Financial Audit vs. Management Audit

Indicate the distinction between financial audit and management audit. Financial audit differs from management audit in the following respects: (1) The main purpose of financial audit is to conduct an independent review of the financial statements of an enterprise and express an opinion about their reliability in representing the financial condition and working results of the enterprise. The overall objective of management audit, on the other hand, is to ascertain whether sound management prevails throughout the organisation and to report as to its efficiency or otherwise, with recommendations to ensure its effectiveness where such is not the case. (2) Financial audit is confined to examination of the financial transactions and books of accounts. But management audit goes beyond the financial audit. Management audit is an examination review and appraisal of the various policies and actions of the management on the basis of certain objective standards. Financial audit is not concerned with management policies. (3) Management audit is a method to evaluate the efficiency of management at all levels throughout the organisation. But financial audit is not concerned with such evaluation. (4) An auditor conducting management audit is required to report not only as to the efficiency or otherwise of management he is also required to make recommendations to ensure its effectiveness.

What is meant by propriety audit ? What are its objectives ? Can a company auditor undertake propriety audit? Give reasons for your answer. Propriety audit, as defined by Eric L. Kohler, means that audit in which the various actions and decisions of the authorities of an enterprise are examined to determine whether they are in public interest and whether they meet the test of commonly accepted customs and standard of conduct. It differs from the traditional audit in that the latter is simply an evaluation of the evidence supporting the transactions and is not concerned with the propriety of the transactions. But while undertaking a propriety audit, the auditor goes into the financial propriety or prudence of the transactions. The objects of propriety audit are to verify and investigate

(1) whether there has been any leakage of revenue;

(2) whether there has been wastage of funds due to a transaction or a group of transactions entered into in violation of any legal requirements or economic or financial consideration;

(3) whether contracts entered into with the third parties are in the best interest of the concern, and

(4) whether there is a system adequate control for safety of the assets of the concern.

The traditional or financial audit has none of these objects. Propriety audit is particularly conducted by the Comtroller and Auditor-General of India. The purpose of government audit, as Asoke Chanda has emphasised, “is to bring to the notice of administration lacunae in the rules and regulations and to suggest, wherever possible, ways and means for the execution of plans and projects with greater expedition, efficiency and economy.” Basically, a company auditor is not required to examine the financial propriety or prudence of transactions.

This is essentially a reporting function about the true and fair character of financial statements. But a careful study of the present Companies Act suggests that in certain specific areas, the company auditor may go beyond his “essential” function and give his opinion about the propriety or prudence of certain transactions. These specific areas are as follows:

(1) The company auditor is required to inquire whether or not the terms on which the company makes loans and advances are detrimental to the interests of the company or its shareholders.

(2) The auditor is required to inquire whether or not the company’s transactions as represented by book entries are prejudicial to the interests of the company.

(3) The auditor of a manufacturing, mining or processing company is to state whether or not the rate of interest and the terms and conditions of certain loans are prima facie prejudicial to the interests of the company.

(4) The auditor must verify the reasonableness of the prices paid for stores, raw materials or components exceeding Rs. 10,000 in value and purchased from the subsidiaries or from firms in which directors have interest.

Updated: July 24, 2019 — 7:13 am

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