Auditing and

corporate governance

ASSIGNMENT
( B. Com (P), Semester 5 )

Submitted By: Submitted To :

Ashish Anand Dr. Neha Singhal Ma’am
0920108, Sec : B ( Assistant Prof. SVC )
Question 1: Explain Audit Process.
Answer :
Auditing : According to the Institute of Chartered Accountants of India, "Auditing is a
systematic and independent examination of data, statements, records, operations and
performance of an enterprise for a stated purpose".
It follows a series of well defined steps called audit process in order to conduct it efficiently
and effectively.
Audit Process :
It is the well defined methodology for organizing an audit to accomplish audit objectives. It is
the series of steps followed by an auditor in order to conduct an audit.
Although every audit process is unique, the audit process is similar for most engagements and
normally consists of three stages i.e,
1. Planning the Audit
2. Conducting the Audit
3. Reporting the Findings

Stage 1: Planning the Audit

During the planning phase, contact with audit clients is initiated and relevant background
information is gathered to gain an understanding of the audited area’s size, responsibilities,
and procedures in place. Also in this phase, audit objectives are defined and audit
methodology is determined through the creation of an audit program, which is the blueprint
for conducting the audit and accomplishing the audit objectives.
Stage 2 : Conducting the Audit
The evaluation phase of the audit is referred to as fieldwork or conducting the Audit. This
phase includes assessing the adequacy of internal controls and compliance, testing of
transactions, records, and resources, and performing other procedures necessary to
accomplish the objectives of the audit.
The duration of an audit varies depending upon its scope and access to records and the
timeliness of responses to audit requests may also affect the duration.
The audit team makes every effort to discuss audit observations, potential issues, and
proposed recommendations as they are identified.
Stage 3 : Reporting the Findings
The final result of every audit is a
written report that details the audit
scope and objectives, results,
recommendations for improvement,
and the audit client’s responses and
corrective action plans.
The final audit report is addressed to
shareholders and presented in Annual
General Meeting (AGM).

Question 2 : Compare and contrast all four types of models of Corporate Governance.
Answer :
The corporate governance structure has certain basic elements i.e, pattern of share ownership,
key players in corporate sector, composition of Board of Directors, interaction among key
players, regulatory framework, disclosure requirements for listed companies and corporate
decisions that require approval of shareholders.
These elements differ in different countries that's why there are different corporate
governance models.
The four types of model are discussed below:-
1. The Anglo - Saxon Model ( The Outsider Model)
The corporate governance model of USA and Commonwealth Countries such as UK,
Australia, Canada, India etc. is known as Anglo Saxon Model.
Some key characteristics of this model are :
(a) A well developed stock market with considerable depth and liquidity.
(b) The ownership structure of companies is widely dispersed.
(c) Strict laws concerning inside trading and disclosure of information.
(d) Unitary or single tier board of directors to give primacy to the interest of shareholders.
(e) Board of directors consist inside and outside directors.
This model is market oriented and is characterized by large number of listed companies,
widespread shareholding and we'll functioning capital market. Stock market exercises control
over the functioning of companies. The legal framework and regulatory agencies are assumed
to ensure protection of shareholders who elect directors. BOD performs function of direction,
control and representation. Managers appointed by the board implement policies and
manages daily affairs of the company.

Fig: Anglo – Saxon Model of Corporate Governance

2. The Insider Model

This model is more popular in Germany and Japan.
German Model
This model exists in Germany, Switzerland, Australia and Netherlands. This is also known as
Continental Europe Model.
Following are the main features of this model :
(a) Weak stock market.
(b) concentrated and cross shareholding.
(c) Dual board or two tier board.
(d) Low legal protection.
(e) More employees participation.

This model reduces institutional pressure for short term decisions and allows long range
strategic planning. It is relationship oriented. It provides employees representation. But this
model overlooks the interest of small shareholders. This model is not suitable for global
capital market as it is more secretive.

Fig : German Model of Corporate governance

3. Japanese Model
This is prevalent in Japan. This model is many sided and represent trust and relationship
oriented approach to corporate governance.
Following are it's features:
(a) Small dominant groups linked by cross shareholding and trading relationships.
(b) Consortium Financing.
(c) Employees participation.
(d) Unitary board structure, board takes all major decisions.
(e) Contingency model; in case of poor performance main bank intervenes in companies
plans.
(f) High degree of autonomy.

The Japanese Model involves participation of employees in corporate governance which

ensures their long term commitment to the company. This model seeks to balance the interest
of all stakeholders unlike the Anglo - Saxon Model which gives primacy to the interest of
shareholders.

Fig : Japanese Model of Corporate Governance

4. The Family Based Model

This model exists in several underdeveloped and emerging countries of East Asia ( Like
India, Korea, Malaysia, Middle East, Brazil, Mexico, Chile, Turkey, Egypt, Kuwait, Saudi
Arab, UAE, etc)
Following are the main characteristics of this company:-

(a) Closely held companies; promoters family is dominant shareholders.

(b) Family exercises full control due to ownership, cross holding and inter locking
directorships.
(c) Single board of directors, controlling family appoints most of directors and CEO.
(d) Company runs primarily for the benefit of the family.
The family based model of corporate governance is changing due to globalisation and
liberalisation. Internationalisation of capital markets, global competition, increasing role of
financial institution are the major forces due to which companies in developing countries are
improving their corporate governance practices. For example, Indian companies which one to
raise capital abroad and get listed on foreign stock exchange are adopting international
standards concerning accounting and public disclosures.

Fig : Family – Based Model of Corporate Governance

 Comparative Study of Corporate Governance Models
Basis of Anglo – German Model Japanese Family – Based
Comparison Saxon Model Model Model

(1) Shareholding Dispersed Concentrated Informally Concentrated

pattern concentrated
(2) State and Well- Developed Less developed Wek low
Influence of developed medium medium to low influence
Capital Market high influence influence influence
(3) Structure and Unitary Two tier based Unitary board : Unitary board :
control of Board Board: High medium high degree of a rubberstamp
of Directors degree of influence cultural
control influence
(4) Involvement Low High High Low
of Banks
(5) Influence of Weak- strong Coordinated Coordinated Weak
financial
Institutions
(6) Employee Low High and High Low
Participation institutionalised

(7) Low – high High High Low

Accountability to
Community
Beyond Law
(8) Agency Shareholders Bank Vs Bank Vs Controlling
Conflict Vs Management Management Family Vs
Management Minority
Shareholders

Question 3 : Difference Between Independent Audit and Internal Audit.

Answer:
Audit: Audit is an independent examination of financial information of any entity, whether
profit oriented or not, irrespective of its size or legal form when such an examination is
conducted with a view to express an opinion on it.

On the basis of specific objectives, audit may be of several types. Two out of them is
Independent Audit and Internal Audit.
Independent audit is an audit conducted by qualified person i.e, Chartered Accountants
having Certificate of Practice. Auditor conducting audit must have independent status and not
be related to organization in any manner.

Internal audit means a thorough examination of books by company's employees or someone

else specially appointed for this purpose. Doing Internal audit is not a compulsory act.

Here are some key differences between Internal Audit and Independent Audit.

Basis of Distinction Internal Audit Independent Audit

1. Meaning Internal audit means a It is an audit conducted by

thorough examination by the professionally qualified and
companies employees or competent auditor who is
buy and outside agency independent of the client
specially appointed for the company.
purpose.
2. Scope Scope is decided by the Scope is decided by law or
management. Generally, it by the contract with the
includes review and auditor.
appraisal of accounting,
financial and administrative 3. Status and Remuneration
control. of auditor

3. Status and Remuneration Auditor is an employee of Auditor is wholly

of Auditor the company, paid salary for independent of the company,
the work. paid fees for the professional
services.

4. Legal status Not compulsory under any Generally compulsory under

law. some law.
5. Main Concern or Main concern is to ensure Main concern is to collect
Approach compliance with (a) adequate and reliable
company's policies, rules evidence to support his
and procedures, (b) good opinion as to the truth and
business practices, (c) fairness of the financial
generally accepted statements.
accounting principles and
(d) legal and government
regulations.
6. Time of Audit Internal audit is continuous Statutory audit is conducted
and carried out throughout after closing of accounts and
the year. preparation of financial
statements.

7. Responsibility Responsible to the Directly responsible to the

management of the shareholders and in some
company.
 cases to interested third
parties.

8. Report There is no specific format Report should be in a

for reporting and the report specified format and the
is presented as per the report is presented only once
requirement of the i.e., after the completion of
management i.e., monthly, the audit.
quarterly, half yearly, etc.