Aashirwaad Notes For CA IPCC Auditing & Assurance by Neeraj Arora

9th Edition
Aashirwaad
Notes for CA IPCC
Auditing & Assurance
By Neeraj Arora
Dedicated To My Family
My Colleagues Pooja Sharma, Vrinda Chugh
My Entire office team.
वीर तम
ु बढ़े चलो धीर तम
ु बढ़े !चलो !
हाथ में ध्वजा रह़े बाल दल सजा रह़े

ध्वज कभी झुक़े नह ीं दल कभी रुक़े नह ीं
वीर तम
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ु बढ़े चलो !
सामऩे पहाड़ हो ससींह की दहाड़ हो

तम
ु ननडर डरो नह ीं तम
ु ननडर डटो वह ीं
वीर तम
प्रात हो कक रात हो सींग हो न साथ हो

सर्
ू य स़े बढ़े चलो चन्द्र स़े बढ़े चलो
वीर तम
एक ध्वज सलऱ्े हुए एक प्रण ककऱ्े हुए

मात ृ भसू म क़े सलऱ्े पपत ृ भसू म क़े सलऱ्े
वीर तम
अन्द्न भसू म में भरा वारर भसू म में भरा

र्त्न कर ननकाल लो रत्न भर ननकाल लो
वीर तम
About CA Neeraj Arora
Qualification
• Chartered Accountant
• Certificate Course in Indirect Taxes by ICAI
• MBA
• M.com
• LL.B.
• B.com
Experience
• Addressed more than 40,000 CA Students
• Addressed more than 5,000 professionals like CA, CS, MBA etc.
• Taught Technical Subjects to More Than 10,000 Students.
Subjects he teaches-
1. CA IPCC Taxation
2. CA IPCC Auditing & Assurance
3. CA IPCC Strategic Management
Books written by him

1. CA IPCC Strategic Management – सींजीवनी बूट
2. CA IPCC Indirect Tax – ज्ञान धारा
3. CA IPCC Direct Tax – राम बाण
4. CA IPCC Auditing & Assurance – आशीवायद
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INDEX
1. Basics of Auditing
2. Audit Evidence
3. Materiality & Sampling
4. Audit Process & Documentation
5. Internal Control, Internal Check & Internal Audit
6. Audit in CIS Environment
7. Audit Report
8. Government Audit
9. Remaining SAs
10. Company Audit
a. Chapter X of Companies Act, 2013 (Audit & Auditors)
b. Company (Audit & Auditors) Rule 2014
11. Accounts of Company
12. Vouching & Verification
13. Special Audit
14. CARO
15. Miscellaneous items under Companies Act, 2013
16. Audit of Share Capital
17. AASB & Other Topics related to it.
18. November 2015 Question Paper
19. Miscellaneous Questions & Topics
Short Codes Which Are Used in this book
1. PPFS – Preparation and presentation of financial statements

2. DIMIC – Design, implementation & Maintenance of Internal Control
3. IC - Internal Control
4. TCWG – those charge with governance
5. S&AE – Sufficient & Appropriate audit evidence
6. AP – Audit Procedures
7. AE – Audit Evidence
8. AR – Audit report
आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C1
Chapter 1 -Introduction to Auditing .
Meaning & definition

 Audit is an
 Independent
 examination of financial information
 of an entity, (whether profit oriented or not and irrespective of its size or legal form),
 where such an examination is conducted with a view to expressing an opinion thereon.
How Audit is conducted? (An Overview)

 Engagement will take place (Details in Chapter 4 & SA 210)
 He will visit the entity to be audited.
 He will understand the entity (Nature, its Accounting System, its Environment, and Style of
working, Management’s policy & procedures.)
 He will evaluate the above things and will do planning
 Then he will start his procedures.
 He will obtain evidences on which he will base his conclusion.
 Finally he will report (Give his opinion)
o Obtain reasonable assurance that financial statements are free from material
misstatements. (RA – FS – F- MMS)
o Form an opinion whether the financial statement are prepared as per applicable
F.R.F and FS comply all disclosure and other requirements (FS – P- AFRF& FS – C -
DOR)
o Opinion must clearly state the financial statement represents true and fair view
of the state of affairs of the organization. (FS – R – T&F – SoA)
Meaning of True & Fair View

Concept of "True and Fair": The phrase "true and fair" in the auditor's report signifies that the auditor is
required to express his opinion as to whether the state of affairs and the results of the entity as ascertained
by him in the course of his audit are truly and fairly represented in the accounts under audit.
What constitutes a true and fair view is a matter of the auditor's judgement in the particular circumstances
of the case. In specific terms to ensure truth and fairness, an auditor has to see:
(i) that the assets are neither undervalued or overvalued;

(ii) no material asset is omitted;
(iii) the charge on assets, if any, is disclosed;
(iv) material liabilities should not be omitted, and liabilities are neither undervalued or overvalued;
(v) accounting policies have been followed consistently;
(vi) all unusual, exceptional, non-recurring items have been disclosed separately;
(vii) accounts have been drawn as per requirement of Schedule III to the Companies Act; and
CA Neeraj Arora Page 1.1

(viii) the accounts have been drawn in compliance to the relevant accounting standards. In
case of deviation from accounting standards, disclosure should be made of the reasons for
such deviation and financial effects, if any arising due to such deviation.
November 2016 Question

Discuss the following - What constitutes true and fair view is a matter of auditor’s judgement, but some specific
points must be seen by the auditor to ensure true and fair view. (5 Marks) Q1(b)
NOTE – We will also discuss the meaning of True and Fair View in context of company audit while studying
company audit. Sections to be referred 128,129,143.
SAs to Be Covered with Chapters (Remaining SAs Given Separately in chapter 9)
S.No. SA No. Name Chapter Number

1. 200 Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on
Auditing
2. 210 Agreeing the terms of audit Engagements
3. 230 Audit Documentation
4. 300 Planning an Audit of Financial Statements
5. 315 Identifying and Assessing the Risks of Material Mis-
statement through Understanding the Entity and Its
Environment
6. 320 Materiality in Planning and Performing an Audit
7. 330 The Auditor's Responses to Assessed Risks
8. 500 Audit Evidence
9. 505 External Confirmations
10. 520 Analytical Procedures
11. 530 Audit Sampling
12. 580 Written Representations
13. 610 Using the Work of Internal Auditors
14. 700 Forming an Opinion and Reporting on Financial
Statements
15. 705 Modifications to the Opinion in the Independent Auditor's
Report
16. 706 Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor's Report
SA 200 Overall objectives of the independent auditor and the

conduct of an audit in accordance with SAs (DETAILED)
Applicable financial Reporting framework
The financial reporting framework

• adopted by management and, where appropriate, those charged with governance
• in the preparation and presentation of the financial statements
• that is acceptable in view of
o the nature of the entity and

o the objective of the financial statements, or
o that is required by law or regulation.
The applicable financial reporting framework often encompasses

• financial reporting standards established by an authorised or recognised standards setting
organisation,
• or legislative or regulatory requirements.
• In some cases,
o the financial reporting framework may encompass
▪ both financial reporting standards established by an authorised or recognised
standards setting organisation and
▪ legislative or regulatory requirements.
Financial Statements
 A structured representation
 of historical financial information
 Including related notes
 intended to show entity's economic results & position AUTHOR’s NOTE -This is very
 as per applicable F.R.F. important. Also Study it as
basic responsibility of Mgt. It
will be used in many chapters
mug it up
Pre–Conditions for an Audit
In Order to establish whether the pre-conditions for an audit are present, the auditor shall
a. Determine whether the financial reporting framework is acce ptable.
b. Obtain the agreement of management that it acknowledges and understands its responsibility
 For preparation of the financial statements in accordance with the applicable financial
reporting framework.
 For the internal control as management considers necessary
 To provide auditor with
 Access to all information such as records, documentation and other matter s;
 Additional information that the auditor may request from management for the
purpose of audit; and
 Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence
Professional Skepticism
The auditor is responsible for maintaining an attitude of professional skepticism throughout
the audit. Do you agree with the statement?
As per SA 200, "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with Standards on Auditing",
• Professional skepticism is an attitude that includes a questioning mind,

• being alert to conditions which may indicate possible misstatement due to error or fraud,
• and a critical assessment of audit evidence.
This includes
• questioning
o contradictory audit evidence and
o the reliability of documents and
o responses to inquiries and
o other information obtained from management and those charged with governance.
• Checking whether audit evidence obtained by auditor is sufficient and appropriate as per
the circumstance
Why Professional Skepticism? (ररस्क को कम करना चाहत़े है !)

Maintaining professional skepticism throughout the audit is necessary to reduce the risks of
• overlooking unusual circumstances,
• over generalising when drawing conclusions.
कौनस़े ररस्क को ओवर लुककीं ग क़े और ओवर ग़ेऩेरल ससींग क़े ररस्क को
Further, while obtaining reasonable assurance, the auditor is responsible for maintaining professional
skepticism throughout the audit,
• considering the potential for management override of controls and (कह ीं मैऩेजमें ट override तो नह ीं कर रह
कींट्रोल्स को)
• recognizing the fact that audit procedures that are effective for detecting error may not be effective
in detecting fraud. एरर तो पकड़ सकत़े है पर फ्रॉड नह ीं
• assessing the risks of material misstatement due to fraud and in designing procedures to detect such
misstatement. (ROMM को Assess करऩे क़े सलए और Mst को डडट़े क्ट करऩे क़े सलए)
Therefore, we do agree with the statement.

Professional Judgment
The ability to make considered decisions or come to sensible conclusions
 It is necessary to make proper decisions during audit.

 For example, decisions about: -
1. Materiality
2. Audit risk
3. NTE of audit Procedure
4. Sufficiency & appropriateness of evidence etc.
 While making professional judgment he considers level of consultation, if required
 It also needs to be appropriately documented.
Reasonable Assurance
 A high
 But not absolute
 level of assurance
• How reasonable assurance is obtained?

o By obtaining sufficient and appropriate audit evidence to reduce audit risk
Audit risk
Risk that auditor expresses inappropriate opinion when financial
statements are materially misstated.
Inherent Limitation of audit SA 200

♥ Discuss Limitation of audit. (Most Important)
Limitations of Audit: As per SA 200 "Overall Objectives of the Independent Auditor and the Conduct of an
Audit in Accordance with Standards on Auditing", the objectives of an audit, is to enable an auditor to
express an opinion on such financial statements.
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement due to fraud or error.
This is because there are inherent limitations of an audit, which result in most of the audit evidence on
which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than
conclusive

The process of auditing, however, is such that it suffers from certain limitations, i.e. the limitation which
cannot be overcome irrespective of the nature and extent of audit procedures. The limitations of an audit
arise from:
i. The Nature of Financial Reporting:

• The preparation of financial statements involves judgment by management.
• In addition, many financial statement items involve subjective decisions or
assessments or a degree of uncertainty.
• Consequently, some financial statement items are subject to an inherent level of
(पररवतयनशीलता)
variability which cannot be eliminated by the application of additional
auditing procedures.
ii. The Nature of Audit Procedures: There are practical and legal limitations on the auditor's ability
to obtain audit evidence. For example:
• There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and
presentation of the financial statements or that has been requested by the auditor.
• Fraud may involve sophisticated and carefully organized schemes designed to conceal
it. The auditor is neither trained as nor expected to be an expert in the authentication
of documents.
• An audit is not an official investigation into alleged wrongdoing. Accordingly, the

auditor is not given specific legal powers, such as the power of search, which may be
necessary for such an investigation.
iii. Timeliness of Financial Reporting and the Balance between Benefit and Cost:
• The relevance of information, and thereby its value, tends to diminish overtime,
• and there is a balance to be struck between the reliability of information and its cost.
There is an expectation by users of financial statements that the auditor will form an
opinion on the financial statements within a reasonable period of time and at a
reasonable cost.
iv. Other Matters that Affect the Limitations of an Audit: In the case of certain assertions or subject
matters, the potential effects of the limitations on the auditor's ability to detect material
misstatements are particularly significant. Such assertions or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.

- The existence and completeness of related party relationships and transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to continue as a going
concern.
Because of the limitations of an audit, there is an unavoidable risk that some material
misstatements of the financial statements may not be detected, even though the audit is
properly planned and performed in accordance with SAs.
However, the inherent limitations of an audit are not a justification for the auditor to be satisfied
with less-than-persuasive audit evidence.

Whether the auditor has performed an audit in accordance with SAs is determined by the
• audit procedures performed in the circumstances,
• the sufficiency and appropriateness of the audit evidence obtained
• and the suitability of the auditor’s report based on an evaluation of that evidence in light of
the overall objectives of the auditor
Scope of Audit
The scope of audit is determined by the auditor having regard to following
• Terms of audit engagement
• Requirement of relevant law
• Pronouncements of ICAI
However, the terms of engagement cannot supersede the requirements of Law or Pronouncement of ICAI
Note on Objective of Audit

Primary Objective is forming an opinion on financial statements. (Discussed earlier)
Secondary Objective –
 Primary Responsibility of prevention, d etection & correction of m iss tatements (PDC - MS) is that
of management. (As per SA 240 - THE AUDITOR’S RESPONSIBILITY TO CONSIDER FRAUD AND ERROR IN AN
AUDIT OF FINANCIAL STATEMENTS) Details of SA 240 will come in Chapter 9
 However, if there are doubtful situation that some material misstatement exist, auditor should extend
(very important line)
his procedure to confirm/dispel the doubt.
 Because of inherent limitation of audit
o he can’t detect all the misstatements
o there is an unavoidable risk that some material misstatements in the financial statements
will not be detected even though the audit is properly planned and performed in accordance
with SAs
 The risk of non-detection of a material misstatement resulting from management fraud is higher.
(Be alert).
 He should maintain professional skepticism
 He should discuss the doubt of fraud with his team.
 If Auditor performs his works in compliance with all SAs, he cannot be held liable for non -
detection of misstatement in financial statement of client.
“ If there remains a deep laid fraud in the accounts, which in the normal course of examination of
accounts may not come to light, it will not be construed as failure of audit, provided the auditor was
not negligent in carrying out his normal work”
“It is no part of the auditor’s duty to give advice either to directors or shareholders as to what they
ought to do”
His opinion does not assure (i) future viability of entity or (ii) efficiency or
effectiveness, with which the management has conducted the affairs of the entity

In some cases, applicable law & regulation may require auditor to express opinion on some specific matters.
Then auditor should undertake further work (As in The Companies Act, 2013 – Details in company audit chapter)
Misstatements in the financial statements can arise from either fraud or error.
The distinguishing factor between fraud and error is whether the underlying action that results in the
misstatement of the financial statements is intentional or unintentional.
Fraud’ deals with intentional misrepresentation but, ‘error’, on the other hand, refers
to unintentional mistakes in financial information.
The subsequent discovery of a material misstatement of the financial statements resulting from
fraud or error does not by itself indicate a failure to conduct an audit in accordance with SAs.
However, the inherent limitations of an audit are not a justification for the auditor to be satisfied
with less-than-persuasive audit evidence. Whether the auditor has performed an audit in
accordance with SAs is determined by the audit procedures performed in the circumstances, the
sufficiency and appropriateness of the audit evidence obtained as a result thereof and the
suitability of the auditor’s report based on an evaluation of that evidence in light of the overall
objectives of the auditor.
Conduct of Audit in accordance with SAs.

Complying with SAs. Relevant to the audit
• He shall comply with relevant SAs.
• An SA is relevant if it is effective and circumstances stated in that S A exist.
• He shall represent compliance with SAs in auditor’s report only if he has complied with
requirements of all relevant SAs.
• (For Ex. SA 610 using the work of an internal auditor is not applicable when there is no
internal auditor)
• Also Refer 143 (9) & 143 (10) of Companies Act 2013
Objectives stated in individual SAs.
• He shall determine whether any additional procedure is required to fulfill the objectives
stated in SA.
• He shall evaluate whether sufficient appropriate evidence has been obtained keeping in
view the objectives stated in SA.
Complying with relevant requirement

• He shall comply with each requirement of a SA unless
i. Entire SA is not relevant or,
ii. Requirement is not relevant because it is conditional & the condition is not
present.

• However, in exceptional circumstances, he may depart from relevant requirement in SA.
He shall perform alternative procedures in that case. (Example will be given later on with
SA 505)
Failure to achieve an objective in relevant SAs.

• In that case, he shall consider the need to
i. Modify the audit report, or
ii. Withdraw from the engagement.
• It is a significant matter requiring documentation as well.

Auditing and Investigation (M. Imp)

To understand auditing in its correct perspective, one should know how auditing is distinct from
investigation.
Auditing is different from investigation which is another significant service, a professional accountant
renders.
 Investigation is a critical examination of the accounts with a special purpose.

 For example if fraud is suspected and an accountant is called upon to check the accounts to
whether fraud really exists and if so, the amount involved, the character of the en quiry changes
into investigation.
 Investigation may be undertaken in numerous areas of accounts, e.g., the extent of waste and
loss, profitability, cost of production, etc.
 It normally concerns only specified areas, but at times, it may involve the whole field of
accounting. Its essence lies in going into the matter with some pre -conceived notion suited to the
objective.
 The techniques fit the circumstances of the case.
 For auditing on the other hand, the general objective is to find out whether the accounts show a
true and fair view.
 Audit never undertakes discovery of specific happenings and is never started with a pre-
conceived notion about the state of affairs.
 The auditor seeks to report what he finds in the normal course of examination of the accounts
adopting generally followed techniques unless circumstances call for a special probe: fraud, error,
irregularity, whatever comes to the auditor's notice in the usual course of checking, are all looked
into in depth and sometimes investigation results from the prima facie findings of the auditor.
Difference between Audit and Investigation

Basis Audit Investigation
i. Objective To judge truthfulness and fairness of To establish a specific fact
financial statement
ii. Scope By law & Standards on Auditing By terms of engagement
iii. Period Yearly It depends on requirement
iv. Nature General examination Detailed and critical examination
v. Inherent More Less (because of detailed checking)
limitations
vi. Evidences Persuasive Conclusive
vii. Reporting General Purpose Confidential
viii. Approach No doubtful approach Doubtful approach
ix. By whom Chartered Accountant Expert Team

Annexure for Your Reading
General Purpose Financial Statements

Financial Statements include the following:
(a) Profit & Loss Account: Which indicates profit earned or loss incurred during a particular
financial year.
(b) Balance Sheet: Which shows position of assets & liabilities at a particular date.
(c) Cash flow & Funds flow Statement: Which shows movement of cash/ funds during a
particular financial year (However these are not prepared by all entities).
(d) Notes to accounts: i.e. Disclosures or explanatory notes.
Financial statements may also include supplementary schedules and other information for example
information about geographical segments of business.
Financial statements does not include, directors report, chairman statements, discussion and analysis
by management and similar items that may be included in a financial report or annual report.
Users of financial statements

Owner
▪ For evaluating performance of business.
▪ For evaluating profitability of business.
Management
▪ For evaluating their own performance.
▪ For making decisions.
▪ For judging tax liabilities.
▪ For estimating expected future outcomes.
Lenders & creditors

▪ For judging credit worthiness of the entity.
▪ For judging recoverability of their dues.
Customers
▪ For determining general consistency of the business.
Government
▪ For calculation of direct tax.
▪ For levying excise duty, VAT, etc.
Employees
▪ For determining reasonableness of wages & salaries etc.
▪ For creating demand for extra bonus.
Research analysts etc

▪ For evaluating trends.
▪ For judging investment opportunities in the entity.

RELATIONSHIP OF AUDITING WITH OTHER

DISCIPLINES
Accounting
• Auditor provides opinion on financial statements.
• For this, he has to review & evaluate the financial statements.
• Thus, he should have thorough & sound knowledge about Accounting principles & form and
• Contents of financial statements.
• It requires complete expertise of accounting concepts.
DIFFERENCE BETWEEN AUDITING AND

ACCOUNTING
Basis Accounting Auditing
Meaning Accounting is the art of Recording, It is Independent Examination of
Classifying & Summarizing financial financial information of an entity to
Information. express an opinion thereon.
Function It records financial aspects of entity It reviews the accounting system.
By whom Any person having good Statutory audit can only be conducted
knowledge of accounting. by a chartered accountant.
Principles As per accounting standards. As per auditing standards.
Primary To maintain accounts& prepare To conduct audit in an effective way is
responsibility financial statements is the the responsibility of auditor.
responsibility of management.
Expertise Accounting expertise. Accounting & auditing Expertise (both).
Time of Accounts are prepared by the Auditing is examination of financial
occurrence management prior to get them information, thus can't be conducted
audited. prior to accounting.
INDEPENDENT AUDIT
(Imp. Question – What are the advantages of

independent audit?)
Meaning of Independence
• Independence means that the judgment of a person is not subordinate to wishes of another person.
• It requires that he should not act under any influence.
• Thus, he can work in a complete unbiased manner.
Auditor's Independence
• The need for auditor independence is provided in Standards on Auditing.

• THE COMPANIES ACT, 2013 also contains specific provision to ensure auditor's independence.
• Moreover, as per THE CHARTERED ACCOUNTANTS ACT, 1949, independence of auditor is required.
Why independence
• If auditor maintains high degree of independence, credibility of financial statements is enhanced.
• Independent audit report will be accepted & respected by all stakeholders.
Advantages of independent audit (Most Important)
Question
What are the advantages of an independent audit? (It is one of the most important question but for better understanding
do it after studying 5 chapters)
Answer
Advantages of an Independent Audit
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may be
easy to understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these
are of considerable value even to those enterprises and organisations where audit is not compulsory, these
advantages are given below
(i) It safeguards the financial interest of persons who are not associated with the management of
the entity, whether they are partners or shareholders.
(ii) It acts as a moral check on the employees from committing defalcations or embezzlement.
(iii) Audited statements of account are helpful in settling liability for taxes, negotiating loans and for
determining the purchase consideration for a business.
(iv) These are also useful for settling trade disputes for higher wages or bonus as well as claims in
respect of damage suffered by property, by fire or some other calamity.
(v) An audit can also help in the detection of wastages and losses to show the different ways by
which these might be checked, especially those that occur due to the absence or inadequacy of
internal checks or internal control measures.
(vi) Audit ascertains whether the necessary books of account and allied records have been properly
kept and helps the client in making good deficiencies or inadequacies in this respect.
(vii) As an appraisal function, audit reviews the existence and operations of various controls in the
organisations and reports weaknesses, inadequacies, etc., in them.
(viii) Audited accounts are of great help in the settlement of accounts at the time of admission or
death of partner.
(ix) Government may require audited and certified statements before it gives assistance or issues
a license for a particular trade.
Space for class notes

Point Description Link

♥ Discuss pre-requisites and fundamental principles to be possessed by an auditor. (Imp

Question)
Prerequisites or fundamental principles in Auditor: It is in the best interest of the accountancy

profession to make known to users, of the services provided by an auditor that they are executed at
the highest level of performance and are in accordance with ethical requirements that strive to
ensure such performance. In order to achieve the objectives of accountancy profession, the auditor
have to observe a number of prerequisites' or fundamental principles as under:
(i) Integrity: An auditor should be straight forward and honest.

(ii) Objectivity: An auditor should be fair and should not allow prejudice or bias, conflict of interest
or influence of others to override objectivity.
(iii) Professional competence and due care: An auditor should perform his duty with due care,
competence and diligence and has a continuing duty to maintain professional knowledge and
skill at a level required to ensure that a client or employer receives the advantage of competent
professional service based on up-to- date developments in practice, legislation and techniques
(iv) Confidentiality: An auditor should respect the confidentiality of information acquired during the
course of an audit and should not use or disclose any such information without proper and
specific authority or unless there is a legal or professional right or duty to disclose.
(v) Professional behavior: An auditor should act in a manner consistent with the good reputation of
the profession and refrain from any conduct which might bring discredit to the profession.
(vi) Technical Standard: An auditor should carry out professional accordance with the relevant
technical and professional standards.

Point Description Link
Integrity
Objectivity
Professional
Competence
Confidentiality
Professional
Behaviour
Technical -
standard
♥ Explain the basic principles governing audit. (8 Marks)
Basic Principles Governing an Audit

The basic principles which govern the auditor's professional responsibilities and which should be
complied with wherever an audit is carried are described below:

(i) Integrity, objectivity and independence: The auditor should be straight forward, honest and
sincere in his approach to his professional work. He should maintain an impartial attitude and
both be and appear to be free of any interest which might be regarded, whatever is actual
effect, as being incompatible with integrity and objectivity.
(ii) 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 a legal or professional duty to disclose.
(iii) Skills and Competence: The audit should be performed and the report prepared with due
professional care by persons who have adequate training, experience and competence in
auditing. The auditor requires specialised skills and competence along with a continuing
awareness of developments including pronouncements of the ICAI on accounting and auditing
matters, and relevant regulations and statutory requirements.
(iv) Work performed by others'. When the auditor delegates work to assistants or uses work
performed by other auditors and experts, he continues to be responsible for forming and
expressing his opinion on the financial information. However, he will be entitled to rely on work
performed by others, provided he exercises adequate skill and care and is not aware of any
reason to believe that he should not have so relied.
(v) Documentation: The auditor should document matters which are important in providing
evidence that the audit was carried out in accordance with the basic principles.
(vi) 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 the client's business.
(vii) Audit evidence: The auditor should obtain sufficient appropriate audit evidence through the
performance of compliance and substantive procedures to enable him to draw reasonable
conclusions therefrom on which to base his opinion on the financial information.
(viii) Accounting system and Internal Control: The auditor should gain an understanding of the
accounting system and related controls and 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.
(ix) 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 clear written opinion on the financial information and should comply
the legal requirements. When a qualified opinion, adverse opinion or a disclaimer of opinion is to be
given or reservation of opinion on any matter is to be made, the audit report should state the reasons
therefore.

♥ State True or false. The principle of confidentiality precludes auditor to disclose the
information about the client to a third party at all circumstances without any exception.
False: The principle of confidentiality is one of the basic principles of auditing. Auditor is generally
not expected to disclose the information of his client to others. But it is not the case always. he can
disclose the information to others if (a) permitted by his client or (b) he has to disclose it as per any
statutory obligation dictated by any law.
♥ Aspects to be covered in Audit (This is a very General Question, just read it 3 to

4 times)
The principal aspect to be covered in an audit concerning final statements of account are the following:
An examination of the system of accounting and internal control to ascertain whether it is appropriate for
the business and helps in properly recording all transactions.
1. Reviewing the system and procedures.

2. Checking of the arithmetical accuracy of the books of accounts.
3. Verification of the authenticity and validity of transactions in the books of accounts
4. Ascertaining that a proper distinction has been made between items of capital and of revenue
nature.
5. Comparison of the balance sheet and profit and loss account or other statements with the
underlying record.
6. Verification of the title, existence and value of the assets appearing in the balance sheet.
7. Verification of the liabilities stated in the balance sheet.
8. Checking the result shown by the profit and loss and to see whether the results shown are true and
fair.
9. Where audit is of a corporate body, confirming that the statutory requirements have been complied
with.
10. Reporting to the appropriate person/body.

Points Description Link
♥ Mention briefly the conditions or events, which increase the risk of fraud or error leading to material misstatement in Financial
Statements. (Homework Question)
Answer
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. Weaknesses in the design of the internal control system and non-compliance with identified control
procedures amongst other conditions or events which increase the risk of fraud or error are:

(i) Weaknesses in the design of internal control system and non-compliance with the laid down control procedures,
(ii) Doubts about the integrity or competence of the management, e.g., domination by one person, high turnover rate of employees,
frequent change of legal counsels or auditors, significant and prolonged understaffing of the accounts department, etc.
(iii) Unusual pressures within the entity, for example, industry is doing well but the company is not performing accordingly, heavy
dependence on a single line of product, inadequate working capital, entity needs raising share prices to support the market price in
the wake of public offer, etc.
(iv) Unusual transactions such as transactions with related parties, excessive payment for certain services to lawyers, etc.
(v) Problems in obtaining sufficient and appropriate audit evidence, e.g., inadequate documentation, significant differences between
the figures as per the accounting records and confirmation received from third parties, etc.
An Auditor has nothing to do with prudence or profitability of the company (Correct/Incorrect) May 2016
Incorrect – Companies Act, 2013 requires the auditor to go beyond the functions of reporting and express an opinion about the
propriety or prudence of certain transactions.
Also auditor shall remain alert throughout the audit for audit evidence of events or conditions that cast significant doubt on
the entity’s ability to continue as going concern.
Therefore, it would not be correct to say that an auditor has got nothing to do with prudence or profitability of a company
because it may impact the going concern.
C/IC – Substantive procedures do not test the balance of accounts
INCORRECT – They are designed to detect the material misstatements at the assertion level. It comprise (i) Test of details (of
classes of transactions, account balances, and disclosures) and (ii) Substantive analytical procedures

Chapter 2 Audit Evidence

SA 500 Audit Evidence
Audit Evidence Sufficient and

appropriate audit
evidence
Information used
Includes
by auditor
Information in
In arriving at
accounting
Other Sufficiency Appropriateness
conclusion Information
records
Underlying the
On which auditor
financial Quantity
opinion is based
statements
Quality / Relevance &
Reliability
In providing support
to conclusions on
Factors to determine which auditor opinion
is based
Sufficiency &
Appropriateness
(a) Degree of risk of misstatement.
(b) The result of audit procedures i.e. any fraud & error detected by auditor.
(c) Materiality of item.
(d) Type of information available.
(e) Experience gained during previous audit.
(f) Trend shown by accounting ratios etc.
AUDIT TECHNIQUES
Meaning
Audit techniques refer to certain means & methods for collecting evidences.
Difference between Audit Procedures & Audit Techniques
Basic Procedures Techniques

Meaning Basic way to handle audit work Methods are employed for
conducting procedures.
Types Two types: Many (Inspection, observation
Compliance & Substantive etc)

1. Inspection
• Inspection consists of examining records, documents or tangible assets. Documents
may be internal or external, in paper form, electronic form, or other media.
• An example of inspection is inspection of records for evidence of authorization.
• Inspection of tangible assets may provide reliable audit evidence with respect to their
existence, but not necessarily about the entity's rights and obligations or the
valuation of the assets.
2. Observation
• Observation consists of witnessing a process or procedure being performed by others.
• For example, the auditor may observe the counting of inventories being performed
by client's personnel.
3. Inquiry and Confirmation

• Inquiry consists of seeking appropriate information from knowledgeable persons
inside or outside the entity.
• Confirmation consists of the response to an inquiry.
• For example, the auditor requests confirmation of receivables by direct
communication with debtors.
4. Recalculation
• Recalculation consists of checking the mathematical accuracy of documents or
records. Recalculation may be performed manually or electronically.
5. Analytical Procedures
• Analytical Procedures refers to studying significant ratios and trends and
investigating unusual fluctuations.
6. Re-performance
• Re-performance involves the auditor's independent execution of procedures or
controls that were originally performed as part of the entity's internal control.
Inconsistency or doubts over reliability of audit

evidence.
The auditor shall determine what
• modifications or additions to audit procedures are necessary to

resolve the matter,
• and shall consider the effect of the matter, if any, on other aspects of the
audit.

Types of Audit Evidence
According to nature
1. Visual For example, observing stock taking conducted by client's staff.
2. Documentary For example, Having a copy of loan agreement, sales bills etc.
3. Oral For example, discussion with management regarding current trends in business.
According to source
1. Internal Which is created within client's organisation. For example., copies of bi ll given to
customers, employee's wage sheets etc.
2. External This originates outside client's organisation. For example, purchase invoice bank
statement etc.
Difference between Internal & External Evidence
Basis Internal External

Origin Within the Organisation Outside the Organisation
Reliability Less More
Auditor’s Provided to the auditor by the It may sometime be obtained directly
Role sources internal to the organisation. by the auditor from the sources
outside the organisation
Example Sales Invoice Purchase invoice, Bank Statement
Reliability of Audit Evidence – Most Imp

Reliability of Audit Evidence: As per SA 500 "Audit Evidence", the reliability of information to be used as audit evidence, and
therefore of the audit evidence itself, is influenced by its
• source and
• its nature, (Direct, indirect, oral, written or original, photocopies) and
• the circumstances under which it is obtained,
• including the controls over its preparation and maintenance where relevant.
Generalisations about the reliability of various kinds of audit evidence are subject to important exceptions.
Even when information to be used as audit evidence is obtained from sources external to the entity, circumstances may exist
that could affect its reliability.
For example, information obtained from an independent external source may not be reliable if the source is not knowledgeable,
or a management's expert may lack objectivity.
While recognising that exceptions may exist, the following generalisations about the reliability of audit evidence may be useful
(i) The reliability of audit evidence is increased when it is obtained from independent sources outside the entity.

(ii) The reliability of audit evidence that is generated internally is increased when the related controls,
including those over its preparation and maintenance, imposed by the entity are effective.
(iii) Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more
reliable than audit evidence obtained indirectly or by inference (for example, inquiry about the application of a control).
(iv) Audit evidence in documentary form, whether paper, electronic, or other medium, is more reliable than evidence
obtained orally (for example, a contemporaneously written record of a meeting is more reliable than a subsequent
oral representation of the matters discussed).
(v) Audit evidence provided by original documents is more reliable than audit evidence provided by photocopies
or facsimiles, or documents that have been filmed, digitised or otherwise transformed into electronic form, the
reliability of which may depend on the controls over their preparation and maintenance.
(vi) Circumstance prevailing in the organisation can have severe impact on the reliability of the audit evidence.
Management's expert
An individual or organisation possessing expertise in a field other than accounting or
auditing, whose work in that field is used by the entity to assist the entity in preparing the
financial statements.
Using the information of management expert as audit evidence.

When information to be used as audit evidence has been prepared using the work of a management's
expert, the auditor shall,
1. Evaluate the competence, capabilities and objectivity of that expert;
2. Obtain an understanding of the work of that expert; and
3. Evaluate the appropriateness" of that expert's work as audit evidence for the relevant
assertion.
SA 505 External Confirmations
External Confirmation.
Question
Explain the process of external confirmation. Give some examples where external confirmation can be used as audit evidence.
(M. Imp)
Answer
According to SA 505 on"
External Confirmation,
it is the process of obtaining and evaluating
through a direct communication
from a third party
information about a particular item affecting assertions made by the management in the financial statements.
When using external confirmation procedures, the auditor shall maintain control over external control requests, including:
(i) Selecting the items for which confirmations are needed. (कौन स़े आइटम्स क़े सलए)
(ii) Determining the information to be confirmed or requested; (क्र्ा)
(iii) Selecting the appropriate confirming party; (ककस स़े)

(iv) Designing the confirmation requests, including determining that requests are properly addressed and contain
return information for responses to be sent directly to the auditor; and (Properly Designed, Addressed, return
information)
(v) Sending the requests, including follow-up requests when applicable, to the confirming party. (भ़ेजो और फोलो उप
रखो)
Examples of situations where external confirmations may be used include the following
(1) Bank balances and other information from bankers.

(2) Accounts receivable balances.
(3) Stocks held by third parties.
(4) Property title deeds held by third parties.
(5) Investments purchased but delivery not taken.
(6) Loans from lenders.
(7) Accounts payable balances.
(8) Long outstanding share application money.
(9) Terms of Agreement or transaction with the third parties
Mgt. refusal to allow the auditor to send a confirmation request-

In such case, he shall
• Inquire mgt's reasons for refusal and assess their validity,
• Evaluate the possibility of risk of material misstatement and
• Perform alternative procedures.
NOTE
 If mgt's refusal is unreasonable, or
 Auditor is unable to perform alternate procedures
 Then he shall communicate with TCWG and consider effect on his report.
Question
The accountant of C Ltd. has requested you, not to send balance confirmations to a particular group of debtors since the said
balances are under dispute and the matter is pending in the Court. Comment.
Answer
External Confirmation Requests: SA 505, “External Confirmations”, establishes standards on the auditor’s use of external
confirmation as a means of obtaining audit evidence.
It requires that the auditor should employ external confirmation procedures in consultation with the management.
The auditor may come across certain situations in which the management may request him not to seek external confirmation
from certain parties because of dispute with the debtors, etc.
The management, for example, might make such a request on the grounds that due to a dispute with the particular debtor, the
request for confirmation might aggravate the sensitive negotiations between the entity and the debtor.
In such cases, when an auditor agrees to management’s request not to seek external confirmation regarding a particular debtor,
the auditor should consider validity of grounds for such a request and assess management’s integrity and obtain
evidence to support the same.
The auditor should also ask the management to submit its request in a written form, detailing therein the reasons for such a
request.

The auditor agrees to management’s request not to seek external confirmation regarding a particular matter, the auditor should
document the reasons for agreeing to the management’s request and should apply alternative procedures to obtain
sufficient appropriate evidence regarding that matter.
While considering the validity of request, in case the auditor reaches at a conclusion that the same was not valid, he may
appropriately modify the report.
In the present case, the accountant of C Ltd. Has requested the auditor not to send balance confirmation requests to a particular
group of debtors due to dispute.
It appears to be a valid ground. The auditor shall accept their request but he must perform alternative procedures. Such as
• Examine Sales invoice.
• Discussion with lawyer with respect to recoverability of amount.
If he is satisfied after applying alternative procedure he shall express a clean opinion, otherwise he shall consider modifying the
audit report as per the circumstances
Reliability of Response
• If he has doubts about reliability of response, he shall obtain further evidences to resolve
doubts
• If response is found to be unreliable, it may indicate fraud risk factor. He shall consider its
effect on NTE of other procedures.
Types of confirmation requests
Positive confirmation requests

 It asks the third party (Confirming party)
 to reply to the auditor
 in all cases
 Either by indicating agreement / disagreement with the given information
 Or by asking third party to provide information
 A response to positive Confirmation request is ordinarily expected to be reliable.
 If reply to a request is not received in reasonable time, he may send an additional confirmation
request.
Negative confirmation requests

 It asks the third party
 to respond directly to the auditor
 only if there is disagreement
 with the information provided in the request.
 It is considered to be less persuasive than the positive confirmation request.
 Auditor should use them only if all of following are present:
a. Risk of misstatement is low
b. I.C is effective
c. Item contains small amount
d. Low exception rate is expected

e. No reason to believe that recipient may disregard the request.
Non - response to positive confirmation request

(1) It means failure of third party to respond or the request returned undelivered.
(2) In case of each non- response he shall perform alternate procedures.
(3) However, if he determines that response is necessary & thus alternate procedures do not
provide sufficient appropriate evidences, he should determine its effect on audit report.
Exception
• It means a response indicating disagreement of third party.
• Auditor shall investigate exceptions to determine whether these are indicative of
misstatement.
SA 580 - WRITTEN REPRESENTATIONS

Written representations (They are also known as management representation letter or simply
management representation)
• A written statement
• by management provided
• to the auditor
o to confirm certain matters or
o to support other audit evidence.
NOTE – Financial statements are not written representation
From Whom
Auditor shall request written representations from management with appropriate
responsibilities for the financial statements and knowledge of the matters concerned.
Form of Written Representations

The written representations shall be in the form of a representation letter addressed to the
auditor.
Written Representations as Audit Evidence (Similar to responses to enquiries)

• Similar to responses to inquiries, written representations are audit evidence.
• Although written representations provide necessary audit evidence, they do not provide
sufficient appropriate audit evidence on their own about any of the matters with which they
deal.
• The fact that management has provided reliable written representations does not affect the
nature or extent of other audit evidence that the auditor obtains.

Objectives of auditor -
written representation
Obtain Support Respond appropriately
written representations other audit evidence by to written representations

from management means of written provided by management
representations
that management believes or absence thereof.

that it has fulfilled the if determined necessary by
fundamental the auditor
responsibilities.
PPFS, DIMIC, Al info, or required by other SAs
additonal Info,
uncrestricted access
Date of and Period(s) Covered by Written Representations

• The date of the written representations shall be as near as practicable to, but not after, the
date of the auditor's report on the financial statements.
• The written representations shall be for all financial statements and period(s) referred to in
the auditor's report.
• If law or regulation requires management to make written public statements about its
responsibilities, the relevant matters covered by such statements need not be included in the
representation letter.
Question – May 2014 – 5 marks – Q4(a)

What do you mean by "Written Representations"? As an auditor, how you will deal if management does not
provide requested written representations?
Answer
Written Representations: As per SA 580, "Written Representation", is a written statement by management provided
to the auditor to confirm certain matters or to support other audit evidence.
These representations are an important source of audit evidence.
If management modifies or does not provide the requested written representations, it may alert the auditor to the
possibility that one or more significant issues may exist.
Requested Written Representations not provided by Management: If management does not provide one or more
of the requested written representations,
(i) the auditor shall discuss the matter with management;
(ii) re-evaluate the integrity of management and evaluate the effect that this may have
on the reliability of representations (oral or written) and audit evidence in general; and

(iii) take appropriate actions, including determining the possible effect on the opinion in the
auditor's report.
The auditor shall disclaim an opinion on the financial statements if management does not provide the
written representations.
Question
An auditor of Mohan Ltd. was not able to get the confirmation about the existence and value of certain
machineries. However, the management gave him a certificate to prove the existence and value of the machinery
as appearing in the books of account. The auditor accepted the same without any further procedure and signed
the audit report. Is he right in his approach?
Answer
Validity of Management Representation:
• The physical verification of fixed assets (Inventory) is the primary responsibility of the management. The
auditor, however, is required to examine the verification programme adopted by the management.
• He must satisfy himself about the existence, ownership and valuation of fixed assets or (inventory).
• In the case of Mohan Ltd., the auditor has not been able to verify the existence and value of some machinery
(inventory) despite the verification procedure followed in routine audit.
• He accepted the certificate given to him by the management without making any further enquiry.
• As per SA 580 “Written Representation” the representations received from management are recognized as
audit evidence, but they do not constitute Sufficient and appropriate audit evidence.
• Auditor is required to seek corroborative audit evidence from other sources inside or outside the entity, to
evaluate whether such representations are reasonable and consistent with other evidences.
• Representation received from Management cannot be a substitute for other audit evidence that the auditor
could reasonably expect to be available.
• Conclusion: The approach adopted by the auditor is not right.
Question Bank for Audit Evidence
♥ Explain various methods to obtain audit evidence.

Methods to obtain Audit Evidence: The auditor obtains evidence in performing compliance and substantive procedures
by one or more of the following methods: -
(i) Inspection: Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset.
Inspection of records and documents provides audit evidence of varying degrees of reliability, depending on their
• nature and source and,
• In the case of internal records and documents, on the effectiveness of the controls over their
production.
An example of inspection used as a test of controls is inspection of records for evidence of authorisation.

Inspection of such documents may not necessarily provide audit evidence about ownership or value. In addition,
inspecting an executed contract may provide audit evidence relevant to the entity's application of accounting
policies, such as revenue recognition.
Inspection of tangible assets may provide reliable audit evidence with respect to their existence, but not necessarily
about the entity's rights and obligations or the valuation of the assets. For this their ownership documents must be
inspected.
(ii) Observation: Observation consists of looking at a process or procedure being performed by the others. For example, the
auditor's observation of inventory counting by the entity's personnel, or of the performance of control activities.
Observation provides audit evidence about the performance of a process or procedure, but is limited to the point in time
at which the observation takes place, and by the fact that the act of being observed may affect how the process or
procedure is performed.
(iii) External Confirmation: An external confirmation represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic or other medium.
External confirmation procedures frequently are relevant when addressing assertions associated with certain account
balances and their elements. However, external confirmations need not be restricted to account balances only. For
example, the auditor may request confirmation of the terms of agreements or transactions an entity has with third
parties; the confirmation request may be designed to ask if any modifications have been made to the agreement and, if
so, what the relevant details are. External confirmation procedures also are used to obtain audit evidence about the
absence of certain conditions, for example, the absence of a "side agreement" that may influence revenue recognition.
(iv) Recalculation: Recalculation consists of checking the arithmetical accuracy of documents or records. Recalculation may
be performed manually or electronically.
(v) Re-performance: It involves the auditor's independent execution of procedures or controls that were originally
performed as part of the entity's internal control.
(vi) Analytical Procedure: Analytical procedures consist of evaluations of financial information made by a study of plausible
relationships among both financial and non-financial data. Analytical procedures also encompass the investigation of
identified fluctuations and relationships that are inconsistent with other relevant information or deviate significantly
from predicted amounts.
(vii) Inquiry: Inquiry consists of seeking information of knowledgeable persons, financial and non- financial, within the entity
or outside the entity. Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries
may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of
the inquiry process.
It may be noted that the two terms, procedure and techniques, are often used inter-changeably; in fact, however, a distinction
does exist. Procedure may comprise a number of techniques and represents the broad frame of the manner of handling the
audit work; techniques stand for the methods employed for carrying out the procedure. For example, procedure requires an
examination of the documentary evidence, which would involve techniques of inspection and checking cSomputation of
documentary evidence.
♥ Audit Techniques
For collection and accumulation of audit evidence, certain methods and means are available and these are known as
audit techniques. Some of the techniques commonly adopted by the auditors are the following:
(i) Posting checking

(ii) Casting checking

(iii) Physical examination and count
(iv) Confirmation
(v) Inquiry
(vi) Year-end scrutiny
(vii) Re-computation
(viii) Tracing in subsequent period
(ix) Bank Reconciliation
The audit techniques stand for the methods employed for carrying out the procedure. For example, procedure requires
an examination of the documentary evidence. This job is performed by the procedure known as vouching which would
involve techniques of inspection and checking computation of documentary evidence.
♥ What are the factors that are to be considered while designing a confirmation request? (8 Marks)
As per SA -505 "External Confirmations", the design of a confirmation request may directly affect the confirmation
response rate, and the reliability and the nature of the audit evidence obtained from responses.
The following factors should be considered while designing a confirmation request: -
(i) The assertions being addressed.
(ii) Specific identified risks of material misstatement, including fraud risks.
(iii) The layout and presentation of the confirmation request.
(iv) Prior experience on the audit or similar engagements.
(v) The method of communication (कैस़े बताऱ्े)
(vi) Management's authorisation to the confirming parties to respond to the auditor. Confirming parties may only
be willing to respond to a confirmation request containing management's authorisation. (क्र्ों तझ
ु को चाह़े -
Management ki हााँ)
(vii) The ability of the confirming party to provide the requested information (र्ारा बता न पाए – ability)
♥ Inquiry is one of the audit procedures to obtain audit evidence. (5 Marks)
Inquiry consists of seeking information of knowledgeable persons, financial and non- financial, within the entity or outside
the entity. Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries may range
from formal written inquiries to informal oral inquiries.
Evaluating responses to inquiries is an integral part of the inquiry process.
Responses to inquiries may provide the auditor with information not previously possessed or with corroborative audit
evidence.
Alternatively, responses might provide information that differs significantly from other information that the auditor has
obtained, for example, information regarding the possibility of management override of controls. In some cases,
responses to inquiries provide a basis for the auditor to modify or perform additional audit procedures.
Although corroboration of evidence obtained through inquiry is often of particular importance, in the case of inquiries
about management intent, the information available to support managements intent may be limited. In these cases,
understanding managements past history of carrying out its stated intentions, management's stated reasons for choosing
a particular course of action, and management's ability to pursue a specific course of action may provide relevant
information to corroborate the evidence obtained through inquiry. ln respect of some matters, the auditor may consider
it necessary to obtain written representations from management and, where appropriate, those charged with
governance to confirm responses to oral inquiries.
♥ The reliability of audit evidence is influenced by its source, nature and circumstances under which it is obtained.
♥ Distinguish between Internal evidence and External evidence

Internal evidence and external evidence: Evidence which originates within the organization being audited is internal
evidence. Example - sales invoice, copies of sales challan and forwarding note, goods received notes, inspection report,
copies of cash memo, debit and credit notes, etc.

External evidence on the other hand is the evidence that originates outside the client's organization; for example,
purchase invoice, supplier's challan and forward note, debit notes and credit notes coming from parties, quotations,
confirmations, etc.
In an audit situation, the bulk of evidence that an auditor gets is internal in nature. However, substantial external evidence
is also available to the auditor. Since in the origination of internal evidence, the client and his staff have the control, the
auditor should be careful in putting reliance on such evidence.
It is not suggested that they are to be suspected; but an auditor has to be alive to the possibilities of manipulation and
creation of false and misleading evidence to suit the client or his staff.
The external evidence is generally considered to be more reliable as they come from third parties who are not normally
interested in manipulation of the accounting information of others. However, if the auditor has any reason to doubt the
independence of any third party who has provided any material evidence e.g., an invoice of an associated concern, he
should exercise greater vigilance in that matter. As an ordinary rule the auditor should try to match internal and external
evidence as far as practicable.
Where external evidence is not readily available to match, the auditor should see to what extent the various internal
evidence corroborates each other.
♥ Explain what you mean by Analytical procedures. How such procedures are helpful in auditing?
SA 520 'Analytical Procedures': As per SA 520 the term "analytical procedures" means evaluations of financial information
through analysis of possible relationships among both financial and non-financial data.
Analytical procedures help in identifying fluctuations or relationships that are inconsistent with other relevant information
or that differ from expected values by a significant amount.
Analytical procedures include the consideration of comparisons of the entity's financial information with, for example:
• comparable information for prior periods,
• anticipated results of the entity,
• such as budgets or forecasts, or expectations of the auditor,
✓ such as an estimation of depreciation and similar industry information,

✓ such as a comparison of the entity s ratio of sales to accounts receivable with industry averages or with other
entities of comparable size in the same industry.
Analytical procedures also include consideration of relationships,

For example:
• among elements of financial information
• that can be predicted based on the entity's experience,
• such as gross margin percentages and
• between financial information and relevant non-financial information, such as payroll costs to number of
employees.
Various methods may be used to perform analytical procedures.

These methods range from performing simple comparisons to performing complex analyses using advanced statistical
techniques. Analytical procedures may be applied to consolidated financial statements, components and individual
elements of information.
Analytical procedures are used for the following purposes:

(i) To obtain relevant and reliable audit evidence.
(ii) To form an overall conclusion as to whether the financial statements are consistent with the auditor's
understanding of the entity.

♥ What do you mean by the term 'Sufficient Appropriate Audit Evidence'? State various factors that help the auditor to
ascertain as to what is sufficient appropriate audit evidence.
Sufficient appropriate audit evidence: The auditor shall design and perform audit procedures that are appropriate in the
circumstances for the purpose of obtaining sufficient appropriate audit evidence.
SA 500 on 'Audit Evidence' further expounds this concept. According to it, the sufficiency and appropriateness of audit
evidence are interrelated. Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence
needed is affected by the auditor's assessment of the risks of misstatement (the higher the assessed risks, the more audit
evidence is likely to be required) and also by the quality of such audit evidence (the higher the quality, the less may be
required). Obtaining more audit evidence, however, may not compensate for its poor quality.
Appropriateness is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support
for the conclusions on which the auditor's opinion is based. The reliability of evidence is influenced by its source and by its
nature, and is dependent on the individual circumstances under which it is obtained.
SA 330 requires the auditor to conclude whether sufficient appropriate audit evidence has been obtained.
Whether sufficient appropriate audit evidence has been obtained to reduce audit risk to an acceptably low level, and
thereby enable the auditor to draw reasonable conclusions on which to base the auditor's opinion, is a matter of
professional judgment.
Further, SA 200 contains discussion of such matters as the nature of audit procedures, the timeliness of financial reporting,
and the balance between benefit and cost, which are relevant factors when the auditor exercises professional judgment
regarding whether sufficient appropriate audit evidence has been obtained.
In general, the various factors which may influence the auditor's judgment as to what is sufficient and appropriate audit
evidence are as under:
(i) Degree of risk of misstatements which may be affected by factors such as the nature of items, adequacy of
internal control, nature and size of businesses carried out by the entity, situations which may exert an unusual
influence on management and the financial position of the entity.
(ii) The materiality of the item.
(iii) The experience gained during previous audits.
(iv) The results of auditing procedures, including fraud and errors which may have been found.
(v) The type of information available.
(vi) The trend indicated by accounting ratios and analysis.

Chapter 3: Sampling & Materiality

SA 320 – Materiality in planning & performing an audit.
Example on materiality
In a company having turnover of Rs. 50 Lakhs P.A. and a profit of Rs. 2 Lakhs P.A. The damages paid of Rs. 1 Lakh may be material and therefore may require separate
disclosure because of its relative size. However, the same information may not be material for a company having turnover of Rs. 100 Crore P.A. and profit of Rs. 15
Crore P.A. Violation of Law even of a very small amount will be considered as material.
The auditor’s determination of materiality is a matter of professional judgement and is effected by auditor’s perception of financial information needs of the users
of the financial statements.
Concept of Materiality SA 320
AS 1 Disclosure of Accounting Policy Relationship between materiality and audit risk: There is an inverse
relationship between materiality & Audit Risk
Material Items are those items the knowledge of which

might influence decisions of the users of the financial
statements
If inherent and control risk of an organisation
are high then we have to keep our materiality
level low.
Audit Materiality: Information is material if its mis-

statement could influence the economic decisions of the
users taken on the basis of the financial information
It may be quantitative or qualitative
Sometimes, the concept of materiality is also discussed in financial reporting framework but it is discussed in the context of
preparation and presentation of financial statements, not from the point of view of auditing but the bases which are used in
FRF can also be used for determining the level of materiality in auditing. FRF generally considers the following things for
determining materiality
• Items which could reasonably be expected to influence the economic decision of the user of the financial
statements.
• Surrounding circumstances & auditor’ perception of the financial information needs of the user of the financial
statements.
• Common financial information needs of the users or a particular group

If FRF discusses the factors effecting materiality it gives auditor a starting point for determining the level of materiality but of
such things are not discussed auditor may use the 3 things mentioned above as per his judgement.
The concept of materiality is applied by auditor

• In planning the audit
• Performing the audit
• Effect of identified misstatement (after SA 450)
• Effect of uncorrected misstatements. (after SA 450)
Question
Materiality and audit risk – Short Note (Imp.)
Answer
Materiality and Audit Risk: SA 320 on 'Materiality in Planning and Performing an Audit' requires that the auditor should
consider materiality and its relationship with audit risk when conducting an audit.
Auditor is required to obtain more reliable evidence in support of material items.
o Materiality depends on the size and the nature of the items judged in the particular set of circumstances..
o The audit should be planned so that audit risk is kept at an acceptably low level.
o There is an inverse relationship between Materiality and the degree of audit risk.
o Accordingly, if we have high risk in an organisation we should keep our materiality level low.
o Higher the materiality levels the lower the audit risk and vice-versa.
o Audit Risk has three components – Inherent risk (IR), Control Risk (CR) & Detection Risk.
o If a company is having low IR & CR then the chances are material misstatement are also low.
o Auditor will keep his materiality level high. So if Risk is less Materiality levels will be high.
o If Risk is high auditor will keep his materiality level low so that he can detect greater number of misstatements.
PLEASE NOTE IR CR & DR will be explained in detail in Chapter Number 5.
NOTE
Auditor’s preliminary assessment of materiality helps the auditor to decide the question as to what items to
examine and whether to use sampling in audit procedure. By this exercise he will reduce the audit risk to an
appropriately low level.
Factors to be considered for determining materiality

1. Materiality of an item may be determined individually or in aggregate.
2. The materiality depends on the regulatory or legal considerations.
3. It has qualitative dimensions as well
4. Even INSIGNIFICANT items in terms of quality may be material in special circumstances.
5. Sometimes the materiality of an item in terms of quantity is described in law itself, For example, Schedule III
requires disclosure of items of expenditures which are in excess of 1 percent of the revenue from operations
or Rs. 1,00,000 whichever is higher.
6. An item whose impact is insignificant at present, but in future it may be significant may be material item.
Example of Qualitative misstatements
Inadequate or improper description of accounting policy
Performance Materiality
✓ For purposes of the SAs,
✓ Performance materiality means
✓ the amount or amounts set by the auditor
✓ at less than materiality
✓ for the financial statements as a whole
✓ to reduce to an appropriately low level
✓ the probability
✓ that the aggregate of misstatements exceeds materiality for the financial statements as a whole.
✓ If, there is one or more particular item

✓ for which misstatements of lesser amounts than the materiality for the financial statements as a whole
could reasonably be expected
✓ to influence the economic decisions of users taken on the basis of the financial statements,
✓ the auditor shall also determine the materiality level or levels to be applied to those particular item.
Revision as the Audit Progresses

• The auditor shall revise materiality for the financial statements as a whole if during the audit he
obtained certain information which could have impact on materiality determined in the beginning.
• Reasons may be as follows
a. Change in circumstances
b. Change in auditor’s understanding of entity, it’s operation and it’s internal control while
performing audit.
c. New information
• If the auditor concludes that a change in materiality for the financial statements as a whole than that
initially determined is appropriate, the auditor shall determine whether it is necessary to revise
performance materiality, and whether the nature, timing and extent of the further audit procedures
remain appropriate.
Benchmarking
1. Meaning: Benchmarking is one recognized method through which an Auditor determines the
materiality level. Under this method, a percentage is often applied to a chosen benchmark, as
a starting point in determining materiality for the Financial Statements as a whole.
2. Factors: Factors that may affect the identification of an appropriate benchmark include –
(a) Elements of the Financial Statement (e.g., Assets, Liabilities, Equity, Revenue,
Expenses)
(b) Whether there are items on which the attention of the users of the particulars Entity’s
Financial Statement tends to be focused (e.g., profit, revenue or net assets)
(c) Nature of the Entity, where the Entity is at in its life cycle, and the industry and
economic environment in which the Entity operates
(d) Ownership Structure and Financial Pattern (e.g., if an entity is financed more by Debt
rather than Equity, users may put more emphasis on Assets, and claims on them, than on the
Entity’s Earning) and

(e) The relative volatility of the benchmark.
Some examples of suitable benchmark depending upon various circumstances
Selection of Appropriate Benchmarks: Examples of benchmark that may be appropriate, include categories of
reported income such as PBT, Total Revenue, Gross Profit and Total Expenses, Total Equity or Net Asset Value.
(a) Profit Before Tax from continuing operations is often used for profit-oriented entities.
In this regard if Profit Before Tax from continuing operations is volatile, other
benchmark may be more appropriate.
(b) In an audit of the entities doing public utility programs/projects, Total Cost or
Net Cost (Expenses less Revenues) may be appropriate benchmarks for that particular
program/project activity.
(c) Where an entity has custody of the assets, assets may be an appropriate
benchmark.

Audit Sampling SA 530

1. Application of Audit Procedure to less than 100% of the population.
2. Every item must have equal chance of selection
3. Main Objective is to draw Conclusion about the population
4. Also known as test checking.
Audit Sampling SA 530
Why sampling Where sampling cannot be applied
Not Enough time for detailed BRS - bank Reconciliation Statement

examination
Few Transacations,
Large number of transaaction
and balances
Few Transacations :
Identical items High Amount , related parties,
unusual nature, Foreign Exchange
If Compliance procedures reveals that Disclosure requirement in As

ICS (Internal Control System) are strong
then detailed checking is not required
Compliance with statutory

provision
Significant Entries near year

end period
Internal controls are weak
What precautions should be taken by an auditor while applying test check techniques?
Test Check Technique: While adopting test check technique, an auditor should take following precautions:
-
(i) PROPER CLASSIFICATION

The transactions of the concern should be classified under appropriate heads and may be
stratified in case of wide variations between the transactions of the same kind.
(ii) STUDY OF VARIOUS ASPECTS

Authorizations, documentations, recording of the transactions should be studied right from the
beginning to end.
(iii) INTERNAL CONTROL

Evaluating the system of internal control for its efficiency, soundness and capability to produce
reliable accounting and financial data.
(iv) PLANNING
Preparation of test check plan with clear audit objective understood by the audit staff.
(v) Un-biased selection of the transactions with reference to the random number tables or other
statistical methods.
(vi) Identification of the areas where test check may not be done.
(vii) APPROPRIATE SIZE

Based on degree of reliance and the confidence level required in the audit, the number of
transactions to be selected for each test plan should be pre-determined.
(viii) Setting up criteria to judge what constitute material or immaterial errors. Further investigation of
only material errors be carried out and all immaterial errors may be avoided.
Important Notes
1. Sample Size - Auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably
low level.
2. Selection of items for testing - Samples should be selected in such a way that every item must have an
equal chance of selection.
3. Sample Design – While designing an audit sample auditor should consider the purpose of audit
procedure and characteristic of population from which the sample will be drawn

Sampling
Risk
Non-sampling risk - The risk that the

auditor reaches an erroneous conclusion
for any reason not related to sampling
risk.
Meaning In compliance
It arise from procedure In substantive
procedure
possibility that
Auditor's
conclusion based
upon sample, Risk of under reliance Risk of over reliance Risk of incorrect Risk of incorrect
Based upon sample, Based upon sample, Rejection Based upon Acceptance
May be different auditor concludes that auditor concludes that sample, auditor Based upon
from, I.C. system is not I.C. are very effective concludes that sample auditor
Conclusion that adequate, however & thus decides to rely transactions/ balances concludes that
would have been actually it is not so. on them, however it is are materially transactions/ balances
reached, not so in reality. misstated, whereas in are not materially
fact these are not. misstated while in fact
If same audit
these are misstated.
procedures were
applied on entire Auditor will have to do
population. more work however Auditor will have to do
audit report is not This may lead to more work however
It is always in errorneous errorenous opinion by audit report is not
This may lead to
sampling. Auditor errorenous opinion by
errorneous
Auditor
If acceptable sampling
risk is low, large
sample is needed.
It arises in both
compliance
procedures &
substantive
procedure.

Other Points
Sampling Flow of
events
Investigate
SELECT SAMPLE
Nature Cause
After Selecting Treat That

Sample of Item
deviation and
as Mis-
misstatement
statement or
deviation
PERFORM AUDIT PROCEDURE
ON EACH ITEM SELECTED
Evaluate their possible
effect
If auditor is unable to
apply
PROJECTION
Suitable
Designed audit
altenative
procudre Mistatement found in
procedure
sampling into population
Treat That
Treat
ItemThat Item
as Mis-
as statement
Mis-statement
or EVALUATE THE RESULT OF
ordeviation
deviation SAMPLING
Check whether sampling

Provided a reasonable basis for
conclusion about the population
that has been tested
What is an Anomaly? –
A misstatement or deviation that is demonstrably not representative of misstatements or deviations in a population.
In the extremely rare circumstances when the auditor considers a misstatement or deviation discovered in a sample to be an
anomaly, the auditor shall obtain a high degree of certainty that such misstatement or deviation is not representative of the
population. –

DIFFERENCE BETWEEN TEST CHECKING AND ROUTINE
CHECKING
Basis Test Checking Routine Checking
1. Meaning Examining less than whole population Detailed checking of all aspects of a
transaction such as casting, posting, carry
forward, calculation, balancing etc.
2.Objective To form an opinion on financial statements To ensure arithmetical accuracy of entries in
on the basis of examination of selected original books & ensure their correct
items only. posting.
3. Nature It May be judgmental or statistical device. It is a mechanical process, which becomes
monotonous at times.
4. Level of The extent of sampling is chosen by higher This work is delegated to junior audit staff.
Function level of audit staff.
5. Time It saves time of audit staff. It is more time consuming.
element
SURPRISE CHECKS
Is surprised checks desirable in audit, if so give important recommendations.
The need for and frequency of surprise checks is obviously a matter to be decided having regard to the
circumstances of each audit.
It would depend upon the extent to which the auditor considers the
• internal control system as adequate,
• the nature of the clients' transaction,
• the locations from which he operates and
• the relative importance of items like cash, investments, stores etc.
However, wherever feasible a surprise check should be made at least once in the course of an audit.
The following are the important recommendations:
(1) Surprise checks should be considered as a desirable part of each audit.

(2) The areas over which surprise checks should be employed would depend upon the circumstances of each audit
but should normally include:
→ Verification of cash and investments.

→ Test-verification of stores and stocks and the records relating thereto.
→ Verification of books of prime entry and statutory registers normally required to be examined for the
purposes of audit.
(3) The results of the surprise checks should be communicated to the management if they reveal any weakness in
the system of internal control or any fraud or error or deficiency in the maintenance of records.
(4) The auditor should satisfy himself that adequate action is taken by the management on the matters
communicated by him.
(5) It is not necessary in all cases for the results of the surprise checks to be included in the auditors'
report on the accounts. They should, however, be included if in the opinion of the auditor they are material
and affect a true and fair view of the accounts on which he is reporting.

Factors Effecting Size of

sampling
Tolerable Error Expected Error

Sampling Risk
If auditor expects
Maximum Error in
possibility of error in Studied Earlier
population that
population, larger
auditor is ready to
sample size is
accept for a given
required.
sample size.
If population is
expected to be free
If smaller tolerable misstatement smaller
error, big sample size sample size is needed
is needed.
In compliance
procedure Maximum
rate of deviation from
established procedure
of Internal Control
In substantive
procedureMaximum
monetary error.

Judgmental sampling &

Statistical sampling
Judgmental sampling Statistical sampling
Meaning Sample is chosen Limitations

Meaning by applying certain
Sample size & composition mathematical & statistical
are decided on basis of devices. It is generally based
auditor's experience. on probability theory. Complex to operate.
This is a traditional method
of sampling.
Not suitable for audit staff
Advantages having no knowledge of
statistical technique.
ExampleHe may decide to
check entries in July, More scientific.
November & February and It may be time consuming
March during audit of exercise.
certain year & out of
remaining months in next No personal bias.
year (Rotation of Emphasis).
Results of sample can be

evaluated & projected in
Advantages Disadvantage more reliable way.
Simple to operate. Widely accepted way of

Unscientific method.
sampling.
Traditional approach thus

understandable by audit There may be personal bias.
staff with the little
expertise.
Sample may not be true

representative of
Rotation of emphasis is population.
done.
Not suitable if situations

Normally year end changes materially (due to
transactions are checked in inadequacy of experience of
detail to ensue whether cut auditor in that particular
off procedures are area).
adequate.

Question Bank
♥ What is the meaning of Sampling? Also discuss the methods of Sampling. Explain in the light of the SA 530. (Most
Important)
Audit Sampling: "Audit Sampling" means the application of audit procedures to less than 100% of items within a population of
audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis
on which to draw conclusions about the entire population.
The objective of the auditor when using audit sampling is to provide a reasonable basis for the auditor to draw conclusions
about the population from which the sample is selected.
There are many methods of selecting samples. The principal methods are as follows
(i) Random Sampling (Selection)

• Simple random sampling is a basic type of sampling.
• The principle of simple random sampling is that every object has equal chance of selection.
• A simple random sample is an unbiased sampling technique.
• (Applied through random number generators, for example, random number tables).
• It is considered that random number tables are simple and easy to use they remove the biasness
• This method is preferred when population consists of reasonably similar units and fall within a reasonable
range.
• For example the population can be considered as homogeneous if expenses fall within the range of ₹ 5,000 to
₹ 25,000 and not in the range of
(ii) Stratified Sampling is

• One of the methods of Random Sampling.
• This method involves dividing the whole population to be tested in a few groups called strata
• And taking a sample from each of them.
• Each stratum is treated as if it were a separate population and if proportionate items are selected from each
of the stratum.
• The groups into which the whole population is divided is determined by the auditor on the basis of his
judgement
• e.g. entire expense vouchers may be divided into:
 Vouchers above Rs. 1,00,000
 Vouchers between Rs. 25,000 and Rs. 1,00,000
 Vouchers below Rs. 25,000
 The auditor can then decide to check all vouchers above Rs. 1,00,000, 50% between Rs. 25,000
and Rs. 1,00,000 and 25% of those below Rs. 25,000.
The reasoning behind the stratified sampling is that for a highly diversified population, weights should be allocated to
reflect these differences. This is achieved by selecting different proportions from each strata. It can be seen that the
stratified sampling is simply an extension of simple random sampling.
(iii) Systematic selection, in which the number of sampling units in the population is divided by the sample size to give a
sampling interval, for example 50, and having determined a starting point within the first 50, each 50th sampling unit
thereafter is selected. Although the starting point may be determined haphazardly, the sample is more likely to be truly
random if it is determined by use of a computerized random number generator or random number tables. When using
systematic selection, the auditor would need to determine that sampling units within the population are not structured
in such a way that the sampling interval corresponds with a particular pattern in the population.
(iv) Monetary Unit Sampling is a type of

• value-weighted selection in which

• sample size,
• selection and
• Evaluation results are converted in monetary amounts.
(v) Haphazard selection, in which the auditor selects the sample without following a structured technique. Although no
structured technique is used, the auditor would nonetheless avoid any conscious bias or predictability (for example,
avoiding difficult to locate items, or always choosing or avoiding the first or last entries on a page) and thus attempt to
ensure that all items in the population have a chance of selection. Haphazard selection is not appropriate when using
statistical sampling.
(only example not be written in exam) Haphazard sampling is a sampling method that does not follow any systematic way
of selecting participants. An example of Haphazard Sampling would be standing on a busy corner during rush hour and
interviewing people who pass by.
Haphazard sampling gives little guarantee that your sample will be representative of the entire population. If you were to
use this method to conduct a survey to find out who people will vote for president, the results you get may not predict the
actual outcome of the election. This is because you would probably only be able to interview people who were probably
white-collar workers on their way to work, or those who were not in such a big hurry to get to where they're going, or those
who lived or worked near the area where you conducted your survey.
(vi) Block selection involves selection of a block(s) of contiguous (next or together in sequence) items from within the population.
Block selection cannot ordinarily be used in audit sampling because most populations are structured such that items
in a sequence can be expected to have similar characteristics to each other, but different characteristics from items
elsewhere in the population.
Although in some circumstances it may be an appropriate audit procedure to examine a block of items, it would rarely
be an appropriate sample selection technique when the auditor intends to draw valid inferences about the entire
population based on the sample.
(only example not be written in exam) In situations when the auditor uses block selection as a sampling technique, many
blocks should be selected to help minimise sampling risk. An example of block selection is where the auditor may examine
all the remittances from customers in the month of January. Similarly, the auditor may only examine remittance advices that
are numbered 300 to 340.
♥ Stratified sampling – Short Note
♥ Advantages of statistical sampling in Auditing
(i) The sample selection is more objective (Unbiased) and is based on mathematical law of probability.
(ii) It may provide a better description of large mass of data than a complete examination of all the data, since non-
sampling errors such as processing and clerical mistake are not large.
(iii) Result of sampling can be evaluated & projected in a better way
♥ Simple random sampling – Short Note
♥ Examination in depth – Short Note (M.imp)
It implies examination of a few selected transactions from the beginning to the end through the entire flow of the
transaction, i.e., from initiation to the completion of the transaction.
This examination consists of studying the recording of transactions at the various stages through which they have passed.
At each stage, relevant records and authorities are examined;
it is also judged whether the person who has exercised the authority in relation to the transactions is fit (authorise) to do
so in terms of the prescribed procedure.

For example, if payment to a creditor is to be verified "in depth", it would be necessary to examine the following documents:
(i) The invoice and statement of account received from the supplier.
(ii) The entry in the stock record showing that the goods were received.
(iii) The Goods Received Note and Inspection Certificate showing that the goods on receipt were verified and
inspected.
(iv) The copy of the original order and authority showing that the goods in fact were ordered by an authority which
was competent to do so.
♥ Audit Planning & Materiality

Audit Planning and Materiality: Materiality is an important consideration for an auditor to evaluate whether the financial
statements reflect a true or fair view or not. SA 320 on "Materiality in Planning and Performing an Audit" requires that an
auditor should consider materiality and its relationship with audit risk while conducting an audit. When planning the audit,
the auditor considers what would make the financial information materially misstated. The auditor's preliminary
assessment of materiality related to specific account balances and classes of transactions helps the auditor decide such
questions as what items to examine and whether to use sampling and analytical procedures.
This enables the auditor to select audit procedures that, in combination, can be expected to support the audit opinion at
an acceptably low degree of audit risk. It may be noted that the auditor's assessment of materiality and audit risk may be
different at the time of initially planning of the audit as against at the time of evaluating the results of audit procedures.
♥ As per SA 530, meaning of audit sampling, sample design, sample size and selection of items for testing.
As per SA 530 on "Audit Sampling", the meaning of the term Audit Sampling is the application of audit procedures to less
than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order
to provide the auditor with a reasonable basis on which to draw conclusions about the entire population.
As per SA 530, Requirements relating to Sample design, sample size and selection of items for testing are explained below-
→ Sample design - When designing an audit sample, the auditor shall consider the purpose of the audit procedure
and the characteristics of the population from which the sample will be drawn.
→ Sample Size- The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low
level.
→ Selection of Items for Testing- The auditor shall select items for the sample in such a way that each sampling unit
in the population has a chance of selection
♥ What precautions should be taken by an auditor while applying test check techniques?
♥ An assistant of X & Co, Chartered Accountants, detected an error of Rs. 5 per interest payment, which
recurred a number of times. The General Manager (Finance) of T Ltd advised him not to request passing
any adjustment entry as individually the errors were of very small amount. The Company had 2000
Deposit Accounts and interest was paid quarterly. State your views in this issue, with reasons.
Answer
Mis-statement, including omissions, are considered to be material if they, individually or in the aggregate, could
reasonably be expected to influence the economies decisions of users taken on the basis of the Financial Statement.
Analysis: In the instant case, an error of `5 in the interest computation, even if small individually, will have a material
effect due to the large number of transactions.
Hence, X & Co, need not pay any attention to the advise given by the General Manager (Finance) of T Ltd. The
necessary adjustment should be carried out in the accounts of the Company.

Chapter 4 – Audit Process &

Documentation
SA 210 - Agreeing the terms of audit engagement
Objective - Accept & Continue An Audit Engagement

only when
Basis of performance has been agreed through
Establish whether precondition are present Confirm Common Understanding
Auditor Management & TCWG

To establish precondition
are present
Auditor Shall
of Terms of Engagement
If preconditions does not exist auditor shall not accept eng. unless
req by Law and regulation
Determine Obtain Agreement that
Management
Financial reporting
framework for
preparation of financial
statement is acceptable Acknowledge Understand
Its responsibility
For Preparation Financial To provide auditor

For Such Internal Control with ALL info,
Statement in accordance as management
with AFRF including their ADDITIONAL info,
determines is necessary to UNRESTRICTED
Fair Presentation enable the preparation of ACCESS - (Check
financial statement that premises on which
free from MMS whether audit is conducted)
due to fraud or error.
Limitation on Scope Prior to Audit Engagement

Acceptance
 If management or those charged with governance

 impose a limitation on the scope of the auditor's work
 in the terms of a proposed audit engagement
 such that the auditor believes the limitation will result in the auditor disclaiming an opinion on the
financial statements,
 the auditor shall not accept such a limited engagement as an audit engagement.
Audit Engagement
Terms
Law & regulation prescribes Audit engagement
Shall be Shall be terms in sufficient details
agreed recorded Shall include (Content of
Audit Eng. Letter)
Between In Audit Auditor need not record them in
management Engagement writing
Objective &
and auditor Letter
scope of audit
Except 2
In suitable Things
Respo of
Form
Auditor Such law & Management Accept &
Regulation is Understand its responsibility
Respo of Mgt. aaplicable to the
entity PPFS DIMIC All info
Identification additional info.
AFRF for prep & Unrestricted
of FS access
Reference to expected
form and content of any
report to be issued by
auditor. Statement that
in may vary in some
circumstances
Recurring Audits
Question
It is not mandatory to send a new engagement letter in recurring audit, but sometimes it becomes mandatory to send new
letter". Explain those situations where new engagement letter is to be sent. (M.imp)
Answer
Issue of Audit Engagement Letter in Recurring Audits:
On recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to
be revised and whether there is a need to remind the entity of the existing terms of the audit engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement each period. However,
in the following situations it is appropriate to revise the terms of the audit engagement or to remind the entity
of existing terms:
(i) Any indication that the entity misunderstands the objective and scope of the audit.
(ii) Any revised or special terms of the audit engagement.
(iii) A recent change of senior management.
(iv) A significant change in ownership.
(v) A significant change in nature or size of the entity's business.
(vi) A change in legal or regulatory requirements.
(vii) A change in the financial reporting framework adopted in the preparation of the financial statements.
(viii) A change in other reporting requirements.
Acceptance of a Change in the Terms of the Audit

Engagement
1. If, prior to completing the audit engagement,
• the auditor is requested to change the audit engagement
• to an engagement that conveys a lower level of assurance,
• the auditor shall determine whether there is
• Reasonable justification for doing so.
2. If the
• auditor is unable to agree to a change of the terms of the audit engagement
• and is not permitted
• by management to continue the original audit engagement, the auditor shall
• Withdraw from the audit engagement where possible under applicable law or regulation; and
• Determine whether there is any obligation, either contractual or otherwise, to report the
circumstances to other parties, such as those charged with governance, owners or regulators.
3. If the terms of the audit engagement are changed,

• the auditor and management shall agree on and
• record the new terms of the engagement in an engagement letter or other suitable form of
written agreement.

Additional Considerations in Engagement

Acceptance
Financial Reporting Standards Supplemented by Law or Regulation
the auditor shall determine whether there are any conflicts between the financial reporting standards &
additional requirement
Yes
the auditor shall discuss with management the nature of and shall agree whether
the additional requirements
The additional requirements can be met through OR

additional disclosures in the financial statements If the action is not possible,
the auditor shall determine
whether it will be necessary
to modify the auditor's report
as per SA 705.
Layout of words of report prescribed by law and

regulation and they differ from SA Requirement
Check whether user might

misunderstand assurance
Yes No
Whether additional OK, Accept the

exaplanation mitigate engagement
misunderstanding
YES No
OK Accept the Shall not accept the audit engagement

engagement unsless required by Law and regulation

Planning an audit of Financial Statements – SA

300
(1) The auditor should plan his work to enable him to conduct an
a. effective audit in an
b. efficient and
c. timely manner.
(2) It should be based on knowledge of the client's business.
Usefulness
Audit planning helps to ensure that:
▪ appropriate attention is devoted to important areas of the audit;
▪ potential problems are promptly identified;
▪ the work is complete in time;
▪ assistants are utilised properly; and
▪ the work done by other auditors and experts is duly coordinated.
Factors Affecting Nature & Extent of planning

activities
The nature and extent of planning activities will vary according to
1. The size and complexity of the entity.
2. The key engagement team members previous experience with the entity and
3. Changes in the circumstances that occur during the audit engagement.
Audit Program
1. An audit program is
• detailed plan of work,
• prepared by the auditor,
• for carrying out an audit.
2. It provides a basis for the supervision and control of the audit work.
3. It consists of set of techniques and procedures; which auditor plans to apply in the given audit
for forming an opinion about the financial statements.
4. It is framed keeping in view the nature, size and composition of the business, assessment of internal
control and given scope of work.
5. Audit program may be altered while carrying out the work according to circumstances and situations
6. There should be a periodic review of audit program to check its efficiency and effectiveness
For the purpose of framing and audit programme the following points should be kept in view
• Audit objective
• Audit procedure to be applied
• Extent of checking to be done
• Timing of checking to be done

• Allocation of work amongst the team member
• Special instructions based on past experience of the auditee
Advantages of Audit Program (Role of Audit

Program in Audit Plan & Performance)
The role of Audit Programme in audit plan and performance: The audit programme is helpful both in
planning and performance stages of audit as follows:
(i) The audit programme lists down areas of audit before commencement.
(ii) The audit timing is built therein; thereby it becomes a schedule of audit plan.
(iii) The staff that is entrusted with the audit assignment is also specified. It is a plan of
resources allocation of the firm.
(iv) It specifies the procedures to be checked during the audit.
(v) As the audit work is split into various elements of procedures to be performed, the audit
programme acts as a guiding chart or check list during the performance of audit.
(vi) Since the staff in charge of each work is specified and they sign the programme, it extracts
the responsibility from the audit assistants.
(vii) The working papers of the audit staff can be reviewed against the audit
programme which helps a base of reference for evaluation of the performa nce before
reporting on the financial statements.
(viii) It also helps in preparing a diary of the performance and plan also base for billing the
clients for the time manpower involved in the audit.
LIMITATIONS OF AUDIT PROGRAM

1. Mechanical Approach – The work may become mechanical and particular parts may be carried
out without understanding the whole concept.
2. Inflexibility - The program often becomes rigid & inflexible. There may be a change in nature of
business or the way business is carried out and we need to accordingly change the audit program.
Assistants are not able to change it as per requirements of specific case.
3. Lack of initiative - Hard & fast program hurts the initiative & judgmental skills of hard working
assistants.
4. Shelter for inefficient assistants - They think that it contains exhaustive matters. They don't
even think of any unusual matter, which is not listed in program even if its presence can change audit
approach. They defend deficiencies in their work on the ground that no instruction in the matter is
contained therein.

SA 230 AUDIT DOCUMENTATION
Audit Documentation - also called

working papers
Record
AP (Audit AE (Audit
C (Conclusion)
Procedure) Evidence)
PERFORMED OBTAINED REACHED
Why Audit
Documentation
Additional
Basic Purpose
Purpose
Sufficient & Appropriate Plan/ Perform the

Evidence Audit
Record (Form the basis) audit
Supervise (To
For Audit Report Planned Performed
Direct & Supervise
the audit work)
In Accordance
with
Accountable
SA Law & Regulation
Future Audits
Quality Control
Review/ Internal
Inspection
External
Inspection
Objective of audit documentation

To provide
(a) A Sufficient & Appropriate record for audit report; and
(b) Evidence that the audit was planned and performed in accordance with SAs and applicable legal and
regulatory requirements.

Audit documentation serves a number of Purposes, including the following:

1. Assisting the engagement team
 to plan and perform the audit.
2. Assisting members of the engagement team responsible for supervision
 to direct and supervise the audit work.
3. Enabling the engagement team
 to be accountable for its work.
4. Retaining a record of matters of continuing
 significance to future audits.
5. Enabling the conduct of
 quality control reviews and internal inspections.
6. Enabling the
 conduct of external inspections in
 accordance with applicable legal, regulatory or other requirements
Basic requirements
(i) W.P should be designed &organized according to circumstances of each audit,
(ii) As far as possible, working papers should be kept in standardized form,
(iii) Documentation should be sufficiently complete, dated & signed.
(iv) All significant matters involving judgment should be documented.
(v) As per ICAI, documentation is the property of auditor& he should maintain it at least upto 7 years
from date of signing of audit report, (previously it was 10 years)
(vi) If it is in electronic /magnetic media, he should take proper care for its storage& retrieval.
(vii) He should maintain confidentiality (should not show his W.P. to outsiders).
Definitions
(a) Audit documentation–
a. The record of
b. audit procedures performed,
c. relevant audit evidence obtained, and
d. Conclusions the auditor reached.
(b) Sometimes they are called working papers of the auditor.
(c) Example of audit documentation
a. Audit programme
b. Checklist
c. Correspondence with management and third party
(d) Audit file

• Records of audit documentation
• for a specific engagement
• in one or more folders or other storage media (Physical & Electronic)
(e) Experienced auditor

An individual (whether internal or external to the firm) who has practical audit experience, and a
reasonable understanding of:
(i) Audit processes;

(ii) SAs and applicable legal and regulatory requirements;
(iii) The business environment in which the entity operates; and
(iv) Auditing and financial reporting issues.
Documentation of Audit
Procedures PERFORMED &
Audit evidence OBTAINED
Procedures Discussions Inconsistency Departure from

elevant
requirement of
SA
Prepare AD that is sufficient to The auditor shall document If the auditor
enable an Experience audior to discussions of significant identified any
understand matter with management, inconsistent
TCWG, and other, information, If, in
the auditor exceptional
NTE of audit shall document circumstances,
proedure how he he departs from
Details such, addressed the SA, the auditor
matter discussed, inconsistency. shall document
results of AP performed AE when and with the reasons for
obtained whom discussion the departure
took place. and alternative
procedures
Significatnt matter arising performed.
during the audit and the
conclusions reached thereon
Auditor shall also record:
Who performed the Who reviewed the audit

audit work and the work performed and the date
date such work was and extent of such review.
completed; and
IMPORTANT NOTES
1. The standard does not in any way limit the specific documentation requirements of other SA’s. In other words, if other
SAs prescribe more documentation requirements, those documentations are also to be maintained.
2. Factors on which Extent of Audit Documentation Depends

a. Size, complexity of the entity.
b. Nature of the Audit Procedures.

c. Identified Risks of Material Misstatements. (ROMM)
d. Significance of the Audit Evidence.
e. Need to document a conclusion.
f. Audit Methodology & Tools used.
3. Working paper are the Property of the Auditor. The Auditor may at his discretion make portion of or extracts from his
working paper available to his clients.
4. Working paper of the Auditor of Branch are property of the Auditor of the Branch.
Matters Arising after the Date of the Auditor's

Report
If, in exceptional circumstances, the auditor performs new or additional audit procedures or draws new conclusions
after the date of the auditor's report, the auditor shall document:
(a) The circumstances encountered; क्र्ा हुआ था
(b) The new or additional audit procedures performed, audit evidence obtained, and conclusions reached,
and their effect on the auditor's report; and (AP AE, C Effect on AR) क्र्ा ककर्ा
(c) When and by whom the changes to audit documentation were made and reviewed. (ककसऩे ककर्ा)
Assembly of the Final Audit File

▪ The auditor shall
 assemble the audit documentation
 in an audit file and
 complete the administrative process of assembling the final audit file on a timely basis
 after the date of the auditor's report. (not more than 60 days after the auditor’s report)
▪ After the assembly, the auditor
 shall not delete audit documentation
 before the end of its retention period.
▪ Where the Auditor finds it necessary
o to modify existing audit documentation or
o add new audit documentation
o after the assembly of the Final Audit has been completed,
o the Auditor shall,
o regardless or the nature of the modifications or additions, document –
▪ The specific reasons for making them, and
▪ When and by whom they were made and reviewed.

Audit Note Book

1. Meaning
 An Audit Notebook is a bound notebook
 in which a variety of matters observed during the course of audit are recorded.
 It is notebook containing points or queries that require
i. clarification,
ii. explanation and
iii. investigation and
iv. The manner in which they are finally settled.

2. The audit notebook is maintained by the audit assistants
3. Contents:
Content of Audit Note Book

(a) Audit queries not cleared immediately, e.g. missing receipts, vouchers, etc.
(b) Mistakes or irregularities observed during the course of audit, e.g. failure to comply with requirements of
the Companies Act, or the provisions of the Memorandum or Articles, a change in the basis of valuation of
Finished Stock and WIP or in computation of depreciation, failure to provide adequate depreciation, etc.
(c) Unsatisfactory book-keeping arrangements, costing method, internal or financial administration or
organisation.
(d) Important information about the Company which is not apparent from the accounts.
(e) Special points requiring consideration at the time of verification of final accounts.
(f) Important matters for future reference.
Queries
Mistakes
Unsatisfactory
Important Info
Special Points
Future
4. Importance: - For this, Write the purpose of audit documentation (Additional Purpose)
Filing of working papers
The auditor, in case of recurring audits, may divide the audit working papers into two parts—permanent file and
current file.
Types of audit file

Permanent audit file
Permanent audit file should contain information, which is of continuing interest and relevance to
succeeding audits. The permanent file typically includes the following:
(a) Information regarding legal and organisational structure of the entity

(b) Extracts or copies of important legal documents, agreements and minutes relevant to the audit
(c) Record of study and evaluation of internal controls related to accounting system
(d) Copies of audited financial statements for previous years.
(e) Analysis of significant ratios and trends
(f) Copies of management letters issued by the auditor, if any
(g) Record of communication with the retiring auditor, if any.
(h) Notes regarding significant accounting policies.
(i) Significant audit observations of earlier years.
Keywords Hooks
Continuing Interest and Permanent audit file should contain information, which is of continuing interest
relevance and relevance to succeeding audits.
Legal organisational
structure
Legal documents
Internal Control
Previous Year
Trends
Management
Retire
Policies
Observation
Current audit file

Current audit file contains information relating to and relevant to the audit of current period. The information,
which may be contained in the current audit file, is given below:
(a) Correspondence relating to acceptance of annual re-appointment.
(b) Extracts of important matters in the minutes of the board meetings and general meeting as are relevant
to audit.
(c) Audit plan and audit programme.
(d) Analysis of transactions and balances.
(e) Record of audit procedures and their results.
(f) Evidence regarding the supervision and review of the work of assistants.
(g) Copies of communication with other auditors (e.g. branch auditor), experts (e.g. lawyers, architects)
and other third parties (e.g. banks; debtors).
(h) Copies of letters or notes concerning audit matters communicated to or discussed with client.
(i) Management representations.
(j) Auditor's conclusions regarding significant matters.
(k) Copies of financial statements being reported on and the related audit report.
Question Bank on C4
♥ Audit documentation serves a number of additional purposes.
♥ 'Auditor shall establish an overall strategy that sets the scope, timing and directions of the audit, and that guides the
development of the audit plan."
Establishment of overall strategy for development of audit plan: According to SA 300, "Planning an Audit of
Financial Statements" the auditor shall establish an overall audit strategy that sets the scope, timing and
directions of the audit, and that guides the development of the audit plan.
In establishing the overall audit strategy, the auditor shall:
(i) Identify the characteristics of the engagement that define its scope;
(ii) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of
the communications required;
(iii) Consider the factors that, in the auditor's professional judgment, are significant in directing the
engagement team's efforts;
(iv) Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the entity is
relevant; and
(v) Ascertain the nature, timing and extent of resources necessary to perform the engagement.
♥ Importance of working papers
Importance of Working Papers: Audit working papers constitute the basic records for the auditor in respect of the audit
carried out by him. They constitute the link between the auditor's report and the client's record.
These includes retention of permanent record in the nature of a document to show the actual audit work executed , the
nature of work, the extent of work and the important points, facts, dates and decisions having bearing on the audit of the
accounts audited. The audit working papers are found very useful in the following aspects as:
(i) It provides guidance to the audit staff with regard to the manner of checking the schedules.
(ii) The auditor is able to fix responsibility on the staff member who signs each schedule checked by him.
(iii) It acts as evidence in the court of law when a charge of negligence is brought against the auditor.
(iv) It acts as the process of planning for the auditor so that he can estimate the time that may be required for
checking the schedules.
♥ What are the audit working papers? Discuss various contents of current file.
Audit Working Papers: Working papers are papers prepared and obtained by the auditor and retained by him, in
connection with the performance of his audit.
Working papers are the property of the auditor. As per SA 230 "Audit Documentation" refers to the record of audit
procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as "working
papers" or "work papers" are also sometimes used).
Working papers should record the audit plan, the nature, timing and extent of auditing procedures performed, and the
conclusions drawn from the evidence obtained.
Current Audit file: The current file normally includes:
(i) Correspondence relating to acceptance of annual reappointment.

(ii) Extracts of important matters in the minutes of Board Meetings and General Meetings, as are relevant to the
audit.
(iii) Evidence of the planning process of the audit and audit programme.
(iv) Analysis of transactions and balances.
(v) A record of the nature, timing and extent of auditing procedures performed and the results of such procedures.
(vi) Evidence that the work performed by assistants was supervised and reviewed.
(vii) Copies of communications with other auditors, experts and other third parties.
(viii) Copies of letters or notes concerning audit matters communicated to or discussed with the client, including the
terms of the engagement and material weaknesses in relevant internal controls.
(ix) Letters of representation or confirmation received from the client.
(x) Conclusions reached by the auditor concerning significant aspects of the audit.
(xi) Copies of the financial information being reported on and the related audit reports.
♥ What are audit working papers? Discuss various contents of Permanent Audit File and Current File.
♥ The audit working papers constitute the link between the auditor's report and the client's records. Discuss stating
clearly the objectives of audit working papers.

Chapter 5 – Internal Control
Meaning of Internal Control

SA 315 Defines Internal Control as
The Process designed, implemented and maintained by (DIM)

a. Those charged with governance(TCWG)
b. Management (Mgt.)
c. Other personnel(OP)
To Provide Reasonable Assurance
with regard to
o Reliability of financial reporting

o Effectiveness& Efficiency of operations
o Safeguarding of assets
o Compliance with applicable law & regulations
Inherent Limitations of I.C.

Limitations which are inseparable from system of l.C.
Effect
▪ Due to Limitations of l.C. System,
▪ it can provide only reasonable,
▪ not absolute assurance,
▪ that its objectives are achieved.
What are Inherent Limitations of Internal control systems?
Question
Explain inherent limitations of internal control systems
Answer
Internal control can provide only reasonable but not absolute assurance that its objective relating to
prevention and detection of errors/frauds, safeguarding of assets etc., are achieved. This is because it
suffers from some inherent limitations, such as:-

(i) Management's consideration that cost of an internal control does not exceed the expected
benefits.
(ii) Most controls do not tend to be directed at unusual transactions.
(iii) The potential of human error due to carelessness, misjudgment and misunderstanding of
instructions.
(iv) The possibility that control may be circumvented (बबगाड़ना) through collusion with
employees or outsiders.
(v) The possibility that a person responsible for exercising control may abuse that authority.
(vi) Compliance with procedures may deteriorate because the procedures becoming inadequate
due to change in condition.
(vii) Manipulation by management with respect to transactions or estimates and judgements
required in the preparation of financial statements.
(viii) Inherent limitations of Audit.
REVIEW OF I.C. BY AUDITOR

Review of l.C. refers to,
Examination and evaluation of Internal control system of the client.
Need for review

To assure that l.C. system is adequate.
Role/Advantages of Review
It enables the auditor to ascertain whether
i. Internal control system is adequate& operating effectively.
ii. I .C. is able to prevent, detect & correct material misstatement.
iii. l.C. Properly safeguards the assets.
iv. l.C. ensures correct recording of transaction.
v. Reports & Certificate provided by management are reliable.
vi. l.C. are weak / excessive in a-particular area.
vii. Effective internal audit department is in operation.
viii. Suggestions can be given to management to improve the l.C. system.
ix. Extensive Substantive procedures are required.
x. Audit procedures or techniques need to be changed from planned ones.
Keyword Link
Adequate
Prevent detect
and control
Safeguard
Recording
Reports/Reliable
Internal Control

Effective internal
audit department
Suggestions
Extensive
Techniques
NOTE – Please cover tools to review IC after this topic (Tools are given in the end of the chapter)
INTERNAL CHECK
Meaning
▪ Check on day to day transactions,
▪ Operating continuously as part of routine system,
▪ Whereby work carried out by one person is automatically checked by another.
▪ Internal check is part of overall internal control system of the entity
Objective
▪ To prevent fraud / error, &
▪ Early detection of fraud and error
General Considerations in framing a System of Internal Check. (Most Important)
1. Distribution of powers
Administrative & financial powers (Eg:- ordering product, issuing cheques etc) should be distributed
among different personnel.
2. No Independent control
A Single person should not have independent control over any important aspect of business.
3. Custody- Records distribution

Persons having physical custody of assets should not have access to accounts or records.
4. Check by another
All acts of one person should come under the review of another.
5. Job Rotation
Duties of staff should be changed from time to time without previous notice.
6. Leave
Every personnel should be encouraged to go on leave at least once in a year. Fraud done by employee
can be detected easily when he is absent.
7. Budgetary control (Standard)

Budgets should be prepared for important activities. If difference between budgeted & actual figure
is significant, it should be enquired into.
8. Accounting Control
For each important asset, accounting control should also be periodically examined.
9. Stock Control
During stock taking at the end of the accounting period trading activities should be suspended.

10. Cash Control

To prevent misappropriation of cash, mechanical devices (Eg:- automatic cash Register) can be employed.
11. Updation of procedure

Timely review of procedures enables the management to change them, if need arises.
Powers
Independent
Custody
Another
Rotation
Leave
A
B
C
Stock
Upadation of
procedure
INTERNAL AUDIT
Meaning
▪ Internal audit is independent management function
▪ Which involves
▪ continuous & critical appraisal
▪ of internal control of the entity
The function of internal audit in an integral part of the system of Internal Control.
Objectives of internal audit

Explain the objectives of internal audit.
Objectives of Internal Audit: Internal Audit is an independent management function, which involves a
continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto
and add value to and strengthen the overall governance mechanism of the entity, including the entity's
risk management and internal control system.
The objective of internal audit can be stated as follows:

(i) To verify the accuracy and authenticity of the financial accounting and statistical records
presented by the management.
(ii) To ascertain that the standard accounting practices, as have been decided to be followed by
the organisation, are being adhered to.
(iii) To establish that there is a proper authority for every acquisition, retirement and disposal of assets.
(iv) To confirm that liabilities have been incurred only for the legitimate activities of the organisation.
(v) To analyse and improve the system of internal check in particular to see (1) that it is working ; (2)
that it is sound ; and (3) that it is economical.
(vi) To facilitate the prevention and detection of frauds.

(vii) To examine the protection afforded to assets and the uses to which they are put.
(viii) To make special investigations for management.
(ix) To provide a channel whereby new ideas can be brought to the attention of management.
(x) To review the operation of the overall internal control system and to bring material
departures and non-compliances to the notice of the appropriate level of management; the
review also generally aims at locating unnecessary and weak controls for making the entire
control system effective and economical.
Keyword Hooks
Accuracy, authenticity
Standardized accounting practices
Authority
Liabilities
Sound, Working, Economical
Prevention, Detection
Protection to assets
Investigation
New ideas
Overall internal control system
SA 610 – Using the work of Internal Auditor
This Standard on Auditing (SA) deals with the external auditor’s responsibilities if using the work of internal
auditors.
This includes (a) using the work of the internal audit function in obtaining audit evidence and (b) using
internal auditors to provide direct assistance under the direction, supervision and review of the external
auditor.
This SA does not apply if the entity does not have an internal audit function.
If the entity has an internal audit function, the requirements in this SA relating to using the work of that
function do not apply if
• The responsibilities and activities of the function are not relevant to the audit; or
• Based on the auditor’s preliminary understanding of the function obtained as a result of procedures
performed under SA 315, the external auditor does not expect to use the work of the function in
obtaining audit evidence.
Nothing in this SA requires the external auditor to use the work of the internal audit function to modify the
nature or timing, or reduce the extent, of audit procedures to be performed directly by the external auditor;
it remains a decision of the external auditor in establishing the overall audit strategy.
Furthermore, the requirements in this SA relating to direct assistance do not apply if the external auditor
does not plan to use internal auditors to provide direct assistance.
Relationship between SA 315 and SA 610 (Revised)

Many entities establish internal audit functions as part of their internal control and governance structures.
The
• objectives and scope of an internal audit function,
• the nature of its responsibilities and its organizational status,
• including the function’s authority and accountability,

vary widely and
depend on
• the size and structure of the entity and
• the requirements of management and, where applicable, those charged with governance.
SA 315 addresses how the knowledge and experience of the internal audit function can inform the external auditor’s
understanding of the entity and its environment and identification and assessment of risks of material misstatement.
In other words knowledge and experience of the internal audit function can have impact on the auditor’s understanding of the
entity and its environment and identification and assessment of risks of material misstatement
SA 610 addresses the external auditor’s responsibilities when, based on the external auditor’s preliminary understanding of
the internal audit function obtained as a result of procedures performed under SA 315, the external auditor expects to use the
work of the internal audit function as part of the audit evidence obtained.
Objectives of external auditor as per SA 610
Where the entity has internal audit function and the external auditor expects to use the work of the function to modify the
nature or timing, or reduce the extent, of audit procedures to be performed directly by the external auditor, or to use internal
auditors to provide direct assistance (He can do so but the he cannot his responsibility of expressing opinion on financial
statements)
The objectives of the external auditor are:
• To determine whether the work of the internal audit function or direct assistance from internal auditors can be used,
and if so,
o in which areas and to what extent;:
क्या (work and direct assistance) यू ज़ कर सकते है अगर हााँ तो कौन कौन से एररया में और ककतना
and having made that determination
• If using the work of the internal audit function, to determine whether that work is adequate for purposes of the audit;
and (एक बार यह पता लगा कलया के यू ज़ कर सकते है तो दे खो क्या वकक adequate है फॉर ऑकिट)
• If using internal auditors to provide direct assistance, to appropriately direct, supervise and review their work.
(Aur agar internal auditors ki direct assistance le rahe hai toh unke kaam ko appropriately DSR karna hai)
Definitions
For purposes of the SAs, the following terms have the meanings attributed below:
Internal audit function – A function of an entity that performs assurance and consulting activities designed to evaluate and
improve the effectiveness of the entity’s governance, risk management and internal control processes.
Direct assistance – The use of internal auditors to perform audit procedures under the direction, supervision and review of
the external auditor.
Determining Whether, in Which Areas, and to What Extent the Work of the Internal Audit Function Can Be Used

1. Evaluating the internal audit function
2. Determining the nature and extent of the work of the internal audit function that can be used
3. Using the work of internal audit function
Evaluating the internal audit function

The external auditor shall determine whether the work of the internal audit function can be used for purposes of the
audit by evaluating the following:
• The extent to which the internal audit function’s organizational status and relevant policies and procedures support
the objectivity of the internal auditors;
• The level of competence of the internal audit function; and
• Whether the internal audit function applies a systematic and disciplined approach, including quality control.
The external auditor shall not use the work of the internal audit function if the external auditor determines that:
• The function’s organizational status and relevant policies and procedures do not adequately support the objectivity of
internal auditors;
• The function lacks sufficient competence; or
• The function does not apply a systematic and disciplined approach, including quality control.
Determining the nature and extent of the work of the internal audit function
that can be used
• the external auditor shall consider the
o nature and scope of the
▪ work that has been performed,
▪ or is planned to be performed, by the internal audit function and
o its relevance to the external auditor’s overall audit strategy and audit plan
• The external auditor shall make all significant judgments in the audit engagement and, to prevent undue use of the
work of the internal audit function, shall plan to use less of the work of the function and perform more of the work
directly.
• The external auditor shall also evaluate whether, in aggregate, using the work of the internal audit function to the
extent planned would still result in the external auditor being sufficiently involved in the audit, given the external
auditor’s sole responsibility for the audit opinion expressed.
• The external auditor shall, in communicating with those charged with governance an overview of the planned scope
and timing of the audit in accordance with SA 260, communicate how the external auditor has planned to use
the work of the internal audit function
Using the Work of the Internal Audit Function

• If the external auditor plans to use the work of the internal audit function, the external auditor shall discuss the
planned use of its work with the function as a basis for coordinating their respective activities.

• The external auditor shall read the reports of the internal audit function relating to the work of the function that
the external auditor plans to use to obtain an understanding of the nature and extent of audit procedures it performed
and the related findings.
• The external auditor shall perform sufficient audit procedures on the body of work of the internal audit
function as a whole that the external auditor plans to use to determine its adequacy for purposes of the audit,
including evaluating whether:
o The work of the function had been properly planned, performed, supervised, reviewed and
documented;
o Sufficient appropriate evidence had been obtained to enable the function to draw reasonable conclusions;
and
o Conclusions reached are appropriate in the circumstances and the reports prepared by the function
are consistent with the results of the work performed.
Determining Whether, in Which Areas, and to What Extent Internal Auditors Can Be Used to Provide Direct Assistance
1. Determining Whether Internal Auditors Can Be Used to Provide Direct Assistance for Purposes of the Audit
2. Determining the Nature and Extent of Work that Can Be Assigned to Internal Auditors Providing Direct Assistance
3. Using Internal Auditors to Provide Direct Assistance
Determining Whether Internal Auditors Can Be Used to Provide Direct

Assistance for Purposes of the Audit
• If using internal auditors to provide direct assistance is not prohibited by law or regulation,
o and the external auditor plans to use internal auditors to provide direct assistance on the audit,
o the external auditor shall evaluate the
▪ existence and significance of threats to objectivity and
▪ the level of competence of the internal auditors who will be providing such assistance.
• The external auditor’s evaluation of the existence and significance of threats to the internal auditors’ objectivity shall
include inquiry of the internal auditors regarding interests and relationships that may create a threat to
their objectivity.
The external auditor shall not use an internal auditor to provide direct assistance if:
(a) There are significant threats to the objectivity of the internal auditor; or
(b) The internal auditor lacks sufficient competence to perform the proposed work.
Determining the Nature and Extent of Work that Can Be Assigned to Internal
Auditors Providing Direct Assistance
• In determining the nature and extent of work that may be assigned to internal auditors and the nature, timing

and extent of direction, supervision and review that is appropriate in the circumstances, the external auditor shall
consider:
o The amount of judgment involved in:
▪ Planning and performing relevant audit procedures; and
▪ Evaluating the audit evidence gathered;
o The assessed risk of material misstatement; and
o The external auditor’s evaluation of the existence and significance of threats to the
objectivity and level of competence of the internal auditors who will be providing such assistance.
• Having appropriately evaluated whether and, if so, to what extent internal auditors can be used to provide direct
assistance on the audit, the external auditor shall, in communicating with those charged with governance in accordance
with SA 260, communicate the nature and extent of the planned use of internal auditors to provide direct assistance
so as to reach a mutual understanding that such use is not excessive in the circumstances of the engagement.
• The external auditor shall evaluate whether, in aggregate, using internal auditors to provide
direct assistance to the extent planned, together with the planned use of the work of the
internal audit function, would still result in the external auditor being
sufficiently involved in the audit, given the external auditor’s sole responsibility for the audit opinion
expressed.
Using Internal Auditors to Provide Direct Assistance

• Prior to using internal auditors to provide direct assistance for purposes of the audit, the external auditor shall:
o Obtain written agreement from an authorized representative of the entity that the internal auditors
will be allowed to follow the external auditor’s instructions, and that the entity will not
intervene in the work the internal auditor performs for the external auditor; and
o Obtain written agreement from the internal auditors that they will keep confidential
specific matters as instructed by the external auditor and inform the external auditor of any threat to their
objectivity.
• The external auditor shall direct, supervise and review the work performed by internal auditors on the
engagement in accordance with SA 220.
• The direction, supervision and review by the external auditor of the work performed by the internal auditors shall be
sufficient in order for the external auditor to be satisfied that the internal auditors have obtained sufficient appropriate
audit evidence to support the conclusions based on that work.
Documentation
If the external auditor uses the work of the internal audit function, the external auditor shall include in the audit
documentation:
• The evaluation of:
o Whether the function’s organizational status and relevant policies and procedures adequately support the
objectivity of the internal auditors;
o The level of competence of the function; and
o Whether the function applies a systematic and disciplined approach, including quality control;

• The nature and extent of the work used and the basis for that decision; and
• The audit procedures performed by the external auditor to evaluate the adequacy of the work used.
If the external auditor uses internal auditors to provide direct assistance on the audit, the external auditor shall include in the
audit documentation:
• The evaluation of the existence and significance of threats to the objectivity of the internal auditors, and the
level of competence of the internal auditors used to provide direct assistance;
• The basis for the decision regarding the nature and extent of the work performed by the internal auditors;
• Who reviewed the work performed and the date and extent of that review in accordance with SA 230
• The written agreements obtained from an authorized representative of the entity and the internal auditors
under paragraph 33 of this SA; and
• The working papers prepared by the internal auditors who provided direct assistance on the audit
engagement.
Audit Risk & Its Components
Discuss in brief the types of audit risk and inter relationship of components of audit risk.
Types of Audit Risk: Audit risk is the risk that an auditor may give an inappropriate opinion on financial
information which is materially misstated.
For example, an auditor may give an unqualified opinion on financial statements without knowing that they
are materially misstated.
Such risk may exist at overall level, while verifying various transactions and balance sheet items.
Three components of audit risk are:

 Inherent risk (risk that material errors will occur); risk that material error will occur and there will be no internal
control for preventing such error. This will always be there because circumstances keeps on changing. It may happen that IC is
missing for in a particular area.
 Control risk (risk that the client's system of internal control will not prevent or correct such
errors); and (IC is there but it is not able to Prevent or correct the errors)
 Detection risk (risk that any remaining material errors will not be detected by the auditor).
As per SA 200 "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with Standards on Auditing", the risks of material misstatement at the assertion level consist of
two components: inherent risk and control risk.
Inherent risk and control risk are the entity's risks; they exist independently of the audit of the financial
statements.
(i) Inherent risk: Inherent risk is the

• susceptibility of an
• account balance or class of transaction
• to a material misstatement, assuming that there were no internal
controls
(ii) Control Risk

Misstatements will not be prevented, or detected and corrected, on a timely basis by the
entity's internal control.
It is a function of the effectiveness of the design, implementation and maintenance of

internal control by management to address identified risks that threaten the achievement of
the entity's objectives relevant to preparation of the entity's financial statements.
(iii) Detection Risk

It is the risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement.
Inter-relationship of components of Audit Risk
▪ There is an inverse relationship between detection risk and the combined level of
inherent and control risks.
▪ For example, the greater the risks of material misstatement the auditor believes exists,
the less the detection risk that can be accepted and, accordingly, the more
persuasive the audit evidence required by the auditor. (अगर लग रहा Misstatement का
risk ज्र्ादा है तो डडट़े क्शन ररस्क कम रखना चाहहए, ऐसा करऩे क़े सलए ज्र्ादा Persuasive Evidence
required है )
▪ Thus, when inherent and control risks are high, acceptable detection risk should be low to reduce the
overall audit risk to an acceptably low level.
▪ However, the assessed levels of inherent and control risk cannot be sufficiently low to eliminate the
need to perform substantive procedures
.
SA 315 - IDENTIFYING AND ASSESSING THE RISK OF MATERIAL

MISSTATEMENT THROUGH UNDERSTANDING THE ENTITY AND ITS
ENVIRONMENT.
Objective
▪ The auditor should
 identify and assess the
 risks of material misstatement, whether due to fraud or error,
 at the financial statement (Preparation, Presentation & Disclosure)
 and assertion levels (Assertion =Representations by management, explicit or otherwise, embodied in the financial statements)
▪ He should
o understand the entity
o and its environment,
o including the entity's internal control.
▪ He should do the above mentioned steps so that, he can design and implement responses to the
assessed risks of material misstatement.
▪ This will help the auditor to reduce the risk of material misstatement to an acceptably low level.
Why there is a need to understand the entity and its environment?

We cannot audit the all the transactions because of ILA. Therefore, we need to decide the nature time and
extent of the audit procedures and we also need to know the sample size.
To determine NTE of Audit Procedures we need to understand 2 things

1. RMM (SA 315) (Assessment of RMM will help in deciding the NTE of AP)
2. Materiality (SA 320)
RMM can be further divided into (We studied this in basics)

1. Inherent Risk (Risk which is inseparable, risk that belongs to entity and is there because of nature of
entity)
2.Control Risk (Risk that IC will fail to PDC Misstatements.
To Assess Inherent risk we need to understand entity and it’s environment and to assess control risk we need
to understand the IC of the entity
Always keep in mind 315 is about assessment and not action and we will formulate our response to the
assessed risk in SA 330
Definitions
Assertions
Representations by management, explicit or otherwise, embodied in the financial statements.
Business risk
A risk resulting from significant conditions, events, circumstances, actions or inactions that could adversely
affect an entity's ability to achieve its objectives.
Risk assessment procedures

The audit procedures performed to
obtain an understanding of the entity and its environment, including the entity's internal control, to identify
and assess the risks of material misstatement at the financial statement and assertion levels.
Significant risk
An identified and assessed risk of material misstatement that requires special audit consideration.
Material Weakness
A. A weakness in internal control that could have a material effect on the financial statements.
B. The auditor shall check that whether any material weakness is there in DOT of IC.
C. The auditor shall communicate material weakness in internal control (if any) on a timely basis to
management.
Risk Assessment Procedures
1. Consider knowledge in other engagements

2. Consider knowledge in previous audit
3. Discussion with team
4. ARP
5. Inquiry
6. Inspection & Observation
Assessment of risk of material misstatements
1. Financial Statement Level

a. Risk that relate to financial statement as a whole and potentially effect many assertions
b. Example risk of fraudulent financial reporting.
c. It is broader risk (overall risk)
d. Other points
i. It take into the environment in which the entity is operating to determine if there are
factors that would make FS of an entity to be materially misstated.
2. Assertion level - RMM at assertion level can be divided into 3 parts
a. Transaction
i. Occurrence
• Recorded transaction occurred during the year
ii. Completeness
• Recorded completely
iii. Accuracy
• Recorded accurately
iv. Cut-off
• Recorded in the correct accounting period
v. Classification
• Properly classified into revenue and capital nature
b. Account Balance (Same as we studied in Substantive Procedures)
i. Existence
• Asset and liability actually exist
ii. Rights and Obligation

• Entity actually have rights over assets and liabilities belong the entity and are
its obligation
iii. Completeness
• Assets and liabilities are recorded completely
iv. Valuation
• Recorded at appropriate amounts in the financial statements
c. Presentation and Disclosure
i. Occurrence and Rights and obligations
• Disclosed transaction have occurred and belong to the entity
ii. Completeness
• Disclosures are complete
iii. Classification and understandability
• Appropriately classified and presented and clearly expressed
iv. Accuracy and valuation
• Disclosed fairly at appropriate amounts
Understand
Entity (How an auditor will obtain understanding of entity)

• Industry
• Regulations (Applicable law and regulation including AFRF
• Nature of entity
i. Operations
ii. Ownership and governance structure
iii. Future plans
• Accounting policy (The entity’s selection and application of accounting policy including the
reasons for change, if any)
• Business risk
i. Entity’s ability to deal with business risk
• Financial performance
i. How entity measures and review it financial performance
Internal Control (How and auditor will understand IC system – by breaking down IC in following parts)
• Information system
• Control Environment (Culture & Ethic)
• Risk assessment procedure of the entity
• Activities having direct impact on internal control
• Monitoring of Internal control
Risks that Require Special Audit Consideration

(Significant risk Examples)
In exercising judgment as to which risks are significant risks, the auditor shall consider the following:
(a) Whether the risk is a risk of fraud;
(b) Whether the risk is related to recent significant economic, accounting, or other developments;

(c) The complexity of transactions;
(d) Whether the risk involves significant transactions with related parties;
(e) The degree of subjectivity in the measurement of financial information; and
(f) Whether the risk involves significant unusual transactions.
Revision of Risk Assessment

The auditor's assessment of the risks of material misstatement at the assertion level may change during the
course of the audit as additional audit evidence is obtained. The auditor shall revise the assessment and
modify the further planned audit procedures accordingly.
Documentation
The auditor shall document:
(a) The discussion among the engagement team;
(b) Key elements of the understanding obtained regarding each of the aspects of the entity and its
environment;
(c) The identified and assessed risks of material misstatement at the financial statement level and at
the assertion level.
SA 330- THE AUDITOR'S RESPONSES TO ASSESSED

RISKS
The auditor shall

 Design, implement and perform
 overall responses and further audit procedures
 to address the assessed risks of material misstatement at the
 Financial statement level (Response for PPD).
 risks of material misstatement at the assertion level.
Procedures are 2 types, ToC &ToD
Test of Controls
1. Perform test of controls if it appears that Internal Control are good.
2. If internal controls are not good, then directly go for Substantive procedure.
3. Use the knowledge & evidence obtained in interim period
4. Use the knowledge & evidence obtained in previous audit
5. Check changes since then
6. Specifically check control over significant risks
7. If deficiency is there in internal control report the same to those charged with governance. (Also
refer SA 265 and letter of weakness)
Substantive Procedure
1. He should perform some substantive procedure for every item irrespective of degree of
risk
2. For the following items substantive procedures shall be applied specifically

a. Financial statements
i. Agreeing or reconciling the financial statements with the underlying
accounting records
ii. Examining material journal entries and other adjustments made during the
course of preparing the financial statements.
b. Significant Risks
Question Bank on Chapter 5
♥ Write short note on the internal control in small business. (Most Important)
Internal control in small business: The auditor needs to obtain the same degree of assurance in order to give an
unqualified opinion on the financial statements of both small and large entities.
However, many controls which would be relevant to large entities are not practical in the small business e.g. in small
business accounting work may be performed by only a few persons.
These persons may have both operating and custodial responsibilities, and segregation of functions may be missing
or severally limited.
Inadequate segregation of duties may, in some cases, be offset by owner/manager supervisory controls which may
exist because of direct personal knowledge of the business and involvement in the business transactions.
In circumstances where segregation of duties is limited or evidence of supervisory controls is lacking, the evidence
necessary to support the auditors' opinion on the financial information may have to be obtained largely through the
performance of substantive procedure.
♥ Letter of Weakness (M.imp)
Letter of Weakness
(1) The auditor does compliance procedure to ascertain that the internal control system exist in the entity, it works
effectively; it work continuously in the entity during review period.
(2) When he comes across any weakness in the control points, he issues letter of weakness.
(3) Letter of weakness is a report issued by auditor stating the weakness in internal control mechanism. It also
suggests measures by which the weakness in the system be corrected and the control system be made better
protected.
(4) Lapses in operation of internal control too are reported in the communication of weakness.
(5) The communication of weakness is reporting to management of such weakness in design and operation of
internal control as have come to notice of auditor during his auditing and it should not be taken to be a review
and comment on adequacy of the control mechanism for management purpose.
♥ The accountant of M/s Blisco was authorized to receive the payments from debtors. On one occasion, when he
recovered bad-debt of Rs. 20,000 he credited the same to the account of a debtor and misappropriated the cash
which he had recovered from the said debtor. Pinpoint weaknesses in the internal control system which led to this
situation. Comment.
Following two essential features of internal control are relevant here:

(i) Breaking the chain of the work in a manner so that no single person can handle a transaction from the
beginning to the end and

(ii) Segregation of accounting and custodial functions.
Weakness in internal control system in the instant case:

(1) The accountant is receiving cash and also passing the entries in the books. The accountant should not
have been allowed to effect recoveries.
(2) It also appears that system for issuing receipts for amount received - whether cash or cheque is also
lacking.
(3) In a small and to some extent medium size organization, the supervision of the owner offsets the
deficiencies in internal control system. But in this case, it appears, that supervision and personal control is
also lacking.
Thus, in the given case, the main weakness of the system is that it is ignoring the basic requirements of a good internal
control system.
♥ What do you understand by the Internal Control? State the objectives of Internal Control.
As per SA 315, "Identifying and Assessing the Risk of Material Misstatement Through Understanding the Entity and its
Environment" the internal control may be defined as The process designed, implemented and maintained by those
charged with governance, management and other personnel to provide reasonable assurance about the
achievement of an entity's objectives with regard to reliability of financial reporting, effectiveness and efficiency of
operations, safeguarding of assets, and compliance with applicable laws and regulations.
Objectives of Internal Control
(i) Transactions are executed in accordance with management's general or specific authorization;
(ii) promptly recorded in the correct amount in the appropriate accounts
All transactions are
and in the accounting period in which executed so as
(iii) Preparation of financial information within a framework of recognized accounting

policies and practices and relevant statutory requirements, if any, and to maintain accountability for
assets;
(iv) Assets are safeguarded from unauthorized access, use or disposition; and
(v) The recorded assets are compared with the existing assets at reasonable
intervals and appropriate action is taken with regard to any differences.
♥ "The division of internal control into the five components provides a useful framework for auditors." Comment and
name those components.
Division of internal control into components: The division of internal control into the following five components provides
a useful framework for auditors to consider how different aspects of an entity's internal control may affect the audit:
(i) The control environment;

(ii) The entity's risk assessment process;
(iii) The information system, including the related business processes, relevant to financial reporting, and
communication;
(iv) Control activities; and
(v) Monitoring of controls.
♥ Discuss the factors relevant to the auditor's judgment, about whether a control, individually or in combination with
others, is relevant to the audit. (When a particular IC is relevant for audit)
Factors relevant to the auditor's judgment, about whether a control, individually or in combination with others, is
relevant to the audit may include such matters as the following:
 Materiality.
 The significance of the related risk.
 The size of the entity.

 The nature of the entity's business, including its organisation and ownership characteristics.
 The diversity and complexity of the entity's operations.
 Applicable legal and regulatory requirements.
 The circumstances and the applicable component of internal control.
 Whether, and how, a specific control, individually or in combination with others, prevents, or detects
and corrects, material misstatement.
♥ "The auditor should consider the assessed levels of inherent and control risks in determining the nature, timing and
extent of substantive procedures required to reduce audit risk to an acceptably low level." Comment.
The auditor should consider the assessed levels of inherent and control risks in determining the nature, timing and
extent of substantive procedures required to reduce audit risk to an acceptably low level. In this regard the auditor
would consider:
• The nature of substantive procedures, for example, using tests directed toward independent parties outside the entity
rather than tests directed toward parties or documentation within the entity, or using tests of details for a particular
audit objective in addition to analytical procedures;
• The timing of substantive procedures, for example, performing them at period end rather than at an earlier date; and
• The extent of substantive procedures, for example, using a larger sample size.
♥ Discuss the factors to be considered by the auditor when evaluating the adequacy of the internal audit system.
The auditor has to examine whether the internal audit system is commensurate with the size of the company and the
nature of its business. The following are some of the factors to be considered in this regard
(i) What is the size of the internal audit department?

(ii) What are the qualifications of the persons who undertake the internal audit work?
(iii) To whom does the internal auditor report?
(iv) What are the areas covered by the internal audit?
(v) Has the internal auditor adequate technical assistance?
(vi) What are the reports which are submitted by the internal auditor or what other evidence is there of
his work?
(vii) What is the follow-up?
♥ In a medium size trading organisation the accountant was given additional responsibility of making recoveries from
the trade receivables. On one occasion, when an insurance claim of Rs. 25,000 was received, he credited the same
to the account of a debtor and misappropriated the cash which he had recovered from the said debtor. Pinpoint
weaknesses in the internal control system which led to this situation. Comment.
Following two essential features of internal control are relevant here:

(i) Breaking the chain of the work in a manner so that no single person can handle a transaction from the
beginning to the end and
(ii) Segregation of accounting and custodial functions.
Weakness in internal control system in the instant case:
(a) The accountant is receiving cash and also passing the entries in the books. The accountant should not have
been allowed to effect recoveries.
(b) It also appears that system for issuing receipts for amount received - whether cash or cheques is also lacking.
(c) In a small and to some extent medium size organization, the supervision of the owner offsets the deficiencies
in internal control system. But in this case, it appears, that supervision and personal control is also lacking.
Thus, in the given case, the main weakness of the system is that it is ignoring the basic requirements of a good
internal control system.

♥ Difference Between External & Internal Auditor
External Auditor Internal Auditor
1. He is generally appointed by the members 1. He is appointed by the management.
2. He examines the financial statements. 2. He basically examines the operations of entity.
3. He expresses his opinion on true & fair view of 3. He reports on effectiveness of operations & activates
financial statements in the entity.
4. His scope is determined by law, ICAI & terms 4. His scope is determined by the management.
5. He is more Independent 5. He is not independent.
6. Appointment of statutory (External) auditor is 6. It is sole discretion of management as to whether to
compulsory under few laws, example: - The appoint internal auditor. (Now Section 138 of the
Companies Act, 2013 companies’ act, 2013 has made it mandatory for
some companies)
♥ "Internal control can provide only reasonable but not absolute assurance that its objective relating to prevention and
detection of errors/frauds, safeguarding of assets etc., are achieved." Explain.
♥ GR & Co., a firm of Chartered Accountants has been called upon to audit the accounts of Dee Vee Philips Ltd. The
auditors are told that Company is not performing well due to weak accounting and administration system in place.
Mr. Preet handling the assignment noticed that there are gaps in internal check system of the company. You are
required to explain the special steps involved in framing a system of Internal Check.
♥ Being an auditor of a college, mention the points that you will consider to check whether a good internal control
system for collection of tuition fees from students has been implemented or not. (Do it yourself question – Do it after
special audits)
Internal control points for collection of tuition fees:

(i) There must be a clear cut tuition fee structure approved by the college council.
(ii) The challan or paying in slip should contain necessary fields for identifying the roll number of the student,
class, and period for which fees is paid etc. The slips should have such number of counterfoils to cross
check the remittance.
(iii) The paying in slip when filled by the students, should be checked for its correctness as to applicable
amount etc by one clerk.
(iv) He must initial the slip which authorizes the cashier to accept the fe1es as per slip.
(v) All remittance should be banked each day. No amount should be allowed to be spared for meeting any
type of expense.
(vi) Alternatively, the fees may be directly remitted into bank and banker's daily remittance slip should be
scrutinized by college officers.
(vii) Arrears list should be periodically prepared from the students rolls.
(viii) Any concession, remission of tuition fees should have approval of competent authority.
(ix) Delayed remittance should carry fines or compensating charges for delay.
(x) When students are readmitted after removal for non-payment of fees, the admission should carry the
permission of competent authority.
May 2016 What are the specific risks related to internal control in an IT environment? (5 Marks) Q1(d)
Risks related to internal control in IT environment: The specific risks related to internal control in an IT environment includes the
following
(i) Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or both. (either data
is wrong or data processing is wrong)
(ii) Unauthorized access to data that may result in destruction of data or improper changes to data, including the recording of
unauthorized or non-existent transactions, or inaccurate recording of transactions. Particular risks may arise where multiple
users access a common database.
(iii) The possibility of IT personnel gaining access privileges beyond those necessary to perform their assigned duties thereby
breaking down segregation of duties. (Lack of segregation of duties)
(iv) Unauthorized changes to data in master files.
(v) Unauthorized changes to systems or programs.
(vi) Failure to make necessary changes to systems or programs.
(vii) Inappropriate manual intervention.

You have been appointed auditor for the first time of a Small and Medium Enterprise carrying on business for past several years. List
down the sources from which you can obtain knowledge of the client's business before commencing the audit. (8 Marks) (May/June
2009)
Knowledge of the Client’s Business

It is one of the important principles in developing an overall audit plan. Infact without adequate knowledge of client’s business, a
proper audit is not possible. SA-315 on “Identifying and Assessing the Risk of Material Misstatement Through Understanding the Entity
and its Environment” deals in detail about the significance of such knowledge on the part of the auditor.
The auditor needs to obtain a level of knowledge of the client’s business that will enable him to identify the events, transactions and
practices that, in his judgment, may have significant effect on the financial information. Among other things, the auditor can obtain
such knowledge from :
• The client’s annual reports to shareholders.
• Minutes of meetings of shareholders, board of directors and important committees.
• Internal financial management reports for current and previous periods, including budgets, if any.
• The previous year’s audit working papers and other relevant files.
• Firm personnel responsible for non-audit services to the client who may be able to provide information on matters that may
affect the audit.
• Discussions with client.
• The client’s policy and procedures manual.
• Relevant publications of the Institute of Chartered Accountants of India and other professional bodies, industry publications,
trade journals, magazines, newspapers or text books.
• Consideration of the state of the economy and its effect on the client’s business.
• Visits to the client’s premises and plant facilities.
Tools to Review the IC system (Homework Topic)
There are 4 tools

1. Narrative records
2. Internal control questionnaire
3. Checklist
4. Flowchart
1. Narrative Record
Meaning
▪ Complete &exhaustive detail of system,
▪ As found in operation by the auditor.
Advantages
(i) When properly framed formal I.C. system is not found, complete description is needed.
(ii) Suitable for small business.
Limitations
i. Detailed observation is needed (time consuming).
ii. It doesn't readily identify weakness in system.
iii. Constant updating is needed if circumstances are changed.
2. Checklist
Meaning
▪ It contains series of questions,
▪ To be answered by the audit staff.
▪ When he completes the instruction he will leave his initials in space provided for the purpose of accountability
Example
"Are tenders invited before placing orders"? Now a member of audit staff checks the same & answer it ("yes", "No", "or "Not Applicable").
After answering, he puts his initials.
Advantage
i. On the job requirement, thus motivating.
ii. Completed checklist is studied by the senior audit staff, thus weaknesses can't be overlooked.
iii. Easy location of weakness.

Limitations
(i) Requires intelligence to prepare proper checklist.
(ii) Time consuming.
(iii) Client can manipulate when responding to questions raised by audit staff.
3. I.C. Questionnaire
Meaning
▪ Set of question designed to give a thorough view of the state of internal control of an organisation
▪ Prepared by auditor & filled by the client's employees.
These questions are generally prepared in sections of distinct control areas like
(i) Purchases & Creditors

(ii) Sales & debtors
(iii) Stock
(iv) Cash & Bank Receipts and payments
(v) Fixed assets
These segments are further divided into further subsections
Advantage
(i) Detailed questionnaire, thus no important aspect is overlooked.
(ii) Weaknesses are easily located.
(iii) Evaluating I.C system becomes Systematic& - easy.
(iv) Recommendations can be readily provided by auditor.
Limitation
(i) Time consuming.
(ii) Client may answer it in a hasty way.
(iii) Client may manipulate the answers.
4. Flowchart
Use of Flow Charts in evaluation of internal control:

• It is a graphic presentation of each part of the company's system of internal control.
• A flow chart is considered to be the most concise way of recording the auditor's review of the system.
• It minimizes the amount of narrative explanation and thereby achieves a consideration or presentation not possible
in any other form.
• It gives bird's eye view of the system and the flow of transactions and integration and in documentation, can be
easily spotted and improvements can be suggested.
• It is also necessary for the auditor to study the significant features of the business carried on by the concern; This will
help him to understand and evaluate the internal controls in the correct perspective.
♥ Write a short note on Internal Control Questionnaire
Internal Control Questionnaire: This is a comprehensive series of questions concerning internal control. This is the most
widely used form for collecting information about the existence, operation and efficiency of internal control in an
organisation.
An important advantage of the questionnaire approach is that oversight or omission of significant internal control
review procedures is less likely to occur with this method.
With a proper questionnaire, all internal control evaluation can be completed at one time or in sections. The review
can more easily be made on an interim basis.
The questionnaire form also provides an orderly means of disclosing control defects. It is the general practice to review
the internal control system annually and record the review in detail.
In the questionnaire, generally questions are so framed that a 'Yes' answer denotes satisfactory position and a 'No'
answer suggests weakness. Provision is made for an explanation or further details of 'No' answers. In respect of
questions not relevant to the business, 'Not Applicable' reply is given.
The questionnaire is usually issued to the client and the client is requested to get it filled by the concerned executives
and employees.

If on a perusal of the answers, inconsistencies or apparent incongruities are noticed, the matter is further discussed by
auditor's staff with the client's employees for a clear picture. The concerned auditor then prepares a report of
deficiencies and recommendations for improvement.

Chapter 6
INTERNAL CONTROLS IN EDP
ENVIRONMENT
Difference between conventional accounting system & Computer based accounting system
Particulars Conventional Accounting System Computer Based Accounting System
1. Input Document Transactions are recorded from source Data is entered “Live” in an online system at the
/ input documents, e.g. bills, invoices, time of transaction itself. Hence on input
receipts vouchers, etc. documents are used.
2. Design Easy to design. More time-consuming to design.
3. Effect on Accounting and book-keeping functions The activities and responsibilities may be
organisation are centralized in the Finances centralized in the EDP department, unless all
structure Department. departments are fully computerized and linked by
network. (e.g. LAN)
4. Complexity Less complex relationships between sub- More complex and high-degree of inter-
systems, e.g. Purchased, Stores, relationships between different sub-systems.
Accounts, Production, etc.
5. Reliability Possibility of collusion in order to Due to effectiveness of controls, it is considered
overtime the system cannot be more reliable.
discounted. Hence less reliable.
2. Audit Trail Fully visible – all ends of the Due to absence of input documents and storage of
transactions can be neatly and clearly information inside the system, audit trail is less
traced. visible.

CIS
Meaning Nature of risks and the internal control

characteristics in CIS environments
CIS Lack of Uniform Lack of Errors and Automatic Potential

Dependen Potential
environme transactio processing segregatio irregulariti Initiation for use of
ce of other for
nt is one ns trails of n of es in or CAAT
controls increased
where one transactio functions developm execution over managem
or more Some CIS ns ent, of Due to
computer ent
computers may maintenan transactio peculiariti
The extent processing supervisio
are provide ce and n es of some
Uniform of n
involved in complete execution transactio
the transactio processing segregatio of CIS n and
processing n trail, of n of CIS may Manual systems,
of however transactio functions initiate control If auditor
present in The certain procedure managem
accounts some may n can potential may be
of client. not eliminate manual transactio may also ent uses required
systems for human ns be used all the
provide it clerical error in to apply
(OLRT). If errors may not automatic while technologi CAAT.
be there in developm ally. The implement es & tools
computers there is which are
CIS ent, authorizati ing CIS. to review
may be absence of there with
environme maintenan on of &!
operated trail, the manual
nt. Thus, ce and these supervise
by the risk will be processing
entity or an execution transactio the CIS
high. . However, of CIS may
by a third programm individual ns may not departme
party. performin be greater be nt of
ing errors than in
may occur. g many document entity, the
computer manual ed risk will be
related system reduced.
works may (due to
be in a technical
position to incompete
perform nce).
incompati
ble
function.

AUDIT TRAIL IN CIS ENVIRONMENT
Meaning Availability in CS
How to compensate loss of audit
trail
Audit trail means tracing a Audit trail is generally not available

transaction from starting to end in EDP environment Because of
and vice versa. following factors CAAT
In Audit Trail Auditor trace the

transaction from the source Non-existence of input document. Arranging for special printouts
doucment to summarsied total in INCREASE in processing speed. NO containing additional information.
accounting reports or vice versa OUTPUT reports. OLRT Systems.
PRINTOUTS contain summary only
Evaluating the
reliability of CIS
Output Others
Input Processing
Data recovery
Output is correct &
Simple. Provided to Data Security against
Authorise complete & Detection of errors on authorised personnel
correct timely basis fire and other
calamities, wrong
processing and fraud,
etc.
amendments to the
program are properly
authorised.
safe custody of the

application software
and the data files.

Audit Around the

Computer
The auditor concentrates can use audit around the Advantages Disadvantage
on input & output and computer
ignore data processing
Simple Costly : In Terms of
Printing Cost.
audit trail is available
auditor carries out the
audit more-or-less in the Low Cost in terms of
same manner as in performacnce o audit Cannot be used in org
manual system Organisation uses having complex CIS
generalized well-tested
software
except that instead of No Technical knowledge
hand-written books of Req. Time Consuming
account, he examines
computer printouts.
Ignores computer's
potential
Audit THROUGH the

Computer
The Auditor uses the can use audit THROUGH Advantages Disadvantage
computer to carry out the computer
Compliance &
Substantive Procedure
Time Saving Costly : In Terms of
Complex Accounting applying .
system
He focuses on all phases Low Cost in terms of
of CIS Activities - I/P/O Print out cost Complex to understand
Huge Volume of
transaction
The auditor reviews and Uses computer potential.

test Internal control Time Consuming
(General & Application)
& Decides NTE of SP
Technical knowledge
Req.

CAAT/Audit software program
• CAAT are Computer program,

• that auditor uses
• as a part of the audit procedure
• To process data of audit significance, contained in organization’s information system.
• In CIS Environment use of CAAT is required to increase the efficiency & Effectiveness’ of the Audit
procedures.
• Some of the commonly used audit software are
1. Package Programs/Generalized Audit Software

These are generalised Computer Programs, that perform data processing functions like selecting
information and performing calculations etc& reporting as per the auditor’s requirement.
2. Purpose Written Programs

For performance of some specific audit task.
This software may be developed by auditor, the entitiy being audited or by a outside programmer.
These cannot be used for every client therefore cost effectiveness have to be kept in mind
3. Utility Program
These are programs for performing common data processing functions like sorting, creating and printing
files.
These are not designed specifically for audit purpose therefore there are no specific features for
auditing purpose but they can be helpful in audit.
Some of the audit Techniques for auditing in CIS Environment
1. Test Data (Test Pack)

• Auditor prepares test data and process the same in the entity’s system under his control.
• If results of processing match with the pre-determined output, this indicates that all
application and general control are functioning
• Test data can be used individually for every control
• Advantage: Reliable, easy to use, Economical
• Disadvantage: Increase in workload, Difficult to design, Time consuming
2. Integrated test facility

• The auditor creates a dummy unit within the client’s actual system.
• Hypothetical data in entered into the client’s actual system.
• Subsequently dummy units and its related data is deleted.
Advantages of Using CAAT

1. Time saving
The auditor can check voluminous data in less time by using CAAT.
2. Sampling
Generally, audit software has embedded sampling routines. Thus, it is easy for the auditor to choose
appropriate sample as per stated criteria.
3. Detailed examination

Exhaustive examination of client's system is possible by using these advanced | techniques.
4. Testing internal controls

Various internal controls embedded within the system can be checked with help of CAAT. Manual audit
procedures are not effective for this.
5. Analytical review procedures

CAAT's are very effective in performing ARP because the software can easily trace unusual fluctuations
and hard copy can be generated for auditor's ready reference.
6. Compensate for loss of audit trail

Due to loss of audit trail in mostly EDP systems, manual audit procedures become impractical, making
use of CAAT indispensable.
7. For OLRT systems

In case, client is using On Line Real Time systems, there is need to check systems itself. This is possible
through ITF.
INTERNAL CONTROLS IN EDP ENVIRONMENT
In CIS Environment Internal control is divided in 2 parts general Controls and application control.
Internal control are embedded in the computer system itself. These IC cannot be checked manually.
Types of I.C.
A. Overall controls affecting EDP environment (General EDP controls).
B. Specific controls over specific applications (EDP Application Controls).
General EDP Controls
a. Organization and Management Controls: —

▪ Designing policies and procedures relating to control functions.
▪ Segregation of incompatible functions.
b. System Software Controls: —
▪ Restricted access of software to authorized personnel only.
▪ Authorization, approval, testing and implementation of new systems software.
c. Application System Development and Maintenance Controls: —

▪ Restricted Access to system documentation.
▪ Changes to application systems should be authorized.
▪ Acquisition of application systems from third parties should be carefully planned.
▪ Testing and implementation of new systems in a proper way.
d. Computer Operation Controls: —

▪ Use of only authorized programs on computers.
▪ Only authorized personnel should use computer.
▪ Systems should be used for authorized purpose.
▪ Processing errors are detected and corrected on a timely basis.

e. Data Entry and Program Controls:—

▪ Restricted access to data and programs to authorized personnel only.
▪ Input should go through an authorization process.
EDP Application Controls
(a) Controls over Input: — to check whether:

▪ Input is duly authorized.
▪ Data input is accurate.
▪ Transactions are not lost or altered.
▪ Incorrect transactions are rejected or submitted after correction.
(b) Controls over Processing and computer data files: — to check whether:
▪ Processing errors are detected and corrected on a timely basis.
▪ Transactions are properly processed by the computers.
(c) Controls over Output: - to check whether:

▪ Results of processing are accurate.
▪ Access to output is restricted to authorized personnel.
▪ Output is provided to appropriate authorized personal on a timely basis
QUESTION BANK ON EDP/CIS Environment Audit
Q1. What are CAATS? Why are CAAT required in computerized information system (CIS) environment? (8 Marks)
Computer Aided Audit Techniques (CAATs): The use of computers may result in the design of systems that provide
less visible evidence than those using manual procedures. Computer Aided Audit Techniques (CAATs) are such
techniques applied through the computer which are used in the verifying the data being processed by it.
System characteristics resulting from the Computerized Information System (CIS) Environment that demand the
use of Computer Aided Audit Techniques (CAAT) are:
(i) Absence of input documents: Data may be entered directly into the computer systems without supporting
documents. In on-line transaction systems, written evidence of individual data entry authorization, e.g.,
credit limit approval may not be available.
(ii) Lack of visible transaction trail: Certain data may be maintained on computer files only. In a manual
system, it is normally possible to follow a transaction through the system by examining source documents,
books of account, records, files and reports. In CIS environment, however, the transaction trail may be
partly in machine-readable form, and it may exist only for a limited period of time.
(iii) Lack of visible output: In a manual system, it is normally possible to examine visually the results of processing.
In CIS environment, the results of processing may not be printed or only a summary data may be printed.
Thus, lack of visible output may result in the need to access data retained on machine readable files.
(iv) Ease of Access to data and computer programmes: Data and computer programmes may be altered at
the computer or through the use of computer equipment at remote locations. Therefore, in the absence
of appropriate controls, there is an increased potential for unauthorized access to, and allocation of, data
and programmes by persons inside or outside the entity.
(v) Audit effectiveness: The effectiveness and efficiency of auditing procedures will be improved through the
use of CAAT in obtaining and evaluating audit evidence, for example -
(1) Some transactions may be tested more effectively for a similar level of cost by using the computer.

(2) In applying analytical review procedures, transactions or balance details of unusual items may be
reviewed and reports got printed more efficiently by using the computer.
(vi) Savings in time: The auditor can save time by reviewing the CIS controls using CAAT than through other
audit procedures.
(vii) Effective test checking and examination in depth: CAAT permits effective examination in depth of selected
transactions since the auditor constructs the lost audit trail.
Q2. To prepare an audit plan in CIS environment an auditor should gather information. Mention any four-such
important information which he has to collect.
The auditor should gather information about the CIS environment that is relevant to the audit plan, including
information as to
1. How the CIS function is organized and the extent of concentration or distribution of computer processing
throughout the entity.
2. The computer hardware and software used by the entity.
3. Each significant application processed by the computer, the nature of the processing (e.g. batch, on-
line), and data retention policies.
4. Planned implementation of new applications or revisions to existing applications.
5. When considering his overall plan the auditor should consider matters, such as:
(i) Determining the degree of reliance, if any, he expects to be able to place on the CIS controls in his
overall evaluation of internal control.
(ii) Planning how, where and when the CIS function will be reviewed including scheduling the works of
CIS experts, as applicable.
(iii) Planning auditing procedures using computer-assisted audit techniques.
Q3. "The overall objective and scope of an audit does not change in an EDP environment". Comment
The principal objective of an audit of financial statements, prepared within a framework of recognised
accounting policies and practices and relevant statutory requirements, if any, is to ensure that the financial
statements reflect a true and fair view.
The scope of an audit of financial statements is determined by the auditor having regard to the terms of the
engagement, the requirements of relevant legislation and the pronouncements of the Institute.
This would involve assessment of reliability and sufficiency of the information contained in the accounting
records and other source data by study and evaluation of accounting system and internal controls in operation.
The overall objective and scope of an audit does not change in an EDP environment but the use of a computer
changes the processing and storage of financial information and may affect the organisation and procedures
employed by the entity to achieve adequate internal control.
Accordingly, the procedures followed by the auditor in his study and evaluation of the accounting system and
related internal controls and nature, timing and extent of his other audit procedures may be affected by an EDP
environment.
The computerisation of accounts would also have an impact on the increase in fraud and errors.
Thus when auditing in an EDP environment, the auditor should have sufficient understanding of computer
hardware, software and processing systems to plan the engagement and to understand how EDP affects the

study and evaluation of internal control and application of auditing procedures including computer-assisted
audit techniques.
The auditor should also have sufficient knowledge of EDP to implement the auditing procedures, depending on
the particular audit approach adopted.
Thus, it is clear from the above that overall objective and scope of audit does not change irrespective of fact
that whether the accounting information is generated manually or through EDP.
Q4. 'Doing an audit in an EDP environment is simpler since the trial balance always tallies' Analyse critically?
Audit in EDP environment: Though it is true that in EDP environment the trial balance always tallies, the same
cannot imply that the job of an auditor becomes simpler. There can still be some accounting errors like omission
of certain entries, compensating errors, duplication of entries, errors of commission in the form of wrong A/c head
is posted., possibility of "Window Dressing" and/or "Creation of Secret Reserves" where the trial balance tallied . .
At present, due to complex business environment the importance of trial balance cannot be judged only upto
the arithmetical accuracy but the nature of transactions recorded in the books and appear in the trial balance
should be focused.
The emergence of new forms of financial instruments like options and futures, derivatives, off balance sheet
financing etc have given rise to further complexities in recording and disclosure of transactions. In an audit,
besides the tallying of a trial balance, there are also other issue like estimation of provision for depreciation,
valuation of inventories , obtaining audit evidence, ensuring compliance procedure and carrying out substantive
procedure, verification of assets & liabilities their valuation etc. which still requires judgement to be exercised by
the auditor.
Responsibility of expressing an audit opinion and objectives of an audit are not changed in the audit in EDP
environment. Therefore, it can be said that simply because of EDP environment and the trial balance has tallied
it does not mean that the audit would become simpler.
Q5. What is an Audit Trail? Briefly state the special audit techniques using the computer as an audit tool.
Audit Trail: 'Audit trail' refers to a situation where it is possible to relate, on a "one - to -one" basis, the original input
with the final output. In a manual accounting system, it is possible to relate the recording of a transaction of
each successive stage enabling an auditor to locate and identify all documents from beginning to end for the
purposes of examining documents, totalling and cross - referencing. In first and early second generation
computer systems, a complete audit trail was generally available. However, with the advent of modern
machines, the EDP environment has become more complex. This led to use of exception reporting by the
management which effectively eliminated the audit trail between input and output. The lack of visible evidence
may occur at different stages in the accounting process, for example:
(i) Input documents may be non-existent where sales orders are entered online. In addition,
accounting transactions such as discounts and interest calculations may be generated by
computer programmes with no visible authorization of individual transactions.
(ii) The system may not produce a visible audit trail of transactions processed through the computer.
Delivery notes and suppliers invoices may be matched by a computer programme. In addition,
programmed control procedures such as checking customer credit limits, may provide visible
evidence only on an exception basis. In such cases, there may be no visible evidence that all
transactions have been processed.
(iii) Output reports may not be produced by system or a printed report may only contain summary
totals while supporting details are retained in computer files.
Special audit Techniques: In the absence of audit trail, the auditor needs the assurance that the programmes
are functioning correctly in respect of specific items by using special audit techniques. The absence of input
documents or the lack of visible audit trail may require the use of Computer Assisted Audit Techniques (CAATs)
i.e. using the computer as an audit tool. The auditor can use the computer to test:

➢ the logic and controls existing within the system, and
➢ the records produced by the system.
Depending upon the complexity of the application system being audited, the approach may be fairly simple
or require extensive technical competence on the part of the auditor. The effectiveness and efficiency of
auditing procedure may be enhanced through the use of CAATs. Properly, two common types of CAATs are in
vogue, viz., test pack or test data and audit software or computer audit programmes.
Q6. Your firm of Chartered Accountants has been allotted Information Systems Audit of branches of Oriental Bank of
Commerce. How would you assess the reliability of internal control system in computerized information system?
Reliability of Internal Control System in CIS: For evaluating the reliability of internal control system in CIS, the
auditor would consider the followings:-
(iii) That authorized, correct and complete data is made available for processing.
(iv) That it provides for timely detection and corrections of errors.
(v) That in case of interruption due to mechanical, power or processing failures, the system restarts
without distorting the completion of entries and records.
(vi) That it ensures the accuracy and completeness of output.
(vii) That it provides security to application software’s & data files against fraud etc.
(viii) That it prevents unauthorized amendments to programs.
Q7. Auditing through the computer.
'Auditing through the computer approach': Following are several circumstances where auditing through the
computer approach must be used:
(i) The application system processes large volumes of input and produces large volumes of output that
make extensive direct examination of the validity of input and output difficult.
(ii) Significant parts of the internal control system are embodied in the computer system. For example, in
an online banking system a computer program may batch transactions for individual tellers to provide
control totals for reconciliation at the end of the day's processing.
(iii) The logic of the system is complex and there are large portions that facilitate use of the system for
efficient processing.
(iv) Because of cost-benefit considerations, there are substantial gaps in the visible audit trail.
The primary advantage is that the auditor has increased power to effectively test a computer system. The range
and capability of tests that can be performed increases and the auditor acquires greater confidence that
data processing is correct. By examining the system's processing the auditor also can assess the system's ability
to cope with environment change.
The primary disadvantage of the approach are the high costs sometimes involved and the need for extensive
technical expertise when system are complex. However, these disadvantages are really spurious if auditing
through computer is the only viable method of carrying out the audit.

Chapter – 7 Audit Report
SA 700
Forming an opinion and reporting on financial statements
Scope of SA
 This SA deals with the Auditor’s responsibility
 To form an opinion on the financial statements.
 It also deals with the form and content
 of the Auditor’s Report issued
 as a result of an audit of Financial Statements.
General purpose framework

 Financial Statements are prepared in accordance with a General Purpose Framework.
 This FRF meets the common financial information needs of many users.
 It may be of two types
Fair presentation framework

FRF that requires compliance with the requirements of FRF and acknowledges that
→ Management may provide disclosures beyond those specifically required by the framework.
→ Management may depart from a requirement of framework to achieve fair presentation of
financial statements (in very rare case).
Example: Financial Statements of a Company.
Compliance framework
FRF requiring compliance with requirements of the framework but does not contain acknowledgement
as above.
NOTE:
 While preparing financial statements
 those who are responsible to prepare financial statements
 needs to inform users regarding the financial reporting framework used
 and also in case of any departure, if fair presentation framework is used,
 disclosures shall be made with such prominence as required
 so that users can understand
 and also provide the reasons why departure was necessary
 and how the alternative treatment adopted by the management resulted in more relevant and reliable
In audit engagements, auditor has to consider the framework used to prepare financial statements as
it has bearing on the audit engagement down to the level of audit report.
Objectives of SA 700
(a) Forming an
1. opinion on the financial statements
2. based on conclusions
3. drawn from evidences obtained &
(b) Expressing
1. Clearly that opinion (including basis thereof)
2. Through a written report.
Forming an opinion
1. Auditor shall from an opinion as to whether the financial statements are prepared in accordance
with applicable FRF and all disclosures have been made properly.
2. To from such an opinion, he shall obtain reasonable assurance as to whether financial statements
as a whole are free from material misstatements.
3. His opinion shall clearly state that the financial statement represents true and fair view of state
of affairs of the organisation.
4. In forming such opinion he shall consider the following:

(i) Sufficiency and appropriateness of audit evidences
(ii) materiality of uncorrected misstatements
(iii) Adequacy of disclosures in financial statements
(iv) Consistency of accounting Policies with applicable FRF
(v) Reasonableness of Accounting Estimates
(vi) Reliability & relevance of financial information
(vii) Adequacy of disclosure of material transactions & Events
(viii) Appropriateness of Terminology used in financial statements
5. In case of fair presentation framework, he shall also consider:

(i) Overall presentation, structure and content of the financial statements, &
(ii) Whether financial statements (including notes), represent the underlying transactions &
events so as to achieve fair presentation.
Form of opinion
Opinion
Unmodified Modified
F.st are F.st are not free unable to obtain sufficient

prepared from material appropriate evidences
as per misstatement
applicable Qualified or
FRF Qualified or Disclaimer
Adverse
(The auditor shall modify the opinion in the auditor’s report in accordance with SA 705).
Discussion with Management
➢ If financial statements prepared in accordance with the requirements of a Fair Presentation

Framework do not achieve Fair Presentation, the auditor shall discuss with management.

➢ When the financial statements are prepared in accordance with a Compliance Framework, the auditor
is not required to evaluate whether the financial statements achieve fair presentation. However, if in
extremely rare circumstances the auditor concludes that such financial statements are misleading,
the auditor shall discuss with management.
Auditor's report
Auditor's report for audits conducted in accordance with SA's has following basic elements:
1. Title
2. Address
3. Introductory Paragraph
4. Management’s Responsibility for the financial statements
5. Auditor’s responsibility
6. Auditor’s opinion
7. Other reporting responsibilities
8. Date of auditor’s report
9. Place of signature
10. Signature of the auditor
1. Title
• Clearly indicating that it is an "Independent Auditor's Report",
• So that it can be distinguished from the reports issued by others.
2. Addresses
• As per the circumstances.
• As per applicable law or regulation.
• To members/TCWG.
• For example, In case of companies, it is addressed to the shareholders.
3. Introductory Para
The introductory para in the auditor’s report shall:
• Identify the entity whose financial statements have been audited.
• State that the financial statements have been audited.
• Identify the Title of each statement that comprises the financial statements.
• Refer to the summary of significant accounting policies and other explanatory information.
• Specify the date or period covered by each financial statement comprising the financial
statements.
4. Management's responsibility for the financial statements

• It describes the responsibility of management/TCWG who is responsible for preparation of
• It states that management is responsible for:
✓ Preparation of financial- statements as per applicable FRF;
✓ Ensuring adequacy of maintenance of accounting books and records;
✓ Design, implementation & maintenance of internal controls; &
✓ Fair presentation of financial statement (in case, financial statements are prepared
as per fair presentation framework)
5. Auditor's Responsibility
This paragraph shall include the following items:

• Responsibility: The auditor’s responsibility of the auditor is to express an opinion on the
financial statements based on the audit.
• Compliance with SAs: The auditor’s report shall state that the audit was conducted in
accordance with SA issued by the ICAI.
• Description of audit: The auditor’s report shall describe an audit by stating that:
✓ Auditor complied with ethical requirements;
✓ Auditor obtained reasonable assurance as to whether financial statements are free
from material misstatements;
✓ Audit involves procedures to obtain evidences about amounts & disclosures in financial
statements;
• Fair presentation: Where the financial statements are prepared in accordance with fair
presentation framework, the description of the audit in the Auditor’s Report shall refer to “the
Entity’s preparation and fair presentation of the financial statements”.
• Audit Evidence: The auditor’s report shall state whether the auditor believes that the audit
evidence the auditor has obtained is S&A to provide a basis for the auditor’s opinion.
6. Auditor's opinion
While expressing unmodified opinion he shall use following:
• In case of fair presentation framework
✓ Financial statements present fairly in all material respects in accordance with
[Applicable FRF]
✓ Financial statements give a true & fair view in accordance with [Applicable FRF]
• In case of compliance framework
✓ Financial statements are prepared in all material respects in accordance with
[applicable FRF]
7. Other Reporting responsibilities

• If there is any requirement, there shall be a separate heading "Report on other legal and
Regulatory Requirements".
• For example: - CARO in case of audit of a company.
8. Date of Auditor’s Report

The auditor’s report shall be dated no earlier than the date on which the auditor has obtained sufficient
appropriate audit evidence on which to base the Auditor’s opinion on the financial statements, including
evidence that-
• Preparation: All the statements that comprise the financial statements, including the related notes,
have been prepared.
• Management Approval: Those with the recognized authority have asserted that they have taken
responsibility for those financial statements.
9. Place of signature
Specific location (The city where the audit report is signed)
10. Signature of the auditor

• In case of sole practitioner, it is signed in the personal name of auditor.
• Mention membership no. of member in ICAI as well.

• In case of firm, it is signed in personal name of proprietor/Partner as well as in the
name of firm.
• Firm's registration no. is also mentioned in this case.
Supplementary information presented with financial

statements
Examine whether it is clearly differntiated from audited

financial statement
Yes No
Ok Ask Management to
change the way to
present it
Management
Yes No
OK State in AR that such

supplementary
information is not
audited

SA 705
Modifications to the Opinion in the Independent Auditor's Report
Auditor will give an

appropriate modified
opinion when
Auditor concludes Auditor is unable to

on the basis of obtain Sufficient &
evidence obtained Appropriate evidence
that FS are NOT FREE that FS are FREE from
from SA 705 Modifications to the MMS
Opinion in the Independent
Auditor's Report
Material Mistatement Effect
Pervasive NOT Pervasive Pervasive NOT Pervasive
ADVERSE QUALIFIED DISCLAIMER Qualified
Types of modified of modification

(iii) A Qualified opinion
(iv) An adverse opinion
(v) A disclaimer of opinion
Determining type of Nature of Matter Giving Auditor's Judgment about the Pervasiveness of the
modification Rise to the Modification Effects or Possible Effects on the Financial
Statements
Material but Not Material and Pervasive
Pervasive
Financial statement are Qualified opinion Adverse opinion
materially misstated
Inability to obtain Qualified opinion Disclaimer of opinion
sufficient appropriate
audit evidence
Form & Content of auditor's report in case of modified opinion
"Basis for modification " Para

→ He shall, in addition to SA 700, place this Para immediately before the opinion Para.
→ Its heading is "Basis for____________ opinion" as appropriate.
→ Here, he shall describe the matter giving rise to modification.
→ It includes quantification of financial effects of matter unless impracticable.
→ If not practicable to quantify, state this fact.
Communication with TCWG

→ In case he expects to modify his opinion,
→ He shall communicate the circumstances & proposed wordings.
SA 706
Emphasis of matter paragraphs & other matter paragraphs in the
independent auditor's report
Scope of SA
 This SA deals with

 additional communication
 in the auditor’s report
 when the auditor considers it necessary
 to draw user’s attention-
o To matters presented or disclosed
▪ in the financial statements
▪ that are of such importance
▪ That they are fundamental
▪ to users understanding of the financial statements.
o To any matters other than those presented or disclosed
▪ in the financial statements
▪ that are relevant to users understanding of the audit,
▪ the auditor’s responsibilities or the auditor’s report.
Objective of the auditor

 To draw user's attention
 by way of additional communication
 in the auditor's report, to both the matters discussed above.
"Emphasis of matter" Para

Meaning
→ Para which refers to a matter appropriately incorporated in the financial statements,
→ that is of such importance that it is fundamental to user's understanding of financial statements.
Inclusion in Auditor’s Report

When the auditor includes an emphasis of matter paragraph in the auditor’s report, the auditor shall-
(a) Include it immediately after the opinion para in the auditor’s report,
(b) Use the heading “Emphasis of matter”, or other appropriate heading,
(c) Include in the paragraph a clear reference to the matter being emphasized and the place where
relevant disclosures that fully describe the matter can be found in the financial statements, and
(d) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.
Circumstances:
Examples where EOM may be necessary
1. Substantial doubt about going concern properly disclosed in financial statements.

2. Material change in the accounting policy.
3. Early application of a new accounting standard,
4. Uncertainty relating, to a pending litigation, properly disclosed in the financial statements by
the management.
Effect of such paragraph:

 The inclusion of an emphasis of matter paragraph in the auditor’s report does not affect the auditor’s
opinion.
 An emphasis of matter paragraph is not a substitute for
o The auditor expressing a
▪ qualified opinion or
▪ an adverse opinion, or
▪ disclaiming an opinion,
o Disclosures in financial statements that the applicable FRF requires management to make.
"Other matter" Para
Meaning
Situation Treatment
• If the auditor considers it necessary to The auditor shall do this in a paragraph in the
communicate a matter other than those that auditor’s report, with the heading “other matter”,
are presented or disclosed in the financial or other appropriate heading.
statements that, in the auditor’s
judgement, is relevant to user’s
understanding of- (a) the audit, or (b) the
auditor’s responsibilities, or (c) the auditor’s
report, AND
• Such communication is not prohibited by law
or regulation.
Inclusion in Auditor’s Report

(a) The placement of other matter paragraph depends on the nature of the information to be
communicated.
(b) The auditor shall include the other matters paragraph immediately after the opinion paragraph and
any emphasis of matter paragraph, or elsewhere in the auditor’s report if the content of the other
matter paragraph is relevant to the other reporting responsibilities section.
Examples where it is necessary

(i) Other reporting responsibilities in case of audit of a company
(ii) LFAR in case of audit of a bank.
Communication with TCWG

If auditor expects to include an EOM or OM paragraph, he shall communicate the same to TCWG.

SA 706
Emphasis of matter paragraphs & other matter paragraphs in the independent
auditor's report
This SA Deals With additional Communication in the Auditor's report when the auditor considers it
necessary to draw user's attention
To matters presented or disclosed in the matters other than those presented or

financial statements disclosed in the financial statements
that are relevant to users understanding of the

fundamental to users understanding of audit, the auditor’s responsibilities or the
the financial statements auditors report.
Matters will be reported through Such communication is not prohibited

Emphasis of matter para by law or regulation.
Immediately after opinion para Matters will be reported through Other matter para
a clear reference to the matter being emphasized and the place Placement depends
where relevant disclosures that fully describe the matter can be on nature of info
found in the financial statements, and
Indicate that the auditor’s opinion is not modified in respect of the If relevant to reporting responsibilty then
matter emphasized. immediately after opinion and EOM Para
effect
does not affect the

is not a substitute for
auditor’s opinion.
Disclosures in financial statements that

The auditor
the applicable FRF requires
expressing a
management to make.
an adverse opinion, disclaiming an

qualified opinion or
or opinion,

Chapter - 8
Government Audit
Government Audit-Meaning
1. Government audit means

 the systematic and independent examination,
 of financial,
 administrative and
 other operations of a public entity,
 For evaluating and verifying them. (FAO - EV)
2. Its objective is to (Ensure accountability w.r.t PR & PE)

 ensure the accountability
 of the government entity
 in respect of public revenue and expenditure.
3. Auditor presents a report containing audit findings along with recommendations for future
actions.
4. CAG has been entrusted for supervising the Government audits in India.
Comptroller & Auditor General (CAG) - Certain Provisions
1. Appointment
a. The President of India shall appoint CAG.
2. Removal or resignation
a. He can be removed from the office only on the ground of proven misbehavior or
incapacity.
b. Moreover, he can be removed from office only when each house of parliament decides to
do so by a majority of at least two third of members present and voting.
c. He can resign any time through a resignation letter addressed to the President of India.
3. Remuneration
a. He shall be paid a salary equivalent to that of a Judge of the Supreme Court.
b. The parliament is competent to make laws to determine salary and other conditions of
service.
4. Terms
a. He shall hold office for six years or up to age of 65 years, whichever is earlier.
5. Submission of Audit Report

a. Relating to the accounts of the Union-to the President

b. Relating to the accounts of the States to the Governor and/or the President who shall cause
these reports to be laid before the legislature of the respective States
Duties of Comptroller & Auditor General
1. Compile and submit accounts

He shall compile the accounts of the Union/State/Union Territory and submit those accounts to the
President/Governor/Administrator respectively.
2. To audit receipts and expenditure of bodies substantially financed by Government Fund
He shall audit all receipts and expenditure of any body, which has been substantially financed from the
Consolidated Fund of India/State/Union Territory.
Note: A body or authority shall be treated as substantially financed if the amount of grant or loan
in one year is greater than;
(i) Rs. 25 lakhs, and ,
(ii) 75% of the total expenditure of that body or authority.
3. To audit grants and loans

He shall audit specific purpose loan or grant given to anybody other than a foreign state or international
organization, out of the Consolidated Fund of India/State/Union Territory.
The CAG shall scrutinize the procedures by which the sanctioning authority satisfies itself as to
fulfillment of the conditions of giving such grants or loans.
4. To audit receipts of union or states

He shall audit all receipts payable in to the Consolidated Fund of India/ State/Union Territory. He shall
satisfy himself that the rules and procedures are designed to secure an effective check on the
assessment, collection and proper allocation of revenue and are being duly observed.
5. To audit account of stores and stock

He shall audit the accounts of stores and stock kept in any office or department of the union or state.
6. To audit accounts of Government Companies and Corporations

CAG shall exercise powers and observe duties as per the provisions of the Companies Act, 2013 in
relation to the Government Companies or Corporations. (To be discussed in the chapter of Government
Audit)
7. To audit and report (Exp. Transaction. Trading/miring – P&L – BS – Subsidiary Accounts)

CAG shall audit and report:
 All expenditure from Consolidated Fund of India/ State/Union Territory.
 All transactions of Union State relating to the 'Contingency Funds and Public accounts.'
 All Trading, Manufacturing, Profit and Loss account and Balance Sheet and other
subsidiary accounts kept in any department of the Union/ State.
Audit of various items

Expenditure Audit
The auditor examines the fulfillment of conditions for incurring government expenditure. It involves
examination of following:—
(a) Audit of rules and orders
(b) Audit of sanctions
(c) Audit against provision of funds
(d) Propriety audit
(e) Performance audit
Audit of Rules and Orders/Audit of Regularity and Legality

(खचाय Constitution, law CAG और higher authority क़े हहसाब स़े होना चाहहए) Yeh check karney ke liye auditor
ko kuch chizo ki Sound knowledge honi chaiye
(1) Its objective is to ensure whether the expenditure is in accordance with:
(a) Relevant provisions of the Constitution and of the laws and rules.
(b) The rules, regulations issued by CAG.
(c) The orders of, or rules made by, any higher authority.
(2) In this connection, auditor should have sound knowledge of rules and orders w.r.t. following:
(a) The powers to incur and sanction expenditure from the Consolidated Fund/ contingency
fund of India / State;
(b) The mode of presentation of claims against government, withdrawing moneys from the
Consolidated Fund, Contingency Fund and the financial rules prescribing the procedure to be
followed by government; and (HOW CLAIMS ARE PRESENTED & HOW MONEY IS
WITHDRAWAN)
(c) Regulating the conditions of service, pay and allowances, and pensions of government
servants.
Audit of Sanctions (हर खचाय sanctioned होना चाहहए है , और sanction proper authority ऩे ककर्ा है )Its objective
is to ensure whether the expenditure is:
(a) Properly covered by a sanction, either general or special.
(b) Sanctioned by authority, which is authorized to do so.
Thus auditor should consider following

(a) He should have knowledge of the sanctioning powers of various authorities.
(b) He should examine whether all sanctions are adequately noted in the prescribed register.
(c) For petty expenditure, the signature of the competent authority on a bill can be regarded
as a sanction.
Audit against provision of funds

Its objective is to ensure whether the expenditure:
(a) Is made for the purpose for which the grant and appropriation has been provided.
(b) Does not exceed the appropriation made.

Propriety Audit (M.imp)

1. According to propriety audit, the auditor examines the cases of improper or wasteful
expenditure even though the expenditure has been incurred as per the existing rules and
regulations.
2. A transaction may satisfy all the requirements of regular audit, but may still be highly
wasteful.
3. For e.g. a building may be constructed for running a school but may not be used for the same
purpose, resulting in wasteful expenditure.
4. Auditor should try to examine public financial morality by looking in to the

a. wisdom,
b. faithfulness and
c. Economy of transactions.
5. No hard and fast rules can be laid down regarding the standards of financial propriety.
6. Here, the auditor should examine that:—

(a) The authorities have made the expenditure
• With same degree of vigilance,
• as a person of ordinary prudence
• would exercise in respect of his own money.
(b) The expenditure is

• not
• prima facie more
• than the occasion demands.
(c) No authority
• exercises its power of sanctioning expenditure
• to pass an order, which will directly or indirectly accrue to its own advantage.
(d) Public money is not utilised for the benefit of a particular person /section of the
community.
Performance Audit/Full Scope Audit

1. Here, auditor tries to ensure that government programmes have achieved the desired
objectives at the lowest cost and given the intended benefits.
(Achieved Objectives, Lowest Cost, Intended Benefits)
2. Performance audit includes efficiency, economy and effectiveness audit.
3. It seeks to identify opportunities for greater economy and effectiveness.
4. Efficiency audit
It examines whether:
 The various schemes/projects are executed, and

 Their operations are carried out in efficient manner, and
5. Economy audit
 The government has acquired the financial, human and physical resources in an economical
manner, and
 The sanctioning and spending authority have observed economy.
6. Effectiveness audit
 Programmes and projects are performing well.
 Overall targeted objectives are being achieved.
Audit of Stores and Stocks
1. Auditor should ascertain whether the internal controls over purchase, receipt, and issue of stores
are well designed and properly carried out during the year.
2. He should bring to the notice of the government any deficiencies in the system of control.
3. The audit of purchase of stores is conducted in the same manner as audit of expenditure.
4. The auditor has to ensure that the prices paid are reasonable.
5. Cases of uneconomical purchase of stores and losses due to defective or inferior quality of
stores are specifically examined.
6. The certificates of quality and quantity given by expert should be examined.
7. Any excess or idle stocks should be specifically mentioned in the report.
8. Auditor should ensure their existence by attending physical verification of stock.
9. The valuation of the stocks is also examined properly.
Audit of Receipts
The government audit also covers receipts payable in to the Consolidated Fund of India and of each
State/Union Territory. The auditor examines whether: —
1. Internal checks are imposed for prompt detection and investigation of irregularities. .
2. Internal procedures adequately ensure proper accounting of demands collection.
3. There is effective check on assessment, collection and proper allocation of revenue.
4. Such regulations and procedures are actually being carried out.
5. All revenues have been correctly assessed, realized and credited to the government account.
6. There is no leakage of revenue.
Audit of Commercial Accounts

Nature of Enterprise Audit Undertaken by
1. Departmental Enterprises engaged in Audit of these enterprises are undertaken by the
commercial and trading operations, which are CAG in the same manner as any other Government
subject to the same laws, financial and other Department.
regulations as other Government Departments
and Agencies.
2.Statutory Bodies, Corporations, created Audit of these bodies depends upon the nature and
by specific statutes mostly financed by type of governing statutes.
Government in the form of loans, grants etc.

3.Government Companies set up under the Audit is conducted by Statutory Auditors appointed
Companies Act,2013 by the CAG.
Q1. Audit of expenditure in Government audit.

Audit of Expenditure in Government Audit: The various standards set for audit of expenditure are:
(i) Audit against Rules & Orders: The auditor has to see that the expenditure incurred conforms to the relevant
provisions of the statutory enactment and is in accordance with the financial rules and regulations framed
by the competent authority.
(ii) Audit of Sanctions: The auditor has to ensure that each item of expenditure is covered by a sanction, either
general or special, accorded by the competent authority, authorizing such expenditure.
(iii) Audit against Provision of Funds: It contemplates that there is a provision of funds out of which expenditure
can be incurred and the amount of such expenditure does not exceed the appropriations made.
(iv) Propriety Audit: It is required to be seen that the expenditure is incurred with due regard to broad and
general principles of financial propriety. The auditor aims to bring out cases of improper, avoidable, or
infructuous expenditure even though the expenditure has been incurred in conformity with the existing
rules and regulations.
(v) Performance Audit: This involves that the various programmes, schemes and projects where large financial
expenditure has been incurred are being run economically and are yielding results expected of them.
Q2. What are the focus points in doing propriety audits by C & AG as regards government expenditure? (8 Marks)
Focus points for doing Propriety Audits of Government Expenditure: The Propriety audit is to vet the expenditure
in the annals of financial wisdom and uprightness. It is to check to bring out the improper, avoidable, or in
fructuous expenditure even though such expenditure has been incurred in conformity with the existing rules and
regulations. A transaction may satisfy all the requirements of regularity audit in so far as the various formalities
regarding rules and regulations are concerned but may still be highly wasteful. It is not audit of sanction or against
norms. It is a qualitative, opinion-based expression of auditor's findings as regards the efficiency, effectiveness
and economy dimensions of expenditure.
In this regards, the following main points should be kept for consideration:
(i) The expenditure should not be prima facie more than what the occasion demands. Public money should
be spent by the officers, as of their own with utmost diligence and care.
(ii) No order for sanction of expenditure should be made by an authority which results in pecuniary gains
directly or indirectly.
(iii) Public moneys should not be utilised for the benefit of a particular person or section of the community
unless
(1) the amount of expenditure involved is insignificant; or

(2) a claim for the amount could be enforced in a Court of law; or
(3) the expenditure is in pursuance of a recognized policy or custom; and
(4) the amount of allowances, such as travelling allowances, granted to meet expenditure of a
particular type should be so regulated that the allowances are not, on the whole, sources of profit
to the recipients.
(iv) There should not be profiteering by the authority or anybody where the expenditure is in the nature of
compensating.
(v) Wastages are avoided in expenditure.

(vi) The cost of administering should not eat off the benefits of the expenditure.
(vii) The expenditure should percolate down the beneficiary without corruption.
(viii) The expenditure should bring out optimum, enduring benefits instead of mere frittering away the public
money on meeting day to day needs repeatedly.
Q3. What are the duties of Comptroller and Auditor General? (10 marks)

Duties of Comptroller & Auditor General: The Comptroller & Auditor General's (Duties, Powers and Conditions of
Service) Act, 1971 lays down duties of the C&AG as under:
(i) Compile and submit Accounts of Union and States - The C&AG shall be responsible for compiling the
accounts of the Union and of each State from the initial and subsidiary accounts rendered to the audit
and accounts offices under his control by treasuries, offices or departments responsible for the keeping of
such account.
(ii) General Provisions Relating to Audit - It shall be the duty of the C&AG -
(a) to audit and report on all expenditure from the Consolidated Fund of India and of each State and
of each Union Territory having a Legislative Assembly and to ascertain whether the moneys shown
in the accounts as having been disbursed were legally available for and applicable to the service
or purpose to which they have been applied or charged and whether the expenditure conforms to
the authority which governs it;
(b) to audit and report all transactions of the Union and of the States relating to Contingency Funds
and Public Accounts;
(c) to audit and report on all trading, manufacturing profit and loss accounts and balance-sheets and
other subsidiary accounts kept in any department of the Union or of a State.
(iii) Audit of Receipts and Expenditure - Where anybody or authority is substantially financed by grants or loans
from the Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly,
the Comptroller and Auditor General shall, subject to the provisions of any law for the time being in force
applicable to the body or authority, as the case may be, audit all receipts and expenditure of that body
or authority and to report on the receipts and expenditure audited by him.
(iv) Audit of Grants or Loans - Where any grant or loan is given for any specific purpose from the Consolidated
Fund of India or of any State or of any Union Territory having a Legislative Assembly to any authority or
body, not being a foreign State or international organisation, the Comptroller and Auditor General shall
scrutinize the procedures by which the sanctioning authority satisfies itself as to the fulfillment of the
conditions subject to which such grants or loans were given and shall for this purpose have right of access,
after giving reasonable previous notice, to the books and accounts of that authority or body.
(v) Audit of Receipts of Union or States - It shall be the duty of the Comptroller and Auditor General to audit
all receipts which are payable into the Consolidated Fund of India and of each State and of each Union
Territory having a Legislative Assembly and to satisfy himself that the rules and procedures in that behalf
are designed to secure an effective check on the assessment, collection and proper allocation of revenue
and are being duly observed and to make this purpose such examination of the accounts as he thinks fit
and report thereon.
(vi) Audit of Accounts of Stores and Stock - The Comptroller and Auditor General shall have authority to audit
and report on the accounts of stores and stock kept in any office or department of the Union or of a State.
(vii) Audit of Government Companies and Corporations - The duties and powers of the Comptroller and
Auditor General in relation to the audit of the accounts of government companies shall be performed and
exercised by him in accordance with the provisions of the Companies Act, 2013.
Q4. Basic standards set for audit of Government expenditure.
Basic standards set for audit of Government Expenditure: The audit of government expenditure is one of the major
components of government audit. The basic standards set for audit of expenditure are to ensure that there is
provision funds authorised by competent authority fixing the limits within which expenditure can be incurred.
These standards are :—
(i) that the expenditure incurred conforms to the relevant provisions of the statutory enactment and in
accordance with the Financial Rules and Regulations framed by the competent authority. Such an audit
is called as the audit against 'rules and orders'.
(ii) that there is sanction, either special or general, accorded by competent authority authorizing the
expenditure. Such an audit is called as the audit of sanctions.
(iii) that there is a provision of funds out of which expenditure can be incurred and the same has been
authorized by competent authority. Such an audit is called as audit against provision of funds.
(iv) that the expenditure is incurred with due regard to broad and general principles of financial propriety.
Such an audit is also called as propriety audit.

(v) that the various programmes, schemes and projects where large financial expenditure has been incurred
are being run economically and are yielding results expected of them. Such an audit is termed as the
performance audit.
Q5. Power of Comptroller and Auditor General of India in performance of duties. (November 2014)
Powers of Comptroller and Auditor General of India in performance of duties: The Comptroller and Auditor
General's (Duties, Powers and Conditions of Service) Act, 1971 gives the following powers to the C&AG in
connection with the performance of his duties-
(i) To inspect any office of accounts under the control of the Union or a State Government including office
responsible for the creation of the initial or subsidiary accounts.
(ii) To require that any accounts, books, papers and other documents which deal with or are otherwise
relevant to the transactions under audit, be sent to specified places.
(iii) To put such questions or make such observations as he may consider necessary to the person in charge
of the office and to call for such information as he may require for the preparation of any account or
report which is his duty to prepare.
In carrying out the audit, the C&AG has the power to dispense with any part of detailed audit of any accounts
or class of transactions and to apply such limited checks in relation to such accounts or transactions as he may
determine.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C9 - SAs
Chapter 9- Other SAs

S.NO. SA NO. NAME
1. 250 CONSIDERATIONS OF LAWS AND REGULATIONS IN AN AUDIT OF FINANCIAL STATEMENTS
2. 260 COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE
3. 265 COMMUNICATING DEFICIENCIES IN INTERNAL CONTROL TO THOSE CHARGED WITH
GOVERNANCE AND MANAGEMENT
4. 299 RESPONSIBILITY OF JOINT AUDITORS
5. 450 EVALUATION OF MISSTATEMENTS IDENTIFIED DURING THE AUDIT
6. 501 AUDIT EVIDENCE—SPECIFIC CONSIDERATIONS. FOR SELECTED ITEMS.
7. 620 Using the work of an Auditor's Expert
8. 600 Using the work of another auditor
9. 220 Quality control for an audit of financial statements
10. 240 The Auditor’s responsibilities relating to fraud in an audit of Financial Statement
11. 550 Related Parties
12. 560 Subsequent Events
13. 570 Going Concern
14. 510 Initial Audit Engagement
15. 540 AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE ACCOUNTING ESTIMATES,
AND RELATED DISCLOSURES
16. 402 Audit consideration relating to an entity using a service organisation
17. 710 Comparative information – Corresponding figures and comparative financial statement
18. 720 The auditor’s responsibility in relation to other information in documents containing audit
financial statements
SA 250 CONSIDERATIONS OF LAWS AND

REGULATIONS IN AN AUDIT OF FINANCIAL
STATEMENTS
Basic Responsibility & Procedures
1. Some laws have direct impact on FS. Some laws do not affect FS.
2. Mgt. is responsible for compliance
3. Auditor is not responsible for prevention/ detection of non-compliance
4. He should obtain general understanding of regulatory framework & how entity complies with it
5. He Should
i. Obtain sufficient & appropriate evidence w.r.t. compliance with laws directly
affecting determination of amount & Disclosure in financial statements.
ii. Perform limited procedure w.r.t. non-compliance with laws that may have effect on
financial statements (inquire mgt. & check correspondence)
6. Alert for doubtful situation
7. Maintain W.P. –
i. Identified non-compliance
ii. suspected non-compliance
iii. His communication with TCWG.
8. If he identifies non-compliance
i. Examine impact on financial statement
ii. Ask TCWG (may consult lawyer also)
Reporting Non- Compliance in the Auditor's Report on the Financial Statements

1. Non-compliance has a material effect on the financial statements,
o The auditor shall, express a qualified or adverse opinion on the financial statements.
o If the auditor is precluded by management or those charged with governance from obtaining
sufficient appropriate audit evidence, the auditor shall express a qualified opinion or disclaim an
opinion.
2. If the auditor is unable to determine whether non-compliance has occurred

▪ because of limitations imposed by the circumstances
▪ Rather than by management or those charged with governance, the auditor shall evaluate the effect on
the auditor's opinion.
Reporting Non- Compliance to Regulatory and Enforcement Authorities If the auditor has identified or
suspects non-compliance with laws and regulations, the auditor shall determine whether the auditor has a
responsibility to report the identified or suspected non-compliance to parties outside the entity.

SA 260 COMMUNICATION WITH THOSE

CHARGED WITH GOVERNANCE
Definitions
SA 260 - Communication with Those Charged with

Governance

Requirements
Those Charged with Governance

The auditor shall determine the appropriate person(s) within the entity’s governance structure with whom to
communicate.
Communication with a Subgroup of Those Charged with Governance
If the auditor communicates with a subgroup of those charged with governance, for example, an audit
committee, or an individual, the auditor shall determine whether the auditor also needs to communicate
with the governing body.
When All of Those Charged with Governance Are Involved in Managing the Entity
In some cases, all of those charged with governance are involved in managing the entity,
For example, a small business where a single owner manages the entity and no one else has a governance
role. In these cases, if matters required by this SA are communicated with person(s) with management
responsibilities, and those person(s) also have governance responsibilities, the matters need not be
communicated again with those same person(s) in their governance role.
The auditor shall be satisfied that communication with person(s) with management responsibilities
adequately informs all of those with whom the auditor would otherwise communicate in their governance
capacity.
Matters to Be Communicated
The Auditor’s Responsibilities in Relation to the Financial Statement Audit

The auditor shall communicate with those charged with governance the responsibilities of the auditor in relation
to the financial statement audit, including that:
• The auditor is responsible for forming and expressing an opinion on the financial statements that have been
prepared by management with the oversight of those charged with governance; and
• The audit of the financial statements does not relieve management or those charged with governance of
their responsibilities.
Planned Scope and Timing of the Audit

The auditor shall communicate with those charged with governance an overview of the planned scope and
timing of the audit, which includes communicating about the significant risks identified by the auditor.
Significant Findings from the Audit

The auditor shall communicate with those charged with governance
(a) The auditor‟s views about significant qualitative aspects of the entity‟s accounting practices, including
accounting policies, accounting estimates and financial statement disclosures.
(b) Significant difficulties, if any, encountered during the audit;
(c) Unless all of those charged with governance are involved in managing the entity:

(d) Significant matters arising during the audit that were discussed, or subject to correspondence, with
management; and
(e) Written representations the auditor is requesting;
(f) Circumstances that affect the form and content of the auditor‟s report, if any; and
(g) Any other significant matters arising during the audit that, in the auditor‟s professional judgment, are
relevant to the oversight of the financial reporting process.
Auditor Independence
In the case of listed entities, the auditor shall communicate with those charged with governance:
A statement that the engagement team and others in the firm as appropriate, the firm and, when applicable, network
firms have complied with relevant ethical requirements regarding independence; and
a. All relationships and other matters between the firm, network firms, and the entity that, in the auditor‟s
professional judgment, may reasonably be thought to bear on independence. This shall include total
fees charged during the period covered by the financial statements for audit and non-audit services
provided by the firm and network firms to the entity and components controlled by the entity. These
fees shall be allocated to categories that are appropriate to assist those charged with governance in
assessing the effect of services on the independence of the auditor; and
b. The related safeguards that have been applied to eliminate identified threats to independence or reduce
them to an acceptable level.
The Communication Process

Establishing the Communication Process - The auditor shall communicate with those charged with governance the
form, timing and expected general content of communications.
Forms of Communication - The auditor shall communicate in writing with those charged with governance
regarding significant findings from the audit if, in the auditor‟s professional judgment, oral communication would
not be adequate. Written communications need not include all matters that arose during the course of the audit.
The auditor shall communicate in writing with those charged with governance regarding auditor independence
when required
Timing of Communications - The auditor shall communicate with those charged with governance on a timely basis.
Adequacy of the Communication Process - The auditor shall evaluate whether the two-way communication
between the auditor and those charged with governance has been adequate for the purpose of the audit. If it has
not, the auditor shall evaluate the effect, if any, on the auditor‟s assessment of the risks of material misstatement
and ability to obtain sufficient appropriate audit evidence, and shall take appropriate action.
Documentation
Where matters required by this SA to be communicated are communicated orally, the auditor shall include them in the
audit documentation, and when and to whom they were communicated. Where matters have been communicated in
writing, the auditor shall retain a copy of the communication as part of the audit documentation.

Significant difficulties
Significant difficulties encountered during the audit may include such matters as:
• Significant delays by management, the unavailability of entity personnel, or an unwillingness by

management to provide information necessary for the auditor to perform the auditor‟s procedures.
• An unreasonably brief time within which to complete the audit.
• Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
• The unavailability of expected information.
• Restrictions imposed on the auditor by management.
• Management‟s unwillingness to make or extend its assessment of the entity‟s ability to continue as a
going concern when requested.
In some circumstances, such difficulties may constitute a scope limitation that leads to a modification of the auditor’s
opinion.
Significant Matters
Significant matters discussed, or subject to correspondence with management may include such matters as:
• Significant events or transactions that occurred during the year.

• Business conditions affecting the entity, and business plans and strategies that may affect the risks of
material misstatement.
• Concerns about management’s consultations with other accountants on accounting or auditing
matters.
• Discussions or correspondence in connection with the initial or recurring appointment of the auditor
regarding accounting practices, the application of auditing standards, or fees for audit or other
services.
• Significant matters on which there was disagreement with management, except for initial differences
of opinion because of incomplete facts or preliminary information that are later resolved by the auditor
obtaining additional relevant facts or information.
Circumstances that Affect the Form and Content of the

Auditor’s Report
SA 210 requires the auditor to agree the terms of the audit engagement with management or those charged
with governance, as appropriate.
The agreed terms of the audit engagement are required to be recorded in an audit engagement letter or
other suitable form of written agreement and include, among other things, reference to the expected form
and content of the auditor’s report.
The communication required is intended to inform those charged with governance about circumstances in
which the auditor’s report may differ from its expected form and content or may include additional
information about the audit that was performed.
Circumstances in which the auditor is required or may otherwise consider it necessary to include additional
information in the auditor’s report in accordance with the SAs, and for which communication with those
charged with governance is required, include when:

• The auditor expects to modify the opinion in the auditor‟s report in accordance with SA 705.
• A material uncertainty related to going concern is reported in accordance with SA 570.
• Key audit matters are communicated in accordance with SA 701.
• The auditor considers it necessary to include an Emphasis of Matter paragraph or Other Matters
paragraph in accordance with SA 706 or is required to do so by other SAs.
In such circumstances, the auditor may consider it useful to provide those charged with governance with a
draft of the auditor’s report to facilitate a discussion of how such matters will be addressed in the auditor’s
report.

SA 265 COMMUNICATING DEFICIENCIES IN

INTERNAL CONTROL TO THOSE CHARGED
WITH GOVERNANCE AND MANAGEMENT
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditor's responsibility to communicate appropriately to
those charged with governance and management deficiencies in internal control that the auditor has
identified in an audit of financial statements.
Definitions
(a) Deficiency in internal control - This exists when:
(i) A control is designed, implemented or operated in such a way that it is unable to prevent, or
detect and correct, misstatements in the financial statements on a timely basis; or
(ii) A control necessary to prevent, or detect and correct, misstatements in the financial
statements on a timely basis is missing.
(b) Significant deficiency in internal control - A deficiency or combination of deficiencies in internal control
that, in the auditor's professional judgment, is of sufficient importance to merit the attention of those
charged with governance. (जजसप़े TCWG काध्र्ानलानाजरुर है )
Requirements
1. The auditor shall determine whether, on the basis of the audit work performed, the auditor has
identified one or more deficiencies in internal control. (कुछसमल क्र्ा)
2. If the auditor has identified one or more deficiencies in internal control, the auditor shall determine,
they constitute significant deficiencies or not. (समल तोSignificatntहै क्र्ा)
3. The auditor shall communicate in writing significant deficiencies in internal control identified during
the audit to those charged with governance on a timely basis. The auditor shall also communicate to
management at an appropriate level of responsibility on a timely basis: (Significant है तो TCWG और Apt.
level of Mgt. को Communicate करदो in writing)
4. The auditor shall include in the written communication of significant deficiencies in internal control:
(a) A description of the deficiencies and an explanation of their potential effects; and
(क्र्ाथीऔरइसस़ेक्र्ाहोसकताहै )
(b) Sufficient information to enable those charged with governance and management to understand
the context of the communication. In particular, the auditor shall explain that:

(i) The purpose of the audit was for the auditor to express an opinion on the financial
statements;
(ii) The audit included consideration of internal control relevant to the preparation of the
financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of
internal control; and
(iii) The matters being reported are limited to those deficiencies that the auditor has
identified during the audit and that the auditor has concluded are of sufficient
importance

SA-299 - RESPONSIBILITY OF JOINT

AUDITORS
Joint Auditor Meaning When two or more practicing units are appointed to conduct audit of an entity.
Why Due to voluminous work in large entities.
Division of Work - Basis of Division

Joint Auditor should divide work among themselves (after mutual discussion) on basis of -
(i) Period;
(ii) Functional areas;
(iii) Components of financial statement; or
(iv) Geographical location, etc.
(v) Divisional basis (Identifiable units) – For example Steel, Cement, Clothing etc.
Documentation - Such division should be adequately documented.
Reliance - Each Joint Auditor is entitled to rely on other Joint Auditor. There is no need to review work done
by other Joint Auditor.
Co-ordination - If some Joint Auditor comes to know a matter, relevant for other Joint Auditor, then he
should communicate it immediately in writing to other joint auditors. The date of such communication should be
before date of audit report.
If such a matter is brought to the attention of other joint auditor after the date of audit report then auditor
who found the matter and not reporter it will be responsible. The other joint auditor to whom it was reported
after the date of audit report will not be responsible.
Difference of Opinion
▪ Generally, all arrive at unanimous opinion.
▪ However, any joint auditor is not bound by majority opinion.
▪ Those disagreeing with others may provide their own opinion through a separate report.
Mention the points/area in which all the joint auditors are jointly and severally responsible. (November 2015 ICAI IPCC)
Points/Areas in which all the Joint Auditors Are Jointly and Severally Responsible: As per SA 299 "Responsibility of Joint
Auditors", in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated
to him, whether or not he has prepared a separate report on the work performed by him. On the other hand, all the joint
auditors are jointly and severally responsible -
(i) in respect of the audit work which is not divided among the joint auditors and is carried out by all of them.
(ii) in respect of decisions taken by all the joint auditors concerning the nature, timing or extent of the audit
procedures to be performed by any of the joint auditors.
(iii) in respect of matters which are brought to the notice of the joint auditors by any one of them and on which
there is an agreement among the joint auditors.
(iv) for examining that the financial statements of the entity comply with the disclosure requirements of
the relevant statute.

(v) for ensuring that the audit report complies with the requirements of the relevant statute.
.
(vi) the responsibility of obtaining and evaluating information and explanation from the management is generally a joint
responsibility of all the auditors.
What are the advantages and disadvantages of Joint Audit?
1. Advantages
a. Pooling and sharing of expertise
b. Reduced work load
c. Better performance
d. Improved service to the client
e. Local firms can conduct audit in a better manner specially in case of multi-national companies.
f. A sense of healthy competition towards better performance.
g. Low cost (in terms of development of staff and conducting audit)
2. Disadvantages
a. The fees being shared.
b. Psychological problem where firms of different standing are associated in the joint audit.
c. General superiority complexes of some auditors.
d. Problems of coordination of the work.
e. Areas of work of common concern being neglected,
f. Uncertainty about the liability for the work done,
g. Lack of clear definition of responsibility.
Specific Responsibility
• The work which is specifically allotted to him

• To determine NTE of audit procedures
• To determine materiality, test checks etc.
• For risk assessment of specific areas covered under his work.
• To perform compliance procedure in relation to work allocated to him.
• To perform substantive procedures in relation to assertions of area assigned to him
• For his audit documentation
• For obtaining evidence and reaching to conclusions on the basis of such evidence.

SA 450 EVALUATION OF MISSTATEMENTS

IDENTIFIED DURING THE AUDIT
Objective
The objective of the auditor is to evaluate:
(a) The effect of identified misstatements on the audit; and
(b) The effect of uncorrected misstatements, if any, on the financial statements.
Definitions
(a) Misstatement - A difference between the
a. amounts,
b. classification,
c. presentation, or
d. disclosure of a reported financial statement item
and required for the item to be in accordance with the applicable financial reporting framework.
Misstatements can arise from error or fraud.
(b) Uncorrected misstatements - Misstatements that the auditor has accumulated during the audit
and that have not been corrected.
Communication and Correction of Misstatements

▪ The auditor shall communicate on a timely basis all misstatements accumulated during the audit with
the appropriate level of management, unless prohibited by law or regulation.
▪ The auditor shall request management to correct those misstatements.
▪ If management refuses to correct some or all of the misstatements communicated by the auditor, the
auditor shall obtain an understanding of management's reasons for not making the corrections.
Evaluating the Effect of Uncorrected Misstatements
Prior to evaluating the effect of uncorrected misstatements, the auditor shall reassess materiality
determined.
The auditor shall determine whether uncorrected misstatements are material, individually or in aggregate.
In making this determination, the auditor shall consider:
(a) The size and nature of the misstatements, both in relation to particular item and the financial
statements as a whole; and
(b) The effect of uncorrected misstatements related to prior periods on the relevant and the
financial statements as a whole.

Communication with Those Charged with Governance
▪ The auditor shall communicate with those charged with governance uncorrected misstatements and
the effect that they, individually or in aggregate, may have on the opinion in the auditor's report,
unless prohibited by law or regulation.
▪ The auditor shall also communicate with those charged with governance the effect of uncorrected
misstatements related to prior periods.
Written Representation
The auditor shall request a written representation from management and, where appropriate, those charged
with governance whether they believe the effects of uncorrected misstatements are immaterial, individually
and in aggregate, to the financial statements as a whole.
Documentation
The audit documentation shall include:
(a) The amount below which misstatements would be regarded as clearly trivial.
(b) All misstatements accumulated during the audit and whether they have been corrected; and
(c) The auditor's conclusion as to whether uncorrected misstatements are material, individually or in
aggregate, and the basis for that conclusion.

SA 501
Audit Evidence - Specific Considerations for

Selected Items.
Inventory
Sufficient & Appropriate Evidence
• When inventory is material
• He shall obtain sufficient appropriate evidence
• w.r.t. existence and condition of inventory by
• Attendance & Observation at physical inventory count
• Examining Entity’s final inventory records & comparing them with actual count result
• Evaluate I.C
• Inspect inventory
• Perform test count
Inventory under control of a third party

Obtain evidences by performing one or more of following: -
• Request confirmation from third party.
• Obtaining service auditor’s report w.r.t. adequacy of procedures of third party.
• Attending / arranging another auditor to attend third party's counting procedure.
• Inspecting documentation (Example - warehouse receipts).
• Request confirmation from parties when inventory has been pledged.
Inventory counting conducted at date other than B/S date

 He shall perform additional procedure
 w.r.t. changes in inventory
 Between count date & B/S date.
Auditor unable to attend Inventory Count due to unforeseen circumstances

 He shall make some count
 on alternate date
 and perform procedures on intervening transactions.
Attendance at inventory count is impracticable

 He shall perform alternate procedures.
 If it is not possible, then modify the audit report.
Litigation and claims

Identify litigation and claims
 perform procedures to
 Identify litigation & claims by

 Inquiring management & others
 Reviewing minutes of meetings of TCWG and
 Reviewing Correspondence with legal counsel.
 Reviewing legal expense account.
Risk of misstatement w.r.t. litigation & claims

 If Risk is identified
 then, seek communication
 with entity's external legal counsel.
 If law, regulation etc.
 Prohibits such direct communication
 Then perform alternate procedures.
Modify the opinion

 If mgt. does not permit auditor to communicate with legal counsel or
 Legal counsel refuses to respond
 and auditor is unable to obtain sufficient appropriate evidence
then modify opinion
Written representation
 Auditor shall request WR
 From mgt. and TCWG
 That all known litigation & claims affecting financial statements
 Have been disclosed to auditor and appropriately accounted for.
Segment Information (AS -17)

Sufficient Appropriate Evidences
 w.r.t. Presentation and disclosure
 of segment information
 as per applicable F.R.F
Audit procedures
• He should understand the methods used by Mgt. and evaluate their consistency with
applicable F.R.F.
• Perform analytical procedures appropriate in circumstances.

SA 520 Analytical Procedures
Nature of
Analytical analytical
Procedures procedure
Meaning
Through It includes Can be

Evaluation Analysis of Among comparison with performed
relationship through
of Financial Comparable Anticipated Similar Industry Simple

Financial
Information Information results Information Comparisons
Non - Financial Prior periods Like budgets and complex analysis

Data forecast using advance
statistical
techniques
Objectives of Auditor w.r.t. Analytical Procedures

• Apply SAP - Substantive Analytical Procedure लगाओ
• Obtain AE - Audit Evidence (Obtain करो)
• Check Financial Statements Are Consistent
• with auditors understanding of the entity
Analytical procedures help in identifying fluctuations or relationships that are inconsistent with other relevant information or
that differ from expected values by a significant amount.
Substantive Analytical Procedures (SAP)
When using substantive analytical procedures, he shall consider the following four factors
1. Suitability of particular SAP

• He should determine suitability of SAP for a particular item.
• These are generally adopted for those transactions that tend to be predictable over
time.
• For example, it can be used to compare gross profit ratio in a stable entity.
• However, such comparisons (like relationship between revenue & expenditure) may not
be performed for PSU.
2. Reliability of Data to be compared It is influenced by the following:

• source of information available (for example it is more reliable if obtained from some
independent source)
• Comparability of information available (Entities should be comparable)

• Relevance of the information available (budgets should be realistic)
• Control over Preparation of information (if last year’s financial statements are audited)
3. Development of expectations
• He shall develop an expectation of recorded values.
• These expectations should be sufficiently precise so that any misstatement can be
easily identified.
4. Difference of Recorded amount from expected value that is acceptable

• If difference is more than acceptable difference, he shall further investigate to rule
out the possibility of misstatement.

SA 620 Using the work of an Auditor's

Expert
Auditor’s expert
→ An individual / organization
→ Possessing expertise in a field
→ Other than accounting or auditing
→ Whose work is used by auditor
→ In obtaining evidence
→ He may be auditor’s internal expert or external expert.
Management expert
→ Whose work is used by Entity
→ In preparing the financial statements.
SA not applicable when

(a) Engagement team includes a member with expertise in specialized area of accounting auditing, or
(b) Auditor's use of management's expert. (SA 500 is applicable)
Auditor’s Responsibility
1) Auditor has sole responsibility of his audit opinion.
2) His responsibility is not reduced by using auditor’s expert.
3) However, he may accept the work of auditor’s expert as evidence if he concludes that work of
auditor’s expert is adequate.
Objectives of auditor
To determine whether:
(a) to use the work of auditor’s expert, &
(b) that work is adequate for his purpose
Auditor's Procedures w.r.t determining adequacy of work of auditor's expert

In case, auditors consider that using the work of auditors expert is necessary, he shall determine whether
the work of that expert is adequate by considering the following:
1. Competence, capability and objectivity of auditor's expert’s

(1) He shall evaluate whether expert is having necessary skills & objectivity.
(2) He should be aware of the relationships that may hamper expert's independence.
2. Understanding the field of expertise of auditor's (Through Discussion – This will help in
evaluating adequacy)
3. Agreement with Auditor's expert - in writing – Nature scope & Objective – Roles & Respo. of
Auditor & Expert – Timing & Mode of communication – Confidentiality
4. Evaluating Adequacy of auditor's expert's work

(1) By considering
• Reasonableness of expert’s findings,
• Consistency of finding of that expert with other evidences,
• Reasonableness of assumptions used by expert,
• Reasonableness & accuracy of source data used by expert.
(2) If auditor determines that work of expert is not adequate, he shall perform further procedures.
Reference to auditor’s expert in auditor’s Report

In case of unmodified opinion
(1) Auditor shall not refer to work of auditor's expert in the report containing unmodified opinion
unless required by law / regulations to do so.
(2) If required by law/regulations, he shall indicate in auditors report that such reference does not
reduce auditor's responsibility for the audit opinion.
In case of modified opinion

(1) He shall refer to work of auditor’s expert if such reference is necessary for understanding the
nature of modification.
(2) He shall indicate that such reference does not reduce auditor’s responsibility for the opinion.

SA-600 -USING THE WORK OF ANOTHER

AUDITOR
Component - Any branch, division, subsidiary, joint venture or associates, etc., whose financial information is
used in the financial statements of client.
Principal Auditor - Auditor of client.
Another Auditor - Auditor of component of client.
Applicability
▪ This standard is applicable to material components, w.r.t. financial statements as a whole.

▪ Not Applicable
o Joint Auditor - 299
o Predecessor auditor
Co-ordination Another auditor should also share important information with principal auditor and properly co-
ordinate with him.
Documentation by principal auditor

• Components audited by another auditor;
• Audit procedures adopted and evidence obtained;
• Conclusion that particular component is not material;
• Manner of dealing with modification in another auditor's report,
Reporting by Principal auditor
• Principal auditor should Qualify / Disclaim his audit report if he

o Can't use another auditors work & procedures.
o Not able to perform sufficient additional procedures.
• There should be statement of division of responsibility in Principal Auditor's Audit report by showing
extent to which financial statement of component audited by another auditor has been included in
financial statement of entity.
Explain the audit procedures when Principal Auditor is using the work of another Auditor. (8 Marks – Nov 14)
Consideration by Principal Auditor before and while using the work of Another Auditor.
Using the Work of Another Auditor: As per SA 600, “Using the Work of Another Auditor” when the
principal auditor plan to use the work of another auditor:
(i) The principal auditor should perform procedures to obtain sufficient audit evidence, that the work of the
other auditor is adequate for the principal auditor’s purpose, in the context of the specific assignment.
(ii) The principal auditor should consider the professional competence of the other auditor in the
context of specific assignment if the other auditor is not a member of The Institute of Chartered Accountants
of India.
(iii) When principal auditor decides to use the work of another auditor he should perform following procedures:
• Advise the other auditor of the use that is to be made of the other auditor’s work
and report and make sufficient arrangements for co-ordination of their efforts at the

planning stage of the audit.
• Advise the other auditor of the significant accounting, auditing and
reporting requirements and obtain representation as to compliance with them.
(iv) The principal auditor might discuss with the other auditor the audit procedures applied or review a
written summary of the other auditor’s procedure and findings which may be in the form of a completed
questionnaire or check list.
(v) The principal auditor may conclude that it is
• not necessary to apply procedures because sufficient appropriate audit evidence previously
obtained
• that acceptable quality control policies and procedures are complied with
• in the conduct of the other auditor’s practices.
(vi) The principal auditor should consider the significant findings of the other auditor.
(vii) Discuss with the other auditor and the management of the component, audit findings of the
financial statement of the component.
(viii) Principal auditor should document the significant findings of the component whose financial
statements was audited by the other auditor, name of the auditor, conclusions reached that the individual
component is not material, performed procedures and conclusions reached, how he deals with the
qualifications or adverse remarks contained in the other auditor’s report.

SA 220 –Quality Control for an Audit of

Financial Statement
Key Terms
1. Engagement Partner (EP)
→ Partner/ other person in firm (CA Full time in practice)
→ Responsible for engagement & report thereon
2. Engagement Quality Control Review (EQCR)

Process to evaluate judgment & conclusion of ET (Engagement Team) before report is issued.
3. EQC Reviewer (EQCRr)

→ Partner or
→ Other person
→ External person
→ Or a Firm
→ To conduct review
4. Network Firm - Entity under common control ownership or management with firm
(Nationally/Internationally)
Leadership REQ
Leadership responsibilities for quality on Audits- is of EP (Engagement Partner)
Ethical REQ
→ EP shall remain alert for non-compliance of ethical requirement by ET member
→ In case of non-compliance determine appropriate action after consultation
Independence
→ EP form conclusion with independent requirement
→ Identify circumstances of threat to independence
→ Take appropriate action to eliminate such threats
Acceptance & continuance of client engagement & relationship

• All procedure for acceptance followed
• Got information that would have caused the firm to decline the AE (Audit Engagement) had that
information have been available earlier
• Communicate information to firm for prompt action
Assignment of engagement team

→ Competent or capable team
→ Performance as per professional/ legal requirements
→ Appropriate audit report
Performance
• Direction, supervision.

o Of audit engagement in compliance with professional standards and regulatory & legal
requirements, and
o Appropriateness of audit report
• Reviews
o In accordance with the firm’s review policy
o Review on or before the date of audit report
▪ Audit Documentation & Discussion with the engagement team.
▪ Be Satisfied that Sufficient and appropriate evidence has been obtained to support
conclusions on which audit report will be based
Consultation-
→ ET should take proper consultation on difficult matters
→ It may be within the team or outside team
→ EP shall ensure- consultation are agreed with person consulted
→ Check conclusion have been implemented or not
EQCR
→ EP shall ensure EQCRr has been appointed
→ Discuss matters with EQCRr
→ Audit Report shall be dated after EQCR is complete.
EQCRr shall evaluate the following-

→ Significant matters discussed with EP
→ FS + Proposed AR
→ Selected Audit doc
→ Conclusion for AR
→ Independence
→ Consultation
Difference of opinion
→ ET- Parties consulted
→ EP- EQCR
→ Follow firm policy for dealing and resolving matter
ICAI May 2015 CA IPCC

Mention any four information which assists the auditor in accepting and continuing of relationship with the client as per SA 220.
Information which assist the Auditor in accepting and continuing of relationship with Client: As per SA 220, "Quality Control for an Audit of
Financial Statements" the auditor should obtain information considered necessary in the circumstances before accepting an engagement with
a new client, when deciding whether to continue an existing engagement and when considering acceptance of a new engagement with an
existing client. The following information would assist the auditor in accepting and continuing of relationship with the client:
• The integrity of the principal owners, key management and those charged with governance of the entity;
• Whether the engagement team is competent to perform the audit engagement and has the necessary
capabilities, including time and resources;
• Whether the firm and the engagement team can comply with relevant ethical requirements; and
• Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.

SA 240 - The Auditor’s responsibilities

relating to fraud in an audit of Financial
Statement
Scope of this SA
Specifically, it expands on how SA 315 and SA 330 are to be applied in relation to risks of material misstatement due
to fraud.
Basically how to Identify and assess the risk of material misstatement because of fraud (SA 315) and how to respond
that risk (SA 330)
Responsibility for the Prevention and Detection of Fraud

 The primary responsibility for the prevention and detection of fraud rests with both those charged with
governance of the entity and management .
 Management and those charged with governance, should place a strong emphasis on fraud prevention.
 This involves a commitment to creating a culture of honesty and ethical behavior.
Responsibilities of the Auditor

 An auditor is responsible for obtaining reasonable assurance that the financial statements taken as a whole
are free from material misstatement .
 As described in SA 200, due to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements of the financial statements will not be detected, even though the audit is properly
planned and performed in accordance with the SAs.
 The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting
one resulting from error .This is because fraud may involve carefully organized schemes designed to conceal
it
 It is difficult for the auditor to determine whether misstatements in judgment areas such as accounting
estimates are caused by fraud or error.
 The risk of the auditor not detecting a material misstatement resulting from management fraud is greater
than for employee fraud as management can manipulate accounting records.
Objectives
The objectives of the auditor are:
 To identify and assess the risks of material misstatement in the financial statements due to fraud;
 To obtain sufficient appropriate audit evidence about the assessed risks of material misstatement due to
fraud; and
 To respond appropriately to identified or suspected fraud.
Definitions (M.imp)
(a) Fraud -An intentional act by one or more individuals among management, those charged with governance,
employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.
(b) Fraud risk factors -Events or conditions that indicate an incentive or pressure to commit fraud or provide
an opportunity to commit fraud.
Professional Skepticism
The auditor shall maintain an attitude of professional skepticism throughout the audit .

 HE should recognize the possibility that a material misstatement due to fraud could exist, notwithstanding
the auditor's past experience of the honesty and integrity of the entity's management and those charged
with governance. (चाह़े पुराना experience कैसा भी रहा हो)
 Unless doubtful situations are present, the auditor may accept records and documents as genuine.
 If conditions cause the auditor to believe that a document may not be authentic or that terms in a document
have been modified, the auditor shall investigate further.
 Where responses to inquiries of management or those charged with governance are inconsistent, the
auditor shall investigate the inconsistencies.
Risk Assessment Procedures and Related Activities In relation to risk of material misstatement due to fraud
1. Enquiring Management and Others within the Entity
2. Enquiring Those Charged with Governance
3. Unusual or Unexpected Relationships Identified
4. Other Information
5. Evaluation of Fraud Risk Factors
The auditor shall make inquiries of management regarding:

(a) Management's assessment of the risk of material misstatement due to fraud;
(b) Management's process for identifying & responding to the risks of fraud in the entity, including any specific
risks of fraud;
(c) Management's communication, if any, to those charged with governance; and
(d) Management's communication, if any, to employees regarding its views on business practices and ethical
behavior.
For those entities that have an internal audit function, the auditor shall make inquiries of internal auditor.
Enquiring Those Charged with Governance

 He shall obtain an understanding of how TCWG supervise management's processes .
 The auditor shall ask TCWG whether they have knowledge of any fraud affecting the entity.
Unusual or Unexpected Relationships Identified

The auditor shall evaluate whether unusual or unexpected relationships identified in performing analytical
procedures, may indicate risks of material misstatement due to fraud.
Other Information
The auditor shall consider whether other information obtained by the auditor indicates risks of material
misstatement due to fraud.
Evaluation of Fraud Risk Factors

 The auditor shall evaluate whether the information obtained, indicates that one or more fraud risk factors
are present.
 However, fraud risk factors may not necessarily indicate the existence of fraud.
Responses to the Assessed Risks of Material Misstatement Due to Fraud

In accordance with SA 330, the auditor shall determine overall responses to address the assessed risks of material
misstatement due to fraud at the financial statement level.
Overall Responses
The auditor shall:
(a) Assign and supervise personnel as per their capability;
(b) Evaluate whether accounting policies adopted by the entity indicate fraudulent financial reporting resulting
from management's effort to manage earnings; and
(c) Incorporate surprise element in the selection of the NTE of audit procedures.
(d) The auditor shall design and perform further audit procedures whose nature, timing and extent are
responsive to the assessed risks of material misstatement due to fraud at the assertion level.
Evaluation of Audit Evidence

 The auditor shall evaluate whether analytical procedures are consistent with the auditor's understanding of
the entity and its environment
 When the auditor identifies a misstatement, the auditor shall evaluate whether such a misstatement is
indicative of fraud.
 If there is such an indication, the auditor shall evaluate the implications of the misstatement in relation to
other aspects of the audit, particularly the reliability of management representations.
 If the auditor identifies a misstatement, the auditor shall re-evaluate the assessment of the risks of material
misstatement due to fraud and its resulting impact on the nature, timing and extent of audit procedures.
 When the auditor confirms that, or is unable to conclude whether, the financial statements are materially
misstated as a result of fraud the auditor shall evaluate the implications for the audit.
Auditor Unable to Continue the Engagement

The auditor shall:
(a) Determine the professional and legal responsibilities applicable in the circumstances, including whether
there is a requirement for the auditor to report to the person or persons who made the audit appointment
or, in some cases, to regulatory authorities;
(b) Consider whether it is appropriate to withdraw from the engagement; and
(c) If the auditor withdraws:
(i) Discuss with the appropriate level of management and those charged with governance, the auditor's
withdrawal from the engagement and the reasons for the withdrawal; and
(ii) Determine whether there is a professional or legal requirement to report to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities, the auditor's
withdrawal from the engagement and the reasons for the withdrawal.
Management Representations (Written representations to be obtained)
(a) Its responsibility for the design, implementation and maintenance of internal control to prevent and detect
fraud;
(b) It has disclosed to the auditor the results of its assessment of the risk of fraud;
(c) It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity involving:
(i) Management;
(ii) Employees who have significant roles in internal control; or
(iii) Others; and
(d) It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud, affecting the
entity's financial statements.
Communications to Management and TCWG

 If the auditor has identified a fraud or has indication of fraud, the auditor shall communicate these matters
on a timely basis to the appropriate level of management.
 The auditor shall communicate with those charged with governance any other matters related to fraud that
are, in the auditor's judgment, relevant to their responsibilities.
Communications to Regulatory Authorities

The auditor's legal responsibilities may override the duty of confidentiality, in some circumstances.

Documentation
 He shall maintain documentation as per SA 315 and 330.
 The auditor shall document communications about fraud made to management, those charged with
governance, regulators and others.
 When the auditor has concluded that the presumption that there is a risk of material misstatement due to
fraud related to revenue recognition is not applicable in the circumstances of the engagement, the auditor
shall document the reasons for that conclusion.

SA 550 RELATED PARTIES

Nature of Related Party Relationships and Transactions
▪ Many related party transactions are in the normal course of business. In such circumstances, they
may carry no higher risk of-material misstatement of the financial statements than similar transactions
with unrelated parties. However, the' nature of related party relationships and transactions may, in
some circumstances, give rise to higher risks of material misstatement of the financial statements
than transactions with unrelated parties. For example-
▪ Related party transactions may not be conducted under normal market terms and conditions; for
example, some related party transactions may be conducted with no exchange of consideration.
▪ Planning and performing the audit with professional skepticism is therefore particularly important in
this context, given the potential for undisclosed related party relationships and transactions|~The
requirements in this SA are designed to assist the auditor in identifying and assessing the risks of
material misstatement associated with related party relationships and transactions, and in designing
audit procedures to respond to the assessed risks.
Objective (Whether FRF demands or not)

The objectives of the auditor are:
1. To obtain an understanding of related party relationships and transactions (RPRT) sufficient to be
able:
A. To recognize fraud risk factors,
B. To conclude whether the financial statements, insofar as they are affected by those
relationships and transactions:
i. Achieve a true and fair presentation; or
ii. Are not misleading; and
C. FRF Requires Establishment of RPRT - To obtain sufficient appropriate audit evidence about
whether RPRT have been appropriately identified, accounted for and disclosed (IAD) in
the financial statements in accordance with the framework.
Definitions
(a) Arm's length transaction - A transaction conducted on such terms and conditions as between a
willing buyer and a willing seller who are unrelated and are acting independently of each other and
pursuing their own best interests.
(b) Related party — A party that is either:
(i) A related party as defined in the applicable financial reporting framework; or

(ii) Where the applicable financial reporting framework establishes minimal or no related party
requirements
(a) A person or other entity that has control or significant influence,
i. directly or indirectly
ii. through one or more intermediaries,
iii. over the reporting entity;
(b) Another entity over which the reporting entity has control or significant influence, directly
or indirectly through one or more intermediaries; or

(c) Another entity that is under common control with the reporting entity through having:
—
i. Common controlling ownership;
ii. Owners who are close family members; or
iii. Common key management.
However, entities that are under common control by a state (i.e., a national, regional or local government) are
not considered related unless they engage in significant transactions or share resources to a significant
extent with one another.
Risk Assessment Procedures and Related Activities
Understanding the Entity's RPRT

The auditor shall inquire of management regarding:
(a) The identity of the entity's related parties,
• including changes from the prior period;
(b) The nature of the relationships between the entity and these related parties; and
(c) Whether the entity entered into any transactions with these related parties during the
period and, if so, the type and purpose of the transactions.
The auditor shall inquire of management and others within the entity, and perform other risk assessment
procedures considered appropriate, to obtain an understanding of the controls
Maintaining Alertness for Related Party Information When Reviewing Records or Documents
That may indicate RPR/T not identified or disclosed by Mgt.
If the auditor identifies significant transactions outside the entity's normal course of business the auditor
shall inquire of management about:
(a) The nature of these transactions; and

(b) Whether related parties could be involved.
Sharing Related Party Information with the Engagement Team

The auditor shall share relevant information obtained about the entity's related parties with the other
members of the engagement team.
Identification and Assessment of the Risks of Material Misstatement Associated with RPRT
and determine whether they are significant risk or not (SA 315 – significant risk)
Fraud risk factors identified – consider them while I/A Risk of MMS Due to Fraud (SA 240)
Identification of Previously Unidentified or Undisclosed Related Parties or Significant Related

Party Transactions
The auditor identifies related parties or significant related party transactions that management has not
previously identified or disclosed to the auditor, the auditor shall
1. Promptly communicate to ET

2. Identify Turns. Request management to identify all transactions with the newly identified related
parties for the auditor's further evaluation; and
3. Why control failed - Inquire as to why the entity's controls over RPRT failed
4. SP -Perform appropriate substantive audit procedures relating to such newly identified related
parties or significant related party transactions;
5. Risk of Other RP/RT - Reconsider the risk that other related parties or significant related party
transactions may exist that management has not previously identified or disclosed to the auditor,
and perform additional audit procedures as necessary; and
6. Intentional no disclosure - If the non-disclosure by management appears intentional evaluate the
implications for the audit.
Identified Significant Related Party Transactions outside the Entity's Normal Course of
Business
For identified significant related party transactions outside the entity's normal course of business, the
auditor shall:
1. Inspect the underlying contracts or agreements, if any, and evaluate whether:
a. The business rationale (or lack thereof) of the transactions suggests that they may have been
entered into to engage in fraudulent financial reporting or to conceal misappropriation of
assets;
b. The terms of the transactions are consistent with management's explanations; and
c. The transactions have been appropriately accounted for and disclosed in accordance with the
applicable financial reporting framework; and
2. Obtain audit "evidence that the transactions have been appropriately authorized and approved.
Evaluation of the Accounting for and Disclosure of Identified RPRT
In forming an opinion on the financial statements the auditor shall evaluate:
1. Whether the identified RPRT have been appropriately

a. accounted for and
b. disclosed in accordance with the applicable financial reporting framework; and
2. Whether the effects of the RPRT
a. Prevent the financial statements from achieving true and fair presentation; or
b. Cause the financial statements to be misleading.
Written Representations
Where FRF Defines RP Requirements
• Obtain WR From Mgt& TCWG
o Identity, Relation, Transaction of/with RP Disclosed.
o Apt. disclosed & accounted for RP transaction & relationship as per FRF
Communication with Those Charged with Governance Documentation – Significant matters in

relation to RP
Documentation
The auditor shall include in the audit documentation
• the names of the identified related parties and
• the nature of the related party relationships.

Strong Ltd. holding 60% of the equity shares in Weak Ltd. purchased goods worth Rs. 50 Lakhs from Weak
Ltd. during the financial year 2006-07. The Managing Director of Strong Ltd. is of the opinion that it is normal
business activity and there is no need to disclose the same in the final accounts of the Company.
(6 Marks) [CA (PCC) November 2007]
Answer
1. As per AS 18 " Related Party Disclosure" parties are considered as related if at any time during the
financial year, one party has the ability to control or exercise significant influence over the other
party.
2. Moreover, as per SA-550, it is auditor's duty to obtain sufficient and appropriate evidence regarding
identification and disclosure of related parties and transaction with them, by the management in
the financial statements.
3. Strong Ltd. holds more than 50% of the voting power of weak Ltd., thus it is the holding company of
weak Ltd. i.e. it is a related party.
4. As per AS-18, following facts should have been disclosed in the present case:
(i) Related party's name and nature of relationship.
(ii) If there is transaction between the related parties, then nature of transaction, whether it has
been made at arm's length price and amount of the transaction outstanding at the balance
sheet date etc.
5. In the present case, there is related party transaction.
6. Managing Director of strong Ltd is not right in his approach. The auditor should ask the
management to properly disclose the same as per AS-18 and if the management refuses,
the auditor should express a qualified opinion in accordance with SA-550.

SA 560 SUBSEQUENT EVENTS

SUBSEQUENT EVENTS
Events occurring between the date of the financial statements and the date of the auditor's report, and facts that
become known to the auditor after the date of the auditor's report.
OBJECTIVE
- Obtain Sufficient And Appropriate Evidence about whether events occurring between the date of the financial
statements and the date of the auditor's report that require adjustment of, or disclosure in, the financial
statements are appropriately reflected in those financial statements; and
- Respond appropriately to facts that become known to the auditor after the date of the auditor's report, that,
had they been known to the auditor at that date, may have caused the auditor to amend the auditor's report.
TYPES OF SUBSEQUENT EVENTS

A. Type I
Those events that provide additional evidence with respect to conditions that existed on the date of balance
sheet and effect the estimation made in the preparation of the financial statements. The statement should be
adjusted for any change in estimates resulting from the use of evidence of subsequent events.
For example-
 Debtors as on balance sheet date are declared insolvent after the balance sheet date but before
auditor's report
 Settlement of legal disputes before audit report date, which arose before balance sheet date
B. Type II
Those events which provide evidence with respect to conditions that did not exist on the date of the balance
sheet being reported on but arose subsequent to the date. These events should not result in adjustments of the
financial statements. Some of these events however may be of such a nature that disclosure of them is required
to keep the financial statements from not being misleading.
For example-
 Purchase of business
 Sale of shares and debentures
 Settlement of legal disputes when the event giving rise to the claim took place subsequent to balance
sheet date
 Loss of plant or inventory as a result of fire
AUDIT PROCEDURES FOR SUBSEQUENT EVENTS

This standard requires that auditor should perform procedures designed to obtain sufficient and appropriate audit
evidence that all the events up to date of the auditor’s report that may require adjustment of (type-l events) or
disclosure (type- ll event’s) the financial statements have been identified.
The following procedures may be followed to identify the subsequent events:-

 Review the procedures that management followed to identify the subsequent events.
 Inquiring of management and, where appropriate, those charged with governance as to whether any
subsequent events have occurred which might affect the financial statements.
 Read the minutes of meeting of board of directors, executive committee, meeting of shareholders held after
balance sheet date
 Read latest interim financial statements
 Inquire, read about and the latest position of legal cases
 Management representation that all subsequent events are identified
INQUIRIES OF MANAGEMENT REGARDING SUBSEQUENT

EVENTS The auditor may inquire as to the current status of items that were accounted for on the basis of preliminary or
inconclusive data and may make specific inquiries about the following matters:
 Whether new commitments, borrowings or guarantees have been entered into.
 Whether sales or acquisitions of assets have occurred or are planned.
 Whether there have been increases in capital or issuance of debt instruments such as the issue of new shares
or debentures, or an agreement to merge or liquidate has been made or is planned.
 Whether any assets have been appropriated by government or destroyed, fc example, by fire or flood.
 Whether there have been any developments regarding contingencies.
 Whether any unusual accounting adjustments have been made or are contemplated.
 Whether any events have occurred or are likely to occur that will bring in question the appropriateness of
accounting policies used in the finance statements, as would be the case, for example, if such events call ir
question the validity of the going concern assumption.
 Whether any events have occurred that are relevant to the measurement estimates or provisions made in the
 Whether any events have occurred that are relevant to the recoverability assets.

SUBSEQUENT EVENTS AND BRANCH AUDITOR'S REPORT

If branch auditor has already audited the branch and submitted the report to principal auditor, the principal auditor
would follow audit procedures in respect events occurring between the date of signing of the audit report of the auditor
of branch and the date of signing of his (principal) report.
FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE DATE OF THE AUDITOR'S REPORT BUT BEFORE THE DATE THE
FINANCIAL STATEMENTS ARE ISSUED
 The auditor has no obligation to perform any audit procedures regarding the financial statements after the
date of the auditor's report. However, when, after the date of the auditor's report but before the date the
financial statements are issued, a fact becomes known to the auditor that, had it been known to the auditor
at the date of the auditor's report, may have caused the auditor to amend the auditor's report, the auditor
shall:
(a) Discuss the matter with management and, where appropriate, TCWG.
(b) Determine whether the financial statements need amendment and, if so,
(c) Inquire how management intends to address the matter in the financial statements.
 If management amends the financial statements, the auditor shall:
(a) Carry out the audit procedures necessary in the circumstances on the amendment.
(b) Extend the audit procedures referred to the date of the new auditor's report; and
(c) Provide a new auditor's report on the amended financial statements.
 However, when management does not amend the financial statements in circumstances where the auditor
believes they need to be amended, then:
(a) If the auditor's report has not yet been provided to the entity, the auditor shall modify the opinion as
required by SA 705 and then provide the auditor's report; or
(b) If the auditor's report has already been provided to the entity, the auditor shall notify management
and, unless all of those charged with governance are involved in managing the entity, those charged
with governance, not to issue the financial statements to third parties before the necessary
amendments have been made. If the financial statements are nevertheless subsequently issued
without the necessary amendments, the auditor shall take appropriate action, to seek to prevent
reliance on the auditor's report.
DUAL DATING
The following is an illustration of such an additional date:
"(Date of auditor's report), except as to Note Y, which is as of (date of completion of audit procedures restricted to
amendment described in Note Y)".
FACTS WHICH BECOME KNOWN
 After the financial statements have been issued, the auditor has no obligation to perform any audit procedures
regarding such financial statements.
TO THE AUDITOR AFTER THE FINANCIAL STATEMENTS HAVE BEEN ISSUED

 However, when, after the financial statements have been issued, a fact becomes known to the auditor that,
had it been known to the auditor at the date of the auditor's report, may have caused the auditor to amend
the auditor's report, the auditor shall:
(a) Discuss the matter with management and, where appropriate, those charged with governance.
(b) Determine whether the financial statements need amendment and, if so,
(c) Inquire how management intends to address the matter in the financial statements.
 If the management amends the financial statements, the auditor shall:
(a) Carry out the audit procedures necessary in the circumstances on the amendment.
(b) Review the steps taken by management to ensure that any one in receipt of the previously issued
financial statements together with the auditor's report thereon is informed of the situation.
 If management does not take the necessary steps to ensure that anyone in receipt of the previously issued
financial statements is informed of the situation, the auditor will seek to prevent future reliance on the auditor's
report.

SA 570
GOING CONCERN
Responsibilities of management
✓ It is management's responsibility to assess the entity's ability to continue as a going concern even if
the financial reporting framework does not include an explicit requirement to do so.
Responsibilities of the auditor

✓ The auditor's responsibility is to obtain sufficient appropriate audit evidence about the
appropriateness of management's use of the going concern assumption.
✓ He shall consider whether there is a material uncertainty about the entity's ability to continue as a
going concern.
✓ Most Important – As per SA 200 The absence of any reference to going concern uncertainty in an
auditor's report cannot be viewed as a guarantee as to the entity's ability to continue as a going
concern. (SA 200)
Risk assessment procedures and related activities

✓ The auditor shall consider whether there are events or conditions that may cast significant doubt on
the entity's ability to continue as a going concern.
✓ In doing so, the auditor shall determine whether management has already performed a preliminary
assessment of the entity's ability to continue as a going concern.
✓ The auditor shall remain alert throughout the audit for audit evidence of events or conditions that
may cast significant doubt on the entity's ability to continue as a going concern.
✓ There may be following types of indicators:
Financial indicators
✓ Negative Net worth/working capital;
✓ Arrears / discontinuance of Dividends;
✓ Adverse financial ratio;
✓ Substantial operating losses;
✓ Borrowings approaching maturity without any chance of renewal/ repayment;
✓ Short term borrowing for long term asset financing;
✓ No payment to creditors on due date.
✓ Non-compliance with terms in loan agreement;
✓ Negative cash flow from operations;
✓ Rearrangement with creditors for reduction in liability; or
✓ Change from creditors to cash on delivery transaction with supplier.
Operating indicators
✓ Loss of key management and no replacement available;
✓ Loss of major market or supplier;
✓ Labour unrest, strikes etc; or
✓ Loss of major licence, franchise, etc.
Other indicators
✓ Pending legal proceedings;
✓ Change in Govt. Policy affecting the entity adversely; or
✓ Non- compliance with Statutory requirements
However, such indications may be mitigated by some positive factors.

For example: loss of some major supplier may be compensated by availability of some alternate source of
supply.
Additional audit procedures when events or conditions are identified

When events or conditions have been identified that may cast significant doubt on the entity's ability to
continue as a going concern, the auditor shall perform procedures as follows:

(a) Request management to make its assessment of the entity's ability to continue as a going concern.
(b) Evaluating management's plans for future actions.
(c) When the entity has prepared a cash flow forecast, then consider its reliability.
(d) Considering whether any additional facts or information have become available since the date on
which management made its assessment.
(e) Requesting written representations from management or those charged with governance,
regarding their plans for future action and the feasibility of these plans.
Auditor Conclusions
Appropriateness of management’s use of the going concern
The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained regarding, and shall
conclude on, the appropriateness of management’s use of the going concern basis of accounting in the
preparation of the financial statements. (क्या SAAE OBTAIN कर लिए है और conclude करे गा ON…………………………….)
Existence of Material Uncertainty

Based on the audit evidence obtained, the auditor shall conclude whether, in the auditor’s judgment, a material
uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the
entity’s ability to continue as a going concern.
(Evidence के बेलिि पर conclude करे गा …………………………………)
A material uncertainty exists when the
• magnitude of its potential impact and

• likelihood of occurrence
• is such that,
• in the auditor’s judgment,
• appropriate disclosure of the nature and implications of the uncertainty is necessary
Adequacy of Disclosures When Events or Adequacy of Disclosures

Conditions Have Been Identified and a When Events or Conditions
Material Uncertainty Exists Have Been Identified but No
Material Uncertainty Exists
The auditor shall determine whether the financial The auditor shall evaluate whether, in view
statements. of the requirements of the applicable
• Adequately disclose the financial reporting framework, the
o principal events or conditions financial statements provide adequate
▪ that may cast significant doubt on disclosures about these events or
▪ the entity’s ability to continue as a conditions.
going concern
o and management’s plans to deal with
these events or conditions; and
• Disclose clearly that
o there is a material uncertainty related to
events or conditions

o that may cast significant doubt on the
entity’s ability to continue as a going
concern and,
o therefore, that it may be unable to realize
its assets and discharge its liabilities in the
normal course of business
Implications for the Auditor’s Report

Use of Going Concern Basis of Accounting Is Inappropriate
If the financial statements have been prepared using the going concern basis of accounting but, in the auditor’s
judgment, management’s use of the going concern basis of accounting in the preparation of the financial
statements is inappropriate, the auditor shall express an adverse opinion.
Use of Going Concern Basis of Accounting Is Appropriate but a Material Uncertainty

Exists
Adequate Disclosure of a Material Uncertainty Is Made in the Financial Statements
If adequate disclosure about the material uncertainty is made in the financial statements, the auditor shall
express an unmodified opinion and the auditor’s report shall include a separate section under the heading
“Material Uncertainty Related to Going Concern” to
(a) Draw attention to the note in the financial statements that discloses the matters.
(b) State that these events or conditions indicate that a material uncertainty exists that may cast significant
doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is not modified
in respect of the matter.
Adequate Disclosure of a Material Uncertainty Is Not Made in the Financial Statements
If adequate disclosure about the material uncertainty is not made in the financial statements, the auditor shall
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern and
that the financial statements do not adequately disclose this matter.
Management Unwilling to Make or Extend

Its Assessment
If management is unwilling to make or extend its assessment when requested to do so by the auditor, the auditor
shall consider the implications for the auditor’s report.

Significant Delay in the Approval of Financial

Statements
If there is significant delay in the approval of the financial statements by management or those charged with
governance after the date of the financial statements,
➢ the auditor shall inquire

➢ as to the reasons for the delay.
➢ If the auditor believes that the delay could be related to events or conditions relating to the going concern
assessment,
➢ the auditor shall perform those additional audit procedures necessary,
➢ as well as consider the effect on the auditor’s conclusion regarding the existence of a material uncertainty.

SA 510
INITIAL AUDIT ENGAGEMENTS-OPENING
BALANCES
Definitions
(a) Initial audit engagement - An engagement in which either:
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a predecessor auditor.
(b) Opening balances - Those account balances that exist at the beginning of the period.
(c) Predecessor auditor - The auditor from a different audit firm, who audited the financial statements
of an entity in the prior period and who has been replaced by the current auditor.
Audit Procedures - Opening Balances

The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period's financial statements by:
(a) Correct brought forward & Adjustment done as required Determining whether the prior period's
closing balances have been correctly brought forward to the current period or, when
appropriate, any adjustments have been disclosed as prior period items in the current year's
Statement of Profit and Loss;
(b) OB Reflect Apt A/Cing Policy
a. Appropriate accounting policies reflected in the opening balances
i. have been consistently applied in the current period's financial statements, or
ii. Changes thereto are properly accounted for and adequately presented and
disclosed in accordance with the applicable financial reporting framework.
(c) Whether there is a misstatement in the opening balances (For checking this auditor should do
the following things)
a. PRIOR PERIOD AUDITED
i. Auditor can place reliance on the audit report of the predecessor auditor. (Consider
SA 200 – Using the work performed by others)
ii. He should obtain the report of the predecessor auditor.
b. PRIOR period was not audited
i. Obtain audit evidence whether there is a misstatement in the opening balance or not.
NOTE - If the prior period FS were audited by a predecessor auditor and there was a modification in the
opinion, the auditor shall evaluate the effect of the modification in assessing the risk of material
misstatement in the current period

Audit Conclusions and Reporting
Conclusion & Reporting
Opening Balance: Consistency of Accounting Policy Modification in Predecessor's Audit

Report
Contains That modification

misstatement not remains relevant and
Unable to obtain property Change in Accounting
Consistently Not materials to current
evidence w.r.t them Adjusted/disclosed in Policy not adjusted/
applied as per F.R.F - year's financial
current year's disclosed as per F.R.F -
Qualified Diclaimer Qualified or adverse statement then,
financial statemnets Qualified or adverse
Modify current year
Qualified Adverse Audit Report
Mr. T. a Chartered Accountant, was first time appointed the Auditor of XY2 Ltd. Mr. T. carried the audit
procedure for verifying the opening balances only, but not the previous year's accounting policies as it is
not needed. (6 Marks) (May, 2007)
Answer
1. As per the SA-510 "Initial Engagement - Opening Balances", it is the duty of the auditor, auditing
the financial statements first time, to verify and obtain appropriate audit evidence regarding
assertions as follows:
(a) Whether opening balances contain any misstatement which is materially affecting the
financial statements of the current period and
(b) Accounting policies followed in the preceding period are also being followed in current
period i.e. consistency of accounting policies followed.
2. Thus, in view of SA-510 Mr. T should verify the accounting policies also to ensure its continuity.
3. So, contention of Mr. T is not appropriate.

SA 540
AUDITING ACCOUNTING ESTIMATES,
INCLUDING FAIR VALUE ACCOUNTING
ESTIMATES, AND RELATED DISCLOSURES
Nature of Accounting
▪ Some financial statement items cannot be measured precisely, but can only be estimated.
▪ For purposes of this SA, such financial statement items are referred to as accounting estimates.
▪ The degree of estimation uncertainty affects the risks of material misstatement of accounting
estimates.
▪ A difference between the outcome of an accounting estimate and the amount originally
recognized in the financial statements does not necessarily represent a misstatement of the financial
statements. This is particularly the case for fair value accounting-estimates.
Objective of auditor
To obtain sufficient appropriate audit evidence whether:
(a) accounting estimates, including fair value accounting estimates are reasonable; and
(b) Related disclosures in the financial statements are adequate.
Risk Assessment Procedures and Related Activities

Auditor shall obtain an understanding of the following in order to identify and assess the risks of material
misstatement for accounting estimates:
(a) The requirements of the applicable financial reporting framework. (FRF की req. क्र्ा है for AE)
(b) How management identifies those transactions, events and conditions that may give rise to the
need for accounting estimates. (कैस़े पता चलता है क़े इसमें AE चाहहए)
(c) How management makes accounting estimates (methods, assumptions, use of expert etc.),
(Mgt. AE कैस़े बनती है )
(d) The auditor shall review the outcome of accounting estimates included in the prior period
financial statements. (पपछल़े वालो का क्र्ा हुआ)
Reponses to the Assessed Risks

Based on the assessed risks of material misstatement, the auditor shall determine:
(a) Whether management has appropriately applied the applicable financial reporting framework
(b) Whether the methods are appropriate and have been applied consistently,
Measurement and Disclosures Related to Accounting Estimates

▪ S&A E Whether the accounting estimate and their disclosure in the financial statements is
appropriate.
▪ For accounting estimates that give rise to significant risks, the auditor shall check adequacy of the
disclosure of their estimation uncertainty in the financial Statements
Indicators of Possible Management Bias

The auditor shall review the judgments and decisions made by management.

Written Representations
The auditor shall obtain written representations from management whether management believes
significant assumptions used by it in making accounting estimates pre reasonable.
Documentation
The audit documentation shall include
(a) Conclusion का Basis - The basis for the auditor's conclusions about the reasonableness of
accounting estimates and their disclosure that give rise to significant risks; and
(b) Indicators of possible management bias, if any.

SA 402
AUDIT CONSIDERATIONS RELATING TO AN
ENTITY USING A SERVICE ORGANIZATION.
Scope of this SA
1. This Standard on Auditing (SA) deals with the user auditor's responsibility to obtain
sufficient appropriate audit evidence when a user entity (UE) uses the services of one or more
service organizations. (ऑडडटर की क्र्ा क्र्ा responsibilities है evidence को ल़ेकर जब User entity service
organization की services use कर रह हो)
2. SA applicable only when service of the service organisation are relevant for financial
reporting.
3. A service organization's services relevant to financial reporting if these services affect any
of the following:
(a) The classes of transactions in the user entity's operations that are significant to the
user entity's financial statements; (ऐसी Transactions जो importance रखती हो UE की FS क़े
सलए)
(b) The procedures, by which the user entity's transactions are

• initiated, (I)
• recorded, (R)
• processed, (P)
• corrected as necessary, (C)
• transferred to the general ledger and (T)
• reported in the financial statements; (R)
(SO की services ऐस़े हो जो सीधा effect डालती हो ऐस़े procedures पर जजस स़े UE की Transaction
I, R, P, C, T, R होती हो )
(c) The financial reporting process used to prepare the user entity's financial statements,
including significant accounting estimates and disclosures; and
(जजस स़े financial reporting process जो की use होता है preparation of FS of UE पर effect हो)
(d) Controls surrounding journal entries, including non-standard journal entries used to
record non-recurring, unusual transactions or adjustments.
Objective
The objectives of the user auditor, when the user entity uses the services of a service organization,
are:
(a) To obtain an understanding of the nature and significance of the services provided by the
service organization and their effect on the user entity's internal control relevant to the
audit, sufficient to identify and assess the risks of material misstatement; and
ककस तरह की services है और उनका entity क़े internal control पर क्र्ा effect है ताकक हम ररस्क of
material misstatement को identify and assess कर पाए

(b) To design and perform audit procedures responsive to those risks.
Definitions
(a) Report on the description and design of controls at a service organization (referred to in
this SA as a Type 1 report) - A report that comprises:
(i) A prepared by management of the service

description,
organization, of the service organization's
• system,
• control objectives and
• related controls that have been designed and implemented as at a specified date;
and
(ii) A report by the service auditor with the objective of conveying reasonable
assurance that includes the service auditor's opinion on the description of
the service organization's system, control objectives and related
controls and the suitability of the design of the controls to achieve the specified
control objectives.
(b) Report on the description, design, and operating effectiveness of controls at

a service organization (referred to in this SA as a Type 2 report)
A report that comprises

(i) A description, prepared by management of the service organization, of the service
organization's
• system,
• control objectives and
• or
related controls, their design and implementation as at a specified date
throughout a specified period and, in some cases,
their operating effectiveness throughout a specified
period; and
(ii) A report by the service auditor with the objective of conveying reasonable assurance
that includes:
a. The service auditor's opinion on the description of the service organization's
system, control objectives and related controls, the suitability of the design of
the controls to achieve the specified control objectives, and the
operating effectiveness of the controls; and
b. A description of the service auditor's tests of the
controls and the results thereof.
(c) Service auditor - An auditor who, at the request of the service organization, provides an
assurance report on the controls of a service organization.

(d) Service organization — A third-party organization (or segment of a third-party organization)
that provides services to user entities that are part of those entities' information systems
relevant to financial reporting.
(e) Service organization's system - The policies and procedures designed, implemented and
maintained by the service organization to provide user entities with the services.
(f) Subservice organization - A service organization used by another service organization to
perform some of the services provided to user entities.
(g) User auditor - An auditor who audits and reports on the financial statements of a user entity.
(h) User entity - An entity that uses a service organization and whose financial statements are
being audited.
Obtaining an understanding of the services provided by a service organization, including internal

control
1. When obtaining an understanding of the user entity in accordance with SA 315, the user
auditor shall obtain an understanding of how a user entity uses the services of a service
organization in the user entity's operations, including:
(a) The nature of the services provided by the service organization and the significance
of those services to the user entity.
(b) The nature and materiality of the transactions processed or accounts or financial
reporting processes affected by the service organization;
(c) The degree of interaction between the activities of the service organization and those
of the user entity; and
(d) Using another auditor to perform procedures that will provide the necessary
information about the relevant controls at the service organization.
2. The user auditor shall evaluate the design and implementation of relevant controls at the user
entity that relate to the services provided by the service organization.
3. The user auditor shall determine whether a sufficient understanding of the nature and
significance of the services provided by the service organization and their effect on the user
entity's internal control relevant to the audit has been obtained.
4. If the user auditor is unable to obtain a sufficient understanding from the user entity, the
user auditor shall obtain that understanding from one or more of the following procedures:
(a) Obtaining a Type 1 or Type 2 report, if available;
(b) Contacting the service organization, through the user entity, to obtain specific
information;
(c) Visiting the service organization and performing procedures; or
(d) Using another auditor to perform procedures that will provide the necessary
information about the relevant controls at the service organization.
Using a type 1 or type 2 report to support the user auditor's understanding of the service
organization
In determining the sufficiency and appropriateness of the audit evidence provided by a Type 1 or
Type 2 report, the user auditor shall be satisfied as to:
(a) The service auditor's professional competence (except where the service auditor is a member
of the Institute of Chartered Accountants of India) and independence from the service
organization; and
(b) The adequacy of the standards under which the Type 1 or Type 2 report was issued.
Responding to the assessed risks of material misstatement

In responding to assessed risks in accordance with SA 330, the user auditor shall:

(a) Determine whether sufficient appropriate audit evidence concerning the relevant financial
statement assertions is available from records held at the user entity; and, if not,
(b) Perform further audit procedures to obtain sufficient appropriate audit evidence or use
another auditor to perform those procedures at the service organization on the user auditor's
behalf.
Tests of controls
When the user auditor's risk assessment includes an expectation that controls at the service
organization are operating effectively, the user auditor shall obtain audit evidence about the
operating effectiveness of those controls from one or more of the following procedures:
(c) Obtaining a Type 2 report, if available;
(d) Performing appropriate tests of controls at the service organization; or
(e) Using another auditor to perform tests of controls at the service organization on behalf of
the user auditor.
Type 1 and type 2 reports that exclude the services of a subservice organisation
If the user auditor plans to use a Type 1 or a Type 2 report that excludes the services provided by
a subservice organisation and those services are relevant to the audit of the user entity's financial
statements, the user auditor shall apply the requirements of this SA with respect to the services
provided by the subservice organisation also.
Fraud, non-compliance with laws and regulations and uncorrected misstatements in relation to
activities at the service organization
The user auditor shall inquire of management of the user entity whether the service organisation has
reported to the user entity, or whether the user entity is otherwise aware of, any fraud, non-
compliance with laws and regulations or uncorrected misstatements affecting the financial
statements of the user entity.
The user auditor shall evaluate how such matters affect the nature, timing and extent of the user
auditor's further audit procedures, including the effect on the user auditor's conclusions and user
auditor's report.
Reporting by the user auditor

 The user auditor shall modify the opinion in the user auditor's report if the user auditor is
unable to obtain sufficient appropriate audit evidence regarding the services provided by the
service organisation.
 The user auditor shall not refer to the work of a service auditor in the user auditor's report
containing an unmodified opinion.
 If reference to the work of a service auditor is relevant to an understanding of a modification
to the user auditor's opinion, the user auditor's report shall indicate that such reference does
not diminish the user auditor's responsibility for that opinion.
Question
G Ltd. is a mobile phone operating company. Barring the marketing function it had outsourced
the entire operations like maintenance of mobile infrastructure, customer billing, payroll,
accounting functions, etc. Assist the auditor of G Ltd. as to how he can obtain an understanding
of how G Ltd. uses the services of the outsourced agency in its operations.

Answer
 Standard on Auditing (SA) 402 deals with the user auditor's responsibility to obtain sufficient
appropriate audit evidence when a user entity uses the services of one or more service
organisations.
 When obtaining an understanding of the user entity in accordance with SA 315, the user
auditor shall obtain an understanding of how a user entity uses the services of a service
organisation in the user entity's operations, including:
(a) The nature of the services provided by the service organisation and the significance
of those services to the user entity.
(b) The nature and materiality of the transactions processed or accounts or financial
reporting processes affected by the service organisation;
(c) The degree of interaction between the activities of the service organisation and
those of the user entity; and
(d) The nature of the relationship between the user entity and the service organisation,
including the relevant contractual terms.

SA 710
COMPARATIVE INFORMATION
CORRESPONDING FIGURES AND
COMPARATIVE FINANCIAL INFORMATION
Meaning
Comparative financial statements
 Comparative information
 where amounts and other disclosures for the prior period -) are included for comparison with
the financial statements of the
 current period but,
 if audited, are referred to in the auditor's opinion.
Corresponding figures
 Comparative information
 where amounts and other disclosures for the prior period, are included
 as an integral part of current period financial statements, and
 are intended to be read only in relation to the amounts and other
 disclosures relating to the current period.
Audit reporting (difference between two approaches)

 Comparative financial statements: Auditor's Opinion refers to each period for which financial
statements are presented.
 Corresponding Figures: Auditor's Opinion on financial statements refers to current period
only.
Considerations of other SA
 If prior period financial statements are audited by another auditor /unaudited: SA 510 (Audit
of opening balances)
 If auditor had audited the prior period financial statements- SA 560 (Subsequent Event)
Audit procedures
Determine as to whether
 Financial statements include Comparative information required by FRF, &
 Whether information - classified appropriately.
Evaluate whether
 Comparative information agrees with amounts and disclosures presented in prior period;
 Accounting policies reflected are consistent with those applied in current period.
 Changes in accounting policies- have been properly accounted for and disclosed.
Professional skepticism
 In case of doubt of Material Misstatement in comparative information,
 Perform additional audit procedures
 To obtain sufficient appropriate audit evidence regarding existence of material misstatement.

Obtain Written representation- as required by SA 580

 For all periods referred to in his opinion.
 & for any prior period item separately disclosed in current year's profit and loss statement
Prior period financial statements
Audited by another auditor

Auditor shall state in OTHER MATTERS PARA:
 That financial statements of prior period were audited by predecessor auditor.
 Types of opinion expressed by him (reasons for modifications, if any).
 Date of that report.
Where, prior period financial statements contain material misstatements (not reflected in previous
audit report):
 Communicate misstatement to TCWG and Management.
 Request that predecessor auditor be informed.
Are Unaudited
Auditor shall state in OTHER MATTERS PARA that corresponding financial statements are
unaudited.
However, this does not relieve the auditor from need to obtain sufficient appropriate audit evidences
that opening balances do not contain misstatements materially affecting current financial statements
Reporting - comparative financial statements

 Audit opinion to refer to each period for which financial statements are presented and on
which opinion is expressed.
 If opinion on prior period financial Statements expressed in current period is different from
opinion expressed in the relevant prior period, give reason for difference in Other Matter
Para. (As per SA 706)
Reporting – corresponding figures

Audit opinion shall not refer to corresponding figures, EXCEPT:
(1) When Auditor's report in prior period financial statements was modified and the subject
matter is still unresolved (Modify opinion on current period's financial statements)
(2) When auditor obtains audit evidence w.r.t. existence of material misstatement in prior period
financial statements on which unmodified opinion was issued, and misstatement has not been
dealt as required by applicable FRF. (qualified / adverse opinion on current financial
statements w.r.t. Corresponding figures)

SA 720
THE AUDITOR'S RESPONSIBILITY IN RELATION
TO OTHER INFORMATION IN DOCUMENTS
CONTAINING AUDITED FINANCIAL STATEMENTS
Scope of this SA
It deals with auditor’s responsibility in relation to other information in “documents containing audited
financial statements and auditor’s report thereon.
In this SA "documents containing audited financial statements" refers to annual reports (or similar
documents), that are issued to owners (or similar stakeholders), containing audited financial
statements and the auditor's report thereon. This SA may also be applied, adapted as necessary in
the circumstances, to other documents containing audited financial statements.
Objective
Auditor’s objective is to respond appropriately when “documents containing audited financial
statements” and auditor's report thereon include other information that could undermine the
credibility of those financial statements and the auditor's report.
Definitions
(a) Other information - Financial and non-financial information (other than the financial
statements and the auditor's report thereon) which is (either by law, regulation or custom)
included in a “document containing audited financial statements” and the auditor's report
thereon.
(b) Inconsistency - Other information that contradicts information contained in the audited
(c) Misstatement of fact — Other information that is unrelated to matters appearing in the
audited financial statements that is incorrectly stated or presented. It may undermine the
credibility of the “document containing audited financial statements”.
REQUIREMENTS
Reading other information
Auditor shall
 read “other information” to identify material inconsistencies with the audited financial
statements.
 make appropriate arrangements with management or TCWG to obtain other information prior
to the date of the auditor's report. If not possible to obtain all other information- auditor
shall read such other information as soon as practicable.
Material inconsistencies
If auditor identifies a material inconsistency, the auditor shall determine whether the audited
financial statements or the other information needs to be revised.
Material inconsistencies identified in other information obtained PRIOR TO THE DATE OF THE
AUDITOR'S REPORT
 Revision of audited financial statements is necessary and management refuses to make
revision, then auditor shall modify the opinion in accordance with SA 705

 Revision of other information is necessary and management refuses to make revision, then
auditor shall communicate this matter to TCWG
(a) Include in auditor's report an Other Matter paragraph describing material inconsistency.
(b) If withdrawal is legally permitted, withdraw from engagement.
Material inconsistencies identified in other information obtained SUBSEQUENT TO THE DATE

OF THE AUDITOR'S REPORT
 If revision of audited financial statements is necessary, then auditor shall follow SA 560
 When revision of other information is necessary and management agrees to make revision,
then auditor shall carry out necessary procedures.
 When revision of other information is necessary, & management refuses to make revision,
then auditor shall notify TCWG and take any further appropriate action.
Material misstatements of fact
 If auditor becomes aware of an apparent material misstatement of fact, he shall discuss the
matter with management.
 Following such discussions, auditor still considers that there is an apparent material
misstatement of fact, auditor shall request management to consult with a qualified third party,
such as the entity's legal counsel, and auditor shall consider advice received.
 When the auditor concludes that there is a material misstatement of fact in other information
which management refuses to correct, auditor shall notify TCWG and take any further
appropriate action.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C10 – Company Audit
Chapter 10- Company Audit

The provisions related to Audit & Auditors of a company is dealt in Chapter X of the Companies Act, 2013. Section
139 to Section 148 are there in Chapter X. Relevant rules to be studied Companies (Audit and Auditors) Rules, 2014.
So Let’s Begin.
S.No. Contents Sec. no.
1 Appointment of Auditors 139
2 Removal, Resignation of auditor and giving of special notice 140
3 Eligibility, Qualifications and Disqualifications of auditors 141
4 Remuneration of auditors 142
5 Powers and duties of auditors and auditing standards 143
6 Auditor not to render certain services 144
7 Auditor to sign audit reports, etc. 145
8 Auditors to attend general meeting 146
9 Punishment for Contravention 147
10 Central Government to specify audit of items of cost in respect 148
of certain companies.
Section 139 – Appointment of Auditors
(1) APPOINTMENT OF SUBSEQUENT AUDITORS OF A COMPANY OTHER THAN GOVERNMENT COMPANY
Subject to the provisions of this Chapter, every company shall, at the

• first annual general meeting,
• appoint an individual or a firm as an auditor
• who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general
meeting. (Some lines omitted deliberately)
Provided that the company shall place the matter relating to such appointment for ratification by
members at every annual general meeting
Provided further that before such appointment is made,

• the written consent of the auditor to such appointment,
• and a certificate from him or it that the appointment, if made, shall be in accordance with
the conditions as may be prescribed,
shall be obtained from the auditor:
Conditions Prescribed for appointment and notice to registrar (Rule 4)
The auditor proposed to be appointed shall submit a certificate that
1. The individual or firm is eligible for appointment and is not disqualified for the appointment under the act,
The Chartered Accountants act, 1949 and the rules and regulations made there under.
2. The proposed appointment is as per the terms provided in the act.
3. The proposed appointment is within the limits laid down by or under the authority of the act.
4. The list of proceedings against the auditor or audit firm or any partner of the audit firm pending with
respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

Provided also that the certificate shall also indicate whether the auditor satisfies the criteria
provided in section 141 (Qualification & Disqualification of Auditor)
Provided also that

• the company shall inform the auditor concerned
• of his or its appointment, and
• also file a notice of such appointment with the Registrar within fifteen days of the
meeting in which the auditor is appointed.
What if ratification of appointment of auditor is not given?
If at any AGM, the appointment of auditor is not ratified by the members the board of directors shall appoint
another individual or firm as its auditor(s) after following the procedure laid down in the act.
Ratification has to be given through passing ordinary resolution at AGM.
ROTATION OF AUDITORS
(2) No listed company or a
• company belonging to such class or classes of companies as may be prescribed, shall appoint or
re-appoint—
a. an individual as auditor for more than one term of five consecutive years; and
b. an audit firm as auditor for more than two terms of five consecutive years:
(कोई भी सलस्ट़े ड र्ा प्ऱेसक्राइब्ड कींपनी ककसी individual को 5 साल (one term of 5 consecutive years) स़े ज्र्ादा क़े सलए और फमय
को 10 साल (2 terms of 5 consecutive years) स़े ज्र्ादा क़े सलए ऑडडटर नह ीं अप्पोइींट कर सकती)
Provided that—
i. an individual auditor who has completed his term under clause (a) shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of his term;
ii. an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment
as auditor in the same company for five years from the completion of such term:
Common Partner OR Partner

Provided further that as on the date of appointment
• no audit firm having a common partner or
• partners to the other audit firm, whose tenure has expired in a company immediately
preceding the financial year, shall be appointed as auditor of the same company for a period of five
years:
Provided also that every company, existing on or before the commencement of this Act which is required
to comply with provisions of this sub-section, shall comply with the requirements of this sub-section within
three years from the date of commencement of this Act:

Provided also that, nothing contained in this sub-section shall prejudice the right of the company to
remove an auditor or the right of the auditor to resign from such office of the company.
Rule 5 of the Companies (Audit and Auditors) Rules, 2014
Following classes of companies have been prescribed for the purpose of rotation of auditors
1. All unlisted public companies having paid up share capital of Rs. 10 crore or more;
2. All private limited companies having paid up share capital of Rs. 20 crore or more;
3. All companies having paid up share capital below the limits mentioned in (a) and (b) above,
but having public borrowings from financial institutions, banks or public deposits of Rs. 50
crore or above.
(3) Subject to the provisions of this Act, members of a company may resolve to provide that—
a. in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals as
may be resolved by members; or
b. the audit shall be conducted by more than one auditor.
(4) The Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors
in pursuance of sub-section (2).
Explanation.—For the purposes of this Chapter, the word “firm” shall include a limited liability partnership
incorporated under the Limited Liability Partnership Act, 2008.

CG may, by rules, prescribe the manner of rotation of auditors. – Rule 6 of Company Audit &
Auditors Rule 2014. (CAAR, 2014)
Manner of rotation of auditors by the companies on expiry of their term
1. In case the company is required to constitute an Audit Committee, the procedure shall be
as follows
(a) Recommendation to the board

The Audit Committee shall recommend to the Board, the name of an individual auditor or
of an audit firm who may replace the incumbent auditor on expiry of the term of such
incumbent,
(b) Consider the recommendation

The Board shall consider the recommendation of the Audit Committee.
(c) The Board, shall make its own, recommendation for appointment of the next auditor by the,
members in the AGM.
2. In case the company is not required to constitute an Audit Committee, the procedure shall
be as follows
(a) The Board shall itself consider the matter of rotation of auditors.
(b) The Board shall intake its own recommendation for appointment of the next auditor by the
members in the AGM.
The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with
the outgoing auditor or audit firm under the same network of audit firms.
'Same network' includes the firms operating or functioning, under the same brand name, trade
name or common control.
If a partner, who is in charge of an audit firm and also certifies the financial statements of the
company, retires from the said firm and joins another firm of chartered accountants, such other firm
shall also be ineligible to be appointed for a period 5 years.

Manner and procedure of selection of auditors (Rule 3)
The manner and procedure of selection of auditors by the members of the company at any AGM
shall be such as may be prescribed.
Rule 3 of the Companies (Audit and Auditors) Rules, 2014 prescribes the following procedure:
1. The qualifications and experience of the individual or the firm proposed to be appointed as
auditor shall be considered by-
(a) the Board; or
(b) the audit committee, in case the company is required to constitute an Audit
Committee.
2. While considering the appointment, the Board / Audit Committee shall have due regard to
any order of professional misconduct passed against the proposed auditor; and any
proceedings of professional misconduct pending against the proposed auditor.
3. The Board / Audit Committee may call for such other information from the proposed auditor
as it may deem fit.
4. In case the company is not required to constitute the Audit Committee, the Board shall
consider and recommend an individual or a firm as auditor to the members in the AGM for
appointment.
5. In case the company is required to constitute the Audit Committee, following procedure shall
be adopted:
(a) The Audit committee shall recommend the name of an individual or a firm as auditor
to the Board for consideration.
(b) If the Board agrees with the recommendation of the Audit Committee, it shall further
recommend such individual or such firm as auditor to the members in the AGM for
appointment.
(c) If the Board disagrees with the recommendation of the Audit Committee, it shall refer
back the recommendation to the Audit committee for reconsideration citing reasons
for such disagreement.
(d) If the Audit Committee, after considering the reasons given by the Board, decides not
to reconsider its original recommendation, (जो था वो ह रह़े गा) and the Board continues
to disagree with the recommendations of the Audit Committee, the Board shall
(i) record reasons for its disagreement with the committee
(ii) send its own recommendation for consideration of the members in the AGM;
(e) If the Audit Committee, after considering the reasons given by the Board, decides not
to reconsider its original recommendation, and the Board agrees with the
recommendations of the Audit Committee, the Board shall recommend the name of
the individual or the firm as recommended by the Audit Committee to the members in
the AGM for appointment.
(5) APPOINTMENT OF SUBSEQUENT AUDITORS IN CASE OF GOVERNMENT COMPANY
Notwithstanding anything contained in sub-section (1), in the case of a

• Government company or

• any other company owned or controlled, directly or indirectly, by the Central Government, or by any
State Government or Governments,
• or partly by the Central Government and partly by one or more State Governments,
the Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor
duly qualified to be appointed as an auditor of companies under this Act, within a period of one hundred
and eighty days from the commencement of the financial year, who shall hold office till the
conclusion of the annual general meeting.
Definition of 'Government Company' Sec. 2(45)

Any company in which not less than 51% of the paid-up share capital is held by -
(a) CG; or
(b) SG(s); or
(c) partly by CG and partly by SG(s).
'Government company' includes a company which is a subsidiary company of a Government

company.
(6) APPOINTMENT OF FIRST AUDITORS OF A COMPANY OTHER THAN GOVERNMENT COMPANY
Notwithstanding anything contained in sub-section (1), the first auditor of a company, other than a
Government company,
shall be appointed by the Board of Directors within thirty days from the date of registration of the
company
and in the case of failure of the Board to appoint such auditor, it shall inform the members of the
company,
who shall within ninety days at an extraordinary general meeting appoint such auditor and such
auditor shall hold office till the conclusion of the first annual general meeting.
(7) APPOINTMENT OF FIRST AUDITORS OF A GOVERNMENT COMPANY
Notwithstanding anything contained in sub-section (1) or sub-section (5), in the case of a Government company
or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State
Government, or Governments, or partly by the Central Government and partly by one or more State
Governments,
the first auditor shall be appointed by the Comptroller and Auditor-General of India within sixty days
from the date of registration of the company
and in case the Comptroller and Auditor-General of India does not appoint such auditor within the said
period,
the Board of Directors of the company shall appoint such auditor within the next thirty days; and in
the case of failure of the Board to appoint such auditor within the next thirty days,
it shall inform the members of the company who shall appoint such auditor within the sixty days at
an extraordinary general meeting,

who shall hold office till the conclusion of the first annual general meeting.
(8) Any casual vacancy in the office of an auditor shall—

a. in the case of a company other than a company whose accounts are subject to audit by an auditor
appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within
thirty days, but if such casual vacancy is as a result of the resignation of an auditor, such
appointment shall also be approved by the company at a general meeting convened within
three months of the recommendation of the Board and he shall hold the office till the
conclusion of the next annual general meeting;
b. in the case of a company whose accounts are subject to audit by an auditor appointed by the
Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India
within thirty days
Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within the
said period, the Board of Directors shall fill the vacancy within next thirty days.
Notes
Casual Vacancy is not defined in the act. It can be understood as any vacancy after proper appointment of auditor. If
appointment is invalid than it cannot be a case of casual vacancy. In this case appointment is void ab intio and there is
no appointment rather than casual vacancy
(9) Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring auditor may be re-
appointed at an annual general meeting, if—
a. he is not disqualified for re-appointment; (141)

b. he has not given the company a notice in writing of his unwillingness to be re-appointed; and
c. a special resolution has not been passed at that meeting appointing some other auditor or providing
expressly that he shall not be re-appointed.
(10) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor shall
continue to be the auditor of the company.
There is a difference between no auditor appointed and no ratification. In case of no auditor is appointed at 6 th AGM
then as per (10) the existing auditor will be reappointed but if in 2 nd, 3rd , 4th, 5th, AGM no ratification is received it will
be a case of no ratification and casual vacancy will be there.
Always remember that retiring auditor can be reappointed only when sub section is complied that is to say
• He is not disqualified
• Not given notice of unwillingness
• No SR has been passed to appoint someone else or not to appoint him
(11) Where a company is required to constitute an Audit Committee under section 177, all appointments, including
the filling of a casual vacancy of an auditor under this section shall be made after taking into account the
recommendations of such committee.
Time limits under related to appointment of auditor
1. Subsequent auditor to be appointed at first AGM – Company other than GC.

2. Auditor appointed at 1st AGM will continue till the conclusion of 6th AGM.
3. Information to the auditor and notice to the registrar within 15 days.

4. Appointment of subsequent auditor of GC – 180 days from the commencement of the financial year (hold
the office till the conclusion of AGM)
5. Appointment of FIRST auditor of a Company other than GC. – Board within 30 days from the date of
registration. Board fails members with 90 days through EGM.
6. Appointment of FIRST auditor of a GC – CAG within 60 days of Reg. of Company – Board within next 30
days. Board fails – Members within 60 days at EGM. Hold the office till the conclusion of First AGM.
7. Casual Vacancy – Board within 30 days
8. Casual Vacancy because of resignation – Board within 30 days approved by members in EGM within 3
months of recommendation of the board – hold the office till the conclusion of the next AGM.
9. Casual Vacancy GC – CAG within 30 days – CAG does not – BOD within next 30 days.
Removal, resignation of auditor and giving of special notice. – Section 140
REMOVAL OF AUDITOR BEFORE EXPIRY OF THE TERM.

(1) The auditor appointed under section 139 may be removed from his office before the expiry of his term only
by a
Special resolution of the company, after obtaining the
Previous approval of the
Central Government in that behalf in the prescribed manner:
Provided that before taking any action under this sub-section, the auditor concerned shall be given a reasonable
opportunity of being heard.
Procedure for obtaining approval of CG and passing SR (Rule 7)

(a) An application shall be made to CG in Form ADT-2. The application shall be accompanied with the
prescribed fees.
(b) The application shall be made to CG within 30 days of passing of the Board resolution.
(c) The company shall hold the general meeting within 60 days of receipt of approval of CG for passing
the special resolution.
STATEMENT BY AUDITOR TO THE COMPANY AND REGISTRAR

(2) The auditor who has resigned from the company shall file within a period of thirty days from the date of
resignation, a statement in the prescribed form with the company and the Registrar, and in case of
companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the
Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant
with regard to his resignation.
PENALTY FOR NON-FILING OF STATEMENT

(3) If the auditor does not comply with sub-section (2), he or it shall be punishable with fine which shall not
be less than fifty thousand rupees but which may extend to five lakh rupees.
(4)
SPECIAL NOTICE FOR APPOINTING SOME ONE ELSE OR EXPRESSELY NOT APPOINTING
RETIRING AUDITOR
a. Special notice shall be required for a resolution at an annual general meeting appointing as
auditor a person other than a retiring auditor, or providing expressly that a retiring auditor
shall not be re-appointed, except where the retiring auditor has completed a consecutive tenure of
five years or as the case may be, ten years, as provided under sub-section (2) of section 139.
b. On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the
retiring auditor.

c. Where notice is given of such a resolution and the retiring auditor makes with respect thereto
representation in writing to the company (not exceeding a reasonable length) and requests its
notification to members of the company, the company shall, unless the representation is received
by it too late for it to do so,—
i. in any notice of the resolution given to members of the company, state the fact of the
representation having been made; and
ii. send a copy of the representation to every member of the company to whom notice
of the meeting is sent, whether before or after the receipt of the representation by the
company, and if a copy of the representation is not sent as aforesaid because it was
received too late or because of the company's default, the auditor may (without
prejudice to his right to be heard orally) require that the representation shall be read out
at the meeting:
Provided that if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the Registrar:
Curtailing right of the auditor regarding circulation of copy of representation

in the case of appointment of Auditor other than retiring Auditor under
section 140(4) of the Companies Act, 2013
If the Tribunal is satisfied on an application either of the company or of any other aggrieved person that the rights
conferred by section 140(4) of the Companies Act, 2013 are being abused by the auditor, then, the copy of the
representation may not be sent and the representation need not be read out at the meeting.
Direction by Tribunal in case auditor acted in a fraudulent manner
As per sub-section (5) of the section 140, the Tribunal either suo motu or on an application made to it by the Central
Government or by any person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly,
acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its directors or
officers, it may, by order, direct the company to change its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor
is required, it shall within fifteen days of receipt of such application, make an order that he shall not function as an auditor
and the Central Government may appoint another auditor in his place.
It may be noted that an auditor, whether individual or firm, against whom final order has been passed by the Tribunal
under this section shall not be eligible to be appointed as an auditor of any company for a period of five years from the
date of passing of the order and the auditor shall also be liable for action under section 447.
It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner or partners who
acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company or its director or
officers.

Remuneration of auditors. – Section 142

(1) The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as
may be determined therein:
Provided that the Board may fix remuneration of the first auditor appointed by it.
(2) The remuneration under sub-section (1) shall, in addition to the fee payable to an auditor, include the
expenses, if any, incurred by the auditor in connection with the audit of the company and any facility
extended to him but does not include any remuneration paid to him for any other service rendered by him at
the request of the company.
Powers and duties of auditors and auditing standards. – Section 143
(1) Every auditor of a company shall have a
 right of access at all times to the books of account and vouchers of the company, whether kept
at the registered office of the company or at any other place and shall be
 entitled to require from the officers of the company such information and explanation as he may
consider necessary for the performance of his duties as auditor and
 amongst other matters inquire into the following matters, namely: —
a. whether loans and advances made by the company on the basis of security have been properly
secured and whether the terms on which they have been made are prejudicial to the interests
of the company or its members;
b. whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
c. where the company not being an investment company or a banking company, whether so much
of the assets of the company as consist of shares, debentures and other securities have been sold
at a price less than that at which they were purchased by the company;
d. whether loans and advances made by the company have been shown as deposits;
e. whether personal expenses have been charged to revenue account;
f. where it is stated in the books and documents of the company that any shares have been allotted
for cash, whether cash has actually been received in respect of such allotment, and if no cash has
actually been so received, whether the position as stated in the account books and the balance sheet is
correct, regular and not misleading:
Provided that the auditor of a company which is a holding company shall also have the right of
access to the records of all its subsidiaries insofar as it relates to the consolidation of its
financial statements with that of its subsidiaries.
(2) REPORT TO MEMBERS
(3) The auditor's report shall also state— (REPORT ON PRINCIPAL ASSERTIONS – NOT OPTIONAL –
AUDITOR HAS TO HAS TO HAS TO REPORT)

a. whether he has sought and obtained all the information and explanations which to the best
of his knowledge and belief were necessary for the purpose of his audit and if not, the details
thereof and the effect of such information on the financial statements;
b. whether, in his opinion, proper books of account as required by law have been kept by the
company (some words omitted) and proper returns adequate for the purposes of his audit have been
received from branches not visited by him;
c. whether the report on the accounts of any branch office of the company audited under sub-
section (8) by a person other than the company's auditor has been sent to him and the manner
in which he has dealt with it in preparing his report;
d. whether the company's balance sheet and profit and loss account dealt with in the report are
in agreement with the books of account and returns;
e. whether, in his opinion, the financial statements comply with the accounting standards;
f. the observations or comments of the auditors on financial transactions or matters which have
any adverse effect on the functioning of the company;
g. whether any director is disqualified from being appointed as a director under sub-section (2) of
section 164;
h. any qualification, reservation or adverse remark relating to the maintenance of accounts

and other matters connected therewith;
i. whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls;
j. such other matters as may be prescribed.
Other matters to be included in Auditor's report (Rule 11)

The auditor shall include in his report, his views and comments on the following matters:
(a) Whether the company has disclosed the impact, if any, of pending litigations on its financial position
in its financial statement.
(b) Whether the company has made provision, as required under any law or accounting standards, for
material foreseeable losses, if any, on long term contracts including derivative contracts.
(c) Whether there has been any delay in transferring amounts, required to be transferred, to the Investor
Education and Protection Fund by the company.
(4) Where any of the matters required to be included in the audit report under this section is answered in the
negative or with a qualification, the report shall state the reasons thereof.
(5) In the case of a Government company, the Comptroller and Auditor-General of India shall appoint the
auditor under sub-section (5) or sub-section (7) of section 139 and direct such auditor the manner in
which the accounts of the Government company are required to be audited and thereupon the auditor so
appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India which,
among other things, include the directions, if any, issued by the Comptroller and Auditor-General of India,
the action taken thereon and its impact on the accounts and financial statement of the company.

POWER OF CAG TO CONDUCT SUPPLEMENTARY AUDIT

(6) The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit
report under sub-section (5) have a right to,—
a. conduct a supplementary audit of the financial statement of the company by such person or
persons as he may authorize in this behalf; and for the purposes of such audit, require
information or additional information to be furnished to any person or persons, so authorized,
on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General
of India may direct; and
b. comment upon or supplement such audit report:
Provided that any comments given by the Comptroller and Auditor-General of India upon, or supplement
to, the audit report shall be sent by the company to every person entitled to copies of audited
financial statements (under sub-section (1) of section 136) and also be placed before the annual general meeting
of the company at the same time and in the same manner as the audit report.
(7) Without prejudice to the provisions of this Chapter, the Comptroller and Auditor-General of India may, in
case of any company covered under sub-section (5) or sub-section (7) of section 139, if he considers necessary,
by an order, cause test audit to be conducted of the accounts of such company.
(8) Where a company has a branch office, the accounts of that office shall be audited either by the auditor
appointed for the company (herein referred to as the company's auditor) under this Act or by any other
person qualified for appointment as an auditor of the company under this Act and appointed as such
under section 139, or where the branch office is situated in a country outside India, the accounts of
the branch office shall be audited either by the company's auditor or by an accountant or by any
other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the
laws of that country and the duties and powers of the company's auditor with reference to the audit of
the branch and the branch auditor, if any, shall be such as may be prescribed:
Provided that the branch auditor shall prepare a report on the accounts of the branch examined by him
and send it to the auditor of the company who shall deal with it in his report in such manner as he
considers necessary.
Duties and powers of the company's auditor prescribed under the Rules (Rule 12)
(a) The duties and powers of the company's auditor with reference to the audit of the branch and the
branch auditor, if any, shall be as contained in sub-sections (1) to (4) of section 143.
(b) The provisions regarding reporting of fraud by the auditor shall also extend to such branch auditor to
the extent it relates to the concerned branch.
(9) Every auditor shall comply with the auditing standards. The Central Government may prescribe the
standards of auditing or any addendum thereto, as recommended by the Institute of Chartered Accountants
of India, in consultation with and after examination of the recommendations made by the National Financial
Reporting Authority:
(10) Provided that until any auditing standards are notified, any standard or standards of auditing
specified by the Institute of Chartered Accountants of India shall be deemed to be the auditing
standards.
(11) The Central Government may, in consultation with the (NFRA) National Financial Reporting Authority,
direct in respect of such class or description of companies, as may be specified in the order, that the
auditor's report shall also include a statement on such matters as may be specified therein.
(12) Notwithstanding anything contained in this section, if an auditor of a company in the course of the
performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount
or amounts as may be prescribed, is being or has been committed in the company by its officers or
employees, the auditor shall report the matter to the Central Government within such time and in such
manner as may be prescribed:
Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the
matter to the audit committee constituted under section 177or to the Board in other cases within such time
and in such manner as may be prescribed:
Provided further that the companies, whose auditors have reported frauds under this sub-section to the
audit committee or the Board but not reported to the Central Government, shall disclose the details about
such frauds in the Board's report in such manner as may be prescribed.
Reporting of frauds by auditor and other matters. – Rule 13
(1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has
reason to believe that an offence of fraud, which involves or is expected to involve individually an
amount of rupees one crore or above, is being or has been committed against the company by its
officers or employees, the auditor shall report the matter to the Central Government.
(2) The auditor shall report the matter to the Central Government as under:—

(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be,
immediately but not later than two days of his knowledge of the fraud, seeking their reply or
observations within forty-five days;
(b) on receipt of such reply or observations, the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the Central Government within fifteen days
from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee
within the stipulated period of forty-five days, he shall forward his report to the Central
Government along with a note containing the details of his report that was earlier forwarded to
the Board or the Audit Committee for which he has not received any reply or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by
Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in
confirmation of the same;
(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address and
contact telephone number or mobile number and be signed by the auditor with his seal and shall
indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4.
(3) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report
the matter to Audit Committee constituted under section 177 or to the Board immediately but not
later than two days of his knowledge of the fraud and he shall report the matter specifying the
following:—
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved
(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-
rule (3) during the year shall be disclosed in the Board's Report:—
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
(5) The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a Secretarial Auditor
during the performance of his duties under section 148 and section 204 respectively.

(13) No duty to which an auditor of a company may be subject to shall be regarded as having been
contravened by reason of his reporting the matter referred to in sub-section (12) if it is done in good
faith.
Author’s Note – The Principle of Confidentiality shall not be regarded as contravened by reason of his
reporting the matter referred to in 143(12) if it is done in good faith.
(14) The provisions of this section shall mutatis mutandis apply to—
a. the cost accountant in practice conducting cost audit under section 148; or
b. the company secretary in practice conducting secretarial audit under section 204.
(15) If any auditor, cost accountant or company secretary in practice do not comply with the provisions of sub-
section (12), he shall be punishable with fine which shall not be less than one lakh rupees but which may
extend to twenty-five lakh rupees.

Auditor not to render certain services. – Section 144
 An auditor appointed under this Act shall provide to the company only such other services as are
approved by the Board of Directors or the audit committee,
 but which shall not include any of the following services (whether such services are rendered directly or
indirectly to the company or its holding company or subsidiary company), namely:—
1. accounting and book keeping services;

2. internal audit;
3. design and implementation of any financial information system;
4. actuarial services;
5. investment advisory services;
6. investment banking services;
7. rendering of outsourced financial services;
8. management services; and
9. any other kind of services as may be prescribed:
TRANSITIONAL PROVISIONS
Provided that an auditor or audit firm who or which has been performing any non-audit services on or before the
commencement of this Act shall comply with the provisions of this section before the closure of the first financial
year after the date of such commencement.
Explanation. —For the purposes of this sub-section, the term "directly or indirectly" shall include rendering of
services by the auditor
(i) in case of auditor being an

 individual,
• either himself or
• through his relative or
• any other person connected or associated with such individual or
• through any other entity, whatsoever,
• in which such individual has significant influence or control, or whose name or
trade mark or brand is used by such individual;
(ii) in case of auditor being a

 firm,
• either itself or
• through any of its partners or
• through its parent, subsidiary or associate entity or
• through any other entity, whatsoever,
• in which the firm or any partner of the firm has significant influence or control, or
whose name or trade mark or brand is used by the firm or any of its partners.
Auditor to sign audit reports, etc. – Section 145
• The person appointed as an auditor of the company shall

o sign the auditor's report
o Sign or certify any other document of the company in accordance with the provisions of sub-section
(2) of section 141 and

o the qualifications, observations or comments on financial transactions or matters, which have
any adverse effect on the functioning of the company mentioned in the auditor's report shall be read
before the company in general meeting and shall be open to inspection by any member of the company.
TEXT OF SECTION 141(2)
Where a firm including a limited liability partnership is appointed as an auditor of a company, only the
partners who are chartered accountants shall be authorized to act and sign on behalf of the firm.
Auditors to attend general meeting. – Section 146

All notices of, and other communications relating to, any general meeting shall be forwarded to the auditor of the company,
and the auditor shall, unless otherwise exempted by the company, attend either by himself or through his authorized
representative, who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at such meeting
on any part of the business which concerns him as the auditor.
Punishment for Contravention

(sec.147)
147(1)Punishment for Consequences Measures to Jointly & several

contravention of sec. 147(2)Punishment for ensure prompt liability of
the auditor for of conviction of
139 to 146 auditor for payment of partners
contravention of sec. damages
139, 143, 144 or 145 contravention
under sub In case of
Punishment for Punishment for sec.147 (2) For ensuring auditor being an
the co. officer in default prompt audit firm, the
payment of liability(whether
Min: Rs.25,000
damages by the civil or criminal)
Max Max: Rs.5 lakhs auditor, CG
Min: Rs.25,000 The auditor shall
imprisonment : 1 shall, by
Max: Rs. be liable to
year notification, Shall be of the
5,00,000 refund to the
fines co. the specify any partner(s)
If a concerned & of
Min: Rs.10,000 contravention is remuneration statutory body/
received by him authority/ an the firm jointly
Max: Rs. 1 lakh committed & severally
knowingly or officer
willfully with the
intention to Such statutory
deceive the co. The auditor shall body/ authority/
or its be liable to pay an officer shall
shareholders/ damages to the
creditors or tax co./statutory
bodies or Pay the File a report
authorities
authorities/ any damages to the with CG
other persons persons entitled containing
Punishment to damages particulars of
Max imprisonment: 1 year damages
Fines For loss arising
out of incorrect
Min: Rs.1 lakh or misleading
Max: Rs.25 lakhs statements of
particulars
made in his
audit report.

Central Government to specify audit of items of cost in respect of certain companies. – Section
148
CERTAIN ITEMS TO BE INCLUDED IN BOOKS OF ACCOUNT FOR SPECIFIED COMPANIES

(1) Notwithstanding anything contained in this Chapter,
• the Central Government may,
• by order,
• in respect of such class of companies
• engaged in the production of such goods or
• providing such services as may be prescribed,
• direct that particulars relating to
i. the utilization of material or labor or
ii. to other items of cost as may be prescribed
• shall also be included in the books of account kept by that class of companies
• CG shall consult the relevant regulatory body (related to the concerned company) before
making such an order.
(2) COST AUDIT FOR SPECIFIED COMPANIES

If the Central Government is of the opinion,
• that it is necessary to do so,
• it may, by order,
• direct that the audit of cost records of class of companies,
• which are covered under sub-section (1) and
• which have a net worth of such amount as may be prescribed or
• a turnover of such amount as may be prescribed,
• shall be conducted in the manner specified in the order.
Rule 3 of Companies (Cost Records and Audit) Rules, 2014 as amended on 31st December 2014
Application of cost records
A. The ministry has introduced six major regulated sectors which are:
• Telecommunication Services,
• Generation, distribution, and regulation of Electricity,
• Petroleum industry,
• Drugs and Pharmaceuticals,
• Fertilizers, and
• Sugar & Industrial Alcohol).
B. Besides the regulated sectors, the ministry has also named a number of Non-regulated sectors that
should be included in the purview of the new audit rules.
The major industries in the Non-regulated sector are

• Arms and Ammunitions,
• Turbo Jets,
• Steel,
• Aeronautics, and
• Coffee and Tea, etc.
• Others (हमाऱे बस की नह ीं है ) ☺

Provided further that nothing contained in this rule shall apply to a company which is classified as a micro
enterprise or a small enterprise including as per the turnover criteria under sub-section (9) of section 7 of
the Micro Small and Medium Enterprises Development Act, 2006 (27 of 2006).
Records are to be maintained under this rule only if the overall turnover from all of its product and service
equal to or exceed Rs. 35 Crores in the preceding financial year.
Rule 4 – Applicability for Cost Audit
FOR REGULATED SECTORS

1. Every company specified in item (A) of rule 3 shall get its cost records audited in accordance with
these rules if the
• overall annual turnover of the company from all its products and services during the
immediately preceding financial year is
✓ rupees fifty crore or more
• and the aggregate turnover
 of the individual product or products or service or services
 for which cost records are required to be maintained under rule 3
✓ is rupees twenty-five crore or more.
FOR UNREGULATED SECTORS
2. Every company specified in item (B) of rule 3 shall get its cost records audited in accordance with
these rules if the
• overall annual turnover of the company from all its products and services during the
Immediately preceding financial year is rupees one hundred crore or more
• and the aggregate turnover
 of the individual product or products or service or services
 for which cost records are required to be maintained under rule 3
✓ is rupees thirty-five crore or more.
3. The Requirement for cost audit under these rules shall not apply to a company which is covered rule 3,
and
• Whose revenue from exports, in foreign exchange, exceeds seventy-five per cent of its total
revenue; or
• Which is operating from a special economic zone.
Rule 5 of the Companies (cost records and audit) Rules, 2014
Every company under these rules

• including all units and branches thereof,
• shall,
• Maintain cost records in form CRA -1
• The cost records shall be maintained on regular basis
• in such manner as to facilitate calculation of
• per unit cost of production
• or cost of operations,
• Cost of sales and
• Margin
• for each of its products and activities for every financial year on monthly or quarterly or half-
yearly or annual basis.
• The cost records shall be maintained in such manner so as to
• enable the company to exercise,

• control over the various operations and costs to achieve optimum economies in
utilization of resources and
• these records shall also provide necessary data which is required to be furnished under
these rules
AUDIT BY COST ACCOUNTANT IN PRACTICE – APP. BY BOARD – REM. IN MANNER PRESC. BY MEMBERS.
(3) The audit under sub-section (2) shall be conducted by a cost accountant in practice who shall be appointed by
the Board on such remuneration as may be determined by the members in such manner as may be prescribed:
Provided that no person appointed under section 139 as an auditor of the company shall be appointed for
conducting the audit of cost records:
Provided further that the auditor conducting the cost audit shall comply with the cost auditing standards.
Explanation. —For the purposes of this sub-section, the expression "cost auditing standards" mean such standards as
are issued by the Institute of Cost and Works1 Accountants of India, constituted under the Cost and Works Accountants
Act, 1959 (23 of 1959), with the approval of the Central Government.
Procedure for appointment and fixation of remuneration of the Cost Auditor - Rule 14 of Companies
(Audit and Auditors) Rules, 2014.
Case I: The Company is required to constitute an audit committee
 The Board shall appoint the cost auditor on the recommendations of the Audit Committee.
 The Audit Committee shall recommend the remuneration of the cost auditor.
 The remuneration of the cost auditor shall be considered and approved by the Board and
ratified subsequently by the members.
Case II: The Company is not required to constitute an audit committee

 The Board shall appoint the cost auditor.
 The remuneration of the cost auditor shall be fixed by the Board and ratified subsequently by
the members.
 Only a cost accountant in practice or a firm of cost accountants in practice can be appointed
as a cost auditor.
(4) An audit conducted under this section shall be in addition to the audit conducted under section 143.
(5) The qualifications, disqualifications, rights, duties and obligations applicable to auditors under this
(AFTER 141)
Chapter shall, so far as may be applicable, apply to a cost auditor appointed under this section and it shall be
the duty of the company to give all assistance and facilities to the cost auditor appointed under this section for
auditing the cost records of the company:
Provided that the report on the audit of cost records shall be submitted by the cost accountant in practice to
the Board of Directors of the company.
(6) A company shall

• within 30 days from
• the date of receipt of a copy of the cost audit report prepared in pursuance of a direction under sub-
section (2)
• furnish the Central Government with such report along with full information and explanation on every
reservation or qualification contained therein.

(7) If, the Central Government is of the opinion that any further information or explanation is necessary, it may
call for such further information and explanation and the company shall furnish the same within such time as
may be specified by that Government.
(8) If any default is made in complying with the provisions of this section, —
• the company and every officer of the company who is in default shall be punishable in the manner as
provided in sub-section (1) of section 147;
• the cost auditor of the company who is in default shall be punishable in the manner as provided in
sub-sections (2) to (4) of section 147.
Cost audit - Rule 6 of Companies (Cost Records And Audit) Rules 2014.
(1) The category of companies specified in rule 3 and the thresholds limits laid down in rule 4, shall
within one hundred and eighty days of the commencement of every financial year, appoint a cost
auditor:
Provided that before such appointment is made, the written consent of the cost auditor to such
appointment, and a certificate from him or it, as provided in sub-rule (1A), shall be obtained.
(1A) The cost auditor appointed under sub-rule (1) shall submit a certificate that—
(a) the individual or the firm, as the case may be, is eligible for appointment and is
not disqualified for appointment under the Act, the Cost and Works Accountants
Act, 1959 (23 of 1959) and the rules or regulations made thereunder;
(b) the individual or the firm, as the case may be, satisfies the criteria provided in
section 141 of the Act, so far as may be applicable;
(c) the proposed appointment is within the limits laid down by or under the authority
of the Act; and
(d) the list of proceedings against the cost auditor or audit firm or any partner of
the audit firm pending with respect to professional matters of conduct, as
disclosed in the certificate, is true and correct.
(2) Every company referred to in sub-rule (1) shall inform the cost auditor concerned of his or its
appointment as such and file a notice of such appointment with the Central Government within a
period of thirty days of the Board meeting in which such appointment is made or within a period of
one hundred and eighty days of the commencement of the financial year, whichever is earlier,

through electronic mode, in form CRA-2, alongwith the fee as specified in Companies (Registration
Offices and Fees) Rules, 2014.
(3) Every cost auditor appointed as such shall continue in such capacity till the expiry of one hundred
and eighty days from the closure of the financial year or till he submits the cost audit report, for
the financial year for which he has been appointed:
Provided that the cost auditor appointed under these rules may be removed from his office before
the expiry of his term, through a board resolution after giving a reasonable opportunity of being
heard to the Cost Auditor and recording the reasons for such removal in writing
Provided further that the Form CRA-2 to be filed with the Central Government for intimating
appointment of another cost auditor shall enclose the relevant Board Resolution to the effect:
Provided also that nothing contained in this sub-rule shall prejudice the right of the cost auditor
to resign from such office of the company.
(3A) Any casual vacancy in the office of a cost auditor, whether due to resignation death or removal,
shall be filled by the Board of Director, within thirty days of occurrence of such vacancy and the
company shall inform the Central Government in Form CRA-2 within thirty days of such appointment
of cost auditor.
(3B) The cost statements, including other statements to be annexed to the cost audit report, shall
be approved by the Board of Directors before they are signed on behalf of the Board by any of the
director authorised by the Board, for submission to the cost auditor to report thereon.
(4) Every cost auditor, who conducts an audit of the cost records of a company, shall submit the
cost audit report along with his or its reservations or qualifications or observations or suggestions,
if any, in form CRA-3.
(5) Every cost auditor shall forward his duly signed report to the Board of Directors of the company
within a period of one hundred and eighty days from the closure of the financial year to which the
report relates and the Board of Directors shall consider and examine such report, particularly any
reservation or qualification contained therein.
(6) Every company covered under these rules shall, within a period of thirty days from the date of
receipt of a copy of the cost audit report, furnish the Central Government with such report along
with full information and explanation on every reservation or qualification contained therein, in Form
CRA-4 in Extensible Business Reporting Language format in the manner as specified in the Companies
(Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015 along with
fees specified in the Companies (Registration Offices and Fees) Rules, 2014.

(7) The provisions of sub-section (12) of section 143 of the Act and the relevant rules made
thereunder shall apply mutatis mutandis to a cost auditor during performance of his functions under
section 148 of the Act and these rules.

Eligibility, qualifications and disqualifications of auditors – Section 141
1. A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant:
Provided that a firm whereof majority of partners practicing in India are qualified for appointment as aforesaid
may be appointed by its firm name to be auditor of a company.
2. Where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners
who are chartered accountants shall be authorized to act and sign on behalf of the firm.
3. The following persons shall not be eligible for appointment as an auditor of a company, namely: —
a. a body corporate other than a limited liability partnership registered under the Limited Liability
Partnership Act, 2008 (6 of 2009);
b. an officer or employee of the company;
c. a person (Company ke officer ya employee ka partner ya employee)

• who is a partner,
• or who is in the employment,
• of an officer or employee of the company;
d. a person who, or his relative or partner—

• is holding any security of or interest in
 the company (C Ltd.)
 or its subsidiary, (S Ltd)
 or of its holding or (H Ltd.)
 associate company or a (A Ltd.)
 subsidiary of such holding company: (Subsidiary of H Ltd.)
NOTE
1. The relative (NOT PARTNER and the auditor himself) may hold security or interest in the
company of face value not exceeding Rs. 1,00,000. or such sum as may be prescribed;
2. If a relative acquires any security exceeding Rs. 1 lakh, then, the auditor shall take the
corrective action within next 60 days so as to maintain the limit of Rs. 1 lakh.
• is indebted to
 the company,
 or its subsidiary,
 or its holding or
 associate company or a
 subsidiary of such holding company,
 in excess of such amount as may be prescribed; or

NOTE:
1. The Prescribed amount is Rs. 5,00,000.
2. If an auditor purchases on credit goods of the company of a value exceeding Rs. 5,00,000 he shall be indebted
to the company, and consequently he shall vacate the office of auditor held by him. It is immaterial that the
credit period allowed to the auditor is allowed to all the customers in the ordinary course of business.
3. If an auditor recovers fees from the company on a progressive basis, even though the audit has not been
completed, he cannot be said to be indebted to the company, and therefore, he shall not vacate the office of
auditor held by him.
• has given a guarantee or provided any security

 in connection with the indebtedness of any third person
✓ to the company, or
✓ its subsidiary, or
✓ its holding or
✓ associate company or
✓ a subsidiary of such holding company,
 for such amount as may be prescribed; (Amount Prescribed Rs. 1,00,000)
e. a person or a firm who, whether directly or indirectly,

• has business relationship with
✓ the company, or
✓ its subsidiary, or
✓ its holding or
✓ associate company or
✓ subsidiary of such holding company
 of such nature as may be prescribed;
NOTE: If the business transaction is not at arm’s length price then there exist a business relationship
f. a person whose
• relative is a
• director or
• is in the employment of the
• company as a director or key managerial personnel;
g. a person who is in
• full time employment elsewhere
• or a person
• or a partner of a firm holding appointment as its auditor, if such persons or partner is at the
date of such appointment or reappointment holding appointment as auditor of more than
twenty companies;
Ceiling on Number of Company Audits: As per section 141 (3)(g) of the Companies Act, 2013, a person shall not be
eligible for appointment as an auditor if he is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such person or partner is at the date of such appointment or reappointment holding
appointment as auditor of more than twenty companies, other than one person companies, dormant companies, small
companies and private companies having paid-up share capital less than ` 100 crore.

h. a person who has been

• convicted by a court
• of an offence involving fraud and
• a period of ten years has not elapsed from the date of such conviction;
i. any person whose

• subsidiary or
• associate company or
• any other form of entity,
• is engaged as on the date of appointment in consulting and specialised services as provided in
section 144. (Also refer “directly and indirectly” clause of Section 144)
4. Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned in sub-
section (3) after his appointment, he shall vacate his office as such auditor and such vacation shall be deemed
to be a casual vacancy in the office of the auditor.
Definition of 'relative' [Sec. 2(77) of the Companies Act, 2013
'Relative', with reference to any person, means anyone who is related to another, if -
(i) they are members of a Hindu Undivided Family;
(ii) they are husband and wife; or
(iii) one person is related to the other in such manner as may be prescribed.
As per Rule 4 of the Companies (Specification of definitions details) Rules, 2014, a person shall be
deemed to be the relative of another, if he or she is related to another in the following manner, namely:
(1) Father (including step-father)
(2) Mother (including step-mother)
(3) Son (including step-son)
(4) Son's wife
(5) Daughter
(6) Daughter's husband
(7) Brother (including step-brother)
(8) Sister (includes step-sister)
ILLUSTRATION ON DISQUALIFICATIONS OF AUDITORS
1. Mr. Abhinav, a Chartered Accountant is a director in Small Ltd. State whether he is disqualified to
be the auditor of Huge Ltd., its holding company.
Ans. As per section 141(3) of the Companies Act, 2013, Mr. Abhinav is not disqualified to be an
auditor of Huge Ltd.
2. Ms. Ekta is a Chartered Accountant. She is a part-time employee of Partition Ltd. State whether she
is disqualified to be the auditor of Partition Ltd.
Ans. As per section 141(3), An employee (whether full time or part time) is disqualified to be an
auditor. Accordingly, Ms. Ekta is disqualified to be an auditor of Partition Ltd.
3. Mr. Shekhar, a chartered accountant in practice, is holding debentures in Deerghaayu Ltd. State
whether he can be appointed as an auditor of Deerghaayu Ltd.

Ans. As per Sec. 141(3), Mr. Shekhar is disqualified to be an auditor of Deerghaayu Ltd. since he holds
debenture (a security) in the company.
4. (Holding of securities by relative) Mr. Little is a chartered Accountant in practice. His father is holding
shares in Prakash Ltd. The face value of shares is Rs. 15,000. However, the market value of same is Rs.
1,25,000. State whether Mr. Little is disqualified to be appointed as auditor in Prakash Ltd.
Ans. As per Sec. 141(3), Mr. Little is not disqualified since holding of securities upto face value of Rs.
1,00,000 does not result in disqualification (market value of the security is immaterial).
5. Mr. Amit is a chartered accountant in practice. His sister's husband holds equity shares having face
value of Rs. 50 lakhs in Amita Ltd. State whether Mr. Amit is disqualified to be an auditor of Amita Ltd.
Ans. As per Sec. 141(3), Mr. Amit is not disqualified since sister's husband is not covered under
'Relative' u/s 2(77) of the Companies Act, 2013.
6. Mr. Akash is a Chartered Accountant in practice. His sister is CEO in Huge Ltd. State whether Mr.
Akash is disqualified to be the auditor of Small Ltd., a subsidiary company of Huge Ltd.
Ans. As per Sec. 141(3), Mr. Akash is not disqualified.
7. Mr. Mahesh is a Chartered Accountant in practice providing management consultancy services to

Sangharsh Ltd. State whether he is disqualified to be appointed as the auditor of Sangharsh Ltd.
Ans. Mr. Mahesh is disqualified u/s 141(3),
8. Mr. Dravid is a Chartered Accountant in practice. He holds a derivative contract of Drona Ltd in his
own name. State whether he is disqualified to be appointed as the auditor of Drona Ltd.
Ans. Mr. Dravid is disqualified to be appointed as an auditor of Drona Ltd. [As per Sec. 2(81) of the
Companies Act, 2013, the term 'securities' means the 'securities' as defined under the Securities
Contracts (Regulation) Act, 2013. As per the Securities Contracts (Regulation) Act, 2013, 'securities'
includes 'derivative'].

AUDIT COMMITTEE Section 177 of the Companies Act, 2013
1. Mandatory constitution of audit committee by certain companies

Constitution of an audit committee is mandatory for -
(a) every listed company; and
(b) such other class or classes of companies, as may be prescribed.
As per Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014, following classes of
companies have been prescribed for this purpose:
(i) All public companies with a paid up capital of Rs. 10 crore or more
(ii) All public companies having turnover of Rs. 100 crore or more
(iii) All public companies, having in aggregate, outstanding loans or borrowings or debentures or
deposits exceeding Rs. 50 crore or more.
Explanation. The paid up share capital or turnover or outstanding loans, or borrowings or debentures or
deposits, as the case may be, as existing on the date of last audited Financial Statements shall be taken
into account.
2. Composition of audit committee

(a) The Audit Committee shall consist of a minimum of 3 directors.
(b) The majority of members of the Audit Committee shall be the independent directors.
(c) Majority of members of the Audit Committee (including the Chairperson of the Audit
Committee) shall be persons with ability to read and understand, the financial statement.
3. Functions of the audit committee

Every Audit Committee shall act in accordance with the terms of reference specified in writing by the
Board which shall include -
(i) the recommendation for appointment, remuneration and terms of appointment of
auditors of the company;
(ii) review and monitor the auditor's independence and performance, and effectiveness of
audit process;
(iii) examination of the financial statement and the auditors' report thereon;
(iv) approval or any subsequent modification of transactions of the company with related parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related matters.
4. Powers of the audit committee

(a) The Audit Committee shall have the power to call for the comments of the auditors about
internal control systems, the scope of audit, including the observations of the auditors.
(b) It shall have the power to review the financial statement before their submission to the Board.
(c) It shall have the power to discuss any issues with respect to financial statement with the
internal and statutory auditors and the management of the company.
(d) It shall have the authority to investigate into any matter relating to any of the
aforementioned matters or referred to it by the Board and for this purpose, it shall have
the power to obtain professional advice from external sources and shall have full access
to information contained in the records of the company.
(e) The auditors of a company and the key managerial personnel shall have a right to be
heard in the meetings of the Audit Committee when it considers the auditor's report but
shall not have the right to vote.

THE AUDITOR'S LIEN

Lien- Meaning
 Any person,
 having the lawful possession of somebody else's property,
 on which he has worked,
 may retain the property for non-payment of his dues,
 on account of the work done on the property.
Auditor's lien
Auditor can exercise lien on books and documents placed at his possession by the client for non-payment of
fees, for work done on the books and documents.
Conditions for exercising Lien

It can be done on the on the following conditions:
(i) Documents retained must belong to the client who owes the money.
(ii) Documents must have come into possession of the auditor on the authority of the client. They
must not have been received through irregular or illegal means.
(iii) The auditor can retain the documents only if he has done work on the documents assigned to him.
(iv) Such documents can be retained which are connected with the work on which fees have not been
paid.
Is lien possible in case of Company?

1. Under Section 128 of the Act, books of accounts of a company must be kept at the registered office.
2. However, Board can pass a resolution and hand over the books of account to the auditor and makes
the necessary notification to the Registrar.
3. However, he must provide reasonable facility for inspection of the books of account by directors
and others authorized to inspect under the Act
Lien on working papers

Lien is exercised in respect of client's property. His working papers being his own property, the
question of lien on them does not arise.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C11 – Accounts of a Company
Chapter 11
Accounts of Company
Section LOCATION, MANNER, PERIOD OF MAINTENANCE AND INSPECTION OF
128 BOOKS OF ACCOUNT - Section 128
Method of preparation
Maintenance of books of account in electronic form
Location of books of account etc.
Preservation of books of account
Persons responsible and Penalty
Inspection of books of account
Section FINANCIAL STATEMENTS
129
Basics
Non- Applicability
Laying of financial statements
Exemption
Notes to be part of Financial statements
Person responsible and penalty
Section Accounting Standards
129
Section Financial Statements, Board’s Report Etc.
134
Basics
Signing of Financial Statements
Submission to the auditor
Attachment of auditor’s report
Content of Board report
Content of DRS
Disclosures relating to conservation of energy etc. (Conservation of energy, Technology
absorption, Foreign exchange earnings and outgo)
Other matters in Board’s Report
Board report in case of One-person company
Signing of board report
LOCATION, MANNER, PERIOD OF MAINTENANCE AND

INSPECTION OF BOOKS OF ACCOUNT - Section 128
Every company shall

prepare and
keep
• books of account and
• ther relevant books and papers and
• financial statement (hereinafter referred to as 'books of account etc.')
for every financial year.

Method of preparation
The books of account etc. must -
(a) give a true and fair view of the state of the affairs of the company, including its branch office(s);
(b) explain the transactions effected at the registered office and its branch office(s);
(c) be prepared on accrual basis;
(d) be prepared according to the double entry system of accounting.
Maintenance of books of account in electronic form

The books of account and other relevant papers may be kept in electronic mode in such manner as may be prescribed.
Rule 3 of the Companies (Accounts) Rules, 2014 prescribes the following manner
(a) The books of account and other relevant books and papers maintained in electronic mode shall remain
accessible in India so as to be usable for subsequent reference.
(b) The books of account and other relevant books and papers shall be retained completely in the format in
which they were originally generated, sent or received.
(c) The information received from branch offices shall not be altered and shall be kept in a manner where
it shall depict what was originally received from the branches.
(d) The information in the electronic record of the document shall be capable of being displayed in a legible
form.
(e) There shall be a proper system for storage, retrieval, display or printout of the electronic records
as the Audit Committee, if any, or the Board may deem appropriate and such records shall not be
disposed of or rendered unusable, unless permitted by law.
(f) The back-up maintained in electronic mode, including at a place outside India, if any, shall be kept in
servers physically located in India on a periodic basis.
(g) The company shall intimate to the Registrar on an annual basis at the time of filing of financial
service provider;
(i) the name of the service provider;
(ii) the protocol address of service provider;
(iii) the location of the service provider (wherever applicable);
(iv) where the books of account and other books and papers are maintained on cloud, such address as
provided by the service provider.
Location of books of account etc.

(a) The books of account etc. shall be kept at the registered office of the company.
(b) All or any of the books of account and other relevant papers may be kept at such other place in India as
the Board of directors may decide. In such a case, the company shall within 7 days of the decision
of the Board, file with the registrar a notice in writing giving the full address of that other place.
(c) Where a company has a branch office (whether in India or outside India), the books of account relating
to the transactions effected at the branch office may be kept at the branch office. But, proper
summarized returns must be periodically sent by the branch office to the company at its
registered office or the other place, if any, where the books of account etc. are kept in pursuance of
the decision taken by the Board of directors.
Preservation of books of account

Every company shall preserve in good order the books of account together with the relevant vouchers. The time period
of preservation shall be –
(a) not less than 8 financial years immediately preceding the relevant financial year; or

(b) if the company has been in existence for less than 8 financial years, then, for the entire period
of its existence.
(c) Where an investigation of the company is ordered, CG may direct that the books of account may
be kept for such longer period as it may deem fit.

(i) Managing director
(ii) Whole-time director in charge of finance
(iii) Chief Financial Officer
(iv) Any other person of a company charged by the Board with such duty
Penalty
(i) Imprisonment upto 1 year; or
(ii) Fine: Minimum Rs. 50,000; Maximum Rs. 5,00,000.
(iii) Both.
Inspection of books of account

1. The books of account etc. maintained within India shall be open for inspection by any director at the
registered office of the company or at such other place in India where the books have been kept during
business hours.
2. The inspection of books of account of any subsidiary company shall be made only by the person authorized
by a resolution of the Board of Directors.
3. It shall be the duty of every officer and employee of the company to give to the person making inspection all
reasonable assistance in connection with the inspection.
4. In the case of financial information, if any, maintained outside the country, copies of such financial
information shall be maintained and produced for inspection by any director subject to such conditions as
may be prescribed.
Provisions Contained in the rules
(a) The summarized returns of the books of account of the company kept and maintained outside India shall be
sent to the registered office at quarterly intervals, which shall be kept and maintained at the registered
office of the company and kept open to directors for inspection.
(b) Where any other financial information maintained outside the country is required by a director, the
director shall furnish a request to the company setting out the full details of the financial information sought and
the period for which such information is sought.
(c) The company shall produce such financial information to the director within 15 days of the date of receipt of
the written request.
(d) The financial information shall be sought for by the director himself and not by or through his power of
attorney holder or agent or representative.
FINANCIAL STATEMENT (Sec. 129 of the Companies Act, 2013)
Basics
1. The financial statements shall give a true and fair view of the state of affairs of the company.

2. The financial statements shall comply with the accounting standards notified u/s 133. If the financial
statements do not comply with the accounting standards, the company shall disclose in its financial statements,
-
a. the deviation from the accounting standards;
b. the reasons for such deviation; and
c. the financial effects, if any, arising out of such deviation.
3. The financial statements shall be in the form or forms as may be provided for different class or classes of
companies in Schedule III.
4. Where a company has one or more subsidiaries, it shall also prepare a consolidated financial statement of
the company and of all the subsidiaries in the same form and manner as that of its own.
5. For this purpose, the term 'subsidiary' shall include associate company and joint venture.
Non-applicability
Nothing contained in Sec. 129(1) shall apply to
(a) any insurance company; or
(b) any banking company; or
(c) any company engaged in the generation or supply of electricity; or
(d) any other class of company for which a form of financial statement has been specified in the Act governing
such class of company.
Laying of financial statements

At every AGM, the Board shall lay the following documents:
(a) Financial statements of the company.
(b) Consolidated financial Statement of the company and of all the subsidiaries, if any.
Statement containing salient features of subsidiary
The company shall also attach along with its financial statement, a separate statement containing the salient features
of the financial statement of its subsidiary or subsidiaries in such form as may be prescribed.
Exemption
 CG may, by notification, exempt any class or classes of companies from complying with any of the
requirements of this section or the rules made thereunder.
 CG may grant such exemption on its own or on an application by a class or classes of companies.
 CG may grant such exemption if it considers necessary to grant such exemption in the public
interest.
 Such exemption may be granted either unconditionally or subject to such conditions as may be
specified in the notification.
'Notes' to be a part of financial statement

For the purposes of Sec. 129, any reference to the financial statement shall include any notes annexed to or forming
part of such financial statement, giving information required to be given and allowed to be given in the form of such notes
under this Act.

Persons responsible
(i) Managing director
(ii) Whole-time director in charge of finance
(iii) Chief Financial Officer
(iv) Any other person of a company charged by the Board with such duty
(v) all the directors, in the absence of any of the officers mentioned above
Punishment for contravention

(i) Imprisonment upto 1 year; or
(ii) Fine: Minimum Rs. 50,000; Maximum Rs. 5,00,000.
(iii) Both.

ACCOUNTING STANDARDS Section 133 of the Companies Act,

2013
The power to prescribe the accounting standards Vests with CG.
Stages in prescribing accounting standards
(i) At the first stage, ICAI recommends the Standards of Accounting.

(ii) At the second stage, these Standards of Accounting shall be examined by the National Financial
Reporting Authority (NFRA). NFRA may also make its own recommendations.
(iii) At the third stage, the Central Government examines the recommendations made by NFRA. Then, the Central
Government may prescribe, after consultation with NFRA, the Accounting Standards.
Position until NFRA is constituted

CG may prescribe the standards of accounting, as recommended by ICAI in consultation with and after examination of
the recommendations made by the National Advisory Committee on Accounting Standards constituted u/s 21OA
of the Companies Act, 1956
FINANCIAL STATEMENT, BOARD'S REPORT, ETC. (Sec. 134 of

the Companies Act, 2013)
The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors
before they are signed on behalf of the Board.
Signing of financial statement

The financial statement, including consolidated financial statement, if any, shall be signed on behalf of the Board, at least
by —
(i) the chairperson of the company, where he is authorized by the Board, or 2 directors, out of which one shall
be managing director;
(ii) Chief Executive Officer, if he is a director in the company; and
(iii) the Chief Financial Officer and the company secretary of the company, wherever they are appointed.
(iv) In the case of a One Person Company, the financial statement, including consolidated financial statement, if any,
shall be signed by one director only.
Submission to the, auditor

The financial statement, including consolidated financial statement, if any, shall be submitted to the auditor after they
have been approved and signed.
Attachment of auditors' report

The auditors' report shall be attached to every financial statement.
Contents of Board's Report

Board's Report shall be attached to the financial statement laid before the company in general meeting. The Board's Report
shall include the following matters:
1. The extract of the annual return

2. Number of meetings of the Board.
3. Directors' Responsibility Statement (later)
4. A statement on declaration given by independent directors

5. Explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer
made —
a. by the auditor in his report; and
b. by the company secretary in practice in his secretarial audit report.
6. Particulars of loans, guarantees or investments u/s 186.
7. Particulars of contracts or arrangements with related parties.
8. The state of the company's affairs.
9. The amounts, if any, which it proposes to carry to any reserves,
10. The amount, if any, which it recommends should be paid by way of dividend.
11. The details about the policy developed and implemented by the company on corporate social responsibility
initiatives taken during the year,
12. Such other matters as may be prescribed
Contents of Directors' Responsibility Statement [Section 134(5)]
Directors' responsibility statement is aimed at highlighting the accountability of the directors with a view to ensuring
good corporate governance.
It will make the directors accountable to safeguard the assets of the company and to take positive steps in this regard.
The directors' responsibility statement shall disclose the following particulars:
1. The directors' responsibility statement shall disclose as to whether the applicable accounting standards had
been followed in the preparation of the annual accounts. In case of any material departures, proper
explanation shall be given.
2. The directors' responsibility statement shall disclose as to whether the directors had selected such accounting
policies and applied them consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the company and of the profit and loss of the
company.
3. The directors' responsibility statement shall disclose as to whether the directors had taken proper and
sufficient care –
a. for the maintenance of adequate accounting records in accordance with the provisions of this Act;
b. for safeguarding the assets of the company; and
c. for preventing and detecting fraud and other irregularities.
4. The directors' responsibility statement shall disclose as to whether the directors had prepared the annual
accounts on a going concern basis.
5. In the case of a listed company, the directors' responsibility statement shall disclose as to whether the
directors, had laid down internal financial controls to be followed by the company and whether such internal
financial controls are adequate and were operating effectively.
The term "internal financial controls" means the policies and procedures adopted by the company for ensuring
a) the orderly and efficient conduct of its business, including adherence to company's policies,
b) the safeguarding of its assets,
c) the prevention and detection of frauds and errors,
d) the accuracy and completeness of the accounting records, and
e) the timely preparation of reliable financial information.
6. The directors' responsibility statement shall disclose as to whether the directors had devised proper systems
to ensure compliance with the provisions of all applicable laws and whether such systems were adequate and
operating effectively.

Disclosures relating to conservation of energy etc.
As per Rule 8(3) of the Companies (Accounts) Rules, 2014, the Board's Report shall contain the following information and
details:
Conservation of energy
1. The steps taken or impact on conservation of energy. of energy
2. The steps taken by the company for utilizing alternate sources of energy,
3. The capital investment on energy conservation equipment.
Technology absorption
1. The efforts made towards technology absorption.
2. The benefits derived like product improvement, cost reduction, product development or import substitution.
3. In case of imported technology (imported during the last 3 years) the details of technology imported;
(a) the year of import;
(b) whether the technology been fully absorbed;
(c) if not fully absorbed, areas where absorption has not taken place, and the reasons thereof
4. The expenditure incurred on Research and Development.
Foreign exchange earnings and Outgo

1. The Foreign Exchange earned in terms of actual inflows during the year.
2. The Foreign-Exchange outgo during the year in terms of actual outflows.
Other matters prescribed

Rule 8(5) of the Companies (Accounts) Rules, 2014, prescribes the disclosure of following other matters:
(i) Tile financial summary or highlights.
(ii) The change in the nature of business, if any.
(iii) The details of directors or key managerial personnel who were appointed or have resigned during the year.
(iv) The names of companies which have become or ceased to be its Subsidiaries, joint ventures or associate
companies during the year.
(v) The details relating to deposits, covered under Chapter V of the Companies Act, 2013 -
i. accepted during the year;
ii. remained unpaid or unclaimed as at the end of the year;
iii. whether there has been any default in repayment of deposits or payment of interest thereon
during the year and if so, number of such cases and the total amount involved -
(i) at the beginning of the year;
(ii) maximum during the year;
(iii) at the end of the year.
(v) The details of deposits which are not in compliance with the requirements of Chapter V of the Companies
Act, 2013.
(vi) The details of significant and material orders passed by the regulators or courts or tribunals impacting the
going concern status and company's operations in future.
(vii) The details in respect of adequacy of internal financial controls with reference to the Financial Statements.
Board's Report in case of One Person Company

In case of a One Person Company, Board's Report shall mean a report containing explanations or comments by the
Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.
Signing of Board's Report

1. The Board's report and any annexures thereto shall be signed by -
(i) the chairperson of the company, if he is authorized by the Board; or
(ii) at least 2 directors, one of whom shall be a managing director, if the chairperson of the company is not so
authorized.
2. In case there is only one director, the Board's report and any annexures thereto shall be signed by such director

For Notes




REQUIREMENT FOR INTERNAL AUDIT (Section 138 of the Companies Act, 2013)
138. (1) Such class or classes of companies as may be prescribed shall be required to appoint an internal
auditor, who shall either be a chartered accountant or a cost accountant, or such other professional as may
be decided by the Board to conduct internal audit of the functions and activities of the company.
(2) The Central Government may, by rules, prescribe the manner and the intervals in which the internal
audit shall be conducted and reported to the Board.
As per Rule 13 of the Companies (Accounts) Rules, 2014, following class of companies shall be covered u/s 138:
(a) Every listed company
(b) Every unlisted public company having –
(i) Paid up share capital of Rs. 50 crore or more during the preceding financial year; or
(ii) Turnover of Rs. 200 crore or more during the preceding financial year; or
(iii) Outstanding loans or borrowing from banks or public financial institutions exceeds Rs.
100 crore or more at any point of time during the preceding financial year; or
(iv) Outstanding deposits of Rs. 25 crore or more at any point of time during the preceding
financial year.
(c) Every private company having –
(i) Turnover of Rs. 200 crore or more during the preceding financial year; or
(ii) Outstanding loans or borrowing from banks or public financial institutions exceeding Rs.
100 crore or more at any point of the during the preceding financial year.
• The internal auditor may or may not be an employee of the company.

• A ‘Chartered Accountant’ may be appointed as an internal auditor whether or not he is engaged in practice.
• The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor, formulate
the scope, functioning, periodicity and methodology for conducting the internal audit.
Re-opening of accounts on Court’s or Tribunal’s Orders
Section 130 of the Companies Act, 2013 states that a company shall not re-open its books of account and not recast
its financial statements, unless an application in this regard is made by the Central Government, the Income-tax
authorities, the Securities and Exchange Board, any other statutory regulatory body or authority or any person
concerned and an order is made by a court of competent jurisdiction or the Tribunal to the effect that
• the relevant earlier accounts were prepared in a fraudulent manner; or

• the affairs of the company were mismanaged during the relevant period, casting a doubt on the reliability of
Provided that the court or the Tribunal, as the case may be, shall give notice to the Central Government, the
Income-tax authorities, the Securities and Exchange Board or any other statutory regulatory body or authority
concerned and shall take into consideration the representations, if any, made by that Government or the authorities,
Securities and Exchange Board or the body or authority concerned before passing any order under this section.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C12 – Vouching
Chapter – 12 VOUCHING
MEANING
• The act of examining vouchers is referred to as vouching.
• Vouching is an inspection by an auditor of documentary evidence supporting and substantiating transactions.
OBJECTIVE OF VOUCHING
• It is the practice in an audit with the objective of establishing the authenticity of the transaction recorded in the
primary books of account.
• It is through vouching that the auditor comes to know of the genuineness of transaction.
DOCUMENTARY EVIDENCE
It essentially consists of verifying a transaction recorded in the books of account with the
• relevant documentary evidence and
• the authority on the basis of which the entry has been made;
• also confirming that the amount mentioned in the voucher has been posted to an appropriate account which
would disclose the nature of the transaction on its inclusion in the final statements of account.
ON THESE CONSIDERATIONS, THE ESSENTIAL POINTS TO BE BORNE IN MIND WHILE EXAMINING A

VOUCHER ARE (Imp)
(i) That the date of the voucher falls within the accounting period; (Substantive Procedure - Measurement)
(ii) That the voucher is made out in the client’s name; (Substantive Procedure – Rights & Obligation)
(iii) That the voucher is duly authorised; (Proper internal control)
(iv) That the voucher comprised all the relevant documents which could be expected to have been received or
brought into existence on the transactions having been entered into; i.e., the voucher is complete in all
respects;(Substantive Procedure – Completeness)
(v) That the account in which the amount of the voucher is adjusted is the one that would clearly disclose the
character of the receipts or payments posted thereto on its inclusion in the final accounts. (Substantive Procedure
– Presentation and disclosure)
RUBBER STAMP/INITIALS
After the examination is over, each voucher should be either impressed with a rubber stamp or initialled so that it may not
be presented again in support of another entry.
VOUCHER - MEANING
A voucher is a documentary evidence in support of any transaction in books of account. Without vouchers,
vouching cannot be done. Vouchers are integral part of vouching. Voucher can originate within the organisation or
outside the organisation i.e. they can be internal or external
TYPES OF VOUCHERS
VOUCHERS ARE OF TWO TYPES:
a. Primary vouchers – All written evidence in original are primary vouchers e.g., a purchases invoice or cash memo etc.
b. Collateral Vouchers- Copies of original vouchers are called collateral vouchers, e.g., carbon copy of sales invoice, a
copy of resolution passed at Board Meeting etc.
GENERAL GUIDELINES FOR VOUCHING/VERIFICATION

1. General Expenses
 Obtain a schedule form the client.
 No personal expenses have been charged to revenue account.

 Outstanding/Prepaid expenses
 If expenditure is in foreign currency, check permission of RBI if required.
 Also consider Relevant AS
2. General Income
 Fully Accounted for (Advance and outstanding point is very important)
 Provision for bad & doubtful debts – Provision should be there if it was unrecoverable.
 AS 9 COMPLIANCE
 Discounts, if any
 TDS (Gross up)
3. RENT/ COMMISSION/ ROYALTY/ INSURANCE/ HIRE PURCHASE

 Examine agreement and the terms and conditions from the agreement.
 Check whether the calculations have been done as per the terms mentioned in the agreement.
4. STATUTORY PAYMENTS
 E-payment challan.
 Compliance with the requirements of the statute.
 Examine assessment orders and returns filed.
 Check whether there is any dispute regarding the amount payable.
 Check reporting requirements under of CARO.
5. LOANS
 MOA/ AOA (if company)
 Agreement & Terms & Conditions
 Board meeting/ General meeting resolution
 Purpose of loan and utilisation thereof
 Securities offered
 Disclosure
6. GENERAL WORDS TO BEGIN THE SENTENCES FOR VOUCHING/ VERIFICATION

 Examine
 Verify
 Ensure
 Test Check
 Ascertain
 Inspect
 See
 Obtain
7. LAST POINT GENERALLY

 Check compliance with the respective Accounting Standards/ CARO/ Schedule III
8. STANDARDS ON AUDITING REFERENCE

 SA 580 - Written Representations
 SA 505 - External Confirmations
 SA 520 - Analytical Procedures
 SA 620-Auditor's Expert
 SA 500 (Management expert), Audit techniques
 SA 501 in case of Inventory, Litigation and Claims and Segment information
 Others

9. TRADING TRANSACTIONS- PURCHASES/ SALES/ INVENTORY

 Cut-Off procedures
10. GENERAL POINTS

 Internal Controls
 Authorisation
 Accounting Entry
 Bank Statement
 Vouchers are serially numbered
 Minutes of meeting
11. FIXED ASSETS- TANGIBLE

 Existence - Physical Verification
 Ownership - Title Deed/ Purchase Deed
 Incidental Expenses
 Charges, if any
 Purchase/ sale during the year
 Valuation\ Revaluation
 Disclosures
 AS 6 & AS 10 Compliance
12. FIXED ASSETS- INTANGIBLE

 Existence/ Ownership
 Purchase/ Renewal/ Expiry
 Amortisation
 Registration
 In house Development
 AS 26 Compliance
13. LIABILITIES
 Nature of the liability
 Internal controls
 Whether all liabilities accounted for
 Properly valued
 Properly classified
 Properly disclosed
 Obtain Written Representations
 Contingent liabilities correctly disclosed
CUT - OFF PROCEDURES (Most important)
MEANING
• Accounting is a continuous process

• because the business never comes to halt.
• It is, therefore, necessary that transactions of one period
• would be separate from those in the upcoming period
• so that the results of the working of each period can be correctly ascertained.
• The arrangement that is made for the purpose is technically known as "Cut-off arrangement".

TRADING TRANSACTIONS
 Cut-off procedures are generally applied to trading transactions.
EXAMINATION BY AUDITOR
For this purpose, the auditor satisfies by examination and test checks that the cut-off procedures adequately
ensure that:
GOODS PURCHASED
(i) Goods purchased, property in which has passed to the client, have in fact been included in the
inventories and that the liability has been provided for in case of credit purchase; and
GOODS SOLD
(ii) Goods sold have been excluded from the inventories and credit has been taken for such sales. If the
value of sales is to be received, the concerned party has been debited.
SAMPLE OF DOCUMENTS
The auditor may examine a sample of documents evidencing the movement of stocks into and out of
stores, including documents pertaining to period shortly before and after the cut-off date and check whether
stocks represented by those documents were included or excluded, as appropriate, during stock taking
because this directly affects the profitability of the business.
Verification – Meaning
▪ Verification is a process to verify the

o Ownership,
o Valuation,
o Possession and
o Existence of a particular Asset or liability.
▪ Verification establishes the correspondence of actual facts or details with those represented in accounts.
Vouching Vs Verification
Basis Vouching Verification

1.Meaning Act of examining vouchers i.e. Process to verify the ownership,
documentary evidences in support of valuation, possession & existence
transactions of a particular asset or liability.
2.Scope Narrow Wide
3.Object Verify the authority, authenticity and Satisfy as to existence, ownership,
genuineness of transactions. possession, valuation and
disclosure of items.
4. Level of expertise Done by junior level assistants Done by senior assistants and auditor
himself.
5.Relationship with P&L A/C & some B/s items. Only B/S items
financial statements
6. Time period Throughout the year End of the year
Verification vs. Valuation
Basis Verification Valuation

1.Scope Includes valuation Is a part of verification
2.Object To verify existence, ownership, To ensure assets have been valued
possession and valuation according to generally accepted
accounting principles.
3.Responsibility Auditor Management

Objectives of Verification of Assets
1. Cost To ascertain the cost of Asset to the entity.

2. Authorisation To ascertain that the transactions w.r.t. asset are authorised.
3. Valuation To find out the accuracy of valuation of Asset.
4. Existence To ensure that the particular Asset is actually in existence.
5. Charge To ascertain the charge, if any, created on that particular Asset.
6. Ownership To ascertain the actual ownership title of that particular Asset.
7. Disclosure To check appropriate disclosure of the Asset in the books of Accounts.
Vouching & Verification
November 2011 Exam
Q1. Vouching of payment of taxes. (5 Marks)
Answers- Vouching of Payment of Taxes:
(i) Obtain the computation of income prepared by the auditee and verify whether it is as per the Income-tax Act,
1961 and Rules made there under.
(ii) Review adjustments, expenses disallowed, special rebates etc. with particular reference to the last available
completed assessment.
(iii) Examine relevant records and documents pertaining to payment of advance tax, self-assessment tax and other
demands.
(iv) Payment on account of income-tax and other taxes consequent upon a regular assessment should be verified
by reference to the copy of the assessment order, assessment form, notice of demand and the receipted
challan.
(v) Payments or advance payments of income-tax should also be verified with the notice of demand and the
receipted challan acknowledging the amount paid.
(vi) The interest allowed on advance payments of income-tax should be included as income and penal interest
charged for non-payment should be debited to the interest account.
(vii) Ensure that the requirements of AS 22 on 'Accounting for Taxes on Income' have been appropriately followed
for the period under audit.
Q2. Audit of sale of Investments

Audit of Sale of Investments:
(i) See that sale of investment has been made on the proper authorization of Board or other competent authority.
(ii) Ascertain the method of selling investments. It may be either through broker, directly or through a bank. See the
broker's sold note.
(iii) See that the difference between the carrying amount and the sales proceeds, net of expenses, is recognized in the
Profit & Loss Account. Ensure that when only a part of the holding of an individual investment is sold, the carrying
amount is allocated on the basis of average carrying amount of the total holding of the investments.
(iv) See that proper disclosures as required by AS 13 are made as follows:
(1) Interest, dividends, rentals on investments are to be shown in P& L A/c at Gross Value and TDS as advance tax paid.
(2) Showing separately profit & Loss on disposal and changes in carrying amount of current and long term investments.
Q3. What procedure an auditor should adopt to test the authenticity of cash at bank. (5 Marks)
Answer-
Verification of Cash at Bank: While testing the authenticity of cash at bank, the following areas may be considered
by the auditor:
(i) Apart from comparing the entries in the cash book with those in the Pass Book the auditor should obtain a certificate
from the bank confirming the balance at the close of the year as shown in the Pass Book.
(ii) Examine the bank reconciliation statement prepared as on the last day of the year and see whether (a) cheques
issued by the entity but not presented for payment, and (b) cheques deposited for collection by the entity but not
credited in the bank account have been duly debited/credited in the subsequent period.
(iii) Pay special attention to those items in the reconciliation statements which are outstanding for an unduly long period.
The auditor should ascertain the reasons for such outstanding items from the management. He should also examine
whether any such items require an adjustment write-off.
(iv) Examine relevant certificates in respect of fixed deposits or any type of deposits with banks duly supported by bank
advices.
(v) The auditor should examine the possibility, that even though the balance in an apparently inoperative account may
have remained stagnant, transactions may have taken place in that account during the year.

(vi) In relation to balances/deposits with specific charge on them, or those held under the requirements of any law, the
auditor should examine that suitable disclosures are made in the financial statements.
(vii) Remittances shown as being in transit should be examined with reference to their credit in the bank in the subsequent
period. Where the auditor finds that such remittances have not been credited in the subsequent period, he should
ascertain the reasons for the same. He should also examine whether the entity has reversed the relevant entries in
appropriate cases.
(viii) The auditor should examine that suitable adjustments are made in respect of cheques which have become stale as
at the close of the year.
(ix) Where material amounts are held in bank accounts which are blocked, e.g. in foreign banks with exchange control
restrictions or any banks which are under moratorium or liquidation, the auditor should examine whether the relevant
facts have been suitably disclosed in the financial statements. He should also examine whether suitable adjustments
on this account have been made in the financial statements in appropriate cases.
(x) Where the auditor finds that the number of bank accounts maintained by the entity is disproportionately large in
relation to its size, the auditor should exercise greater care in satisfying himself about the genuineness of banking
transactions and balances.
Q4. Disclosure requirements of debtors in the financial statements. (5 Marks)
Answer-
Disclosure Requirements of Debtors in Financial Statements:
1. Classification by Age
(i) Debtors outstanding for a period exceeding 6 months and
(ii) Other debts.
The amount of provision for doubtful debts shall be shown separately. This is called classification by Age.
2. Classification by nature:
(i) Debts considered good and in respect of which the company is fully secured.
(ii) Debts considered good for which the company holds no security other than the debtor's personal security and
(iii) Debts considered doubtful or bad.
3. Classification by party:
(i) Debts due by the Directors or other officers of the company, or any of them severally or jointly with any other person.
(The term "officer" includes any Director, Manager, or secretary but not auditor).
(ii) Debts due by Firms or private companies respectively in which any director is a partner or a director or a member, as
the case may be.
(iii) Debts due from other companies under the same management along with names of companies concerned.
The maximum amount due, by directors or other officers of the company at any time during the year to be shown by
way of a note.
4. Provisions: Provisions shown herein should not ensure the amount of the debts considered doubtful or bad-surplus
provided, if any shall be shown as revenue under the head "reserves and surplus" under the heading "Reserve for
Doubtful or bad debts".
5. Excluded items: The amounts to be shown under sundry debtors shall include the amounts due in respect of goods
sold or services rendered or in respect of other contractual obligations, but shall not include the amounts which are
in the nature of loans or advances.
Q5. Verification of assets acquired on lease.

Verification of Assets acquired on Lease:
(i) Examine the terms and conditions of the lease deed.
(ii) If a part of the leasehold property has been sublet, examine the tenant's agreement.
(iii) Verify relevant document to check the cost of property.
(iv) In case of acquisition of an asset is on operating lease, lease payment should be recognized as an expense in the
statement of profit and loss account on a straight line basis over the lease term.
(v) In case of acquisition of an asset is on finance lease, ensure all the substantial risks and rewards to ownership are
transferred, considering the indication as prescribed in AS-19, the lessee should recognize the lease as an asset and
as a liability. Such recognition should be at an amount equal to the fair value of the leased assets at the inception of
the lease. Ensure contingent rents are recognized as expense in the statement of profit & loss for the period in case
of Finance lease.
(vi) Ensure assets acquired under finance lease are segregated from the assets owned.
(vii) Ensure that the assets under lease have been properly disclosed as per requirement of Schedule VI

May 2012 Exam

Q6. How will you verify/ vouch the retirement gratuity to employees? (6 Marks)
Answer-
Vouching /Verification of Retirement Gratuity to Employees
i. Examine the basis on which the gratuity payable to employees is worked out. The liability for gratuity may either be
worked out on actuarial rules or agreement or on the presumption that all employees retire on the balance sheet
date.
ii. Verify computation of liability of gratuity on the aggregate basis.
iii. Check the amount of gratuity paid to employees who retired during the year with reference to number of years of
service rendered by them.
iv. See that the annual premium has been charged to Profit and Loss account in case the concern has taken a policy
from LIC.
v. Ensure that the basis of computing gratuity is valid.
vi. Ensure that the accounting treatment is in accordance with AS 15, "Accounting for Retirement Benefits in the
Financial Statements".
November 2012 Exam
Q7. Explain, what are the factors to be considered while "Vouching of travelling expenses” (8 Marks)
Answer-
The following factors are to be considered while "Vouching of Travelling Expenses":
(i) Travelling expenses are normally payable to staff according to rules approved by directors or partners. Where no rules
exist, the auditor should recommend that these be framed for controlling the expenditure. In the absence of T.A.
Rules, the expenditure should be vouched on the basis of actual expenditure incurred. A voucher should be
demanded for all items of expenses incurred, except those which are capable of independent verification.
(ii) As regards travelling expenses claimed by directors the auditor should satisfy himself that these were incurred by them
in the interest of the business and that the directors were entitled to receive the amount from the business.
(iii) The voucher for travelling expenses should normally contain the under mentioned information:
→ Name and designation of the person claiming the amount.
→ Particulars of the journey.
→ Amount of railway or air fare.
→ Amount of boarding or lodging expenses or daily allowance alongwith the dates and times of arrival and
departure from each station.
→ Other expenses claimed
(iv) If the journey was undertaken by air, the counterfoil of the air ticket should be attached to the voucher; this should
be inspected. For travel by rail or road, the amount of the fare claimed should be checked from some independent
source.
(v) Particulars of boarding and lodging expenses and in the case of halting allowance the rates thereof should be
verified.
(vi) The evidence in regard to sundry expenses claimed is generally not attached to T.A. bills. So long as the amount
appears to be reasonable it is usually not questioned. All vouchers for travelling expenses should be authorised by
some responsible official. In the case of foreign travel or any extraordinary travel, the expenses, before being paid,
should be sanctioned by the Board.
(vii) The travelling advance taken, if any, should be settled on receipt of final bills. At the year end, the amount not settled
should be shown appropriately in the Balance Sheet.
(viii) Unless the articles specifically provide or their payment has been authorised by a resolution of shareholders, directors
are not entitled to charge travelling expenses for attending Board Meetings.
Q8. Audit of discounted bills receivable dishonoured.

Answer-
Audit of Discounted Bills Receivable Dishonoured
(i) Obtain the schedule of discounted bills receivable dishonoured.
(ii) Check the entry in bank statement regarding the amount of bills dishonoured and see that the bank has debited the
account of client.
(iii) Verify the bills receivable returned by the bank along with bank's advice.

(iv) See that the dishonoured bills have been noted and protested by following the proper procedure and the account
of the drawee or the debtor is also debited.
(v) Check that bank commission, if any, charged by the bank has been recovered from the party.
May 2013 Exam
Q9. How will you vouch/verify the followings?

i. Purchase with invoice
ii. Patterns, dies, loose tools etc.
iii. Work-in-Progress
Answer-
i. Purchase with invoice: While vouching entries for purchases with the invoices, the following points should be specially
observed:
a. that the date of invoice falls within the accounting period;

b. that the invoice is made out in the name of the client;
c. that the supplier's account has been credited with the full amount of the invoice and that the deduction in the
amount of the invoice, if any, has been made on a proper basis;
d. that the goods purchased are those that are regularly dealt in by the concern or required for the process of
manufacture carried on by it and that the price payable has been correctly arrived at;
e. that the cost of purchases has been debited to an appropriate nominal account or accounts;
f. that the invoice is signed by the accountant to show that he has verified it as well as the store-keeper to indicate
that the delivery of goods have been taken by him. If the invoice relates to the purchase of a technical store
or a chemical, the price whereof is dependent on its quality, a copy of the report of a technical person showing
that the article purchased is of the specification for which the order has been placed; and
g. that the manager or some other official, competent to sanction payment, has authorized its payment.
ii. Patterns, Dies, Loose Tools, etc.: Several entities have large investments in such assets which have a relatively short
useful life and low unit cost. Evidently, it is a difficult matter, under the circumstances, to prepare a separate account
for each such asset although a careful control over such property is necessary.
On these considerations, some entities charge off small tools and other similar items to Production Account as and
when they are purchased and do not place any value on the unused stock on the Balance Sheet. Nevertheless, a
record of issues and receipts of tools to workmen is kept, as a check on the same being pilfered and a memorandum
stock account of dies and patterns is also maintained. In other concerns, the cost of tools, dies, etc. purchased is
debited to appropriate assets account, and an inventory of the unused items at the end of the year is prepared and
valued; the sum total of opening balance and purchase reduced by the value of closing stock, as disclosed by the
inventory, is charged off to Production Account in respect of such assets. On the other hand, some concerns carry
such assets at their book values at the end of the first year and charge off the cost of all the purchases in the
subsequent year to the Production Account on the plea that they represent cost of replacement.
The most satisfactory method, however, is that of preparing an inventory of serviceable articles, at the close of each
year, and revaluing the assets on this basis, the various articles included in the inventory being valued at cost. It should
be seen that the inventory does not include any worn out or defective articles the life of which has already run out.
iii. Work-in-Progress: The audit procedures regarding work-in-progress are similar to those used for raw materials and
finished goods. However, the auditor has to carefully assess the stage of completion of the work-in-progress for
assessing the appropriateness of its valuation. For this purpose, the auditor may examine the production/costing
records (i.e., cost sheets), hold discussions with the personnel concerned, and obtain expert opinion, where
necessary. The auditor may advise his client that where possible the work-in-progress should be reduced to the
minimum before the closing date. Cost sheets of work-in-progress should be verified as follows:
a. Ascertain that the cost sheets are duly attested by the works engineer and works manager.
b. Test the correctness of the cost as disclosed by the cost records by verification of quantities and cost of
materials, wages and other charges included in the cost sheets by reference to the records maintained in
respect thereof.
c. Compare the unit cost or job cost as shown by the cost sheet with the standard cost or the estimated cost
expected.
d. Ensure that the allocation of overhead expenses had been made on a rational basis.
e. Compare the cost sheet in detail with that of the previous year. If they vary materially, investigate the cause
thereof.
f. Ensure that the Work-in-Progress as at Balance Sheet date has been appropriately disclosed in Balance Sheet
as per the requirements of Part I of Revised Schedule VI (applicable w.e.f. 1.4.2011) to the Companies Act, 2013

November 2013 Exam
Q10. How will you vouch and verify the following?

(a) Remuneration paid to directors.
(b) Assets acquired on hire purchase.
(c) Profit or loss arising on sale of plots held by real estate dealer.
(d) Advertisement expenses.
Answer-
a. Remuneration paid to Directors
i. Refer to General Meeting or Board meeting resolution for the appointment and terms of appointment of the
director.
ii. Examine Articles of Association and general meeting resolution to determine the mode of payment-monthly,
quarterly, or by way of commission.
iii. Check agreement with the director.
iv. Verify director's attendance in the board meetings.
v. Ensure compliance with the provisions of Sections 198, 309, 349 and 350 and Schedule XIII of the Companies
Act, 2013, where appropriate.
vi. Check computation of the net profits and the commission payable to directors in terms of Revised Schedule VI
to the Companies Act, 2013.
vii. Computation of net profit under section 349 with details of the commission payable as percentage of profits to
the directors including Managing Directors/Manager (if any) should be stated by way of note.
b. Assets acquired on Hire purchase

i. Examine the Board's minutes book approving the purchase on Hire Purchase terms
ii. Examine the Hire Purchase Agreement carefully & note the description of the machinery and cost of machinery,
Hire Purchase charges, terms of payment and rate of purchase
iii. Assets acquired under Hire Purchase system should be recorded at full cash value with corresponding liability
of the same amount. In case cash value is not readily available, it should be calculated presuming an
appropriate rate of interest
iv. Hire Purchased assets are shown in Balance Sheet with appropriate narration to indicate that the enterprise
does not have full ownership thereof. The interest payable along with each installment, whether separately or
included therein, should be debited to the interest account, and not to the asset account.
c. Profit or loss arising on sale of plots held by real estate dealer.

The land holding in the case of real estate dealer will be a current asset and not a fixed asset. The same should,
therefore, be valued at cost or market value whichever is less. Profit or loss arising on sale of plots of land by Real
Estate Dealer should be verified as follows:
i. Each property account should be examined from the beginning of the development with special reference to
the nature of charges so as to find out that only the appropriate cost and charges have been debited to the
account and the total cost of the property has been set off against the price realised for it.
ii. This basis of distribution of the common charges between different plots of land developed during the period,
and basis for allocation of cost to individual properties comprised in a particular piece of land should be
scrutinised.
iii. If land price lists are available, these should be compared with actual selling prices obtained. And it should be
verified that contracts entered into in respect of sale have been duly sanctioned by appropriate authorities.
iv. Where part of the sale price is intended to reimburse taxes or expenses, suitable provisions should be maintained
for the purpose.
v. The prices obtained for various plots of land sold should be checked with the plan map of the entire tract and
any discrepancy or unreasonable price variations should be inquired into. The sale price of different plots of
land should be verified on a reference to certified copies of sale deeds executed.
vi. Out of the sale proceeds, provision should be made for the expenditure incurred on improvement of land,
which so far has been accounted for.
d. Advertisement Expenses: The following steps may be taken by the auditor tovouch/verify the different items:
i. Ascertaining the value of advertisement expenses to ensure that the said expense has been properly allocated.
ii. Examining that such expenses relate to the client's business.
iii. Review and examination of the complete list of media of advertisement indicating the dates, location, timing,
etc., along with the amounts paid in respect of each category.

iv. Examination of the receipts for amounts paid.
v. Reviewing the contracts with the different agencies and ensuring that the billing conforms to the term and
conditions specified therein.
vi. Ensuring that all such outstanding expenses have been properly accounted for.
RTP November 2013
Q11. Leam Well School, an educational institute deposits all of its collection/receipt in separate collection account of bank.
Being an auditor mention any six points to be considered by you, while verifying the correctness of bank balance.
Answer-
For verifying the balances lying with bank in collection account, the auditor should adopt following procedure:
a. Examine and compare the pay-in-slips with the entries in the ledger account of the educational institute.
b. Check the casting, carry forwards and balancing of ledger account.
c. Compare the entries in the ledger account with the bank statement.
d. Review the bank reconciliation statement for its correctness.
e. Scrutiny the subsequent period bank statement to ensure that items of reconciliation are subsequently cleared.
f. Verify the balance confirmation certificate, (b) Ledger Keeper & Frauds
Q12. List out some examples of fraud that can be done by ledger keeper in Bought ledger and sales ledger
Answer-
Examples of frauds that can be done by ledger keeper in bought ledger:
a. Crediting the account of a supplier on the basis of a fictitious invoice, showing that certain supplies have been
received from the firm, whereas in fact no goods have been received or on the basis of duplicate invoice from
a supplier, the original amount whereof has already been adjusted to the credit of the supplier in the Bought
Ledger, and subsequently misappropriating the payment made against the credit in the supplier's accounts.
b. Suppressing a credit note issued by a supplier in respect of return or an allowance and misappropriating an
amount equivalent thereto out of the payment made to him. For if a credit note issued by a supplier either in
respect of goods returned to him or for an allowance granted by him, is not debited to his account, the balance
in his account in the Bought Ledger would be larger than the amount actually due to him. The ledger-keeper
thus will be able to misappropriate the excess amount standing to the supplier's credit.
c. Crediting an amount due to a supplier not in his account but under a fictitious name and misappropriating the
amount paid against the credit balance.
Examples of frauds that can be done in sales ledger:

a. Teeming and Lading: Amount received from a customer being misappropriated; also to prevent its detection
the money received from another customer subsequently being credited to the account of the customer who
has paid earlier. Similarly, moneys received from the customer who has paid thereafter being credited to the
account of the second customer and such a practice is continued so that no one account is outstanding for
payment for any length of time, which may lead the management to either send out a statement of account
to him or communicate with him.
b. Adjusting an unauthorised credit or fictitious rebate, allowance, discount, etc. in the account with a view to
reduce the balance and when payment is received from the debtor, misappropriating an amount equivalent
to the credit.
c. Writing off the amount receivable from a customer's bad debt account and misappropriating the amount
received in payment of the debt.
Q13. How would you vouch/verily the following?

(a) Rental Receipts.
(b) Assets acquired on Hire-purchase.
(c) Cash Sales.
(d) Sale of Investments.
Answer-
a. Rental Receipts
i. Check copies of bills or rent receipt issued to the tenant with reference to tenancy agreement and bills of
charges paid by the landlord on behalf of tenants.
ii. The entries in the rental register in respect of rent accrued should be traced with reference to copies of rental
bills.
iii. Scrutinize the account of collecting agent when the rent is collected by such agent.
iv. Vouch the entries for rent received in advance and ensure proper adjustment is made.
v. Investigate into abnormal rent outstanding.
vi. Reconcile the outstanding rent and see that proper provision is made if unrecoverable.

vii. If rent is received net of TDS, see that rent income is shown at gross and TDS is shown in Balance Sheet as
advance Tax.
(b) Assets acquired on Hire purchase

i. Inspect the hire purchase agreement to ascertain the terms and condition, the installment and amount of
interest included in the installment.
ii. Ensure that these are treated as assets acquired under finance lease as per AS-19.
iii. Verify that initial recognition of lease should be as an asset and a liability at equal amounts.
iv. If it is reasonably certain that lessee will get ownership at the end of the term, see that asset is depreciated over
its useful life. Otherwise confirm that asset is depreciated over the shorter of its useful life and the lease term.
v. Ensure that it is shown separately in the Balance Sheet.
(c) Cash Sales

i. Examine the system of internal check to ascertain any loopholes therein.
ii. Ascertain the practice followed in the matter of issuing cash memos and trace the memos into cash sale
summary.
iii. Ensure that the date of cash memos tally with the entry in the cash book/summary.
iv. Verify that prices of goods sold have been correctly recorded and check the calculation.
v. Verify the entry in the goods outward book with the sales summary.
vi. See that the cancelled cash memos are not removed from the receipt book.
(d) Sale of Investments

i. See that sale of investment has been made on the proper authorisation of Board or other competent authority.
ii. Ascertain the method of selling investments. It may be either through broker, directly or through a bank. See
the broker's sold note.
iii. See that the difference between the carrying amount and the sales proceeds, net of expenses, is recognised
in the Profit & Loss Account. Ensure that when only a part of the holding of an individual investment is sold, the
carrying amount is allocated on the basis of average carrying amount of the total holding of the investments.
iv. See that proper disclosures as required by AS 13 are made as follows:
v. Interest, dividends, rentals on investments are to be shown in P& L A/c at Gross Value and TDS as advance tax
paid.
vi. Showing separately profit & Loss on disposal and changes in carrying amount of current and long term
investments.
May 2014 Exam
Q14. As an auditor what are the essential points to be borne in mind while examining a voucher? (5 Marks)
Answer-
Examining a Voucher: The essential points to be borne in mind while examining a voucher are:
i. that the date of the voucher falls within the accounting period;
ii. that the voucher is made out in the client's name;
iii. that the voucher is duly authorised;
iv. that the voucher comprised all the relevant documents which could be expected to have been received or
brought into existence on the transactions having been entered into, i.e., the voucher is complete in all
respects; and
v. that the account in which the amount of the voucher is adjusted is the one that would clearly disclose the
character of the receipts or payments posted thereto on its inclusion in the final accounts.
After the examination is over, each voucher should be either impressed with a rubber stamp or initialed so that it may
not be presented again in support of another entry.
Q15. How will you vouch/verify the following?

(a) Preliminary expenses
(b) Building
(c) Recovery of bad debts written off
(d) Cut-off arrangement/procedures. (4x4= 16 Marks)
Answer
(a) Preliminary Expenses: The auditor takes following steps to vouch/verify preliminary expenses:

i. Expenditure incidental to creation and floating of a company includes stamp duties, registration fees,
legal costs, accountant's fees, cost of printing, etc. All such kind of expenses should be related to the
formation of the enterprise.
ii. Contracts relating to preliminary expenses should be examined with all preliminary expenses, relevant
supporting documents should be there.
iii. He should examine company's minute's book to determine the pattern of writing off of the preliminary
expenses over the period.
iv. He must check that if such kinds of expenses are incurred by the promoters or they have been
reimbursed to the promoters, it is as per the instructions of the BOD and the powers in AOA.
v. He should make a cross check of the amount of preliminary expenses with that of amount mentioned
in the prospectus, statutory report and balance sheet. Any amount in excess should be approved by
the shareholders.
(b) Buildings:
i. Examine the title deeds of buildings to see whether the client holds the title on the balance sheet date.
If the property has been mortgaged, the title deeds will be in the possession of the mortgagee, from
whom a certificate should be obtained to that effect.
ii. Verify the original cost of buildings by reference to the deed of conveyance. If the building is
constructed by the client, verify the original cost by reference to the cost as recorded in the books of
account of the year in which the construction was completed.
iii. Verify that appropriate depreciation has been provided against the buildings. In case no depreciation
is provided on the buildings, a note to this effect should be given in the profit and loss account.
iv. See the appropriate lease deed, if the building is leasehold, to ascertain the cost, amortisation, etc.
Also ensure that all the covenants in the lease deed have been fulfilled by the client.
v. See that the buildings have been valued at cost less depreciation. If any revaluation has taken place,
see the basis of revaluation and ensure that the disclosure of the same has been made. In case of a
company, the requirements of Schedule VI to the Companies Act, 2013, have been complied with.
vi. See that the relevant particulars of buildings have been entered in the fixed assets record maintained
by the client.
(c) Recovery of Bad Debts written off:

i. Check all correspondence and proper authorization of bad debts written off earlier and ensure that
the decision of writing off of bad debts was recorded properly.
ii. Ascertain total bad debts and see whether all recovery of bad debts is recorded properly in the books
of account and deposited into bank.
iii. Check all notifications from Court or bankruptcy trustee and all correspondence from debtors and
collecting agencies.
iv. Check Credit Manager's files for amount recovered and confirm acknowledgement receipts issued to
trustee/debtors.
v. Vouch acknowledgement receipts issued to debtors or trustees.
(d) Cut-off arrangement: Accounting is a continuous process because the business nevercomes to halt. It is,
therefore, necessary that transactions of one period would beseparated from those in the ensuing period so that
the results of the working of eachperiod can be correctly ascertained. The arrangement that is made for this
purpose is technically known as "cut-off arrangement". It essentially forms part of the internal control system of
the organisation. Accounts, other than sales, purchase and stock are not usually affected by the continuity of
the business and therefore, this arrangement is generally applied only to sales, purchase and stock. The auditor
satisfies by examination and test-checks that the cut-off procedures are adequately followed and ensure that:
i. Goods purchased, property in which passed on to the client, have in fact been included in the
inventories and that the liability has been provided for in case credit purchase.
ii. Goods sold have been excluded from the inventories and credit has been taken for the sales. If the
value of sales is to be received, the concerned party has been debited.
The auditor may examine a sample of documents, evidencing the movement of stock into and out of
stores, including documents pertaining to period shortly before and after the cut-off date and check
whether stocks represented by those documents were included or excluded as appropriate during stock
taking for perfect and correct presentation in the financial statements.
Q16. Describe "Analytical Review Procedures" in Audit. Briefly discuss analytical procedures for verification of debtors.
Answer-
Analytical Review Procedure: As per SA 520, Analytical Procedure means analysis of financial information through
analysis of relationship among financial and non-financial data. It includes comparison of the entity's financial
information with comparable information with prior period, anticipated results of the entity like budgets etc or
expectations of auditor and similar industry information.

Therefore, an analytical review procedure assists the auditor in planning the nature, timing and extent of other audit
procedures. It is an auditing procedure based on ratios among accounts and tries to identify significant changes.
Analytical review procedures can be used in the consideration of risks and/or as direct tests of balances. When deciding
whether to incorporate analytical review procedures into the examination program as substantive tests of balances,
the examiner should consider the extent to which the underlying data should be tested.
Analytical Procedures in case of debtors: Following are the analytical review procedures which may often be helpful
as a means of obtaining audit evidence regarding the various assertions relating to debtors:
(i) comparison of closing balances of debtors with the corresponding figures for the previous year;
(ii) comparison of the relationship between current year debtor balances and the current year sales with the
corresponding budgeted figures, if available;
(iii) comparison of actual closing balances of debtors with the corresponding budgeted figures, if available;
(iv) comparison of current year's ageing schedule with the corresponding figures for the previous year;
(v) comparison of significant ratios relating to debtors with similar ratios for other firms in the same industry, if
available;
(vi) comparison of significant ratios relating to debtors with the industry norms, if available.
(vii) Check whether there is any change in credit policy of the organization.
(viii) Check the percentage of bad debts of previous years and current year.
(ix) Find the reasons of major variations in the estimated values and actual values.
These are only an illustrative list of analytical review procedures which an auditor may employ in carrying out an audit
of debtors. The exact nature of analytical review procedures to be applied in specific situation is a matter of professional
judgment of the auditor.
RTP May 2014
Q17. Explain clearly the meaning of vouching. Also discuss the essential points to be borne in mind while examining a
voucher.
Answer- The act of examining vouchers is referred to as vouching. It is the practice followed in an audit with the
objective of establishing the authenticity of the transactions recorded in the primary books of account. It essentially
consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the
authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher
has been posted to an appropriate account which would disclose the nature of the transaction on its inclusion in the
final statements of account. On these considerations, the essential points to be borne in mind while examining a
voucher are:
i. that the date of the voucher falls within the accounting period;
ii. that the voucher is made out in the client's name;
iii. that the voucher is duly authorised;
iv. that the voucher comprised all the relevant documents which could be expected to have been received or
brought into existence on the transactions having been entered into, i.e., the voucher is complete in all
respects; and
v. that the account in which the amount of the voucher is adjusted is the one that would clearly disclose the
character of the receipts or payments posted thereto on its inclusion in the final accounts.
Q18. How will you verify/vouch the following?

(a) Stock lying with Third Party.
(b) Purchase of Motor Car.
(c) Sales Commission Expenditure.
(d) Sales Return.
Answer-
(a) Stock lying with third party
i. Obtain confirmations from the third party including the time period and reasons thereof.
ii. Evaluate condition of goods and see whether adequate provision has been made.
iii. Check whether subsequently the goods lying with third party were sold or received back after the
expiry of stipulated time period.
iv. Ensure that the goods have been included in the closing stock though lying with third party.
(b) Purchase of Motor Car
i. Ascertain whether the purchase of car has been properly authenticated.
ii. Check invoice of the car dealer to confirm purchase price.

iii. Examine registration with Transport Authorities to verify the ownership.
iv. Ensure that all expenses relating to purchase of car have been properly capitalized and the same
have been disclosed properly in the balance sheet.
(c) Sales Commission Expenditure

i. Ascertain agreement, if any, in respect of sales transaction actually occurred during the year
carried out by authorized parties on its behalf. If yes the commission should be in accordance with
the terms and conditions as specified.
ii. Check evidence of services rendered by the party to whom commission is paid with reference to
correspondence etc.
iii. Ensure that the sales in fact have taken place and the same has been charged to profit and loss
account.
iv. Compare the amount incurred in previous years with reference to total turnover.
(d) Sales Return

(i) Examine the accounting basis for such transactions with reference to corresponding Debit Note
to Debit Note. The relevant correspondence may also be examined.
(i) Verify by reference to relevant corresponding record in good inward book or the stores records.
Further, the figures in these documentary evidencesshould be compared with the original
invoices for rates and other charges and calculation should also be checked.
(ii) Examine in depth to eliminate the possibility of fictitious sales returns for covering bogus sales
recorded eariier when such returns outwards are in substantial figure either at the start or end of
the accounting year.
(iii) Cross-check with reference to original invoices any rebates in price or allowances if any given
by buyers on strength of their Debit Notes.
RTP November 2014
Q19. How will you verify/vouch the following:

(d) Sale proceeds of Scrap Material.
(e) Trade Marks and Copyrights.
(f) Machinery acquired under Hire-purchase system.
(g) Work-in-progress.
Answer-
a. Sale Proceeds of Scrap Material

i. Review the internal control on scrap materials, as regards its generation, storage and disposal and see
whether it was properly followed at every stage.
ii. Ascertain whether the organisation is maintaining reasonable records for the sale and disposal of scrap
materials.
iii. Review the production and cost records for determination of the extent of scrap materials that may
arise in a given period.
iv. Compare the income from the sale of scrap materials with the corresponding figures of the preceding
three years.
v. Check the rates at which different types of scrap materials have been sold and compare the same
with the rates that prevailed in the preceding year.
vi. See that scrap materials sold have been billed and check the calculations on the invoices.
vii. Ensure that there exists a proper procedure to identify the scrap material and good quality material is
not mixed up with it.
viii. Make an overall assessment of the value of the realisation from the sale of scrap materials as to its
reasonableness.
b. Trade Marks and Copyrights

i. Obtain schedule of Trade Marks and Copyrights duly signed by the responsible officer and scrutinise
the same and confirm that all of them are shown in the Balance Sheet.
ii. Examine the written agreement in case of assignment of Copyrights and Assignment Deed in case of
transfer of trade marks. Also ensure that trademarks and copyrights have been duly registered.

iii. Verify existence of copyright by reference to contract between the author and the entity and check
the payment of royalty made to author.
iv. See that the value has been determined properly and the costs incurred for the purpose of obtaining
the trademarks and copyrights have been capitalised.
v. Ascertain that the legal life of the trademarks and copyrights have not expired.
vi. Ensure that amount paid for both the intangible assets is properly amortised having regard to
appropriate legal and commercial considerations, as per the principles enunciated under AS 26 on
Intangible Assets.
c. Machinery acquired under Hire-purchase system

i. Examine the Board's Minute Book approving the purchase on hire-purchase terms.
ii. Examine the hire-purchase agreement carefully and note the description of the machinery, cost of the
machinery, hire purchase charges, and terms of payment and rate of purchase.
iii. Assets acquired under Hire Purchase System should be recorded at the full cash value with
corresponding liability of the same amount. In case cash value is not readily available, it should be
calculated presuming an appropriate rate of interest.
iv. Hire purchased assets are shown in the balance sheet with an appropriate narration to indicate that
the enterprise does not have full ownership thereof. The interest payable along with each installments,
whether separately or included therein should be debited to the interest account and not to the asset
account.
d. Work-in-Progress: The audit procedures regarding work-in-progress are similar to those used for raw materials
and finished goods. However, the auditor has to carefully assess the stage of completion of the work-in-progress
for assessing the appropriateness of its valuation. For this purpose, the auditor may examine the
production/costing records (i.e., cost sheets), hold discussions with the personnel concerned, and obtain expert
opinion, where necessary. The auditor may advise his client that where possible the work-in-progress should be
reduced to the minimum before the closing date. Cost sheets of work-in-progress should be verified as follows:
i. Ascertain that the cost sheets are duly attested by the works engineer and works manager.
ii. Test the correctness of the cost as disclosed by the cost records by verification of quantities and cost
of materials, wages and other charges included in the cost sheets by reference to the records
maintained in respect thereof.
iii. Compare the unit cost or job cost as shown by the cost sheet with the standard cost or the estimated
cost expected.
iv. Ensure that the allocation of overhead expenses had been made on a rational basis.
v. Compare the cost sheet in detail with that of the previous year. If they vary materially, investigate the
cause thereof.
vi. Ensure that the Work-in-Progress as at Balance Sheet date has been appropriately disclosed in Balance
Sheet as per the requirements of Part I of Schedule VI of the Companies Act
Q20. What procedure an auditor should adopt to test the authenticity of cash at bank?
Answer-
Verification of Cash at Bank: While testing the authenticity of cash at bank, the following areas may be considered
by the auditor:
i. Apart from comparing the entries in the cash book with those in the Pass Book the auditor should obtain a
certificate from the bank confirming the balance at the close of the year as shown in the Pass Book.
ii. Examine the bank reconciliation statement prepared as on the last day of the year and see whether (a)
cheques issued by the entity but not presented for payment, and (b) cheques deposited for collection by the
entity but not credited in the bank account have been duly debited/credited in the subsequent period.
iii. Pay special attention to those items in the reconciliation statements which are outstanding for an unduly long
period. The auditor should ascertain the reasons for such outstanding items from the management. He should
also examine whether any such items require an adjustment write-off.
iv. Examine relevant certificates in respect of fixed deposits or any type of deposits with banks duly supported by
bank advices.
v. The auditor should examine the possibility, that even though the balance in an apparently inoperative account
may have remained stagnant, transactions may have taken place in that account during the year.

vi. In relation to balances/deposits with specific charge on them, or those held under the requirements of any law,
the auditor should examine that suitable disclosures are made in the financial statements.
vii. Remittances shown as being in transit should be examined with reference to their credit in the bank in the
subsequent period. Where the auditor finds that such remittances have not been credited in the subsequent
period, he should ascertain the reasons for the same. He should also examine whether the entity has reversed
the relevant entries in appropriate cases.
viii. The auditor should examine that suitable adjustments are made in respect of cheques which have become
stale as at the close of the year.
ix. Where material amounts are held in bank accounts which are blocked, e.g. in foreign banks with exchange
control restrictions or any banks which are under moratorium or liquidation, the auditor should examine whether
the relevant facts have been suitably disclosed in the financial statements. He should also examine whether
suitable adjustments on this account have been made in the financial statements in appropriate cases.
x. Where the auditor finds that the number of bank accounts maintained by the entity is disproportionately large
in relation to its size, the auditor should exercise greater care in satisfying himself about the genuineness of
banking transactions and balances.
`
November 2014 Exam
How you will vouch/verify the following?

(a) Assets acquired on lease.
(b) Investment in the shares and debentures of subsidiary.
(c) Provision for income tax.
(d) Retirement gratuity to employees.
(4x4 = 16 Marks)
Answer
(a) Verification of Assets acquired on Lease:
(i) Examine the terms and conditions of the lease deed.
(ii) If a part of the leasehold property has been sublet, examine the tenant's agreement.
(iii) Verify relevant document to check the cost of property.
(1) In case of acquisition of an asset is on operating lease, lease payment should be recognized
as an expense in the statement of profit and loss account on a straight line basis over the lease
term, in case of operating lease;
(2) In case of acquisition of an asset is on finance lease, ensure all the substantial risks and rewards
to ownership are transferred, considering the indication as prescribed in AS-19, the lessee
should recognize the lease as an asset and as a liability. Such recognition should be at an
amount equal to the fair value of the leased assets at the inception of the lease. Ensure
contingent rents are recognized as expense in the statement of profit & loss for the period in
case of Finance lease.
(iv) Ensure assets acquired under finance lease are segregated from the assets owned.
(v) Ensure that the assets under lease have been properly disclosed as per requirement of Schedule III.
(b) Investment in the Shares and Debentures of Subsidiary:

(i) The auditor should obtain a complete schedule of all such investments held, showing particulars as
regards the name of the subsidiary company, class of shares or debenture, date of purchase, number
of units and denoting numbers, book value, dividend received etc.
(ii) All the particulars entered in the schedule should be verified with the relevant account in the General
Ledger.
(iii) The auditor should, at the same time, examine all the investments by inspection of the securities, share
scrips or certificates, debenture bonds, etc. If any of the securities are held by bankers, he should verify
them with their certificate which should disclose the charge, if they are subject to any such charge.
(iv) The provisions contained in Part III, Schedule III to the Companies Act, 2013 requires that the shares held
in a subsidiary should be shown separately.
(v) The shares or debentures of a subsidiary are valued at cost.

(vi) If the subsidiary has suffered a loss, then a provision for the proportionate part of the loss should be
made in the accounts of the holding company.
(c) Provision for Income Tax:

(i) Obtain the computation of income prepared by the auditee and verify whether it is as per the Income-
tax Act, 1961 and Rules made thereunder.
(ii) Review adjustments, expenses, disallowed special rebates, etc. with particular reference to the last
available completed assessment.
(iii) Examine relevant records and documents pertaining to advance tax, self-assessment tax and other
demands.
(iv) Compute tax payable as per the latest applicable rates in the Finance Act.
(v) Ensure that overall provisions on the date of the balance sheet is adequate having regard to current
year provision, advance tax paid, assessment orders, etc.
(vi) Ensure that the requirements of AS 22 on Accounting for Taxes on Income have been appropriately
followed for the period under audit.
(d) Retirement Gratuity to Employees:

(i) Examine the basis on which the gratuity payable to employees is worked out. The liability for gratuity
may either be worked out on actuarial rules or agreement or on the presumption that all employees
retire on the balance sheet date.
(ii) Verify computation of liability of gratuity on the aggregate basis.
(iii) Check the amount of gratuity paid to employees who retired during the year with reference to number
of years of service rendered by them.
(iv) See that the annual premium has been charged to Profit and Loss account, in case if the concern has
taken a policy.
(v) Ensure that the accounting treatment is in accordance with AS 15, "Employee Benefits"
May 2015 Exam
How mil you vouch/verify the following?

(a) Rental Receipts
(b) Repair to assets
(c) Work-in-progress
(d) Insurance claims. (4x4 = 16 Marks)
Answer
(a) Rental Receipts:
• Check copies of bills or rent receipts issued to the tenant with reference to tenancy agreement and
bills of charges paid by the landlord on behalf of tenants.
• The entries in the rental register in respect of rent accrued should be traced with reference to copies
of rental bills.
• Scrutinize the account of collecting agent when the rent is collected by such agent.
• Vouch the entries for rent received in advance and ensure proper adjustment is made.
• Investigate abnormal rent outstanding, if any.
• Reconcile the outstanding rent and check that proper provision is made if unrecoverable.
• If rent is received net of TDS, check that the rental income is shown at gross amount and TDS is shown
in Balance Sheet as per Schedule III to the Companies Act, 2013.
(b) Repair to Assets:

• Since the line demarcating repairs from renewals is slender, usually it is not a simple matter to determine
the amount of the expenditure, if any, included as charges for repairs, which should be considered as
that incurred for renewal of an asset and added to its cost.
• It may sometimes be possible to determine this on a consideration of the nature of repairs carried out.
The proportion of the charges which had the effect of increasing the value of an asset or enhancing
its capacity or life should be treated as capital expenditure.
• Where, however, it is not possible to form an opinion accurately on the basis of evidence as regards
the nature of repairs, a certificate from the engineer under whose supervision the repairs were carried
out, confirming the classification of expenditure should be obtained.
• It should be ensured that Repairs to 'Certain Assets' like Building and Machinery have been separately
disclosed as per the requirements of Schedule III to the Companies Act, 2013.

(c) Work in Progress:

• Involve a technical expert in verification and valuation of WIP, if necessary.
• Ensure that cost sheets are duly attested by the works manager.
• Test the correctness of the cost as disclosed by the cost records by verification of quantities and cost
of materials, wages and other charges included in the cost- sheets by reference to the records
maintained in respect of issues of materials, payment of wages and its classification and original
evidence in respect of all expenditure included in the cost-sheets.
• Verify stage of completion with component of cost involved with underlying records.
• Compare the unit cost as shown by the cost sheet with standard cost for any large variations.
• Ensure that the allocation of overhead expenses has been made on reasonable basis and is same as
used in earlier period.
• Compare the cost sheet with that of the previous year and if there is any large variation, investigate
the reason thereof.
(d) Insurance Claims: While vouching the receipts of insurance claims, following points may be considered-
• The auditor should examine a copy of the insurance claim lodged with the insurance company.
Correspondence with the insurance company and with the insurance agent should also be seen.
Counterfoils of the receipts issued to the insurance company should also be seen.
• The auditor should also determine the adjustment of the amount received in excess or short of the
value of the actual loss as per the insurance policy.
• The copy of certificate/report containing full particulars of the amount of loss should also be verified.
• The accounting treatment of the amount received should be seen particularly to ensure that revenue
is credited with the appropriate amount and that in respect of claim against asset, the profit and loss
account is debited with the short fall of the claim admitted against book value.
• If the claim was lodged in the previous year but no entries were passed, entries in the profit and loss
account should be appropriately described.
MAY 2015 RTP

How will you verify/vouch the following:
(a) Contingent Liabilities
(b) Excise Duty
(c) Recovery of Bad-debts written off
(d) Endowment Policies.
(a) Contingent liabilities: Accounting Standard (AS) 29 on 'Provisions, Contingent Liabilities and Contingent
Assets', defines 'Contingent Liability' as a possible obligation that arises from past events and the
existence of which will be confirmed only by the occurrence or non-occurrence of one or more
uncertain future events not wholly within the control of the enterprise; or as a present obligation that
arises from past events but is not recognized because it is not probable that an outflow of resources
embodying economic benefits will be required to settle the obligation, or a reliable estimate of the
amount of the obligation cannot be made.
The auditor may take following steps to vouch or verify the contingent liabilities:
(i) Inspect the minute books of the company to ascertain all contingent liabilities known to the
company.
(ii) Examine the contracts entered into by the company and the likelihood of contingent liabilities
emanating there from.
(iii) Scrutinize the lawyer's bills to track unreported contingent liabilities.
(iv) Examine bank letters in respect of bills discounted and not matured.
(v) Examine bank letters to ascertain guarantees on behalf of other companies or individuals.
(vi) Discuss with various functional officers of the company about the possibility of contingent liability
existing in their respective field.
(vii) Obtain a certificate from the management that all known contingent liabilities have been
included in the accounts and they have been properly disclosed.
(viii) Ensure that proper disclosure has been made as per Schedule III to the Companies Act, 2013 and
AS 29, "Provisions, Contingent Liabilities and Contingent Assets".
(b) Excise Duty: Excise duty is levied on manufacture. The liability for duty arises only at the point of time at
which manufacturing is complete. The point of time at which duty is collected may be determined by
consideration of administrative convenience.

Normally excise duty is paid before the issue of excisable goods from the factory. For this, the auditor
should take into consideration:
(i) Ensure that excise duty is paid at the time of issue of excisable goods from the godown at
factory of the producer. The duplicate copy of the challan as issued by the bank is forwarded
for the purpose of issue of the excisable goods.
(ii) Verify the amount of duty paid with the corresponding value of the goods issued from the
inventory register of the producer by applying test check. In case where the client maintains
an advance deposit with Excise Department, the auditor should see that the permits are issued
for delivery of the goods against the advance deposit and corresponding adjustment.
(iii) Ascertain the rates of excise duty and apply it to the total sales and see that the amount
actually paid does not exceed the amount thus calculated.
(iv) Ascertain that in case of dispute about the amount of duty payable, a provisional amount
may be paid in lieu of final amount. In such cases, the final amount determined as payable
should be verified. If the provisional payment was more than the actual amount, the refund of
such excess amount should be vouched.
(v) The auditor may also physically verify RG 1 with actual and see reconciliation of financial
records with sales tax records.
(c) Recovery of Bad Debts written off:

(i) Check all correspondence and proper authorization of bad debts written off earlier and
ensure that the decision of writing off of bad debts was recorded properly.
(ii) Ascertain total bad debts and see whether all recovery of bad recorded properly in the books
of account and deposited into bank.
(iii) Check all notifications from Court or bankruptcy trustee correspondence from trade
receivables and collecting agencies.
(iv) Check Credit Manager's files for amount recovered and acknowledgement receipts issued to
trustee/trade receivables.
(d) Endowment Policies:

(i) Ascertain the specific purpose for which the endowment policy is taken, e.g., Sinking Fund
policies for redemption of debentures, redemption of leases or policies taken for other similar
purposes, etc. debts is and all confirm
(ii) Verify the terms and conditions of policies and ensure that all such conditions are in force and
being followed.
(iii) Check that premium has been deposited in time and the policy is in force.
(iv) Examine that proper disclosures have been made in the financial statements in respect of
items for which the policy has been taken.
MAY 2015 RTP - General Points to Be Considered in Scrutiny of General Ledger

(i) The General Ledger contains all the balances which are ultimately included in the Profit and Loss Account
and the Balance Sheet. Its examination therefore is undertaken last of all.
(ii) The scrutiny of General Ledger should be carried out with due care in as much as it is the final review of
balances which, on inclusion in Final Accounts, cumulatively reflect the financial position of the concern.
(iii) Entries in the General Ledger usually are posted in a summary form from the books of original entries such as
Cash Book, Journal, Sales Book, Purchase Book and other subsidiary books. Therefore, it should be confirmed
that all the postings on various accounts have been verified, totals, etc. checked.
(iv) It should also be ascertained that balances in all the income and expense accounts have been adjusted:
(1) according to standard accounting practices (i.e., all unpaid, prepaid expenses have been adjusted and
accrued Income and pre-recorded income is properly adjusted); and (2) on a consideration of the legal
provisions which are applicable to the concern.

(v) The balances in the General Ledger should be traced to the trial balance and from the trial balance to the
final accounts.
NOVEMBER 2015 RTP
(a) Verification of the Credit Sales: The credit sales should be verified by reference to copies of invoices issued
to customers and, in the process, attention should be paid to the following matters-
(i) that each item of sales relates to the period of account under audit;
(ii) that the goods are those that are normally dealt in by the concern;
(iii) that the sale price has been correctly arrived at and the copy of the requisition slip issued by the Sales
Department and the copy of the Despatch Note showing the date and mode of despatch of goods are
attached with the invoice;
(iv) that the amount of the invoice has been adjusted in an appropriate account; and
(v) that the sale has been authorized by a responsible official and in token thereof he has initialed the invoice;
also that any alteration in the invoice has been attested by the same person.
(b) Bank Overdraft

(i) The auditor should ensure that the facility of overdraft is authorized by the Board's resolution/partner's
resolution.
(ii) Pursue the agreement with the bank and see whether the overdraft is clean or against hypothecation or
pledge of company's property.
(iii) Verify the register of charges and ensure that the charge has been registered with Registrar of Companies.
(iv) Verify the rate of interest and other terms and conditions from the agreement.
(v) Verify the amount of overdraft from the books of accounts and compare it with the passbook.
(vi) If the overdraft is against hypothecation of assets like inventories, a certificate from the bank should be
obtained.
(vii) If the overdraft is against hypothecation of assets or pledge of company's property, see that overdraft is
properly shown under 'secured loans' and nature of security has been properly disclosed.
(b) Goods lying with Third Party

(i) The auditor should check that the materiality of the item under this caption included in inventories.
(ii) He should obtain confirmation of the amount of goods lying with them. The confirmation may be directly
obtained by auditor or be produced by client depending upon the situation.
(iii) He should inquire into the necessity of sub-contractor retaining the inventory. He should ensure the process
that they do are related to the business requirement and there is no ground for suspicion on this score.
(iv) The goods lying with them for the very long period would merit auditor's special attention for making
provision.
(v) The records, voucher/slips for the regulating the movement of inventory into and out of entity for sub-
contracting work be reviewed by vouching for few transactions for ensuring existence and working of
internal control system for them.
(vi) The excise gate pass, entry in such records, information in returns, be also cross-verified.
(vii) The valuation of inventories should be correctly made for including material cost on appropriate inventory
valuation formulae and also for inclusion of proportionate processing charges for the work in process with
the contractors.
(viii) The provision should be created for work done, billed for processing and also for incidence of any
applicable levy like service tax payable.
(c) Goods Sent Out on Sale or Return Basis

(i) Check whether a separate memoranda record of goods sent out on sale or return basis is maintained. The
party accounts are debited only after the goods have been sold and the sales account is credited.
(ii) See that price of such goods is unloaded from the sales account and the trade receivable^ record. Refer
to the memoranda record to confirm that on the receipt of acceptance from each party, his account has
been debited and the sales account correspondingly credited.
(iii) Ensure that the goods in respect of which the period of approval has expired at the close of the year either
have been received back subsequently or customers' accounts have been debited.
(iv) Confirm that the inventory of goods sent out on approval, the period of approval in respect of which had
not expired till the close of the year lying with the party, has been included in the closing inventory.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C13 – Special Audit
Auditing & Assurance- Past Year Questions & RTPS
Chap-13- Special Audit

May 2011 Exam
Q1. Mention any 8 special points which you as an auditor would look into while auditing the books of accounts of:
(a) Hospital (8 Marks)
(b) Cinema (8 Marks)
Answer
(a) Audit of Hospital:
The special steps involved in such an audit are as follows:
i. Vouch the Register of patients with copies of bills issued to them. Verify bills for a selected
period with the patients' attendance record to see that the bills have been correctly prepared. Also see
that bills have been issued to all patients from whom an amount was recoverable according to
the rules of the hospital.
ii. Check cash collections as entered in the Cash Book with the receipt, counterfoils and other
evidence for example, copies of patients bills, counterfoils of dividend and other interest warrants, copies of
rent bills, etc.
iii. See by reference to the Property and Investment Register that all income that should
have been received by way of rent on properties, dividends and interest on securities settled on the hospital
has been collected.
iv. Ascertain that legacies and donations received for a specific purpose have been applied in
the manner agreed upon.
v. Trace all collections of subscription and donations from the Cash Book to the
respective Registers. Reconcile that total subscriptions due (as shown by the
Subscription Register and the amount collected and that still outstanding).
vi. Vouch all purchases and expenses and verily that the capital expenditure was
incurred only with the prior sanction of the Trustees or the Managing Committee and
that appointments and increments to staff have been duly authorised.
vii. Verify that grants, if any, received from Government or local authority have been duly
accounted for. Also that refund in respect of taxes deducted at source has been claimed.
viii. Compare the totals of various items of expenditure and income with the amount budgeted for them and report
to the Trustees or the Managing Committee significant variations which have taken place.
ix. Examine the internal check as regards the receipts and issue of stores; medicines, lines,
apparatus, clothing, instruments, etc. so as to insure that purchases have been properly recorded in
the Stock Register and that issues have been made only against proper authorisation.
x. See that depreciation has been written off against all the assets at the appropriate rates.
xi. Inspect the bonds, share scripts, title deeds of properties and compare their particulars with
those entered in the Property and Investment Register.
xii. Obtain inventories, specially of stocks and stores as at the end of the year and check a percentage of
the items physically, also compare their total values with respective ledger balances.
(b) Audit of Cinema:

The special steps involved in its audit are as follows:-
(i) Verify
→ that entrance to the cinema hall during show is only through printed tickets;
→ that they are serially numbered and bound into books;

→ that for advance booking a separate series of tickets is issued; and
→ that the stock of tickets is kept in the custody of a responsible official.
(ii) end of show, a statement of tickets sold is prepared and cash

Confirm that at the
collected is agreed with it.
(iii) Verify that a record is kept of the 'free passes' and that these are issued under proper authority.
(iv) Reconcile the amount of Entertainment Tax collected with the total number of tickets issued for
each class.
(v) charges collected for advertisement slides by reference to the Register
Verify the
of Slides kept at the cinema as well with the agreements, entered into with advertisers in this
regard.
(vi) Vouch the expenditure incurred on advertisement, repairs and maintenance. No
part of such expenditure should be capitalised except the expenditure on extensive
redecoration, and that should be adjusted as deferred revenue expenditure.
(vii) Vouch payments on account of film hire with bills of distributors and in the process, the
agreements concerned should be referred to.
(viii) Examine unadjusted balance out of advance paid to the distributors against
film hire contracts to see that they are good and recoverable. If any film in respect of which an advance was
paid has already run, it should be enquire as to why the advance has not been adjusted. The management
should be asked to make a provision in respect of advances that are considered irrecoverable.
(ix) The arrangement for collection of the share in the restaurant income should be
enquired into either a fixed sum or a fixed percentage of the taking may be receivable annually. In case the
restaurant is run by the Cinema, its accounts should be checked. The audit should cover sale of
various items of foodstuffs, purchase of foodstuffs, cold drink, cigarettes, etc. as in the case of club.
November 2011 Exam
Q2. Mention 8 special points which you as an auditor would look into while auditing the accounts of a Recreation Club
with facilities for indoor games and in house eatery. (8 Marks)
(a) Audit of Accounts of Recreational Club

i. Examine the constitution, powers of governing body and relevant rules relating to
preparation and finalization of accounts.
ii. Vouch the receipt on account of entrance fees with member's applications,
counterfoils issued to them, and minutes of the Managing Committee.
iii. Vouch Members' subscription with the counterfoils of receipts issued to them. Trace
receipts for a selected period to the Register of members; reconcile the amount of
total subscription due with the amount collected and the outstanding. Check
totals of various columns of the Register of Members and tally them across. See the
Register of Members to ascertain the Member's dues which are in arrear and enquire whether
necessary steps have been taken for their recovery. The amount considered
irrecoverable, if any should be written off.
iv. Ensure that arrears of subscriptions for the previous year have been correctly brought over
and arrears for the year under audit and subscription received in advance have been correctly adjusted.
v. Verify the internal check as regards members being charged with the price of
foodstuffs and drinks provided to them and their guests as well as with the fees chargeable for the
special service rendered such as billiards, tennis, etc. Trace debits for a selected period from
subsidiary registers maintained in respect of supplies and services to members to confirm that the account
of every member has been debited with amounts recoverable from him.

vi. Vouch purchase of sports items, furniture, crockery, etc., and trace their entries into the
respective stock registers. Vouch purchases of food-stuffs, cigars, wines, etc. and test their sale
price so as to confirm that the normal rates of profit have been earned on their sales.
vii. The stock of unsold provisions and stores, at the end of the year should be verified
physically and its valuation checked. Check the stock of furniture, sports material and other
assets physically with the respective stock registers or inventories prepared at the end of the year.
viii. share scrips and bonds in respect of investments, check their current values
Inspect the
for disclosure in final accounts, also ascertain that the arrangements for their safe
custody are satisfactory, check the accrual of income there from and provision of income tax
thereon..
May 2012 Exam

Q3. Mention the eight important points which an auditor will consider while conducting the audit of educational
institutions. (8 Marks)
Answer- Audit of Educational Institutions
The important points which an auditor should consider while conducting the audit of education institutions are as
follows:
i. Examine the Trust Deed or Regulations, in the case of school or college and note all the
provisions affecting accounts. In the case of a university, refer to the Act of Legislature and
the Regulation framed thereunder.
ii. Read through the minutes of the meetings of the Managing Committee or Governing Body, noting
resolutions affecting accounts to see that these have been duly complied with, specially
the decisions as regards the operation of bank accounts and sanctioning of expenditure.
iii. Check names entered in the Students Fee Register for each month or term, with the respective
Class Registers, showing names of students on roils and test amount of fees charged;
and verify that there operates a system of internal check which ensures that demands against
the students are properly raised.
iv. Check fees received by comparing counterfoils of receipts granted with entries in the Cash Book and tracing
the collections in the Fee Register to confirm that the revenue from this source has been duly accounted for.
v. Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in advance
have been carried forward and that the arrears that are irrecoverable have been written off under the sanction
of an appropriate authority.
vi. Check admission fees with admission slips signed by the head of the institution and confirm that the
amount has been credited to a Capital Fund, unless the Managing Committee has taken a decision to the
contrary.
vii. See that free studentship and concessions have been granted by a person authorised to do so, having regard
to the Rules prescribed by the Managing Committee.
viii. Confirm that fines for late payment or absence, etc. have been either collected or remitted
under proper authority.
ix. Confirm that hostel dues were recovered before student's accounts were closed and their deposits
of caution money refunded.
x. Verify rental income from rented property with the rent rolls, etc.
xi. Vouch income from endowments and legacies, as well as interest and dividends from
investment; also inspect the securities in respect of investments held.
xii. Verify any Government or local authority grant with the relevant paper of grant. If any expense
has been disallowed for purposes of grant, ascertain the reasons and compliance thereof.
xiii. Report any old heavy arrears on account of fees, dormitory rents, etc. to the Managing Committee.
xiv. Confirm that caution money and other deposits paid by students on admission, have been shown as liability in
the balance sheet not transferred to revenue, unless they are not refundable.
xv. See that the investments representing endowment funds for prizes are kept separate and any income in excess
of the prizes has been accumulated and invested along with the corpus.
xvi. Verify that the Provident Fund money of the staff has been invested in appropriate securities.

xvii. Vouch donations, if any with the list published with the annual report. If some donations were meant for any
specific purpose, see that the money was utilised for the purpose.
xviii. Vouch all capital expenditure in the usual way and verify the same with the sanction for the Committee as
contained in the minute book.
xix. Vouch, in the usual manner, all establishment expenses and enquire into any unduly heavy expenditure under
any head. If there was any annual budget prepared, see that any excess under any head over the amount
budget was duly sanctioned by the Managing Committee. If not, bring it to the Committee's notice in your
report.
xx. See that increase in the salaries of the staff have been sanctioned and minuted by the Committee.
xxi. Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs, clothing and other
equipment is efficient and all bills are duly authorised and passed before payment.
xxii. Verify the inventories of furniture, stationery, clothing, provision and all equipment etc. These should be checked
by reference to Stock Register or corresponding inventories of the previous year and values applied to various
items should be test checked.
xxiii. Confirm that the refund of taxes deducted from the income from investment (interest on securities etc.)
has been claimed and recovered since the institutions are generally exempted from the payment of income-
tax.
xxiv. Finally, verify the annual statements of account and, while doing so see that separate statements of account
have been prepared as regards Poor Boys Fund, Games Fund, Hostel and Provident Fund of staff, etc.
November 2012 Exam
Q4. What are the eight audit points to be considered by the auditor during the audit of a Hospital (8 Marks)
May 2013 Exam
Q5. Mention important points which auditors will consider while conducting audit of accounts of a partnership firm. (8 Marks)
Answer- Important points which auditors will consider while conducting audit of accounts of a partnership firm are:
i. Confirming that the letter of appointment, signed by a partner, duly authorised, clearly states the
nature and scope of audit contemplated by the partners, specially the limitation, if any, under which the
auditor shall have to function.
ii. Studying the minute book, if any, maintained to record the policy decision taken by partners
specially the minutes relating to authorisation of extraordinary and capital expenditure,
raising of loans; purchase of assets extraordinary contracts entered into and other such matters as are not
of a routine nature.
iii. Verifying that the business in which the partnership is engaged is authorised by the partnership
agreement; or by any extension or modification thereof agreed to subsequently.
iv. Examining whether books of account appear to be reasonable and are considered
adequate in relation to the nature of the business of the partnership.
v. Verifying generally that the interest of no partner has suffered prejudicially by an activity engaged in by the
partnership which, it was not authorised to do under the partnership deed or by any violation of a provision in
the partnership agreements.
vi. Confirming that a provision for the firm's tax payable by the partnership has been made in the accounts before
arriving at the amount of profit divisible among the partners.
vii. Verifying that the profits and losses have been divided among the partners in their agreed profit-sharing ratio.
Q6. What are the points on which an auditor should concentrate while planning audit of an N.G.O. ? (8 Marks)
Answer- While planning the audit of an N.G.O, the auditor should concentrate on the following:
i. Knowledge of the NGO's work, its mission and vision, areas of operations and environment
in which it operate.
ii. Updating knowledge of relevant statutes especially with regard to recent amendments,
circulars, judicial decisions viz. Foreign Contribution (Regulation) Act 1976, Societies Registration Act,
1860, Income Tax Act 1961 etc. and the Rules related to the statutes.
iii. Reviewing the legal form of the Organisation and its Memorandum of Association, Articles of Association,
Rules and Regulations.

iv. Reviewing the NGO's Organisation chart, Financial and Administrative Manuals,
Project and Programme Guidelines, Funding Agencies Requirements and formats, budgetary policies if any.
v. Examination of minutes of the Board/Managing Committee/Governing Body/Management and Committees
thereof to ascertain the impact of any decisions on the financial records.
vi. Study the accounting system, procedures, internal controls and internal checks existing for the NGO and verify
their applicability.
vii. Setting of materiality levels for audit purposes.
viii. The nature and timing of reports or other communications.
ix. The involvement of experts and their reports.
x. Review the previous year's Audit Report.
November 2013 Exam
Q7. What procedure may be adopted by an auditor, while auditing leasing transactions entered into by the leasing
company? (8 Marks)
Answer-
In respect of leasing transaction entered into by the leasing company, the following procedures may be adopted by
the auditor.
i. The object clause of leasing company to see that the goods like capital goods, consumer durables etc. in
respect of which the company can undertake such activities. Further, to ensure that whether company can
undertake financing activities or not.
ii. Whether there exists a procedure to ascertain the credit analysis of lessee like lessee's ability to meet the
commitment under lease, past credit record, capital strength, availability of collateral security, etc.
iii. The lease agreement should be examined and the following points may be noted:
→ the description of the lessor, the lessee, the equipment and the location where the equipment is to be
installed. (The stipulation that the equipment shall not be removed from the described location except
for repairs. For the sake of identification, the lessor may also require plates or markings to be attached
to the equipment).
→ the amount of tenure of lease, dates of payment, late charges, deposits or advances etc. should be
noted.
→ whether the equipment shall be returned to the lessor on termination of the agreement and the cost
shall be borne by the lessee.
→ whether the agreement prohibits the lessee from assigning the subletting the equipment and authorises
the lessor to do so.
iv. Examine the lease proposal form submitted by the lessee requesting the lessor to provide him the equipment
on lease.
v. Ensure that the invoice is retained safely as the lease is a long-term contract.
vi. Examine the acceptance letter obtained from the lessee indicating that the equipment has been received in
order and is acceptable to the lessee.
vii. See the Board resolution authorising a particular director to execute the lease agreement has been passed by
the lessee.
viii. See that the copies of the insurance policies have been obtained by the lessor for his records.
Q8. Mention any eight important points which an auditor will consider while conducting audit of club? (8 Marks)
Answer- Audit of Club: A club Is usually constituted as a company limited by guarantee. Therefore, various provisions of
the Companies Act, 2013 relating to the audit of accounts of companies are also applicable to its audit. The special
steps involved in such an audit are stated below:
i. Vouch the receipt on account of entrance fees with members' applications, counterfoils issued to them, as well
as on a reference to minutes of the Managing Committee.
ii. Vouch members' subscriptions with the counterfoils of receipt issued to them, trace receipts for a selected
period to the Register of Members; also reconcile the amount of total subscriptions due with the amount
collected and that outstanding.
iii. Ensure that arrears of subscriptions for the previous year have been correctly brought over and arrears for the
year under audit and subscriptions received in advance have been correctly adjusted.
iv. Check totals of various columns of the Register of members and tally them across.
v. See the Register of Members to ascertain the Member's dues which are in arrear and enquire whether
necessary steps have been taken for their recovery; the amount considered irrecoverable should be
mentioned in the Audit Report.

vi. Verify the internal check as regards members being charged with the price of foodstuffs and drinks provided
to them and their guests, as well as, with the fees chargeable for the special services rendered, such as billiards,
tennis, etc.
vii. Trace debits for a selected period from subsidiary registers maintained in respect of supplies and services to
members to confirm that the account of every member has been debited with amounts recoverable from him.
viii. Vouch purchase of sports items, furniture, crockery, etc. and trace their entries into the respective stock
registers.
ix. Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale price so as to confirm that the normal rates
of gross profit have been earned on their sales. The stock of unsold provisions and stores, at the end of year,
should be verified physically and its valuation checked.
x. Check the stock of furniture, sports material and other assets physically with the respective stock registers or
inventories prepared at the end of the year.
xi. Inspect the share scrips and bonds in respect of investments, check their current values for disclosure in final
accounts; also ascertain that the arrangements for their safe custody are satisfactory.
xii. Examine the financial powers of the secretary and, if these have been exceeded, report specific case for
confirmation by the Managing Committee.
RTP November 2013
Q9. M/s GRS & Co has been appointed to audit the accounts of a Hospital in Delhi. What special steps will you as an auditor
suggest to take into consideration in auditing the accounts of this hospital?
Answer-
Audit of Hospital
May 2014 Exam
Q10. State the background of 'Local Bodies". Draft an audit programme for audit of local bodies. (8 Marks)
Answer- Background of Local Bodies: A municipality can be defined as a unit of local self- government in an urban
area. By the term 'local self-government' is ordinarily understood the administration of a locality - a village, a town, a
city or any other area smaller than a state - by a body representing the local inhabitants, possessing fairly large
autonomy, raising at least a part of its revenue through local taxation and spending its income on services which are
regarded as local and, therefore, distinct from state and central services.
Municipal government in India covers five distinct types of urban local authorities, viz., the municipal corporations, the
municipal councils, the notified area committees, the town area committees and the cantonment committees.
Audit Programme for local bodies:
i. The Local Fund Audit Wing of the State Govt, is generally in charge of the audit of municipal accounts.
Sometimes bigger municipal corporations e.g. Delhi, Mumbai etc have power to appoint their own auditors for
regular external audit. So the auditor should ensure authenticity of his appointment.
ii. The auditor while auditing the local bodies should report on the fairness of the contents and presentation of
financial statements, the strengths and weaknesses of system of financial control, the adherence to legal
and/or administrative requirements; upon whether value is being fully received on money spent. His objective
should be to detect errors and fraud and misuse of resources.
iii. The auditor should ensure that the expenditure incurred conforms to the relevant provisions of the law and is in
accordance with the financial rules and regulations framed by the competent authority.
iv. He should ensure that all types of sanctions, either special or general, accorded by the competent authority.
v. He should ensure that there is a provision of funds and the expenditure is incurred from the provision and the
same has been authorized by the competent authority.
vi. The auditor should check that the different schemes, programmes and projects, where large financial
expenditure has been incurred, are running economically and getting the expected results.
Q11. Mention any eight important points which an auditor will consider while conducting the audit of hospital.
Answer- Audit of Hospital: The points to be considered by the auditor during the audit of a Hospital are stated below:-
i. Income from Services: Vouch the Register of patients with copies of bills issued to them. Verify bills for a selected
period with the patients' attendance record to see that the bills have been correctly prepared. Also see that
bills have been issued to all patients from whom an amount was recoverable according to the rules of the
hospital.
ii. Collection of cash: Check cash collections as entered in the Cash Book with the receipts, counterfoils and other
evidence for example, copies of patients bills, counterfoils of dividend and other interest warrants, copies of
rent bills.
iii. Income from Investments: See by reference to the property and Investment Regis¬ter that all income that
should have been received by way of rent on properties, dividends, and interest on securities settled on the
hospital, has been collected.
iv. Legacies and Donations: Ascertain that legacies and donations received for a specific purpose have been
applied in the manner agreed upon.

v. Reconciliation of Subscriptions: Trace all collections of subscription and donations from the Cash Book to the
respective Registers. Reconcile the total subscriptions due (as shown by the Subscription Register and the
amount collected and that still outstanding).
vi. Authorisation and Sanctions: Vouch all purchases and expenses and verify that the capital expenditure was
incurred only with the prior sanction of the Trustees or the Managing Committee and that appointments and
increments to staff have been duly authorised.
vii. Grants and TDS: Verify that grants, if any, received from Government or local authority has been duly
accounted for. Also, that refund in respect of taxes deducted at source has been claimed.
viii. Budgets: Compare the totals of various items of expenditure and income with the amount budgeted for them
and report to the Trustees or the Managing Committee significant variations which have taken place.
ix. Internal Check: Examine the internal check as regards the receipt and issue of stores; medicines, linen,
apparatus, clothing, instruments, etc. so as to ensure that purchases have been properly recorded in the Stock
Register and that issues have been made only against proper authorisation.
x. Depreciation: See that depreciation has been written off against all the assets at the appropriate rates.
xi. Registers: Inspect the bonds, share scrips, title deeds of properties and compare their particulars with those
entered in the property and Investment Registers.
xii. Inventories: Obtain inventories, especially of stocks and stores as at the end of the year and check a
percentage of the items physically; also compare their total values with respective ledger balances.
xiii. Management Representation and Certificate: Get proper Management Representation and Certificate with
respect to various aspects covered during the course of audit.
RTP May 2014

Q12. Describe the salient features of Financial Administration of Local Bodies
Answer
Salient Features of Financial Administration of Local Bodies
i. Budgetary Procedure: The objective of local bodies budgetary procedure are financial accountability, control
of expenditure, and to ensure that funds are raised and moneys are spent by the executive departments in
accordance with the rules and regulations and within the limits of sanction and authorisation by the legislature
or Council. Different aspects covered in budgeting are determining the level of taxation, fees, rates, and laying
down the ceiling on expenditure, under revenue and capital heads.
ii. Expenditure Control: At the State and Central level, there is a clear demarcation between the legislature and
executive. In the local body, legislative powers are vested in the Council whereas executive powers are
delegated to the officers, e.g., Commissioners. All matters of regular revenue and expenditures are generally
delegated to the executive wing. For special situations like, reduction in property taxes, refund of security
deposits, etc., sanction from the legislative wing is necessary.
iii. Accounting System: Municipal Accounting System has been conventionally prepared under the cash system.
In the recent past however, it is being changed to the accrual system of accounting. The accounting system
is characterized by (a) subsidiary and statistical registers for taxes, assets, cheques etc., (b) separate vouchers
for each type of transaction, (c) compulsory monthly bank reconciliation, (d) submission of summary reports
on periodical basis to different authorities at regional and state level.
Q13. Draft an audit programme for conducting audit of accounts of a Local Body
Answer
RTP November 2014
Q14. State any five special points which you, as an auditor, would look into while examining the income and collection of
fund by an NGO engaged in providing relief work for flood victims.
Answer-
Five special points to be looked into while examining the income and collection of funds by an NGO engaged in
providing relief work for flood victims are:-
i. Grant donations and contributions received from various Government, other NGO, industry and
public should be checked with reference to the grant letter, bank statements and ensured that
they are properly accounted and banked.
ii. Foreign contribution received should be checked with reference to the correspondence receipt
issued, bank statement, conversion into local currency. It should be ensured that all such contributions are
as per RBI guidelines and be kept in separate bank account.
iii. In the case of any fund raising cultural or sports program, verify the internal control
system, mode of receipt and the authority accountable. Ensure that all collections are duly receipted and
deposited in the bank promptly.

iv. Check the fee received from members with the register of members.
v. Check interest and dividend received from investments with investment held.
Q15. You are approached by a partnership firm to list out the advantages that will accrue to them, if the accounts are
audited. State five important advantages.
Answer-
Advantages of audit of accounts of a partnership firm: Advantages are as follows (any five):
i. Audited accounts provide a convenient and reliable means of settling accounts between the partners
and thereby possibility of dispute among them is mitigated.
ii. On the retirement/death of a partner, audited accounts constitutes a reliable evidence for computing the
amount due to the retiring partner or representative of deceased partner.
iii. Audited accounts are generally accepted by the Income tax authorities for computing the
assessable income.
iv. Audited accounts are relied upon by banks for advancing loan.
v. negotiation for sale or admission of a new partner.
Audited accounts can be helpful in the
vi. It is an effective safeguard against any undue advantage being taken by a working partner
as against the non working partners.
November 2014 Exam

Q16. Mention 8 important points which an auditor will consider while conducting the audit of a school.
Audit of School: The special steps involved in the audit of school are the following:
(i) Examine the Trust Deed or Regulations in the case of school or college and note all the provisions affecting
accounts. In the case of a university, refer to the Act of Legislature and the Regulations framed there under.
(ii) Read through the minutes of the meetings of the Managing Committee or Governing Body, noting resolutions
affecting accounts to see that these have been duly complied with, specially the decisions as regards the
operation of bank accounts and sanctioning of expenditure.
(iii) Check names entered in the Students' Fee Register for each month or term, with the respective class registers,
showing names of students on rolls and test amount of fees charged; and verify that there operates a system
of internal check which ensures that demands against the students are properly raised.
(iv) Check fees received by comparing counterfoils of receipts granted with entries in the cash book and tracing
the collections in the Fee Register to confirm that the revenue from this source has been duly accounted for.
(v) Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in advance
have been carried forward and the arrears that are irrecoverable have been written off under the sanction of
an appropriate authority.
(vi) Check admission fees with admission slips signed by the head of the institution and confirm that the amount
had been credited to a Capital Fund, unless the Managing Committee has taken a decision to the contrary.
(vii) See that free studentship and concessions have been granted by a person authorized to do so, having regard
to the prescribed Rules.
(viii) Confirm that fines for late payment or absence, etc., have either been collected or remitted under proper
authority.
(ix) Confirm that hostel dues were recovered before students' accounts were closed and their deposits of caution
money refunded.
(x) Verify rental income from landed property with the rent rolls, etc.
(xi) Vouch income from endowments and legacies, as well as interest and dividends from investment; also inspect
the securities in respect of investments held.
(xii) Verify any Government or local authority grant with the relevant papers of grant. If any expense has been
disallowed for purposes of grant, ascertain the reasons and compliance thereof.
(xiii) Report any old heavy arrears on account of fees, dormitory rents, etc, to the Managing Committee.

(xiv) Confirm that caution money and other deposits paid by students on admission have been shown as liability in
the balance sheet and not transferred to revenue.
(xv) See that the investments representing endowment funds for prizes are kept separate and any income in excess
of the prizes has been accumulated and invested along with the corpus.
(xvi) Verify that the Provident Fund money of the staff has been invested in appropriate securities.
(xvii) Vouch donations, if any, with the list published with the annual report. If some donations were meant for any
specific purpose, see that the money was utilized for the purpose.
(xviii) Vouch all capital expenditure in the usual way and verify the same with the sanction for the Committee as
contained in the minute book.
(xix) Vouch in the usual manner all establishment expenses and enquire into any unduly heavy expenditure under
any head.
(xx) See that increase in the salaries of the staff have been sanctioned and minuted by the Committee.
(xxi) Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs, clothing and other
equipment is efficient and all bills are duly authorized and passed before payment.
(xxii) Verify the inventories of furniture, stationery, clothing, provision and all equipment, etc. These should be
checked by reference to Stock Register and values applied to various items should be test checked.
(xxiii) Confirm that the refund of taxes deducted from the income from investment (interest on securities, etc.) has
been claimed and recovered since the institutions are generally exempted from the payment of income-tax.
(xxiv) Verify the annual statements of accounts and while doing so see that separate statements of account have
been prepared as regards Poor Boys Fund, Games Fund, Hostel and Provident Fund of Staff, etc.
Q17. Mention any ten special points to be examined by you in the audit of Income and Expenditure of a Charitable
Institution running a hospital.
Audit of Hospital: While auditing the Income and Expenditure Account of a charitable institution running a hospital,
following special points may be examined:
(i) Verify the register of patients with duplicate copy of bills and patients admission record to see that bills
have been properly and correctly prepared for all the services, tests and treatments.
(ii) Check cash collections from patients by tracing the receipt issued into cash book.
(iii) Check receipt of interest, rent, dividend etc., with receipt counterfoil into cash book and bank book
and ensure that all such income has been duly accounted for.
(iv) Check collection of subscription, donations from the receipt issued, correspondence etc., into cash
book.
(v) Verify that all grants from government and other bodies have been duly accounted for and have been
applied in the manner as specified.
(vi) Verify all recurring nature of revenue expenditure, with necessary evidence like bill, authority, period
etc.
(vii) Examine the internal check as regards the receipt and issue of stores, medicines, linen etc., to ensure
that these have been properly recorded and issued/consumed only on proper authorization.
(viii) See that depreciation has been written off in respect of all the assets at appropriate rate and method
as in the earlier year.
(ix) Verify the receipts from supply of food and canteen receipts and compare the same with previous
year as regards number of patients.
(x) Ensure that all outstanding liabilities have been adequately provided for and similarly all accrued
incomes and receipts have been duly accounted for.
(xi) Obtain inventory of stock and stores as at the end of the year and physically check a percentage of
items.

May 2015 Exam
Q18. What are the advantages of the audit of the accounts of a partnership firm? (6 Marks)
Q19. State the important objectives of local body's audit. (4 Marks)
Objectives of Audit of Local Bodies: The external control of municipal expenditure is exercised by the state
governments through the appointment of auditors to examine municipal accounts. The municipal corporations
of Delhi, Mumbai and a few others have powers to appoint their own auditors for regular external audit. The
important objectives of audit are-
• reporting on the fairness of the content and presentation of financial statements;
• reporting upon the strengths and weaknesses of systems of financial control;
• reporting on the adherence to legal and/or administrative requirements;
• reporting upon whether value is being fully received on money spent; and
• detection and prevention of error, fraud and misuse of resources
RTP – November 2015
Q20. What procedure may be adopted by an auditor while auditing leasing transactions entered into by the leasing
company?
Q21. What are the special steps involved in conducting the audit of a University?

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C14 – CARO, 2016
Chapter – 14
COMPANIES (AUDITOR'S REPORT) ORDER, 2016
Applicability
It shall apply to every company Clarifications while computing limits w.r.t. private limited company:
including a foreign company as defined in 1. Loans from banks or financial institutions are normally in the form
clause (42) of section 2 of the Companies of term loans, demand loans, working capital limits, cash credits,
Act. 2013 except- overdraft facilities, bills purchased or discounted.
(i) a banking company as defined
2. Outstanding balances of such loans should be considered as loan
in clause (c) of section 5 of the
outstanding for the purpose of computing the limit of rupees one
Banking Regulation Act, 1949 (10 of
crore.
1949);
(ii) an insurance company as 3. It is clarified that since the words used by the order are 'any bank
defined under the Insurance Act. or financial institution’, the limit of exceeding one crore rupees
1938 (4 of 1938); applies in aggregate to all loans:
(iii) a company licensed to operate
under section 8 of the 4. As per schedule III of Companies Act 2013 "Reserves & Surplus"
Companies Act; consists of:-
(iv) a One Person Company as  Capital Reserves;
defined under clause (62) of section  Capital Redemption Reserve;
2 of the Companies Act and a  Securities Premium Reserve;
small company as defined  Debenture Redemption Reserve;
under clause (85) of section 2 of the  Revaluation Reserve;
Companies Act; and  Share Options Outstanding Account;
 Surplus i.e. balance in Statement of Profit and Loss (Debit
(v) a private limited company,
balance of Statement of Profit and Loss shall be shown as a
not being a subsidiary or holding
negative figure under the head "Surplus".
company of a public company,
having a paid up capital and 5. For determining the applicability of the Order to a private limited
reserves and surplus not company, both capital as well as revenue reserves should be taken
more than Rs. 1 crore as into consideration while computing the limit of Rs. 1 crore;
on the balance sheet date prescribed for paid-up capital and reserves & surplus.
and which does not have total
Revaluation reserve, if any, should also be taken into consideration
borrowings exceeding Rs.
while determining the figure of reserves for the limited purpose of
1 crore from any bank or determining the applicability of the Order.
financial institution at any
point of time during the In case of debit balance of profit and loss, the same shall be netted
financial year and which does for computing reserves & surplus. To summarize, total of reserves
not have a total revenue as and surplus as disclosed in the financial statements should be
disclosed in Scheduled III considered in evaluating the threshold.
to the Companies Act,
6. Revenue
2013 (including revenue The term, "revenue", has been defined by the Order as total
from discontinuing revenue disclosed in Schedule III of the Act. Accordingly, the total
operations) exceeding Rs. revenue would include other income as per Schedule III. Here
10 crore during the financial year revenue will also include revenue from discontinuing operations as
as per the financial statements. specified in the Order.
[Note: Small company is a company

(other than public company) whose paid
up capital does not Rs. exceed 50 lakhs &
turnover as per last P&L A/c does not
exceed 2 crores. But following shall not
he termed as small companies: (a)
Holding or subsidiary Co. (b) U/s 8
company (c) Company/Body corporate
under any special Act]


Matters to be included in the auditor’s report under CARO, 2016

Fixed Assets
• Whether the company is maintaining proper records showing full
o particulars, including (Fixed asset register)
o quantitative details and (For Verification)
o situation of fixed assets.
(a) These records should also contain particulars in respect of those items of fixed
assets that have been fully depreciated or amortized or have been
retired from active use and held for disposal.
(b) The records should also contain necessary particulars in respect of item of fixed
assets that have been fully impaired during the period covered by the audit
report.
(c) Where assets like furniture etc., are located in the residential premises
of members of the staff, the fixed assets register should indicate the
name/ designation of the person.
• Whether these fixed assets have been

o physically verified
o by the management
o at reasonable intervals;
• Whether any material discrepancies were noticed on such verification and if so, whether the
same have been properly dealt with in the books of account.
NOTES
▪ Physical verification of the assets has to be made by the management and not by the
auditor.
▪ The auditor may observe the verification, particularly when verification of all assets
can be made by the management on a single day or within a relatively short period of
time.
▪ It is necessary to ensure that the person making the verification had the
required technical knowledge, where such knowledge is required.
▪ It is also possible for verification to be made by outside expert agencies
engaged by the management for the purpose.
• Whether the title deeds of immovable properties are held in the name of the company. If not,
provide the details thereof.
NOTES
▪ The auditor should obtain the fixed asset register and reconcile it with the
title deeds of immovable properties.
▪ He should seek confirmation from banks if the title deeds have been kept with
them as a charge against loan.

Inventory
Whether
• physical verification of inventory has been conducted at
• reasonable intervals by the management and
Whether any material discrepancies were noticed and if so, whether they have been properly dealt
with in the books of account.
NOTES
o Inventories include goods purchased and held for resale, for example, merchandise purchased by a
retailer and held for resale.
o Inventories also include finished goods produced, or work in progress and materials, stores and
spares, consumables and lose tools.
o Physical verification of inventory is the responsibility of the management of the company.
o The periodicity of the physical verification of inventories depends upon the nature of
inventories and their location.
o This would require the auditor to make use of his professional judgment.
o The SA-501, "Audit Evidence - Additional Consideration for specific
items", lays down the guidance regarding the audit procedures to be applied for physical
verification of inventory.
Loan Granted.
Whether the company has granted any loans, secured or unsecured to companies, firms, Limited Liability
Partnerships or other parties covered in the register maintained under section 189 of the Companies Act,
2013. If so,
o Whether the terms and conditions of the grant of such loans are not prejudicial to the
company's interest.
o Whether the schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular.
o if the amount is overdue, state the total amount overdue for more than ninety
days, and whether reasonable steps have been taken by the company for recovery of the
principal and interest
NOTES
1. The auditor should obtain a list of companies, firms or other parties covered in the register maintained under
Section 189 of the Act from the management.
2. The auditor should also take into consideration the loan transactions that have been squared-up during the
year.
Section 185 & 186 Compliance

In respect of loans, investments, guarantees, and security whether provisions of section
185 and 186 of the Companies Act, 2013 have been complied with. If not, provide the details thereof.
NOTES
• As per section 185 of the companies Act, 2013, no company shall directly or indirectly -
(a) advance any loan to a "specified person".
(b) give any guarantee in connection with a loan taken by a "specified person"
(c) provide any security in connection with a loan taken by a "specified person".
except in certain cases.

• As per the provision of section 186 of the companies Act, 2013, if the loans, investments etc. already made by
the company along with loans, investments etc. proposed to be made by the company exceed the limit
specified under section 186(2), approval by special resolution is required.
• Moreover, approval of board is required prior to making any loan, or giving any guarantee or providing any
security to any person or investing in securities of anybody corporate, irrespective of amount involved therein.
• Auditor should obtain the copies of board resolution and SR. if any, to check compliance with section 186.
• Section 186 requires following disclosures in financial statement as well:
(i) full particulars of loans, investments etc.
(ii) purpose of the recipient
Auditor shall, after examining the same, comment under this clause accordingly.
Deposits
In case the company has accepted deposits from the public, whether the
• directives issued by the Reserve Bank of India and
• the provisions of Sections 73 to 76 or
• any other relevant provision of the Act and the rules framed there under,
have been complied with.
If not, the nature of contraventions should be stated;
If an order has been passed by Company Law Board or National Company Law Tribunal or Reserve Bank of India or
any court or any other tribunal, whether the same has been complied with or not?
Cost Records
Where maintenance of cost records have been prescribed by the central Government under section 148(1) of the
Act, whether such accounts and records have been made and maintained.
NOTES
• The auditor should obtain a written representation from the management.
• The auditor should, conduct a general review of the cost records to ensure that the records as prescribed arc
made and maintained.
DUES

Dues
whether the company is where dues of income tax or sales tax or

regular in depositing service tax or duty of customs or duty of
undisputed statutory excise or value added tax
dues
have not been deposited on

including provident fund, employees'
account of any dispute,
state insurance, income-tax, sales-tax,
etc
then the amounts involved and the
forum where dispute is pending shall
Yes No be mentioned.
(A mere representation to the concerned

Extent Of Arrears Department shall not be treated as a dispute).
OK
of outstanding statutory dues as on

the last day of the financial year
for a period of more than six months from the

date they became payable, shall be indicated
Repayment of Loan or Borrowings
Whether the company has defaulted in repayment of loans or borrowing to a financial institution, bank, Government
or dues (Principal as well as interest) to debenture holders?
If yes,
• the period and
• the amount of default to be reported
• (in case of defaults to banks, financial institutions, and Government, lender wise details to be provided).
NOTES
1. Auditors should obtain a list of loans and borrowings from FI. banks and government & dues to debenture
holders from the management.
2. He should obtain confirmation from lenders in accordance with SA-550.
3. The term 'Government' here does not include government company.
4. The auditor should obtain a schedule of repayments to banks, financial institutions, government and
debenture- holders from the management of the company.
5. The auditor should examine the agreement or other documents containing the terms and
conditions of the loans and borrowings of the company from banks and financial institution.
6. The auditor should also examine the debenture trust deed.
7. It is clarified that the auditor should report the period and amount of all defaults existing at the balance
sheet data irrespective of when those defaults have occurred

Moneys raised by way of initial public

Whether moneys raised by way of
• initial public offer or
• further public offer (including debt instruments) and
• term loans
were applied for the purposes for which those are raised.
If not, the details together with delays or default and subsequent rectification, if any, as may be applicable, be
reported
Fraud on or by Company
Whether any fraud on or by the company has been noticed or reported during the year, if yes, the nature and the
amount involved is to be indicated.
NOTES
1. The clause does not require the auditor to discover the on the company and by the company.
2. The auditor is also required to comply with the requirements of SA-240.
3. The auditor should examine the reports of the internal auditor with a view to ascertain whether any fraud has
been reported or noticed by the management.
4. The auditor should also discuss the matter with other employees of the company. The auditor should also
examine the minute book of the board meeting of the company in regard.
Managerial Remuneration
Whether managerial remuneration has been paid or provided in accordance with the requisite approvals mandated
by the provisions of section 197 read with Schedule V to the Companies Act? If not. state the amount involved and
steps taken by the company for securing refund of the same.
1. As per the provisions of section 197 of the Companies Act, 2013. remuneration of directors and manager of a
company (other than a private company) shall be maximum 11% of net profit.
2. Calculation of net profit shall be made as per section 198 except that remuneration of directors shall not be
deducted.
3. Sitting fee is payable to a director for attending board meeting or committee meeting.
4. Amount of sitting fee can be maximum Rs. 1 lakh per board meeting to each director.
5. Auditor should check attendance records to cross verify the payment of sitting fees.
6. Sitting fess can be paid even if the company has incurred a loss.
7. In case of no profit or inadequate profits remuneration exceeding 11 % may be paid -
(a) in accordance with the provisions of schedule V or
(b) with the previous approval of CG
8. Remuneration to directors can be paid by following modes: -
(i) monthly payments, or
(ii) specified percentage of net profits, or
(iii) partly by monthly payment and partly by specified percentage of net profits.
9. In case excess remuneration has been paid by the company the director shall refund such sum to the company.
Auditor shall also examine if same has been refunded or not. If not he shall state the steps taken by the company
for recovery of same.
10. Thus, auditor shall comment on compliance with section 197 under this clause.

NIDHI Company
whether the Nidhi Company has complied with the Net Owned Funds to Deposits in the ratio of 1: 20 to meet out
the liability and whether the Nidhi Company is maintaining ten per cent unencumbered term deposits as specified
in the Nidhi Rules, 2014 to meet out the liability.
Related Party Transaction

Whether all transactions with the related parties are in compliance with sections 177 and 188 of Companies Act,
2013 where applicable and the details have been disclosed in the Financial Statements etc., as required by the
applicable accounting standards.
NOTES
1. As per requirements of section 188, all related party transactions (which are not arm's length transactions)
require board resolution.
2. Moreover, if such transactions exceed limits as provided, approval by members is also obtained in general
meeting.
3. In this regard, auditor shall read the agenda of board meeting wherein such proposal was considered. He shall
obtain a copy of board resolution approving such transaction with related party.
3. In case member's approval was required, he shall obtain a copy of such resolution also, to check compliance with
section 188.
4. In case, company is required to constitute audit committee as per the provision of section 177 of the companies
Act' 2013. the transactions with related parties require approval of audit committee.
5. The auditor shall examine if approval of audit committee has been obtained or not.
6. For this he shall examine the minutes of the meeting of the audit committee.
7. As per relevant Accounting standard, (AS-18) the transaction with related party needs to be disclosed within
financial statements by the management.
8. The auditor shall, as per SA - 550 "Related Parties", ensure that all the details with respect to such transactions
have been provided in accordance with applicable accounting standards.
Preferential allotment or private placement of shares

Whether the company has made any preferential allotment or private placement of shares or fully or partly
convertible debentures during the year under review and if so, as to whether the requirement of section 42 of the
Companies Act, 2013 have been complied with and the amount raised have been used for the purposes for which
the funds were raised. If not, provide the details in respect of the amount involved and nature of non-compliance.
1. As per the provisions of section 42 of the companies Act, 2013, a company may make private placement through
issue of a private placement offer letter.
2. It can be made to such number of persons not exceeding prescribed number in a financial year and on such
conditions as may be prescribed.
3. Any offer or invitation not in compliance with the provisions of section 42 shall be treated as a public offer.
4. He shall obtain a written representation from management & TCWG as well.
5. He should examine if the funds raised have been used for the purposes for which the funds were raised.
6. He should study the funds flow statement to verify the application of funds.
NON Cash Transaction with Directors

whether the company has entered into any non-cash transactions with directors or persons connected with him and if so,
whether the provisions of section 192 of Companies Act, 2013 have been complied with;
1. As per section 192 of the companies Act' 2013. prior approval of the company in GM is required for an arrangement by
which: -
(a) A director of the company or its holding, subsidiary or associate company or a person connected with him acquires
or is to acquire assets for consideration other than cash from the company.or
(b) The Company acquires or is to acquire assets for consideration other than cash, from such director or person so
connected.

2. The Auditor shall obtain a copy of resolution passed in GM. if there has been any non-cash transaction between the company
and directors or persons connected with him.
3. He should also consider whether notice of such GM include the particulars of the arrangement along with the value of the
assets involved in such arrangement.
NBFC
Whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether
the registration has been obtained.
NOTES
(1) Section 45-1A of the Reserve Bank of India Act, 1934 requires a non-banking financial company to be registered with
RBI.
(2) Without obtaining registration certificate, a company cannot commence the business of non-banking financial
company (NBFC)
(3) The auditor shall obtain a copy of such registration certificate from the company.
Reasons to he stated for unfavourable or qualified answers (Paragraph 4)

Where, in the auditor's report, the answer to any of the questions referred as above is unfavourable or qualified, the auditor's
report shall also state the basis for such unfavourable or qualified answer, as the case may be.
Where the auditor is unable to express any opinion on any specified matter, his report shall indicate such fact together with the
reasons as to why it is not possible for him to give his opinion on the same.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C15 –Misc Items Under Company Act 2013
Misc. Items Under Companies Act, 2013
DIVIDEND
Sources of dividend (Section 123 of the Companies Act, 2013)

Examine that dividend has been declared only out of:
(a) Profits of the company for that financial year (after providing for depreciation)
(b) Profits of the company for any previous financial year(s) and remaining undistributed (after providing for depreciation)
(c) Moneys provided by the Central Government or State Government in pursuance of a guarantee given by it.
Transfer to reserves (Section 123 of Companies Act, 2013)

A company may, before the declaration of any dividend in any financial year, transfer such percentage of its profits for that financial year as
it may consider appropriate to the reserves of the company.
Declaration of dividend out of reserves (Section 123 of Companies Act, 2013)

(a) Where, owing to inadequacy or absence of profits in any financial year, any company proposes to declare dividend out of the
accumulated profits earned by it in previous years and transferred by the company to the reserves, such declaration of dividend
shall not be made except in accordance with such Rules as may be prescribed in this behalf.
(b) No dividend shall be declared or paid by a company from its reserves other than free reserves.
Provision for Depreciation

Depreciation shall be provided in accordance with the provisions of Schedule II.
Mode of payment
 No dividend shall be payable except in cash, i.e; dividend shall be payable only in cash.
 However, payment of dividend by issue of a cheque or dividend warrant or payment of dividend in electronic mode is also
permissible.
 However, issue of bonus shares or payment of a bonus call by capitalizing the profits; or reserves is permissible.
 Thus, auditor should ensure compliance with the same.
Deposit of dividend
 Examine whether it has been deposited in a separate bank account within 5 days of declaration of dividend. Check bank statement
w.r.t. same.
 The amount so deposited shall be used only for the purpose of payment of dividend (whether interim or final).
Dividend declared but remaining unpaid

 Check that any dividend declared but remaining unpaid or unclaimed for 30 days from the date of its declaration has been
transferred to unpaid dividend account.
 The transfer shall be made within 7 days to a special account in any scheduled bank to be called 'Unpaid Dividend Account of
Company Limited/Company (Private) Limited'.
 Any money transferred to the unpaid dividend account of a company which remains unpaid for 7 years from the date of such transfer
shall be transferred by the company to the Fund called 'investor Education and Protection Fund'. Examine compliance with this
requirement also.
Penalty for non-payment (Section 127 of Companies Act, 2013)

(a) Director
Every director who is knowingly a party to the default shall be liable for simple imprisonment up to 2 years and a fine of Rs. 1,000
per day for each day of default.
(b) Company
The company shall be liable to pay simple interest @ 18% per annum during the period for which the default continues.
Dividend etc. to be held in abeyance (Section 126 of the Companies Act, 2013)
Where a duly signed transfer deed is deposited with the company, but the transfer of shares has not yet been registered by the company, the
company shall –
(a) Transfer the dividend in relation to such shares to the Unpaid Dividend Account, unless the registered shareholder authorizes the
company to pay such dividend to the transferee.
(b) Keep in abeyance in relation to such shares any offer of rights shares or bonus shares.
Remuneration paid to directors

For public company, certain requirements of the Companies Act, 2013 have to be complied with, which are as follows;
Specific provisions are required for remuneration as per -

 Articles; or
 Resolution in GM
It can be paid as -
 Fee for attending meetings
 Monthly/quarterly or annual salary for whole time director
(1) Thus, Auditor should check the authorization level to release the payment.
(2) Auditor should seek the attendance record from the company.
(3) Check the computation of director remuneration to ensure compliance with requirement of the Companies Act, 2013.
(4) Ensure that proper disclosure has been made in financial statements w.r.t same.
(5) Auditor should examine compliance with section 197 which prescribes:
 manner of payment of managerial remuneration.
 overall limit to managerial remuneration.
 increase in remuneration with the approval of the Central Government.
(6) He should also consider compliance with the conditions for payment of remuneration for companies having no
profits or inadequate profits and companies having negative effective capital (Schedule V)
Payments controlled by the Companies Act 2013
Provisions of the Companies Act, 2013 which should be considered by the Auditor, are as under:
As per Sec. 180 of the Companies Act, 2013, the Board of directors of a company shall exercise the following powers only with the consent of
the company by a special resolution
(a) Sell, lease or dispose of—

- the whole / substantially the whole
- of one or more undertakings of the company.
(b) Investment of compensation received by the company

- as a result of any merger or amalgamation.
- Exception: Consent of members by way of SR is not required
- if such compensation is invested in trust securities
- specified u/s 20 of the Indian Trusts Act.
(c) Borrowing of money if-

- money already borrowed, together with moneys proposed to be borrowed
- will exceed the aggregate of paid up capital and free reserves.
(d) Remission, or give time for the repayment

- of a debt due by a director.
181.The Board of Directors of a company may contribute to bona fide charitable and other funds:
Provided that prior permission of the company in general meeting shall be required for such contribution
in case any amount the aggregate of which, in any financial year, exceed five per cent of its average net
profits for the three immediately preceding financial years.
As per Sec. 182 of the Companies Act, 2013, -

(a) Following companies are prohibited from making any political contribution:
(i) A Government company
(ii) Any company which is in existence for less than 3 FYs.
(b) Any other company may make political contribution up to 7.5% of average net profits during 3 immediately preceding FYs
(c) The company shall disclose in the P&L Account, the name of the political party and the amount of political contribution
made.
As per Sec. 183 of the Companies Act, 2013, -

(a) The Board is authorized to contribute to National Defence Fund without any restriction.
(b) The company shall disclose in the P&L Account, the amount contributed.
Q1. (MISC Question) Janta Ltd. has made a contribution of Rs. 7.8 lacs during the financial year ended 31 st March, 2015 to Samaj Seva
Party, political party, for running a teaching institute situated in the rural area, where most of the workers of the company reside. It
is admitted that the benefit of the institute is mostly for the children of the workers of the company. The average net profit of the
company during the three immediately preceding financial years was Rs. 100 lakhs. Comment.
Restrictions regarding Political Contribution: Section 182 of the Companies Act, 2013 deals with prohibitions and restrictions regarding
political contributions. According to this section, a government company or any other company which has been in existence for less than
three financial years cannot contribute any amount directly or indirectly to any political party.
In other cases, aggregate contribution in any financial year should not exceed seven and a half percent of average net profit during the
three immediately preceding financial years.
In the given case, Janta Ltd. has made a contribution of Rs. 7.8 lacs to Samaj Seva Party, a political party. The average net profit of the
company during the three immediately preceding financial years is Rs. 100 lakhs and the 7.5 % of this works out to Rs. 7.5 lacs.
As the company has contributed Rs. 7.8 lacs, there is a violation of the provisions of section 182 of the Companies Act, 2013 although the
children of its workers are benefited. Therefore, the auditor would have to qualify his report accordingly.
Q2. XYZ Ltd. Co. gave a donation of Rs. 50,000 each to a Charitable Society running a school and a trust set up for the service of Blind during
financial year ending on 31st March, 2014. The average net profits of the company for the last three years were 15 lakhs. Comment.
Answer- Donation to Charitable Institutions: Section 181 of the Companies Act, 2013 provides that the Board of Directors of a company
may contribute to bona fide charitable and other funds with prior permission of the company in general meeting for such contribution in
case any amount the aggregate of which, in any financial year, exceed five per cent of its average net profits for the three immediately
preceding financial years.
Facts of the case: In the instant case, the company has given donation of Rs. 50,000/-each to the two charitable organisations which
amounts to Rs. 1,00,000. Assuming that the charitable organisations are not related to the business of the company, the average profits of
the last 3 years is Rs. 15 lakhs and the 5% of this works out to Rs. 75,000. Hence the maximum of donation could be Rs. 75,000 only. For
excess of Rs. 25,000 the company is required to take prior permission in general meeting which is not been taken.
Conclusion: By paying donations of Rs. 1,00,000 which is more than Rs. 75,000, the Board has contravened the provisions of Section 181 of
the Companies Act, 2013. Hence the auditor should qualify his report accordingly.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance C16 –Audit of Share Capital
Chapter 16- Audit of Share Capital – Topics to

Be Covered
S.no. Topic
1. Audit of share issued for consideration other than cash
2. Audit of securities issued at premium
3. Prohibition on issue of shares at discount
4. Audit of Issue of Sweat Equity Shares
5. Audit of buy-back of securities
6. Audit of Calls In Advance
7. Redeemable preference shares
8. Alteration in capital clause of memorandum
9. Audit of forfeiture of shares
10. Option on share capital
11. Audit of transfer or transmission of securities
12. Audit of issue of bonus shares
13. Audit of debentures
Audit of shares issued for consideration other than cash

(a) Shares may be issued to underwriters towards payment of underwriting commission or to promoters for services
rendered by them. Thus, auditor should examine relevant contract entered into with such parties.
(b) Examine the Board resolution authorizing issue of shares for non-cash consideration.
(c) Ensure appropriateness of accounting treatment with respect to allotment of shares.
(d) Examine whether issue of shares for non-cash consideration has been separately disclosed in the balance sheet.
(e) Examine that the Return of Allotment sufficiently discloses that the shares have been issued for consideration
other than cash.
AUDIT OF SECURITIES ISSUED AT PREMIUM – Section 52
Auditor should examine whether the client company has followed the specific requirements of the Companies Act,
2013 w.r.t. issue of securities at a premium, which are as follows:
No condition for issue of securities at premium

 No provision is required in the articles to issue the shares at premium.
 The Companies Act, 2013 does not prescribe any restriction or condition regarding issue of shares at premium.
 22Where a company issues any shares at a premium, the amount of premium received shall be transferred to
the 'Securities Premium Account'.
Utilization of premium The 'Securities Premium Account' can be used for the following purposes:
(a) Issuing fully paid bonus shares to the members of the company.
(b) Writing off the preliminary expenses of the company.
(c) Writing off the expenses of, or commission paid, or discount allowed on, issue of shares or debentures of the
company.
(d) Providing for the premium payable on the redemption of any redeemable preference shares or debentures of
the company.
(e) For buy back of shares u/s 68 of the Companies Act, 2013.
Utilization of premium for other purposes

Where 'Securities Premium Account' is used for any purpose other than the purposes permitted under the Act,5 then,
the provisions of the Act as are applicable to reduction of share capital shall apply, as if the 'Securities Premium Account'
were the paid up share capital of the company.

Issue of securities for cash or otherwise, is immaterial The provisions of the Act w.r.t. transfer of premium received on issue
of securities to 'Securities Premium Account' and utilization 6f 'Securities Premium Account' shall apply irrespective of the
fact that the securities have been issued for cash or for consideration other than cash.
Prohibition on issue of shares at discount – Section 53
1. Prohibition
 Issue of shares at a discount is prohibited.
 The prohibition applies to all companies, whether public or private.
2. Issue to be void
 Any issue of shares at a discount shall be void.
3. Punishment for contravention

 Fine on the company: Minimum: Rs. 1 Lakh; Maximum: Rs. 5 Lakh.
 Every officer in default: Imprisonment upto 6 months or fine (Minimum: Rs. 1 Lakh; Maximum Rs. 5 Lakh)
or both.
4. No prohibition on issue of sweat equity shares

 Issue of sweat equity shares does not fall within the purview of Sec. 53 of the Companies Act, 2013.
 A company may issue sweat equity shares in accordance with the provisions of Sec. 54 of the
Companies Act, 2013.
Audit of Issue of Sweat Equity Shares

2013, which are as follows:
Definition of sweat equity shares

'Sweat equity shares' means such equity shares as are issued by a company to its directors or employees —
(a) at a discount; or
(b) for consideration, other than cash,
for providing their know-how or making available rights in the nature of intellectual property rights or value additions,
by whatever name called.
1. Nature of shares
Sweat equity shares must belong to a class of shares already issued by the company.
2. Authorization for issue

 Issue of sweat equity shares must be authorized by passing SR.
 SR passed by the company shall specify the following particulars:
(a) Number of shares
(b) Current market price
(c) Consideration, if any
(d) The class of directors or employees to whom sweat equity shares are to be issued.
3. Completion of 1 year
At the date of issue of sweat equity shares, at least 1 year has elapsed since the date on which the company
had commenced business.
4. Compliance of Rules or Regulations

Listed companies - shall comply with the regulations made by SEBI in this behalf
Unlisted companies - shall comply with the Rules prescribed by CG.
5. Issue of sweat equity shares to whom?

Sweat equity shares can be issued by a company only to its directors or employees. For this purpose, the
expression 'employee' means –
(a) a permanent employee of the company who has been working in India or outside India, for at least
last 1 year; or
(b) a director of the company, whether a whole time director or not; or

(c) an employee or a director as defined (a) or (b) above of a subsidiary, in India or outside India, or of a
holding company of the company.
Audit of buy-back of securities – Section 68

2013, which are as follows
Sources of buy-back
1. A company may buy-back its own shares or other specified securities out of -
(a) Free reserves; or
(b) Securities premium account; or
(c) Proceeds of fresh issue of shares or other specified securities.
2. However, the buy-back shall not be made out of the proceeds of an earlier issue of same kind of shares.
Conditions for buy-back

1. Power in articles
Authorization in the articles is required for buy-back.
2. Resolution for buy-back

 The buy-back must be authorized by SR passed in GM.
 However, SR is not required, if the following conditions are satisfied: f
(a) The buy-back has been authorized by the Board by means of a resolution passed at a BM only.
(b) The buy-back does not exceed 10% of the aggregate of paid-up equity capital and free
reserves.
 Notice of GM, in which SR is to be passed shall be accompanied by an explanatory statement, stating

—
(a) all material facts;
(b) necessity for buy-back;
(c) class of securities to be bought-back;
(d) amount to be invested under the buy-back;
(e) time limit for completion of buy-back.
3. Limits on buy- back by passing SR

 The buy-back shall not exceed 25% of aggregate of paid-up capital and free reserves.
 The buy-back of equity shares in any FY shall not exceed 25% of its total paid up equity capital in that
FY.
4. Debt-equity ratio
 The ratio of debt (secured as well as unsecured debt) owed by the company must not be more than
twice the aggregate of paid up capital and free reserves after such buy-back.
 CG may, by order, notify a higher ratio for any class or classes of companies.
5. Fully paid shares

All the securities for buy-back must be fully paid-up.
6. Time limit for completion of buy- back
The buy-back shall be completed within 1 year of passing the resolution for buy-back (whether SR or the Board
resolution).
7. Buy-back from whom?

The buy-back may be -
(a) from the existing shareholders on a proportionate basis; or
(b) from the open market; or
(c) by purchasing the shares issued to employees by way of stock option or sweat equity.
8. Declaration of solvency
 The company shall file with the Registrar a declaration of solvency stating that it solvency will not be
rendered insolvent within next 1 year.

 In case of a listed company, declaration of solvency shall also be filed with SEBI.
9. Extinction of shares bought back

The company shall extinguish and physically destroy the shares bought-back within 7 days of completion of
buy-back.
10. Prohibition on further buy-back
Further offer of buy-back shall not be given within 1 year of closure of preceding offer of buy-back.
11. Prohibition of further issue

The company shall not make further issue of same kind of securities within next 6 months, except
(a) bonus shares; or
(b) issue of shares in discharge of subsisting obligations such as conversion of warrants, stock option
schemes, sweat equity or conversion of preference shares or debentures into equity shares.
12. Register of shares bought-back

The company shall maintain a register containing the following particulars:
(a) The securities bought back
(b) The consideration paid for the securities bought-back
(c) The date of cancellation of securities
(d) The date of extinguishing and physically destroying the securities
(e) Any other particulars, as may be prescribed.
13. Other compliances

Listed companies - shall comply with the regulations made by SEBL Unlisted companies - shall comply with the
Rules prescribed by CG.
14. Return of buy- back

 After completion of buy-back, the company shall, within 30 days, file a return containing such
particulars relating to buy-back as may be prescribed.
 The return shall be filed with - ROC - In case of unlisted companies

- ROC and SEBI - In case of listed companies.
15. Meaning of certain terms

For the purpose of Sec. 68 -
(a) the term 'specified securities' includes 'employees stock option' or other securities as may be notified
by CG;
(b) the term 'free reserves' includes securities premium account.
Audit of Calls in Advance Section 50

Meaning of 'calls in advance'
A member may, on his own, pay to the company whole or a part of the amount remaining unpaid on the shares held
by him, even if no part of that amount has been called up. Such amount is referred to as 'calls in advance'.
Power to accept calls in advance

Specific power is required in the articles to accept the calls in advance.
Interest on 'calls in advance'

 The company is liable to pay interest on calls paid in advance.
 The interest is payable whether or not the company has any profits, i.e. the interest may be paid out of capital
 The interest shall be paid at such rate as may be specified in the articles.
 As per Regulation 18 of Table F to Schedule I to the Companies Act, 2013, the rate of interest on calls in advance
shall be such as may be agreed between the Board and the member paying calls in advance (but not
exceeding 12% per annum).
Voting rights
A member is not entitled to any voting rights in respect of "calls in advance' until that amount has been called up.

Other rights
 The member becomes an unsecured creditor of the company.
 The amount paid as calls in advance is non-refundable.
 The liability of the member to pay the future calls is extinguished to the extent of calls paid in advance by him.
 In the event of winding up of the company, the amount paid as calls in advance along with interest shall be
repaid before repayment of capital to the members, but after all the creditors have been paid off.
REDEEMABLE PREFERENCE SHARES – Section 55

Auditor should examine whether the client company has followed the specific requirements w.r.t. issue and
Redemption of preference shares, which are as follows:
Conditions for issue of redeemable preference shares

1. Term of preference shares
 Issue of irredeemable preference shares is prohibited.
 The term of preference shares shall not exceed 20 years.
 The term of preference shares may exceed 20 years, subject to the following conditions:
(a) Such preference shares are issued for Infrastructure project as specified under
Schedule VI.
(b) The company shall redeem, at the option of such preference shareholders, on an
annual basis, such percentage of preference shares as may be prescribed.
Authorization in the articles is required to issue the preference shares.
3. Compliance of Rules
The conditions prescribed by CG under the Companies (Share Capital and Debentures) Rules, 2014
must be complied with.
Conditions for redemption of preference shares

No authorization is required in the articles to redeem the preference shares.

Preference shares can be redeemed only if they are fully paid up.
3. Sources of redemption
(a) Out of the profits available for dividend.
(b) Out of a fresh issue of shares made for the purpose of such redemption.
4. Premium payable on redemption
In case of prescribed class of companies whose financial statement comply with AS prescribed u/s
133, -
(i) Premium payable on redemption shall be provided for out of the profits of the company;
(ii) In case of preference share capital issued before the commencement of this Act, premium
payable on redemption may be provided for—
(a) out of the profits of the company; or
(b) out of securities premium account.
In any other case, -
Premium payable on redemption may be provided for -
(a) out of the profits of the company; or
(b) out of securities premium account.
5. Creation of CRR
(a) Creation of CRR is mandatory, if the preference shares are redeemed out of profits.
(b) Amount to be transferred to CRR out of profits of the company = Nominal value of preference
shares proposed to be redeemed out of profits.
6. Utilization of CRR
 CRR may be utilized only for the purpose of issuing fully paid bonus shares to the 1 members.
 All the provisions of the Act relating to reduction of share capital shall apply to CRR, as if CRR
were the paid up capital of the company.

Situation where company is unable to redeem the preference shares or pay dividend
1. Issue of further redeemable preference shares
 If a company is not in a position to redeem the preference shares or to pay dividend (such
shares are hereinafter referred to as the 'unredeemed preference shares'), then, it may issue
further redeemable preference shares equal to the amount due on redemption of such
unredeemed preference shares including the amount of dividend due thereon.
2. Legal requirements for issue of further redeemable preference shares

 Issue of such redeemable preference shares requires —
(a) consent of holders of 3/4th in value of such preference shares; and
(b) approval of the Tribunal.
 The Tribunal shall, while granting approval, order the redemption forthwith of preference shares
held by such persons who had not consented to the issue of further redeemable preference
shares.
3. Legal effect of issue of further redeemable preference shares

 On issue of further redeemable preference shares, the unredeemed preferenc e shares shall
be deemed to have been redeemed.
 Issue of further redeemable preference shares and redemption of unredeemed preference
shares shall not be deemed to be an increase of share capital or reduction of share capital.
Provisions contained in the Rules

1. Conditions for issue of preference shares
(a) The issue of preference shares must be authorized by passing 'SR' in GM.
(b) At the time of such issue of preference shares, there must not be any subsisting default with
respect to -
(i) the redemption of preference shares (whether issued before or after the
commencement of this Act); or
(ii) payment of dividend due on any preference shares.
2. Compliance with SEBI Regulations
A company intending to list its preference shares on a recognized stock exchange shall issue the
preference shares in accordance with the relevant regulations made by SEBI.

3. Disclosures in register of members
The Register of Members maintained u/s 88 shall contain all the particulars with respect to the
preference shareholders.
ALTERATION IN CAPITAL CLAUSE OF MEMORANDUM - Section 61
Sec. 61 applies to all limited companies having a share capital.
Nature of alterations in capital clause

(a) Increase its authorized share capital by such amount as it may think fit.
(b) Consolidate and divide its share capital into shares of a larger amount than its existing shares.
(c) Convert its fully paid up shares into stock, and reconvert stock into fully paid-up shares of any denomination.
(d) Sub-divide its shares into shares of smaller amount subject to the Condition that, after such alteration, the
proportion of the amount paid up on shares and the amount remaining unpaid on shares shall remain same as
was before such alteration.
(e) Cancel shares which have not been taken or agreed to be taken by any person, and diminish the amount of
its share capital by the amount of the shares so cancelled.
Requirements for alteration of capital

(a) Authorization is required in the articles.
(b) OR is required to be passed in the GM.
(c) As per Sec. 64 of the Companies Act, 2013, notice of alteration of share capital is to be given to ROC m
- within 30 days;
- in the prescribed form;
- along with a copy of altered memorandum.
It must be noted that alteration of capital does not require confirmation by the Court, CG, i CLB, Tribunal or any other
authority.
Cancellation vis-a-vis education

Cancellation of shares (also termed as diminution of capital) shall not be deemed to be reduction of share capital.
Difference between diminution of capital and reduction of capital is explained in the chapter 'Shares and Share
Capital',
Alteration vis-a-vis diminution

‘Alteration of capital' is different from 'diminution of capital' (also called as 'cancellation of capital'). 'Alteration of
capital' is a wider term than 'diminution of capital'.
AUDIT OF FORFEITURE OF SHARES
Auditor should examine the compliance with following:
1. Authorization for forfeiture

 Specific provision in the articles is required.
 The articles must contain the grounds for forfeiture of shares. Grounds for
2. Legal requirements for forfeiture

Grounds for forfeiture
 Generally, forfeiture is made on the ground of non-payment of a call. forfeiture
 However, forfeiture is also possible on any bonafide ground contained in the articles.
Call made
A valid call must have been made by the company. The call remains unpaid.
Notice of forfeiture
 Before effecting forfeiture, the company is required to give notice of forfeiture to the defaulting
shareholder.
 The notice must clearly specify —

(i) the last day upto which the unpaid calls can be paid;
(ii) the amount payable by the shareholder.
(iii) a clear warning that the shares shall be forfeited in case of non-payment of calls within the
time specified in notice (not being less than 14 days).
• The shareholder defaults in payment of the amount due within the period specified in the notice.
• The shares stand forfeited only when the Board passes a resolution effecting forfeiture.
• Forfeiture is in the nature of penal proceedings. Therefore, forfeiture is valid only if the provisions of the articles
are strictly complied with.
• Forfeiture must be bonafide and in the interest of the company.
3. Reissue of forfeited shares

 BOD should have authority under the articles to reissue forfeited shares.
 The total amount received on such shares (prior to forfeiture plus pursuant to reissue) should not b& less
than the par value.
 Any surplus resulting on reissue should be credited to the capital reserve account.
OPTION ON SHARE CAPITAL

Meaning
An option on shares arises when a person has acquired a right under an agreement with the company, if he so chooses.
Instances
Option on share capital generally arise under the following circumstances:
(a) Under the promoter's agreements, subsequently ratified by the company;
(b) Collaboration agreements;
(c) Loan agreements;
(d) Debenture deeds;
(e) An agreement for convertible preference shares;
(f) Employee stock option schemes.
Allotment of shares on account of conversion of loans or debenture into shares

Nothing in Sec. 62 shall restrict the power of the company to allot shares on account of conversion of loans or
debentures into shares, provided that -
(a) the terms of issue of such debentures or the terms of raising such loan contained a term regarding conversion
of debentures or loans into shares.
(b) the terms of issue of such debentures or the terms of raising of such loans were approved, before the issue of
such debentures of raising loans, by passing SR.
AUDIT OF TRANSFER OR TRANSMISSION OF SECURITIES Section 56
Auditor should examine compliance with following:
1. Transfer deed
 The application for transfer of securities must be made in the form prescribed for this purpose (viz. Form
No. SH-4).
 This form is called as 'instrument of transfer' or 'transfer deed' or 'transfer form'.
2. Execution of transfer deed

 The transfer deed shall be stamped and dated.
 The transfer deed shall be executed (viz. signed) by the transferor and the transferee.
3. Submission of documents
 The transfer deed (after stamping, dating and signing) shall be submitted to the company within 60
days of execution..
 Certificate relating to the securities shall also be submitted along with the transfer deed. However, if
the certificate relating to the securities is not in existence, then, the letter of allotment shall be
submitted.
 The transfer deed may be submitted to the company by -
(a) the transferor; or

(b) the transferee.
4. Situation where transfer deed is lost or delivered after 60 days

In case the transfer deed is —
 lost; or
 delivered to the company after 60 days of its execution,
the company may register the transfer of shares after obtaining such indemnity as the Board may deem fit.
5. Right of the transferee to object to the transfer

When is notice required?
 The company is required to give notice to the transferee only if both the following conditions are
satisfied:
(a) The transfer deed is presented to the company by the transferor.
(b) The shares are partly, paid up.
 The notice shall be given by the company to the transferee in the manner prescribed (viz. in Form No.
SH-5).
Rights of transferee
The transferee has the right to object to the proposed transfer within 2 weeks.
Registration of transfer
If the transferee fails to state his objections within 2 weeks, the company may thereafter register the transfer.
6. Provisions w.r.t. shares held in dematerialized form

 No transfer deed is required for transfer of shares, where the shares are held in dematerialized form.
 Where securities are issued by a company in dematerialized form, the company shall intimate the
details of allotment to the depository, immediately after allotment.
 If any transfer of shares is effected by any depository or depository participant with an intention to
defraud any person, it shall be liable u/s 447.
7. Transmission of shares
Where any person acquires any right to securities by operation of any law, the company may register the
transmission of shares in favour of such person if the company receives intimation of transmission from such
person, and in such a case no transfer deed shall be necessary.
8. Transfer of securities by legal representative

In case of death of holder of any, security, the transfer of such security by the legal representative of the
deceased shall be valid -
 even though the legal representative is not the holder of such security;
 as if the legal representative were the holder of such security.
9. Time limits for delivery of certificate relating to securities

In case of allotment of securities to the subscribers to memorandum
Within 2 months of incorporation
In case of any allotment of shares

Within 2 months of allotment
In case of any allotment of debentures

Within 6 months of allotment
In case of transfer or transmission of securities

Within 1 month of receipt of transfer deed or intimation of transmission
AUDIT OF ISSUE OF BONUS SHARES Section 63
Authorization in the articles is required to issue the bonus shares.
2. Recommendation of the Board

 Bonus shares can be issued only if the Board recommends such an issue,

 A company which has once announced the decision of its Board recommending a bonus issue, shall
not subsequently withdraw the same (Rule 7 of the Companies (Share Capital and Debentures) Rules,
2014).
3. Ordinary resolution
Issue of bonus shares is possible only if the authorization to issue the bonus shares is obtained by passing an OR
in the GM.
4. Sources of issue
 Bonus, shares may be issued by capitalizing the profits or reserves, i.e. bonus shares 'may be issued out
of -
(a) its free reserves; or
(b) the Securities Premium Account; or
(c) Capital Redemption Reserve Account.
 Bonus shares shall not be issued by capitalizing the reserves created by the revaluation of assets.
5. No default in debts
Bonus shares can be issued only if the company has not defaulted in payment of principal sum or interest on
the fixed deposits or debt securities issued by it.
6. No default in statutory dues

Bonus shares can be issued only if the company has not defaulted in payment of statutory dues of the
employees, such as contribution to provident fund, gratuity and bonus.
7. Compliance with prescribed conditions

Conditions prescribed by CG in respect of issue of bonus shares must be complied with.
8. Issued to existing members

Bonus shares can be issued only to the existing members of the company.

Bonus shares must be fully paid up.
10. Existing shares to be fully paid up

If there are any partly paid shares, they must be made fully paid up before the issue of bonus shares.
11. Not to be in lieu of dividend

Bonus shares shall not be issued in lieu of dividend.
Audit of debentures Section 71
Provisions contained in Sec. 71 of the Companies Act, 2013 and Rule 18 of the Companies (Share Capital and
Debentures) Rules, 2014.
1. Issue of convertible debentures
A company may issue debentures with an option to convert them (either wholly or in part) into shares, provided
such issue is approved by passing SR in the GM.
2. No voting rights
No debenture shall carry any voting right.
3. Issue of secured debentures

A company may issue secured debentures by complying with such terms and conditions as may be prescribed.
4. Mandatory creation of DRR

 Every company issuing the debentures shall create Debenture Redemption Reserve Account.
 DRR shall be created out of the profits available for distribution of dividend.
 DRR shall be utilized only for the purpose of redemption of debentures. Appointment of one or more
debenture trustee is mandatory, if –

5. Appointment of debenture trustee(s)
 Appointment of one or more debenture trustee is mandatory, if -
(a) the company issues a prospectus; or
(b) the company makes an offer or invitation to the public; or
(c) the company makes an offer to its members exceeding 500 in number;
 The appointment of debenture trustee(s) shall be made -
(a) before issue of prospectus or before making such offer or invitation; and
(b) by complying with such terms and conditions as may be prescribed.
6. Duties and functions of debenture trustee(s)

 To protect the interests of the debenture holders.
 To redress the grievances of debenture holders in accordance with such rules as may be prescribed.
7. Creation of Debenture Redemption Reserve

(a) The Debenture Redemption Reserve shall be created out of the profits of the company available for
payment of dividend.
(b) The company shall create, before commencement of redemption of debentures, Debenture
Redemption Reserve equivalent to at least 50% of the amount raised through the issue of debenture.
(c) The company shall, on or before the 30th day of April in each year, invest or deposit, as the case may
be, a sum which shall not be less than 15% of the amount of its debentures maturing during the year
ending on the 31 St day of March of the next year, in specified manner.
(d) In case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect
of non-convertible portion of the debentures.
(e) The amount credited to the Debenture Redemption Reserve shall not be utilized by the company
except for the purpose of redemption of debentures.
Audit procedures for debentures
Allotment
 Examine whether prospectus had been duly filed with the registrar before allotment.
 Verify whether allotment was made as per terms and conditions contained in the prospectus.
 Examine a copy of debentures trust deed and note the conditions including creation of Debenture Redemption
Reserve contained therein as to issue and repayment.
 Compliance with SEBI Guidelines should also be examined.

 Check the applications for debentures with the application and allotment book to verify that the name,
address of the applicants and the number of the debentures applied for, are properly recorded.
 Verify the allotment of debentures by reference to the Minutes of Board meeting.

 Examine the entries in the Register of Debentures.
 Extract balances in the Register of Debentures in respect of amounts paid by the debenture holders and match
their total with the balance in Debentures Account in the General Ledger.
 If debentures have been issued as fully paid to vendors as a part of the purchase consideration, examine the
contract.
 Examine that the stamp duty has been properly paid on the debentures issued.
Issue
 In case, debentures are issued at premium, the amount of premium collected should be credited to Premium
on debentures Accounts. The balance to the credit of this account should be subsequently transferred to the
Capital Reserve Account.
 When debentures are issued at a discount, the amount of discount should be debited to Discount on
Debentures' Account so as to credit the Debentures Account with the full normal value. The balance in this
account shall appear in the Balance Sheet until written off.

Interest on Debentures
 Interest on debentures is payable whether or not any profit is made. Therefore, examine the provision made in
the Books of account w.r.t. interest on debentures.
 The interest paid on debentures must be disclosed as a separate item in the P&L account.
 The payment of interest should be examined with the acknowledgement of the debenture holders.
 The total amount paid should be reconciled with the total amount due and payable and amount of interest
outstanding for payment.
Redemption of Debentures on Premium

Examine that the accounting entries w.r.t. redemption of debentures have been properly recorded in the Books of
account.
Issue of debentures as Collateral

 Debentures may be issued as collateral security to the creditors, bankers or other parties.
 The collateral security becomes effective only in the event of default or loan not being repaid. When the loan
is repaid, the debentures are automatically cancelled.
 The auditor should read the loan agreement and confirm that the BOD has approved the issue.
Question
Although profits of XYZ Ltd. are good, it is suffering liquidity crunch. It proposes to declare dividend @ 8% in AGM, but
the board proposes that payment of dividend should be deferred by three months from date of AGM by passing a
resolution in AGM, comment.
Ans.
1. Payment of dividend is a must within 30 days of declaration of dividend. If the company fails to do so, the
directors and the company are attracted to the penal provisions under section 127 of the Companies Act,
2013.
2. Thus, dividend has to be paid within 30 days of its declaration at the AGM.
3. It implies that in AGM, members should not pass a resolution to defer the payment of dividend as it is not as per
law.
4. In the present case, it is apparent that board has only proposed the dividend but no resolution has been passed
in the AGM. Thus, dividend has not yet been declared.
5. Thus, the company should not declare dividend in the AGM & should not defer its payment. Rather, dividend
should be declared in a subsequent general meeting (EGM) so that it can be paid within 30 days of that EGM.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance AASB & Other Topics
Chapter 17 AASB & Other Topics

What are Standards on Auditing (SAs)?
SAs are Auditing Standards, which prescribe the way the auditing should be conducted.
Procedure for issuing SAs

Generally following procedure is followed for issuing the SAs :
 Auditing and Assurance Standard Board (AASB) of the Institute of Chartered Accountants of
India (ICAI) determines the specific area in which the SAs need to be formulated.
In preparation of SAs—
 AASB is assisted by study groups constituted to consider specific subjects.
 An exposure draft of the proposed SA is finalized by the AASB' of ICAI on the basis of work of the
study group.
 The exposure draft of the proposed SA is published for comments by the members of the Institute
(ICAI).
 AASB finalizes the draft of the proposed SA after considering the comments received and submit
to the Council of the Institute (ICAI).
 The Council considers the draft of the proposed SA and if necessary, modifies the same in
consultation with AASB. The SA is then issued under the authority of the Council of the Institute of
Chartered Accountants of India.
 AASB of ICAI tries to integrate/harmonize the SAs to the extent possible in the light of the condition
and practices prevailing in India with ISAs (International Standards For Auditing) issued by IAASB
(International Auditing and Assurance Standards Board) of IFAC.
ICAI re-classified the existing auditing and assurance standards in 2008. The objective of re-classification is to converge
our existing auditing and assurance standards with International Standard on Auditing (ISA) issued by the International
Federation of Accountants (IFAC).
Question
Standards collectively known as the Engagements Standards issued by AASB under the authority of the council of ICAI - Discuss
The following Standards issued by the Auditing and Assurance Standards Board under the authority of the Council are
collectively known as the Engagement Standards:
 Standards on Auditing (SAs), to be applied in the audit of historical financial information.
 Standards on Review Engagement (SREs), to be applied in the review of historical financial

information.
 Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing

with subject-matters other than historical financial information.
 Standards on Related Services (SRSs), to be applied to engagements involving application of

agreed upon procedures to information, compilation engagements, and other related services
engagements as may be specified by the ICAI.
 Standards on Quality Control (SQCs) issued by the AASB under the authority of the Council, are to
be applied for all services covered by the Engagement Standards as described above.
A diagram containing the structure of the Standards issued by the Auditing and Assurance Standards Board under the
authority of the Council is given as under.

Structure of Standards issued by the Auditing and Assurance Standards Board under the Authority of the Council of
ICAI
The Chartered Accountants Act, 1949, Code of Ethics and other relevant pronouncements of the ICAI
Standard on Quality Controls (SQCs)
Service covered by the pronuncemnet of the Auditing and

assurance board under the authority of the council of the ICAI
Assurance
Related Service
Services
Audit and Review of Assurance Engagements Framework for

historical financial other than audits or Assurance
information reviews of historical Engagement
financial informaiton
Standards on Standard on
Standard on Standards on
Auditing (SAs) Review
Assurance Related Services
100-999 Engagements
Engagement (SRSs) 4000-
(SREs) 2000- 4699
(SAEs) 3000-
2699
3699
Note: Only SAs from 200 to 720 are in CA Intermediate (IPC) syllabus, other SAs 800 to 810, SREs, SAEs and SRSs are not in
syllabus.
International Auditing and Assurance Standards Board (IASB)
(a) In 1977, the International Federation of Accountants (IFAC) was set up with a view to bring in harmony in the
profession of accounting on an international scale.
(b) In pursuing this mission, the IFAC Board has established the International Auditing and Assurance
Standards Board (IAASB) to develop and issue, high quality Auditing and Assurance Standards for use around
the world.
(c) The IAASB's pronouncement govern Audit, Review, Other Assurance and Related Services
Engagements that are conducted in accordance with International Standards. However, they do not override
the local laws or regulations that govern the audit of Historical Financial Statements, required to be
followed in accordance with that country's National Standards.
(d) The IAASB functions as an independent standard-setting body, which serves the objective of setting high
quality Auditing and Assurance Standards and by facilitating the convergence of International and National
Standards, thereby enhancing the quality & uniformity of practice throughout the world. IASSB achieves
this objective by -
 Establishing high quality Auditing Standards and Guidance for Financial Statement audits, other
types of Assurance Services, Other Related Services, Quality Control areas,
 Publishing Other pronouncements on Auditing and Assurance matters.

Auditing and Assurance Standards Board (AASB)
(a) ICAI is a member of IFAC and is committed to work towards the implementation of the guidelines issued by IFAC.
(b) ICAI constituted the Auditing Practices Committee (APC) in 1982. The main function of the APC is to review the existing
auditing practices in India and to develop Statements on Standard Auditing Practices (SAPs) so that these may be
issued by the Council of the Institute.
(c) While formulating the SAP's in India, the APC gives due consideration to the International Auditing Guidelines
issued by the IAPC and then tries to integrate them to the extent possible in the light of the conditions and practices
prevailing in India. While formulating the SAPs, the APC takes into consideration the applicable laws, customs,
usages and business environment in India.
(d) In July 2002, the APC has been converted into an Auditing and Assurance Standards Board (AASB) by the
Council of ICAI, to be in line with the international trend. The nomenclature of SAPs had also been changed to Auditing
and Assurance Standards (AASs).
(e) In 2007, the AASB issued several revised / new Standards pursuant to the IAASB Clarity Project, and henceforth
all the standards have been collectively called as "Standards on Auditing".
Objectives and Functions of the Auditing and Assurance

Standards Board
The following are the objectives and functions of the Auditing and Assurance Standards Board
(i) To review the existing and emerging auditing practices worldwide and identify areas in which Standards on Quality
Control, Engagement Standards and Statements on Auditing need to be developed.
(ii) To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so that these may
be issued under the authority of the Council of the Institute.
(iii) To review the existing Standards and Statements on Auditing to assess their relevance in the changed conditions
and to undertake their revision, if necessary.
(iv) To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to any specific industry or on
generic issues, so that those may be issued under the authority of the Council of the Institute.
(v) To review the existing Guidance Notes to assess their relevance in the changed circumstances and to undertake their
revision, if necessary.
(vi) To formulate General Clarifications, where necessary, on issues arising from Standards.
(vii) To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own authority for
guidance of professional accountants in the cases felt appropriate by the Board.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance Past Year Question Papers
Chapter 18 Past Year Question Papers

PAPER - 6: AUDITING AND ASSURANCE – November 2015
Question No.1 is compulsory.
Attempt any five questions from the remaining six questions.
Question 1
Discuss the following:
(a) With reference to SA 320 indicate the factors which may affect the identification of an appropriate bench mark in determining
materiality for the financial statement as a whole. (5 Marks)
(b) The assertions used by auditor to consider potential misstatements about account balances at the period end. (5
Marks)
(c) P' an auditor decides not to send a new audit engagement letter to G Ltd. every year. Whether he is right in his approach? State
the circumstances where sending new engagement letter, would be appropriate. (5 Marks)
(d) State the principal aspects to be covered in an audit concerning financial statement of account. (5 Marks)
Answer
(a) Factors that may affect the Identification of an Appropriate Benchmark in Determining Materiality: As per SA 320 "Materiality in
Planning and Performing an Audit", determining materiality involves the exercise of professional judgment. A percentage is often
applied to a chosen benchmark as a starting point in determining materiality for the financial statements as a whole. Factors that
may affect the identification of an appropriate benchmark include the following-
(i) The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);
(ii) Whether there are items on which the attention of the users of the particular entity's financial statements tends to be
focused (for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or
net assets);
(iii) The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the
entity operates;
(iv) The entity's ownership structure and the way it is financed (for example, if an entity is financed solely by debt rather than
equity, users may put more emphasis on assets, and claims on them, than on the entity's earnings); and
(v) The relative volatility of the benchmark.
(b) Assertions used by Auditor to Consider Potential Misstatements about Account Balances at the Period End: According to SA 315
"Identifying and Assessing the Risk of Material Misstatement through understanding the Entity and its Environment", the assertions
used by the auditor to consider the different types of potential misstatements that may occur about account balances at the period
end are-
(i) Existence—assets, liabilities, and equity interests exist.
(ii) Rights and obligations—the entity holds or controls the rights to assets and liabilities are the obligations of the entity.
(iii) Completeness—all assets, liabilities and equity interests that should have been recorded have been recorded.
(iv) Valuation and allocation—assets, liabilities, and equity interests are included in the financial statements at appropriate
amounts and any resulting valuation or allocation adjustments are appropriately recorded.
(c) New Audit Engagement Letter: As per SA 210, "Agreeing the Terms of Audit Engagements", on recurring audits, the auditor shall
assess whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the
entity of the existing terms of the audit engagement.
It is not necessary to issue audit engagement letter each year for repetitive audit. It is enough if the same had been issued at the
time of taking initial engagement. Therefore, Mr. P is right in his approach.
However, the following factors may make it appropriate to revise the terms of the audit engagement or to remind the entity of
existing terms:
(i) Any indication that the entity misunderstands the objective and scope of the audit.
(ii) Any revised or special terms of the audit engagement.
(iii) A recent change of senior management.
(iv) A significant change in ownership.
(v) A significant change in nature or size of the entity's business.
(vi) A change in legal or regulatory requirements.
(vii) A change in the financial reporting framework adopted in the preparation of the financial statements.
(viii) A change in other reporting requirements.
(d) Aspects to be covered in Audit: The principal aspects to be covered in an audit concerning financial statement of account are the
following-
(i) An examination of the system of accounting and internal control to ascertain whether it is appropriate for the business
and helps in properly recording all transactions. This is followed by such tests and enquiries as are considered necessary

to ascertain whether the system is in actual operation. These steps are necessary to form an opinion as to whether reliance
can be placed on the records as a basis for the preparation of final statements of account.
(ii) Reviewing the system and procedures to find out whether they are adequate and comprehensive and incidentally whether
material inadequacies and weaknesses exist to allow frauds and errors going unnoticed.
(iii) Checking of the arithmetical accuracy of the books of account by the verification of postings, balances, etc.
(iv) Verification of the authenticity and validity of transactions entered into by making an examination of the entries in the
books of accounts with the relevant supporting documents.
(v) Ascertaining that a proper distinction has been made between items of capital and of revenue nature and that the amounts
of various items of income and expenditure adjusted in the accounts corresponding to the accounting period.
(vi) Comparison of the balance sheet and profit and loss account or other statements with the underlying record in order to
see that they are in accordance therewith.
(vii) Verification of the title, existence and value of the assets appearing in the balance sheet.
(viii) Verification of the liabilities stated in the balance sheet.
(ix) Checking the result shown by the profit and loss and to see whether the results shown are true and fair.
(x) Where audit is of a corporate body, confirming that the statutory requirements have been complied with.
(xi) Reporting to the appropriate person/body whether the statements of account examined do reveal a true and fair view of
the state of affairs and of the profit and loss of the organization.
Question 2
State with reasons (in short) whether the following statements are correct or incorrect: (Answer any eight)
(i) AB & Co. is an audit firm having partners Mr. A and Mr. B. Mr. C, the relative of Mr. B is holding securities having face value of `
2,00,000 in XYZ Ltd. AB & Co. is qualified for being appointed as an auditor of XYZ Ltd.
(ii) Working papers are property of client, as it contains client's information.
(iii) The auditor of a Ltd. Company wanted to refer to the minute books during audit but board of directors refused to show the
minute books to the auditors.
(iv) The auditor has to report to Central Govt, within 90 days of his knowledge of an offence involving fraud.
(v) Manner of rotation of auditor will not be applicable to company A, which is having paid up share capital of ` 15 crores and having
public borrowing from nationalized bank of ` 50 crore because it is a Private Limited Company.
(vi) The auditor should study the Memorandum and Articles of Association to see the validity of his appointment.
(vii) Teeming and lading is one of the techniques of inflating cash payments.
(viii) Managing director of A Ltd. himself appointed the first auditor of the company.
(ix) A Chartered Accountant holding securities of S Ltd. having face value of ` 950 is qualified for appointment as an auditor of S Ltd.
(x) Mr. N, a member of the Institute of Chartered Accountants of England and Wales, is qualified to be appointed as auditor of Indian
Companies. (8x2 = 16
Marks)
Answer
(i) Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified to be appointed as an auditor of a company if
his relative is holding any security of or interest in the company of face value exceeding ` 1 lakh.
Therefore, AB & Co. shall be disqualified for being appointed as an auditor of XYZ Ltd. as Mr. C, the relative of Mr. B who is a partner
in AB & Co., is holding securities in XYZ Ltd. having face value of ` 2 lakh.
(ii) Incorrect: Working papers are the property of the auditor and he is entitled to retain them. He may, at his discretion, make portions
of or extracts from his working papers available to clients.
(iii) Incorrect: The provisions of Companies Act, 2013 grant rights to the auditor to access books of account and vouchers of the
company. He is also entitled to require information and explanations from the company. Therefore, he has a statutory right to
inspect the minute book.
(iv) Incorrect: If an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence
involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately
report the matter to the Central Government within 60 days of his knowledge and after following the prescribed procedure.
(v) Incorrect: According to section 139 of the Companies Act, 2013, the provisions related to rotation of auditor are applicable to all
private limited companies having paid up share capital of ` 20 crore or more; and all companies having paid up share capital of below
threshold limit mentioned above, but having public borrowings from financial institutions, banks or public deposits of ` 50 crore or
more.
Although company A is a private limited company yet it is having public borrowings from nationalized bank of ` 50 crores, therefore
it would be governed by provisions of rotation of auditor.
(vi) Incorrect: The auditor should study the Memorandum of Association to check the objective of the company to be carried on, amount
of authorized share capital etc. and Articles of Association to check the internal rules, regulations and ensuring the validity of
transactions relating to accounts of the company.
To see the validity of appointment, the auditor should ensure the compliance of the provisions of section 139, 140 and 141 of the
Companies Act, 2013.

Alternative reasoning: The auditor should study the appointment letter & the prescribed form submitted to the Registrar of the
Companies to see the validity of his appointment.
(vii) Incorrect: Teeming and Lading is one of the techniques of suppressing cash receipts and not of inflating cash payments. Money
received from one customer is misappropriated and the account is adjusted with the subsequent receipt from another customer
and so on.
(viii) Incorrect: As per section 139(6) of the Companies Act, 2013, the first auditor of a company, other than a government company, shall
be appointed by the Board of directors within 30 days from the date of registration of the company.
Therefore, the appointment of first auditor made by the managing director of A Ltd. is in violation of the provisions of the Companies
Act, 2013.
(ix) Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified to be appointed as an auditor of a company if
he is holding any security of or interest in the company.
As the chartered accountant is holding securities of S Ltd. having face value of ` 950, he is not eligible for appointment as an auditor
of S Ltd.
(x) Incorrect: A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant.
It may be noted that a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be
appointed by its firm name to be auditor of a company.
Thus, Mr. N is disqualified to be appointed as an auditor of Indian Companies.
Question 3
How will you vouch/verify the following:
(a) Refund of General Insurance premium paid
(b) Payment of Taxes
(c) Sale Proceeds of junk material
(d) Intangible Assets. (4x4 = 16 Marks)
Answer
(a) Refund of General Insurance Premium Paid: The refund of insurance premium may be because of earlier provisional payment of
premium or may be a policy might have been cancelled at a later date. The auditor should take following steps while vouching such
refunds-
(i) Ascertain the reasons for refund of insurance premium.
(ii) Examine insurance policy or cover note to find out the amount of premium.
(iii) Verify advice of refund received from the insurance company. When refund is admitted, the insurance company sends the
advice. This will be evidence as a covering letter to the cheque for the refund. Sometimes, a cheque is issued after a receipt
is sent in advance to the insurance company.
(iv) Scrutinise correspondence between the insurance company and the client.
(v) Check entries in the bank book or the bank statement. If necessary, the counterfoil of the pay-in-slips can also be verified.
(b) Payment of Taxes:

(i) Payment on account of income-tax and other taxes consequent upon a regular assessment should be verified by reference
to the copy of the assessment order, assessment form, notice of demand and the receipted challan.
(ii) Payments or advance payments of income-tax should also be verified with the notice of demand and the receipted challan
acknowledging the amount paid.
(iii) The interest allowed on advance payments of income-tax should be included as income and penal interest charged for
non-payment should be debited to the interest account.
(iv) Nowadays, electronic payment of taxes is also in trend. Electronic payment of taxes means payment of taxes by way of
internet banking facility or credit or debit cards.
(v) The assessee can make electronic payment of taxes also from the account of any other person. However, the challan for
making such payment must clearly indicate the Permanent Account Number (PAN) of the assessee on whose behalf the
payment is made.
(vi) It is not necessary for the assessee to make payment of taxes from his own account in an authorized bank. While vouching
such E-Payment, the auditor should cross verify the payments of taxes through the receipted challan along with PAN
No./TAN No. etc.
(c) Sale Proceeds of Junk Material:

(i) Review the internal control on junk materials, as regards its generation, storage and disposal and see whether it was
properly followed at every stage.
(ii) Ascertain whether the organisation is maintaining reasonable records for the sale and disposal of junk materials.
(iii) Review the production and cost records for the determination of the extent of junk materials that may arise in a given
period.
(iv) Compare the income from the sale of junk materials with the corresponding figures of the preceding three years.

(v) Check the rates at which different types of junk materials have been sold and compare the same with the rates that
prevailed in the preceding year.
(vi) See that all junk materials sold have been billed and check the calculations on the invoices.
(vii) Ensure that there exists a proper procedure to identify the junk material and good quality material is not mixed up with
it.
(viii) Make an overall assessment of the value of the realization from the sale of junk materials as to its reasonableness. Ensure
that proper accounting has been done for it.
(d) Intangible Assets: The auditor should verify the following points in this regard-
(i) An intangible asset should be measured at cost. After initial recognition an intangible asset should be carried at its cost
less any accumulated amortization and any impairment losses.
(ii) If an item covered does not meet the definition of an intangible asset, expenditure to acquire it or generate it internally is
recognised as an expense when it is incurred.
(iii) Some intangible assets may be contained in or on a physical substance such as a compact disk (in the case of computer
software), legal documentation (in the case of a license or patent) or film (in the case of motion pictures). The cost of the
physical substance containing the intangible assets is usually not significant. Accordingly, the physical substance containing
an intangible asset, though tangible in nature, is commonly treated as a part of the intangible asset contained in or on it.
(iv) In some cases, an asset may incorporate both intangible and tangible elements that are, in practice, inseparable. In
determining whether such an asset should be treated under AS 10, Accounting for Fixed Assets, or as an intangible asset
under this Statement, judgement is required to assess as to which element is predominant.
(v) As per AS-26, internally generated goodwill is not recognized as an asset because it is not an identifiable resource
controlled by the enterprise that can be measured reliably at cost.
(vi) Auditor should also ensure that proper disclosure is made in the financial statements about the carrying amount,
amortization methods, useful lives, etc.
Question 4
(a) Mention the points/area in which all the joint auditors are jointly and severally responsible. (6 Marks)
(b) Mr. A was appointed statutory auditor of P Ltd., but he was not able to gather the sufficient audit evidences. Discuss how he
should proceed to gather more audit evidences. (6 Marks)
(c) Discuss the recognition principles of contingent liability. (4 Marks)
Answer
(a) Points/Areas in which all the Joint Auditors are Jointly and Severally Responsible: As per SA 299 "Responsibility of Joint Auditors",
in respect of audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him,
whether or not he has prepared a separate report on the work performed by him. On the other hand, all the joint auditors are jointly
and severally responsible -
(i) in respect of the audit work which is not divided among the joint auditors and is carried out by all of them.
(ii) in respect of decisions taken by all the joint auditors concerning the nature, timing or extent of the audit procedures to be
performed by any of the joint auditors.
(iii) in respect of matters which are brought to the notice of the joint auditors by any one of them and on which there is an
agreement among the joint auditors.
(iv) for examining that the financial statements of the entity comply with the disclosure requirements of the relevant statute.
(v) for ensuring that the audit report complies with the requirements of the relevant statute.
(vi) it is the separate and specific responsibility of each joint auditor to study and evaluate the prevailing system of internal
control relating to the work allocated to him, the extent of enquiries to be made in the course of his audit.
(vii) the responsibility of obtaining and evaluating information and explanation from the management is generally a joint
responsibility of all the auditors.
(viii) each joint auditor is entitled to assure that the other joint auditors have carried out their part of work in accordance with
the generally accepted audit procedures and therefore it would not be necessary for joint auditor to review the work
performed by other joint auditors.
(b) Audit Evidence: According to SA 500 "Audit Evidence", audit procedures to gather more audit evidence would include -
Inspection: Inspection involves examining records or documents, whether internal or external, in paper form, electronic form, or
other media, or a physical examination of an asset. Inspection of records and documents provides audit evidence of varying degrees
of reliability, depending on their nature and source and, in the case of internal records and documents, on the effectiveness of the
controls over their production. An example of inspection used as a test of controls is inspection of records for evidence of
authorisation.
Observation: Observation consists of looking at a process or procedure being performed by others, for example, the auditor's
observation of inventory counting by the entity's personnel, or of the performance of control activities.

External Confirmation: An external confirmation represents audit evidence obtained by the auditor as a direct written response to
the auditor from a third party (the confirming party), in paper form, or by electronic or other medium. External confirmation
procedures frequently are relevant when addressing assertions associated with certain account balances and their elements.
However, external confirmations need not be restricted to account balances only.
Recalculation: Recalculation consists of checking the mathematical accuracy of documents or records. Recalculation may be
performed manually or electronically.
Re-performance: Re-performance involves the auditor's independent execution of procedures or controls that were originally
performed as part of the entity's internal control.
Analytical Procedures: Analytical procedures consist of evaluations of financial information made by a study of plausible
relationships among both financial and non- financial data. Analytical procedures also encompass the investigation of identified
fluctuations and relationships that are inconsistent with other relevant information or deviate significantly from predicted amounts.
Inquiry: Inquiry consists of seeking information of knowledgeable persons, both financial and non-financial, within the entity or
outside the entity. Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries may range from
formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process.
(c) Recognition Principles of Contingent Liability: An enterprise should not recognize the contingent liability but it should be disclosed
in financial statement, unless the possibility of an outflow of resource embodying economic benefit is remote. In some cases an
enterprise is jointly and severally liable for an obligation in that case, the part of the obligation that is expected to be met by other
parties is treated as contingent liability. Contingent liabilities are continuously assessed and if it becomes probable that an outflow
of future economic benefit will be required to settle obligation which is previously assessed as contingent liabilities, a provision is
recognized.
From the auditing point of view, the auditor should verify that a proper disclosure about contingent liabilities is made in financial
statement as required by AS 29. An enterprise should disclose for each class of contingent liability at the balance sheet date:
 A brief description of the nature of the contingent liability, where practicable.
 An estimate of the amount as per measurement principle.
 Indication of the uncertainty relating to outflow.
 The possibility of any reimbursement.
Where any of the information as required above is not disclosed because it is not practicable to do so, that fact should be stated.
Question 5
(a) Discuss about the provisions for removal of auditor before expiry of term. (6 Marks)
(b) As the statutory auditor of A Ltd., you have observed that the gross profit of the company has decreased in comparison to last
years. Mention the possible factors which may be responsible for decrease in gross profit. (6 Marks)
(c) State the precautions to be taken to avoid the disadvantage of a continuous audit. (4 Marks)
Answer
(a) Removal of Auditor Before Expiry of Term: According to section 140 of the Companies Act, 2013, the auditor appointed under
section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining
the previous approval of the Central Government in that behalf as per Companies (Audit and Auditors) Rules, 2014 -
(i) The application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be accompanied
with prescribed fees.
(ii) The application shall be made to the Central Government within thirty days of the resolution passed by the Board.
(iii) The company shall hold the general meeting within sixty days of receipt of approval of the Central Government for passing
the special resolution.
It is important to note that before taking any action for removal before expiry of terms, the auditor concerned shall be given a
reasonable opportunity of being heard.
(b) Factors which decreases the Gross Profit: Factors which may be responsible for decrease in gross profit are-
(i) Over valuation of the opening inventory or undervaluation of closing inventory either due to mistakes made in taking
inventory or in its valuation.
(ii) Alteration of the basis of valuation of inventory, e.g., closing inventory having been valued at cost, which is below the
market price, when the opening inventory was valued at market price above cost.
(iii) Inclusion in the year of the amount of goods purchased in the previous year, that were received and taken in the same
year.
(iv) Reversal of the fictitious sale entries recorded in the previous year to boost up profit.
(v) Entry of sales returns twice or failure to account for purchase returns when the goods in question have been sent back.
(vi) Excessive provisions have been made for wages or direct expenses.

(vii) Failure to include in closing inventory goods sent out for sale on approval or on a consignment basis.
(viii) Omission to adjust the value of unused inventory of consumables stores, such as fuel and packing material or inclusion in
Trading Account expenses which should have been included in the Profit in the Loss Account.
(ix) Failure to take credit for the amount of an insurance claim in respect of a consignment of goods lost in transit or destroyed
by fire.
(x) Failure to account for goods sold or destroyed or given away as samples.
(c) Precautions to be taken to Avoid Disadvantages of a Continuous Audit: The disadvantages of a continuous audit can be avoided if
the following precautions are taken -
(i) During the course of each visit, work should be completed upto a definite stage so as to avoid loose ends.
(ii) At the end of each visit, important balances should be noted down and the same should be compared at the time of the
next visit.
(iii) The visits should be at irregular intervals of time so that the client's staff may not in advance know the exact date when
the audit would be resumed and thus may be able to prepare themselves in advance for the same.
(iv) The nominal accounts should be checked only at the time of final closing.
(v) The client's staff should be instructed not to alter or correct audited figures. The auditor should also device a special form
of ticks for being placed against figures which have been altered and neither its purpose nor significance should be dis-
closed to the client's staff.
Question 6
(a) The form, contents and extent of audit documents depend on certain factors. Explain with reference to SA 230. (4 Marks)
(b) Why Tests of Control are performed? Also explain what does they include. (4 Marks)
(c) State the Standards issued by AASB which are collectively known as engagement standards. (4 Marks)
(d) State the factors which are to be considered in determining materiality. (4 Marks)
Answer
(a) Form, Contents and Extent of Audit Documentation: Working papers should record the audit plan, nature, timing and extent of
auditing procedures performed, and the conclusions drawn from the evidence obtained.
According to SA 230 "Audit Documentation", the form, content and extent of working papers depend on factors such as:
(i) The size and complexity of the entity.
(ii) The nature of the audit procedures to be performed.
(iii) The identified risks of material misstatement.
(iv) The significance of the audit evidence obtained.
(v) The nature and extent of exceptions identified.
(vi) The need to document a conclusion or the basis for a conclusion not readily determinable from the documentation of the
work performed or audit evidence obtained.
(vii) The audit methodology and tools used.
(b) Tests of Control: Tests of control are performed to obtain audit evidence about the effectiveness of the -
(i) design of the accounting and internal control systems, that is, whether they are suitably designed to prevent or detect and
correct material misstatements; and
(ii) operation of the internal controls throughout the period.
Tests of control include tests of elements of the control environment where strengths in the control environment are used by
auditors to reduce control risk.
Tests of control may include:

 Inspection of documents supporting transactions and other events to gain audit evidence that internal controls have
operated properly, for example, verifying that a transaction has been authorised.
 Inquiries about, and observation of, internal controls which leave no audit trail, for example, determining who actually
performs each function and not merely who is supposed to perform it.
 Re-performance of internal controls, for example, reconciliation of bank accounts, to ensure they were correctly
performed by the entity.
 Testing of internal control operating on specific computerized applications or over the overall information technology
function, for example, access or program change controls.
(c) Engagement Standards: The following standards issued by the Auditing and Assurance Standards Board under the authority of the
Council are collectively known as the Engagement Standards-
(i) Standards on Auditing (SAs), to be applied in the audit of historical financial information.
(ii) Standards on Review Engagements (SREs), to be applied in the review of historical financial information.

(iii) Standards on Assurance Engagements (SAEs), to be applied in assurance engagements, dealing with subject matters other
than historical financial information.
(iv) Standards on Related Services (SRSs), to be applied to engagements involving application of agreed-upon procedures to
information, compilation engagements, and other related services engagements, as may be specified by the ICAI.
(d) Factors to be considered for Determining Materiality:

(i) Item of materiality may be determined individually or in aggregate.
(ii) The materiality depends on the regulatory or legal considerations.
(iii) Materiality is not often reckoned with respect to quantitative details only. It has qualitative dimensions as well.
(iv) Even insignificant items in terms of quality may be material in special circumstances.
(v) Sometimes the materiality of an item in terms of quantity is described in law itself. For example, Schedule III requires
disclosure of items of expenditures which are in excess of one percent of the revenue from operations or ` 1,00,000,
whichever is higher.
(vi) An item whose impact is insignificant at present, but in future it may be significant, may be material item.
Question 7
Write short notes on any four of the following:
(a) Remuneration paid to directors in case of a public limited company
(b) Payment for acquisition of assets
(c) A qualified opinion
(d) Fraudulent financial reporting
(e) Surprise checks.
(4x4 = 16 Marks)
Answer
(a) Remuneration Paid to Directors: The following points must be considered regarding the directors' remuneration in case of a public
company-
(i) Examine the Entitlement: The directors are not automatically entitled to remuneration. It is paid either according to the
terms of articles of association or in accordance with a resolution of the general meeting.
(ii) Examine Adherence to Legal Provisions: The auditor should examine adherence to relevant sections of the Act such as -
(1) Section which deals with manner of payment of managerial remuneration.
(2) Section which deals with payment of sitting fees.
(3) Section which has prescribed the overall limit to managerial remuneration.
(4) Schedule V to the Act that has laid down conditions for payment of remuneration for companies having no
profits or inadequate profits and companies having negative effective capital.
(5) Proviso to section which provides for increase in remuneration with the approval of the Central Government.
(b) Payment for Acquisition of Assets: The following points must be considered regarding payment for acquisition of assets-
(i) The purchase of an asset must be duly supported by the receipt for the amount paid.
(ii) In case of an immovable property the auditor must also inspect the title deeds. The title of an immovable property passes
only on registration. It is therefore essential for an auditor to see that property has been registered in the purchaser's
name as required by the relevant regulations and also that the title of the transfer to sell property has been verified by a
solicitor or an advocate.
(iii) In the case of movable property requiring registration of ownership, e.g., a car or a ship, it must be verified that such a
registration has been made in favour of the purchaser. It is necessary for the auditor to satisfy himself generally as regards
existence, value and title of the assets acquired.
(iv) It must also be verified that the assets were purchased only by a person who had the authority to do so. Companies Act,
2013 provides that only the Board of Directors can invest the funds of the company. Thus the Board alone can sanction
the purchase of a fixed asset.
(v) If the benefit of an item of expense has been acquired by the purchaser along with the asset, its value should be debited
to a separate account, e.g., when a motor car has been purchased on which certain taxes and insurance charges were paid
by the seller for a period that had not expired.
(vi) In the case of an asset constructed or manufactured by the client himself, e.g., where a building has been constructed or
a plant or machinery manufactured by the concern with its labour and materials, it must be verified that the cost of labour,
materials and other direct expenses incurred has been charged as cost of the asset on a proper allocation of the total
expenditure debited under these heads.
(vii) It must also be seen that neither expenses on repairs and maintenance have been capitalized nor the cost of additions to
assets charged off as revenue expenses.
(c) Qualified Opinion: The auditor shall express a qualified opinion when -

(i) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are material, but not pervasive, to the financial statements; or
(ii) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor
concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but
not pervasive.
(d) Fraudulent Financial Reporting: Fraudulent financial reporting involves intentional misstatements including omissions of amounts
or disclosures in financial statements to deceive financial statement users. It can be caused by the efforts of management to manage
earnings in order to deceive financial statement users by influencing their perceptions as to the entity's performance and
profitability. Such earnings management may start out with small actions or inappropriate adjustment of assumptions and changes
in judgments by management. Pressures and incentives may lead these actions to increase to the extent that they result in
fraudulent financial reporting.
In some entities, management may be motivated to reduce earnings by a material amount to minimize tax or to inflate earnings to
secure bank financing.
Fraudulent financial reporting may be accomplished by the following:

(i) Manipulation, falsification (including forgery), or alteration of accounting records or supporting documentation from
which the financial statements are prepared.
(ii) Misrepresentation in or intentional omission from, the financial statements of events, transactions or other significant
information.
(iii) Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or
disclosure.
Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating
effectively.
(e) Surprise Checks: Surprise checks are a part of normal audit procedures. An element of surprise can significantly improve the audit
effectiveness. Wherever practical, an element of surprise should be incorporated in the audit procedures.
The element of surprise in an audit may be, both in regard to the time of audit, i.e. selection of date, when the auditor will visit the
client's office for audit and selection of areas of audit.
Surprise checks are mainly intended to ascertain whether the internal control system is working effectively and whether the
accounting and other records are kept up to date as per the statutory regulations. Surprise checks can exercise good moral check
on the client's staff. It helps in determining whether errors or frauds exist and if they exist, brings the matter promptly to the
management's attention, so that corrective action can be taken at the earliest. Surprise checks are very effective in verification of
cash and investments, test checking of inventory, verification of accounting records, statutory registers and internal control
system. The frequency of surprise checks may be determined by the auditor in the circumstances of each audit but should
normally be at least once in the course of an audit.

PAPER - 6: AUDITING AND ASSURANCE – May 2015

Question No. 1 is compulsory.
Attempt any five questions from the remaining six questions.
Question 1
Discuss the following:
(a) Advantages of independent audit (5 Marks)
(b) The auditor's report is considered to be modified under certain circumstances. (5 Marks)
(c) Is detection of fraud and error duty of an auditor? (5 Marks)
(d) Mention any four information which assists the auditor in accepting and continuing of relationship with the client as per SA 220.
(5 Marks)
Answer
(a) Advantages of Independent Audit: The chief utility of audit lies in reliable financial statements on the basis of which the state of
affairs may be easy to understand. Apart from this obvious utility, there are other advantages of audit. Some or all of these are of
considerable value even to those enterprises and organizations where audit is not compulsory, these advantages are given below-
(i) It safeguards the financial interest of persons who are not associated with the management of the entity, whether they
are partners or shareholders.
(ii) It acts as a moral check on the employees from committing defalcations or embezzlement.
(iii) Audited statements of account are helpful in settling liability for taxes, negotiating loans and for determining the purchase
consideration for a business.
(iv) These are also useful for settling trade disputes for higher wages or bonus as well as claims in respect of damage suffered
by property by fire or some other calamity.
(v) An audit can also help in the detection of wastages and losses to show the different ways by which these might be checked
especially those that occur due to the absence or inadequacy of internal checks or internal control measures.
(vi) Audit ascertains whether the necessary books of account and allied records have been properly kept and helps the client
in making good deficiencies or inadequacies in this respect.
(vii) As an appraisal function, audit reviews the existence and operations of various controls in the organizations and reports
weaknesses, inadequacies, etc., in them.
(viii) Audited accounts are of great help in the settlement of accounts at the time of admission or death of partner.
(ix) Government may require audited and certified statement before it gives assistance or issues a license for a particular
trade.
(b) Modified Report: An auditor's report is considered to be modified when it includes -

(A) Matters That Do Not Affect the Auditor's Opinion
(i) Emphasis of Matter paragraph: Sometimes the auditor considers it necessary to draw users' attention to a
matter presented or disclosed in the financial statements that, in the auditor's judgment, is of such importance
that it is fundamental to users' understanding of the financial statements, the auditor shall include an Emphasis
of Matter paragraph in the auditor's report provided the auditor has obtained sufficient appropriate audit
evidence that the matter is not materially misstated in the financial statements.
(ii) Other Matter paragraph: If the auditor considers it necessary to communicate a matter other than those that
are presented or disclosed in the financial statements that, in the auditor's judgment, is relevant to users'
understanding of the audit, the auditor*s responsibilities or the auditor's report and this is not prohibited by law
or regulation, the auditor shall do so in a paragraph in the auditor's report, with the heading "Other Matter", or
other appropriate heading.
(B) Matters that Do Affect the Auditor's Opinion
(i) Qualified Opinion: The auditor shall express a qualified opinion when-
• The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are material, but not pervasive, to the financial statements; or
• The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but
the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.
(ii) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on
the financial statements of undetected misstatements, if any, could be both material and pervasive.
(iii) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material
and pervasive to the financial statements.
The auditor shall modify the opinion in the auditor's report when:

• The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from
material misstatement; or
• The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole
are free from material misstatement.
(c) Detection of Fraud and Error - Duty of an Auditor: As per SA-240, "The Auditor's Responsibilities Relating to Fraud in an Audit of
Financial Statements", primary responsibility for the prevention and detection of fraud rests with both those charged with
governance of the entity and management. It is important that management, with the oversight of those charged with governance,
place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which
could persuade individuals not to commit fraud because of the likelihood of detection and punishment. This involves a commitment
to creating a culture of honesty and ethical behaviour which can be reinforced by an active oversight by those charged with
governance. In exercising oversight responsibility, those charged with governance consider the potential for override of controls or
other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to
influence the perceptions of analysts as to the entity's performance and profitability. Broadly, the general principles laid down in
this regard are:
• An auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance that the financial
statements taken as a whole are free from material misstatement, whether caused by fraud or error. As described in SA
200, "Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on
Auditing", owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of
the financial statements will not be detected, even though the audit is properly planned and performed in accordance
with the SAs.
• The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting
from error. This is because fraud may involve sophisticated and carefully organized schemes designed to conceal it, such
as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor.
• Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraud is greater
than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting
records, present fraudulent financial information or override control procedures designed to prevent similar frauds by
other employees.
• When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of professional skepticism
throughout the audit, considering the potential for management override of controls and recognizing the fact that audit
procedures that are effective for detecting error may not be effective in detecting fraud. The requirements in this SA are
designed to assist the auditor in identifying and assessing the risks of material misstatement due to fraud and in designing
procedures to detect such misstatement.
It may be concluded from the above that detection of fraud and error is not the duty of the auditor provided that he complies with
the requirements given in Standards on Auditing, maintains professional skepticism throughout the audit and is not grossly negligent
in the performance of his duties as an auditor.
(d) Information which assist the Auditor in accepting and continuing of relationship with Client: As per SA 220, "Quality Control for
an Audit of Financial Statements" the auditor should obtain information considered necessary in the circumstances before accepting
an engagement with a new client, when deciding whether to continue an existing engagement and when considering acceptance of
a new engagement with an existing client. The following information would assist the auditor in accepting and continuing of
relationship with the client:
• The integrity of the principal owners, key management and those charged with governance of the entity;
• Whether the engagement team is competent to perform the audit engagement and has the necessary capabilities,
including time and resources;
• Whether the firm and the engagement team can comply with relevant ethical requirements; and
• Significant matters that have arisen during the current or previous audit engagement, and their implications for continuing
the relationship.
Question 2
State with reasons (in short) whether the following statements are correct or incorrect: (Answer any eight)
(i) C& AG orders to conduct test audit of the accounts of a Government company.
(ii) The auditor shall not modify the opinion in the auditor's report.
(iii) The first auditor of a Government company was appointed by the Board in its meeting after 10 days from the date of registration.
(iv) As per section 138 of the Companies Act, 2013 private companies are not required to appoint internal auditor.
(v) Written representation by management as to the quality of inventory is substitute for verification.
(vi) Letter of weakness is issued by the Management.
(vii) Scrutiny of Bank Reconciliation statement is one of the audit techniques.
(viii) The basic objective of audit does not change with reference to nature, size or form of an entity.
(ix) Director's relative can act as an auditor of the company.

(x) If an LLP (Limited Liability Partnership Firm) is appointed as an auditor of a company, every partner of a firm shall be authorized to
act as an auditor.
(8x2= 16 Marks)
Answer
(i) Correct: Comptroller and Auditor- General of India may, in case of a government company, if he considers necessary, by an order,
cause test audit to be conducted of the accounts of such company.
(ii) Incorrect: The auditor shall modify the opinion in the auditor's report when the auditor concludes that, based on the audit evidence
obtained, the financial statements as a whole are not free from material misstatement or the auditor is unable to obtain sufficient
appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.
(iii) Incorrect: According to section 139(7) of the Companies Act, 2013, in the case of a Government company, the first auditor shall be
appointed by the Comptroller and Auditor-General of India within 60 days from the date of registration of the company. If CAG fails
to make the appointment within 60 days, the Board shall appoint in next 30 days.
(iv) Incorrect: Section 138 of the Companies Act, 2013 requires every private company to appoint an internal auditor having turnover
of Rs. 200 crore or more during the preceding financial year; or outstanding loans or borrowings from banks or public financial
institutions exceeding Rs. 100 crore or more at any point of time during the preceding financial year.
(v) Incorrect: Inspecting inventory when attending physical inventory counting assists the auditor in ascertaining the existence of the
inventory (though not necessarily its ownership) and in identifying its quality for example, obsolete, damaged or ageing inventory.
Written representations cannot be a substitute for other evidence that the auditor could expect to be reasonably available.
Alternative Reason for incorrect answer may be given as: One of the objectives of the written representation is to support other
audit evidence relevant to the financial statements or specific assertions in the financial statements by means of written
representation. So it is clear that written representations cannot be a substitute for other evidence that the auditor could expect to
be reasonably available.
(vi) Incorrect: Letter of weakness is a report issued by auditor stating the weakness in internal control mechanism. It also suggests
measures by which the weakness in the system to be corrected and the control system be made better protected.
(vii) Correct: For collection and accumulation of audit evidence, certain methods and means are available and these are known as audit
techniques. The scrutiny of Bank Reconciliation Statement is one of the Audit techniques commonly adopted by the auditors.
(viii) Correct: An audit is an independent examination of financial information of any entity, whether profit oriented or not, and
irrespective of its size or legal form, when such an examination is conducted with a view to expressing an opinion thereon. It is clear
that the basic objective of auditing, i.e., expression of opinion on financial statements does not change with reference to nature,
size or form of an entity.
(ix) Incorrect: As per section 141(3) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor of a
company whose relative is a Director or is in the employment of the Company as a director or key Managerial Personnel.
(x) Incorrect: As per section 141(2) of the Companies Act, 2013, where a firm including a limited liability partnership (LLP) is appointed
as an auditor of a company, only the partners who are Chartered Accountants shall be authorized to act and sign on behalf of the
firm.
Question 3
How mil you vouch/verify the following?
(a) Rental Receipts
(b) Repair to assets
(c) Work-in-progress
(d) Insurance claims. (4x4 = 16 Marks)
Answer
(a) Rental Receipts:
• Check copies of bills or rent receipts issued to the tenant with reference to tenancy agreement and bills of charges paid
by the landlord on behalf of tenants.
• The entries in the rental register in respect of rent accrued should be traced with reference to copies of rental bills.
• Scrutinize the account of collecting agent when the rent is collected by such agent.
• Vouch the entries for rent received in advance and ensure proper adjustment is made.
• Investigate abnormal rent outstanding, if any.
• Reconcile the outstanding rent and check that proper provision is made if unrecoverable.
• If rent is received net of TDS, check that the rental income is shown at gross amount and TDS is shown in Balance Sheet as
per Schedule III to the Companies Act, 2013.
(b) Repair to Assets:

• Since the line demarcating repairs from renewals is slender, usually it is not a simple matter to determine the amount of
the expenditure, if any, included as charges for repairs, which should be considered as that incurred for renewal of an
asset and added to its cost.

• It may sometimes be possible to determine this on a consideration of the nature of repairs carried out. The proportion of
the charges which had the effect of increasing the value of an asset or enhancing its capacity or life should be treated as
capital expenditure.
• Where, however, it is not possible to form an opinion accurately on the basis of evidence as regards the nature of repairs,
a certificate from the engineer under whose supervision the repairs were carried out, confirming the classification of
expenditure should be obtained.
• It should be ensured that Repairs to 'Certain Assets' like Building and Machinery have been separately disclosed as per the
requirements of Schedule III to the Companies Act, 2013.
(c) Work in Progress:

• Involve a technical expert in verification and valuation of WIP, if necessary.
• Ensure that cost sheets are duly attested by the works manager.
• Test the correctness of the cost as disclosed by the cost records by verification of quantities and cost of materials, wages
and other charges included in the cost- sheets by reference to the records maintained in respect of issues of materials,
payment of wages and its classification and original evidence in respect of all expenditure included in the cost-sheets.
• Verify stage of completion with component of cost involved with underlying records.
• Compare the unit cost as shown by the cost sheet with standard cost for any large variations.
• Ensure that the allocation of overhead expenses has been made on reasonable basis and is same as used in earlier period.
• Compare the cost sheet with that of the previous year and if there is any large variation, investigate the reason thereof.
(d) Insurance Claims: While vouching the receipts of insurance claims, following points may be considered-
• The auditor should examine a copy of the insurance claim lodged with the insurance company. Correspondence with the
insurance company and with the insurance agent should also be seen. Counterfoils of the receipts issued to the insurance
company should also be seen.
• The auditor should also determine the adjustment of the amount received in excess or short of the value of the actual loss
as per the insurance policy.
• The copy of certificate/report containing full particulars of the amount of loss should also be verified.
• The accounting treatment of the amount received should be seen particularly to ensure that revenue is credited with the
appropriate amount and that in respect of claim against asset, the profit and loss account is debited with the short fall of
the claim admitted against book value.
• If the claim was lodged in the previous year but no entries were passed, entries in the profit and loss account should be
appropriately described.
Question 4
(a) State the significant difficulties encountered during audit with reference to SA-260 (communication with those charged with
governance). (6 Marks)
(b) The auditor may exercise his judgement to identify which risks are significant risks. Explain the above in context of SA-315. (6
Marks)
(c) State the manner of rotation of auditors on expiry of their term. (4
Marks)
Answer
(a) Significant Difficulties Encountered During the Audit: As per SA 260 "Communication with Those Charged with Governance",
significant difficulties encountered during the audit may include such matters as:
 Significant delays in management providing required information.
 An unnecessarily brief time within which to complete the audit.
 Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
 The unavailability of expected information.
 Restrictions imposed on the auditor by management.
 Management's unwillingness to make or extend its assessment of the entity's ability to continue as a going concern when
requested.
(b) Identification of Significant Risks: SA 315 "Identifying and Assessing the Risk of Material Misstatement through understanding the
Entity and its Environment" defines 'significant risk' as an identified and assessed risk of material misstatement that, in the auditor's
judgment, requires special audit consideration.
As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in the auditor's judgment, a
significant risk. In exercising this judgment, the auditor shall exclude the effects of identified controls related to the risk.
In exercising judgment as to which risks are significant risks, the auditor shall consider at least the following-
(i) Whether the risk is a risk of fraud;
(ii) Whether the risk is related to recent significant economic, accounting or other developments like changes in regulatory
environment etc. and therefore requires specific attention;

(iii) The complexity of transactions;
(iv) Whether the risk involves significant transactions with related parties;
(v) The degree of subjectivity in the measurement of financial information related to the risk, especially those measurements
involving a wide range of measurement uncertainty; and
(vi) Whether the risk involves significant transactions that are outside the normal course of business for the entity or that
otherwise appear to be unusual.
(c) Manner of Rotation of Auditors on Expiry of their Term: Prescribed manner of rotation of auditors on expiry of their term is given
below-
• The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit firm who may replace the
incumbent auditor on expiry of the term of such incumbent.
• Where a company is required to constitute an Audit Committee, the Board shall consider the recommendation of such
committee and in other cases, the Board shall itself consider the matter of rotation of auditors and make its
recommendation for appointment of the next auditor by the members in annual general meeting.
• For the purpose of the rotation of auditors-
• in case of an auditor (whether an individual or audit firm), the period for which the individual or the firm has
held office as auditor prior to the commencement of the Act shall be taken into account for calculating the period
of five consecutive years or ten consecutive years, as the case may be;
• the incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated with the outgoing
auditor or audit firm under the same network of audit firms.
The term "same network" includes the firms operating or functioning, hitherto or in future, under the same
brand name, trade name or common control.
Further, for the purpose of rotation of auditors,-
(a) a break in the term for a continuous period of five years shall be considered as fulfilling the
requirement of rotation;
(b) if a partner, who is in charge of an audit firm and also certifies the financial statements of the company,
retires from the said firm and joins another firm of chartered accountants, such other firm shall also
be ineligible to be appointed for a period of five years.
• Where a company has appointed two or more individuals or firms or a combination thereof as joint auditors, the company
may follow the rotation of auditors in such a manner that both or all of the joint auditors, as the case may be, do not
complete their term in the same year.
Question 5
(a) Audit documentation serves a number of purposes. Explain with reference to SA-230. (6 Marks)
(b) Explain the inherent limitations of Internal Control. (6 Marks)
(c) Point out any eight areas where external confirmation used as an audit procedure. (4 Marks)
Answer
(a) Audit Documentation: As per SA 230 "Audit Documentation", audit working papers are the record of audit procedures performed,
relevant audit evidence obtained and conclusions the auditor reached.
(i) Working papers are the evidence of the auditor's basis for a conclusion about the achievement of the overall objective of
the auditor and evidence that the audit was planned and performed in accordance with SAs and applicable legal and
regulatory requirements.
• Assisting the engagement team to plan and perform the audit.
• Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to
discharge their review responsibilities in accordance with SA 220.
• Enabling the engagement team to be accountable for its work.
• Retaining a record of matters of continuing significance to future audits.
• Enabling the conduct of quality control reviews and inspections in accordance with SQC 1.
• Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements.
(b) Inherent Limitations of Internal Control: (Check Internal Control Chapter)

(c) External Confirmation as an Audit Procedure: SA 505, "External Confirmations", lays down standards for external confirmation of
balances. External confirmations are frequently used in relation to account balances and their components but need not be
restricted to these items. For example, the auditor may request external confirmation of the terms of agreements or transactions
an entity has with third parties. The confirmation request is designed to ask if any modifications have been made to the agreement,
and if so, the relevant details thereof. Other areas where external confirmations may be used include the following:
 Bank balances and other information from bankers.
 Accounts receivable balances.
 Inventories held by third parties.
 Property title deeds held by third parties.

 Investments purchased but delivery not taken.
 Loans from lenders.
 Accounts payable balances.
 Long outstanding share application money.
Question 6
(a) What are the advantages of the audit of the accounts of a partnership firm? (6 Marks)
(b) What are the objectives and functions of Auditing and Assurance Standards Board (AASB)? Explain. (6 Marks)
(c) State the important objectives of local body's audit. (4 Marks)
Answer
(a) Advantages of audit of accounts of a partnership firm (Check Special Audit Chapter)
(b) Objectives and Functions of the Auditing and Assurance Standards Board: The following are the objectives and functions of the
Auditing and Assurance Standards Board-
• To review the existing and emerging auditing practices worldwide and identify areas in which Standards on Quality Control,
Engagement Standards and Statements on Auditing need to be developed.
• To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so that these may be
issued under the authority of the Council of the Institute.
• To review the existing Standards and Statements on Auditing to assess their relevance in the changed conditions and to
undertake their revision, if necessary.
• To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to any specific industry or on
generic issues, so that those may be issued under the authority of the Council of the Institute.
• To review the existing Guidance Notes to assess their relevance in the changed circumstances and to undertake their
revision, if necessary.
• To formulate General Clarifications, where necessary, on issues arising from Standards.
• To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own authority for guidance
of professional accountants in the cases felt appropriate by the Board.
(c) Objectives of Audit of Local Bodies: (Check Special Audit Chapter)
Question 7
Write short notes on any four of the following:
(a) Fundamental Accounting Assumptions.
(b) Methods to obtain audit evidence.
(c) Importance of working papers.
(d) Random sampling.
(e) Defalcation of cash with examples. (4x4=16 Marks)
Answer
(a) Fundamental Accounting Assumptions: AS 1 states that certain fundamental accounting assumptions underlie the preparation and
presentation of financial statements. They are usually not specifically stated because their acceptance and use are assumed.
Disclosure is necessary if they are not followed. The following have been generally accepted as fundamental accounting
assumptions:
(1) Going Concern: The enterprise is normally viewed as a going concern, that is, as continuing in operation for the foreseeable
future. It is assumed that the enterprise has neither the intention nor the necessity of liquidation or of curtailing materially
the scale of the operations.
(2) Consistency: It is assumed that accounting policies are consistent from one period to another.
(3) Accrual: Revenues and costs are accrued, that is, recognised as they are earned or incurred (and not as money is received
or paid) and recorded in the financial statements of the periods to which they relate.
Thus, if the fundamental accounting assumptions, viz., Going Concern, Consistency and Accrual are followed in financial statements,
specific disclosure is not required. If a fundamental accounting assumption is not followed, the fact should be disclosed.
(b) Methods of Obtaining Audit Evidence: (Write Audit Techniques Studied In Chapter 2)
(c) Importance of Working Papers: (Check chapter of Audit Documentation)
(d) Random Sampling: Random selection ensures that all items in the population or within each stratum have a known chance of
selection. It may involve use of random number tables. Random sampling includes two very popular methods which are discussed
below-
(i) Simple random sampling: Under this method each unit of the whole population e.g. purchase or sales invoice has an equal
chance of being selected. The mechanics of selection of items may be by choosing numbers from table of random numbers
by computers or picking up numbers randomly from a drum. It is considered that random number tables are simple and
easy to use and also provide assurance that the bias does not affect the selection. This method is considered appropriate
provided the population to be sampled consists of reasonably similar units and fall within a reasonable range. For example

the population can be considered homogeneous, if say, trade receivables balances fall within the range of Rs. 5,000 to Rs.
25,000 and not in the range between Rs. 25 to Rs. 2,50,000.
(ii) Stratified Sampling: This method involves dividing the whole population to be tested in a few separate groups called strata
and taking a sample from each of them. Each stratum is treated as if it was a separate population and if proportionate of
items are selected from each of these stratum. The number of groups into which the whole population has to be divided
is determined on the basis of auditor judgment. For example in the above case, trade receivables balances may be divided
into four groups as follows -
(a) balances in excess of Rs. 1,00,000;
(b) balances in the range of Rs. 75,000 to Rs. 1,00,000;
(c) balances in the range of Rs. 25,000 to Rs. 75,000; and
(d) balances below Rs. 25,000.
(e) Defalcation of Cash: Defalcation of cash has been found to perpetrate generally in the following ways -
(i) By inflating cash payments.
Examples of inflation of payments:
(1) Making payments against fictitious vouchers.
(2) Making payments against vouchers, the amounts whereof have been inflated.
(3) Manipulating totals of wage rolls either by including therein names of dummy workers or by inflating them in
any other manner.
(4) Casting a larger totals for petty cash expenditure and adjusting the excess in the totals of the detailed columns
so that cross totals show agreement.
(ii) By suppressing cash receipts. Few Techniques of how receipts are suppressed are:
(1) Teeming and Lading: Amount received from a customer being misappropriated; also to prevent its detection the
money received from another customer subsequently being credited to the account of the customer who has
paid earlier. Similarly, money received from the customer who has paid thereafter being credited to the account
of the second customer and such a practice is continued so that no one account is outstanding for payment for
any length of time, which may lead the management to either send out a statement of account to him or
communicate with him.
(2) Adjusting unauthorized or fictitious rebates, allowances, discounts etc. to customer1 accounts and
misappropriating amount paid by them.
(3) Writing off as debts in respect of such balances against which cash has already been received but has been
misappropriated.
(4) Not accounting for cash sales fully.
(5) Not accounting for miscellaneous receipts e.g. sale of scrap, quarters allotted to the employees etc.
(6) Writing down asset values in entirety, selling them subsequently and misappropriating the proceeds.
(iii) By casting wrong totals in the cash book.

Auditing and Assurance
May ’2016
Question Paper
Question No .1 is compulsory .
Answer any five question from the remaining six question.
In case, any candidates answer extra question sub-questions over and above the
Required number, then only the requisite number of question first answered in the
Answer book shall be valued and subsequent extra questions answered shall be ignored.
1. Discuss the following:
(a) With reference to SA-550, “Identification of significant related party Transaction outside the entity’s normal course of 5
business”
(b) With reference to SA-530, meaning of audit sampling and requirements relating to sample design, sample size and selection 5
help to plan and perform the audit?
(c) How does an audit programme help to plan and perform the audit? 5
(d) What are the specific risks related to internal control in an IT environments? 5
2. State with reason in shor whether the following statements are correct or incorrect answer any eight 8x2 =16
(a) The scope of work of an internal auditor may extend even beyond the financial accounting .
(b) An auditor has nothing to do with prudence of profitability of a company.
(c) Evaluating responses to enquiries is an integral part of the inquiry process.
(d) Internal control questionnaires are a good source of identifying weakness in internal control system .
(e) Cluster sampling is less effective than random sampling.
(f) Errors of duplication affects the Trail Balance.
(g) Substantive procedures do not test the balances of accounts.
(h) The first auditors of a Government company was appointed by the Board of Directors.
(i) The members of XYZ Ltd .Preferred a complaint against the auditor stating that he has failed to send the auditor’s report to them.
(j) Mr .Pawan, a practicing Chartered Accountant, is appointed as “Tax-Consultant ”of ABC Ltd .In which his father Mr .Singh is the
Managing Director.
3. How you will vouch/verify the following? 4x4 =16

(a) Preliminary expenses
(b) Customs & Excise Duties
(c) Floating assets
(d) Recovery of bad debts written-off
4. (a) Mention the disclosure requirement of current investments as per schedule III of the Companies Act, 2013. 6
(b) What are the significant matters observed during the course of audit, a record of which should be kept in the Audit Note book? 6
(c) Write short note on the use of flowchart in evaluation of internal control. 4
5. (a) Mention any six special points which you as an auditor would look into while auditing the books of a partnership firm. 6
(b) Draft an audit programme for conducting audit of account of local body. 6
(c) What precautions should be taken by an auditor while applying test check techniques? 4
6. (a) What are the matter to be included in Director’s Responsibility statement? 6

(b) Discuss to provisions of section 134 of the companies Act, 2013 regarding the authentication of financial statement 6
(c) State the factors to be considered to verify the validity of any transaction. 4
7. Write short on any four of the following: 4x4 =16
(a) Provision for applicability of internal audit as per Companies Act, 2013.
(b) Prohibition to buy-back its own securities in certain circumstance.
(c) Advantage in accounting policies.
(d) Recognition of interest on deposit.

आशीवायद- Comprehensive Module For CA IPCC Auditing & Assurance Miscellaneous Topics
Chapter 19
Miscellaneous Topics
TYPES OF ERRORS
As per nature
a) Self revealing errors
 These appear during preparation of accounts.
 For example, if a cheque deposited is not shown. It becomes apparent during BRS.
b) Non-self revealing errors

 They do not appear themselves during preparation of accounts.
 These can be known only by detailed analysis.
 For e g: capital expenditure shown as revenue expenditure.
c) Unintentional error
 These are not deliberate mistakes.
 It may be due to ignorance / oversight of facts.
 For example, if Petty cashier forgets to record freight of Rs. 10/- in petty cash book.
d) Intentional errors
 Deliberate mistakes i.e. frauds.
 Bad debts recovered not recorded in books, thus misappropriating the money so received by employee of the
entity.
e) Unconcealed Errors
Same as unintentional error. No efforts are made to hide the error by person committing it.
f) Concealed Error
 Whereby the person committing the error (fraud) is making ways to hide it.
 These can be ascertained only by detailed checking.
g) Error affecting trial balance

 One sided error due to which trial balance does not tally.
 For example: goods sold to 'A' entered in sales book but not in A's account.
h) Errors not affecting trial balance

 Two sided error such as compensating error or complete omission of transaction.
 For example- No provision for bad debts.
According to Accounting Aspect
(i) Error of principle

a) Recording an entry in fundamentally incorrect manner.
b) For example: Capital expenditure charged to revenue.
c) No effect on trial balance.
d) But they may affect profit..
(ii) Compensating Errors

a) Which are nullified by the impact of another error.
b) For example.: expenses amounting to Rs. 6000 wrongly recorded at Rs. 8000 while another expense amounting to
Rs. 2000 not recorded at all.
c) No effect on Trial Balance.
d) But may affect profits if one error arises in revenue a/c & other in a balance sheet item.
(iii) Error of Omission
a) Where transaction is not recorded in Accounts, wholly or partly.
b) For example: Sales of 1000 to a either not recorded wholly or shown in sales Accounts but not posted to A's
account.

c) Full omission does not affect trial balance but partial omission does.
d) May affect profit.
(iv) Error of commission

 Incorrect recording of a transaction.
 Maybe of following types:
 Posting error: - wrong Account/Amount/ Side.
 Casting Error:- Wrong totalling/balancing.
 Duplication error: - entry recorded twice.
 Carry forward error:- Wrong amount/ side.
 For example: - Sales amounting to Rs. 1000/- recorded as 100/- or page total of wage sheets 500/ Carried
forward as Rs. 5500/-.
 May or may not affect trial balance. Same is the case of impact on profit.
Conditions which increase the risk of misstatement in financial statement:

a) Weakness in internal control system.
b) Doubt about competence and integrity of management.
c) Unusual pressure within entity e.g., entity facing problems in getting finance.
d) Unusual transactions e.g., transaction with related parties.
e) Problems in obtaining sufficient & appropriate audit evidence. For example, management deliberately not cooperating with
the auditor.
ACCOUNTING CONCEPT - DISCLOSURE OF ACCOUNTING POLICIES
Meaning Accounting Policies

 It refers to specific accounting principles & methods of applying those principles, adopted by entity.
 In preparation & presentation of financial statements.
Why disclosure is needed?

a) There is no single list of accounting policies that can be applicable in all situations.
b) Management chooses the appropriate accounting policy.
c) For e.g., depreciation can be charged as per written down value method or straight-line method.
Same ways, different polices may be adopted for following: -
 Valuation of inventory
 Treatment of expenditure during construction
 Valuation of fixed assets
 Conversion of foreign currency items
 Valuation of investments
 Treatment of research & development expenditure
 Treatment of contingent liability
d) The profit or loss can be significantly affected by adopting different accounting policies.
e) Thus disclosure of accounting policies followed becomes necessary so that readers of financial statement can properly
understand the view presented.
Requirement of Accounting Standard regarding disclosure of accounting policie s- AS-1

a) All significant accounting policies adopted in financial statements should be disclosed; &
b) Disclosure should usually be made at one place; &
c) Disclosure should from part of financial statement; &
d) Any change in Accounting policies having material effect should be disclosed along with amount by which financial
statement is affected by such change (if amount is ascertainable) If amount is not ascertainable, the fact should be
stated; &
FUNDAMENTAL ACCOUNTING ASSUMPTION
Meaning
 Certain fundamental accounting assumptions underlie the preparation & presentation of financial statements.
 Their use is assumed.
3 fundamental accounting assumptions:

a) Going Concern: The enterprise is viewed as going concern that is, continuing operations for the foreseeable future. It
is assumed that the enterprise has neither the intention nor the necessity of close down.
b) Consistency: It is assumed that accounting policies are consistent from one period to another period.
c) Accrual: Revenues and costs are accrued, that is, recognized as they are earned or incurred (and not as money is received
or paid) and recorded in the financial statements of the period to which they relate.

Disclosure requirement as per AS-1
a) If all three fundamental Accounting assumptions are being followed in preparation & presentation of financial statements,
specific disclosure is not needed.
b) However, if any fundamental accounting assumption is not followed the fact has to be disclosed in the financial
statements.

♥ Give various factors which result in increase in Gross profit.
Factors which increase the gross profit:

(i) Undervaluation of opening stock; it may be either the effect of non-inclusion of certain items of stocks or that of valuation of the
stock at a rate lower than that warranted by the basis of valuation adopted or miscalculation of the value of one or more items
of stock. In such a case, the increase in the rate of gross profit would be preceded by a fall in the rate of gross profit in the previous
year.
(ii) Overvaluation of closing stock, either by the inclusion therein of fictitious items of stock or over-statement of values of some of
them.
(iii) Alteration of the basis of valuation of closing stock, e.g., where the opening stock was valued at cost or market rate whichever
was lower, valuing the closing stock at the market price which is higher than cost.
(iv) Increase in the value of some of the items included in the opening stock above cost, on account of which the unsold stock of these
items at the close of the year is valued at cost.
(v) Under-statement of opening stock or over-statement of closing stock, due to adjustment of the amount of sales, when goods sold
but not delivered are included in the closing stock or when goods were delivered and taken out of stock last year, but sales
invoices is raised in the current year.
(vi) Entry of fictitious purchases to boost up the profits, if such a practice has been resorted to, it would have the effect of reducing
the rate of gross profit in the ensuing year.
(vii) Inclusion in the closing stock of goods returned awaiting despatch to supplier, the cost of which has been debited to them or
goods returned by customers, the cost whereof has not been credited to parties.
(viii) Inclusion in the closing stock of goods received for the sale on approval or on a consignment basis.
(ix) Treatment of goods sent out for sale on consignment basis as regular sales.
(x) No provision or under-provision in the expenses accounts included in the Trading Account. For example, purchase may be
understated; provision for outstanding wages or carriage inward may not have been made.
♥ Define depreciation and discuss various purposes of providing depreciation.
Definition: According to AS-6 "Depreciation Accounting" issued by the Institute of Chartered Accountants of India "Depreciation is a measure of the
wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time, obsolescence through technology and market
charges. Depreciation is allocated so as to charge a fair proportion of the depreciable amount in each accounting period during the expected useful
life of the asset. Depreciation includes amortisation of assets whose usefulness is predetermined".
The term "depreciable amount" of a depreciable asset as per the standard is its historical cost, or other amount substituted for historical cost in the
financial statements less the estimated residual value.
The accounting standard recommends that the depreciable amount of a depreciable asset should be allocated on a systematic basis to each accounting
period during the useful life of the asset.
Purpose of Providing Depreciation:
(ix) To keep capital intact: It will be evident that one of the effects of providing for depreciation on an asset is to retain an amount (equal to
the proportion of the cost of the asset employed in the business that has run off, estimated on the basis of the period of its working life and
its scrap value) in the business out of the profits in each year.
(x) To ascertain cost accurately: Unless a proper charge on account of depreciation is included in the Profit and Loss Account, the true cost of
manufacture of different products will not be ascertained. This is because depreciation is as much a charge against revenue as any other
expenditure and must be included in accounts irrespective of the fact whether the final result of a working is profit or loss.
(xi) To charge initial costs against earnings: The cost of a machine less its scrap value can, in effect, be regarded as the price for use of the
machine paid in advance for the period it will be rendering service. According to this view unless an appropriate part of this price is charged
to the profits of the business each year, the profit earned on its working will not be correctly ascertained.
(xii) To prepare true and fair statements: Unless depreciation is provided, the assets will be shown at an amount higher than their true value
and the profit shown will be more than the real profit. In other words, the Balance Sheet and the Profit and Loss Account will not be true
and fair.
♥ Discuss the areas in which different accounting policies may be adopted (6 Marks)
Areas in which Different Accounting Policies are adopted: Accounting policies refer to the specific accounting principles and the methods
of applying those principles adopted by the enterprise in the preparation and presentation of financial statements.
There is no single list of accounting policies which are applicable to all circumstances. The different circumstances in which enterprises
operate in a situation of diverse and complex economic activity make alternative accounting principles and methods of applying those
principles acceptable. The choice of the appropriate accounting principles and the methods of applying those principles in the specific
circumstances of each enterprise require for considerable judgment by the management of the enterprise.
The following are examples of the areas as given in AS- 1, Disclosure of Accounting Policies in which different accounting policies may be
adopted by different enterprises.
(i) Method of depreciation, depletion and amortization.

(ii) Valuation of fixed assets.
(iii) Valuation of inventories.
(iv) Valuation of goodwill.
(v) Valuation of investment.
(vi) Treatment of retirement benefits.
(The above list is not exhaustive. There may be other examples as well.)
♥ Disclosure requirements of debtors in the financial statements. (5 Marks)
Disclosure Requirements of Debtors in Financial Statements:
1. Classification by Age
(iii) Debtors outstanding for a period exceeding 6 months and

(iv) Other debts.
The amount of provision for doubtful debts shall be shown separately. This is called classification by Age.
2. Classification by nature:
(iv) Debts considered good and in respect of which the company is fully secured.
(v) Debts considered good for which the company holds no security other than the debtor's personal security and
(vi) Debts considered doubtful or bad.
3. Classification by party:
(iv) Debts due by the Directors or other officers of the company, or any of them severally or jointly with any other person. (The term
"officer" includes any Director, Manager, or secretary but not auditor).
(v) Debts due by Firms or private companies respectively in which any director is a partner or a director or a member, as the case
may be.
(vi) Debts due from other companies under the same management along with names of companies concerned.
The maximum amount due, by directors or other officers of the company at any time during the year to be shown by way of a note.
4. Provisions: Provisions shown herein should not ensure the amount of the debts considered doubtful or bad-surplus provided, if any shall
be shown as revenue under the head "reserves and surplus" under the heading "Reserve for Doubtful or bad debts".
5. Excluded items: The amounts to be shown under sundry debtors shall include the amounts due in respect of goods sold or services rendered
or in respect of other contractual obligations, but shall not include the amounts which are in the nature of loans or advances.
Standards collectively known as the Engagements Standards issued by AASB under the authority of the council of ICAI.
♥ Distinguish between Reserves and Provisions. (5

Marks)
Reserves and Provision
(i) Reserve is an appropriation of profit whereas provision is a charge against Profit.

(ii) Reserves are not intended to meet any liability, contingency or diminution in the value of assets. Provisions are made to provide
for depreciation, renewal or a known liability or a disputed claim.
(iii) Reserves cannot be created unless there is a profit except revaluation reserve and capital subsidy. Provisions must be created
whether or not there is profit.
(iv) Reserves are generally optional except in certain situations - Capital Redemption reserve, Debenture Redemption Reserve,
Declaration of dividend higher than 10% etc. Provisions are not optional and have to be made as per generally accepted
accounting principles.
(v) Reserves are shown on the liability side. Provisions for depreciation and provision for doubtful debts are shown as deduction
from respective assets. Provision for liability is shown on the liability side.
♥ You are the auditor and examining the book debts of a company. Give some indications which leads to
doubt about recovery as uncollectable debts from debtors and advances.
The following are some of the indications of doubtful and uncollectible debts, loans and advances:
(i) The terms of credit have been repeatedly ignored.

(ii) There is stagnation or lack of healthy turnover in the account.
(iii) Payments are being received but the balance is continuously increasing.

(iv) Payments though being received regularly, are quite small in relation to the total outstanding balance.
(v) An old bill has been partly paid (or not paid), while later bills have been fully settled.
(vi) The cheques received from the debtors have been repeatedly dishonoured.
(vii) The debt is under litigation, arbitration, or dispute.
(viii) The auditor becomes aware of unwillingness or inability of the debtor to pay the dues, e.g., a debtor has either become
insolvent, or has closed down his business, or is not traceable.
(ix) Amounts due from employees, which have not been repaid on termination of employment.
(x) Collection is barred by statute of limitation.
♥ Purposes of providing depreciation.
Purposes of Providing Depreciation: The main purposes of providing depreciation are as under:
(i) To keep intact the capital invested in fixed assets - This is accomplished by retaining the amount of depreciation charged in the
profit and loss account in the business.
(ii) To ascertain the true cost of production - As the value of fixed assets depletes gradually by consumption during the process of
production, it is necessary that such consumption of value be charged in the accounts for determination of the true cost of
production.
(iii) To determine the profit or loss for the year - Depreciation being an expense represented by the loss in value of fixed assets arising
on use, it is charged to the profit and loss account for determining the profit or loss during a year;
(iv) To present a true and fair value of entity's assets in the balance sheet, since the original costs of fixed assets gradually decreases
due to use and other factors, it is improper to continue to carry such assets at original costs. Therefore, the amount of
depreciation charged in the profit and loss account representing the loss in value of the assets is deducted from the original cost
on a cumulative basis so as to reflect in the balance sheet a true and fair value of the fixed assets.
♥ Cut-off arrangements: Accounting is a continuous process because the business never comes to halt. It is, therefore, necessary that
transactions of one period would be separated from those in the ensuing period so that the results of the working of each period can be
correctly ascertained. The arrangement that is made for this purpose is technically known as "cut-off arrangement". It essentially forms part
of the internal control system of the organisation. Accounts, other than sales, purchase and stock are not usually affected by the continuity
of the business and therefore, this arrangement is generally applied only to sales, purchase and stock. The auditor satisfies by examination
and test-checks that the cut-off procedures are adequately followed and ensure that:
(i) Goods purchased, property in which passed on to the client, have in fact been included in the inventories and that the liability
has been provided for in case of credit purchase.
(ii) Goods sold have been excluded from the inventories and credit has been taken for the sales. If the value of sales is to be received,
the concerned party has been debited.
The auditor may examine a sample of documents, evidencing the movement of stock into and out of stores, including documents pertaining
to period shortly before and after the cut-off date and check whether stocks represented by those documents were included or excluded
as appropriate during stock taking for perfect and correct presentation in the financial statements.
♥ Company can provide lower rate of depreciation than prescribed by Schedule XIV of the Companies Act;
1956.
It is permissible for the entity to charge deprecation on its assets at rate different from schedule XIV rates provided those rates are higher
than the schedule rates based on technical estimation or otherwise allowed under Section 205 of the Act. The rates as contained in Schedule
XIV are minimum rates and therefore a company cannot provide lower rate of depreciation than prescribed by Schedule XIV of the
Companies Act, 1956
.
♥ What are the obvious assertions in the following items appearing in the Financial Statements?
(i) Profit and Loss Statement
Travelling Expenditure Rs. 50,000
(ii) Balance Sheet
Debtors ` Rs. 2,00,000
(e) Travelling Expenditure: Rs. 50,000

 Expenditure has been actually incurred for the purpose of travelling.
 Travelling has been undertaken during the year under consideration.
 Total amount of expenditure incurred is ` 50,000 during the year.
 It has been treated as revenue expenditure and charged to profit and loss account.
(ii) Debtors: Rs. 2,00,000

 These include all sales transaction occurred during the year.
 These have been recorded properly and occurred during the year
 These constitute assets of the entity.
 These have been shown at proper value, i.e. after showing the deduction on account of provision for bad and doubtful debts.
♥ While auditing the accounts of XYZ Ltd., it has come to the notice of the auditor that receipts have been
suppressed. Discuss explaining at least five techniques as to how receipts may be suppressed.
Five Techniques of how receipts are suppressed are:

(i) Teeming and Lading: Amount received from a customer being misappropriated; also to prevent its detection the money received from
another customer subsequently being credited to the account of the customer who has paid earlier. Similarly, moneys received from the
customer who has paid thereafter being credited to the account of the second customer and such a practice is continued so that no one
account is outstanding for payment for any length of time, which may lead the management to either send out a statement of account to
him or communicate with him.
(ii) Adjusting unauthorized or fictitious rebates, allowances, discounts, etc. to customer accounts and misappropriating amount paid by them.
(iii) Writing off as debts in respect of such balances against which cash has already been received but has been misappropriated.
(iv) Not accounting for cash sales fully.
(v) Not accounting for miscellaneous receipts, e.g., sale of scrap, quarters allotted to the employees, etc.
♥ "In terms of the Revised Preface, the Auditing and Assurance Standards are now renamed based on the
type of assurance provided by the engagement undertaken by a member." Discuss
The Auditing and Assurance Standards Board, in 2007, adopted the Revised Preface to Standards on Quality Control, Auditing, Review,
Other Assurance and Related Services. In terms of the Revised Preface, the Auditing and Assurance Standards are now renamed based
on the type of assurance provided by the engagement undertaken by a member, viz.,
(i) Standards on Auditing (SAs)- to be applied in the audit of historical financial information
(ii) Standards on Review Engagements (SREs) - to be applied in the review of historical financial information.
(iii) Standards on Assurance Engagements (SAEs) - to be applied in assurance engagements, engagements dealing with subject
matters other than historical financial information
(iv) Standards on Related Services (SRSs) - to be applied to engagements to apply agreed upon procedures to information and
other related services engagements such as compilation engagements
♥ "Statements" and "Guidance Notes" of ICAI-whether mandatory or recommendatory?

Statements and Guidance Notes of ICAI -whether mandatory or recommendatory:
Statements: The 'Statements' have been issued with a view to securing compliance by members on matters which, in the opinion of the
Council, are critical for the proper discharge of their functions. 'Statements' therefore are mandatory.
Accordingly, while discharging their attest function, it will be the duty of the members of the Institute to ensure that statements are followed
and complied with.
Guidance Notes: 'Guidance Notes' are primarily designed to provide guidance to members on matters which may arise in the course of their
professional work and on which they may desire assistance in resolving issues which may pose difficulty. Guidance Notes are
recommendatory in nature. A member should ordinarily follow recommendations in a guidance note relating to an auditing matter except
where he is satisfied that in the circumstances of the case, it may not be necessary to do so.
Similarly, while discharging his attest function, a member should examine whether the recommendations in a guidance note relating to an
accounting matter have been followed or not. If the same have not been followed, the member should consider whether keeping in view
the circumstances of the case, a disclosure in his report is necessary.
There are, however a few guidance notes in case of which the Council has specifically stated that they should be considered as mandatory
on members while discharging their attest function.
♥ As a Statutory Auditor, how would you deal with the following?

(a) The Managing Director of the Company has committed a "Teeming and Lading" Fraud. The amount involved has been however subsequently
after the year end deposited in the company.
(b) The accountant of C Ltd. has requested you, not to send balance confirmations to a particular group of debtors since the said balances are
under dispute and the matter is pending in the court.
(a) Fraud Committed by Managing Director: The Managing Director of the company has committed a Teeming and Lading" fraud. The fact that
the amount involved has been subsequently deposited after the year end is not important because the auditor is required to perform his
responsibilities as laid down in SA 240, The Auditor's responsibilities relating to Fraud in an Audit of Financial Statements". First of all, as per

SA 240, the auditor needs to perform procedures whether the financial statements are materially misstated. Because an instance of fraud
cannot be considered as an isolated occurrence and it becomes important for the auditor to perform audit procedures and revise the audit
risk assessment. Secondly, the auditor needs to consider the impact of fraud on financial statements and its disclosure in the audit report.
Thirdly, the auditor should communicate the matter to the Chairman and Board of Directors. Finally, in view of the fact that the fraud has
been committed at the highest level of management, it affects the reliability of audit evidence previously obtained sinoe there is a genuine
doubt about representations of management. Finally, the auditor shall have to report under CARO, 2003 indicating the nature and
amount involved in respect of fraud noticed during the year.
(b) External confirmation Requests: SA 505, "External Confirmations", establishes standards on the debtor's use of external confirmation as a
means of obtaining audit evidence. It requires that the auditor should employ external confirmation procedures in consultation with the
management.
If management refuses to allow the auditor to send a confirmation request, the auditor shall:
(i) Inquire as to management's reasons for the refusal, and seek audit evidence as to their validity and reasonableness;
(ii) Evaluate the implications of management's refusal on the auditor's assessment of the relevant risks of material
misstatement, including the risk of fraud, and on the nature, timing and extent of other audit procedures; and
(iii) Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
If the auditor concludes that management's refusal to allow the auditor to send a confirmation request is unreasonable, or the auditor is
unable to obtain relevant and reliable audit evidence from alternative audit procedures, the auditor shall communicate with those charged
with governance in accordance with "SA 260 Communication with Those Charged with Governance". The auditor also shall determine the
implications for the audit and the auditor's opinion in accordance with "SA 705 Modifications to the Opinion in the Independent Auditor's
Report".
♥ Preliminary Expenses – Short Note

This term is applied to expenses incurred in connection with the formation of a limited company. They generally include the following expenses:
(i) Legal costs in drafting the memorandum and articles of association;

(ii) Capital duty and other fees on registration of the company;
(iii) Cost of printing the memorandum and articles of association;
(iv) Cost of statutory books and the companies seal, etc; and
(v) Any other expense incurred to bring into existence the statutory books of the company.
Preliminary expenses in so far as they have not been written off to date must be shown separately in the balance sheet of the company under the
heading "Miscellaneous Expenditure".
The auditor should verify these expenses with reference to supporting documents such as invoices and contracts relating to these expenses. In the
case of a company, the auditor should also examine that the reimbursement of such expenses to promoters is in accordance with the disclosures made
in the prospectus. Compliance with legal provisions regarding reimbursement of the promoters' expenses should be specifically examined.
♥ Self-revealing errors – Short Note

These are such errors the existence of which becomes apparent in the process of compilation of accounts.
A few illustrations of such errors are given hereunder, showing how they become apparent.
(i) Omission to post a part of a journal entry to the ledger. Trial balance is thrown out of agreement.
(ii) Wrong totaling of the Purchase Register. Control Account (e.g., the Sundry Creditors Account) balances and the
aggregate of the balances in the personal ledger will disagree.
(iii) A failure to record in the cash book amounts paid into or Bank reconciliation statement will show up error.
withdrawn from the bank.
(iv) A mistake in recording amount received from X in the account of Statements of account of parties will reveal mistake.
Y.
From the above, it is clear that certain apparent errors balance almost automatically by double entry accounting procedure
and by following established practices that lie within the accounting system but not being generally considered to be a part
of it, like bank reconciliation or sending monthly statements of account for confirmation.

Continuous audit (M.imp)
Concept
• According to R. C. Williams "A continuous audit is one where the

• auditor or his staff is constantly engaged in checking the accounts
• during the whole period or
• where for checking the accounts the auditor or his staff visits at regular or irregular intervals, during the period"
Features
1. It is carried throughout the year.

2. It is conducted at regular or irregular intervals.
3. The accounts are subjected to scrutiny as and when prepared.
4. Full verification of assets and liabilities is left until the balance sheet is prepared. However, some assets like
cash balances and inventory may be verified at every visit by the auditor.
5. Trial balance, profit and loss account and balance sheet are audited at the end of the year.
Suitability
1. Where final accounts are to be presented immediately after the close of financial year, for example, in case of
subsidiary companies.
2. Where internal controls are not very effective.
3. Where volume/number of transactions is very large.
4. Where management is interested in getting statement of accounts audited at regular intervals, for example,
to know the ageing schedule of debtors and to calculate the cash balance needed for operations.
Advantages
1. Early detection of frauds and errors

Detailed and exhaustive checking of accounts leads to quick detection of frauds and errors. Extent of fraud gets limited
in case of continuous audit as compared to a situation where the defrauding party has full one year to operate.
2. Knowledge of technical details

Continuous audit helps the auditor to understand the technicalities of business. Hence, he can advance valuable
suggestions to his client for improving the system of maintaining accounts and other internal controls.
3. Efficiency of auditors
The auditor's work is more evenly spread over the year i.e. slack periods are filled and busy periods relieved. As a result the
auditor, who has a number of such audit assignments, avoids a situation in which additional and, possibly, less trained staff
has to be employed temporarily in busy periods.
Moreover, continuous audit makes it possible to present the final audited accounts to the shareholders soon after the
close of financial year. The auditor, thus, can discharge his work more efficiently.
4. Moral check
The fact that the auditor is visiting frequently acts as a moral check on the staff of the client.
Disadvantages of continuous audit
1. Tampering with figures

Figures may be altered (unknowingly or fraudulently) after being checked.
2. Likely collusion between client's staff and auditor's staff

Frequent interaction of the staff of the client with that of the auditor may provide scope for unhealthy relationship
between the two. They might collude to perpetuate a fraud.
3. Losing link in audit work

The auditor's staff may not be able to, despite caution, follow up transactions and certain queries may be left
unanswered.

4. Dislocation of client's work
Frequent visits of the auditor disrupt the normal flow of work. The staff of the client may divert its attention from their
routine work to providing details required by the auditor.
5. Expensive
The continuous audit involves detailed and exhaustive checking. The auditors, therefore, charge hefty audit fees.
Safeguards to be applied
1. Against tampering of figures

Instruct the staff of the client to make alterations, if any, in figures that have been audited by only passing
rectification entries in journal and bringing it to the notice of auditor.
Device special form of ticks for being placed against figures which have been altered
Total of accounts at the end of the period under review should, if practicable, be recorded in the audit note
book and verified at the next visit.
2. To prevent collusion between staff of the auditor and that of client

Rotate the duties of his staff in such a manner that every audit clerk is allowed to check a particular account
only for a short period.
3. Ensure that the link in audit work is not lost

Prepare detailed audit programme.
Note down the queries, whose explanations are unsatisfactory, and try to sort them out at subsequent visit.
Try to check the accounts of similar nature in one continuous sitting.
4. Dislocation in client's work may be reduced by planned visits in consultation with the client
5. Expensive
Only big organisations should go for it after undertaking cost benefit analysis.
What is continuous audit and what are the precautions which should be taken to avoid the disadvantages of
continuous audit?
Answer
Continuous audit: A continuous audit is one in which the auditor's staff is engaged continuously in checking the
accounts of the client the whole year round or when for this purpose the staff attends at intervals, fixed or otherwise,
during the currency of the financial period.
The disadvantages of a continuous audit can be avoided if the following precautions are taken:
(2) During the course of each visit, work should be completed upto a definite stage so as to avoid loose ends.
(3) At the end of each visit, important balances should be noted down and the same should be compared at the
time of the next visit.
(4) The visits should be at irregular intervals of time so that the client's staff may not in advance know the exact date
when the audit would be resumed and thus may be able to prepare themselves in advance for the same.
(5) The nominal accounts should be checked only at the time of final closing.
(6) The client's staff should be instructed not to alter or correct audited figures. The auditor should also device a
special form of ticks for being placed against figures which have been altered and neither its purpose nor
significance should be dis-closed to the client's staff.
♥ The discipline of behavioural science is closely linked with the subject of auditing.
The discipline of behavioural science (the scientific study of human behaviour) is closely linked with the subject of auditing.
While it may be said that an auditor, particularly the financial auditor, deals basically with the figures contained in the
financial statements but he shall be required to interact with a lot of people in the organisation.

As against the financial auditor, the internal auditor or a management auditor is expected to deal with human beings
rather than financial figures.
One of the basic elements in designing the internal control system is personnel.
Howsoever, if a sound internal control structure is designed, it cannot work until and unless the people who are working
in the organisation are competent and honest.
The knowledge of human behaviour is indeed very essential for an auditor so as to effectively discharge his duties.
♥ Mention briefly the conditions or events, which increase the risk of fraud or error leading to material
misstatement in Financial Statements (Misc. Question Do it Yourself – Cover after 5 chapters)
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. Weaknesses in the design of the internal control
system and noncompliance with identified control procedures amongst other conditions or events which increase
the risk of fraud or error are:
(i) Weaknesses in the design of internal control system and non-compliance with the laid down
control procedures, e.g., a single person is responsible for the receipt of all dak and marking it to the
relevant sections or two persons are responsible for receipt of dak but the same is not followed in
actual practice, etc.
(ii) Doubts about the integrity or competence of the management, e.g., domination by one
person, high turnover rate of employees, frequent change of legal counsels or auditors, significant and
prolonged understaffing of the accounts department, etc.
(iii) Unusual pressures within the entity, for example, industry is doing well but the company
is not performing accordingly, heavy dependence on a single line of product, inadequate working
capital, entity needs raising share prices to support the market price in the wake of public offer, etc.
(iv) Unusual transactions such as transactions with related parties, excessive payment for certain
services to lawyers, etc.
(v) Problems in obtaining sufficient and appropriate audit evidence, e.g., inadequate
documentation, significant differences between the figures as per the accounting records and
confirmation received from third parties, etc.
♥ Discuss the types of audits required under law.
Audits required under Law: Audit is not legally obligatory for all types of business organisations or institutions. On this basis
audits may be of two broad categories i.e., audit required under law and voluntary audits.
The organisations which require audit under law are the following:
(i) Companies governed by the Companies Act, 2013;
(ii) Banking companies governed by the Banking Regulation Act, 1949;
(iii) Electricity supply companies governed by the Electricity Supply Act, 1948;
(iv) Co-operative societies registered under the Co-operative Societies Act, 1912;
(v) Public and charitable trusts registered under various Religious and Endowment Acts;
(vi) Corporations set up under an Act of Parliament or State Legislature such as the Life Insurance
Corporation of India.
(vii) Specified entities under various sections of the Income-tax Act, 1961.
(viii) Audit required under Sales-tax and VAT by various State Government.
♥ "The relationship between auditing and law is very close one." Discuss.
The relationship between auditing and law is very close one.
Auditing involves examination of various transactions from the view point of whether or not these have been properly
entered into. It necessitates that an auditor should have a good knowledge of business laws affecting the entity.

He should be familiar with the law of contracts, negotiable instruments, etc. The knowledge of taxation laws is also
inevitable as entity is required to prepare their financial statements taking into account various provisions affected by
various tax laws.
In analysing the impact of various transactions particularly from the accounting aspect, an auditor ought to have a
good knowledge about the direct as well as indirect tax laws.
♥ "Audit is not legally obligatory for all types of business organizations or institutions" Discuss. (Repeat
Question – Check - Discuss the types of audits required under law)

Aashirwaad Notes For CA IPCC Auditing & Assurance by Neeraj Arora

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9th Edition

My Colleagues Pooja Sharma, Vrinda Chugh

My Entire office team.

हाथ में ध्वजा रह़े बाल दल सजा रह़े

सामऩे पहाड़ हो ससींह की दहाड़ हो

प्रात हो कक रात हो सींग हो न साथ हो

एक ध्वज सलऱ्े हुए एक प्रण ककऱ्े हुए

अन्द्न भसू म में भरा वारर भसू म में भरा

Books written by him

The One & Only Teacher in Faridabad who

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Guys! Also consider the latest RTP issued by ICAI.

All The Best

Short Codes Which Are Used in this book

1. PPFS – Preparation and presentation of financial statements

Chapter 1 -Introduction to Auditing .

Meaning & definition

How Audit is conducted? (An Overview)

Meaning of True & Fair View

(i) that the assets are neither undervalued or overvalued;

CA Neeraj Arora Page 1.1

November 2016 Question

SAs to Be Covered with Chapters (Remaining SAs Given Separately in chapter 9)

S.No. SA No. Name Chapter Number

SA 200 Overall objectives of the independent auditor and the

Applicable financial Reporting framework

The financial reporting framework

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The applicable financial reporting framework often encompasses

Pre–Conditions for an Audit

• Professional skepticism is an attitude that includes a questioning mind,

Why Professional Skepticism? (ररस्क को कम करना चाहत़े है !)

Therefore, we do agree with the statement.

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 It is necessary to make proper decisions during audit.

• How reasonable assurance is obtained?

Inherent Limitation of audit SA 200

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i. The Nature of Financial Reporting:

• An audit is not an official investigation into alleged wrongdoing. Accordingly, the

- Fraud, particularly fraud involving senior management or collusion.

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Note on Objective of Audit

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Conduct of Audit in accordance with SAs.

Objectives stated in individual SAs.

Complying with relevant requirement

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Failure to achieve an objective in relevant SAs.

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Auditing and Investigation (M. Imp)

 Investigation is a critical examination of the accounts with a special purpose.

Difference between Audit and Investigation

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General Purpose Financial Statements