program effects, and also in the formulation of policy. These are not, of course, the only areas in which methodological improvements need to be made, but they would certainly constitute important steps in credibility enhancement and in the rather slow-moving cross-fertilization between the two fields. In short, the suggestion here is not only that auditors and evaluators should better integrate their studies with the political and public framework that engenders and tests them, but also, that the methodological credibility of audits and evaluations requires no less a commitment to ongoing development and improvement. Conciliating politics with technical work that stands or falls on its objectivity and methodological credibility can be a tall order, even in quieter political times when there is acceptance of the idea that thoughtful questioning is an appropriate approach to public policymaking. But when ideology takes over in government, the auditor or evaluator is like Tolstoys General Kutuzov, trying to stay afloat during the Napoleonic wars: The commander is always in the midst of a series of shifting events, and so he can never at any instant consider the whole import of an event that is occurring. Moment by moment, the event is imperceptibly shaping itself, and at every second of this continuous, uninterrupted shaping of events, the commander is involved in a most complex play of intrigues, worries, contingencies, authorities, projects, counsels, threats and deceptions, and is continual y obliged to reply to innumerable questions addressed to him, which constantly conflict with one another (Tolstoy, 1954). Like Kutuzov, auditors and evaluators are pushed and pulled and bullied by political partisans who care only for outcomes, not methodological triumphs. But unlike Kutuzov, they have at least two real opportunities for detachment, first at the design phase of their work, and then, during the writing of the study report. It is at these points that the time and calm can be found to think not only about the strength and credibility of findings, but also about achieving the political goals of accountability studies. The suggestions offered here have worked well in practice, and although they are not revolutionary steps, they do expand some traditional notions of audit and evaluation. They can certainly help auditors

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and evaluators move forward in understanding both the legitimacy and societal purpose of public audits and evaluations, and in integrating the various requirements of political accountability within their studies. Over time, they can hope to improve the fit of their work within their political universe, and play a more meaningful role in fulfilling the accountability obligation to the public

3.3 Audit and Civil Society

1. Introduction
In the era of globalization, information dissemination and decentralization, society has undergone changes at an unprecedented pace. Tremendous changes have taken place in the public and private sector, creating unforeseen challenges that necessitate adaptability. Historical y, governments have imposed taxes and levies in return for having exclusive rights to the provision of the so-called public goods, including defence, diplomacy and policing. This is a form of supplier-oriented Administration service that disregards the needs of consumers. However, with the maturing of democracy, the awareness of the citizenry has been heightened to the extent that they now demand more rights as taxpayers. Diverse groups/classes with divergent interests have imposed a variety of demands on the government, in addition to increasingly confronting each other. Civil society groups wield significant influence through monitoring government activities and intervening in their decision-making. Consequently, governments are increasingly shifting away from the unilateral, supplier-focused administration that ignores the wishes of the citizenry. Given that the principal function of audit pertains to critical y viewing and monitoring government activity from a third-party perspective, the inter-relation-ship between the functions of audit and civil society can easily be seen. The following sections explore key issues pertaining to the audit function & discuss the aforementioned interrelationship between audit and civil society with relevant case studies from the Republic of Korea.

2. Functions of National Audit & Key Issues

According to the agency theory, audit refers to a series of activities where auditors, agents or third parties with specialized knowledge assess the economic activities of those subject to audit and report the results to the owner or the principal. By doing so, the responsibility of

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the auditor is completed.113 Likewise; national audit also has the function of monitoring and controlling public servants, with regards to their appropriate management of the taxpayers money. functions/activities The in the only difference between private sector national audit and audit

pertains to national audit being more

comprehensive. In other words, it includes the concept of control. While there may be contrasting positions on this viewpoint, if the audit function is viewed in terms of securing accountability, the concept of accountability includes not only fiscal, but also managerial and program accountability. The audit function should be accompanied by a control function, as it realm of accountability is very comprehensive. Given that the head of the national audit agency in the United States, the United Kingdom and some other countries is called the Comptroller and Auditor General, national audit has both audit and control functions. The Board of Audit and Inspection (BAI) of the Republic of Korea (ROK) was Established when the Board of Audit (previously in charge of accounting audit) and the Commission of Inspection (formerly in charge of inspection) merged to conduct both audit and inspection. Inspection incorporates examining whether governmental activities (excluding fiscal) are conducted efficiently and reasonably, in accordance with relevant laws, and investigating wrongdoings by relevant public officials. These activities clearly represent an expansion in the realm of the audit function.

The core value of the audit function pertains to its independence, for audit results cannot be trusted without first ensuring the independence of the process itself, be it the public or private sector. In the face of daunting challenges from successive administrations, audit institutions (and indeed the auditors themselves) continual y strive to maintain their independence and integrity. Several countries have already implanted provisions in their constitution and related laws to ensure the independence of national audit agencies.

3. Interrelationship between Audit and Civil Society

With regards to the relationship between the government and civil society, the function of civil society includes direct participation in, and criticism and monitoring of governmental activities. The monitoring/criticism function of civil society relates closely to the audit function, consequently they can utilize/share the content of the other partys activities. National audit agencies tend to view civil societies as entities playing cooperative and complementary roles, thereby minimizing the possibility of friction between the two parties.

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For example, civil society group utilize audit reports to criticize the government in addition to monitoring their activities concurrently, information and data on government monitoring gathered by civil society groups can be utilized by national audit agencies. Civil society groups expect audit agencies to increase their activities in addition to disclosing all their results in a transparent manner. However, the question arises with regards to the extent to which audit results should be disclosed, particularly with regards to the conflict of interest between satisfying peoples right to know, and the need to maintain confidentiality on projects related to national security. Civil society groups often demand transparent audit execution as well as the disclosure of all audit results related to defence expenditure, citing substantial percentage of tax revenues a located to this field. However, accepting this demand of civic society jeopardizes national security as state secrets pertaining to national defence strategies are made public. As the activity of the national audit agency falls within the realm of governmental activity, when it is criticized and monitored by civil society groups, the mutual association is transformed from a collaborative to a monitoring relationship. In such a scenario, the audit agency (just like any other governmental agency) adopts a passive/defensive stance and tries to justify its behaviour. Civil society groups, on the other hand, expect the audit agency to conduct its activities and execute its duties with a higher degree of transparency (compared to other government agencies), given that it is an oversight agency. The participation function of civil society extends to the realm of the national audit agency, particularly in its expectation of the audit agency to conduct audits in areas that are closely related to the interests of the citizenry. Given a maturation in their level of awareness, the interest of the citizenry in governmental activities has grown, such that (in terms of the scope of audit) they not only expect compliance audits (which have taken place in the past) but also performance audits that examine whether policies and projects pursued by the government are conducted in an economical, efficient and effective manner. Consequently, the scope of national audit has expanded to the extent that it is now examining and evaluating the outcome of state policies and projects. Environmental audit (currently conducted in a number of countries) is but one outcomes of this constantly evolving scope, and one in which the civil society can play a major role.

Civil society groups expect experts to have direct or indirect participation in national audit activities. Their direct participation in audit activities, despite the best of intentions, can jeopardize the national audit agencys independence in conducting audit activities. This

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issue should therefore be approached with due caution and prudence. National audit agencies should maintain independence and neutrality, not only from the audited subjects, but also from outside influence. However, indirect participation through citizen experts acting as advisors in the audit planning stage is highly recommended, as it raises the level of expertise, which is not sufficiently

4. Case Study of Korea

The work of the Board of Audit and Inspection is greatly enhanced by the Policy Advisory Commission (PAC), which acts as an advisor to the Chairman of the BAI. Commission members are comprised of experts who have gained societal recognition through their active contribution to civil society groups, and come from all walks of life. They offer advice on BAIs audit direction as well as other audit-related policies. Concurrently, they serve s a conduit to convey the demands/ suggestions of colleagues and acquaintances to the BAI. However, the BAI has no legal obligation to comply with these suggestions. Additional y, the BAI has separate advisory groups for each of its audit bureaus, whose members are comprised of professors/researchers from professional academic/research institutions. They offer their professional opinions and have an opportunity to reflect their knowledge in the auditing process. The BAI is in the process of implementing the Advanced Audit Notice System, whereby the citizenry is notified (in advance) on the direction and period of audits, particularly in areas that affect their interests. Under this system, the BAI would reflect in their audits, any advance complaints or advice from the citizenry pertaining to malpractice on the part of executive organizations. In line with the digital age, the new system now all owns the citizenry to convey its opinions through the internet, which in commonly available throughout the Republic of Korea. In July 2001, the BAI introduced the Citizen Audit Request System to ensure timeliness and efficiency in auditing, in addition to solidifying trust in the national audit agency. Based on the Anti-Corruption Act, this system all owns the citizenry to request audits in areas where they feel that the public entity entrusted with carrying out a certain function has not done so effectively or judiciously. For the process to be initiated, a written request must first be submitted by three hundred (or more) citizens. A Citizen Audit Request Screening Committee is then assigned, which, together with the BAI, decides whether or not to conduct an audit. If the decision is in the affirmative, the audit is conducted and the requesting party is notified of the audit results In order to respond to

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requested audits more actively, the BAI has altered the composition of the 7-member Citizen Audit Request Screening Committee. Previously, the Committee was comprised of four BAI officials and three outside experts from civil society groups. The BAI has increased the number of outside experts to four, while reducing the number of BAI officials to three. An outside expert replaced a BAI official as Chairman of the Committee. Consequently, the Citizen Audit Request System has gained widespread popularity among the general public, and the number r of audit requests have been on the rise. Public entities subject to auditing under this system were suspected of having seriously undermined the public good through corruption and the violation of laws. The BAI also operates a civil petition department to address petitions lodged by citizens against executive agencies. Several local governments have also introduced the Citizen Auditor System for the same purpose, whereby citizen representatives (who are not public officials) serve as auditors for a certain period, review grievances and complaints of petitioning citizens, conduct necessary audits, & notify the aggrieved party of the audit result. Considerable change has also taken place with regards to the disclosure of audit reports. Previously, audit results were not revealed in full text and what was disclosed was only a summary of the findings. However, following increasingly vocal clamours from politicians and civil society groups, audit results are now fully disclosed to the publicwith the exception of matters that can jeopardize public and state security if disclosed. The Ombudsmans Office monitors the BAIs activities through conducting internal inspections, checking ethical code violations by BAI officials as well as following up on public criticism directed towards the private lives of BAI officials. Nevertheless, the BAI is criticized by civil society groups for failing to establish an adequate mechanism to monitor and supervise its activities. The BAIto respond to this criticism and facilitate transparent internal controlhas proposed a plan to legalize the appointment of a private citizen or an external expert (not an inside official) to head its internal inspection office.

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CHAPTER-4

4.1 DISADVANTAGES OF AUDIT

1. FRAUDS BY MANAGEMENT OR PLANNED: Sometime the management commits a planned fraud. And for the auditor it is not possible to find out that fraud. In this case the audited account cannot describe the true and fair view of the business.

2. WRONG CERTIFICATES: Auditing is based on many certificates taken from management and other persons. These certificates may not disclose true information. Auditing may to fail to provide desired results. When certificates provide wrong information, the financial statement cannot show correct position.

3. MISLEADING CLARIFICATION: Auditing fails to disclose correct information. The background of entries may not be clear to the audit staff. The management may not provide correct clarification is not true. The auditing fails to help many persons who rely on audit report.

4. NO TRUE PICTURE: The auditing does not cent per cent true picture. The auditor is concerned with the facts figures shown in the books of accounts. When figures have been manipulated, the auditing fails to disclose true picture. The purpose of audit fails when it is unable to depict real scene of business affairs.

5. NO CORRECT VIEW: The auditing fails to present correct view. There are limitations of accounting. So accounting figures are not facts. There are based on opinion. Moreover the auditor has to make judgment on various matters. The personal judgment may be wrong in certain cases. Thus auditing is unable to disclose correct view.

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6. NO SUGGESTION: The audit is conducted to show the fair view of financial statements. Auditing is not concerned with management policies. The auditor cannot guide the management for better use of capital. The auditor examines what has been done. He is unable to suggest how it should have been done.

7. ABSENCE OF HONESTY: The auditing work depends upon various professional and personal qualities of an auditor. Honesty and independence are highly essential traits. The auditor must certify which is true. Management or other parties cannot influence him. The absence of honesty and independence means failure of audit purpose.

8. BIAS: The auditing fails to present fair view due to bias of an auditor. It is quality of an auditor. It is the quality of an auditor that he should be independent when such trait is missing the opinion of the auditor is included in the audit work. The biased auditing fails to help many people.

9. HIGH COST: The audit work is completed with high cost. The cost of audit should not exceed the cost of error and fraud. The small-scale business enterprise considers it as burden on their performance. Audit fails to save millions of business entities.

10. PAST ACTIONS: Auditing is nothing more than checking of past activities. It has no concern with present or future. The audit fee increases the cost of business concern. Such cost does not help to improve the market standing of enterprise. It fails to suggest improvement in qualities and reduction in cost.

4.2 Auditing Fraud - A SAI India Experience

In recent times the Comptroller and Auditor General of India audited a series of fraudulent drawls of public funds in a provincial government .These drawls amounting to Rs. 6500 million occurred during 1990-96 and related to the Animal Husbandry department of that government.

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Audit investigations were prompted by the following: Annual financial statements and appropriation accounts of several years showed that the Animal Husbandry department had made large scale excess drawls over and above their authorised budgets. Unexplained and unjustified increase in purchases of cattle feed ,fodder ,medicines and veterinary equipment were noticed. Preliminary examination of records provided evidence of subversion of internal control mechanisms.

Media reports
Public interest litigations had been filed before the High Court of the province. Police action had been initiated in some cases in early 1996. The provincial government had shown vulnerability to fraud as it had been reluctant to ensure timely submission of initial accounts and had been lukewarm in its response to earlier reports of the CAG of India. Though the fraud essentially involved drawl of money against bills based on fake invoices by officials of the Animal Husbandry Department connivance of officials of the Treasury and Finance departments were probable.

Audit Strategy
In view of the strong evidence of extensive subversion of internal controls and established procedures, reliance was placed on direct substantive testing. Nearly 9000 vouchers and 0.35 million sub-vouchers were compiled into a database. It was also decided to extensively document and report on the breakdown of internal controls and subversion of procedures relating to purchases , budgetary and expenditure control, and the drawl and disbursement of funds. The role of officials in departments, such as Finance, District Administration, Treasury, Vigilance and Sales Tax, who could have connived in the systematic fraudulent drawl of funds was also to be examined.

Constraints
Large non- computerised volumes of data were to be audited. Audit staff had limited previous experience of investigating fraudulent transactions.

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Auditee offices were dispersed and located at considerable distances away from the audit office. Since the fraud was also being investigated by a Federal Investigating agency key officials were not easily available for discussion as many were in custody. Further, a number of vital records had also been seized by the investigating agency and were therefore not easily available for audit examination. A large number of audit teams were deployed and this raised coordination issues. The possible connivance of the top political leadership in the fraud led to reluctance on the part of key officials in coming forward with information. Threats existed to the personal safety of audit officials. The ongoing criminal investigations placed a heavy demand on senior audit officials for information thereby affecting the pace of audit work. There was pressure from the media to provide information on audit findings.

Audit Approach
In view of the constraints detailed above, several innovations had to be built into the audit approach. The more significant of these are: A database was created of purchase and payroll vouchers and sub-vouchers. This facilitated analysis and review of the fraudulent payments and provided insights into new aspects of the fraud. The skills of the auditors were supplemented through close supervision and monitoring to cover the lack of adequate guidelines for auditing fraud. To keep audit findings confidential the standard practice of issuing preliminary observations was dispensed with. The findings were ultimately issued to the highest ranking civil servants of the provincial government. Audit teams were given limited assignments and their findings were collated by senior officers so as to maintain confidentiality of final audit conclusions. Records were largely examined at the audit offices and the offices of the investigating agencies. Audit Findings Rupees 6,500 million were drawn over budget authorisation in 6 years by the Animal Husbandry Department.

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During 1993-96, Rupees 4,730 million was drawn by Animal Husbandry Department towards purchase of feed and fodder while approximately only Rupees 100 million was required as per approved scale. Just 7 Drawing officers of this department, drew approximately Rupees 4,350 million in 3 years even though the total budget provision for the entire department was approximately Rupees 2,300 million .The bulk of the fraudulent payments , amounting to Rupees 4,010 million were made to only 36 suppliers in 6 districts. System of centralised selection of vendors for purchase of feed and fodder, was made nonfunctional. This facilitated issue of purchase orders on little known farms for supply of enormous amounts of feed/fodder, medicines etc. Reputed manufacturers and suppliers of medicines were bypassed and established procedures for vendor selection were ignored . Hence medicines were ordered on little known local dealers. While Rupees 1,510 million was paid for supply of medicines, hospitals and dispensaries reported receipt of negligible quantities of medicines. They also confirmed that no indents for medicines had been placed by them. The purchases were therefore fictitious. Numerous discrepancies were noticed in the suppliers invoices and they appeared to be fake. Payment authorisation process by the departmental officers and the treasuries violated all prescribed checks and controls. Funds allotment figures, quoted in the bills, were unrealistically high. The treasury officers overlooked this and did not check whether allotments shown actually existed before admitting claims for payments. Several other violations in procedures pointed to the direct complicity of treasury officers in this fraud. Finance Department failed to investigate continued excess of expenditures over budget allotments thereby eroding completely the expenditure control mechanisms. This significantly contributed to the unfettered drawl of funds by the Animal Husbandry Department . Finance Department overlooked exchequer problems caused due to heavy drawl of funds from the some of the treasuries. They did not question or investigate the reasonableness of such cash outgo, even though the Reserve Bank of India periodically kept the department posted regarding cash disbursement from treasuries. The Budget Controlling Officer (Director) of the concerned department subverted crucial budgetary and expenditure controls. Instead he provided misleading budgetary forecasts. These were not critically examined in the Finance Department while framing budget estimates of the government.

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Internal check over payments were completely subverted within the Animal Husbandry Department . The bill drawing officers , entrusted with the task of exercising checks , were directly involved in presenting false claims on the basis of fake documents. Several officials subsequently found to be involved in the fraud were continued in the same positions in violation of laid down policy regarding transfer of officials. Some of these officers were also retained in service beyond their dates of superannuation without following laid down procedures for vigilance clearance etc. and in one case despite court orders to the contrary. The complicity of top political executives in blocking detailed investigation into the fraudulent drawls and in providing patronage to tainted officials was pointed out in audit and documented. Cases of irregular and unauthorised appointment of large number of junior officials were also detected in course of audit examinations. An examination of sales tax cases and income tax cases relating to the suppliers who had received fraudulent payments showed that action taken on these by the concerned departments were inadequate and had allowed suppression of taxable sales turnover as wellas taxable incomes.

Impact of the Audit

SAI demonstrated its capability to investigate and report on cases of corruption and fraud even if these involved high level political functionaries. Speedy finalisation of audit facilitated the ongoing investigation by the Investigating agencies and commencement of prosecutions against the key officials who were mentioned in the audit report. Media coverage of the audit findings created public awareness about the need of improved accountability through the CAG's audit. In the light of the audit findings the concerned department and the government could take corrective action for improving financial control . Fraud awareness and methodology of audit of fraud related matters in the SAI was developed. This helped in audit of several other cases of fraud in other provincial governments. Timely completion of this audit highlighted the importance and usefulness of application of information technology in investigative audit. In the countries where auditee records are not computerised, application of sophisticated analytical tools could be possible by creating computerised databases in the audit office, as was demonstrated in this case.

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Ways of Fraud
Financial Statement Fraud Intentional misstatements or omissions of amounts or disclosures in financial statements designed to deceive FS users where the effect causes the FS not to be presented in conformity with GAAP. SAS 99 Misappropriation of Assets In law, misappropriation is the intentional, illegal use of the property or funds of another person for one's own use or other unauthorized purpose, particularly by a public official, a trustee of a trust, an executor or administrator of a dead person's estate or by any person with a responsibility to care for and protect another's assets (a fiduciary duty). It is a felony, a crime punishable by a prison sentence. Misappropriation does not occur in instances where the capital was obtained for a service rendered. Five Major Types of Financial Statement Fraud Fictitious revenues Timing differences Concealed liabilities & expenses Improper disclosures Improper asset valuations And these frauds can be better understood by case studies.

1. Fictitious revenues Case study of Enron The ultimate cause of Enron Corporation's brutal collapse was a culture of greed and arrogance that bred excessive secrecy," competitors and lawyers interviewed by Kurt Eichenwald of the New York Times said. Due to the alleged white-collar crime causing the fall of Enron Corporation, one of the world's largest energy traders, Congress has been forced to reevaluate the business ethics of the entire nation. Critics and members of Congress charge that Enron Corporation managed to violate basic accounting procedures and committed whitecollar crime, that have not only effected its employees and shareholders, but its political status with the country.

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"Dec. 2 Enron Corporation filed for a Chapter 11 bankruptcy, which is a form of bankruptcy that allows the company to operate while attempting to redeem itself," Dr. Mary Harris, assistant professor of finance, said. A Chapter 11 bankruptcy may not seem extremely detrimental to many businesses, but in Enron's situation it is a matter of $1.2 billion of debt and losses that were kept off the books, hidden in separate investment partnerships. Investment partnerships can be best described as separate businesses that were partially owned by Enron Corporation; however, Enron failed to report the debt and losses of these small investment partnerships on the books because Enron did not claim to own more than half of these companies. According to a basic accounting principle, known as the Owner of Partnership, if a company/person (Enron) owns less than 50-percent of a company (investment partnerships) the loss and debt of that company does not have to be reported on the books. It was later discovered that Enron did have ownership in more than half of these so-called investment partnerships. What Enron essentially did, according to accusations from 1997 to 2000 was report all the investment partnerships revenue (gain) and disregarded their losses. Arthur Anderson, a Big Five Accounting firm, is currently being investigated for signing financial statements and reports that contained false information involving the loss and gain of Enron's investment partnerships. "As an accounting major seeking my CPA certification, it has been driven into me that the only companies worth working for are the Big Five Accounting Firms," Lisa Simonetti, a senior accounting major, said. "An occurrence such as Enron filing Chapter 11 shows how large firms are blinded by the almighty dollar, anything to make a buck. Enron should not have attempted to keep separate investment partnerships off the books, and Arthur Anderson should have had the ethical standing to refuse approval of financial statements." Aside from charges of breaching accounting ethics, Enron also has been met head-on with three different charges of white-collar crime. The first charge brought against Enron is Security Fraud. Enron is accused with failing to give correct copies of a 10K report to potential investors and shareholders. A 10K is a financial report that shows the share-worth (earnings per-share), net income and the overall growth or decline of the corporation. The second charge brought against Enron is referred to as insider trading. Former Enron officers have been accused of making $1 billion in Enron stock before officially declaring bankruptcy. In plain terms, Enron executives sold their stock for $1 billion dollars before Enron stock value plunged by keeping their financial status under their hats. The final criminal charge brought against Enron is tax fraud. This offense is usually used when dealing with tax

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evasion. Enron has allegedly been charged with Federal Bank Fraud, which involves lending information between Enron and the said bank. Even though Enron has officially declared a Chapter 11 bankruptcy, former Enron employees appear to be financially suffering the most. Enron employees invested much of their savings in Enron stock, which now is worthless. People lost much of their life savings for retirement.

When dealing with a typical 401K plan, it is standard procedure that an employee makes a contribution to his retirement plan that his place of employment usually matches in stock. Enron only supplied their employees with an equal contribution in Enron stock. Under legit circumstances, it is the duty of the employing company to supply its employees with diverse stock options; however, Enron stock was the only stock offered to Enron employees. For the most part, Enron employees were happy with their 401K plans because Enron stock was growing.

When Enron executives discovered that the financial collapse of their company was inevitable they put a "lock-out" on employee stock, which stopped employees from trading Enron. This "lock-out" forced employees to lose half of their retirement pension because of the company's failure.

It has been established that Enron has played a major role in dramatically disrupting the lives of its' employees and shareholders, but it has also displayed a negative effect from a political standpoint.

Prior to Enron's collapse, Enron representatives met Vice President Dick Cheney on several occasions to discuss new energy policy. Enron was a major contributor to politicians. Enron gave $1 million to President Bush and contributed heavily to many members of Congress. This is the same Congress that is now investigating Enron.

Two months after one of the world's largest energy traders, Enron Corporation, declared bankruptcy, 20,000 people are out of jobs and out of much of their retirement pension. Kenneth L. Lay, CEO of Enron, has refused to appear before Congress because he feels as though he has already been convicted of the crimes brought against him and another former Enron officer was found dead in his home last week of an alleged suicide.

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2. TIMING DIFFERENCES Case study of Medford Machining Co. NEW YORK, Jan. 13 -- Nine employees or agents of companies that supplied products to U.S. Foodservice Inc. were charged Thursday with falsifying records in an alleged scheme that helped the Columbia-based company inflate earnings by more than $800 million. The nine men conspired with executives at the Maryland Distribution Company, which is a subsidiary of Royal Ahold NV, to mislead the firm's auditors, U.S. Attorney David N. Kelley of Manhattan said at a news conference. Netherlands-based Ahold, which also owns the Giant Food grocery chain, uncovered the fraud in 2003 and eventually restated more than $1 billion in earnings. Two U.S. Foodservice executives pleaded guilty to criminal charges last summer, and the firm's former chiefs of finance and marketing are awaiting trial on charges that they artificially reduced reported expenses from 2000 to 2003 by overstating financial rebates the company was receiving from suppliers. Thursday's charges by the Justice Department and a parallel action by the Securities and Exchange Commission are part of a broad effort to crack down on auditors, suppliers and bankers who aid and abet corporate fraud, officials said. "We strive to foster an environment, indeed a culture, in which insiders cannot turn to third parties for help in manipulating financial results," Kelley said. "It is not only a crime for executives to falsify the books of their corporations, it is also a crime to help companies falsify." In November, a Houston jury convicted four Merrill Lynch & Co. bankers of helping Enron Corp. mislead investors by disguising a loan as the sale of a stake in three barges. In December, the insurance company American International Group agreed to pay $126 million to end inquiries into its sale of insurance products that some public companies used to smooth out their earnings and improve their appearance of fiscal health. SEC Deputy Director of Enforcement Linda C. Thomsen said the supplier cases "demonstrate the commission's commitment to identifying and bringing enforcement actions against outsiders who, while they may not have orchestrated the fraud, nevertheless violated federal securities laws by agreeing to assist the architects of the fraud." In the U.S. Foodservice case, the nine men were charged with conspiracy to falsify records for signing letters that were sent to U.S. Foodservice's auditors that purported to confirm that their firms owed millions of dollars in rebates to the distributor.

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Two, Peter O. Marion and Mark A. Bailin, were also charged with insider trading and lying. Prosecutors said the two men bought U.S. Foodservice stock after being tipped by insiders that Ahold was about to buy the company. The others are Kenneth H. Bowman, Timothy Neal Daly, Michael J. Hannigan, John Nettle, Gordon Redgate, Bruce Robinson and Michael Rogers. Marion, the owner of Maritime Seafood Processors Inc., had been charged previously with insider trading, but all of the others are new defendants

3.Concealed liabilities & expenses World com. On June 26, 2002, the US-based telecommunications major WorldCom received unprecedented media coverage all over the world. Not for good reasons though. The company had earned the dubious distinction of being involved in the largest accounting scandal ever to hit the US corporate history. WorldCom had reportedly misrepresented its financial statements to an extent of around $ 4 billion. The company admitted that it had resorted to fraudulent accounting practices for five quarters (four quarters of 2001 and the first quarter of 2002). Soon after, WorldCom terminated the services of some of its top executives including Scott Sullivan (Sullivan), the Chief Financial Officer and David Myers, the Senior Vice President and Controller. The company's auditors held Sullivan responsible for the accounting mess and Sullivan was soon arrested on charges of fraud and misrepresentation. Adding fuel to the fire was the fact that Arthur Anderson was WorldCom's auditor while the inappropriate accounting was taking place.2 However, Arthur Andersen tried to wash its hands off the crisis stating that it was not aware of the accounting discrepancies. They accused Sullivan for withholding crucial information about book-keeping practices followed at WorldCom. With the sudden appearance of a $ 4 billion hole in its balance sheet, WorldCom was in an acute financial crisis. A severe cash crunch forced the company to layoff 17000 workers, which constituted 20% of its global workforce. Eventually, the financial crisis forced WorldCom to file for reorganization under chapter 113 of the Bankruptcy Code in July 2002., In August 2002, WorldCom shocked company observers and stakeholders yet again by reporting an additional improper reporting in its financial statements. This time around, the amount involved was $ 3.3 billion, carried out by manipulating the EBITDA4 during 19992001, and the first quarter of 2002. By late 2002, the extent of misappropriation by WorldCom was estimated to be well over $ 9 billion

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WorldCom was started by Bill Fields in Hattiesburg, Mississippi, in 1983 under the name 'Long Distance Discount Services' (LDDS), providing long distance telecommunication (telecom) services. The venture was profitable right from the start. In 1985, Bernie Ebbers (Ebbers) became the company's CEO. Ebbers reportedly played a major role in the success of LDDS in the following years. The company went public in 1989 when it acquired Advantage Companies Inc., a publicly traded long distance telecom services company. Throughout the 1990s, the company continued to grow by acquiring various companies and expanding its operations across the world (Refer Table I for the major acquisitions). In 1992, LDDS acquired Advanced Telecommunications Corp. In 1995, LLDS changed its name to WorldCom, as the management found the new name to be consistent with the company's future growth strategy of building a global presence through acquiring telecomrelated companies across the world. In 1998, WorldCom bought the network units of America Online and CompuServe. However, WorldCom's biggest deal was that of acquiring Microwave Communication Inc (MCI)5 for an estimated $ 40 billion in the same year. The company now operated under the name 'MCI WorldCom.' To complete the merger that year, MCI sold its Internet access business to Cable & Wireless plc (a leading communication company), and British Telecommunications (BT) ended its partnership with the company and bought MCI's Concert Communication6 stake. Bert Roberts (Roberts), CEO-MCI was made the Chairman of MCI WorldCom, and Ebbers, the CEO... In the early 1990s, the US economy went through a phase of consolidation, in which many major companies acquired or merged with weaker companies to strengthen their own position in the market (as seen earlier, WorldCom happened to be one of the key acquirers in this phase). The share prices of companies play a vital role during mergers and acquisitions. Therefore companies try to 'maintain' the prices of their shares (that is, keep them sufficiently high). If they fail to do so, they can easily become targets for takeover/acquisition. Moreover, if a company wishes to raise capital from the market, its performance on the stock exchange is considered to be very important. The companies are generally valued on the basis of cash flows they could generate in future. As the financial performance of a company is one of the most important (and direct) factors affecting its share price, companies were under constant pressure to show positive revenue streams...

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4.Improper disclosures Cardinal Health, Inc. The Securities and Exchange Commission filed a civil action against Cardinal Health, Inc. (Cardinal), a pharmaceutical distribution company based in Dublin, Ohio, in which Cardinal agreed to pay $35 million to settle charges that it engaged in a nearly four-year long fraudulent revenue and earnings management scheme, as well as other improper accounting and disclosure practices. The Commission's complaint alleges that, from September 2000 through March 2004, Cardinal engaged in this conduct in order to present a false picture of its operating results to the financial community and the investing public - one that matched Cardinal's publicly disseminated earnings guidance and analysts' expectations, rather than its true economic performance. Through these practices, Cardinal materially overstated its operating revenue, earnings and growth trends in certain earnings releases and filings with the Commission. According to the complaint, Cardinal managed its reported revenue and earnings through a variety of undisclosed and improper actions. Cardinal inflated reported operating revenue by misclassifying more than $5 billion of bulk sales as operating revenue. As detailed in the complaint, Cardinal classified its revenue from drug distribution as either "bulk" revenue, which consisted of certain full case quantities of pharmaceutical products delivered to customer warehouses, or operating revenue, which consisted of all other sales. The complaint alleges that Cardinal implemented an undisclosed internal practice under which it reclassified any revenue from the sale of bulk product held on its premises for 24 hours or longer as operating revenue. Shortly thereafter, as the complaint describes, Cardinal began intentionally holding certain bulk shipments for longer than 24 hours, in order to shift revenue from the bulk revenue line to the operating revenue line and fraudulently inflate its operating revenue and operating revenue growth rates in certain quarters (the 24-Hour Lever). Cardinal used the 24-Hour Lever along with other revenue and earnings management practices to fraudulently overstate its operating results. According to the complaint, Cardinal managed its reported earnings by:

selectively accelerating, without disclosure, the payment of vendor invoices in order to

prematurely record a cumulative total of $133 million in cash discount income;

improperly adjusting reserve accounts, which misstated earnings by more than $65

million; and

improperly classifying $22 million of expected litigation settlement proceeds to

increase operating earnings.

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In addition, the complaint alleges that Cardinal failed timely to disclose the impact of a change in the method of applying its last-in-first-out (LIFO) inventory valuation accounting principle and, on one occasion, intentionally transferred inventory within business units in order to avoid a negative LIFO impact on year-end reported earnings. Furthermore, the complaint alleges that Cardinal prematurely recognized millions of dollars in revenue from Pyxis, a wholly-owned subsidiary it featured as an important growth driver. The terms of the settlement reflect, and the Commission acknowledges, the cooperation provided by Cardinal during the course of the SEC investigation. Without admitting or denying the allegations of the Commission's complaint, Cardinal has consented to the entry of a final judgment permanently enjoining it from violating: the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 (Securities Act), Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Exchange Act Rule 10b-5; the reporting provisions of the Exchange Act, Section 13(a) and Exchange Act Rules 12b-20, 13a-1, 13a-11 and 13a-13; and the record-keeping and internal controls provisions of the Exchange Act, Sections 13(b)(2)(A) and 13(b)(2)(B). Cardinal also agreed to pay $1 in disgorgement and a $35 million penalty, which the Commission will seek to place in a Fair Fund for distribution to affected shareholders. Cardinal further consented to engage an independent consultant to conduct a review of its disclosure processes, practices and controls, as well as those policies and procedures that relate to allegations in the Commission's complaint. The settlement is subject to court approval. The Commission also acknowledges the assistance and cooperation of the U.S. Attorney's Office for the Southern District of New York. The Commission's investigation is continuing.

5.Improper asset valuations Parmalat Parmalat SpA, an Italian dairy and food company and Europe's biggest dairy company, was declared bankrupt in late 2003. Its worldwide operations include almost 140 production centers. Over 36,000 workers around the world collect Parmalat pay packets, and 5,000 Italian dairy farms are dependent on the company for the bulk of their business. At the end of 2003, one of the biggest corporate accounting scandals in history came to light as a 8 billion euro hole was discovered in Parmalat's accounting records. In 1999, Parmalat set up a subsidiary in the Cayman Islands called Bonlat.

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The first indication of financial problems came in early 2003 as the company tried to sell 500 million euro in bonds. After this CFO Fausto Tonna resigned in March replaced by Alberto Ferraris. The crisis became public in November as the Parmalat Scandal. Questions were raised about transactions with mutual fund Epicurum, another Cayman-based company linked to Parmalat causing its stock to plummet. Ferraris resigned less than a week later replaced by Luciano Del Soldato. In December, Del Soldato resigned, unable to get cash from Epicurum fund, needed to pay debts and make bond payments. Enrico Bondi was called in to help the company. Tanzi himself resigned as chairman and CEO. Parmalat's bank, Bank of America, then released a document showing 3.95billion euros in Bonlat's bank account as a forgery. Prime Minister Silvio Berlusconi initiated a Fraud investigation and appointed Bondi to administer the company's rescue. Calisto Tanzi, once a symbol of unlimited success, was detained hours after the firm was declared officially insolvent and eventually charged with financial fraud and money laundering. Italians were shocked that such a vast and established empire could crumble so quickly. Among the questionable accounting practices with which Parmalat dressed up its books: it sold itself credit linked notes, in effect placing a bet on its own creditworthiness in order to conjure up an asset out of thin air. After his arrest, Tanzi reportedly admitted during questioning at Milan 's San Vittore prison, that he diverted funds from Parmalat into Parmatour and elsewhere. The family football and tourism enterprises were financial disasters; as well as Tanzi's attempt to rival Berlusconi (another rags-to-riches Italian success story) by buying Odeon TV, only to sell it at a loss of about 45 million euro.

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Chapter-5
Conclusion
The conception of democracy in the age of globalization must be expanded to incorporate peoples right over resource management. As the focus increasingly Shifts toward resource generation and national economic growth, greater attention must be paid to tackling the issues of corruption, waste, and the inappropriate use of scarce resources. This can be achieved through strengthening SAIs and other institutions of financial management and auditing. It is essential to generate public opinion in favour of new institutions that can produce trained human resources in the field of auditing. Without greater control over how national resources are being spent, without better financial management, and without greater accountability of Government spending, society cannot evolve for the better. To achieve these goals, it is necessary for the media to play a very supportive role. Tremendous scope exists for effective collaboration between SAIs and the media to push forward a genuinely accountable and transparent governance process without which neither democracy nor economic prosperity can attain their true potential. The medias advocacy role can be greatly strengthened through a network of committed print and audio visual institutions. Additional y, a network of committed media and civil society institutions can become a viable force, both national y and international y, in advocating the peoples right to know. Governments have an aversion to oversight institutions and public scrutiny, irrespective of whether they are democracies or not. Consequently there exists an adversarial relationship between the government and oversight institutions, a relationship in which the government is at best a reluctant partner, but most often a total y disinterested party. The stronger the demand for the right to information as a fundamental right, the more effective will be the reluctant supplier, i.e. the government.

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BIBLOGRAPHY

WEBSITES
http://www.sec.gov/litigation/litreleases/2007/lr20212.htm http://www.slideshare.net/ http://informationbible.com http://www.asosai.org http://www2.accaglobal.com http://www.aacmi.org http://aaahq.org http://iamsam.hubpages.com http://www.wikipedia.org/

BOOKS PRINCIPLES OF AUDITING BY RICK S. HAYES AND ARNOLD SCHILDER WITH ROGER DASSEN & PHILIP WALLAGE INTERNATIONAL AUDITING: PRACTICAL RESOURSE GUIDE BY DAVID O REGAN ADVANCED AUDITING & INVESTIGATION BY EMILE WOOLF ET AL

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