A PROJECT REPORT

A STUDY ON
‘‘CON CURRENT AUDIT IN AVENUE SUPERMARTS LTD’’.

A Project Report submitted in partial fulfilment

for the award of degree of

Master’s Degree in Business Administration

University of Mysore, Mysore

Submitted by
Mr. Harinath.B
Reg. No: 17MB2218
Under the Guidance of
Ms. VICTORIA
Faculty
Department of Management Studies

IZEE Business School, Bangalore

2017 – 2019

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 IZEE BUSINESS SCHOOL, BANGALORE

CERTIFICATE

This is to certify that this Internship Report titled “CON CURRENT AUDIT” has
been submitted to IZEE Business School Bangalore in partial fulfilment of the requirement
for the award of the MBA is a bonafide work of Mr. Harinath.B, MBA, and Reg. No
17MB2218 under the guidance and supervision of Ms.VICTORIA, Faculty of IZEE
Business School Bangalore, Bangalore. This is to further certify that to the best of my
knowledge and belief, this report has not been submitted earlier to any other University or
Institution for the award of any Degree/Diploma/Certificate.

His character and conduct are satisfactory during the study and we wish his all the
success in his future endeavour.

Place: Bangalore Ms.Nancy Thiara

Date: Director

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 IZEE BUSINESS SCHOOL, Bangalore.

GUIDE CERTIFICATE

This is to certify that this Internship Report titled “A PROJECT REPORT ON “CON
CURRENT AUDIT”has submitted to IZEE Business School, Bangalore in partial fulfillment
of the requirement for the award of MBA is bonafide work of Mr. Harinath.B, MBA, Reg. No
17MB2218, prepared under my guidance and supervision. This is to further certify that to the best
of my knowledge and belief, this report has not been submitted earlier to any other University or
Institution for the award of any Degree/Diploma/Certificate.

Place: Bangalore Ms. VICTORIA

Date: Faculty

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 IZEE BUSINESS SCHOOL, Bangalore.

DECLARATION

I hereby declare that the internship report titled ‘‘ A STUDY ON “CON CURRENT AUDIT”
submitted to IZEE Business School, Bangalore impartial fulfilment of the award of the MBA is
based on my original work and been prepared by me under the supervision and guidance of Faculty
Ms.VICTORIA, IZEE Business School, Bangalore.

I also declare that this report is entirely based on the information provided by the company and is
a result of my own efforts. I further declare that this report has not been submitted in part or full
towards any other degree or diploma to this Institution or any other Institution or University.

Place : Bangalore Harinath.B

Reg.No.17MB2218

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 IZEE BUSINESS SCHOOL, Bangalore.

ACKNOWLEDGEMENT

I would like to have this opportunity to place it on a record that this project would never been
successful without the kind co-operation and support of certain individuals. Though it is not
possible to name all of them, it would be unpardonable on my part if I do not mention some of the
most important persons.

I would like to thank Mr. GyanDube (External auditor) for giving periodical and optimistic
guidance to complete my project as a part of my curriculum and it has been fortunate in getting
the generous help and constant encouragement from Mr.krishna (CCA), It’s my duty to express
deep sense of gratitude to my faculty guide Ms. VICTORIA (Faculty of MBA) for his valuable
suggestion and guidance throughout the project. I would also like to take an opportunity of
expressing my sincere thanks to Ms.Manisha Saxena (Assistant Faculty of MBA), my parents and
friends who guided me in all efforts.

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 IZEE BUSINESS SCHOOL, Bangalore.

PROJECT PROFILE

The project was commenced from 02nd July 2018 to 15th August 2018. The duration of the study
was 6 Weeks. The company guide Mr. GyanDube (External Auditor) had constantly guided and
monitored the progress of the project work throughout these 6 Weeks.

The project has been done at Avenue Supermarts Ltd, at Bangalore. For the first 1 week, I had
orientation classes in Avenue Supermarts Ltd. Later I did SAP and Financial Accounting and learnt
about Accounting tools and techniques with the client’s information.

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 TABLE CONTENTS

CONTENT
1 Chapter 1: Introduction to Auditing 01-04

2 Chapter 2: Concurrent Audit 05-28

2.1. Need for concurrent audit
2.2. Scope of work
2.3.Detection of Frauds & Errors
2.4.Advantages of auditing
2.5.Miscellaneous
2.6.Auditor's duties and responsibilities in respect of
frauds
2.7.Audit types

3 Chapter 3: Company profile 29-46

3.1 Introduction to Retail industry
3.2 Characteristics of retailing
3.3 About Dmart
3.4 Organised and Unorganised retailing

4 Chapter 4: Data analysis and Interpretation 47-51

4.1 Introduction
4.2 Literature

5 Chapter 5: Research methodology

5.1 Evolution of the external audit analytics framework

6 Chapter 6: Findings, Suggestions and Conclusion 69-71

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8
 CHAPTER – 1
INTRODUCTION TO AUDITING

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INTRODUCTION TO AUDITING
1.2 INTRODUCTION -AN OVERVIEW OF AUDITING:
Economic decisions in every society must be based upon the information available at the
time the decision is made. For example, the decision of a bank to make a loan to a business is
based upon previous financial relationships with that business, the financial condition of the
company as reflected by its financial statements and other factors.
If decisions are to be consistent with the intention of the decision makers, the information
used in the decision process must be reliable. Unreliable information can cause inefficient use of
resources to the detriment of the society and to the decision makers themselves. In the lending
decision example, assume that the barfly makes the loan on the basis of misleading financial
statements and the borrower Company is ultimately unable to repay. As a result the bank has lost
both the principal and the interest. In addition, another company that could have used the funds
effectively was deprived of the money.
As society become more complex, there is an increased likelihood that unreliable
information will be provided to decision makers. There are several reasons for this: remoteness of
information, voluminous data and the existence of complex exchange transactions
As a means of overcoming the problem of unreliable information, the decision-maker must
develop a method of assuring him that the information is sufficiently reliable for these decisions.
In doing this he must weigh the cost of obtaining more reliable information against the expected
benefits.
A common way to obtain such reliable information is to have some type of verification
(audit) performed by independent persons. The audited information is then used in the decision
making process on the assumption that it is reasonably complete, accurate and unbiased.
1.3 ORIGIN AND EVOLUTION
The term audit is derived from the Latin term ‘audire,’ which means to hear. In early days
an auditor used to listen to the accounts read over by an accountant in order to check them
Auditing is as old as accounting. It was in use in all ancient countries such as Mesopotamia,
Greece, Egypt. Rome, U.K. and India. The Vedas contain reference to accounts and auditing.
Arthasashthra by Kautilya detailed rules for accounting and auditing of public finances.
The original objective of auditing was to detect and prevent errors and frauds
Auditing evolved and grew rapidly after the industrial revolution in the 18th century With
the growth of the joint stock companies the ownership and management became separate. The
shareholders who were the owners needed a report from an independent expert on the accounts of
the company managed by the board of directors who were the employees.
The objective of audit shifted and audit was expected to ascertain whether the accounts
were true and fair rather than detection of errors and frauds.
In India the companies Act 1913 made audit of company accounts compulsory
With the increase in the size of the companies and the volume of transactions the main
objective of audit shifted to ascertaining whether the accounts were true and fair rather than true
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and correct. Hence the emphasis was not on arithmetical accuracy but on a fair representation of
the financial efforts
The companies Act.1913 also prescribed for the first time the qualification of auditors
The International Accounting Standards Committee and the Accounting Standard board of
the Institute of Chartered Accountants of India have developed standard accounting and auditing
practices to guide them. accountants and auditors in the day to day work

The later developments in auditing pertain to the use of computers in accounting and
auditing.
In conclusion it can be said that auditing has come a long way from hearing of accounts to taking
the help of computers to examine computerised accounts

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1.4 DEFINITION
The term auditing has been defined by different authorities.
1. Spicer and Pegler: "Auditing is such an examination of books of accounts and vouchers of
business, as will enable the auditors to satisfy himself that the balance sheet is properly
drawn up, so as to give a true and fair view of the state of affairs of the business and that
the profit and loss account gives true and fair view of the profit/loss for the financial period,
according to the best of information and explanation given to him and as shown by the
books; and if not, in what respect he is not satisfied."

2. Prof. L.R.Dicksee. "auditing is an examination of accounting records undertaken with a

view to establish whether they correctly and completely reflect the transactions to which
they relate

3. The book "an introduction to Indian Government accounts and audit" "issued by the
Comptroller and Auditor General of India, defines audit “an instrument of financial control.
It acts as a safeguard on behalf of the proprietor (whether an individual or group of persons)
against extravagance, carelessness or fraud on the part of the proprietor's agents or servants
in the realization and utilisation of the money or other assets and it ensures on the
proprietor's behalf that the accounts maintained truly represent facts and that the
expenditure has been incurred with due regularity and propriety. The agency employed for
this purpose is called an auditor."

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1.5 FEATURES OF AUDITING
a. Audit is a systematic and scientific examination of the books of
accounts of a business;
b. Audit is undertaken by an independent person or body of persons
who are duly qualified for the job.
c Audit is a verification of the results shown by the profit and loss account and the state of affairs
as shown by the balance sheet.
d. Audit is a critical review of the system of accounting and internal
control.
e. Audit is done with the help of vouchers, documents, information and
explanations received from the authorities.
f. The auditor has to satisfy himself with the authenticity of the financial statements and report that
they exhibit a true and fair view of the state of affairs of the concern.
g The auditor has to inspect, compare, check, review, scrutinize the vouchers supporting the
transactions and examine correspondence, minute books of share holders, directors, Memorandum
of Association and Articles of association etc., in order to establish correctness of the books of
accounts.

1.6 OBJECTIVES OF AUDITING

There are two main objectives of auditing. The primary objective and the secondary or
incidental objective.
a. Primary objective – as per Section 227 of the Companies Act 1956, the primary duty (objective)
of the auditor is to report to the owners whether the balance sheet gives a true and fair view of the
Company’s state of affairs and the profit and loss A/c gives a correct figure of profit of loss for the
financial year.
b. Secondary objective – it is also called the incidental objective as it is incidental to the satisfaction
of the main objective. The incidental objective of auditing are: i. Detection and prevention of
Frauds, and ii. Detection and prevention of Errors.

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 CHAPTER _ 2
Concurrent Audit

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INTRODUCTION
Concurrent audit is a systematic and timely examination of financial transactions on a regular basis
to ensure accuracy, authenticity, compliance with procedures and guidelines. The emphasis under
concurrent audit is not on test checking but on substantial checking of transactions.

It is an ongoing appraisal of the financial health of an entity to determine whether the financial
management arrangements (including internal control mechanisms) are effectively working and
identify areas of improvement to enhance efficiency.

Objective of Concurrent Audit

✓ Ensure voucher/ evidence based payments to improve transparency

✓ Ensure accuracy and timeliness in maintenance of books of accounts

✓ Ensure timeliness and accuracy of periodical financial statements

✓ Improve accuracy and timeliness of financial reporting especially at sub-district levels ✓ Ensure
compliance with laid down systems, procedures and policies

✓ Regularly track, follow up and settle advances on a priority basis

✓ Assess & improve overall internal control systems

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2.1Need for Concurrent Audit
Low quality of book/ account keeping & lack of accuracy of financial reports especially at sub
district level

Lack of follow up on statutory audit observations leading to repetition of observations and hence
lack of improvement in the systems

High amount of unadjusted advances and lack of periodical follow up carried to settle outstanding
advances

Need of continuous handholding support to the finance staff in improvement of financial

management and accounting systems

2.2 Scope of Work

As per the guidelines issued by GoI, concurrent auditor is to be appointed both at the state and
district level. The scope of work of the State concurrent auditor is as follows:

✓ Audit of the SHS accounts and expenditure incurred by SHS

✓ Verification of Quarterly FMRs with Books of Accounts

✓ Audit of Advances at the SHS level

✓ Audit of the Provisional Utilization Certificates sent to GoI

✓ Monitoring timely submission of the District concurrent audit reports

✓ Detailed analysis and compilation of the District concurrent audit reports

✓ Vetting of the State Action Taken Reports and providing observations thereon

✓ Follow-up & monitoring over the ATRs prepared by districts on the observations made
in the audit

✓ Preparation of Quarterly Executive summary to be sent to GoI in the prescribed format

✓ Audit of Financial Statements of DHS

✓ Certification of the Statement of Expenditure

✓ Review and analysis of the Age wise and Party wise Advances Report

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✓ Comparison between financial and physical performance and analysis

✓ Visits to sample blocks (in a way to cover all blocks in a year) and peripheral units

✓ Filling in the checklist provided

✓ Vetting of the district ATRs and providing observations thereon

✓ Any other evaluation work, as desired by the District Audit Committee

✓ Concurrent Audit will be carried out on a “monthly basis”

✓ The fee structure for the concurrent auditor should be decided keeping in mind overall scope
and coverage of audit. The state may provide an ‘indicative range” for audit fees, however actual
fees for state as well as district level audits should be decided through competitive bidding
process.

✓ The respective audit committees can take a view on the rationalization of fees before approving
the same and can also make suitable modifications to limits for the audit fee taking into account
factors such as, inflation.

✓ In case the appointment does not happen within the first quarter the fees should be appropriately
reduced as per the decided scope and coverage.

✓ The decision on remuneration should be judicious and balanced.

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Audit Committee
The members of the district audit committee should be the following:

➢ Chief Medical Officer – Member Secretary

➢ District Magistrate – Member

➢ District Accounts Manager – Member

➢ Representative from NDCP (atleast one) – Member

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2.3 DETECTION OF FRAUD & ERRORS
The term fraud means the willful misrepresentation made with an intention of deceiving
others. It is a deliberate mistake committed in the accounts with a view to get personal gain. In
accounting, fraud means two things.
a. Defalcation involving misappropriation of either cash or goods; and
b. Fraudulent manipulation of accounts not involving defalcation.
FRAUD COVERS THE FOLLOWING
FRAUD THROUGH DEFALCATION.
Following are the methods of defalcation involving misappropriation of cash or goods
1 By misappropriating the receipt by not recording the same in the cashbook
2 By destroying the carbon copy or counter foil of the receipt and misappropriating the cash
received
3 By entering lesser amount on the counterfoil and misappropriating the difference between money
actually- received and the amount entered on the counterfoil of the receipt book
4 By not recording the receipt of sale of a casual nature for example sale of scrap, sale of old
newspapers etc.
5 By omitting to record cash donations received by non-profit making charitable institutions
6 By misappropriating the cash received on discounting the bills receivable and showing them as
bills outstanding on hand.
7 By misappropriating cash received from debtors and concealing the same by giving artificial
credit to the debtors in the form of bad debts, discount or sales return etc.
8 By adopting the method of "teeming and lading" or "lapping process". Under this method cash
received from one debtor is misappropriated and deficiency in that debtors account is made good
when another payment is received from second debtor by crediting the second debtors account less
by that amount. This process is carried out round the year.
9 By suppressing the cash sales by not recording them or by treating
the cash sales as credit sales.
10 By misappropriating the sale proceeds of VPP sales or sales of goods on approval basis by
treating the transaction as goods received or not approved.
11 By under casting receipt side total of the cashbook
12 By recording fictitious or bogus payments
13 By recording more payments than actual amounts paid by altering the figures on the vouchers.
14 By showing the same payment twice.
15 By showing credit purchases as cash purchases and misappropriating the amount

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16 Recording personal expenses as business expenses
17 By not recording discounts and allowances given by the creditors and misappropriating the
amounts
18 By overcasting the payment side total of the cashbook
19 Recording fictitious and inflated purchases and misappropriating that amount.
20 By suppressing the credit notes for returns and showing the full payment to creditors.
21 By including the names of dummy workers or the workers who have?
The job in the wage sheets and misappropriating the amount.
22 By over casting the total of wages sheets and drawing that amount for misappropriation.
23 By misappropriating the undisbursed wages.

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FRAUD THROUGH MANIPULATION OF ACCOUNTS
It implies presentation of accounts more favorably than what they actually are. Window
dressing means showing a wrong picture. The fraud through manipulation of accounts is also
known as window dressing because accounts are manipulated to show a wrong picture of the profit
or loss of the business and its financial state of affairs. Generally this type of fraud is committed
by the people at the top management level. This does not involve any misappropriation of cash or
goods but it is either over statement of profit or understatement of the same. Such fraud is
committed with certain objective and is relatively difficult to detect.
THE AUDITOR CAN SUSPECT FRAUD UNDER THE FOLLOWING
CIRCUMSTANCES.
1. When vouchers, invoices, cheques, contracts are missing etc.
2. When control account does not agree with subsidiary books.
3. When the difference in trial balance is difficult to locate.
4. When there are greater fluctuation in G.P. and N.P. ratios.
5. When there is difference between the balance and the confirmationof the balance by the parties.
6. When there is difference between the stock as per records and thestock physically counted.
7. When the explanation given by the client is not satisfactory.
8. When there is a overwriting of some figures.
9. When there is a contradiction in the explanation given by differentparties.
PROCEDURE TO BE FOLLOWED TO DETECT ERRORS.
Following procedures may be adopted by the auditor to detect the errors.
1. Check the opening balances from the balance sheet of the last year.
2. Check the posting into respective ledger accounts
3. Check the total of the subsidiary books.
4. Verify all the castings and the carry forwards.
5. Ensure that the list of debtors and creditors tally with the ledgeraccounts.
6. Make sure that all accounts from the ledger are taken into accounts.
7. Verify the total of the trial balance.
8. Compare the various items from the trial balance with that of theprevious year.
9. Find out the amount of difference and see whether an item of half orsuch amount is entered
wrongly.
10. Check differences involving round figures as Rs. 1,000; Rs. 100 etc

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THE AUDITOR SHOULD PERFORM THE FOLLOWING DUTIES IN RESPECT OF
FRAUD.
1. Examine all aspects of the finance.
2. Vouch all the receipts from the counterfoils or carbon copies or cashmemos, sales mart reports
etc.
3. Check thoroughly the salary and wages register.
4. Verify the methods of valuation of stocks.
5. Check up stock register, goods inwards notes, goods out wardsbooks and delivery challans etc
6. Calculate various ratios in order to detect fraudulent manipulation ofaccounts
7. Go through the details of unusual items.
8. Probe into the details of the problems when there is a suspicion.
9. Exercise reasonable skill and care while performing the duty.
10. Make surprise visit to check the accounts.

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ADVANTAGES OF AUDIT
A. Businessman's point of view B. Investor's point of view C. Other Advantages.
1 Detecfonof errorsandfrauds 1 . Protects interest 1. Evaluate financial status
2 Loan from banks 2. Moral check 2. Usting of shares
3 Builds reputation 3. Proper valuation of
investments
3. Settlements of claims
4 Proper valuation of assets 4 Good security 4 Evidence in court
5. Government acceptance 5. Settlement of accounts
6. Update accounts 5. F aciStates calcu lation of
Purchase. Conskteraton.
7 Suggestions for improvement
7 Facilitates taxation
8. Useful for agency

MISCELLANEOUS
AUDITING Vs INVESTIGATION
Points of difference Auditing Investigation
1. objects
2 period
3 conducted
4 scope
5. compulsion
The object is to find out whether balance sheet and profit and loss account exhibit a true and fair
view of business.
It usually covers one accounting year.
It is conducted for proprietors only.
It is restricted to balance sheet and profit and toss account.
Audit is legally compulsory for companies.
It may be conducted at the end of the year.
It is undertaken to know the essential facts about a matter under inquiry. It is done with some
special purpose of view.
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It may cover more than one accounting year.
It is carried out on behalf of any party interested in the matter.
It is wider in scope. It may be carried out beyond balance sheet.
It is voluntary. It is required under certain circumstances.
It may be conducted at any time in case of suspicion about any transaction.
Form of report is not.
6 time
7. report
8. appointment
9. qualifications
10. rework
Form of report is prescribed. It is presented to the shareholders.
Owners appoint the auditors.
The statutory auditors must posses proper qualifications.
Re - audit is not generally undertaken.
prescribed. It is presented to the client.
Even third party can appoint an investigator.

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DISTINCTION BETWEEN ACCOUNTING AND AUDITING
Points of difference Accounting Auditing
1. meaning
2. nature
3. objects
4. commencement
5. scope
It is recording of all the day to day transactions in the books of accounts leading to preparation of
financial statements.
It is concerned with finalisation of accounts.
The object is to ascertain the trading results.
Accounting commences when book keeping ends.
It involves various financial statements. It involves maintenance of books of accounts. It does not
go beyond books of accounts.
It is the critical examination of the transactions recorded in the books of accounts.
It is concerned with establishment of reliability of financial statements.
The object is to certify the correctness of financial statements.
Auditing begins when accounting
ends.
It depends upon the agreement or upon the provisions of law. It
goes beyond books of accounts.

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1.10.3 TRUE AND FAIR VIEW.
An audit of accounts by an independent expert assures the outside users that the accounts
are proper and reliable. The outsiders can rely on the accounts if the auditor reports that the
accounts are true and fair. The accounts are said to be true and fair:
1. When the profit and loss shown in the profit and loss account is true and fair, and
2. Also when the value of assets and liabilities shown in the balance sheet is true and fair. What
constitutes true and fair is not defined under any law. However the following general guidelines
may be laid down in connection with true and fair.
a) Conform to accounting principles: The books of accounts must be kept according to the
normally accepted accounting principles such as the concept of entity, continuity, periodical
matching of costs and revenue, accrual and double entry system etc.
b) No window dressing or secret reserves: The accounts must show the financial position and the
profit or loss as they are. I.e. there is neither an overstatement nor an understatement. There should
be in other words neither window dressing nor secret reserves. In window dressing the accounts
are made in such a way as to show a much better condition than the actual condition. The profit
and the net worth are overstated
The accounts are said to show true and fair view when the accounts show only the actual conditions
as it is. i.e. the profit and the net worth are shown as they are.
In order to show a true and fair view the auditor should ensure that:
1. The final accounts agree with the books of accounts.
2. The provision for depreciation is proper.
3. The closing stock is physically verified and valued properly.
4. Intangible assets like goodwill, patents, preliminary expenses or other deferred revenue
expenses are written off properly.
5. Proper provision is made for bad and doubtful debts.
6. Capital expenses is not treated as revenue expenses and vice versa.
7. Capital receipts are not treated as revenue receipts.
8. Effect of changes in rate of foreign exchange on value of assets and liabilities is recorded in the
books properly.
9. Contingent liabilities are not treated as actual liabilities and vice versa.
10. Provision is made for all known losses and liabilities
11. A reserve is not shown as a provision and vice versa
12. Cut off transactions are recorded properly, so that all sales invoices are matched with goods
delivered and all purchase invoices are matched with goods received.
13. Transactions are recorded on accrual basis, i.e. outstanding expenses, prepaid expenses,
income accrued and advance income are recorded properly.
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14. Expected or anticipated gains are not credited to the profit and loss account.
15. Effect of events after the balance sheet date on the value of an asset and liability is disclosed
in the accounts properly.

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LET US SUM UP
Auditing is a systematic and scientific examination of the books of accounts and records of
business to enable the auditor to satisfy himself that the profit and loss account and the balance
sheet are properly drawn up so as to exhibit a true and fair view of the financial state of affairs of
the business and profit or loss for the financial period.
The term auditing has been distinguished from accounting and investigation The main point
of distinction is that accountancy is concerned with the preparation of financial statements whereas
auditing is concerned with checking of these financial statements and reporting on the financial
position and result of operation of the organisation. Investigation is undertaken for some special
purpose i.e. to determine the extent of fraud or to determine the purchase price of the organisation
and the like.
Objectives of audit are broadly classified into a) primary objective and b) secondary
objective. Primary objective of audit is to substantiate the accuracy of the financial statements
prepared by the accountant while the secondary objective is to detect and prevent errors and frauds.
A number of advantages can be derived from getting the accounts audited by a qualified
auditor, such as early detection of errors and frauds, reliability of accounts, statements of various
types of claims, securing loans from banks and other financial institutions, etc.
Audit is classified into various types, viz., audit under statute, audit of accounts of private firm,
audit of accounts of private individuals, audit of trust accounts. An auditor can adopt any one of
the modes to conduct his audit of an organisation, viz. continuous audit or periodical audit or
interim audit.
Besides being a Chartered Accountant an auditor should possess certain other qualities, such
as knowledge of relevant laws, intelligence, tactfulness, vigilance, honesty and integrity courage,
impartiality, broadmindedness, patience, perseverance, maintaining secrecy of his client,
commonsense etc.

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MEANING AND DEFINITION OF ERRORS AFRAUDS
DEFINITIONS :
Error refers to unintentional mis-statements or mis- descriptions in the records or
books of accounts by the books keepers. In other words, they are unintentional mistakes arising on
account of negligence or ignorance. Errors may be basically of two types :
(a) Principal Errors and (b) Clerical Errors
(a) principal Errors and : these errors arise generally when the principals of accountancy are not
observed while recording a transaction. For instance a capital expenditure is recorded as a revenue
expenditure or vice versa. Such errors are difficult to detect as the Trial Balance tallies inspite of
such errors. Basically it arises on account of ignorance of accounting principles. Following are the
examples of principles errors :
(1) Wages paid for installation of plant and machinery is
recorded as wages paid to workers
(2) Revenue receipt is recorded as a capital receipt (3) Incorrect provisions for doubtful debts (4)
Incorrect provisions for discount on debtors (5) Rent paid to landlord debited to the landlord
account
instead of rent ac account (6) Overvaluation or undervaluation of stock on account
of ignorance
(b) Clerical Errors – these errors arise on account of negligence of the accounting staff. They are
called technical errors clerical errors may be further divided as errors of omission, Errors of
Commission, Duplicating Errors and Compensating Errors.
2.2 REASONS AND CIRCUMSTANCES
R.K. Mautz, has classifieds the reasons and circumstances of errors and he has include fraud
in the broad category of errors. The classifications are the following.
1. ignorance on the part of employees of accounting development, generally accepted accounting
principles, appropriate account classification of the necessary reconciling subsidiary ledgers with
controlling accounts and of good accounting practices in general. 2. carelessness on the part of
those doing the accounting work. 3. A desire to conceal the effect of defalcations of shortage of
one kind or another. 4. A tendency of the management to permit prejudice or bias to influence
the interpretation of transactions or events or their presentation in the financial statements. 5. An
ever presents desires to hold taxes on income to
minimum.
A sixth cause may be added to those Mr.Mautz has listed and that is more serious in nature. It is
the intentional effort committed by persons in positions of authority to :

20
TYPES OF ERRORS
Commission
It includes posting errors, casting errors and totalling errors. For example ale to A
has been recorded in B’s A/c, it is a posting error or it is recorded in A’s A/c but the amount is
wrongly recorded. Similarly the balance of Rs.510 is carried forward as Rs.501, and then it is a
casting error. Certain errors will not affect the trial balance for example posting in a wrong account
will not affect the trial balance but if there is a totalling error or a casting error then the trial balance
does not agree.
2.3.2 Omission
In the process of recording the accounting clerk may omit a transaction from
recording either fully or partially. If a transaction is fully omitted, then it will be difficult to trace
out, as both the debit and the credit are missing and the trial balance will tally inspite of these
errors. However if a transaction is partly omitted, then only one aspect of the transaction is
recorded. In this case it is easier to locate such an error.
2.3.3 Principle and compensating
PARTICULRS PRINCIPLE COMPENSATING MEANING A Transaction Is Basically
Recorded In The Books In An Incorrect Manner.
An error which is counter balanced by another error, so that it is not disclosed by the trial balance.
Types. (a) errors which do not affect profit: e.g. manufacturing wages posted to trade expenses
A/C or wrong classification of assets or Liabilities. (b) Error which affect profit : e.g. treating rent
paid as a debtor instead pf as expenses, when capital expenditure is treated as revenue and debited
to P&L account.
It may or may not affect profit. If both original and compensating errors arise in revenue accounts,
profit will not be affected, but if one arises in a revenue account and other in an asset or liability
account, trial balance will agree, but profit will be incorrectly stated. It arises in various ways,
most frequently in casting, e.g., cast of expenditure account may be Rs.96,000 too much, profit
and asset being thereby shown improperly. 3 Effect on trial balance.
These errors will not affect the trial balance.
These errors will not affect the trial balance. Effect on profit Error that involves income and
expenditure a/c e.g. wrong distinction between capital and revenue
Compensating errors, involving income and affect profit. But if error is in asset and liability
accounts only, profits may not be

21
TYPES OF FRAUDS
According to the standard Auditing practices issued by the Institute of Chartered
Accountants of India, the term fraud refers to intentional misrepresentation of finance information
by one or more individuals among management or third parties. In other words, it is intentional or
wilful misrepresentation r deliberate concealed of a material fact with a view to deceive, cheat or
mislead another person.
Frauds may be of different types:
i) Manipulation of accounts, ii) Misappropriation of cash, iii) Misappropriation of Goods.
Manipulation of Accounts
Manipulation of accounts is said to be committed when a person makes a false entry in the books
of accounts knowing it to be wrong, alters or destroys a true entry in the business records or
prevents the making of a true entry in the business records. Normally it is done by people at the
top management level. It is done to overstate or understate the profits and the financial conditions
of the business so as to serve their purpose. Manipulation may be done in any of the following
ways :
1) Non provisions of depreciation on fixed assets
2) Overvaluation or undervaluation of assets
3) Recording revenue expenditure as capital expenditure
4) Showing expenses of the next year in the current year’s profit and loss account
5) Not recording currents year’s accrued expenses etc. A comm0on form of manipulation of
accounts is known as “window Dressing.”
expenditure will affect profit. affected.
Detection These errors are detected by audit procedures like analytical reviews, ledger scrutiny,
analysis of comparative financial statements, etc.
Such errors are generally deliberately concealed and hence difficult to detect. Audit procedures
like analytical review, posting checking, ledger scrutiny, etc. can partly help to locate these errors.
Misappropriation of Cash
Misappropriation of cash is also called embezzlement of cash. It means fraudulent appropriation
of cash belonging to another person by one who has been entrusted to it. Misappropriation may
take place in the following ways:
1) Not recording full cash sales and pocketing a part of the proceeds
2) Teeming and Lading
3) Misappropriation the money received from sale of goods sent on sale or return basis
4) Making fictitious entries in customer’s accounts for bad debts, discount etc.
5) Misappropriation the amount received from sale of defective goods by not recording such sale

22
6) Recording fictitious cash purchase
7) Recording payments to fictitious creditors 8) Not recording discounts received from creditors
9) Recording payments to dummy or ghost workers and pocketing the money, etc.

RISK OF FRAUD AND ERROR IN AUDIT

The following events may increase the risk of fraud or error - 1. Internal Control Faults:
Weaknesses in the design of internal control system and non-compliance with laid down control
procedures, e.g. a single person being responsible for receipt of all pasts/ mails and marking it ti
the relevant secions or two persons responsible for receipt of all posts/ mails but the same is not
followed in the practice.
2. Doubts about the integrity or competence of the management, e.g. domination by one person,
high rate of employee turnover, frequent change of legal counselsof Auditors, significant and
prolonged understaffing of the accounts department, etc.
3. Unusual pressures within the entity, e.g. industry is doing well but the Company's performance
is poor, heavy dependence on a single line of product, inadequate working capital, need to show
more profit to support the share market price, etc.
4. Unusual transactions e.g. transactions with related parties,
excessive payment for certain services to lawyers, etc.
5. Problems in obtaining sufficient and appropriate auditevidence,
E.g. inadequate documentation significant differences between the figures as per accounting
records and confirmation received from third parties. Etc.

2.6 AUDITOR’S DUTIES AND RESPONSIBILITIES IN

RESPECT OF FRAUD
The primary objective of an auditor is to express an opinion on the financial statements.
However, the auditor while conducting the audit is required to consider the risk of material
misstatements in the financial statements resulting from fraud or error.
An audit conducted in accordance with the auditing standards generally accepted in India is
designed to provide reasonable assurance that the financial statements taken as a whole are free
from material misstatement, whether caused by fraud or error. The fact that an audit is carried out
may act as a deterrent, but the auditor is not and cannot be held responsible for the prevention of
fraud and error.
The auditor’s opinion on the financial statements is based on the concept of obtaining reasonable
assurance; hence, in an audit, the auditor does not guarantee that material misstatements, whether
from fraud or error, will be detected. Therefore, the subsequent discovery of a material
misstatement pf the financial statement resulting from fraud or error does not, in and of itself,
indicates: a) Failure to obtain reasonable assurance, b) Inadequate planning, performance or
judgment, c) Absence of professional competence and due care, or, d) Failure to comply with
auditing standards generally accepted in

23
India.
This is particularly the case for certain kinds of intentional misstatements, since auditing
procedures may be ineffective for detecting an intentional misstatement that is concealed through
collusion between or among one or more individuals among management. Those charged with
governance, employees, or third parties, or involves falsified documentation. Whether the auditor
has performed an audit in accordance with auditing standards generally accepted in India is
determined by the adequacy of the audit procedures performed in the circumstances and the
suitability of the auditor’s reports based on the result of these procedures.
In planning and performing his examination the auditor should take into consideration the risk of
material misstatements of the financial information caused by fraud or error. He should inquire
with the management as to any fraud or significant error. Which has occurred in the reporting
period, and modify his audit procedures, if
necessary. If circumstances indicate the possible existence of fraud and error, the auditor should
consider the potential effect of the suspected fraud and error on the financial information. If he is
unable to obtain evidence to confirm, he should consider the relevant laws and regulations before
expressing his opinion.
The auditor also has the responsibility to communicate the misstatement to the appropriate level
of management on a timely basis and consider the need to report to it then changed with
governance. He may also obtain legal advice before reporting on the financial information or
before withdrawing from the engagement. The auditor should satisfy himself that the effect of
fraud is properly reflected in the financial information or the error is corrected in case the modified
procedures performed by the auditor confirm the existence of the fraud.

2.7 BASIC PRINCIPLES OF AUDIT

AAS-1 describes the basic principles, which govern the auditor's professional responsibilities and
which should be complied with whenever an audit is carried out. These are:-
1. Integrity, objectivity and independence: The auditor should be straightforward, honest and
sincere in his approach to his professional work. He must be fair and must not allow prejudice or
bias to override his objectivity. He should maintain an impartial attitude and appear to be free of
any interest which might be regarded. Whatever it's actual effect, as being incompatible with
integrity and objectivity.
2. Confidentiality: The auditor should respect the confidentiality of information acquired in the
course of his work and should not disclose any such information to a third party without specific
authority or unless there is legal or professional duty to disclose. It is remarked that an auditor
should keep his ears and eyes open but his mouth shut.
3. Skill and competence: The audit should be performed and the report prepared with due
professional care by persons who have adequate training, experience and competence. This can be
acquired through a combination of general education, technical knowledge obtained through study
and formal courses concluded by a qualifying examination recognized for this purpose and
practical experience under proper supervision.
4. Work performed by others:
24
 When the auditor delegates work to assistant* or uses work performed by other auditors or experts,
he will continue to be responsible for forming and expressing his opinion on the financial
information. At the same time he is entitled to rely on work performed by others provided he
exercises adequate skills and care and is not aware of any reason to believe that he should not have
relied. The auditor should carefully direct, supervise & review work delegated by assistants. He
should obtain reasonable assurance that work performed by other auditors or experts is adequate
for this purpose.
5. Documentation: The auditor should document matters, which are important in providing
evidence that the audit was carried out in accordance with the basic principles.
6. Planning:
The auditor should plan his work to enable him to conduct an effective audit in an efficient and
timely manner. Plans should be based on knowledge of client's business. They should be further
developed and revised, if required, during the course of audit.
7. Audit evidence: The auditor should obtain sufficient appropriate audit evidence through the
performance of compliance and substantive test procedure. It will enable him to draw reasonable
conclusions there from on which he has to base his opinion on the financial information.
8. Accounting system & internal control: The auditor should gain an understanding of the
accounting system and related internal controls. He should study and evaluate the operation of
those internal controls upon which he wishes to rely in determining the nature, timing and extent
of other audit procedures.

9. Audit conclusions and reporting: The auditor should review and assess the conclusions drawn
from the audit evidence obtained and from his knowledge of business of the entity as the basis for
the expression of his opinion on the financial information.
The audit report should contain a written expression of opinion of the financial information. It
should comply with the legal requirements. In case of a qualified opinion, adverse opinion or
disclaimer of opinion is given or reservation on any matter is to be made reasons thereof.

25
2.7 AUDIT TYPES
MEANING:
Audit is not legally obligatory for all types of business organizations or institutions. On
this basis audits may be of two broad categories i.e., audit required under law and voluntary audits.
(i) Audit required under law : The organizations which require audit under law are the following:
(a) companies governed by the Companies Act, 1956;
(b) banking companies governed by the Banking Regulation Act,1949;
(c) electricity supply companies governed by the Electricity supply Act, 1948;
(d) co-operative societies registered under the co-operative Societies Act, 1912;
(e) public and charitable trusts registered under various Religious and Endowment Acts;
(f) corporations set up under an Act of parliament or State Legislature such as the Life Insurance
Corporation of India.
(g) Specified entities under various sections of the Income-tax
Act, 1961.
(ii) In the voluntary category are the audits of the accounts of proprietary entities, partnership
firms, Hindu undivided families, etc. in respect of such accounts, there is no basic legal
requirement of audit. Many of such enterprises as a matter of internal rules require audit. Some
may be required to get their accounts audited on the directives of Government for various purpose
like sanction of grants, loans, etc. But the important motive for getting accounts audited lies in the
advantages that follow from an independent professional audit. This is perhaps the reason why
large numbers of proprietary and partnership business get their accounts audited.
Government companies have some special feature which will be seen later.
INTERIM AUDIT: An audit that is taken up between two annual audits is called an Interim Audit.
A specific date, as per the client’s requirement is taken into account, e.g. 30th September, 31st
December, etc. a trial balance is drawn and verified with a view to prepare financial statement.
Financial statement are prepared and authenticated for the interim audit period. Assets and
liabilities are verified for interim
balance sheet purposes. Independence is considered less independent than the statutory Auditor;
generally an employee of the enterprise will be the internal auditor. In the interim audit no format
is prescribed. It depends on the nature of work, coverage and audit observations.
CONTINUOUS AUDIT:
A continuous audit is one in which the auditor’s staff is engaged continuously in checking the
accounts of the client, during the whole year round or when for the purpose, the staff attends at
quite frequent intervals say weekly basis during the financial period.

26
ADVANTAGES AND DISADVANTAGES OF AUDIT PROGRAMME
While construction an audit programme, the Auditor should keep the following points in his
mind-
1. to operate within the scope and limitations of the assignment.
2. to determine the avidence reasonably available and identify the best avidence for deriving the
necessary satisfaction.
3. to apply only those steps and procedures, which are useful in accomplishing the verification
purpose in the specific situation.
4. to consider all possibilities of error.
5. to co-ordinate the procedures to be applied to related items.

27
KEYWORDS
Auditing: Auditing is a systematic and scientific examination of the books of accounts and records
of business to enable the auditor to satisfy himself that the profit and loss account and the balance
sheet are properly drawn up so as to exhibit a true and fair view of the financial state of affairs of
the business and profit or loss for the financial period.
Continuous audit: An audit which involves a detailed and exhaustive examination of the books of
accounts at regular intervals throughout the year along with the accounting work.
Errors: Mistakes committed innocently and unknowingly while making entries in the books of
accounts.
Frauds: Fictitious entries made in the books of accounts with certain motives.
Interim audit: An audit which is conducted for a part of the accounting period for some specific
purpose.
Investigation: Examination of accounts for special purpose.
Qualified auditor: A person who is a Chartered Accountant within the meaning of the Chartered
Accountants Act,1949.
Statutory audit: An audit undertaken under any specific statute or Act.
True and fair view: A phrase which means that the financial statements must not contain anything
which is untrue, unfair, unlawful, immoral and unethical i.e. the financial statements must not
contain errors and fraud.

28
 CHAPTER – 3
COMPANY PROFILE

29
 COMPANY PROFILE

3.1 INTRODUCTION TO RETAIL INDUSTRY

MEANING OF RETAIL
Retail comes from the French word retailler, which refers to "cutting off, clip and divide" in terms
of tailoring (1365). It first was recorded as a noun with the meaning of a "sale in small quantities"
in 1433 (French). Its literal meaning for retail was to "cut off, shred, paring”. Retail is the final
stage of any economic activity. By virtue of this fact, retail occupies an important place in the
world economy. According to Philip Kotler, Retailing includes all the activities involved in selling
goods or services to the final consumers for personal, non-business use. A retailer or retail store is
any business enterprise whose sale volume comes primarily from retailing. These are the final
business entities in a distribution channel that links manufacturers to customers. Manufacturers
typically make products and sell them to retailers or wholesalers. Wholesalers resell these products
to the retailers and finally, retailers resell these products to the ultimate consumers.
Any organization selling to final consumers whether it is a manufacturer, wholesaler or retailer-is
doing retailing. It does not matter how the goods or services are sold (by person, mail, telephone,
vending machine, or internet or where they are sold-in a store, on the street, or in the consumer’s
home). A Retailer thus, provides value creating functions like assortment of products and services
to the consumers, breaking bulk, holding inventory and provides services to consumers,
manufacturers and wholesalers.
Retailing broadly involves:
1. Understanding the consumers’ needs
2. Developing good merchandise assortment and
3. Display the merchandise in an effective manner so that shoppers find it easy and attractive to
buy.
Retailing thus, may be understood as the final step in the distribution of merchandise, for
consumption by the end consumers. Put simply, any firm that sells products to the final consumer
is performing the function of retailing. It thus consists of all activities involved in the marketing
of goods and services directly to the consumers, for their personal, family or household use. In an
age where customer is the king and marketers are focusing on customer delight, retail may be
redefined as the first point of customer contact.
The distribution of finished products begins with the producer and ends at the ultimate consumer.
Between two of them there is a middleman – the retailer. Retailing is the set of business activities
that adds value to the product and services sold to the consumers for their personal or family use.
Often retailing is being thought of as the sale of products in the stores, but retailing also involves
the sales of services: overnight lodging in a hotel, a haircut, a car rental, or home delivery of Pizza.
Retailing encompasses selling through the mail, the internet, and door-to-door visits – any channel
30
that could be used to approach the consumer. Retailing is responsible for matching individual
demands of consumer with supplies of all the manufacturers.

Retailing has become such an intrinsic part of our everyday lives that it is often taken for granted.
The nations that have enjoyed the greatest economic and social progress have been those with a
strong retail sector. The world over retail business is dominated by small family run chains and
regionally targeted stores. Gradually more and more markets in the Western world are being taken
over by billion-dollar multinational conglomerates, such as Wal-Mart, McDonald’s, Marks and
Spencers, etc. The larger retailers have set up huge supply/distribution chains, inventory
management systems, financing pacts, and wide scale marketing plans which have allowed them
to provide better services at competitive prices by achieving economies of scale.
Retail Concept
The retailing concept is essentially a customer oriented, company-wide approach to developing
and implementing a marketing strategy. It provides guidelines which must be followed by all
retailers irrespective of their size, channel design, and medium of selling.
The retailing concept covers the following four broad areas:
1. Customer orientation
The retailer makes a careful study of the needs of the customer and attempts to satisfy those needs.
2. Goal orientation
The retailer has clear cut goals and devises strategies to achieve those goals.
3. Value driven approach
The retailer offers good value to the customer with merchandise keeping the price and quality
appropriate for the target market.
4. Coordinated effort
Every activity of the firm is aligned to the goal and is designed to maximize its efficiency and
deliver value to the customer.
Characteristics of Retailing
Retailing can be distinguished in various ways from other business activities. It has following
characteristics:
• There is a direct end-user interaction in retailing.
• It is the only point in the value chain to provide platform for promotions.
• Sales at the retail level are generally in small unit sizes.
• Location is a critical factor in retail business.
• In most retail business, services are as important at core products.
• There are a larger number of retail units compared to other members of the value chain. This
occurs primarily to meet the requirements of geographical coverage and

31
population density.
A retailer is a person, agent, agency, company, or organization, which is instrumental in reaching
the goods, merchandise, or services to the ultimate consumer. They are the final business in a
distribution channel that links manufacturer to consumers. Retailers perform specific activities
such as anticipating consumers’ wants, developing assortments of products, acquiring market
information, and financing. A retailer performs certain value creating functions as:
1. Providing an assortment of products and services
All retailers offer assortment of products, but they specialize in the assortments they offer.
Supermarkets provide assortments of food, health and beauty care, and household products, while
Abercrombie & Fitch provides assortments of clothing and accessories. Supermarkets typically
carry 20,000 to 30,000 different items made by over 500 companies. Offering an assortment
enables their customers choose from a wide selection of brands, designs, sizes, colors, and prices
at one location.
2. Breaking Bulk
Breaking bulk means physical repackaging of the products by retailers in small unit sizes according
to customers’ convenience and stocking requirements. Normally retailers receive large quantities
of sacks and cases of merchandise from suppliers to reduce their transportation costs. In order to
meet customer requirements retailers have to break or arrange the bulk into convenient units. The
entire function adds value to the offerings not only for the end consumers but also for the suppliers
in the value chain.
3. Holding Inventory
To ensure the regular availability of their offerings, retailers maintain appropriate levels of
inventory. Consumers normally depend on the retailers directly to replenish their stock at home.
Therefore, retailers on periodic basis, maintain the required level of inventory to meet the regular
or seasonal fluctuations in demand. They need to maintain equilibrium between the range, or
variety carried and sales which it gives rise to.

4. Extending services
Retailers provide multiple services to immediate customers and other members of value chain.
They offer credit so customer can have a product now and pay for it later. They display products
so consumers can see and test them before buying. Some retailers have sales people in the store or
use their websites to answer questions and provide additional information about products.
3.3 About Dmart
A focus on financial fundamentals, high levels of patience and strong conviction have been the
bedrock, on which the Company’s
By the late 1990s, our founder, Mr. Radhakishan Damani was already established as one of the
more successful and well known value investors in the Indian equity markets. Through his
investing style he had developed a very keen understanding of the Indian consumer sector and its
32
psyche. He was anxious to start a business beyond investing, which would enable him to test his
hypothesis about the Indian consumer. After a couple of years of introspection and research he
decided to start a grocery retail chain, focusing primarily on the value segment. values and business
direction have been built.
Avenue Supermarts Ltd (ASL), founded in 2002, is the owner of well established supermarket
chain D-Mart. ASL is amongst the largest and the most profitable Food & Grocery retailer in India.
It offers wide range of Food and non-food products. ASL operates total 160 stores in 12 states and
1 Union Territory.
DMart, our retail chain, was conceived by him in the year 2000. Mr. Damani imagined the retail
business with the same values of simplicity, speed and nimbleness that he espoused in his stellar
investing career.
A focus on financial fundamentals, high levels of patience and strong conviction have been the
bedrock, on which the Company’s values and business direction have been built.
DMart took eight years to start its first ten stores. This wasn’t because of dearth of investment
opportunities, but more because of his belief in the importance of validating the business model
from a perspective of both profitability and scalability. His beginnings at DMart were frugal. For
a number of years since inception, DMart’s corporate operations were run from a small space,
carved out from one of the early stores. He and his early leadership team worked together as one
cohesive unit without any hierarchy or barriers.
More importantly, from the very beginning he had the foresight to understand and strongly believe
that any business needs the right blend of entrepreneurship and professionalism. Entrepreneurship
to build and strengthen the concept in its formative years, professionalism to allow a committed
team to create, sustain and grow a scalable business model into the future.
Today, DMart continues to focus on this early belief system created during our formative years.
We have a great blend of entrepreneurial spirit and high quality execution. We humbly attribute
our success to the values and the way of business thinking, that our founder has instilled in us.
Company background
Incorporated in 2002, Avenue Supermarts Limited (ASL) is a Mumbai based supermarket chain
under the name of D-Mart. Company is among the largest and the most profitable F&G retailers
in India. Company offers a wide range of products with a focus on the Foods, Non-Foods (FMCG)
and General Merchandise & Apparel product categories.
Company has 160 stores spread across12 states and 1 Union Territory in India. Company also
operates distribution centres and packing centres which form the backbone of the supply chain to
support its retail store network. Company has 21 distribution centres and six packing centres in
Maharashtra, Gujarat, Telangana and Karnataka. It is classified as Non-govtcompany and is
registered at Register of Companies.

33
Board of Directors
Mr. Ignatius Navil Noronha, Managing Director & CEO
Mrs. Manjri Chandak, Non-Executive Director
Mr. Elvin Machado, Whole-time Director, Business Development
Mr. Ramesh Damani, Chairman & Independent Director
Mr. Ramakant Baheti, Whole-time Director & CFO
Mr. Chandrashekhar Bhave, Independent Director
Mr. Ignatius Navil Noronha, Managing Director & CEO
Mr. Udaya Bhaskar Yarlagadda, Chief Operating Officer, Retail
Mr. Amitabha Sen, Sr. Vice President, Human Resources
Senior Leadership Team
CORPORATE OVERVIEW STATUTORY REPORTS FINANCIAL STATEMENTS NOTICE
OF THE AGM
Mr. Ramakant Baheti, Whole-time Director & CFO
Mr. Narayanan Bhaskaran,
Mr. Samardeep Subhandh, Chief Operating Officer,
Chief Marketing Officer Supply Chain Management
Mr. Dheeraj Kampani,
Mr. Hitesh Shah, Vice President, Associate Vice President, Buying and Merchandising

FOUNDERS

DMart is owned and operated by Avenue Supermarts Ltd. (ASL) – a company founded by Mr.
Radhakishan Damani. Mr. Radhakishan Damani is respected in the business world as an astute
investor in the Indian equity market, he has built a company that constantly strives towards
developing a deep understanding of customer needs and satisfying them with the right products.
A firm believer in core business fundamentals and strong ethical values, Mr. Damani has built
DMart into an efficient, large and profitable retail chain that is highly respected by customers,
partners and employees alike.

34
 OPERATIONS OUR MISSION

At DMart, we research, identify and make available new products and categories that suit the
everyday needs of the Indian family. Our mission is to provide the best value possible for our
customers, so that every rupee they spend on shopping with us gives them more value for money
than they would get anywhere else.

OUR CUSTOMER SERVICE PLEDGE

Action

Focus: To be focused about what I do.

Motivated: To be clear of achieving my goal.
Enthusiastic: To love what I do.

Care

Respect: To respect every individual in the organisation and provide her/him with the dignity and
attention to make her/him believe that she/he makes a difference to the organisation.
Listen: To listen and resolve any employee / customer grievance quickly and fairly.

Truth

Integrity: By being open, honest and fair in all our relationships and being respectful and trustful
to others.

INDUSTRY OVERVIEW
India is a consumption-led economy with Private Final Consumption forming almost 60% of the
GDP, out of which the retail sector contributes for 50% of the Private Final Consumption
Expenditure in India.

The Indian retail industry is notorious as a fast-paced industry, due to the entry of numerous new
players. It accounts share of 10% in India’s GDP and over 8% of employment. India is world’s

35
fifth largest global destination in retail space. The country’s retail market is expected to double to
USD 1 trillion by 2020 as this expansion will be aided by urbanization attitudinal shift. While the
overall retail market is expected to grow at 12% per annum, modern trade would expand and reach
the growth rate up to 20% per annum. Whereas, it’s traditional trade is likely to expand by 10%.
E-business has also revolutionized the retail market, which is expected to reach USD 700 billion
by 2020.

36
3.4 ORGANIZED V/S UNORGANIZED RETAILING
Unorganized retailing/traditional retailing
According to the National Accounts statistics of India ‘the unorganized sector includes units whose
activity is not regulated by any statue or legal provision, and/or those, which do not maintain

37
 regular accounts. In the context of retail sector, it could therefore be said to cover those forms of
trade which sell an assortment of products and services ranging from fruits and vegetables to shoe
repair. These products or services may be sold or offered out of a fixed or mobile location and the
number of people employed could range between 10- 20 people. Thus, the traditional formats of
low-cost retailing, for example, the neighborhood baniya, the local kirana shop, owner manned
general stores, provision stores, flea (Thadi) markets, hand cart and pavement vendors, the
vegetable, fruit vendor, Mom and Pop Stores, local sabji mandi, weekly haats, general readymade
garment shop or a footwear shop, general electronic shop etc. the, the paanwala, the cobbler, etc.
would be termed as the unorganized sector.

Organized or modern retailing :

Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who
are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and
retail chains, departmental store, discount stores, drug stores, factory outlets, and also the privately
owned large retail businesses. The organized retail stores are characterized by professionally
managed stores or large chain of stores, providing goods and services that appeal to customers, in
an ambience that is encouraging for shopping and agreeable to customers.
For example:
Dmart,
Vishal Mega Mart,
Big Bazaar,
Wills Lifestyle,
Shoppers Stop,
Reliance Trends,
Spencers, Reebok,
Nike, and
Catmos, Lilliput, McDonald’s, Pizza Hut, Barista, Cafe Coffee Day, Koutons, Cotton County,
Peter England, Titan, Raymonds, Sony, Samsung, Next, LG, Apollo Pharmacy, etc.

LITIGATIONS AGAINST THE COMPANY*

 Criminal matters- 20 cases outstanding.

 Direct Tax matters- 32 cases (Amount- Rs 13.265Cr)

 Indirect Tax matters- 14 cases (Amount- Rs 8.818 Cr.)

38
 Actions by regulatory authorities- 36 cases (Amount- Rs 0.919 Cr.)

 Other matters exceeding Rs. 3.206 Cr or other material litigations- 4 cases involving an amt of Rs
24.461 Cr.
*(The number of litigations also includes those of subsidiaries, promoters, group companies, and
directors).

RISK FACTORS
 The ‘Objects of the Issue’ have not been appraised by any bank or financial institution and the
company has not entered into any definite agreement regarding the same.

 Promoters of the company own interests in other retail businesses (of a different format) which
have competing business objects.

 The company has still not been granted a certain trademarks in its name that it had applied for, due
to which unauthorised use of such trademarks can’t be prevented and that might lead to dilution
of D’Mart’s goodwill.

 The company has not paid any dividends in the past and may not pay it in the future as well.
FINANCIAL OVERVIEW
Topline growth led by Same Store Growth Plus Expansion:
D-Mart’s same store growth in last 3 years has been amazing with 26%, 22% and 21% for FY14,
FY15, and FY16 respectively.

The company had a total of 117 stores as on Dec’16 with a large revenue penetration from
Maharashtra (63% of rev in FY16), followed by Gujarat (19% of rev), Telangana (10% of rev) etc.

They plan to add 2.1 Million Square feet or about 70 new stores by 2020 (Assuming every store is
30-35k Sq Feet). +-

The company also plans to deepen its store network in southern and western India and gradually
expand the network in other parts of India pursuant to its cluster-focused expansion strategy.

39
BUSINESS MODELS IN RETAIL
India is a country dominated by local and traditional retailers and business models specific to
Indian context are bound to emerge. This section discusses some of the retail businessmodels that
have emerged and which are peculiar to the Indian landscape. These are as:
STORE BASED RETAILERS-
These operate at fixed point of sale locations. Their stores are located and designed toattract a high
volume of walk-in customers. In general, store based retailers offer a widevariety of merchandise
and use mass media advertising to attract customers. These can befurther classified on the basis of
various parameters like:
I. Ownership
II. Strategy-mix
III. Service vs. Goods retail mix.
1. OWNERSHIP BASED RETAILERS–
Depending on the ownership pattern, stores can be divided into six categories as:
Independent Stores
i. Owned by a single retailer-
ii. Low entry barriers
iii. Low initial investments
iv. Simple licensing procedures
v. Owner holds the right to decisions

40
vi. Can act as specialized stores
Chain stores
i. Have two or more retail outlets
ii. Common ownership & control
iii. Centralized purchase & merchandising.
iv. Sell similar lines of merchandise
v. Bulk purchaser, high bargaining power
vi. E.g.: Bata, Liberty, Kodak, Archies, Titan, Raymonds, LG, McDonald’s,

Franchise stores
i. Store based on contractual agreement between a Franchiser (manufacturer)& a Franchisee,
which allows the franchisee to conduct a given form of business under an established name &
according to a given pattern of business.
ii. Franchisee gets well-known brands.
iii. Exclusive rights to sell.
iv. Benefit of the nationwide promotional activities.
v. Exposure to standard operating procedures.
vi. E.g.- Aptech, McDonald’s, Monte Carlo, Koutons, Pizza-Hut,etc.
Leased Departmental store
i. A department in a retail store that is rented to an outside party.
ii. The lessee is accountable for all activities of the leased department.
iii. Adds variety to the merchandise offered by the store.
iv. No cannibalizing of sales of existing product lines of the stores.
v. Reduced cost of establishment.
vi. Increased customer traffic.
Vertical Marketing system

41
i. A distribution system in which the producers, wholesalers, & retailers actin a unified manner to
facilitate the smooth flow of goods & services tothe end-user.
ii. One channel member owns the other or has contracts with them.
Consumer Cooperatives
i. Retail operations owned & managed by its customer members.
ii. A group of customers invest in the retail operations in return of stock certificates, which entitle
them to a share in the profits of the retail store.

42
Low penetration provides huge potential for growth in F&G

Currently in the modern retail, Food & Grocery (F&G) has lower penetration compared to other
categories like apparel & accessories, footwear, jewellery & watches, consumer electronics, etc.
Going forward, we expect the penetration in this category to improve, which in turn will prove
beneficial for the big organised players like D-Marts.

Consistently improving margins in a low margin industry

While growing its business, company has not compromised on its profitability, which can be seen
in its healthy operating profit margins over FY2012-16. While it continues to attract consumers by
keeping low prices every day, it also maintains lower operating costs every day, which shows that
management is involved in the day to day operations and maintains a strong discipline in costs.
While margins are not likely to go up from the current levels, focus on strong operational efficiency
is likely to keep margins at the current levels, which we think is a comfortable level.
Track record of healthy financial performance
The company has reported revenue CAGR of ~40% over FY2012-16 on the back of strong growth
in number of stores and also growth in existing stores. On the bottom-line front, the company has
reported CAGR of ~52% over FY2012-16 on the back strong revenue growth and gradual
improvement n operating margins. Further, the company has also improved its ROE from 9% in
FY2012 to 32% in
Key risks
Increase in penetration of e-commerce
Increase in penetration of e-commerce in retails could affect the company’s profitability
Increase in competition
Due to low entry barrier in business, the company could face increased competition, which would
impact the company’s profitability

43
44
45
46
 CHAPTER - 4
DATA ANALYSIS AND INTEPRETATION

47
4.1 Introduction
In our daily work, we perform data analytics for financial statement auditors. In our experience, it
is
challenging to gain added value from applying data analytics during an audit. Often, auditors do
not
have a clear idea of what is possible with data analytics and have trouble identifying where data
analytics can add value. Even when data analytics is applied, the results are not effectively acted
upon. Because of the abundance of information, apparently auditors do not know how to process
the results.
As a part of our work, we have experience with several types of data analyses:
• Ad hoc data analytics, where an actual question is answered by applying data analytics
• Developing an interactive dashboard, where auditors can do their own analysis using a
graphical, intuitive interface
• Continuous Auditing / Monitoring systems, where reports based on audit tests are
generated periodically.
In this thesis, we consider the impact of data analytics on the audit by researching whether it has a
positive or negative impact on the efficiency of the audit. Furthermore we will discuss the way
forward based on some interviews with data analysts and auditors.
4.1.1 Objective
The goal of this thesis is to determine if data analytics has a positive impact on the efficiency of
the
audit. In this paragraph we formulate this goal as a research question, we formulate sub questions
and our hypotheses as an approach to reach our research objective.
1.1.1 Research question
Does applying data analytics during an audit have a positive effect on the efficiency of the audit?
1.1.2 Sub questions
1. What variables can sufficiently explain the audit fee?
2. What is the effect of applying data analytics during an audit on the audit fee?

48
4.1.2 Hypotheses
To define a hypothesis for our research question we have conducted a literature study into the field
of audit fees and the impact of the use of data analytics on audit fees. We have not found any
literature concerning the impact of the use of data analytics on audit fees, but based on experience
and interviews with subject matter experts suspect that there could be a dependency.
To test this dependency and to answer our research questions we consider the following two types
of audit:
I. Audits where data analytics has not been applied
II. Audits where data analytics has been applied
4.1.3 Approach
The approach we will follow to answer the research questions from 1.1.2 is shown schematically
in
Objective
Literature Study
Analyse Audit fee
Test hypothesis
Interpret Results
Conclusion

Definitions
Data analytics The extensive use of data, statistical and quantitative analysis in order to obtain an optimal or realistic
decision. Audit Providing a certain level of assurance by testing an audit object against a predefined norm by an
independent, qualified auditor. Audit fee A fee an auditee pays their external auditor in exchange for performing an
audit.

Audit where data analytics has been applied 11 Audits where extensive use has been made of data, statistical and
quantitative analysis in order to obtain optimal or realistic decisions supporting the audit work. Equity Shareholders'
equity represents the amount by which a company is financed through common and preferred shares. Gross profit Net
sales minus cost of goods sold.

Inventory The value of goods and materials that a business holds for the ultimate purpose of resale. Net Profit Gross
profit minus overheads minus interest payable for a given time period. Receivables The amount due from individuals
and companies. Total assets The sum of current and long-term assets owned by a person, company, or other entity.
Total liabilities The aggregate of all debts an individual or company is liable for Turnover The income that a company
receives from its normal business activities.

4.2 Literature
We start by defining data analytics in general in section 2.1. Then, we investigate how data
analytics can be applied in financial statement audits in section 2.2. We continue by describing

49
how auditees make use of data analytics for internal control procedures in sections 2.3Error!
Reference source not found. and 2.4. Finally, in section 2.5 we summarize prior research on
variables that predict audit fees, so that we have foundation to start our analysis in chapter 3.
4.2.1 Data Analytics
ISACA (2011) explains that data analytics processes and activities are performed and designed to
evaluate data and to generate useful information. A variety of software tools, ranging greatly in
cost and features, are used to perform data analytics. They state however, that planning the
approach to data analytics and the execution techniques are, however, usually more important
success factors than the features of the tools themselves.
Furthermore ISACA tells us that the use of data analytics usually starts off as an ad hoc data
analytics project to solve or create insight into a specific business question. If companies see the
added value of these ad hoc projects ISACA says, they could start to make repeatable, structured
and documented data analytics projects. They could even start creating a centralized business unit
to perform data analytics. Eventually a company might start implementing continuous or periodic
forms of data analytics.
4.2.2 Data analytics in audit
For audit purposes, these activities can be applied in multiple areas such as risk identification and
fraud detection. Benjaminse and Heijden (2012) and Boerkamp and Soerjoesing (2010) examples
are provided of how data analytics can be used during audits, such areas are journal entry testing,
segregation of duties and authority profile check, testing of application controls.
Byrnes, Criste, Stewart and Vasarhelyi (2014) define data analytics in audit as
“the science and art of discovering and analysing patterns, identifying anomalies, and
extracting other useful information in data underlying or related to the subject matter of an
audit through analysis, modelling, and visualization for the purpose of planning or
performing the audit.”
From the definition it is clear that these authors are of the opinion that data analytics can be applied
in several phases of an audit. Applications they state are planning, substantive testing and assisting
in forming an overall conclusion.
In the same article, Byrnes et al state that analytics can be used to achieve the same level of
assurance more efficiently, meaning at lower cost, or it can be used to achieve a higher level of
assurance at the same cost level.
Knechel (2007) asks a question that, as numbers of transactions to be audited increase rapidly, is

50
becoming more and more relevant: “Does examining a few transactions in a sea of activity provide
adequate assurance over a stream of transactions?” He comes to a conclusion that auditors do not
like to be confronted with. Budget versus sample sizes has always been a trade-off and following
traditional sampling models results in sample sizes that are often considered uneconomically large.
Therefore, auditors frequently apply sample sizes based on professional judgment that are
significantly smaller than sample sizes resulting from sampling models. The question Knechel asks
next is: “Are traditional substantive tests really as good as most believed?”
Knechel goes on to argue that analytical testing may require similar investments as traditional
substantive testing. However, analytical testing has the advantage that it provides evidence of an
entire population, rather than a sample of individual items. He suggests Continuous Auditing does
not offer benefits in terms of audit efficiency, but by offering effectiveness in the form of a higher
level of assurance.
4.2.3 Continuous Analytics
When data analytics for control testing becomes continuous or periodic, we enter the field of
continuous monitoring and continuous auditing. This means that continuous monitoring process
involves the automated testing of all transactions and system activities, within a given business
process area, against a suite of control rules. The monitoring is typically put in place in a recurrent
time frame, which is dependent on the nature of the underlying business cycle, control and
identified risks. Certain transactions are flagged as control exceptions and management is notified.
It is the management responsibility to respond to these notifications and remediate control
deficiencies and correct defective transactions. Many of the techniques of continuous monitoring
of controls by management are similar to those that may be performed in continuous auditing by
internal auditors.

51
 CHAPTER – 5
RESEARCH METHODOLOGY

52
5.1 Research methodology
Keele (2007 p. 3) states that “A systematic literature review…is a means of identifying, evaluating,
and interpreting all available research relevant to a particular research question, or topic area, or
phenomenon of interest.” Systematic research is conducted to:
•

Summarize and organize the existing research

Identify gaps in this research

Provide a framework/background to understand the research and to appropriately direct

new research activities

The main objective of this research is to explore and then categorize and synthesize the available
academic research on analytical procedures in the external audit engagement. As discussed in the
Introduction: section, a primary concern of practice is whether business analytics should be used
in the engagement, and if so, when and how often (Appelbaum, Kogan & Vasarhelyi, 2017)? And
should these techniques be more complex? Could the focus of extant research help direct practice?
However, it is not yet ascertained that these are concerns of academics historically.
The next objective is to organize these selected papers to assist in understanding this literature and
identify existing gaps and areas for further investigation. The third objective is to apply the results
to a structured framework that can appropriately direct future research activities.

Following the methodology of a systematic literature review as proposed by Keele (2007), this
research comprises the following search procedures:

Keywords search
Keywords and search strings are collected based on the research questions. This process entailed
keyword searches for “analytics”; “analytical procedures”; “analytical review”; “audit
planning”; “risk assessment”; “internal control assessment”; “compliance testing”; “statistical
analysis”; “statistical sampling”; “substantive testing activities”; “review”; “fraud”; “Going
Concern”; and “Fair Value Assessment”. Every technique type was also included in the search;
as listed in Table 7 of Appendix A.

Search strings
These are constructed from the keywords in conjunction with the research questions. The string
format is generic so that it may be used in most libraries. For example: (Management Fraud) OR
(Earnings Misstatement).

Sources
To accomplish the task of initially identifying relevant papers, the database of auditing research
compiled by a sub-committee of the AAA Auditing Section Research Committee (Trotman et al.,
53
2009) is examined for academic papers likely to discuss audit analytics. The references of these
papers are also examined for likely additions to the list and those subsequent papers are similarly
reviewed and additional references tracked, in an iterative process. This entire process is then
repeated in Google Scholar and SSRN.

Filtering
The papers selected for this study had to be published as full papers in academic journals or as
completed dissertations or as completed working papers published online. After obtaining the
results from the inclusion/exclusion lists that follow, all remaining studies were examined for the
required additional textual analysis. Table 2 shows the selection steps for the literature review.
Table 2. Format of literature selection process in a literature review (Keele 2007).
Selection
Step:

Apply keywords and strings to all sources and follow up with source references,
Step 1
gathering results until additional papers cannot be extracted

Step 2 Exclude any invalid papers

Step 3 Apply inclusion/exclusion criteria to titles, keywords, and abstracts

Step 4 Apply criteria to introductions and conclusions

Step 5 Review the entire text, applying exclusion/inclusion criteria

The complete listing of all identified papers and major categorizations can be found in Table 9
of Appendix B. The inclusion criteria are as follows:
•
Papers published in academic journals, completed dissertations available online, and
working papers published online

Papers mentioning external auditing, audit engagement, assurance services, engagement

team, public accounting/auditing, financial auditing

Papers discussing some aspect of analytical procedures/analytics/statistics/sampling/data

mining/machine learning and/or one of those techniques

Papers discussing at least one phase of the audit (see discussion that follows)

54
 Papers where analytics are not the primary focus but meet all other criteria (this is typical
for many behavioral studies)

Papers are excluded based on the following criteria:

Papers published in media that were practitioner journals at the time of publication

Conference papers and workshop papers

Incomplete papers and duplicate papers

Papers that mention “auditing” or “auditor” but do not distinguish internal from external
and do not describe or refer to a typical engagement responsibility or task

In general, a paper is considered relevant if it mentions directly external auditing and discusses an
aspect of analytics that typically belongs in at least one phase of the external audit model as
developed by Cushing and Loebbecke (1986), see Fig. 1 (Elliott, 1983). In the public company
audit setting, analytics could be the primary focus of the paper or a secondary focus or part of
another process/objective. For those papers where the use of analytics is not the primary focus,
only those papers where analytics are essential to the process/argument/study are selected. For
example, several behavioral studies are included that focus on professional judgment and utilize
analytical procedures in the experiment or survey process (e.g. Arrington et al., 1984; Asare &
Wright, 1997). Furthermore, if an analytical procedure is discussed but the typical stage of the
audit cycle for that procedure is not identified directly by the author(s) but is otherwise described,
the audit cycle is not identified in the categorization table (Table 9) in Appendix B online.

5.2 Survey results

This literature survey process encompasses a total of 572 papers across auditing, systems,
accounting, economics, and finance literature, and after applying the selection process, results in
301 papers (Table 3).
Table 3. Reasons for Literature Reduction from the total of 572 surveyed papers to 301 papers.
Number of
Running Total Number of
Exclusion Reason Publications
Included Publications
Excluded

Total Number of Papers 572

55
 Number of
Running Total Number of
Exclusion Reason Publications
Included Publications
Excluded

No mention of EXTERNAL or PUBLIC

(103) 469
Audit/phase

Not available online (usually these are

(47) 422
references from earlier publications)

APs are not mentioned (21) 401

All other exclusion reasons (100) 301

Total Exclusions (271) 301 (Total of Inclusions)

5.2.1. Literature evaluation

A large majority of the papers (80%) discuss the effectiveness or efficiency of various APs as the
primary topic. Fourteen papers mention the effectiveness and efficiency of the APs as topics for
future research. The overwhelming thrust of each paper is the quality of the performance of APs
as either a primary or secondary factor in some aspect of the external audit (Table 4).
Table 4. Research Focus of the papers that mention Analytical Procedures in the External Audit.
Number of
Focus of Research
Papers

AP use in different phases, internal controls, sampling, and evidence 177

AP as secondary emphasis to primary topics such as judgment,

60
independence, bias, and experience

APs to detect earnings misstatements and management fraud 28

Fraud detection (employee and financial statement) 14

Going Concern/Bankruptcy Assessments 18

APs for Valuations 4

Most academic research about APs in the financial audit engagement appears to be accessible
online for publications as of 1958. Although the publications were sparse for the first two decades,
this changes in the 1980’s and maintains that pace ever since for a total of 301 papers (Fig. 2).

56
Fig. 2. Number of Analytical Papers per year, from 1970 (aggregated for years prior to 1970) until
2015, in five year increments.
These papers are also classified by their research method into the following categories (Fig. 3):
•

Analytical (Simulation, Modeling, Design Science, Internal Logic (Vasarhelyi, 1982, p 48-
4)

•
Behavioral (Case Study, Experimental, Field Study, Survey, Empirical/Behavioral)

•
Archival (Empirical/Archival, Data Review/Analysis, Literature Review, Historical)

Conceptual (Discussion, Theoretical, Normative)

57
Fig. 3. Display of the number and percentage of paper types/approaches that discuss analytics in
the external audit.
Empirical methods are considered as both Behavioral and Archival since both approaches are
based on research that can be verified through experimentation or verification (Vasarhelyi, 1982,
p. 48-4; Coyne, Summers, Williams, and Wood, 2010 p 634) The research methods are described
more precisely per paper in Appendix B, but are summarized in the body of this manuscript at the
level of Analytical, Behavioral, Archival, and Conceptual, since these general approaches are
predominant. For example, a paper may be classified as a survey in Appendix B but be represented
in this figure as behavioral. These 301 papers vary in both research methods and in analytical
techniques (see Figs. 12–15 of Appendix A online). The most popular research methods are
analytical, behavioral, archival, and conceptual.
The papers are published in thirty-three different journals, with Auditing: A Journal of Practice
and Theory with the higher frequency, followed by the Accounting Review, the Journal of
Accounting Research, and Contemporary Accounting Research. Fig. 15 in Appendix A displays
the number of papers published by each journal. The earliest papers were published primarily
in The Journal of Accountancy and The Accounting Review, both of which were considered the
primary academic accounting publication venues at that time (Vasarhelyi, 1982). Prior to and
changing in the 1950’s, accounting academic literature emphasized individual expert opinion
(most papers were single authorship) and internal logic (Vasarhelyi, 1982; Vasarhelyi et al., 1988).
Academic accounting research evolved during the late 50’s and early 60’s into more empirical
thought and interdisciplinary approaches (Vasarhelyi, 1982). Prior to the advent of the Auditing:
A Journal of Theory and Practice, many papers referred to auditors as “outside accountants” or as
“accountants and auditors” (Keenoy, 1958; Arkin, 1958; Hill, 1958). Auditing became more
established as a field of its own, with unique issues of judgment and expertise that frequently were
examined with behavioral methods (Felix & Kinney, 1982).
Specific areas of emphasis for analytical review procedures in the external audit are shown in this
literature to be Financial Statement/Management Fraud (Hogan, Rezaee, Riley Jr & Velury,
2008; Trompeter, Carpenter, Desai, Jones & Riley, 2013), Going Concern Opinion (Carson et al.,
2013), and Fair Value Measurement (Martin, Rich, & Wilks, 2006; Bratten, Gaynor, McDaniel,
Montague, & Sierra, 2013).
The papers mention analytical methods in the six audit phases with the frequency shown below
in Fig. 4, organized in sequence to the typical audit engagement process. Many papers discuss

58
applying analytical methods in more than one phase, and each instance of analytical procedures in
a phase is separately counted. Analytics are discussed in the papers as follows: 36 times for the
Engagement phase, 228 times for the Planning/Risk Assessment Phase, 225 times for the
Substantive Testing Phase, 167 times for the Review Phase, 46 times for the Reporting Phase, and
not at all in the Continuous Activities Phase. Given the role of analytical procedures as prescribed
in the standards, it is not surprising that research is primarily concentrated in the phases of
planning, substantive testing, and review and minimally in the areas of engagement and reporting.

Fig. 4. Total number of papers discussing the application of analytics per Audit Phase.
The analytical procedures are also examined for each step of the C-L model (Fig. 1). Upon initial
examination, it soon became obvious that this research is broader in scope than the AP processes
detailed in Table 1. Accordingly, these techniques, detailed below as mentioned in the papers, are
categorized1 as follows:
•
Audit Examination: Ratio Analysis, Transaction Tests, Sampling, Firm Developed
Proprietary Software, Data Analytics, Data Modeling

Unsupervised2: Predictive Process Discovery, Clustering, Visualization, Simulation, Real

Time Process Analysis, Text Mining
•

Supervised3: Bayesian Theory/Bayesian Belief Networks (BBN), probability theory,

Process Optimization, Bayesian Structural Time Series (BSTS), Naïve Bayes, Fuzzy
Artificial Neural Networks (ANN), C4.5 Statistical Classifier, Random Forest, Bagging,
Stacking, Majority Vote, Multilayer Feed Forward Neural Network (MLFF)
•

Regression: Log, Linear, Time Series, Multivariate Regression Analysis, Univariate

Regression Analysis, Step-Wise Logistic, Auto Regressive Integrated Moving Average
59
 (ARIMA), Martingale Model, Multivariate Distribution, Sub-Martingale Model, Box
Jenkins (ARIMA), Discriminant Analysis, Seasonal Time Series X-11, Random Walk
(ARIMA), Ordinary Least Squares (OLS), Double-Exponential Smoothing Model, Single-
Exponential Smoothing Model, Random Walk Drift (ARIMA), Hypergeometric
Distribution, Ordinal Regression Model, Probit Model

Other Statistical Methods: Descriptive Statistics, Benfords Law, Monte Carlo

Study/Simulations, Complementary Hypothesis Evaluation, Analytic Heirarchy Process
(AHP)

The Audit Examination, Unsupervised, Supervised, Regression, and Other Statistical techniques
are considered appropriate if they had been applied in the context of the Cushing-Loebbecke model
(Fig. 1), which may also be referred to as the “traditional” external audit model. A complete listing
of the literature with audit phases and analytical techniques identified may be found online
in Appendix B.
The percentage of papers using specific analytical techniques is shown below in Fig. 5. Many
papers mention more than one analytical technique. In the realm of audit analytic techniques, the
most frequently used techniques are those of Audit Examinations followed by Regressions. Audit
Examinations were discussed 459 times; Unsupervised Methods, 43 times; Supervised Methods,
171 times; Regression, 251 times; and Other Statistical Methods, 77 times.

Fig. 5. Number of papers using certain Audit Analytics techniques in the literature.
Many of the techniques are applied to the different phases of the external audit, albeit sporadically
in the case of unsupervised and supervised methods and frequently in the case of Audit
Examination techniques and Regression techniques. Each of the audit phases of Engagement,
Planning/Risk Assessment, Substantive & Compliance Testing, Review, Opinion Formulation and

60
Reporting, and Continuous Activities exhibits academic research as follows (please see Table 8
in Appendix A and Appendix B for more detailed analysis per publication):
1.

Engagement: The papers from this phase primarily discuss ratio analysis, regression,
descriptive statistics, and expert systems, with only a few papers handling visualization,
text mining, expert systems, multi-criteria decision aids and structural models.

2.

Planning/Risk Assessment: Most of the papers in this phase deal with all types of audit
examination, all of the regression techniques, and descriptive statistics, with some
discussion of expert systems, Bayesian Belief Networks (BBN), and probability models,
and slightly less of clustering, text mining, visualization, multi-criteria decision aids, and
structural models.

3.
Substantive Testing & Compliance Testing: Audit examination techniques are enormously
popular here as were all of the regression techniques, descriptive statistics, expert systems,
BBN, and probability models. Less popular were the unsupervised methods and other
supervised techniques such as Support Vector Machines (SVM), Artificial Neural
Networks (ANN), genetic algorithms, bagging/boosting, and multi-criteria decision aids.

4.
Review: Ratio analysis and Computer Assisted Audit Techniques (CAATS) are discussed
frequently as were linear and time series regression and expert systems, with BBN,
probability models, and descriptive statistics used occasionally.

5.

Opinion Formulation and Reporting: In the opinion phase, the main techniques mentioned
are ratio analysis, visualization, expert systems, log and linear regression, descriptive
statistics and multi-criteria decision aids.

6.

Continuous Activities: None of the papers discuss analytics in the context of

ongoing/continuous activities.

All the techniques observed even once in the literature are marked in Table 5 below as to which
audit phase they occur. For example, although all instances for sampling total 164 mentions, some
variations of sampling occur more than once in some papers, resulting in a total of 145 papers
in Table 5. Additionally, Table 8 in Appendix A online contains a listing of the papers for each
technique per audit phase that have been identified in the external audit literature.

61
Table 5. Summary listing/draft framework of the techniques occurring at least once in the various Audit Phases in the
literature, where the numbers of papers containing that technique type per phase are indicated in parentheses.
Audit Other
Techniques: Unsupervised Supervised Regression
Examination Statistics

Audit Phase:

Multi-
Expert Log
Ratio Visualizations criteria
Engagement: Systems/Decision Regression
Analysis (21) (3) Decision
Aids (7) (15)
Aid (3)

Linear
Text Mining Structural
Regression
(4) Models (1)
(7)

Descriptive
Process Time Series
Statistics
Mining (1) (2)
(11)

Univariate
and
Multivariate
(6)

Multi-
Log
Transaction Process criteria
Planning: Clustering (6) Regression
Tests (20) Optimization (4) Decision
(65)
Aid (15)

Ratio Expert Linear Descriptive

Text Mining
Analysis Systems/Decision Regression Statistics
(6)
(159) Aids (33) (36) (27)

Visualizations Time Series Structural

CAATS (19) BBN (22)
(7) (33) Models (7)

Probability Model
ARIMA (9)
(19)

Univariate
and
Multivariate
(25)

62
 Audit Other
Techniques: Unsupervised Supervised Regression
Examination Statistics

Substantive & Ratio Linear

Visualizations Benford's
Compliance Analysis SVM (1) Regression
(8) Law (7)
Testing: (139) (50)

Descriptive
Sampling Text mining Time Series
ANN (8) Statistics
(145) (5) (36)
(24)

Process Genetic Structural

CAATS (21) ARIMA (12)
Mining (4) Algorithms (1) Models (7)

Univariate
Expert
and
Systems/Decision AHP (1)
Multivariate
Aids (26)
(22)

Bagging, Boosting Monte Carlo

(4) Study (3)

BBN (29)

Probability Models
(17)

Multi-
Ratio Expert Linear
Visualizations criteria
Review: Analysis Systems/Decision Regression
(8) Decision
(115) Aids (24) (36)
Aid (16)

Descriptive
Process Time Series
CAATS (14) BBN (4) Statistics
Mining (2) (28)
(23)

Probability Models Structural

ARIMA (10)
(16) Models (7)

Univariate
Hypothesis
and
Evaluation
Multivariate
(1)
(26)

63
 Audit Other
Techniques: Unsupervised Supervised Regression
Examination Statistics

Multi-
Expert Log
Ratio Visualizations criteria
Opinion: Systems/Decision Regression
Analysis (35) (3) Decision
Aids (7) (22)
Aid (3)

Linear Descriptive
Process
Regression Statistics
Mining (1)
(11) (10)

Continuous
Activities:

Based on the analysis of which techniques are used in the various audit phases in the literature, a
preliminary mapping (Table 5) has been created, based entirely on the discussions in the 301
papers. The predominant techniques for all phases belong to the Audit Examination and
Regression approaches, with some use of BBN, probability models, descriptive statistics, and
expert systems. Although it may appear in the framework that many other more complex
techniques are analyzed by audit academics, their deployment in the literature is inconsistent and
sporadic. Some techniques are discussed only a couple of times, as is the case with text mining,
visualizations, process mining, SVM, ANN, Genetic Algorithm, C4.5 Classifiers, AHP, and
hypothesis evaluation.

4. Evolution of the external audit analytics framework

The sheer number of academic papers still presents a challenge for researchers even after many
features have been described. The available academic research on analytical procedures goes well
beyond developing expectation models and testing actual results, which is the definition for
Analytical Procedures as described in the standards. The systematic research method (Keele 2007)
suggests that an organizing conceptual framework should be developed to facilitate understanding.
The aim of this structured research is not just to aggregate the evidence but to also provide
guidelines for future academic research and practitioner applications in a specific context.
A conceptual framework may be defined as “the way ideas are organized to achieve a research
project’s purpose” (Shields and Rangarajan, 2013, p. 24). The purpose of a framework is to
organize the literature to best understand how academic researchers apply analytical procedures to
the audit engagement. Since the typical engagement proceeds with the format of the audit phases,
it seems logical to organize the literature first by audit phase and then these phases are subsequently
divided by AP type. Table 5summarizes this information which is also available in more detail
with paper numbers, see Table 8 of Appendix A online. However, Table 8 may still appear
overwhelming. Therefore, it may be appropriate to organize this literature within another view of
APs, that of Business Analytics (BA).
4.1. Business analytics
Since auditors examine business financial data, much of which may be generated with applications
and analytics embedded in management enterprise systems, gaining knowledge of and perhaps

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adapting concepts of business analytics as discussed in academic literature (Holsapple et al., 2014)
could be beneficial. Business analytics is ‘the use of data, information technology, statistical
analysis, quantitative methods, and mathematical or computer-based models to help managers gain
improved insight about their operations, and make better, fact-based decisions’ (Davenport &
Harris, 2007).
The recently proposed three dimensions of Business Analytics (BA), domain, orientation, and
techniques (Holsapple et al., 2014), are useful for understanding the scope of business analytics.
Domain refers to the context or environment in which the analytics are being applied. Orientation
describes the outlook of the analytics – descriptive, predictive, or prescriptive, while techniques
refer to the analytical processes of the domain and orientation (Holsapple et al., 2014). The
feasibility of the application of a technique is dictated not only by its orientation, but also by the
available data.
In the environment that the audit team operates, the domain dimension of the client is business
enterprise and management. The three dimensions of orientation (descriptive, predictive, and
prescriptive), as discussed by Holsapple et al. (2014), should be clarified to gain an understanding
of their potential roles in the business domain. The differing orientations of these dimensions are
partly due to the availability of different types of data in conjunction with various techniques and
the capabilities of the client enterprise systems.

4.1.1. Descriptive analytics

Descriptive analytics answers the question as to what happened. It is the most common type of
analytics used by businesses (IBM, 2013) and is typically characterized by descriptive statistics,
Key Performance Indicators (KPIs), dashboards, or other types of visualizations (Dilla, Janvrin,
and Raschke, 2010). Descriptive analytics also forms the basis of many continuous monitoring
alert systems, where transactions are compared to data based analytics (Vasarhelyi and Halper,
1991) and thresholds are established from ratio and trend analysis of historical data.

4.1.2. Predictive analytics

Predictive Analytics is the next step taken with the knowledge acquisition from descriptive
analytics (Bertsimas & Kallus, 2014) and answers the question of what could happen (IBM, 2013).
It is characterized by predictive and probability models, forecasts, statistical analysis and scoring
models. Predictive models use historical data accumulated over time to make calculations of
probable future events. Most businesses use predominantly descriptive analytics and are just
beginning to use predictive analytics (IBM, 2013).

4.1.3. Prescriptive analytics

Prescriptive Analytics (Bertsimas & Kallus, 2014; Holsapple et al., 2014; IBM, 2013; Ayata,
2012) answers the question of what should be done given the descriptive and predictive analytics
results. Prescriptive analytics may be described as the optimization approach. Prescriptive
analytics go beyond descriptive and predictive by recommending one or more solutions and
showing the likely outcome of each.
The techniques for predictive and prescriptive analytics may appear similar, but their orientation
and ability to prescribe or predict depends on the type and amount of data available for analysis.
The bigger the data and more varied the data types, the more likely the solution may be
prescriptive. Prescriptive techniques may pull upon quantitative and qualitative data from internal
and external sources. Analytics based on quantitative financial data alone are utilizing only a
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fraction of all available data, since most data is qualitative (Basu, 2013). Based on business rules,
constraints, and thresholds, in a prescriptive orientation, mathematical simulation models or
operational optimization models are built that identify uncertainties and offer solutions to mitigate
the accompanying risks or adverse forecasts (Appelbaum, Kogan & Vasarhelyi, 2017; Appelbaum,
Kogan, Vasarhelyi & Yan, 2017).
The techniques of business analytics can be considered as either qualitative or quantitative, or as
deterministic or statistical, or based on unstructured, semi-structured, or structured data (Table 7,
App. A). The most traditionally used accounting techniques are those that are quantitative,
statistical, and based on structured data. While in the past most advanced business analytics
techniques came from statistical data analysis, more recently research has begun incorporating
techniques that originate in machine learning, artificial intelligence (AI), deep learning, text
mining, and data mining. Some of these recently popular techniques do not make any statistical
assumptions about underlying data, and consequently generate models that are not statistical in
nature. The techniques found in business analytics are classified in Table 7 of online Appendix
A.,4 Given the attributes of audit engagement APs as discussed in the literature, the next challenge
is to obtain an understanding of how these APs can be considered as Business Analytics. This
process starts by first understanding this literature to date, by undertaking the next steps of the
literature review process.

4.2. Given its attributes, how can this literature be presented to direct future academic
research?
One of the more common reasons for performing a literature review is to provide a framework or
context to appropriately position new research activities, having identified the extant research
(Keele 2007, p. 3). Within this scope of a review lies the opportunity to provide an overview of
the literature with the intent to influence the direction of future research. This paper began by
describing the dilemma of the current audit profession, that the emergence of big data as well as
the growing use of analytics by audit clients has brought new concerns. That is, audit clients are
progressively using more complex Business Analytics (BA) and auditors are concerned that APs
as typically and historically applied may not be relevant or effective. Since auditors examine
business financial and BA data, ideally a literature review based framework should be directed
towards these new concerns.
This section will discuss the evolution of a conceptual External Audit Analytics (EAA) framework,
where this examination of extant audit academic research regarding Analytical Procedures is
applied to the more general context of Business Analytics (BA). Although there have been many
applications of Analytical Procedures in the external audit practice5there should be a framework
providing guidance for academic research of the more complex analytical techniques.
External Audit Analytics (EAA) is defined as: the utilization of various analytical procedures,
methods, and models to facilitate the transformation of data into external audit evidence and
subsequently into audit decisions.EAA may be considered as a special sub-area of the wider area
of Business Analytics (BA) since public auditors examine business financial data.
Business Analytics in academic research is discussed in the previous section and its dimensions
(domain, orientation, context) are subsequently applied to the Analytical Procedures function of
the audit engagement. In this context, APs, as practiced to date (Table 1), are but one component
of EAA. APs in the context of EAA provide a greater scope and variation than the APs as
conventionally understood.

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The conventional Analytical Procedures (APs) process, when regarded under the view of Business
Analytics, can now be conceptually regarded as one component of External Audit Analytics
(EAA). EAA provides the generalization needed to encourage further research and use of this
expanded view of APs. For example, in Table 1 APs are limited to basic comparisons and ratio
analysis using both financial and nonfinancial data – however, EAA pertains to all BA techniques
that lend themselves to the engagement process. In this context, EAA in an audit engagement could
comprise of ratio analysis, text mining, and network mapping – a combination of quantitative and
qualitative data sources and a varied range of techniques.
Accordingly, the three BA dimensions are useful for defining EAA. The initial findings of this
literature review will be categorized by these three BA dimensions of domain, orientation, and
technique. These dimensions, particularly that of orientation, are a new way of understanding
analytics in the external audit. The process of categorizing each paper in the context of EAA
involves the following three steps:

1.

Determine the audit phase as described in the paper

2.

Determine the orientation of the research task (descriptive, predictive, prescriptive)

3.
Determine the type of analytical technique deployed in the publication

Parts of the following Fig. 11 are a high level graphic illustration of the results of this three-step
process. It illustrates a literature-based framework which identifies the APs that the papers discuss
and what type of EAA orientation and techniques were examined:

67
Fig. 11. Conceptual External Audit Analytics (EAA) Framework, where the shaded areas indicate
suggested areas of great potential for continued or additional research, based on the extant research
of Aps. The checked marked areas indicate where research has already occurred. The shaded cells
indicate where research is sorely needed, based on the potential scope of EAA.
Fig. 11 categorizes the literature at a high summary level and could be regarded as the literature
based framework for APs in the external audit domain.6 Checkmarks indicate where a paper has
been identified, based on the process for that phase/orientation/technique type. All the unchecked
blank or shaded spaces theoretically represent areas where literature has not been found to date,
yet could be potential areas of research

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 CHAPTER – 5
FINDINGS, RECOMENDATIONS
AND CONCLUSION

69
Audit findings and recommendations
The Auditor-General found that all contracts examined had established the need to procure
goods and services, undertaken an analysis of procurement options and met the tendering
requirements.593 The Auditor-General identified good practice for six key stages of procurement.
They were: 594
• identifying the goods needed to be procured;
• specifying what will be procured;
• Meeting tendering requirements;
• evaluating the bids;
• assuring a quality procurement process; and
• monitoring and evaluation of contractor performance.
Of the 64 contracts sampled, 15 contracts were then compared with the better practice for six
key stages of procurement, above, to determine how well procurement was undertaken. The
Auditor-General determined that six contracts met all six of the good practice requirements
above.595
Documentation for the remaining nine contracts was incomplete, and the Auditor-General
concluded that it was not clear whether the six stages of procurement had been followed or if
inadequate documentation had been kept.596
The Auditor-General found that monitoring and evaluating contractor performance was the
procurement stage that required the most improvement across the agencies reviewed. The Auditor-
General made two recommendations aimed at agencies involved in procurement. They were that:597
• agencies clearly specify contractor performance and key deliverables to allow them to assess
contractor performance before making payments and when deciding whether to extend, vary or re-
engage contractors; and
• Agencies keep reliable records of procurement activities to support the decisions and actions made.
The Auditor-General also recommended that the Department of Sustainability and Environment
(DSE) undertake the following actions: 598
• review procurement policies and guidelines under the Project Development and Construction
Management Act 1994 to take into account better practice identified by the Auditor-General; and
• provide guidance and training to agencies on the relevant procurement activities.
• That users be provided with the criteria used for pre-qualifying consultants; and
• that DOT work

70
Auditor Conclusion:

At the end of the audit, the external auditors prepare and deliver a summary report to the company.
The summary report details all of the findings from the audit. This includes discrepancies found
in the reporting and non-compliance of rules and regulations. The auditor findings offer the
company a way to correct any discrepancies and become compliant before a regulatory body
notices.

71
BIBLIOGRAPHY:-

Websites:-
1. www.google.com
2. www.axisauditing.com
3. www.iasb.org
4. www.acfe.com

Books:-
1., AUDITING AND ASSURANCE SERVICES: Authors Al Arens, Randy Elder and Mark S.
Beasley published this book with Pearson and the recent edition is 16th edition which was
published in 2016.
2. I.M.PANDAY, Financial Management, Vikas Publishing house Private Limited
3. Financial Statement.

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 ANNEXURES

Dear madam/sir
I HARINATH B from IZEE BUSINESS SCHOOL doing a project report on
“CONCURRENT AUDIT”. This study is only for academic purpose so please extend your co-
73
operation by filling this questionnaire. I request you to please return this questionnaire with in
2days.

A.PERSONAL DETAILS:
i.Name…………………………………………………
ii.Gender:-
1.Male
2.Female
iii.Age Group:-
1.Below 20
2.20-35
3.35-50
4.Above 50
iv.Occupation…………………………………
v.Monthly Income………………………………
B.EDUCATIONAL PROFILE:
1.Madhyamik
2.H.S
3.Graduate
4.Post-Graduate
5.Other
QUESTION1:HOW OFTEN DO YOU USE INTERNET PER WEEK?
1.One Hour
2.Two Hours
3.Three Hours
4.More Than Three Hours

QUESTION2. How have you gained the technical knowledge needed to be an external
auditor?

74
I gained a lot of the technical knowledge I need to be an external auditor while I pursued my
bachelor’s degree in accounting. I also have my Certified Information Systems Auditor
designation from ISACA, which indicates I have a lot of technical knowledge related to
information systems and operational auditing experience.

QUESTION3: How do you expect this position to help you advance your career?

QUESTION4:Do you understand the importance of communication skills for an external

auditor?

Question 5: Who Will Audit An Auditing Firm?

Question 6: What Is Final Audit?
Question 7: Do You Know The Different Types Of Audits?
Answer :
1. Statutory Audit
2. Non-statutory Audit
3. External Audit
4. Internal audit
5. Final Audit
6. social audit
7. performance Audit

Question 8: What Is Internal Audit?

Answer :
This is a review of operation carried out sometimes continuously specially assigned staff with
in the client business.

Question 9: What Is External Audit?

Answer :
External audit is that which is critical review of the representation of the published financial
statements it is compulsary for all company;s which are listed in the stock exchange.

Question 10. How Does The Internal Audit Differ From An External Audit?
Answer :
o Internal audit nothing but the checking the product that you produced.
o External audit is checking your product by your customer.

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