1. Asish K Bhattacharyya: Is multiplicity of audit bad?
Asish K Bhattacharyya / December 24, 2012, 0:17 IST
E-mail: asish.bhattacharyya@gmail.com
Affiliations: Professor and Head of the School of Corporate Governance and Public Policy at the Indian
Institute of Corporate Affairs; Advisor (Advanced Studies), the Institute of Cost Accountants of India;
Chairman, Riverside Management Academy Private Limited
Audit is not a welcome activity to the auditee. This is so because no one wants scrutiny of
activities. Quite naturally when a new type of audit is added, managers grumble. Another reason
for considering audit as a wasteful activity is that it is difficult to measure the benefits accurately
while counting of costs is relatively easy.
Let us examine audit of financial statements (in short, financial audit), internal audit and cost
audit. Financial audit is an age-old practice. Companies have learned to live with it. Most
companies started appointing internal auditors just to comply with the ‘Manufacturing and Other
Companies (Auditor’s Report) Order 1988’ (popularly known as MAOCARO), which is now
replaced by the Companies (Auditor’s Report) Order 2003 (CARO).The order required the
finance audit to report on whether the company has an internal audit commensurate with its size
and nature of business. Only recently companies have started appreciating the value of internal
audit. Cost audit is also in place for quite a long time. However, in the year 2011, the
government has made the cost audit more pervasive and more regular than before. Companies
view cost audit as an additional burden. The three audits have different objectives but they are
complementary in nature.
Financial aims at enhancing the degree of confidence of intended users of financial statements.
The auditor is legally accountable to shareholders and morally to all the stakeholders. Thus,
financial audit is a value-added activity from the perspectives of investors and other
stakeholders. Credibility of financial information reduces the cost of capital because the
perceived risk of investment in the company gets reduced. Quality financial audit enhances the
quality of financial information, which leads to appropriate valuation of securities in the capital
market and enhances investors’ confidence. This in turn attracts capital to the corporate sector
and improves capital market efficiency. This is the reason why both regulators and the profession
endeavour to protect the independence of the auditor and improve the audit quality.
An efficient and effective internal audit ensures that the exposure of assets to risks is within the
‘risk appetite’ decided by the board and protects the assets from undesirable use, waste and theft.
It ensures that the internal control system is adequate and operating effectively. It acts as an
internal consultant to the management. In a way it acts as the ears and eyes of the board of
directors, particularly of independent directors and enhances the effectiveness of the board.

2. Consequently, it enhances the quality of corporate governance. It adds value at the firm level as
well as the macro level.
This is the reason why the Companies Bill 2011 empowers the government to prescribe
appointment of the internal auditor for certain classes of companies to be decided by the
government. The scope of internal audit is much wider than the financial audit. The management
decides the scope of internal audit and has the opportunity to avoid duplication between financial
audit and internal audit. A financial auditor relies on the work of the internal audit.
They are complementary in nature. Firms make money by producing and/or selling goods and
services at a cost that is lower than the price at which they can sell the same. Therefore,
managers have an interest in installing an adequate and effective cost accounting system. On this
assumption, managers argue that there is no need for cost audit. But reality is not which should
logically happen. Many companies do not adopt the best management accounting practices.
Managers often do not focus on cost management when the going is good. They take cost cutting
as a project when company’s performance in the product/service market declines sharply. At that
time, in absence of a good cost accounting system they get bewildered and get misled by
unsystematic and inaccurate cost and revenue information. Improvement in the use of resources
should be a continuous process. Customers today look for ‘cheaper and better’ products and
services. The starting point for introducing a continuous cost improvement culture is to establish
a cost accounting system that will provide correct information on the product/service cost and
revenue and the cost dynamics. Cost audit brings out the weaknesses in the cost accounting
system and draws attention to wastes and thus, improves the competitiveness of the business.
Thus, cost audit is complementary to the internal audit. Cost audit aims to improve the
competitiveness of Indian companies and the economic productivity of the country. Therefore,
cost audit adds value both at the firm level and the macro level.
Let us not crib for the multiplicity of audit because they are complementary in nature. Let all
stakeholders work together to improve the audit quality.