Page 128 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes 7.5.2 Increasing Awareness in the International Context

Viewed in the Indian context, the Government in consultation with the Institute of Chartered
Accountants of India, issued the Manufacturing and other Companies (Auditors’ Report) Order,
1975, (Order) for rationalization of the requirements for such evaluation. The revised Order
considerably enhances the reporting responsibilities of the Auditor while reporting upon the
adequacy and reasonableness of the procedures as also the financial health of the company. It is
significant to state in this context that the Order is supplemental to the directions given by the
Comptroller and Auditor-General of India (CAG) under the Companies Act, in respect of
Government Companies with regard to which matters specified in the Order would constitute
an integral part of the Auditor’s Report submitted, and reply to the questionnaire issued by the
CAG would continue to be submitted as hitherto. The Order applies to every company engaged
or proposed to engage in one or more of the following activities:-
1. Manufacturing, mining or processing,
2. Supplying or rendering services,
3. Trading, and
4. The business of financing investments.

Caselet USA, System Based Audit

he National Audit Office of the United Kingdom, in collaboration with the Overseas
Development Administration, in its Manual entitled “A Guide to Certification
TAudit” emphasizes the evaluation of internal control procedures during Systems
Based Audit (SBA). In the United States of America, the introduction of the Foreign Corrupt
Practices Act of 1977 (FCPA) requires the corporate management to maintain a system of
internal accounting controls, sufficient to provide reasonable assurances for the proper
execution of transactions and effecting accountability. Thus, the world over, the need for
internal controls has received considerable impetus and there has admittedly been a
conscious and significant increase in the necessity for ensuring the existence of effective
internal controls.
A system of internal control recognizes the basic principle that it should be as difficult as is
practical and feasible, for individuals to be dishonest or careless. Such a premise is indeed not
based on a cynical view of human nature in general, but rather on the realistic assumption that
there could be a few persons who would be dishonest or careless if it is easy for them to be so.
Further, apart from the prevention and detection of fraud, internal controls should reflect the
strength of the overall accounting environment in an organization as also the accuracy of its
financial and operational records.

7.5.3 Two Dimensions of Internal Control

The two dimensions of internal controls are
1. Administrative Controls, which include but are not limited to the plan of organization
and records that are concerned with the decision processes leading to the management’s
authorization of transactions.

2. Accounting Controls comprise the plan of organization, procedures and records that are
concerned with safeguarding of assets and the reliability of financial records designed to

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