An Introduction to Audit in India for Non-Auditors
By Himanshu Joshi, Dezan Shira & Associates
May 29 – As an increasing number of foreign invested enterprises (FIEs) in India have been established in recent years, many foreign executives based in India responsible for their company’s operations are not necessarily familiar with the audit process in India. While it may be hard for someone without a background in tax or accounting to be responsible for the financial operations of the company’s subsidiary in India, it will certainly be to their benefit if at least a basic understanding of the procedures can be obtained.
The term “audit” means the inspection of an individual’s, or organizations, accounts. It is generally done by an independent person or body who has specialized skills and knowledge of conducting audit. Another way of looking at it is that accounting procedures record all of the business transactions of the company in order to prepare the financial statements, while auditing procedures verify that those transactions were recorded properly and correctly so as to give a true and fair view of the company’s financial statements.
According to the Institute of Chartered Accountants of India:
“Auditing is defined as a systematic and independent examination of data, statements, records, operations and performance (financial or otherwise) of an enterprise for a stated purpose. In any auditing situation, the auditor perceives and recognizes the proposition before him for examination, collects evidence, evaluates the same and on this basis formulates a judgment which is communicated through an audit report. An audit is an independent examination of financial information of an entity, irrespective of its size and form, when such examination is conducted with a view of expressing an opinion thereon.”
The importance of the audit process cannot be understated, as the results can be used for the following purposes:
- Helping investors know the financial health of the company;
- Helping the government know that the company is properly discharging statutory dues;
- Helping lenders evaluate the credibility of the company;
- Helping management take note of any shortcomings in the company’s business operations; and
- Helping management improve business efficiency.
The overlying objectives of the audit process can be classified into the primary objective and the secondary objective.
The primary objective of an audit is to express a true and fair view of the company’s financial statements. This responsibility lies with the auditor who, after completing the audit process, will express their opinion through the issuance of an auditor’s report.
A company’s financial statements should include:
- Balance sheet
- Profit and loss account
- Cash flow statement
- Notes to accounts
A “true and fair view” can only be satisfied if the financial statements are accurate and not misleading. A company can expect the auditor to feel they have provided a true and fair assessment if the following criteria are satisfied:
- The accounts are prepared with reference to the entries in the account books;
- Entries are supported by proper vouchers, documents or other evidence;
- No entry in the account books are omitted while preparing the financial statements and nothing is included in the financial statements that were not in the account books; and
- The financial statements are prepared in accordance with the relevant accounting standards.
The auditor must comply with the relevant auditing standards while conducting the audit and preparing the auditor’s report.
During the course of an audit, the auditor may come across instances of error or fraud in the financial statements. In such situations, it is the duty of an auditor to report these details to the appropriate authorities. Hence, the secondary objective of an audit is to detect cases of error and fraud in the company’s financial statements, however the detection and removal of such errors and fraud is typically the chief concern of the management within the organization being audited.
Auditing in India
The Institute of Chartered Accountants of India (ICAI) is the governing body for audits in India, and is the premier professional accounting body in India. Only a member of ICAI can become an auditor. ICAI has set up an Auditing and Assurance Standard Board (AASB) to review auditing practices and procedures in India, and to develop a set of Auditing and Assurance Standards (which have since been renamed the Auditing, Review and Other Standards). These standards are designed with a view to bring out the best possible outcomes while also expressing an accurate view of the company’s financial statements. All auditors in India must comply with these standards while performing an audit.
For financial statements to have a true and fair view, it is essential that the statements are prepared in accordance with India’s accounting standards. However, India’s accounting standards are different from worldwide accepted International Accounting Standards (IAS) and International Financial Reports Standards (IFRS).
There are numerous subtleties between current Indian accounting standards and IAS/IFRS norms. As IFRS are accepted worldwide, it thus becomes difficult to make comparisons between Indian companies and their foreign counterparts. To overcome such difficulties, the new Indian Accounting Standards (Ind AS) have been prescribed and comply with IFRS. These standards were originally supposed to be applicable from April 1, 2011, but they are yet to be fully implemented. The new date of implementation of Ind AS is yet to be finalized, however general adherence to them is still recommended.
This article was originally published in the India Briefing Magazine, titled “An Introduction to Audit in India.” In this issue, we examine how India’s accounting standards differ from the globally accepted IFRS and IAS protocols, and outline the standard steps and procedures an Indian auditor will go through during the audit process and explain pre-audit preparations that can be carried out to make the process easier to follow and understand for foreign executives.
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
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An Introduction to Doing Business in India
In this guide, we introduce the basics of setting up and running a company in the country and some of the key issues investors should pay attention to. This issue is currently available as a complimentary download on the Asia Briefing Bookstore.