FINANCIAL AUDIT –A TOOL TO AVOID FINANCIAL FRAUDS II
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Applicability of Audit
The entities which come under statutory audit are: (1) The audit of specified entities governed by sec. 44 AB of the Income Tax Act 1961. (2) Banking Companies which comes under the Banking Regulation Act 1949. (3) Co- operative Societies governed by Co- operatives Act 1912. (4) Electricity Companies under Electricity Act 1948. (5) Public and Charitable Trust registered under various religious and endowment Acts. (6) Statutory Corporations like LIC, Air India etc. (7) Pvt. Ltd. & Ltd. companies established under The Companies Act 1956.
Special Audit
Sec. 233A of the Companies Act 1956 gives power to central government to direct special audit in certain cases which are given below.
If the government is of opinion that 
a) That the affairs of the company is not being managed ethically. It means that the company does not follow sound business principles nor the prudent commercial practices. (b) Any company is being managed in a manner which can cause serious injury or damage to the interest of stakeholders, creditors, industry or the business of which it pertains. For e.g. In the Enron case the profits of the company were overstated while the fact was that it had huge losses. (c) The financial position of the company might endanger its solvency. It indicates that the liabilities are more than that of assets.
Cost audit
According to sec 233 B of the Companies Act 1956 the cost audit is defined as the audit process for verifying the cost of manufacture or production process of an article on the basis of accounts as regards utilization of material or labour or the other items of cost maintained by the company. The Cost and Works Accountant Act, 1959 empowers the cost accountants to conduct the cost audit and give its report based on the cost audits.
The audit of Cost accounts is necessary in certain cases where the company is engaged in production, processing, manufacturing or mining activities, such as particulars relating to utilization of material or labour or to other items of cost as may be prescribed as per sub sec. (1) of sec. 209. Industries covered under this act includes aluminum, bearings, bulk drugs, batteries other than dry cells, cement, nylons, papers , sugars, textiles, electronics products, telecommunications etc. The central government may direct the company to circulate the audited cost accounts along with the notice of the annual general meeting to its members.
If the default is made in complying with the sec. 233B the officer shall be punished for a term or which can be extended up to 3years or the company will have to pay fine of Rs. 50,000/- or both.
Tax audit
According to sec. 44AB, tax audit is compulsory for a person carrying on business or profession if, (a) in the case of a business, it’s total sales, turnover or gross receipts in the previous year exceeds Rs. 40 Lacs or (b) in case of profession, his gross receipts in profession in the previous year exceeds Rs. 10 Lacs or (c) where profit and gains from the business are deemed to be the profit and gains of the assessee has claimed his income to be lower than the profit or gains so deemed to be the profits and gains of his business, he must not only maintain books of A/c. but also get audited.
The assessee should get his A/c’s audited before the specified date i.e. 30th Sept. for Assessment year 2008-9. in case of not getting audited books of A/c the assessee will have to pay penalty.
The entities which comes under voluntary audit are (1) Proprietary Concern (2) Partnership Firms (3) HUF (Hindu undivided family) (4) Private Trust.
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