ANSWER:

Given Below:

Q1)

Types of Audit Risk

To understand inherent risk, it helps to place it within the context of audit risk analysis. Audit risk is the risk of error while performing an audit, and it traditionally is broken into three distinct types.

Control risk:

Control risk occurs when a financial misstatement results from a lack of proper accounting controls in the firm. This is most likely to surface in the form of fraud or lazy accounting practices.

Detection risk: It's also possible that auditors simply fail to detect an otherwise easy-to-notice error in the financial accounts. This is known as detection risk. Normally, detection risk is countered by increasing the number of sampled transactions during testing.

Inherent risk:

Considered the most pernicious of the major audit risk components, inherent risk can't be easily avoided through increased auditor training or creating controls in the auditing process. Nevertheless, it is one of the risks auditors and analysts must look for when reviewing financial statements, along with control risk and detection risk.
Common Examples of Inherent Risk

Inherent risk is common in the financial services sector. The reasons include the complexity of regulating financial institutions (the large and ever-changing amount of rules and regulations), the large networks of related companies, and the development of derivative products and other intricate instruments which require complicated calculations to assess.

Q2)

Here we present the 7 step guide to a smooth financial audit and closing of of your housing society accounts, as key takeaways from the Webinar.

1) Understanding what is being audited:

Collections made by Association from Members in form of maintenance dues, usually collected monthly or quarterly
Collections made by Association from non-members, like rent collected general store inside the apartment, etc.
Payments made by Association to Vendors. This would include payments made to Housekeeping, Security, payment for common area electricity, water, etc
Assets of the Associations like Elevators, Transformers, Generators, Water Treatment Plants, Electronics, Gym / Clubhouse equipment, etc.
Investments of the Association which are typically Fixed Deposits

2) Understanding the parties involved in the audit:

Treasurer, who is a part of the Management Committee, who is also an owner
Accountant, who does the day to day accounting entries
Auditor, is a person who will be appointed by the Association for auditing the Society Accounts

3) Setting up your Accounting System for Success:

Immediate entry of Collections into the Books is very important. With systems like a payment gateway for collecting maintenance dues, these entries happen automatically and hence save a lot of time and effort of management committee members
Daily entry of Expenses is very important
Bank Reconciliation (Matching the payments and expenses with the bank statement) should be done on a monthly basis
Monthly Payment of TDS, Service Tax, Professional Tax
Quarterly filing of TDS and Half Yearly Filing of Service Tax
Appoint an Auditor early on during the financial year. The Auditor would be able to advise you with regard to the right accounting practices which are to be followed. Its also advised if he keeps having a look into your book of accounts on a quarterly basis. This makes the audit process at the end of the financial year very smooth.

4) Accounting Discipline to be Kept in Mind:

Zero Cash Collections: This is because accounting of cash is messy and at the end of the year, unaccounted cash causes the most amount of problems
Minimal Cash Payments: It is a best practice to enter into bulk contracts with vendors, so that small payments which necessitates payment by cash, are avoided. Other than petty cash payments like refreshments for meetings, etc. its best to avoid cash payments. Cash payments made should be entered into the system on the same day.
Publishing of Cash Flow reports to Members periodically: This helps in maintaining transparency and also catching hold of any discrepancy early, rather than later in the financial year during audit.

5) Apartment Financial Audit Preparation:

During Apartment financial audit preparation there are certain aspects of your Society’s accounting which you need to take care before the auditor starts looking into your accounting system. Its best to start the audit preparation around May-June, so that as an Association you are prepared for the closing of Society Accounts well within stipulated time.

All Financial Entries should be complete: All deposits, collections, payment entries should be done in the system
Bank Reconciliation Complete: The bank balance amount which your bank is showing should match the bank balance your financial system is showing minus some floating amounts like cheques deposited but not credited yet, etc.

6) Handling the Apartment Financial Audit Process:

During the Apartment financial Audit, here are the activities conducted by the auditor:

He will review and drill down into the trial balance. A trail balance would show the balance across accounting heads, classified across assets and liabilities.
Review of bank reconciliation and matching with Bank Statement
Review of Tax Collection, Remittance and Filing
Auditor will help in Posting of Journal Entries
Accrued interest of FDs
Provision amounts which are payable in last financial year, but you do not have visibility right away
Depreciation
The Auditor would thus generate the Income & Expense Statement, take a print out of the statement from the accounting tool and put his signature and stamp on it. This would end the audit process.

7) Avoid the Frequent Mistakes made by Apartment Association or Societies:

Not performing Bank Reconciliation Regularly
Mistakes related to Taxes
Not deducting TDS from Vendor Payments
Service Tax (Service Tax to be collected if collection is equal to or greater than Rs. 5000 per household per month)
Income Tax: Any Collection from members (Owners/Tenants) is exempt from Income tax. Collection from Non-Members (Rent from Vendors, Sponsorships, etc.) is within Income Tax Scope
Here is a presentation which details out the various ADDA Features which help in making Society Accounting hassle free for Apartment Treasurers & Accountants.