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Audit Notes - 23 Dec
Audit Notes - 23 Dec
‘Fun is just another word for Learning’- Raphael Koster (Creative Director Star Wars Galaxies)
As a CA Student I was always bogged down by all such dilemmas, then I thought how magical it’d be if someone
could make the notes for me which would make the revision a cakewalk in last 1.5 days.
But as Gandhi Ji says, “Be the change you want to see”, so I decided that I myself should sit down with the
Material & finally the journey of these notes began. It was fun in bringing down a chapter from 60 pages to 6
pages, but trust me it’s all the hard work I did during my CA Final Preparation which paved way for this Smart
Work.
I never thought that such bulky material could be summarised in such concise manner but as they say,
“Where there’s a Will, there’s a Way”.
It’s my gratitude to Almighty for showering their blessings which helped me clear CA Exams with All India
Rank 8 & secure 71 Marks in Audit.
Having secured an Exemption at both levels in this paper, I knew that the game is all about Key Words, so why
not share the Cheat Code with everyone!
I’m sure that this book coupled with the Right study strategy can easily help you get an Exemption in this paper
& turn your Fear into Love for Audit.
This book is dedicated to every student who’s working hard day night with full Willpower & Josh to become a
Chartered Accountant.
• Black- Headings
• Blue- Main Concept
• Red- Important Points
• Green- Amendments
Thankful to my parents, CA Gobind Ram Keswani & Mrs. Rekha Keswani & my sister, Dakksha Keswani for their
continuous support.
Thanks to makemydelivery.com for publishing this book. I would also like to thank Bhanwar Borana Sir for
believing in my skill & will to make ‘Audit a Fun Learning Experience for Students’.
Happy Learning!
Regards,
CA Shubham Keswani
AIR 8 CA Final & AIR 29 CA IPCC
B.Com(H), Shri Ram College of Commerce
Standards on Auditing 25 24 34 18
Audit planning 5
Automated Environment 5 4 4
Bank Audit 5 5 5 5
NBFC 5 5
Insurance Audit 4 4
PSU Audit 5 5
Liabilities of Auditor
Professional Ethics 12 17 12 14
Just take some rest, freshen up, drink water & eat some fresh fruits/snacks to get the energy for kickstart
your preparation for Audit.
Start sharp at 7 with Professional Ethics complete it by 9:30 have your Dinner & resume at 10 again.
Now you just need to complete revision of 3 topics Peer/Quality Review, PSU Audit & Ch-2 Audit Planning.
Sleep around 12 & wake up by 6 am. Freshen up, stretch your body, drink lots of water, have fresh fruits &
start your studies.
Time should be around 10 am, take bath, have your Breakfast & resume at 11 sharp.
Time should be around 2 pm, stretch your body, have water & enjoy your Lunch. Do go for a walk after the
Lunch and freshen up your mind.
Now we just need to cover the easiest & scoring topics of the lot:
• Company Audit + CARO (1.5 hrs)
• SA 700 Series (1.5 hrs)
• Consolidated Financial Statements (30 Mins)
Time should be around 7pm, take a break now to have some healthy snacks, chai & whatever you like. Take a 10
min walk outdoors & get back to resume at 7:30.
Now you just need to cover SAs before you sleep, I used to follow the below order, with 15-20 mins break
between each series:
Sleep around 12 & wake up next day at 6 sharp. Congo it’s the exam day i.e. Show time, follow the morning
routine I discussed & start with following topics:
• SEBI LODR
• Automated Environment
• Ch-3 with SA 315 & 330
Go through the latest MTPs & RTPs before you leave for exam hall.
On the way to exam hall just glance through the provisions of tax audit. All the Best! J
Index
S No. Topics- Content Page No.
1 Standards on Auditing 1-88
SQC-1 1
SA 200 6
SA 210 11
SA 220 13
SA 230 14
SA 240 16
SA 250 20
SA 260 22
SA 265 24
SA 299 27
SA 300 (Covered with Ch-2) -
SA 315 29
SA 330 33
SA 320 35
SA 402 36
SA 450 38
SA 500 40
SA 501 43
SA 505 46
SA 510 49
SA 520 51
SA 530 53
SA 540 56
SA 550 61
SA 560 64
SA 570 66
SA 580 70
SA 600 72
SA 620 74
SA 700 78
SA 701 83
SA 705 84
SA 706 86
SA 710 87
SA 720 89
2 Audit Planning, Strategy & Execution 92-96
3 Risk Assessment & Internal Control 97-104
4 Audit in Automated Environment 105-109
5 Company Audit 110-126
6 CARO 2020 127-131
7 Schedule III 132-145
8 Audit Committee & Corporate Governance 146-153
S No. Topics-Content Page No.
9 Consolidated Financial Statements 154-158
10 Bank Audit 159-172
11 NBFC Audit 173-178
12 Insurance Audit 179-187
13 PSU Audit 188-193
14 Liabilities of Auditor 194-195
15 Internal Audit 196-199
16 SA 610 200-201
17 Management Audit 202-205
18 Operational Audit 206-208
19 Due Diligence 209-210
20 Investigation 211-219
21 Forensic Audit 220-224
22 Peer Review 225-229
23 Quality Review 230-234
24 Direct Tax Audit 235-245
25 Reports vs Certificates 246
26 Professional Ethics 247-283
Fundamental Principles 247
Types of Threats 248
Membership provisions 250
Branch Office 253
KYC Norms 233
First Schedule
Part I 255
Part II, III, IV 267-268
Second Schedule
Part I 268
Part II & III 272
Council General Guidelines 273
Recommendatory Self-Regulatory Measures 277
Disciplinary Proceedings 278
NOCLAR 279
List of All Clauses 281
SQC 1 “Quality Control for Firms that perform Audits & Reviews of Historical
Financial Information, and Other Assurance & Related Services Engagements”
All firms to have system of quality control that provides reasonable assurance that:
(a) Firm & personnel comply with professional standards, regulatory & legal requirements, &
(b) Reports issued by firm or partners are appropriate in circumstances.
Definitions:-
• Engagement partner –partner or other person in the firm who is member of ICAI and is in full
time practice and responsible for engagement and its performance, and for report that is issued
on behalf of firm, and who has appropriate authority from professional, legal or regulatory body.
• Engagement quality control review –process designed to provide objective evaluation, before
report is issued, of significant judgments that engagement team made and conclusions they
reached in formulating the report.
• Engagement quality control reviewer –partner, person in firm, qualified external person, or team
of individuals, with experience and authority to objectively evaluate, before report is issued,
significant judgments the engagement team made and conclusions they reached in formulating
report. However, in case the review is done by a team of individuals, such team should be headed
by a member of ICAI.
Independence
Policies & procedures should enable firm to:
● Communicate independence requirements to personnel & others.
● Identify & evaluate circumstances creating threat to independence.
● Take appropriate action to eliminate threats/withdrawal from engagement.
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Policies & Procedures in case of breach of Independence requirements
The policies and procedures should include requirements for:
(a) All who are subject to independence requirements to promptly notify firm of independence
breaches;
(b) Firm to promptly communicate identified breaches to:
(i) Engagement partner who, with the firm, needs to address the breach; and
(ii) Other relevant personnel in firm and those subject to independence requirements who need to
take appropriate action; and
(c) Prompt communication to the firm, if necessary, by engagement partner and other individuals of
actions taken to resolve the matter, so that firm can determine whether it should take further action.
Notes:
● At least annually, firm should obtain written confirmation of compliance with policies and
procedures on independence from all firm personnel in terms of requirements of Code.
● The familiarity threat is particularly relevant in context of F.S. audits of listed entities. For
these audits, engagement partner should be rotated after a pre-defined period, normally not
more than 7 years.
Information on integrity of client that the firm obtains may come from, for example:
• Communications with existing or previous providers of professional accountancy services to client
in accordance with the Code, and discussions with other third parties.
• Inquiry of other firm personnel or third parties such as bankers, legal counsel and industry
peers.
• Background searches of relevant databases.
Matters to be considered in determining if firm has capabilities, competence, time and resources to
undertake new engagement:
• Firm personnel have knowledge of relevant industries or subject matters;
• Firm personnel have experience with regulatory or reporting requirements, or ability to gain
necessary skills and knowledge effectively;
• The firm has sufficient personnel with the necessary capabilities and competence;
• Experts are available, if needed;
• Individuals meeting criteria and eligibility requirements to perform EQCR are available and
• The firm be able to complete engagement within reporting deadline.
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Withdrawal from Engagement
Policies and procedures on withdrawal from engagement include following:
• Discussing with client’s mgt and TCWG regarding action that firm might take based on
relevant facts and circumstances.
• If firm determines that it is appropriate to withdraw, discussing with appropriate level of
client’s mgt and TCWG withdrawal and reasons for the withdrawal from engagement.
• Considering professional, regulatory or legal requirement for firm to remain in place, or for
firm to report withdrawal, together with reasons for withdrawal, to regulatory authorities.
• Documenting significant issues, consultations, conclusions and basis for conclusions.
Human Resources
Establish policies/procedures to reasonable assure that:
• Firm has sufficient personnel with capabilities, competence & commitment (CCC) to ethical
principles; &
• Engg partner to issue appropriate report.
The firm’s performance evaluation, compensation and promotion procedures give due recognition and
reward to development and maintenance of competence and commitment to ethical principles.
Capabilities and competence considered when assigning engagement teams, and determining level of
supervision reqd, include following:
• Understanding, and practical experience with, engagements of similar nature and
complexity through appropriate training and participation.
• An understanding of professional stds and regulatory and legal requirements.
• Appropriate technical knowledge, including knowledge of relevant information technology.
• Knowledge of relevant industries in which clients operate.
• Ability to apply professional judgment.
• Understanding of firm’s quality control policies and procedures.
Engagement Performance
Review responsibilities are determined on basis that more experienced engagement team members,
including engagement partner, review work performed by less experienced team members.
CA SHUBHAM KESWANI 3
e) The work performed supports conclusions reached and is appropriately documented;
f) The evidence obtained sufficient and appropriate to support report; and
g) The objectives of engagement procedures have been achieved.
Consultation
The firm should establish policies and procedures designed to provide it with reasonable assurance
that:
a) Appropriate consultation takes place on difficult or contentious matters;
b) Sufficient resources are available to enable appropriate consultation to take place;
c) The nature and scope of such consultations are documented; and
d) Conclusions resulting from consultations are documented and implemented.
An EQCR for audits of F.S. of listed entities includes considering the following:
• Engagement team’s evaluation of firm’s independence in relation to specific engagement.
• Significant risks identified during the engagement and the responses to those risks.
• Judgments made, particularly with respect to materiality and significant risks.
• Whether appropriate consultation has taken place on matters involving differences of opinion or
other difficult or contentious matters, and conclusions arising from them.
• The significance and disposition of corrected and uncorrected misstatements identified during
the engagement.
• The matters to be communicated to management and TCWG and regulatory bodies. (SA 260)
• Whether working papers selected for review reflect the work performed in relation to the
significant judgments and support the conclusions reached.
• The appropriateness of report to be issued.
The firm’s policies and procedures are designed to maintain objectivity of EQCR.
For example, engagement quality control reviewer:
a) Is not selected by engagement partner;
b) Does not participate in engagement during period of review;
c) Does not make decisions for engagement team; and
CA SHUBHAM KESWANI 4
d) Is not subject to other considerations that would threaten reviewer’s objectivity.
Can EP consult EQCR during engagement? Yes as long as it doesn’t affect quality of engagement.
Reviewer’s objectivity should be maintained.
(ii) Complaints and allegations may originate from within or outside the firm. They may be made by
firm personnel, clients or other 3rd parties. (within or outside?)
(iii) Firm establishes clearly defined channels for firm personnel to raise any concerns in manner that
enables them to come forward without fear of reprisals. (how we receive them?)
(iv) Firm investigates such complaints and allegations in accordance with established policies and
procedures. Investigation is supervised by partner with sufficient authority & experience within firm
but not involved in engagement, and includes involving legal counsel as necessary. Small firms and sole
practitioners may use qualified external person or another firm to carry out investigation. Complaints,
allegations and responses to them are documented. (Investigate & document)
(v) Where results of investigations indicate deficiencies in design or operation of the firm’s quality
control policies and procedures, or non-compliance with firm’s SQC by individual or individuals, firm
takes appropriate action. (Action)
CA SHUBHAM KESWANI 5
SA 200 Overall Objectives of Independent Auditor and Conduct of an Audit in
Accordance with Standards on Auditing
(a) To obtain reasonable assurance about whether F.S. as a whole are free from material misstatement,
whether due to fraud or error, thereby enabling auditor to express an opinion on whether F.S. are
prepared, in all material respects, in accordance with applicable FRF; &
(b) To report on F.S., and communicate as required by SAs, in accordance with auditor’s findings.
In all cases when reasonable assurance cannot be obtained and qualified opinion is insufficient for
purposes of reporting to intended users of F.S., SAs require that auditor disclaim an opinion or
withdraw from engagement, where withdrawal is legally permitted.
Definitions
● Applicable financial reporting framework (FRF) – The financial reporting framework adopted by
mgt and, where appropriate, TCWG in preparation and presentation of F.S. that is acceptable in
view of nature of entity and objective of F.S., or that is required by law or regulation.
“fair presentation framework” refer to FRF that requires compliance with requirements of
framework and:
(i) Acknowledges, to achieve fair presentation of F.S., it may be necessary for mgt to provide
disclosures beyond those specifically required by the framework; or
(ii) Acknowledges explicitly that it may be necessary for mgt to depart from a requirement of
framework to achieve fair presentation of F.S. Such departures are expected to be necessary only in
extremely rare circumstances.
The term “compliance framework” is used to refer to a FRF that requires compliance with
requirements of framework, but does not contain acknowledgements in (i) or (ii) above.
● Those charged with governance – The person(s) or organisation(s) (e.g., a corporate trustee) with
responsibility for overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. (Executive Members-CEO/CFO/MD)
CA SHUBHAM KESWANI 6
Professional Skepticism
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.
Maintaining professional skepticism throughout audit is necessary if auditor wants to reduce risks of:
• Overlooking unusual circumstances.
• Over generalising when drawing conclusions from audit observations.
• Using inappropriate assumptions in determining the nature, timing, and extent(NTE) of the
audit procedures and evaluating the results thereof.
Professional judgment
• The application of relevant training, knowledge and experience,
• within the context provided by auditing, accounting and ethical standards,
• in making informed decisions about the courses of action
• that are appropriate in circumstances of audit engagement.
CA SHUBHAM KESWANI 7
Audit Risk
The risk that auditor expresses inappropriate audit opinion when F.S. are materially misstated. Audit
risk is function of the risks of material misstatement and detection risk.
Risk of material misstatement (ROMM) - The risk that F.S. are materially misstated prior to audit.
This consists of two components, described as follows at assertion level:
ROMM at assertion level are assessed in order to determine NTE of further audit procedures
necessary to obtain SAAE. This evidence enables auditor to express an opinion on F.S. at an acceptably
low level of audit risk.
Detection risk – The risk that procedures performed by auditor to reduce audit risk to acceptably low
level will not detect a misstatement that exists and that could be material, either individually or when
aggregated with other misstatements i.e. Risk of not detecting a material misstatement.
Scope of Audit
The auditor’s opinion on F.S. deals with whether the F.S. are prepared, in all material respects, in
accordance with the applicable FRF.
• Such an opinion is common to all audits of F.S.
• The auditor’s opinion therefore does not assure, future viability of entity nor the efficiency or
effectiveness with which mgt has conducted affairs of entity.
• In some cases, however, applicable laws and regulations may require auditors to provide opinions
on other specific matters, such as effectiveness of internal control, or consistency of a separate
management report with the F.S.
• While SAs include requirements and guidance in relation to such matters to the extent they are
relevant to forming an opinion on F.S., auditor would be required to undertake further work if
auditor had additional responsibilities to provide such opinions.
CA SHUBHAM KESWANI 8
(c) Unrestricted access to those within entity from whom auditor determines necessary to obtain
audit evidence.
As part of their responsibility for PPFS, mgt and, TCWG are responsible for:
• The identification of applicable FRF , in context of any relevant laws or regulations.
• The PPFS (Preparation & Presentation of F.S.) in accordance with that framework.
• An adequate description of that framework in F.S.
The preparation of F.S. requires mgt to exercise judgment in making accounting estimates that are
reasonable in circumstances, as well as to select and apply appropriate accounting policies. These
judgments are made in the context of applicable FRF.
(4) In case of certain assertions or subject matters, potential effects of inherent limitations on
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.
CA SHUBHAM KESWANI 9
Conduct of an Audit in accordance with SAs
CA SHUBHAM KESWANI 10
SA 210: Agreeing the terms of Audit Engagement
Objective
Objective of auditor is to accept or continue audit engagement only when basis upon which it is to be performed
has been agreed, through:
(b) Confirming that there is common understanding b/w auditor and mgt and, where appropriate, TCWG of terms
of audit engagement.
Preconditions of Audit
The auditor shall:-
(a) determine whether FRF is acceptable
(b) Obtain agreement of mgt that it acknowledges and understands its responsibility:
(i) For preparation of F.S. in accordance with applicable FRF
(ii) For such Internal Control (IC) as mgt determines necessary to enable preparation of F/S free
from material misstatement, whether due to fraud or error; and
(iii) To provide the auditor with: (AAU)
a. Access to all information of which management is aware that is relevant to preparation of F/S
such as records, documentation and other matters;
b. Additional information that auditor may request from mgt for purpose of audit; and
c. Unrestricted access to persons within entity from whom auditor determines necessary to obtain
audit evidence.
However, following factors make it appropriate to revise terms of audit engagement or to remind entity of
existing terms:
CA SHUBHAM KESWANI 11
● Any revised or special terms of audit engagement.
● A recent change of senior management.
● A significant change in ownership.
● A significant change in nature or size of the entity’s business.
● A change in legal or regulatory requirements.
● A change in the FRF adopted in the preparation of F.S.
● A change in other reporting requirements.
If terms are changed, auditor and management agree on and record new terms of engagement in engagement
letter or other suitable form of written agreement.
If auditor unable to agree to change of terms and not permitted by mgt to continue, the auditor shall:
(a) Withdraw from audit engagement where possible under law or regulation; and
(b) Determine whether there is obligation, either contractual or otherwise, to report circumstances to other
parties, such as TCWG, owners or regulators
If above conditions not present and auditor required by law or regulation to undertake audit engagement, he
shall:
(a) Evaluate effect of misleading nature of F.S. on auditor’s report; and
(b) Include appropriate reference to this matter in terms of audit engagement.
Factors that are relevant to auditor’s determination of acceptability of financial reporting framework to be
applied in preparation of financial statements include:
• The nature of entity (for example, whether it is a business enterprise, or a not for profit organization);
• The purpose of F.S. (for example, whether they are prepared to meet the common financial information
needs of a wide range of users or the financial information needs of specific users);
• The nature of F.S. (for example, whether the financial statements are a complete set of financial
statements or a single financial statement); and
• Whether law or regulation prescribes applicable FRF.
CA SHUBHAM KESWANI 12
Audit of Components
When auditor of parent entity also auditor of component, factors that may influence decision whether to send
separate audit engagement letter to the component include the following:
SCQ related to quality control measures that apply on Firm level & SA 220 is limited to Audit
engagement level.
What info is required by EP to determine, whether to accept & continue Client Engagement?
Following info assists engagement partner in determining whether conclusions reached regarding
acceptance and continuance of client relationships and audit engagements are appropriate:
• Whether engagement team is competent to perform audit engagement and has necessary
capabilities, including time and resources;
• Whether firm and engagement team can comply with relevant ethical requirements; and
• Significant matters that have arisen during current or previous audit engagement, and their
implications for continuing relationship.
Differences of Opinion:
It may arise:
• Within the Engagement Team,
• With those consulted, or
• Between the EP and EQC Reviewer.
Engagement Team shall follow the firm’s policies and procedures for dealing with and resolving
differences of opinion.
CA SHUBHAM KESWANI 13
SA 230 “Audit Documentation”
Record of
• audit procedures(AP) performed,
• relevant audit evidence obtained, and
• conclusions the auditor reached” (commonly known as working papers).
In documenting nature, timing and extent of audit procedures performed, auditor shall record:
(i) The identifying characteristics of the specific items or matters tested
(ii) Who performed audit work and date such work was completed; and
(iii) Who reviewed audit work performed and date and extent of such review
6. The need to document a conclusion or the basis for a conclusion not readily determinable from
documentation of work performed or audit evidence obtained.
CA SHUBHAM KESWANI 14
Documentation of Matters Arising after Date of the Auditor’s Report
If, in exceptional circumstances, auditor performs new or additional audit procedures or draws new
conclusions after date of auditor’s report, auditor shall document:
1. The circumstances encountered;
2. The new or additional audit procedures performed, audit evidence obtained, and conclusions
reached, and their effect on the auditor’s report; and
3. When and by whom the changes to audit documentation were made and reviewed.
The auditor shall assemble audit documentation in audit file and complete administrative process of
assembling file on timely basis after date of auditor’s report i.e. after 60 days.
In circumstances where auditor finds necessary to modify existing audit documentation or add new
audit documentation after assembly of final audit file completed, auditor shall, regardless of nature
of modifications or additions, document:
(a) The specific reasons for making them; and
(b) When and by whom they were made and reviewed.
CA SHUBHAM KESWANI 15
SA 240 (Revised): Auditor’s Responsibilities relating to
Fraud in an Audit of Financial Statements
Objectives of Auditor
a) To identify and assess the ROMM in F.S. due to fraud;
b) To obtain SAAE about assessed ROMM due to fraud, through designing and implementing
appropriate responses; and
c) To respond appropriately to identified or suspected fraud.
It often involves management override of controls, misappropriation of assets etc that otherwise
may appear to be operating effectively.
Fraud can be committed by management overriding controls using such techniques as:
(i) Recording fictitious journal entries, close to end of accounting period, to manipulate
operating results or achieve other objectives.
(ii) Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.
(iii) Omitting, advancing or delaying recognition in F.S. of events and transactions that have
occurred during reporting period.
(iv) Concealing, or not disclosing, facts that could affect amounts recorded in F.S.
(v) Engaging in complex transactions structured to misrepresent financial position or financial
performance of entity.
(vi) Altering records and terms related to significant and unusual transactions.
(vii) Embezzling receipts (misappropriating collections from debtors)
(viii) Stealing physical assets or intellectual property
(ix) Causing entity to pay for goods and services not received (for eg, payments to fictitious
vendors, payments to fictitious employees).
(x) Using entity’s assets for personal use (for example, using the entity’s assets as collateral
for a personal loan or a loan to a related party).
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Risk Factors Relating to Misstatements Arising from Misappropriation of Assets:
1. Incentives/Pressures: Personal financial obligations may create pressure on mgt or employees with
access to cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships between entity and employees with access to cash or other assets susceptible
to theft may motivate employees to misappropriate those assets.
3. Attitudes/Rationalizations
Ø Disregard for need for monitoring or reducing risks related to misappropriations of assets.
Ø Disregard for internal control over misappropriation of assets by overriding existing controls
or failing to take remedial action on known deficiencies.
Ø Behavior indicating displeasure or dissatisfaction with entity or its treatment of employee.
Ø Changes in behavior or lifestyle that may indicate assets have been misappropriated.
CA SHUBHAM KESWANI 17
• Where responses to inquiries of mgt or TCWG are inconsistent, he shall investigate
inconsistencies.
Communication
• If auditor identified a fraud or has indication of fraud, communicate à mgt, TCWG &,
• In some circumstances, if required by laws and regulations à regulatory and enforcement
authorities also.
i. consider professional and legal responsibilities, including requirement for to report to person(s)
who made audit appointment or regulatory authorities;
Management Representation
1. Acknowledges responsibility for design, implementation and maintenance(DIM) of internal control
to prevent and detect fraud.
2. Have disclosed results of mgt’s fraud risk assessment w.r.t. F.S.
3. Have disclosed knowledge of fraud or suspected fraud affecting entity involving:
• Management;
• Employees who have significant roles in internal control; or
• Others where fraud could have a material effect on the FS.
4. Have disclosed knowledge of any allegations of fraud, or suspected fraud, affecting entity’s FS.
Documentation
• Understanding of Entity and environment as per SA 315.
• Responses to Assessed Risks.
• Communications with mgt. and TCWG.
• Reasons for non-applicability of presumption of ROMM relating to revenue recognition.
CA SHUBHAM KESWANI 18
Appropriateness of making inquiries of management
Ø Mgt is responsible for entity’s internal control and preparation of F.S. à appropriate for auditor
to make inquiries of management regarding management’s own assessment of risk of fraud and
controls in place to prevent and detect it.
Ø The nature, extent and frequency of mgt’s assessment are relevant to auditor’s understanding of
entity’s control environment. For example, fact management has not made assessment of risk of
fraud may be indicative of lack of importance that mgt places on internal control.
Irrespective of auditor’s assessment of risks of management override of controls, auditor shall design
and perform audit procedures to:
(a) Test appropriateness of journal entries recorded in general ledger and other adjustments in F.S.
In designing and performing audit procedures for such tests, auditor shall:
(i) Make inquiries of individuals involved in financial reporting process about inappropriate
or unusual activity relating to processing of journal entries and other adjustments;
(ii) Select journal entries and other adjustments made at end of a reporting period; and
(iii) Consider need to test journal entries and other adjustments throughout period.
(b) Review accounting estimates for biases and evaluate whether circumstances producing bias
represent ROMM due to fraud.
In performing this review, auditor shall:
(i) Evaluate whether judgments and decisions made by mgt in making accounting estimates
included in F.S, indicate possible bias on part of entity’s mgt that may represent a ROMM
due to fraud. If so, auditor shall re-evaluate a/c estimates taken as a whole; and
(ii) Perform retrospective review of mgt judgments and assumptions related to significant
a/c estimates reflected in F.S. of prior year.
(c) For significant transactions o/s normal course of business or appear to be unusual given auditor’s
understanding of entity and its environment, evaluate whether business rationale (or lack thereof) of
transactions suggests they have been entered to engage in fraudulent financial reporting or conceal
misappropriation of assets.
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SA 250 (Revised) “Consideration of Laws and Regulations in an
Audit of Financial Statements”
a) Monitoring legal requirements and ensuring that operating procedures are designed to meet
these requirements.
b) Instituting and operating appropriate systems of internal control.
c) Developing, publicising and following a code of conduct.
d) Ensuring employees are properly trained and understand code of conduct.
e) Monitoring compliance with code of conduct and acting appropriately to discipline employees
who fail to comply with it.
f) Engaging legal advisors to assist in monitoring legal requirements.
g) Maintaining register of significant laws and regulations with which entity has to comply within
its particular industry and a record of complaints
(a) Provisions of those L&R having a direct effect on determination of material amounts and
disclosures in F.S. such as tax and labour laws; and
(b) Other laws and regulations that don’t have direct effect on determination of amounts and
disclosures in F.S., but compliance with which may be fundamental to operating aspects of business.
• For 1st category referred, auditor’s responsibility is to obtain SAAE about compliance with Laws
& Regulations.
• For second category, auditor’s responsibility is limited to undertake specified audit procedures
to help identify non-compliance with those L&Rs that may have material effect on F.S.
2. The auditor shall obtain SAAE regarding compliance with those laws and regulations generally
recognized to have a direct effect on determination of material amounts and disclosures in F.S.
3.The auditor shall perform following audit procedures to identify instances of noncompliance with
other laws and regulations that may have a material effect on the F.S:
(a) Inquiring of management; and
(b) Inspecting correspondence, if any, with relevant licensing or regulatory authorities.
4. During audit, auditor shall remain alert to possibility that other audit procedures applied may bring
instances of non-compliance or suspected non-compliance with laws and regulations to auditor’s
attention.
CA SHUBHAM KESWANI 20
5. Obtain written representation that known instances of non-compliance with L&Rs have been
disclosed to auditor
• If auditor suspects mgt or TCWG involved in noncompliance, communicate matter to next higher
level of authority at entity, such as audit committee or supervisory board. Where no higher authority
exists, or if auditor believes communication may not be acted upon, obtain legal advice.
• If auditor is precluded by MGT or TCWG from obtaining SAAE, auditor shall express a qualified
opinion or disclaim an opinion.
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SA 260 (Revised) “Communication with Those Charged With Governance”
Scope of SA
• SA 260 deals with auditor’s responsibility to communicate with TCWG in audit of F.S.
• Nothing in this SA preclude auditor from communicating any other matters to TCWG.
Role of communication
Effective two-way communication is important in assisting:
a) Auditor and TCWG in understanding matters related to audit in context, and in developing a
constructive working relationship.
b) Auditor in obtaining from TCWG info relevant to audit. For eg, TCWG may assist auditor in
understanding entity and its environment, in identifying appropriate sources of audit evidence,
and providing info about specific transactions or events; and
c) TCWG in fulfilling their responsibility to oversee financial reporting process, thereby
reducing ROMM of F.S
Auditor’s Objective
• To communicate clearly with TCWG responsibilities of auditor and planned scope and timing of
audit.
• To obtain from TCWG info relevant to audit.
• To provide TCWG with timely observations significant and relevant in overseeing final reporting
process.
• To promote effective two-way communication between auditor and TCWG
Matters to be communicated
• The Auditor’s responsibilities in relation to F.S. Audit
(a) The auditor is responsible for forming and expressing an opinion on F.S.; and
(b) The audit of F.S. does not relieve mgt or TCWG of their responsibilities
• Significant Findings from the Audit : The auditor shall communicate with TCWG:
(a) The auditor’s views about significant qualitative aspects of entity’s a/c practices, including
a/c policies, a/c estimates and F.S. disclosures.
(b) Significant difficulties, if any, encountered during the audit;
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Examples of Significant difficulties:
• Significant delays by mgt to provide required info
• An unnecessarily brief time to complete audit
• Extensive unexpected effort required to obtain SAAE
• Unavailability of expected info
• Restrictions imposed on auditor by mgt
• Mgt’s unwillingness to make or extend assessment of entity’s ability to continue as going
concern when requested.
(d) Circumstances that affect form and content of auditor’s report, if any (Audit Report)
(e) Any other significant matters that in the auditor’s professional judgment, are significant
to the oversight of the financial reporting process
Auditor Independence
In case of listed entities, the auditor shall communicate with TCWG:
(a) A statement that engagement team and others in firm has complied with relevant ethical
requirements regarding independence; and
(b) All relationships and other matters between firm, network firms, and entity that bear on
independence.; and
(c) Related safeguards applied to eliminate identified threats to independence or reduce them to
acceptable level.
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SA 265 “Communicating Deficiencies in Internal Control to
Those Charged With Governance & Management”
Scope of SA
• Communicate deficiencies in Internal control (IC) which significant
• Auditor is required to obtain understanding of internal control relevant to audit when
identifying and assessing ROMM.
In making those risk assessments, auditor considers internal control in order to design audit
procedures, but not for purpose of expressing an opinion on effectiveness of IC.
Auditor may identify deficiencies in IC not only during risk assessment process(RAP) but also at
other stages.
This SA specifies which identified deficiencies auditor is required to communicate to TCWG & mgt.
Auditor’s Objective
To communicate appropriately to TCWG and mgt, deficiencies in internal control that auditor has
identified during audit and in auditor’s professional judgment are of sufficient importance to merit
their respective attentions.
Requirements
• Auditor shall determine whether, on basis of audit work performed, he has identified one or
more deficiencies in IC.
• If identified one or more deficiencies in IC, determine, on basis of work performed, whether,
individually or in combination, they constitute significant deficiencies.
• The auditor shall communicate in writing significant deficiencies in IC identified during audit
to TCWG on a timely basis.
• The auditor shall also communicate to mgt at an appropriate level of responsibility on a timely
basis:
a. In writing, significant deficiencies in IC that auditor has communicated or intends to
communicate to TCWG, unless it would be inappropriate to communicate directly to mgt in
circumstances; and
b. Other deficiencies in internal control identified during audit that have not been
communicated to mgt by other parties and that, in auditor’s professional judgment, are of
sufficient importance to merit mgt’s attention.
(b) Sufficient information to enable TCWG and mgt to understand context of communication.
(ii) Audit included consideration of IC relevant to preparation of F.S. in order to design audit
procedures that are appropriate in circumstances, but not for purpose of expressing opinion
on effectiveness of IC; &
(iii) Matters reported are limited to deficiencies that auditor identified during audit and has
concluded are of sufficient importance to merit being reported to TCWG.
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How to decide if Deficiency is Significant or Not?
Examples of matters that auditor may consider in determining whether a deficiency or combination
of deficiencies in internal control constitutes a significant deficiency include:
• The volume of activity that has occurred or could occur in account balance or class of
transactions exposed to deficiency or deficiencies.
Ø Evidence of ineffective entity risk assessment process (RAP), such as management’s failure to
identify a ROMM that auditor would expect entity’s risk assessment process to have
identified.
Ø Evidence of ineffective response to identified significant risks (e.g., absence of controls over
such a risk).
Ø Misstatements detected by auditor’s procedures that were not prevented, or detected and
corrected(P/D/C), by entity’s IC.
Ø Disclosure of material misstatement due to error or fraud as prior period items in current
year’s P&L.
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How Detailed should be our Communication of Significant Deficiencies?
The level of detail at which to communicate significant deficiencies is matter of auditor’s professional
judgment in circumstances.
Factors that the auditor may consider in determining an appropriate level of detail for the
communication include, for eg:
• The nature of entity. For instance, the communication required for a public interest entity may be
different from that for a non-public interest entity.
• The size and complexity of the entity. For instance, the communication required for a complex
entity may be different from that for an entity operating a simple business.
• The entity’s governance composition. For instance, more detail may be needed if TCWG include
members who do not have significant experience in the entity’s industry or in the affected areas.
When to communicate?
• Listed Entities: Before date of approval of F.S.
• Other Entities: Before assembly of audit file (60 days from date of audit report)
Notes:
● If previously communicated significant deficiency remains, current year’s communication may
repeat description from previous communication, or simply reference previous communication.
● May communicate orally before writing.
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SA 299 (Revised) “Joint Audit of Financial Statements”
‘Joint Audit’ and ‘Joint Auditors’
A joint audit is audit of F.S. of entity by 2 or more auditors appointed with objective of issuing audit
report. Such auditors are described as joint auditors.
• At this stage, RoMM need to be considered and assessed by each of joint auditors and
communicated to other joint auditors, and documented, whether pertaining to overall F.S.
level or to area of allocation among other joint auditors.
• Joint auditors discuss and document NTE of audit procedures for common and specific
allotted areas of audit to be performed by each of them and communicate to TCWG.
• Joint auditors shall obtain common Engg Letter (EL) and common mgt representation letter
(WR).
• After identification and allocation of work among joint auditors, work allocation document
shall be signed by all joint auditors and communicated to TCWG.
• All the joint auditors shall be jointly and severally responsible for:
a. audit work not divided among joint auditors and is carried out by all joint auditors;
c. in respect of common audit areas concerning the NTE of audit procedures to be performed
by each of them.
d. matters which are brought to notice of joint auditors by any one of them and on which there
is agreement among them;
g. ensuring that A/R complies with requirements of relevant statutes, SAs and pronouncements
issued by ICAI.
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• Where a joint auditor comes across matters relevant to areas of responsibility of others and
deserve their attention, or require disclosure or discussion with, or application of judgment by
other joint auditors, he shall communicate same to all other joint auditors in writing prior to
completion of audit.
A joint auditor is not bound by the views of majority of joint auditors regarding opinion or matters
to be covered in audit report and shall express opinion formed by the said joint auditor in separate
audit report in case of disagreement.
In such circumstances, audit report(s) issued by joint auditor(s) shall make a reference to separate
audit report(s) issued by other joint auditor(s).
Further, separate audit report shall also make reference to audit report issued by other joint
auditors.
Such reference shall be made under heading “Other Matter Paragraph” as per Revised SA 706,
“Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”.
b. The other joint auditors have brought to said joint auditor’s notice any departure from applicable
FRF or significant observations noticed in course of audit.
Where F.S. of a division/branch are audited by one of joint auditors, other joint auditors are
entitled to proceed on basis that such F.S. comply with all legal and regulatory requirements and
present a true and fair view of state of affairs and of results of operations of division/branch
concerned.
Before finalizing their audit report, joint auditors shall discuss and communicate with each other
their respective conclusions that would form the content of the audit report.
If JAs expect to include an EOM or OM para, communicate with TCWG to ensure compliance with
Revised SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report”.
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SA 315: Identifying and Assessing the Risk of Material Misstatement (ROMM)
through understanding the Entity and its Environment
Meanings:
Assertions – Representations by mgt, embodied in F.S, used by auditor to consider different types of
potential misstatements that may occur.
Assertions about classes of transactions and events for the period under audit: (OCACC)
(i) Occurrence—transactions and events recorded have occurred and pertain to entity.
(ii) Completeness—all transactions and events that should have been recorded à recorded.
(iii) Accuracy—amounts and recorded transactions and events à recorded appropriately.
(iv) Cut-off—transactions and events recorded à correct accounting period.
(v) Classification—transactions and events recorded à proper accounts
Internal control –
The process designed, implemented and maintained (DIM) by TCWG, management and other
personnel to provide reasonable assurance about achievement of an entity’s objectives with regard to
● reliability of financial reporting (FR),
● effectiveness and efficiency of operations,
● safeguarding of assets, and
● compliance with applicable laws and regulations
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What methods included in Auditor’s Risk assessment procedures (RAP)
The audit procedures performed to obtain understanding of entity and its environment, including
internal control, to identify and assess ROMM, whether due to fraud or error, at F.S. and assertion
levels.
The risk assessment procedures shall include following:
(a) Inquiries of mgt and others within entity who in auditor’s judgment may have info that is likely to
assist in identifying ROMM due to fraud or error.
(b) Analytical procedures.
(c) Observation and inspection.
(a) Relevant industry, regulatory, and other external factors including applicable FRF.
(c) The entity’s selection and application of accounting policies, including reasons for changes
thereto.
(d) The entity’s objectives and strategies, and those related business risks that may result in ROMM.
(a) Identify risks throughout process of obtaining understanding of entity and its environment,
including controls that relate to risks, and considering classes of transactions, account balances, and
disclosures in F.S;
(b) Assess identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions;
(c) Relate identified risks to what can go wrong at assertion level, taking account of relevant controls
that auditor intends to test; and
(d) Consider likelihood of misstatement, including possibility of multiple misstatements, and whether
potential misstatement is of magnitude that could result in material misstatement.
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Understanding of Entity’s Info System Relevant to Financial Reporting
The auditor shall obtain an understanding of information system, including related business
processes, relevant to financial reporting, including following areas:
(a) SCoTs: The classes of transactions in entity’s operations that are significant to financial
statements;
(b)Procedures: The procedures, within both information technology (IT) and manual systems, by
which those transactions are initiated, recorded, processed, corrected as necessary, trfd to general
ledger and reported in financial statements;
(c)Records: The related accounting records, supporting information and specific accounts in the
financial statements that are used to initiate, record, process and report transactions; this includes
correction of incorrect information and how information is trfd to the general ledger. The records
may be in either manual or electronic form;
(d) Info system: How information system captures events and conditions, other than transactions,
that are significant to F.S.;
(e) FRP: The financial reporting process used to prepare the entity’s financial statements, including
significant accounting estimates and disclosures;
(f)Unusual Transactions: Controls surrounding journal entries, including non-standard JEs used to
record non-recurring, unusual transactions or adjustments.
IT Benefits
• Consistently apply predefined business rules and perform complex calculations in processing
large volumes of transactions or data;
• Enhance ability to monitor performance of the entity’s activities and its policies and
procedures;
IT Risks
Specific Risks related to IT an entity’s internal control, including, for example:
• Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data, or both.
• Unauthorised access to data that may result in destruction of data or improper changes to
data
• The possibility of IT personnel gaining access privileges beyond those necessary to perform
their assigned duties thereby breaking down segregation of duties.
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• Failure to make necessary changes to systems or programs.
Significant Risks
An identified and assessed RMM that, in auditor’s judgment, requires special audit consideration.
b. Whether the risk is related to recent significant economic, accounting, or other developments
like changes in regulatory environment, etc., and, therefore, requires specific attention;
e. 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
f. Whether the risk involves significant transactions that are outside normal course of business
for the entity, or that otherwise appear to be unusual.
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SA 330: The Auditor’s Responses to Assessed Risks
What will auditor consider while determining whether evidence of previous audits can be used for
Test of Controls?
a. The effectiveness of other elements of internal control, including the control environment, the
entity’s monitoring of controls, and the entity’s risk assessment process;
b. The risks arising from characteristics of control, including whether it is manual or automated;
c. The effectiveness of general IT-controls;
d. The effectiveness of control and its application by entity, including nature and extent of
deviations in application of control noted in previous audits, and whether there have been
personnel changes that significantly affect application of control;
e. Whether lack of a change in a particular control poses a risk due to changing circumstances; and
f. The ROMM and extent of reliance on the control.
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If auditor plans to use audit evidence from previous audit, establish continuing relevance by obtaining
audit evidence about whether significant changes in controls have occurred subsequent to previous
audit.
Obtain this evidence by performing inquiry combined with observation or inspection, confirm
understanding of those specific controls, and:
(a) If there have been changes that affect continuing relevance of audit evidence from previous
audit, shall test controls in current audit.
(b) If there have not been such changes, auditor shall test controls at least once in every third audit.
Controls over Significant Risks to be tested in current period.
Relevant factors in determining what additional audit evidence to obtain about controls that were
operating during period remaining after Interim period, include:
• The significance of assessed ROMM at assertion level.
• The specific controls that were tested during interim period, and significant changes to them.
• The degree to which audit evidence about operating effectiveness of controls was obtained.
• The length of remaining period.
• The extent to which auditor intends to reduce further substantive procedures based on reliance
of controls.
• The control environment.
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SA 320: Materiality in Planning & Performing an Audit
If, there is one or more particular classes of transactions, account balances or disclosures for which
misstatements of lesser amounts than materiality for FS as a whole could reasonably be expected to
influence economic decisions of users taken on the basis of F.S., auditor shall also determine
materiality level or levels to be applied to those particular classes of transactions, account balances
or disclosures.
The auditor shall determine performance materiality for purposes of assessing ROMM and
determining nature, timing and extent of further audit procedures.
Revision of Materiality
The auditor shall revise materiality for F.S. as a whole (& if applicable, materiality level for
particular classes of transactions, account balances or disclosures) in event of becoming aware of
info during audit that would have caused auditor to have determined different amount initially.
If auditor concludes lower materiality for F.S. as a whole (and, if applicable, materiality level or
levels for particular classes of transactions, account balances or disclosures) than initially
determined, auditor shall determine whether it is necessary to revise PM, and whether NTE of
further audit procedures remain appropriate.
Benchmark
Determining materiality involves exercise of professional judgment. A percentage is often applied to
a chosen benchmark as starting point in determining materiality for F.S. as a whole.
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SA 402: Audit Considerations relating to an Entity Using a
Service Organisation
Ø Deals with user auditor’s responsibility to obtain SAAE when user entity uses services of one or
more service organisations.
Ø Many entities outsource aspects of business to organisations that provide services ranging from
performing a specific task under direction of entity to replacing entity’s entire business units or
functions, such as tax compliance function.
Ø Many of services provided by such organisations are integral to entity’s business operations;
however, not all those services are relevant to the audit.
Ø Services provided by service organisation are relevant to audit of a user entity’s F.S. when those
services, and controls over them, are part of user entity’s information system, including related
business processes, relevant to financial reporting.
How to know if SO’s services are relevant to user entity’s Financial Reporting?
A service organisation’s services are part of user entity’s information system, including related
business processes, 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;
b. The procedures, within both information technology (IT) and manual systems, by which the user
entity’s transactions are initiated, recorded, processed, corrected as necessary, transferred to
the general ledger and reported in the financial statements;
c. The related accounting records, either in electronic or manual form, supporting information and
specific accounts in the user entity’s financial statements that are used to initiate, record,
process and report the user entity’s transactions; this includes the correction of incorrect
information and how information is transferred to the general ledger;
d. How the user entity’s information system captures events and conditions, other than
transactions, that are significant to the financial statements;
e. The financial reporting process used to prepare the user entity’s financial statements, including
significant accounting estimates and disclosures; and
f. Controls surrounding journal entries, including non-standard journal entries used to record
nonrecurring, unusual transactions or adjustments. [Already studied in SA 315]
Auditor’s Objective
(a) To obtain understanding of nature and significance of services provided by service organisation
and effect on user entity’s internal control relevant to audit, sufficient to identify and assess
ROMM; and
Types of Reports
Type 1 Report: Description & design of Internal control
Type 2 Report: Description, design & Operating effectiveness of Internal Controls
CA SHUBHAM KESWANI 36
b. Nature and materiality of transactions processed or accounts or financial reporting processes
affected by service organisation;
c. Degree of interaction between activities of service organisation and those of user entity; and
d. Nature of relationship between user entity and service organisation, including relevant
contractual terms for activities undertaken by service organisation.
Auditor’s Considerations
User auditor shall evaluate design and implementation of controls at user entity that relate to services
provided by service organisation.
User auditor shall determine whether sufficient understanding of nature and significance of services
provided by service organisation and their effect on user entity’s internal control relevant to audit has
been obtained to provide basis for identification and assessment of ROMM.
If user auditor is unable to obtain sufficient understanding from user entity, perform following
procedures:
(a) Obtaining a Type 1 or Type 2 report, if available;
(b) Contacting service organisation, through user entity, to obtain specific info;
(c) Visiting service organisation and performing procedures that will provide info about controls at
service org;
(d) Using another auditor to perform procedures that will provide necessary info about controls at
service org.
These 2 methods of reporting are known as inclusive method and carve-out method, respectively.
If Type 1 or Type 2 report excludes controls at SSO, and services are relevant to audit of user entity’s
F.S., apply this SA in respect of SSO. (i.e. Type 1/2 report or visit or another auditor or contact SSO)
Nature and extent of work to be performed by user auditor regarding services provided by SSO
depend on nature and significance of those services to user entity and relevance of those services to
audit.
• The user auditor shall not refer to work of service auditor in user auditor’s report containing
unmodified opinion unless required by law or regulation. If such reference required by law or
regulation, indicate reference does not diminish user auditor’s responsibility for audit opinion.
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SA 450: Evaluation of Misstatements Identified during the Audit
Objective
The objective of the auditor is to evaluate:
a. Effect of identified misstatements on audit; and
b. Effect of uncorrected misstatements, if any, on F.S.
Uncorrected misstatements – Misstatements that auditor has accumulated during audit and not
corrected.
Sources of Misstatements
a. An inaccuracy in gathering or processing data from which F.S. are prepared;
c. An incorrect accounting estimate arising from overlooking, or clear misinterpretation of facts; and
a. The nature of identified misstatements and circumstances of their occurrence indicate that other
misstatements may exist that, when aggregated with accumulated ones, could be material; or
If, at auditor’s request, mgt has examined and corrected misstatements that were detected, auditor
shall perform additional audit procedures to determine whether misstatements remain.
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Discuss impact of uncorrected misstatements identified during audit and auditor's response to same
Prior to evaluating effect of uncorrected misstatements, auditor shall reassess materiality determined
in accordance with SA 320, to confirm whether it remains appropriate in context of entity’s actual
financial results.
In accordance with SA 450 “Evaluation of Misstatements identified during Audit”, auditor shall
determine whether uncorrected misstatements are material, individually or in aggregate. In making
this determination, the auditor shall consider- (size & effect)
(i) The size and nature of misstatements, both in relation to particular classes of transactions, account
balances or disclosures and F.S. as whole, and particular circumstances of their occurrence; &
(ii) The effect of uncorrected misstatements related to prior periods on relevant classes of
transactions, account balances or disclosures, and F.S. as a whole.
The auditor shall communicate with TCWG uncorrected misstatements and effect on opinion in
auditor’s report, unless prohibited by law or regulation.
Auditor’s communication shall identify material uncorrected misstatements individually. Auditor shall
request that uncorrected misstatements be corrected.
As per mgt, if effect is immaterial then auditor shall request for WR from mgt and TCWG that they
believe effects are immaterial to F.S. as a whole. A summary of such items shall be included in or
attached to the written representation.
If management refuses to adjust financial info and results of extended audit procedures do not enable
auditor to conclude that aggregate of uncorrected misstatements is not material, auditor should report
accordingly.
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SA 500: Audit Evidence
Objective
The objective of auditor is to design and perform audit procedures in a way as to enable him to
obtain sufficient appropriate audit evidence(SAAE) to be able to draw reasonable conclusions on
which to base auditor’s opinion.
Auditor’s responsibility when relying on Audit evidence prepared using Mgt Expert’s work:
(a) Evaluate competence, capabilities and objectivity of that expert;
Information regarding the competence, capabilities and objectivity of a management’s expert may
come from a variety of sources, such as:
• Auditor’s expert, if any, who assists auditor in obtaining SAAE wrt info produced by mgt’s
expert.
• Whether any professional or other standards, and regulatory or legal requirements apply.
• What assumptions and methods are used by the management’s expert, and whether they are
generally accepted within that expert’s field and appropriate for financial reporting purposes.
• The nature of internal and external data or information the auditor’s expert uses.
(c) Evaluate appropriateness of that expert’s work as audit evidence for relevant assertion.
Considerations when evaluating the appropriateness of the management’s expert’s work as audit
evidence for the relevant assertion may include:
• The relevance and reasonableness of expert’s findings or conclusions, their consistency with
other audit evidence, and whether they have been appropriately reflected in F.S;
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• If expert’s work involves use of significant assumptions and methods, relevance and
reasonableness of those assumptions and methods; and
• If expert’s work involves significant use of source data, relevance, completeness, and accuracy
of that source data.
Matters affecting NTE of Audit Procedures in case of info. produced using work of mgt expert
• The nature and complexity of matter to which mgt’s expert relates.
• The ROMM in the matter.
• The availability of alternative sources of audit evidence.
• The nature, scope and objectives of mgt’s expert’s work.
• Whether mgt’s expert is employed by entity, or is party engaged by it to provide relevant
services.
• The extent to which management can exercise control or influence over work of mgt’s
expert.
• Whether mgt’s expert is subject to technical performance standards or other
professional or industry requirements.
• The nature and extent of controls within entity over mgt’s expert’s work.
• The auditor’s knowledge and experience of mgt’s expert’s field of expertise.
• The auditor’s previous experience of work of that expert.
• External Confirmation: 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.
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• Inquiry:
o Inquiry consists of seeking information of knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
o Inquiry is used extensively throughout the audit in addition to other audit procedures.
o Inquiries may range from formal written inquiries to informal oral inquiries.
o Evaluating responses to inquiries is an integral part of the inquiry process
o 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.
o In some cases, responses to inquiries provide a basis for the auditor to modify or perform
additional audit procedures.
• Reliability of audit evidence generated internally increased when related controls are effective.
• Audit evidence obtained directly by auditor (for example, observation of application of control)
more reliable than audit evidence obtained indirectly or by inference (for example, inquiry about
application of control).
• Audit evidence provided by original documents more reliable than audit evidence provided by
photocopies or facsimiles, or documents filmed, digitised or otherwise transformed into electronic
form
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SA 501: Audit Evidence—Specific Considerations for Selected Items
Inventory
When inventory is material to F.S, auditor shall obtain SAAE regarding existence and condition of
inventory by:
i) Evaluate mgt’s instructions and procedures for recording results of entity’s physical inventory
counting;
(b) Performing audit procedures over entity’s final inventory records to determine whether they
accurately reflect actual inventory count results.
Matters that Auditor shall consider when designing audit procedures to obtain audit evidence about
whether changes in inventory amounts are properly recorded include:
1. Whether perpetual inventory records are properly adjusted.
2. Reliability of entity’s perpetual inventory records.
3. Reasons for significant differences between info obtained during physical count and perpetual
records.
• Perform audit procedures to assess whether changes in inventory between date of physical count
and period end date are correctly recorded.
• The auditor would also verify procedure adopted, treatment given for discrepancies noticed
during the physical count.
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• The auditor would also ensure that appropriate cut off procedures were followed by mgt.
If attendance is impracticable:
• This may be due to location & nature of inventory. Eg. Location pose threat to Auditor
• As per SA 200 à matter of difficulty, time, or cost involved is not a valid basis for auditor to
omit an audit procedure or settle for less than persuasive Audit Evidence.
• Perform alternative audit procedures to obtain SAAE regarding existence and condition of
inventory.
• For eg, inspection of documentation of subsequent sale of specific inventory items acquired or
purchased prior to inventory counting, may provide SAAE
• If not possible, modify opinion in auditor’s report in accordance with SA 705.
When inventory under custody of 3rd party is material to F.S, obtain SAAE regarding existence and
condition of inventory by performing one or both of following:
(a) Request confirmation from 3rd party as to quantities and condition of inventory held on behalf
of entity.
• Attending, or arranging another auditor to attend, 3rd party’s physical counting of inventory, if
practicable.
• Obtaining another auditor’s report, or service auditor’s report, on adequacy of 3rd party’s internal
control that inventory is properly counted and adequately safeguarded.
• Inspecting documentation regarding inventory held by 3rd parties, for eg, warehouse receipts.
• Requesting confirmation from other parties when inventory has been pledged as collateral.
• Application of appropriate control activities, for example, collection of used physical inventory
count records, accounting for unused physical inventory count records, and count and re-count
procedures.
• Accurate identification of stage of completion of WIP, of slow moving, obsolete or damaged
items and of inventory owned by a third party, for example, on consignment.
• Procedures used to estimate physical quantities.
• Control over movement of inventory between areas and shipping and receipt of inventory before
and after cut-off date.
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Litigation & Claims
The auditor shall identify litigation and claims through following procedures:
(a) Inquiry of mgt and, where applicable, others within entity, including in-house legal counsel;
(b) Reviewing minutes of meetings of TCWG and correspondence between entity and external legal
counsel; and
(c) Reviewing legal expense accounts.
The auditor shall do so through letter of inquiry, prepared by mgt and sent by auditor, requesting
entity’s external legal counsel to communicate directly with auditor. If law, regulation or respective
legal professional body prohibits entity’s external legal counsel from communicating directly with
auditor, perform alternative audit procedures.
If: (a) Mgt refuses to give permission to communicate with entity’s external legal counsel, or legal
counsel refuses to respond appropriately to letter of inquiry, or is prohibited from responding; and
(b) auditor is unable to obtain SAAE by performing alternative audit procedures, auditor shall modify
opinion in auditor’s report in accordance with SA 705.
Written Representation from mgt & TCWG that all litigation and claims whose effects should be
considered when preparing the financial statements
• have been disclosed to auditor and
• appropriately accounted for and disclosed in accordance with the applicable financial reporting
framework
Segment Information
Auditor shall obtain SAAE regarding presentation and disclosure of segment information in accordance
with applicable FRF by:
(a) Obtaining understanding of methods used by Mgt in determining segment information, and:
i) Evaluating whether such methods are likely to result in disclosure as per applicable FRF; and
ii) Where appropriate, testing application of such methods; and
‘Example of matters’ relevant when obtaining understanding of methods used by mgt in determining
segment information include:
i) Sales, transfers and charges between segments, and elimination of inter-segment amounts.
ii) Comparisons with budgets and other expected results, for eg, operating profits as a % of sales.
iii) Allocation of assets and costs among segments.
iv) Consistency with prior periods, and adequacy of disclosures w.r.t inconsistencies.
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SA 505: External Confirmations
External confirmation – Audit evidence obtained as a direct written response to auditor from a 3rd
party (the confirming party), in paper form, or by electronic or other medium.
• The method of communication (for example, in paper form, or by electronic or other medium).
• The ability of intended confirming party to confirm or provide the requested information (for
example, individual invoice amount versus total balance)
a. Inquire mgt’s reasons for refusal, and seek audit evidence of their validity and reasonableness;
b. Evaluate implications of mgt’s refusal on auditor’s assessment of ROMM, including risk of fraud,
and on NTE of other audit procedures; and
c. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
If auditor concludes that mgt’s refusal is unreasonable, or unable to obtain relevant and reliable
audit evidence from alternative audit procedures, communicate with TCWG in accordance with SA
260.
The auditor shall determine implications for audit and auditor’s opinion as per SA 705.
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Positive Confirmation Requests
• A positive external confirmation request asks confirming party to reply in all cases, either by
indicating agreement with given info, or providing information.
• There is risk that confirming party may reply without verifying if information is correct.
• The auditor may reduce this risk by not stating amt (or other info) on confirmation request, and
ask confirming party to fill amount or furnish other info.
• On other hand, use of this type of “blank” confirmation request may result in lower response rates
because additional effort is required by confirming parties.
Negative Confirmations
Negative confirmation request – A request that confirming party respond directly to auditor only if
confirming party disagrees with the information provided in the request.
Negative confirmations provide less persuasive audit evidence than positive confirmations.
Accordingly, auditor shall not use negative confirmation requests as sole substantive audit procedure
to address assessed ROMM at assertion level unless all of following are present:
(a) The auditor has assessed ROMM as low and obtained SAAE regarding operating effectiveness of
controls;
(b) Population comprises large number of small, homogeneous, account balances, transactions or
conditions;
(d) Auditor is not aware of circumstances that would cause recipients to disregard such requests.
• Accordingly, failure of confirming party to respond provides significantly less persuasive audit
evidence than positive confirmation request.
• Confirming parties also may be more likely to respond indicating their disagreement with
confirmation request when information in requested is not in their favour, and less likely to
respond otherwise.
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Topics related to External Confirmation given in SA 330
• The ability or willingness of the intended confirming party to respond – for example, the confirming
party:
Ø May not accept responsibility for responding to confirmation request;
Ø May consider responding too costly or time consuming;
Ø May have concerns about the potential legal liability resulting from responding;
Ø May account for transactions in different currencies; or
Ø May operate in environment where responding to confirmation requests is not a significant
aspect of day-to-day operations.
• The objectivity of intended confirming party – if confirming party is related party of entity,
responses to confirmation requests may be less reliable.
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SA 510: Initial Audit Engagements—Opening Balances
Objective
In conducting initial audit engagement, objective of auditor with respect to opening balances is to
obtain SAAE about whether:
a) Opening balances contain misstatements that materially affect the current period’s F.S;
b) Appropriate accounting policies reflected in opening balances have been consistently applied in
current period’s F.S, or changes properly accounted for and adequately presented and disclosed
in accordance with FRF.
Opening balances –
• Those account balances that exist at beginning of period.
• Opening balances are based upon closing balances of prior period and reflect effects of
transactions and events of prior periods and accounting policies applied in the prior period.
• Opening balances also include matters requiring disclosure that existed at beginning of
period, such as contingencies and commitments.
The auditor shall obtain SAAE about whether opening balances contain misstatements that materially
affect current period’s F.S. by:
a) Determining whether prior period’s closing balances correctly brought forward to current period
or, when appropriate, any adjustments have been disclosed as prior period items in current year’s
P&L
b) Determining whether opening balances reflect application of appropriate accounting policies; and
If auditor obtains audit evidence that opening balances contain misstatements that could materially
affect current period’s F.S. à perform additional audit procedures appropriate in circumstances to
determine effect on current period’s F.S.
If auditor concludes that misstatements exist in current period’s FS, communicate misstatements with
mgt and TCWG in accordance with SA 450.
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Consistency of Accounting Policies
Auditor shall obtain SAAE that:
• Accounting policies have been consistently applied in current period F.S. &
• whether any changes have been properly accounted for & adequately presented & disclosed as
per FRF.
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SA 520: Analytical Procedures
Objectives of Auditor
a) Obtaining relevant and reliable audit evidence when using substantive analytical procedures; and
b) To design and perform analytical procedures near end of audit that assist auditor when forming
an overall conclusion as to whether FS are consistent with auditor’s understanding of entity.
a) Determine suitability of particular SAP for given assertions, taking account of assessed
ROMM and tests of details for these assertions;
b) Evaluate reliability of data from which auditor’s expectation of recorded amounts or ratios is
developed, taking account of source, comparability, and nature and relevance of information
available, and controls over preparation;
2. In some cases, even unsophisticated predictive model may be effective as analytical procedure.
For eg, where entity has known number of employees at fixed rates of pay throughout period, it may
be possible for auditor to use this data to estimate total payroll costs for period with high degree of
accuracy, providing audit evidence for significant item in F.S. and reducing need to perform TOD on
payroll.
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5. Particular SAP may be considered suitable when TOD are performed on same assertion.
For eg, when obtaining audit evidence regarding valuation assertion for accounts receivable balances,
auditor may apply analytical procedures to aging of customers’ accounts in addition to performing TOD
on subsequent cash receipts to determine collectability of receivables.
(a) Inquiring of management and obtaining appropriate audit evidence relevant to mgt’s responses;
and
Reasonableness: Tests are made by reviewing relationship of certain account balances to other
balances for reasonableness of amounts. Examples of accounts that may be reasonably tested are:
• Interest expense against interest bearing obligations
• Raw Material Consumption to Production (quantity)
• Wastage & Scrap % against production & raw material consumption (quantity)
• Work-in-Progress based on issued of materials & Sales (quantity)
• Sales discounts and commissions against sales volume
• Rental revenues based on occupancy of premises
Structural Modelling: Modelling tool constructs a statistical model from financial and/or non-
financial data of prior-accounting periods to predict current account balances (e.g. linear regression).
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SA 530: Audit Sampling
Objective:
The objective is to provide reasonable basis for auditor to draw conclusions about population from
which sample is selected.
Audit sampling (sampling) – The application of audit procedures to less than 100% of items within a
population such that all sampling units have a chance of selection in order to provide auditor with a
reasonable basis on which to draw conclusions about entire population.
Sampling risk – The risk that auditor’s conclusion based on sample may be different from conclusion
if entire population were subjected to same audit procedure.
(i) In case of TOCs à controls are more effective than they actually are, or in case of TODs à
material misstatement does not exist when in fact it does.
The auditor is primarily concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.
(ii) In case of TOCs à controls are less effective than they actually are, or in case of TODs, that
material misstatement exists when in fact it does not.
This type of erroneous conclusion affects audit efficiency as it would usually lead to additional work
to establish that initial conclusions were incorrect.
Tolerable misstatement
• A monetary amount set by auditor in respect of which auditor seeks to obtain appropriate level of
assurance that the amount set by auditor isn’t exceeded by actual misstatement in population.
• Further, while designing a sample, auditor determines tolerable misstatement in order to address
risk that aggregate of individually immaterial misstatements may cause F.S. to be materially
misstated and provide a margin for possible undetected misstatements.
For eg:
I’ve set materiality as 5% of NP (100 Cr), Materiality = 5 Cr, let’s say PM = 1 Cr (less than materiality
for F.S. as whole). Now, Tolerable Misstatement can be equal to lower than PM, let’s say TM = 50 L,
now I’ll not check any amount in population which is less than 50 L as this is something I can tolerate.
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Sample Design, Size and Selection of Items for Testing
i) When designing audit sample, consider purpose of audit and characteristics of population from which
sample will be drawn.
ii) The auditor shall determine sample size sufficient to reduce sampling risk to acceptably low level.
iii) The auditor shall select items for sample in a way that each sampling unit in population has chance
of selection.
Performing audit procedures
• The auditor shall perform audit procedures, appropriate to purpose, on each item selected.
• If audit procedure is not applicable to selected item, auditor shall perform procedure on
replacement item.
• If auditor is unable to apply designed audit procedures, or alternative procedures, to selected
item, auditor shall treat that item as deviation from prescribed control, in case of TOCs, or
misstatement, in case of TODs.
(a) Random selection (applied through random number generators, for example, random number tables).
• Simple Random Sampling: Whole population has equal chance of selection
• Stratified Sampling: Dividing the population in few separate groups called strata & taking
samples from each of them.
(b) Systematic selection, in which the number of sampling units in the population is divided by the
sample size to give a sampling interval.
For eg, there are 5000 items & I want 100 samples, interval=5000/100= 50, and having determined a
starting point within 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 computerised random number generator or random number
tables.
(c) Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts.
(d) Haphazard selection, in which 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.
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(e) Block selection involves selection of a block(s) of contiguous 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.
TOCs
1. An increase in extent to which auditor’s risk assessment takes into account relevant controls:
Increase
2. An increase in tolerable rate of deviation: Decrease
3. An increase in expected rate of deviation of population to be tested: Increase
4. Increase in auditor’s desired level of assurance that tolerable rate of deviation is not exceeded by
actual rate of deviation in population: Increase
5. An increase in number of sampling units in population: Negligible effect
TODs
1. An increase in auditor’s assessment of risk of material misstatement: Increase
2. An increase in use of other substantive procedures directed at same assertion: Decrease
3. An increase in auditor’s desired level of assurance that tolerable misstatement is not exceeded by
actual misstatement in population: Increase
4. An increase in tolerable misstatement: Decrease
5. An increase in amount of misstatement the auditor expects to find in the population: Increase
6. Stratification of the population when appropriate: Decrease
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SA 540: Auditing Accounting Estimates,
including Fair Value Accounting Estimates & Related Disclosures
Nature of Accounting Estimates: Some F.S. items cannot be measured precisely, can only be
estimated. For purposes of this SA, such items referred to as accounting estimates.
Information available to mgt à accounting estimate varies widely à affects degree of estimation
uncertainty.
Degree of estimation uncertainty affects à ROMM of accounting estimates.
Some A/C estimates involve relatively low estimation uncertainty and give rise to lower ROMM:
• Accounting estimates arising in entities that engage in business activities that are not complex.
• Accounting estimates that are frequently made and updated because they relate to routine
transactions.
• Accounting estimates derived from data that is readily available, such as published interest rate
data or exchange-traded prices of securities. Such data may be referred to as “observable” in
context of fair value accounting estimate.
• Fair value (FV) accounting estimates where method of measurement prescribed by FRF is simple
and applied easily to asset or liability requiring measurement at fair value.
• FV accounting estimates where model used is well-known or generally accepted, provided that
assumptions or inputs to model are observable.
Accounting estimates with relatively high estimation uncertainty, based on significant assumptions,
for eg:
• Accounting estimates relating to outcome of litigation.
• FV accounting estimates for which a highly specialised entity-developed model is used or for
which, there are assumptions or inputs that cannot be observed in marketplace. Accounting
estimates in cases of Wage Revision Agreements wherein negotiations with Trade Unions is on
the way or Government’s sanction is awaited leading to uncertainty.
Examples of situations where accounting estimates, other than fair value accounting estimates, may
be required include:
• Allowance for doubtful accounts.
• Inventory obsolescence.
• Warranty obligations.
• Depreciation method or asset useful life.
• Provision against the carrying amount of an investment where there is uncertainty regarding its
recoverability.
• Outcome of long term contracts.
• Financial Obligations / Costs arising from litigation settlements and judgments.
Examples of situations where fair value accounting estimates may be required include:
• Complex financial instruments, which are not traded in an active and open market.
• Share-based payments.
• Property or equipment held for disposal.
CA SHUBHAM KESWANI 56
• Certain assets or liabilities acquired in a business combination, including goodwill and intangible
assets.
• Transactions involving the exchange of assets or liabilities between independent parties without
monetary consideration, for eg. non-monetary exchange of plant facilities in different lines of
business.
During audit, auditor may identify transactions, events and conditions that give rise to need for
accounting estimates that mgt failed to identify. SA 315 deals with circumstances where auditor
identifies RMM that mgt failed to identify, including determining whether there is significant
deficiency in internal control with regard to entity’s RAP.
(i) How mgt has considered alternative assumptions or outcomes, and why rejected them, or how mgt
otherwise addressed estimation uncertainty in making accounting estimate.
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(iii) Where relevant to reasonableness of significant assumptions used by mgt or appropriate
application of applicable financial reporting framework, management’s intent to carry out specific
courses of action and ability to do so.
(iv) If, in auditor’s judgment, mgt has not adequately addressed effects of estimation uncertainty on
accounting estimates that give rise to significant risks, auditor shall develop a range to evaluate
reasonableness of accounting estimate.
The degree of estimation uncertainty associated with accounting estimate may be influenced by
factors such as:
• The extent to which accounting estimate depends on judgment.
• The sensitivity of accounting estimate to changes in assumptions.
• The existence of recognised measurement techniques that may mitigate estimation
uncertainty.
• The length of forecast period, and relevance of data drawn from past events to forecast
future events.
• The availability of reliable data from external sources.
• The extent to which accounting estimate is based on observable or unobservable inputs.
Ø However, review is not intended to question judgments made in prior periods that were based
on info available at that time.
Ø The outcome of accounting estimate will often differ from accounting estimate recognised in
prior period F.S.
By performing RAP to identify and understand reasons for such differences, auditor may
obtain:
• Info regarding effectiveness of mgt’s prior period estimation process, from which auditor
can judge effectiveness of mgt’s current process.
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Identifying & Assessing ROMM
(a) In identifying and assessing ROMM as required by SA 315, auditor shall evaluate degree of
estimation uncertainty.
(b) Auditor shall determine whether any of those accounting estimate that have been identified as
having high estimation uncertainty give rise to significant risk.
(b) In response to assessed RMM, auditor shall undertake one or more of following:
• Determine whether events occurring up to date of auditor’s report provide sufficient audit
evidence regarding accounting estimate.
• The auditor shall also evaluate whether method used for measurement is appropriate and
assumptions made are reasonable in light of measurement objective of FRF.
This can be achieved by
Ø Testing extent to which data is accurate, complete and relevant and whether accounting
estimate has been properly determined using such data and management assumptions.
Ø Considering source, relevance and reliability of external data.
Ø Recalculating accounting estimate and reviewing information about accounting estimate
for internal consistency.
Ø Test checks effectiveness of controls over estimates used by management with
appropriate substantive procedure.
(c) While determining matters identified or responding to assessed RMM, auditor shall consider
whether specialized skills or knowledge in relation to one or more aspects of accounting estimates are
required in order to obtain SAAE.
Understanding of Assumptions
Matters that the auditor may consider in obtaining an understanding of assumptions underlying the
accounting estimates include, for example:
• The nature of assumptions, including which of the assumptions are likely to be significant
assumptions.
• How management assesses whether assumptions are relevant and complete (that is, that all
relevant variables have been taken into account).
• Where applicable, how management determines that assumptions used are internally consistent.
• Whether assumptions relate to matters within control of management (for eg, assumptions about
maintenance programs that may affect estimation of asset’s useful life), and how they conform
to entity’s business plans and external environment, or to matters that are outside its control
(for eg, assumptions about interest rates, mortality rates, potential judicial or regulatory actions,
or variability and the timing of future cash flows).
CA SHUBHAM KESWANI 59
Disclosures Related to Accounting Estimates
Auditor shall obtain SAAE about whether disclosures in FS related to accounting estimates are in
accordance with FRF. For accounting estimates that give rise to significant risks, evaluate adequacy
of disclosure of their estimation uncertainty in F.S. in context of applicable FRF
(a) The presentation of FS in accordance with applicable FRF includes adequate disclosure of material
matters.
These disclosures may include,
• The assumptions used.
• The method of estimation used, including any applicable model.
• The basis for selection of estimation.
• Any changes in method of estimation from prior period and its subsequent effect.
• The sources and implication of estimation uncertainty.
(b) In relation to accounting estimate having significant risk, even where disclosures are in accordance
with the applicable FRF, the auditor may conclude that the disclosure of estimation uncertainty is
inadequate in light of the circumstances and facts involved.
CA SHUBHAM KESWANI 60
SA 550: Related Parties (RP)
Responsibilities of auditor
• FRF establish a/c & disclosure requiremets à RP relationships, transactions & balances then
Auditor must perform Audit procedures to reduce RMM that entity doesn’t account & disclose RP
relationships, transn & balances as per FRF
• Even if FRF has no such requirement à Auditor shall obtain understanding of RP relationships &
transn to conclude FS give true & fair view & are not misleading
Objectives of Auditor
(a) Obtain understanding of RP relationships and transactions sufficient to be able:
(i) To recognise fraud risk factors, arising from RP relationships and transn relevant to
identification and assessment of ROMM due to fraud; and
(b) In addition, where FRF establishes RP requirements, to obtain SAAE about whether RP
relationships and transn have been appropriately identified, accounted and disclosed in F.S. in
accordance with FRF
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 significant extent with one another.
The auditor shall inquire of management and others within entity, to obtain understanding of controls
that management has established to:
(a) Identify, account for, and disclose RP relationships and transactions in accordance with FRF;
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(b) Authorise and approve significant transactions and arrangements with RP; and
(c) Authorise and approve significant transactions and arrangements o/s normal course of business.
(a) Bank, legal and 3rd party confirmations obtained as part of auditor’s procedures;
(c) Such other records or documents as auditor considers necessary in circumstances of entity.
During the audit, the auditor may inspect records or documents that may provide information about
related party relationships and transactions, for eg:
• Documents associated with the entity’s filings with a securities regulator (e.g, prospectuses).
• Significant contracts and agreements not in the entity’s ordinary course of business.
If auditor identifies significant transactions o/s entity’s normal course of business when performing
audit procedures , he shall inquire of management about:
(a) The nature of transactions; and
(b) Whether RP could be involved.
Fraud Risk Factors Associated with a Related Party with Dominant Influence
Domination of mgt by single person or small group of persons without compensating controls is a
fraud risk factor.
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Identification of Previously Unidentified/Undisclosed RP or Significant RP Transactions
a) Promptly communicate to other members of engg team
• Agreements for provision of services to certain parties under terms and conditions that are o/s
entity’s normal course of business.
• The leasing of premises or rendering of mgt services by entity to another party if no consideration
is exchanged.
• Transactions with circular arrangements, for example, sales with a commitment to repurchase.
CA SHUBHAM KESWANI 63
SA 560: Subsequent Events
Events occurring b/w date of Facts that become known to Facts which become known to
FS & date of Audit Report auditor after date of Audit auditor after FS are issued
report but before F.S. are
issued
a) Auditor shall obtain SAAE to a) Auditor has no obligation to a) After FS have been issued
ensure the events which perform any procedure auditor has no obligation.
require adjustment or regarding FS after issue of AR.
disclosure in FS have been b) However if any fact becomes
identified. b) However, if a fact becomes known to auditor, had it been
known to auditor that had been know at date of AR, he may
b) In determining NTE of Audit known before issue of AR, it have amended the AR, he shall:
procedures, he shall: may have amended the AR, he • Discuss with mgt &
• Obtain understanding of shall: TCWG
mgt procedures of • Discuss matter with mgt & • Determine if FS need
identifying subsequent TCWG amendment & if so,
events • Determine if FS need • Inquire how mgt intends
• Inquiring of mgt as to amendment & if so to address the matter
occurrence of subs. Events • Inquire how mgt intends to
which affect FS address the matter in FS c) If mgt amends the FS,
• Read minutes mgt meetings auditor shall:
held after date of FS c) If mgt amends FS, he shall, • Carry out audit procedures
• Read latest subsequent • Carry our audit procedures necessary in circumstances
interim FS, if any on amendment of amendment
• If auditor identifies events • Extend these procedures to • Review steps taken by mgt
which require adjustment or date of new AR that everyone in receipt of
disclosure in FS, then • Provide a new AR on amended previously issued FS with
determine if it is FS dated not earlier than AR has been informed of
appropriately adjusted or date of approval of amended the situation
disclosed in FS FS • Extend audit procures to
• Written Representation date of new AR, dated no
from mgt that all events d) If law or reg. or FRF doesn’t earlier than date of approval
occurring subsequent to prohibit mgt from restricting of amended FS
date of FS & that require amendment of FS to • Provide a new AR on
adj or discl have been subsequent event, auditor is amended FS
adjusted or disclosed. permitted to restrict audit • In New or amended AR
procedures to that amendment. include EOM/OM para
Auditor shall either: referring to note in FS
• Amend AR to include an discussing reasons for
additional date restricted to amendment in FS & AR
amendment in FS.
d) If mgt doesn’t amend FS &
• Provide a new or amended AR inform users about the
that includes EOM/OM para situation à auditor shall notify
that conveys audit mgt & TCWG that auditor seek
procedures on subsequent
CA SHUBHAM KESWANI 64
events restricted to to prevent future reliance on
amendments in FS. AR
CA SHUBHAM KESWANI 65
SA 570: Going Concern
b) Mgt’s assessment of entity’s ability to continue as going concern involves making judgment, at
particular point in time, about inherently uncertain future outcomes of events or conditions.
Auditor’s Responsibilities
• Auditor’s responsibilities are to obtain SAAE and conclude on, appropriateness of mgt’s use of
going concern basis of accounting in preparation of FS
• To conclude, based on audit evidence obtained, whether a material uncertainty exists about the
entity’s ability to continue as a going concern.
• These responsibilities exist even if FRF used in preparation of FS does not include explicit
requirement for mgt to make specific assessment of entity’s ability to continue as a going concern.
• The absence of reference to material uncertainty about entity’s ability to continue as going concern
in auditor’s report cannot be viewed as a guarantee as to entity’s ability to continue as a going
concern.
Requirements of SA 570
When performing RAP as per SA 315, auditor shall consider whether events or conditions exist that
may cast significant doubt on entity’s ability to continue as a going concern.
In doing so, determine whether mgt has already performed a preliminary assessment of entity’s ability
to continue as a going concern, &
a) If assessment performed à discuss the assessment with mgt and determine whether mgt has
identified events or conditions that, individually or collectively, cast significant doubt on entity’s
ability to continue as going concern and, if so, mgt’s plans to address them; or
b) If assessment not performed à discuss with mgt basis for use of going concern basis of
accounting, and inquire whether events or conditions exist that, individually or collectively, may
cast significant doubt on entity’s ability to continue as going concern.
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The auditor shall remain alert throughout audit for audit evidence of events or conditions that cast
significant doubt over entity’s ability to continue as going concern.
a) Where mgt has not yet performed assessment of entity’s ability to continue as going concern,
requesting mgt to make its assessment.
b) Evaluating mgt’s plans for future actions, whether outcome of these plans likely to improve situation
and whether management’s plans are feasible in the circumstances.
c) Where entity has prepared cash flow forecast, and analysis of forecast is a significant factor in
considering future outcome of events or conditions:
i. Evaluating reliability of underlying data generated to prepare forecast; and
ii. Determining whether there is adequate support for assumptions underlying forecast.
d) Considering whether any additional facts or info become available since date on which mgt made
its assessment.
e) Requesting written representations from mgt and TCWG , regarding their plans for future
actions and feasibility of these plans.
Mgt Written
Plans Cash flow forecast Add. Facts/info
Assessment Representations
Additional procedures:
• Analysing and discussing cash flow, profit and other relevant forecasts with mgt.
• Analysing and discussing entity’s latest available interim financial statements.
• Reading terms of debentures and loan agreements and determining whether any have been
breached.
• Reading minutes of meetings of shareholders, TCWG and committees for reference to
financing difficulties.
• Inquiring of entity’s legal counsel regarding existence of litigation and claims and
reasonableness of mgt’s assessments of their outcome and estimate of financial implications.
• Confirming existence, legality and enforceability of arrangements to provide or maintain
financial support with related and third parties and assessing financial ability of such parties
to provide additional funds.
• Evaluating entity’s plans to deal with unfilled customer orders.
• Performing audit procedures regarding subsequent events to identify those that either mitigate
or otherwise affect entity’s ability to continue as a going concern.
• Confirming existence, terms and adequacy of borrowing facilities.
• Obtaining and reviewing reports of regulatory actions.
• Determining adequacy of support for any planned disposals of assets.
CA SHUBHAM KESWANI 67
Auditor’s Conclusion
• The auditor shall evaluate whether SAAE has been obtained & conclude on, appropriateness of
mgt’s use of going concern basis of accounting in preparation of FS.
• Based on audit evidence obtained, conclude whether material uncertainty exists related to events
or conditions that, individually or collectively, may cast significant doubt on entity’s ability to
continue as a going concern.
• A material uncertainty exists when magnitude of impact and likelihood of occurrence is such that,
appropriate disclosure of nature and implications of uncertainty is necessary for:
a) In case of a fair presentation FRF à fair presentation of FS,or
b) In case of compliance framework, FS not to be misleading.
Adequacy of Disclosures When Events or Conditions Have Been Identified and a Material Uncertainty
Exists
If auditor concludes that mgt’s use of going concern basis of accounting is appropriate in
circumstances but material uncertainty exists, auditor shall determine whether FS:
a) Adequately disclose principal events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern and mgt’s plans to deal with these events or conditions;
and
b) Disclose clearly that there is material uncertainty related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern and, therefore, that it
may be unable to realize its assets and discharge its liabilities in the normal course of business.
Adequacy of Disclosures When Events or Conditions Have Been Identified but No Material
Uncertainty Exists
If events or conditions identified that may cast significant doubt on entity’s ability to continue as
going concern but, based on audit evidence obtained, auditor concludes that no material uncertainty
exists, auditor shall evaluate whether, in view of the requirements of FRF, F.S. provide adequate
disclosures about these events or conditions.
Use of Going Concern Basis of Accounting Is Appropriate but a Material Uncertainty Exists
(a) Draw attention to note in F.S. that discloses the matters; and
(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 F.S. à If adequate disclosure about
material uncertainty is not made in financial statements, auditor shall:
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(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(Revised); and
(b) In Basis for Qualified (Adverse) Opinion section of 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 à Auditor shall consider the implications
for auditor’s report.
Communication with TCWG
a) Whether events or conditions constitute a material uncertainty;
b) Whether mgt’s use of going concern basis of accounting is appropriate in preparation of F.S.;
c) The adequacy of related disclosures in F.S.; and
d) Where applicable, implications for auditor’s report.
Events or Conditions That May Cast Significant Doubt on the Entity’s Ability to Continue as a Going
Concern
Financial
• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets.
• Inability to pay creditors on due dates.
• Indications of withdrawal of financial support by creditors.
• Substantial operating losses or significant deterioration in value of assets used to generate
cash flows.
• Arrears or discontinuance of dividends.
• Negative operating cash flows indicated by historical or prospective financial statements.
• Adverse key financial ratios.
• Change from credit to cash-on-delivery transactions with suppliers.
Operating
• Management intentions to liquidate the entity or to cease operations.
• Loss of key mgt without replacement.
• Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
• Labor difficulties.
• Shortages of important supplies.
• Emergence of a highly successful competitor.
Other
• Non-compliance with capital or statutory or regulatory requirements
• Pending legal or regulatory proceedings against entity that may result in claims that entity is
unlikely to satisfy.
• Changes in law or regulation or government policy expected to adversely affect entity.
• Uninsured or underinsured catastrophes when they occur.
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SA 580: Written Representations (WR)
• A written statement by mgt provided to auditor to confirm certain matters or to support other
audit evidence.
• Written representations in this context do not include F.S., assertions therein, or supporting
books and records.
• WR provide necessary audit evidence, they don’t provide SAAE on their own about any of
matters with which they deal.
Objectives of Auditor
a) To obtain WR from mgt that they believes they have fulfilled their responsibility for
preparation of F.S and for completeness of information provided to auditor;
b) To support other audit evidence relevant to F.S. or specific assertions in F.S by means of WR,
if determined necessary by auditor or required by other SAs; and
c) To respond appropriately to WR provided by management or if management do not provide the
written representations requested by the auditor.
As per SA 580, “Written Representations”, as written representations are necessary audit evidence,
auditor’s opinion cannot be expressed, and auditor’s report cannot be dated, before the date of written
representations.
Furthermore, because auditor is concerned with events occurring up to date of auditor’s report that
may require adjustment to or disclosure in F.S, WR are dated as near as practicable to, but not after,
date of auditor’s report on F.S.
In some circumstances it may be appropriate for auditor to obtain a WR about a specific assertion in
F.S. during the course of audit. Where this is the case, it may be necessary to request an updated
written representation.
The written representations are for all periods referred in auditor’s report because mgt needs to
reaffirm that WR it previously made wrt prior periods remain appropriate. Auditor and mgt may agree
to a form of WR that updates WRs relating to prior periods by addressing whether there are any
changes to such written representations and, if so, what they are.
Situations may arise where current mgt were not present during all periods referred to in auditor’s
report. Such persons may assert that they are not in position to provide some or all of WRs because
they were not in place during prior period.
This fact, however, does not diminish such persons’ responsibilities for F.S. as a whole. Accordingly,
requirement for auditor to request written representations that cover whole of relevant period(s) still
applies.
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Doubt as to the Reliability of Written Representations
If auditor has concerns about competence, integrity, ethical values or diligence (DICE) of mgt, auditor
shall determine effect that such concerns may have on reliability of representations (oral or written)
and audit evidence in general.
In particular, if WR are inconsistent with other audit evidence, auditor shall perform audit procedures
to attempt to resolve the matter. If matter remains unresolved, reconsider assessment of
competence, integrity, ethical values or diligence (DICE) of mgt and determine effect on reliability of
representations (oral or written) and audit evidence in general.
If auditor concludes that WR are not reliable, take appropriate actions, including determining possible
effect on opinion in auditor’s report in accordance with SA 705.
If mgt does not provide one or more of requested written representations, auditor shall:
a) The auditor concludes that there is sufficient doubt about integrity of management such that
WR are not reliable; or
b) Management does not provide WR required.
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SA 600: Using the work of Other Auditor
Principal Auditor
The auditor should consider following before accepting his position as principal auditor:
1. Right to visit component & examine books of accounts & records, if necessary.
2. If planning to use work of other auditor evaluate his competence if he’s not member of ICAI
3. Perform procedures to obtain SAAE that work of other auditor is adequate for principal auditor’s
purpose.
• Advise other auditor of use of his work & co-ordinate at planning stage.
• Inform auditor about areas requiring spl. consideration, procedures for identifying inter-
component transaction, & time table for audit completion.
• Advise other auditor about significant accounting, auditing & reporting requirements & obtain
representation as to compliance with them.
4. Principal Auditor might discuss with other auditor procedures applied or review written summary
of his audit procedures in form of questionnaire or checklist. May also plan to visit other auditor.
NTE of audit procedures would depend on his knowledge of professional competence of other
auditor that can be enhanced from review of his previous audit work.
As per SA 600 “Using the Work of Another Auditor”, there should be sufficient liaison between
principal auditor and other auditor
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iii. When considered necessary by him, principal auditor may require other auditor to answer a
detailed questionnaire regarding matters on which principal auditor requires information for
discharging his duties.
i. The other auditor, knowing context in which his work is to be used by principal auditor, should
co-ordinate with principal auditor. For example, by bringing to principal auditor’s immediate
attention any significant findings requiring to be dealt with at entity level, adhering to time-
table for audit of component, etc.
ii. He should ensure compliance with relevant statutory requirements.
iii. The other auditor should respond to questionnaire sent by Principal Auditor on a timely basis.
Reporting Considerations
When principal auditor concludes, that work of other auditor can’t be used and he has not been able
to perform sufficient additional procedures regarding financial information of component audited by
other auditor, express a qualified or disclaimer of opinion because there is limitation on scope of audit.
In all circumstances, if other auditor issues, or intends to issue, modified auditor's report, principal
auditor should consider whether subject of modification is of such nature and significance, in relation
to financial information of entity that it requires modification of principal auditor's report.
Division of Responsibility
The principal auditor would not be responsible in respect of work entrusted to other auditors, except
in circumstances which should have aroused his suspicion about reliability of work performed by other
auditors.
When principal auditor has to base his opinion on FS of entity as a whole relying upon statements and
reports of other auditors, report should state clearly division of responsibility for financial
information of entity by indicating extent to which financial information of components audited by
other auditors included in financial information of entity, e.g., number of
divisions/branches/subsidiaries or other components audited by other auditors.
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SA 620: Using the work of Auditor’s Expert
SA 620 deals with auditor’s responsibilities regarding use of work in a field of expertise other than
accounting or auditing when that work is used to assist the auditor in obtaining SAAE.
• The valuation of complex financial instruments, land and buildings, plant and machinery,
jewellery, works of art, antiques, intangible assets, assets acquired and liabilities assumed in
business combinations and assets that may have been impaired.
• The actuarial calculation of liabilities associated with insurance contracts or employee benefit
plans.
Objectives of Auditor
(a) To determine whether to use work of an auditor’s expert; and
(b) If using work of an auditor’s expert à determine whether that work is adequate for auditor’s
purposes.
• The expected nature of procedures to respond to identified risks, including auditor’s knowledge
of and experience with work of experts in relation to such matters; and availability of alternative
sources of audit evidence.
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• The extent to which mgt can exercise control or influence over the work of the management’s
expert.
• The management’s expert’s competence and capabilities.
• Whether mgt’s expert is subject to technical performance standards or other professional or
industry requirements.
• Any controls within entity over management’s expert’s work.
Nature, Timing & Extent of Audit Procedures when using work of Auditor’s Expert
The NTE of auditor’s procedures will vary depending on circumstances. The auditor shall consider
matters including:
The following factors may suggest the need for different or more extensive procedures than would
otherwise be the case:
• The work of auditor’s expert relates to significant matter that involves subjective and complex
judgments.
• The auditor has not previously used work of auditor’s expert, and has no prior knowledge of expert’s
competence, capabilities and objectivity.
• The auditor’s expert is performing procedures integral to audit, rather than being consulted to
provide advice on individual matter.
• The expert is auditor’s external expert and not subject to firm’s quality control policies and
procedures.
a) Inquire entity about any known interests or relationships that it has with auditor’s external
expert.
b) Discuss with that expert any applicable safeguards, including professional requirements that
apply to him; and evaluate adequacy of safeguards to reduce threats to acceptable level.
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Interests and relationships that may be relevant to discuss with the auditor’s expert include:
• Financial interests.
• Business and personal relationships.
• Provision of other services by expert
• In some cases, it may also be appropriate for auditor to obtain written representation from
auditor’s external expert about interests or relationships with entity of which that expert is
aware.
c) The nature, timing and extent of communication between auditor and expert, including form of
report to be provided by expert; and
The following factors suggest need for more detailed agreement or written agreement:
• The auditor’s expert will have access to sensitive or confidential entity information.
• The respective roles or responsibilities of auditor and auditor’s expert are different from
those normally expected.
• The auditor has not previously used work performed by that expert.
• The greater the extent of auditor’s expert’s work, and its significance in context of audit.
• Discussion with another expert with relevant expertise when, for example, the findings or
conclusions of the auditor’s expert are not consistent with other audit evidence.
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Use of Significant assumptions & methods (Relevance & Reasonableness)
Factors relevant to the auditor’s evaluation of those assumptions and methods include whether they
are:
• Generally accepted within auditor’s expert’s field;
• Consistent with requirements of applicable FRF;
• Consistent with those of management, and if not, reason for, and effects of, differences.
• Dependent on use of specialised models;
Inadequate work
If the auditor determines that work not adequate for auditor’s purposes, auditor shall:
a) Agree with that expert on nature and extent of further work to be performed by expert; or
b) Perform further audit procedures appropriate to circumstances.
Reporting: If work is not adequate for auditor’s purposes + cannot resolve matter through additional
audit procedures à express modified opinion as per SA 705 because not obtained SAAE.
• The auditor shall not refer to work of auditor’s expert in auditor’s report containing unmodified
opinion unless required by law or regulation to do so. If such reference required by law or regulation,
auditor shall indicate in report that reference does not reduce auditor’s responsibility for audit
opinion.
• In some cases, law or regulation may require reference to work of an auditor’s expert, for purposes
of transparency in public sector.
• If auditor makes reference to work of auditor’s expert in auditor’s report because such reference
is relevant to understanding of modification to auditor’s opinion, indicate in auditor’s report that
such reference does not reduce auditor’s responsibility for that opinion.
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SA 700: Forming an Opinion & Reporting on the Financial Statements
Objective:
a) To form an opinion on F.S. based on evaluation of conclusions drawn from audit evidence obtained;
and
b) To express clearly that opinion through a written report.
(a) The F.S. adequately disclose significant accounting policies selected and applied;
(b) The a/c policies selected and applied are consistent with applicable FRF and are appropriate;
(d) The information presented in F.S. is relevant, reliable, comparable, and understandable;
(e) The F.S. provide adequate disclosures to enable intended users to understand effect of material
transactions and events on information conveyed in F.S.; and
(f) The terminology used in F.S., including the title of each financial statement, is appropriate.
In order to form opinion, obtain reasonable assurance about whether F.S. as whole are free from
material misstatement whether due to fraud or error.
Further, when F.S. are prepared in accordance with fair presentation framework, also evaluate
whether F.S. achieve fair presentation by considering:
In other words, auditor shall express an unmodified opinion when auditor concludes F.S. are
prepared, in all material respects, in accordance with applicable FRF.
1. Title: Auditor’s report shall have title that clearly indicates that it is report of independent
auditor. “Independent Auditor’s Report,” distinguishes independent auditor’s report from reports
issued by others.
3. Auditor’s Opinion: The first section of auditor’s report shall include auditor’s opinion, and shall
have heading “Opinion.” Opinion section of auditor’s report shall also:
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a) Identify entity whose F.S. have been audited;
b) State that F.S. have been audited;
c) Identify title of each statement comprising F.S.;
d) Refer to notes, including summary of significant accounting policies; and
e) Specify date of, or period covered by, each financial statement comprising the F.S.
4.Basis for Opinion: The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:
5. Going Concern: Where applicable, auditor shall report in accordance with SA 570, Auditor’s
responsibilities are to obtain SAAE and conclude on, appropriateness of mgt’s use of going concern
basis of accounting in preparation of F.S, and conclude whether material uncertainty exists about
entity’s ability to continue as going concern.
6. Key Audit Matters: For audits of F.S. of listed entities à communicate KAM in auditor’s report in
accordance with SA 701.
When auditor is otherwise required by law or regulation or decides to communicate key audit matters
in auditor’s report, auditor shall do in accordance with SA 701.
The auditor’s report shall include a section with heading “Responsibilities of Management for
Financial Statements.” In some entities, appropriate reference may be to TCWG.
This section of the auditor’s report shall describe mgt’s responsibility for:
CA SHUBHAM KESWANI 79
a) Preparing F.S. as per applicable FRF, and for such internal control as mgt determines necessary to
enable preparation of F.S. free from material misstatement, whether due to fraud or error; &
b) Assessing entity’s ability to continue as going concern and whether use of GC basis of accounting
is appropriate as well as disclosing matters relating to GC. The expln of mgt’s responsibility for
this assessment shall include description of when use of GC basis of accounting is appropriate.
This section of auditor’s report shall also identify those responsible for oversight of financial reporting
process. In this case, heading of this section shall also refer to “Those Charged with Governance”.
When F.S. prepared in accordance with fair presentation framework, description of responsibilities
for F.S. in auditor’s report shall refer to “preparation and fair presentation of these financial
statements” or “preparation of financial statements that give a true and fair view,” as appropriate.
b) State that reasonable assurance is high level of assurance, but not a guarantee that audit
conducted in accordance with SAs will always detect a material misstatement when it exists; and
c) State that misstatements can arise from fraud or error, and either:
i. Describe that they are considered material if, individually or in aggregate, they could
reasonably be expected to influence economic decisions of users taken on basis of these F.S;
or
ii. Provide a definition or description of materiality in accordance with applicable FRF.
(II) The Auditor’s Responsibilities for the Audit of F.S. section of the auditor’s report shall further:
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(III) The Auditor’s Responsibilities for Audit of Financial Statements section of auditor’s report
also shall:
(a) State that auditor communicates with TCWG regarding, among other matters: planned scope and
timing of audit and significant audit findings, including any significant deficiencies in internal control
that auditor identifies during audit;
(b) State that auditor provides TCWG with a statement that auditor has complied with relevant
ethical requirements regarding independence and communicate with them all relationships and other
matters that may reasonably be thought to bear on auditor’s independence, and where applicable,
related safeguards; and
(c) For audits of F.S. of all such entities for which KAM are communicated in accordance with SA
701, state that, from matters communicated with TCWG, auditor determines those matters that
were of most significance in audit of F.S. of current period and are therefore key audit matters.
As per SA 701, auditor describes these matters in auditor’s report unless law or regulation precludes
public disclosure about the matter or in extremely rare circumstances, auditor determines that a
matter should not be communicated in auditor’s report because adverse consequences of doing so
would reasonably be expected to outweigh the public interest benefits of such communication.
11. Signature of auditor: Audit report shall be signed by Auditor in personal name & audit firm.
Partner signing needs to mention membership no. + Registration no. of firm + UDIN
12. Date of Audit Report: Not earlier than date when auditor has obtain SAAE
Audit reports for audit as per both SAs & International Stds on Audit
Auditor may be required to conduct audit in accordance with, in addition to Standards on Auditing
issued by ICAI, International Standards on Auditing or auditing stds of any other jurisdiction. If this
is the case, auditor’s report may refer to SA in addition to ISA or auditing standards of such other
jurisdiction, but auditor shall do so only if:
(a) There is no conflict between requirements in ISAs or such auditing standards of other
jurisdiction and those in SAs that would lead auditor
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(b) The auditor’s report includes, at a minimum, each of the elements required by SA. The auditor’s
report shall thereby identify such Standards on Auditing.
When auditor’s report refers to both the ISAs or auditing standards of a specific jurisdiction and
SA issued by ICAI, auditor’s report shall clearly identify the same including jurisdiction of origin of
other auditing stds.
If supplementary info that is not required by applicable FRF is presented with audited F.S., auditor
shall evaluate whether it is integral part of F.S. due to its nature or how its presented. When it is
integral part of F.S, it shall be covered by auditor’s opinion.
If supplementary info that is not required by applicable FRF is not considered an integral part of
audited F.S, evaluate whether it is presented in a way that sufficiently and clearly differentiates it
from audited F.S. If not, then auditor shall ask mgt to change its presentation. If mgt refuses ,
auditor shall identify unaudited supplementary info and explain in auditor’s report that such
supplementary info has not been audited.
Examples:
1) When notes to F.S. include expln or reconciliation to the extent to which F.S. comply with another
FRF. Auditor’s opinion will consider such this as supplementary info that can’t be differentiated from
F.S. His opinion will cover such notes or schedules cross referenced from F.S.
2) When additional p&l that discloses specific items of expenditure as separate schedule included as
appendix to F.S. à Auditor shall consider it as supplementary info that can be differentiated from
financial info.
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SA 701: Communicating Key Audit Matters in the
Independent Auditor’s Report
• Key Audit matter are matters that in auditor’s professional judgment, were of most significance
in audit of F.S. of current period.
• KAM are selected from matters communicated with TCWG.
Objective
• To enhance communicative value of auditor’s report by providing greater transparency about
audit that was performed.
• To assist user in understanding those matters that, in auditor’s professional judgment, were
of most significance in audit of F.S. of current period.
a) Areas of higher assessed RMM, or significant risks identified in accordance with SA 315
b) Significant auditor judgments relating to areas in F.S. that involved significant mgt judgment,
including accounting estimates that have been identified as having high estimation
uncertainty.
c) The effect on audit of significant events or transactions that occurred during the period.
a) Key audit matters are those matters that, in auditor’s professional judgment, were of most
significance in audit of F.S. [of current period]; and
b) These matters were addressed in context of audit of F.S. as a whole, and in forming auditor’s
opinion thereon, and auditor does not provide separate opinion on these matters.
If no KAM Identified? :The following illustrates presentation in auditor’s report if auditor has
determined there are no KAM to communicate:
Key Audit Matters: [Except for the matter described in Basis for Qualified (Adverse) Opinion
section or Material Uncertainty Related to Going Concern section,] We have determined that there
are no [other] key audit matters to communicate in our report.]
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SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”
Objective: The objective of auditor is to express clearly an appropriately modified opinion on F.S.
that is necessary when:
a) The auditor concludes, based on audit evidence obtained, that F.S. as a whole are not free
from material misstatement; or
b) The auditor is unable to obtain SAAE to conclude that F.S. as a whole are free from material
misstatement.
(a) Obtained SAAE à concludes that misstatements, individually or in aggregate, are material, but not
pervasive, to F.S.; or
(b) Unable to obtain SAAE to base the opinion, but concludes that possible effects on F.S. of
undetected misstatements, if any, could be material but not pervasive.
(Material but not pervasive)
Spl. Considerations: When the auditor expresses qualified opinion due to material misstatement in F.S,
auditor shall state that, in auditor’s opinion, except for effects of matter(s) described in Basis for
Qualified Opinion section:
(1) When reporting in accordance with fair presentation framework, accompanying F.S. present fairly,
in all material respects (or give a true and fair view of) […] in accordance with [applicable FRF]; or
(2) When reporting in accordance with compliance framework, accompanying F.S. have been prepared,
in all material respects, in accordance with [applicable FRF]. When modification arises from inability
to obtain SAAE, auditor shall use corresponding phrase “except for possible effects of matter(s) ...”
for modified opinion.
Adverse Opinion: Obtained SAAE, concludes misstatements, individually or in the aggregate, both
material and pervasive to financial statements.
Spl. Considerations: When auditor expresses an adverse opinion, auditor shall state that, in auditor’s
opinion, because of significance of matter(s) described in Basis for Adverse Opinion section:
(1) When reporting in accordance with a fair presentation framework, accompanying F.S. do not present
fairly (or give a true and fair view of) […] in accordance with [applicable FRF]; or
(2) When reporting in accordance with compliance framework, accompanying F.S. have not been
prepared, in all material respects, in accordance with [applicable FRF].
Disclaimer of Opinion: Unable to obtain SAAE to base the opinion, and concludes that possible effects
on F.S. of undetected misstatements, if any, could be both material and pervasive.
Note: Unless required by law or regulation, when auditor disclaims an opinion on F.S., auditor’s report
shall not include Key Audit Matters section in accordance with SA 701.
Spl considerations: When auditor disclaims an opinion due to inability to obtain SAAE, auditor shall:
CA SHUBHAM KESWANI 84
1. State that auditor does not express opinion on accompanying F.S;
2. State that, because of significance of matter(s) described in Basis for Disclaimer of Opinion
section, auditor has not been able to obtain SAAE to provide basis for audit opinion on F.S; and
3. Amend the statement required in SA 700 (Revised), which indicates that F.S. have been
audited, to state that auditor was engaged to audit the F.S.
Mgt imposed limitation after acceptance of Audit Engagement à Unable to obtain SAAE
Ø After accepting Audit , mgt impose limitation on scope à likely to result in Qualified or
Disclaim of opinion à auditor request mgt to remove limitation
Ø Mgt refuse to remove limitation à Auditor communicate with TCWG & determine if alternate
procedures can be performed to obtain SAAE
(a) If auditor concludes that possible effects on F.S.of undetected misstatements, if any, could
be material but not pervasive, auditor shall qualify the opinion; or
(b) If auditor concludes that possible effects on F.S. of undetected misstatements, if any,
could be both material and pervasive so that qualification of opinion would be inadequate to
communicate gravity of situation, the auditor shall:
(i) Withdraw from audit, where practicable and possible under applicable law or regulation;
or
(ii) If withdrawal from audit before issuing auditor’s report not practicable, disclaim an
opinion on F.S.
Ø If decides to withdraw à communicate with TCWG à matters regarding misstatement à rise
to modification of opinion
Note: If Auditor expresses Adverse or Disclaimer of Opinion then audit report shall not contain
unmodified opinion w.r.t any element of F.S.
The auditor’s inability to obtain SAAE (also referred to as limitation on scope of audit)
may arise from:
(a) Circumstances beyond the control of entity;
• The entity’s accounting records have been destroyed.
• The accounting records of a significant component have been seized indefinitely by
governmental authorities.
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SA 706: Emphasis of Matter Paragraphs and Other Matter
Paragraphs in the Independent Auditor’s Report
SAs that contain specific requirements for auditor to include Emphasis of Matter paragraphs in
auditor’s report in certain circumstances. These circumstances include:
• When a FRF prescribed by law or regulation would be unacceptable but for the fact that it is
prescribed by law or regulation. (SA 210)
• To alert users that F.S. are prepared in accordance with a special purpose framework.
• When facts become known to auditor after date of auditor’s report and auditor provides a new or
amended auditor’s report (i.e., subsequent events). (SA 560)
• A significant subsequent event that occurs between date of F.S and date of auditor’s report.
• Early application (where permitted) of new a/c std that has material effect on F.S.
• A major catastrophe that has had, or continues to have, significant effect on entity’s financial
position.
When the auditor includes EOM para in auditor’s report, auditor shall:
(a) Include the paragraph within separate section of auditor’s report with appropriate heading that
includes the term “Emphasis of Matter”;
(b) Include in the paragraph clear reference to matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in F.S. The para shall refer only to info
presented or disclosed in F.S; and
(c) Indicate that auditor’s opinion is not modified in respect of matter emphasized.
Note: EOM para is not substitute for KAM, if matter determined as KAM à represent as KAM
The auditor shall include an Other Matter paragraph in the auditor’s report, provided:
a) Not prohibited by law or regulation; and
b) When SA 701 applies, matter has not been determined to be KAM
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SA 710: Comparative Information—Corresponding Figures
and Comparative Financial Statements
Corresponding figures –
• Comparative info where amounts and disclosures for prior period included as integral part of
current period F.S, and intended to be read only in relation to amounts and other disclosures
relating to current period
• The level of detail presented in corresponding amounts and disclosures is dictated primarily by
its relevance to current period figures.
(a) Perform Specific audit Procedure: For determining that F.S. contains appropriately classified
comparative information, auditor should:
• Ensure that comparative info agrees with amount and other disclosure presented in prior period.
• The accounting policies applied are consistent with those applied in current period.
• If there have been any changes in application of accounting policies than they are properly disclosed
and presented.
(b) Evaluating the impact on F.S: If auditor becomes aware of any possible misstatement in comparative
information, then:
• He should perform the necessary audit procedures to obtain sufficient audit evidence.
• If auditor had audited prior period’s F.S. than he should follow the relevant requirements of SA
560.
(c) Written Representation: As required by SA 580, auditor should also request written
representation. He should also obtain a specific written representation regarding any prior period item
that is disclosed in current year’s F.S.
Audit Reporting
Reporting for Corresponding Figures:
Auditor’s opinion shall not refer to corresponding figures except in following circumstances:
• If auditor’s report of previous period contains other than unqualified opinion.
• If auditor has sufficient evidence that material misstatement exists in F.S. of prior period, which
was not addressed earlier.
If prior period F.S. not audited, than obtain sufficient audit evidence that opening balance don’t
contain any material misstatement.
If auditor’s report on prior period, included qualified, disclaimer of opinion, or adverse opinion and
matter which gave rise to modification is unresolved, auditor shall modify auditor’s opinion on current
period’s F.S.
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(a) Refer to both, the current period’s figures and the corresponding figures in description of matter
giving rise to modification when the effects or possible effects of matter on current period’s figures
are material; or
(b) In other cases, explain that the audit opinion has been modified because of effects or possible
effects of unresolved matter on comparability of current period’s figures and corresponding figures.
• The auditor’s opinion shall refer to each period for which the F.S. are presented.
• When reporting on current period’s audit, if auditor’s opinion on such prior period F.S. differs from
opinion previously issued on such F.S, auditor shall disclose substantive reason for different opinion in
OM para in his report.
• If auditor concludes that material misstatement is present in previously audited figures of F.S, he
should report it to mgt and request that predecessor auditor be informed.
If then prior years statements are amended with new report by predecessor auditor, then auditor
shall report only on current period.
Reporting treatment common to both (for corresponding figures and comparative information)
(i) If F.S. of prior period were audited by predecessor auditor, auditor (is permitted by law or
regulation to refer to the predecessor audit report – on case of corresponding figures and decides to
do so) shall state in his audit report:
• That F.S. of the prior period were audited by a predecessor auditor;
• The type of opinion expressed by the predecessor auditor;
• The date of that audit report.
(ii) If prior period F.S. were not audited than he shall report the same in OM Para in his audit report
that corresponding/comparative figures are unaudited.
However, disclosure does not relieve him from his responsibility of obtaining SAAE that opening
balances do not contain misstatements that materially affect current period’s F.S.
CA SHUBHAM KESWANI 88
SA 720: The Auditor’s Responsibility in Relation to Other Information
Scope
• SA 720 deals with Auditor’s responsibilities relating to other info, financial or non-financial
contained in Annual Report.
• Auditor’s opinion on FS doesn’t cover other information (Annual Report)
• He’s just reqd to read & consider other info for any materially inconsistent info from F.S.
that may indicate material misstatement in either F.S. or Annual Report
• Auditor’s responsibility apply whether other info is recd prior to or after auditor’s report
a) Determine, through discussion with mgt, which document(s) comprises the annual report, and
entity’s planned manner and timing of issuance of such document(s);
b) Make appropriate arrangements with mgt to obtain in timely manner and, if possible, prior to
date of auditor’s report, final version of document(s) comprising annual report; and
c) When some or all of document(s) determined in (a) will not be available until after the date of
auditor’s report, request mgt to provide a WR that final version of document(s) will be provided
to auditor when available, and prior to its issuance by entity, auditor can complete the
procedures required by this SA.
While reading other info, remain alert for indications that other info may be materially misstated.
a) Agrees to make correction, auditor shall determine that correction has been made; or
b) Refuses to make correction à communicate the matter with TCWG and request that
correction be made.
If auditor concludes that material misstatement exists in other information obtained prior to date of
auditor’s report, and other information is not corrected after communicating with TCWG, auditor shall
take appropriate action, including:
(a) Considering the implications for auditor’s report and communicating with TCWG about how
auditor plans to address the material misstatement in auditor’s report or
(b) Withdrawing from engagement, where withdrawal is possible under applicable law or regulation.
When F.S. are materially misstated or Auditor’s understanding needs to be updated à respond as
per other SAs.
CA SHUBHAM KESWANI 89
Reporting
The auditor’s report shall include separate section with a heading “Other Information”, or other
appropriate heading, when, at date of auditor’s report:
(a) For an audit of F.S. of listed entity, auditor has obtained, or expects to obtain, other info; or
(b) For an audit of F.S of an unlisted corporate entity, auditor has obtained some or all of the other
info.
When auditor’s report is required to include an Other Information section, it shall include:
(c) A statement that auditor’s opinion does not cover other information and, accordingly, auditor
does not express (or will not express) audit opinion or any form of assurance conclusion thereon;
(d) A description of auditor’s responsibilities relating to reading, considering and reporting on other
information as required by this SA; and
(e) When other information has been obtained prior to date of auditor’s report, either:
i. A statement that auditor has nothing to report; or
ii. If auditor has concluded that there is uncorrected material misstatement of other
information, statement that describes the uncorrected material misstatement of other
information.
CA SHUBHAM KESWANI 90
Examples of Amounts or Other Items that May Be Included in Other Information
The following are eg of amounts and other items that may be included in other info. This list is not
intended to be exhaustive.
Amounts
• Items in a summary of key financial results, such as net income, earnings per share, dividends,
sales and other operating revenues, and purchases and operating expenses.
• Selected operating data, such as income from continuing operations by major operating area,
or sales by geographical segment or product line.
• Special items, such as asset dispositions, litigation provisions, asset impairments, tax
adjustments, environmental remediation provisions, and restructuring and reorganization
expenses.
• Liquidity and capital resource information, such as cash, cash equivalents and marketable
securities; dividends; and debt, capital lease and minority interest obligations.
• Capital expenditures by segment or division.
• Amounts involved in, and related financial effects of, off-balance sheet arrangements.
• Amounts involved in guarantees, contractual obligations, legal or environmental claims, and
other contingencies.
• Financial measures or ratios, such as gross margin, return on average capital employed, return
on average shareholders’ equity, current ratio, interest coverage ratio and debt ratio.
Other Items
• Explanations of critical accounting estimates and related assumptions.
• Identification of related parties and descriptions of transactions with them.
• Descriptions of the nature of off-balance sheet arrangements.
• Descriptions of guarantees, indemnifications, contractual obligations, litigation or
environmental liability cases, and other contingencies, including management’s qualitative
assessments of the entity’s related exposures.
• Descriptions of changes in legal or regulatory requirements, such as new tax or environmental
regulations.
• General descriptions of the business environment and outlook.
• Overview of strategy.
CA SHUBHAM KESWANI 91
Audit Planning, Strategy & Execution
CA SHUBHAM KESWANI 92
• In addition, auditor may begin execution of further audit procedures (FAP) for some classes of
transactions (COTs), account balances and disclosures before planning all remaining further
audit procedures (FAPs).
CA SHUBHAM KESWANI 93
c. Significant factors , Preliminary engagement acts & knowledge gained on other audits
Ø Determine materiality SA 320
Ø Areas with high RMM
Ø Impact of assessed RMM at FS level on D/S/R (direction, supervision & review)
Ø Evidence of mgt commitment to design, implementation & maintenance (DIM) of IC
Ø Volume of transn determine reliance on IC
Ø Imp. Attached to IC
Ø Significant business developments
Ø Significant industry developments
Ø Other significant relevant developments
Relationship between the Overall Audit Strategy and the Audit Plan
• The audit strategy is prepared before audit plan.
• The audit plan is more detailed than overall audit strategy.
• Audit strategy and audit plan are inter-related because change in one would result into change
in other.
• Audit strategy provides guidelines for developing audit plan.
• It establishes scope and conduct of audit procedures and thereby, works as basis for
developing a detailed audit plan.
• Detailed audit plan would include nature, timing and extent of audit procedures so as to obtain
SAAE.
CA SHUBHAM KESWANI 94
Key Phases in Audit execution
• Execution Planning : The auditors need to plan work to carry out audit in effective, efficient
and timely manner.
• Risk & Control Evaluation: For each segment of audit, conduct a detailed risk and control
assessment i.e. list risks that must be reviewed, capture for each risk controls that exist or
and show for each control, work steps required to test effectiveness of controls.
• Testing: Test effectiveness of controls to determine whether controls are operating as
designed.
• Reporting: Report as per SA 700. The auditor should review and assess conclusions drawn
from audit evidence obtained as basis for expression of opinion on F.S.
Identification & Verification of Plant & Machinery, tools & dies to check Obsolescence
(i) Internal Control Aspects: The following may be incorporated in audit programme to check internal
control aspects-
a. Maintaining separate register for hired assets, leased asset and jointly owned assets.
b. Maintaining register of fixed asset and reconciling to physical inspection of fixed asset and to
nominal ledger.
c. All movements of assets are accurately recorded.
d. Authorisation be obtained for –
i. a declaring a fixed asset scrapped.
ii. selling a fixed asset.
e. Check whether additions to fixed asset register are verified and checked by authorised
person.
f. Proper recording of all additions and disposal.
(ii) Assets Register: To review registers and records of plant, machinery, etc. showing clearly date of
purchase of assets, cost price, location, depreciation charged, etc.
(iii) Cost Report and Journal Register: To review the cost relating to each plant and machinery and to
verify items which have been capitalised.
CA SHUBHAM KESWANI 95
(iv) Code Register: To see that each item of plant and machinery has been given a distinct code
number to facilitate identification and verify the maintenance of Code Register.
(v) Physical Verification: To see physical verification has been conducted at frequent intervals.
(vii) Assets Disposal Register: To review whether assets have been disposed off after proper
technical and financial advice and sales/disposal/retirement, etc. of these assets are governed by
authorisation, sales memos or other appropriate documents.
(viii) Spare Parts Register: To examine the maintenance of a separate register of tools, spare parts
for each plant and machinery.
(ix) Review of Maintenance: To scrutinise the programme for an actual periodical servicing and
overhauling of machines and to examine extent of utilisation of maintenance deptt services.
(x) Review of Obsolescence: To scrutinise whether expert’s opinion have been obtained from time to
time to ensure purchase of technically most useful efficient and advanced machinery after a
thorough study.
(xi) Review of R&D: To review R&D activity and its relevance to operations of organisation,
maintenance of machinery efficiency and prevention of early obsolescence.
i. Procure list of raw materials, showing names and detailed characteristics of each raw material.
ii. Obtain standard consumption figures, and ascertain the basis according to which normal wastage
figures have been worked out. Examine break-up of a normal wastage into that in process,
storage and handling stages. Also obtain control reports, if any, in respect of manufacturing
costs with reference to predetermined standards.
iii. Examine various records maintained for recording separately various lots purchased and
identification of each lot with actual material consumption and for ascertaining actual wastage
figures therein.
iv. Obtain reports of Preventive Maintenance Programme of machinery to ensure that quality of
goods manufactured is not of sub-standard nature or leads to high scrappage work.
v. Assess whether personnel employed are properly trained and working efficiently.
vi. See whether quality control techniques have been consistent or have undergone any change.
vii. Examine inventory plans and procedures in report of transportation storage efficiency,
deterioration, pilferage and whether the same are audited regularly.
viii. Examine whether basis adopted for calculating wastage for the month is same as was adopted
for earlier months.
ix. Obtain a statement showing break up of wastage figures in storage, handling and process for
months under reference and compare results of analysis for each of the months.
CA SHUBHAM KESWANI 96
Risk Assessment & Internal Control
1. Inherent Risk
Susceptibility of assertion to misstatement that could be material, assuming there are no related
controls.
Inherent risk is addressed at both F.S. level and assertion level.
For eg, technological developments making product obsolete, causing inventory susceptible to
overstatement.
Arise from entity’s size, operations, complexity, objectives & regulatory environment.
3. Detection Risk
• Risk that auditor will not detect a misstatement that exists in an assertion that could be material,
either individually or when aggregated with other misstatements.
• The acceptable level of detection risk for a given level of audit risk bears inverse relationship to
ROMM at assertion level.
CA SHUBHAM KESWANI 97
Indicators of Possible Potential Misstatements
• Completeness
Ø Transaction not identified
Ø Source doc not prepared/captured/represented
• Existence
Ø Fictitious or unauthorised transactions entered
Ø Source document à duplicate or overstated
Ø Transactions duplicated
• Recording
Ø Inaccurate
o Capturing of source document
o Processing of transactions
o Adjustments in subsy ledger
• Cut-off Procedures
Transactions that occur in a period are recorded in another period.
Analysis: In terms of percentage, about 40% of purchases were made without valid POs and also few
POs were validated after actual purchase. Also there was no reconciliation between goods received
and goods ordered.
Audit Procedures:
The following procedures may address the validity of the account balance:
• Make a selection of purchases, review correspondence with vendors, purchase requisitions
(internal document) and reconciliations of their accounts.
• Review Vendor listing along with ageing details. Follow up the material amounts paid before
normal credit period and analyse reasons for exceptions.
• Meet with company's Purchase officer and obtain responses to our inquiries regarding
purchases made without POs.
• Discuss summary of such issues with client.
Explanation:
1. Risk Assessment: Assessing ROMM in F.S.
Ø Performing client acceptance or continuance procedures; [SA 210 & 220]
Ø Planning the overall engagement; [SA 300]
CA SHUBHAM KESWANI 98
Ø Performing risk assessment procedures (RAP) to understand the business and identify
inherent and control risks; [SA 315]
Ø Identifying relevant internal control procedures and assessing their design and
implementation (those controls that would prevent material misstatements from
occurring or detect and correct misstatements after they have occurred); [SA 315]
Ø Assessing the RMM in the F/S; [SA 315]
Ø Identifying significant risks that require spl consideration
Ø Communicating material weakness in Design & Implementation of IC à TCWG + Mgt
2. Risk response: Designing and performing further audit procedures (FAP) that respond to
assessed risks and reduce the RMM in the F/S to an acceptably low level;
Some of the matters auditor should consider when planning the audit procedures include:
Ø Assertions that cannot be addressed by substantive procedures alone. Eg. highly automated
processing of transactions with little or no manual intervention. [Substantive not enough]
Ø Existence of internal control that, if tested, could reduce need/scope for other substantive
procedures. [Reduce substantive]
Ø The potential for substantive analytical procedures that would reduce the need/scope for
other types of procedures. [Analytics]
Ø The need to incorporate an element of unpredictability in procedures performed. [Surprise
checks]
Ø The need to perform further audit procedures to address potential for management
override of controls or other fraud scenarios. [FAPs]
Ø The need to perform specific procedures to address “significant risks” that have been
identified.
Internal Control
The objectives of internal controls relating to accounting system are:
i) Transactions are executed through general or specific management authorization.
ii) All transactions are promptly recorded in an appropriate manner to permit the preparation of
financial information and to maintain accountability of assets.
iii) Assets and records are safeguarded from unauthorized access, use or disposition.
iv) Assets are verified at reasonable intervals and appropriate action is taken with regard to the
discrepancies.
Basic Accounting Control Objectives: The basic accounting control objectives which are sought to be
achieved by any accounting control system are –
i) Whether all transactions are recorded;
ii) Whether recorded transactions are real;
iii) Whether all recorded transactions are properly valued;
iv) Whether all transactions are recorded timely;
v) Whether all transactions are properly posted;
vi) Whether all transactions are properly classified and disclosed;
vii) Whether all transactions are properly summarized.
CA SHUBHAM KESWANI 99
Limitations of Internal Control
Ø Mgt expect cost not exceed benefit
Ø Most IC not directed at transn. of unusual nature. Also, there’s potential of human error.
Ø Possibility of circumvention of IC through collusion with employees or 3rd parties
Ø Person responsible for exercising IC abuse responsibility e.g. mgt override of IC
Ø Manipulation by mgt wrt transactions/estimates & judgements in preparation of F.S.
1. Control Environment
Elements: (Pairing)
a. Communication & enforcement of integrity & ethical values
b. Commitment to competence
c. Participation by TCWG
d. Mgt philosophy & operating style
e. Org structure
f. Assignment of authority & responsibility
Control Activities
a. Performance Reviews: Actual vs budgeted results
b. Info. Processing: Application & General IT Controls
c. Physical Controls:
Ø Physical security of assets
Ø Authorisation for access to computer prog. & data files
Ø Periodic counting and comparison with amounts shown on control records. For eg.
Comparing results of cash, inventory & security counts with a/c records)
d. Segregation of duties (discussed above)
As an internal auditor, you are required to briefly discuss the general condition pertaining to the
internal check prevalent in internal control system. Do you think that there was proper division of
work in BSF Limited? If not, why?
The general condition pertaining to the internal check system may be summarized as under:
i) No complete control: no single person should have complete control over any important
aspect of the business operation. Every employee’s action should come under the review of
another person.
ii) Job rotation: Staff duties should be rotated from time to time so that members do not
perform the same function for a considerable length of time.
iii) Leave once in a year: Every member of the staff should be encouraged to go on leave at
least once a year.
iv) Person with physical custody no access to books
v) A/c control for each class of asset: There should exist an accounting control in respect of
each class of assets, in addition, there should be periodical inspection so as to establish
their physical condition.
vi) Budgetary controls: Budgetary control should be exercised and wide deviations observed
should be reconciled.
vii) Mechanical devices to prevent misappropriation of cash
viii) Inventory counts, activities stopped & involve staff from different sections : For
inventory taking, at close of the year, trading activities should, if possible be suspended,
and it should be done by staff belonging to several sections of organization.
In given scenario, Co. has not done proper division of work as:
(i) receipts of cash should not be handled by official handling sales ledger and
(ii) delivery challans should be verified by authorised official other than officer handling despatch of
goods.
Manual elements in internal control may be more suitable where judgment and discretion are required
such as for following circumstances:
Ø Large, unusual or non-recurring transactions.
Ø Circumstances where errors are difficult to define, anticipate or predict.
Ø In changing circumstances that require a control response outside the scope of an existing
automated control.
Ø In monitoring the effectiveness of automated controls.
Material Weakness
Material weaknesses are defined as absence of adequate controls on flow of transactions that
increases the possibility of errors and frauds in the financial statements of the entity.
In order to achieve proper internal control over sale of tickets and collection by Y Co. Ltd., following
system should be adopted -
(i) Printing of tickets: Serially numbered pre-printed tickets should be used and designed in such a
way that any type of ticket used cannot be duplicated by others in order to avoid forgery.
(ii) Ticket sales: The sale of tickets should take place from the Central ticket office at each of the 5
centres, preferably through machines. There should be proper control over the keys of the machines.
COSO Framework:
Components of Internal Control: Control Environment, Risk Assessment, Control
Activities,Information & Communication, Monitoring
3 categories of objectives:
Ø Operating objectives: effectiveness & efficiency of operations
Ø Reporting objectives: internal & external financial & non-financial reporting to stakeholders
Ø Compliance objectives: compliance with laws & regulations
COBIT Framework
Ø COBIT stands for Control Objectives for Information and Related Technology.
Ø COBIT has 34 high-level processes that cover 210 control objectives
Ø Today, COBIT is used globally by all managers who are responsible for the IT business
processes.
Ø Overall, COBIT ensures quality, control and reliability (QCR) of information systems in
organization, which is also the most important aspect of every modern business.
Ø This framework guides an organization on how to use IT resources.
Ø Well-governed IT practices can assist businesses in complying with laws, regulations, and
contractual arrangements.
For eg: ERP Applications For eg: For eg: Wide Area For eg: Servers,
SAP, Oracle E Business Webservers like Networks, Local Data centers,
suite, Core Banking Apache, Oracle, Area Networks Backup & storage
Applications Fusion, IIS devices
In a controls-based audit, audit approach can be classified into 3 broad phases comprising of planning,
execution, and completion. In this approach, considerations of automated environment will be relevant
at every phase as given below:
Types of Controls:
• General Controls: Policies & procedures relate to many applications & support effective
functioning of application controls. They apply to mainframe, miniframe, and end user
environment. The GIT controls that maintain integrity of info & security of data commonly
include controls over following:
Ø Data center & network operations
Ø System of software acquisition, change & maintenance
Ø Program change
Ø Access security
Ø Application system acquisition, development & maintenance
• Application Controls: They include both automated or manual controls that operate at business
process level. Application controls can be preventive as well as detective in nature and designed
to ensure integrity of accounting records. Automated Application controls are embedded into
IT applications viz., ERPs and help in ensuring completeness, accuracy and integrity of data in
those systems.
Examples of automated applications include :
Ø edit checks and validation of input data,
Ø sequence number check,
Ø limit check,
Ø format check,
Ø range check,
Ø reasonableness check,
Ø mandatory data fields,
Ø existence check etc.
Types:
1. Direct ELCs: operate at a level higher than business activity or transaction level such as a
business process or sub-process level, account balance level, at a sufficient level of precision,
to prevent, detect or correct a misstatement in a timely manner.
Eg. Business performance reviews, Internal Audit
2. Indirect ELCs: do not relate to any specific business process, transaction or account balance
and hence, cannot prevent or detect misstatements. However, they contribute indirectly to the
effective operation of direct ELC and other control activities.
Eg. Co code of conduct and ethics policies, HR Policies, Employee job roles & responsibilities
When auditing in an automated environment, auditors can apply concepts of data analytics for several
aspects of an audit including following:
• preliminary analytics;
• risk assessment;
• control testing;
• non-standard journal analysis;
• evaluation of deficiencies;
• fraud risk assessment.
Steps to be followed to achieve success with CAATs & supporting tools. A suggested approach to
benefit from use of CAATs:
Understanding Define the Identify source & Extract Data
business objectives & format of data
Environment criteria
including IT
• Section 143 of Companies Act 2013 requires statutory auditors to provide an Independent
Opinion on the Design and Operating Effectiveness of Internal Financial Controls Over Financial
Reporting (IFC-FR) of the company as at Balance Sheet date. For this purpose, the Guidance
Note on Audit of Internal Financial Controls Over Financial Reporting issued by ICAI, provides
the framework, guidelines and procedures for an audit of financial statements.
• Sarbanes Oxley Act of 2002, commonly known as SOX, is a requirement in America. Section 404
of this act requires public listed companies to implement, assess and ensure effectiveness of
internal controls over financial reporting and auditors independent opinion on the design and
operating effectiveness of internal controls over financial reporting (ICFR) – which is similar to
the requirements of IFC-FR for Indian companies.
• ISO 27001:2013 is the Information Security Management System (ISMS) standard issued by
the International Organization for Standardization (ISO). This standard provides the
framework, guidelines and procedures for implementing information security and related controls
in a company. For eg, this std covers password security, application security, physical security,
backup and recovery.
• ITIL (Information Technology Infrastructure Library) and ISO 20000 provide a set of best
practice processes and procedures for IT service management in a company. For example, change
management, incident management, problem management, IT operations, IT asset management
are some of the areas that could be relevant to audit.
• The Payment Card Industry – Data Security Standard or PCI-DSS, is the most widely adopted
information security standard for the payment cards industry. Any company that is involved in
the storage, retrieval, transmission or handling of credit card/debit card are required to
implement the security controls in accordance with this standard.
• The American Institute of Certified Public Accountants has published a framework under the
Statements on Standards for Attest Engagements (SSAE) No.16 for reporting on controls at
service organisation that include
❖ SOC 1 for reporting on controls at a service organization relevant to user entities’ ICFR.
❖ SOC 2 and SOC 3 for reporting on controls at a service organization relevant to security,
availability, processing integrity, confidentiality or privacy i.e., controls other than ICFR.
❖ While SOC 1 and SOC 2 are restricted use reports, SOC 3 is general use report.
• The Cybersecurity Framework (CSF) published by the National Institute of Standards and
Technology is one of the most popular framework for improving critical infrastructure
cybersecurity. This framework provides a set of standards and best practices for companies to
manage cybersecurity risks.
Appointment by Appointment by
Appointment by C&AG within 60 days Appointment by C&AG within 180
BOD within 30 days from from DOR Members in AGM days from
DOR (Note 1) commencement of
the year
In case of failure:
BOD within 30 days Hold office from 1st AGM Hold office till
In case of failure: till 6th AGM subject to conclusion of AGM
Members in EGM within conditions
90 days
In case of failure:
Hold office till conclusion Members in EGM within
of 1st AGM 60 days
Notes:
• Written consent of auditor & certificate that appointment is as per prescribed conditions to
be obtained by Co.
• Certificate should indicate that auditor satisfies criteria u/s 141
• Co. inform auditor of appointment & file notice of appointment with ROC within 15 days of
AGM
Sec 139(10) à Where at any AGM, no auditor appointed or re-appointed, existing auditor shall
continue to be auditor of company.
Disqualifications of Auditor [Sec 141(3) read with Rule 10 of Cos.(Audit & Auditor) Rules 2014]
a) Body Corporate (BC) other than LLP
b) Officer or employee of Co.
(Officer includes Director, Mgr, KMP, Shadow Directors)
Examples:
• G, CAiP is director in A Ltd à CA G would be disqualified to be appointed as auditor of A Ltd.
• G, CAiP is director in Zed Ltd., holding company of RST Ltd. à CA. G would be disqualified to
be appointed as auditor of Zed Ltd. but would not be disqualified in case of RST Ltd.
Note: But as per Ethical Std Board public conscience should be preferred over legal provisions, so
G can’t also be auditor of RST Ltd (Discussed in Professional Ethics)
Example:
Mr. Ajay, a CA appointed as auditor of Bharat Ltd. in the AGM of Co. held in September, 2019, which
assignment he accepted. Subsequently in Feb, 2020, he joined Mr. Bajaj, another CA, who is Manager
Finance of Bharat Ltd., as partner.
Section 141(3)(c) of the Companies Act, 2013 prescribes that any person who is a partner or in
employment of an officer or employee of the company will be disqualified to act as an auditor of a
company. Section 141(4) provides that an auditor who after his appointment, disqualified u/s Section
141(3), he shall be deemed to have vacated his office as an auditor.
In present case, Mr. Ajay, auditor of Bharat Ltd., joined as partner with Mr. Bajaj, who is Manager
Finance of Bharat Ltd. The given situation has attracted Section 141(3)(c) and he shall be deemed to
have vacated office of auditor of Bharat Ltd.
d) Person/relative/partner (PRP)-
i.Is holding security or interest in CASSH (Co/Associate/Suby/Holding/Subsy of such holding i.e.
CASSH)
• Relative may hold security in the Co. of Face value 1 Lakh
• If relative (not auditor or partner) acquires interest > 1 lakh è then corrective action to
maintain limit within 60 Days of acquisition
Definition of Relative: Members of HUF + Husband wife + Father (including step- father),
Mother (including step- mother), Son (including stepson), Son’s wife, Daughter, Daughter’s
husband, Brother (including step- brother), Sister (including step- sister)
Examples:
1. “Mr. Avi”, practicing CA, holding securities of “XYZ Ltd.” face value of ` 990/-. Whether Mr. Avi is
qualified for appointment as Auditor of “XYZ Ltd.”?
Mr. Avi. is not eligible for appointment as auditor of “XYZ Ltd”.
2. “Mr. PK” a practicing CA and “Mr. Qurashi”, relative of “Mr. PK”, is holding securities of “ABC Ltd.”
having face value of ` 99,000/-.
Mr. Qurashi (relative of Mr. PK), is having securities of ` 99,000 face Value in ABC Ltd., which is as
per requirements of proviso to section 141(3)(d)(i). Mr. PK will not be disqualified to be appointed as
auditor of ABC Ltd.
3. “M/s Bhavin & Co.” is Audit Firm having partners “Mr. Bala” and “Mr. Chandu”. “Mr. A” relative of
“Mr. Chandu”, is holding securities of “AMD Ltd.” having face value of ` 1,00,100/-. Whether “M/s
Bhavin & Co.” is qualified for being appointed as an auditor of “AMD Ltd.”?
M/s Bhavin & Co, will be disqualified for appointment as auditor of AMD Ltd as relative of Mr.
Chandu (i.e. partner of M/s Bhavin & Co.), is holding securities in AMD Ltd exceeding limit mentioned.
4. M/s Rajamohan & Co. is audit firm having partners CA. Raja and CA. Mohan. Firm has been offered
appointment as auditor of Inn Ltd. for FY 2019-20. Mr. Bee, relative of CA. Raja, is holding 8,000
shares (face value of ` 10 each) in Inn Ltd. having mkt value of ` 1,60,000. Whether M/s Rajamohan
& Co. is disqualified to be appointed as auditors of Inn Ltd.?
g) Full time employed OR person or partner of firm auditing > 20 companies excluding
OPC/Dormant/Small Cos./Pvt Cos. with paid up capital < 100 Cr (with no default in filing F.S. or
Annual Return)
Notes:
Ø No. of partners on the date of acceptance of audit assignment shall be taken into account
Ø CA in full time employment elsewhere shall not be taken into account
Example:
“PQRST & Co.” is Audit Firm having partners “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and “Mr. T”, Chartered
Accountants. “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and “Mr. T” are holding appointment as an Auditor in 4,
5, 6, 10 and 15 Companies respectively.
(i) Provide the maximum number of Audits remaining in the name of “PQRST & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e. “Mr. P”, “Mr.
Q”, Mr. R, Mr. S and Mr. T.
(iii) Can PQRST & Co. accept the appointment as an auditor in 80 private companies having paid-up
share capital less than ` 100 crore which has not committed default in filing its financial statements
under section 137 or annual return under section 92 of the Companies Act with the Registrar, 2 small
companies and 1 dormant company?
(iv) Would your answer be different, if out of those 80 private companies, 65 companies are having
paid-up share capital of ` 115 crore each?
(i) PQRST & Co. can hold appointment as an auditor of 60 more companies:
Total Number of Audits available to Firm = 20*5 = 100
Number of Audits already taken by all the partners in their individual capacity = 4+5+6+10+15 = 40
Remaining number of Audits available to the Firm = 60 (100-40)
(ii) (1) Mr. P can hold: 20 - 4 = 16 more audits. (2) Mr. Q can hold: 20 - 5 = 15 more audits. (3) Mr. R
can hold: 20 - 6 = 14 more audits. (4) Mr. S can hold 20-10 = 10 more audits and (5) Mr. T can hold 20-
15 = 5 more audits.
(iii) PQRST & Co. can hold appointment as auditor in all 80 private companies having paid-up share
capital less than ` 100 crore , 2 small companies and 1 dormant company as these are excluded from
ceiling limit.
(iv) PQRST & Co. is already having 40 co. audits and accept only 60 more audits.They can also conduct
audit of one person companies, small companies, dormant companies and private companies having paid
up share capital less than ` 100 crores. In given case, out of 80 private companies PQRST & Co. is being
offered, 65 cos. have paid-up share capital of `115 crore each.
h) Convicted for Fraud & period of 10 years not elapsed from date of conviction
i) Renders service under Sec 144 to Co. or its holding.
Example:
1. CA. P is providing services of Design and implementation of financial information system to C Ltd.
Later on, he was also offered to be appointed as auditor of Co. for current FY. Advise.
Section 141(3)(i) of Companies Act, 2013 disqualifies person for appointment as auditor of a Co. who is
engaged as on date of appointment in consulting and specialized services as provided in section 144.
Section 144 of Companies Act, 2013 prescribes certain services not to be rendered by auditor which
includes Design and implementation of financial information system.
Where auditor incurs any of disqualifications after appointment, he shall vacate office and such
vacation shall be deemed to be casual vacancy u/s 139(8).
Cos. for which Rotation provision are applicable, shall not 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.
Examples:
1. Meet Ltd., listed Co. appointed M/s Preet & Co., CA firm, as statutory auditor in its AGM held at
end of Sep, 2019 for 11 years. Here, appointment of M/s Preet & Co. is not valid as appointment can
be made only for one term of 5 consecutive years and then another one more term of 5 consecutive
years. It cannot be appointed for two terms in one AGM only. Further, cooling period of five years
from completion of term is reqd i.e. firm cannot be re-appointed for further 5 years after
completion of two terms of 5 consecutive years.
2. M/s PQR & Co., an audit firm having partner Mrs. P, Mr. Q and Mr. R, whose tenure has expired in
Co. in immediately preceding FY, M/s APJ & Co., is another audit firm in which Mr. P is common
partner, will also be disqualified for same Co. along with M/S PQR & Co. for period of 5 years.
Notes:
• Right of Co. to remove auditor or right of auditor to resign from such office of Co. shall not
be prejudiced.
• Members of a company may resolve to provide that-
(a) in audit firm appointed by it, auditing partner and his team shall be rotated at such
intervals as may be resolved by members; (Internal Rotation) or
(b) audit shall be conducted by more than one auditor. (Joint Audit)
Manner of Rotation
• Audit committee(AC) shall recommend Board name of auditor
• If no AC, then Board forward own recommendations for appointment at AGM by members
• If a partner, who is in charge of audit firm and also certifies F.S. of the Co., retires from said
firm and joins another firm of CAs, such other firm shall also be ineligible to be appointed for
a period of 5 yrs.
• a break in term for a continuous period of 5 yrs shall be considered as fulfilling requirement
of rotation
Sec 142: Auditor’s Remuneration fixed in AGM where appointed. Board may fix remuneration of 1st
auditor.
Remuneration includes fees + expense reimbursed + facility extended to him
(1) The application to the Central Government for removal of auditor shall be made in Form ADT-2
and shall be accompanied with fees as provided for this purpose under the Companies (Registration
Offices and Fees) Rules, 2014.
(2) The application shall be made to the Central Government within 30 days of the resolution.
(3) The company shall hold the general meeting within 60 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, auditor
shall be given reasonable opportunity of being heard.
Ø Auditor shall within 30 days from DOR(Date of Resignation) file ADT-3 (Ab main ho gaya
free) with Co. & ROC + C&AG (for Govt Co.)
Appointment of Auditor other than retiring Auditor who was removed (Sec 140)
Eg. While conducting audit of limited co. for year ended 31st Mar,2020, auditor wanted to refer to
Minute Books. BOD refused to show Minute Books to auditor.
Section 143 of Companies Act, 2013 grants powers to auditor that every auditor has right of access,
at all times, to books and account including all statutory records such as minute books, fixed assets
register, etc. of Co. for conducting audit. In order to verify actions of Co. and to vouch and verify
some of transactions of Co , it is necessary for auditor to refer to decisions of shareholders and/or
directors.
Therefore, essential for auditor to refer to Minute Books. In absence of Minute Books, auditor may
not be able to vouch/verify certain transactions of Co.
Conclusion: In case directors have refused to produce Minute Books, auditor may consider extending
audit procedure and also consider modifying/ qualifying his report in appropriate manner.
Question of Lien?
Auditor may exercise right of lien in cases of cos BUT it is mostly impracticable for legal and
practicable constraints. His working papers being his own property, question of lien does not arise.
a) Loans & advances made on security have been properly secured & whether terms prejudicial to
interest of Co. or its members
b) Transactions merely represented by book entries prejudicial to intt of Co.
c) Where Co. not being Investment/ Banking Co. whether its assets consisting of shares,
debentures & other securities sold at price < purchase price
f) Where shares of Co. have been allotted For cash, whether cash received & if no cash recd,
position as per books & balance sheet, correct, regular & non misleading
Notes:
Ø Auditor not reqd to report on above matters unless spl. comments to make
Ø Auditor should report only when ans. to any of matters is in adverse
(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 reqd by law have been kept by the Co. so far as
appears from his examination of those books and proper returns adequate for the purposes of his audit
have been received from branches not visited by him;
(c) whether the report on accounts of branch office of the Co. audited u/s 143(8) by a person other
than the company’s auditors has been sent to him and the manner he has dealt with it in preparing
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 u/s 164(2)
(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 with reference to financial statements
in place and the operating effectiveness of such controls;
Rule 11 of Cos. (Audit and Auditors) Rules, 2014 other matters to be included in auditor’s report
namely:-
a) whether Co. has disclosed impact, of pending litigations on its financial position in its financial
statement;
Note: Auditors of public cos. Required to report remuneration to directors within limits u/s 197
under the Section Report on Other Legal and Regulatory Requirements.
Manner of reporting
• Report to Board or AC within 2 days seeking their reply within 45 days (ACà Audit Committee)
• On receipt of reply forward
Ø His Report
Ø Reply or observation of board or AC
Ø With his comments
• to CG within 15 days of receipt of reply
• If no reply recd. then shall forward only his report
• Send to Secretary, MCA in sealed cover by Regd post with acknowledgment due (RPAD) or by
Speed post followed by e-mail
• Report format à ADT 4
• On letter head of auditor with post address, e-mail, mobile no., & signed by auditor with Seal +
Membership no.
Disclosure on Board Report: Nature of fraud, amount, parties involved (if remedial action not taken)
or remedial action taken (fraud < 1 Cr)
143(13) safeguards auditor from fraud reported out of Good Faith.
The provisions of reporting on Fraud also apply to Cost & Secretarial Auditor.
The auditor is also required to report under clause (xi) of para 3 of CARO, 2020 on whether any
fraud by company or any fraud on Company has been noticed or reported during year. If yes, nature
and amount involved is to be indicated.
Example: Senior Mgr on instruction of CEO entered fake invoices of credit purchases in books of a/c
aggregating to 95 L and cleared all payments to such bogus creditor.
Here, auditor is required to report fraudulent activity to Board or Audit Committee (as the case may
be) within 2 days of knowledge of fraud. Further, Co. also required to disclose in Board’s Report.
Auditor need not report to CG as amount of fraud is less than 1 cr, however, reporting under CARO,
2020 is required.
Rule 3 – Applicability of maintenance of Cost Records => t/o of products & services >= 35 cr
Non-Applicability
• Revenue from exports in forex > 75% of total revenue or
• Operating from SEZ
• Engaged in generation of electricity for captive consumption through captive generating plant
Rule 5 à every Co. covered by Rule 3 maintain cost records in Form CRA-1
Who can be a Cost Auditor? Cost Accountant appointed by Board + Cos’ auditor can’t be cost auditor
CARO Clause: As per Clause (vi) to Para 3 of CARO 2020, auditor has to report whether maintenance
of cost records has been specified by the CG under section 148(1) of the Companies Act, 2013 and
whether such accounts and records have been so made and maintained.
Applicability to Companies:
a) Listed Companies
b) Unlisted public companies
Ø Paid up capital >= 500 Cr or
Ø T/o >= 1000 Cr or
Ø Loans/Deposits/Debentures >= 500 Cr
as on 31st March of preceding FY
c) Insurance, banking companies, cos. engaged in generating electricity,
d) Any BC or Co. or person referred to NFRA by CG in public interest
e) A BC incorporated or regd o/s India which is subsy/associate of Companies referred in (a) to
(d), if Income/NW > Consol Income/NW of such Co.
Above companies will be governed by NFRA rules for 3 years after it ceases to fulfil above conditions
*Co. not governed by NFRA rules will inform NFRA about Auditor’s appointment within 15 days form
NFRA-1
Audit of Dividend
• Dividend out of profits after providing for depreciation under Schedule II
• Transfer to reserves optional: Co. may transfer such percentage of profits it considers
appropriate to reserves irrespective of size of declared dividend
• Out of Past profits: If current profits inadequate, it may declare out of past profits
• Dividend only from free reserves
• Dividend includes Interim dividend which can be out of profits of that FY
• If loss during FY upto last qtr à Rate of dividend <= average of preceding 3 FY
• It should be deposited within 5 days in separate a/c in scheduled bank from date of declaration
• It must be paid within 30 days from date of declaration
• If not paid within 30 days, interest @18% p.a. applicable + defaulting director (upto 2 yrs +
1000/day)
• No offence on part of Co. if:
Ø non-payment due to operation of any law
Ø shareholder given directions & those directions can’t be complied & this told to
Shareholder
Ø dispute regarding right to receive dividend
Ø dividend adjusted lawfully against sum due from shareholder
Ø any other reason, not due to fault of Co.
• If authorised by articles may pay in proportion of paid up amount of share
• Board may deduct amount receivable by Co. on account of calls while paying dividend
• If dividends are declared after the bal. sheet date but before F.S. are approved for issue,
check that dividends have not been recognised as a liability as per AS 4 and Ind AS 10- Events
after the Reporting Period, but disclosure of the same has been made in the notes.
The Investor Education & Protection Fund shall be utilised for the following purposes in accordance
with such rules as may be prescribed-
(a) refund in respect of unclaimed dividends, matured deposits, matured debentures, the application
money due for refund and interest thereon;
(b) promotion of investors’ education, awareness and protection;
(c) distribution of any disgorged amount among eligible and identifiable applicants for shares or
debentures, shareholders, debenture-holders or depositors who suffered losses due to wrong actions
by any person, in accordance with orders made by Court which had ordered disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245
by members, debenture-holders or depositors as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto.
Right to dividend, rights shares and bonus shares to be held in abeyance pending registration of
transfer of shares (Sec 126)
Payment of dividend and allotment of bonus and right shares to transferee to be held in abeyance till
title to shares is decided. Where any instrument of transfer of shares has been delivered to Co. for
registration and transfer of such shares has not been regd., it shall transfer dividend in relation to
such shares to spl. account referred to in section 124 i.e. Unpaid Dividend Account unless Co. is
authorised by regd. holder of such shares in writing to pay such dividend to transferee specified in
such instrument of transfer. Further, Co. shall also keep in abeyance in relation to such shares, any
offer of right shares and any issue of fully paid up bonus shares.
Power to close register of members or debenture-holders or other security holders (Sec 91)
Co. may close register of members or debenture-holders or other security holders for any period not
exceeding aggregate 45 days in each year, but not exceeding 30 days at any one time, subject to giving
of previous notice of at least 7 days or such lesser period as may be specified by SEBI for listed cos.
or cos. which intend to get securities listed.
Notes:
Ø residual value of asset shall not be more than 5% of original cost of asset
Ø Useful life of asset shall not ordinarily be different from useful life specified in Part ‘C’ to
Schedule II
Ø If asset is used for double shift, depreciation will increase by 50% for that period and in case
of triple shift depreciation shall be calculated on the basis of 100% for that period.
The Council of ICAI has taken note of the fact that there is a practice prevalent whereby companies
do not make provision for tax even when such a liability is anticipated. It has expressed view that on
an overall consideration of relevant provisions of law, non-provision for tax (where a liability is
anticipated) would amount to contravention of provisions of Sec 128 and 129 of the Companies Act,
2013.
Accordingly, it is necessary for the auditor to qualify his report and such qualification should bring out
the manner in which the accounts don’t disclose a “true and fair” view of state of affairs of Co. and
the profit or loss of the company.
An example of manner in which report on balance sheet and Statement of Profit and Loss may be
qualified in this respect is given below:
“The company has not provided for taxation in respect of its profits and the estimated aggregate
amount of taxation not so provided for is ` ............ including ` ............. for the Year ended on ..............To
the extent of such non-provision for the year, profits of Company for FY under report have been
overstated and to extent of such aggregate non provision, reserves of company appearing in said
balance sheet have been over-stated and current liabilities and provisions appearing in said balance
sheet have been understated”.
Appointment of Auditor: The auditor may be appointed by designated partners (DPs) of LLP –
1. At any time for 1st FY but before the end of first financial year,
2. At least 30 days prior to the end of each financial year (other than the first financial year),
3. To fill the causal vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.
Note: The partners may appoint the auditors if DPs have failed to appoint them.
3.The auditor should read the LLP agreement & note the following provisions:
a) Nature of the business of the LLP.
b) Amount of capital contributed by each partner.
c) Interest – in respect of additional capital contributed.
d) Duration of partnership.
e) Drawings allowed to the partners.
f) Salaries, commission etc., payable to partners.
g) Borrowing powers of the LLP.
h) Rights & duties of partners.
i) Method of settlement of accounts between partners at the time of admission, retirement,
admission etc.
j) Any loans advanced by the partners.
k) Profit sharing ratio.
4. If partners maintain minute book he shall refer it for any resolution passed regarding the
accounts.
Miscellaneous Topic:
AS 1 - Disclosure of Accounting Policies -In case of a Co, members should qualify their audit reports
in case:
(a) a/c policies required to be disclosed under Schedule III or any other provisions of Companies
Act, 2013, have not been disclosed, or
(b) accounts have not been prepared on accrual basis, or
(c) fundamental a/c assumption of going concern not followed and fact not disclosed in F.S., or
(d) proper disclosures regarding changes in accounting policies have not been made.
Applicability:
To every Co. including foreign Co. except:
• Banking Co.
• Insurance Co.
• Sec 8 Co. (NGO)
• One Person Co. (OPC) & Small Co.
• Pvt ltd Co. (not holding/subsy of Public Co.)
Paid up Share Cap + Reserves & Surplus <= 1 Cr (B.S. Date) &
Borrowings (Bank or FI) <= 1 Cr (Any time during year) &
Revenue (including revenue from discontinued operations) <= 10 Cr as per F/S
*CARO not applicable to Consolidated financial statements
(i) (Proper records of PPE/Intangibles + Physical verification + Title deeds + Revaluation + Benami)
(a) (A) whether Co. is maintaining proper records showing full particulars, including quantitative
details and situation of Property, Plant and Equipment;
(B) whether company is maintaining proper records showing full particulars of intangible assets;
(b) whether these PPE have been physically verified by management at reasonable intervals;
whether any material discrepancies were noticed on such verification and if so, whether same
have been properly dealt in books of a/c;
(c) whether title deeds of all immovable properties (other than properties where company is
lessee and lease agreements are duly executed in favour of lessee) disclosed in F.S. are held in
name of company, if not, provide details thereof in format below:-
Description Gross Held in Whether Period held- Reason for
of property carrying name of promoter,director indicate not being
value or their relative range,where held in name
or employee appropriate of Co.
(d) whether company has revalued its PPE (including Right of Use assets) or intangible assets or
both during the year and, if so, whether revaluation is based on valuation by Registered Valuer;
specify amount of change, if change is 10% or more in aggregate of net carrying value of each
class of PPE or intangible assets;
(e) whether any proceedings initiated or pending against company for holding any benami
property under Benami Transactions (Prohibition) Act, 1988 and rules made thereunder, if so,
whether Co. has appropriately disclosed details in its F.S.;
(a) whether physical verification of inventory has been conducted at reasonable intervals by mgt and
whether, in opinion of auditor, coverage and procedure of verification by mgt is appropriate; whether
any discrepancies of 10% or more in aggregate for each class of inventory were noticed and if so,
whether they have been properly dealt with in books of a/c;
(a) whether during year Co. has provided loans or provided advances in nature of loans, or stood
guarantee, or provided security to any other entity [not applicable to companies whose principal
business is to give loans], if so, indicate-
(A) aggregate amt during year, and balance o/s at BS date w.r.t. such loans or advances and
guarantees or security (LAGS) to subsidiaries, joint ventures and associates;
(B) Agg. amt during year, and balance outstanding at BS date w.r.t such LAGS to parties other
than subsidiaries, joint ventures and associates;
(b) whether investments made, guarantees provided, security given and T&Cs of grant of all loans and
advances in nature of loans and guarantees provided are not prejudicial to the company’s interest;
(c) in respect of loans and advances in nature of loans, whether schedule of repayment of principal and
payment of interest has been stipulated and whether repayments or receipts are regular;
(d) if amount is overdue, state total amount overdue for more than 90 days, and whether reasonable
steps have been taken by company for recovery of principal and interest;
(e) whether any loan or advance in the nature of loan granted which has fallen due during the year, has
been renewed or extended or fresh loans granted to settle the overdues of existing loans given to the
same parties, if so, specify the aggregate amount of such dues renewed or extended or settled by
fresh loans and percentage of aggregate to total loans or advances in the nature of loans granted
during year [not applicable to companies whose principal business is to give loans];
(f) whether company has granted any loans or advances in the nature of loans either repayable on
demand or without specifying any terms or period of repayment, if so, specify the aggregate amount,
percentage thereof to the total loans granted, aggregate amount of loans granted to Promoters,
related parties as defined in clause (76) of section 2 of the Companies Act, 2013;
Deposits
(v) in respect of deposits accepted by the company or amounts which are deemed to be deposits,
whether directives issued by RBI and provisions of Sec 73 to 76 or any other relevant provisions of
Companies Act and the rules made thereunder, where applicable, have been complied with, if not, the
nature of such contraventions be stated; if an order has been passed by Company Law Board or NCLT
or RBI or any court or any other tribunal, whether the same has been complied with or not;
Cost records
(vi) whether maintenance of cost records has been specified by CG under section 148(1) of Companies
Act and whether such accounts and records have been so made and maintained;
(b) where statutory dues referred to in sub-clause (a) have not been deposited on account of any
dispute, then amounts involved and forum where dispute is pending shall be mentioned (a mere
representation to the concerned Department shall not be treated as a dispute);
Income Disclosure
(viii) whether any transactions not recorded in the books of account have been surrendered or
disclosed as income during year in the tax assessments under Income Tax Act, 1961, if so, whether
the previously unrecorded income has been properly recorded in the books of account during the year;
Repayment of loans
(ix) (a) whether Co. has defaulted in repayment of loans or other borrowings or in payment of interest
thereon to any lender, if yes, the period and the amount of default to be reported as per the format
below:-
Nature of Name of Amt not paid Whether No. of days Remarks,
borrowing, lender on due date principal or delay or if any
including debt interest unpaid
securities
*lender wise details in case of default to Bank, financial institutions & Govt
(b) whether company is a declared wilful defaulter by any bank or financial institution or other lender;
(c) whether term loans were applied for purpose for which loans were obtained; if not, amount of loan
so diverted and purpose for which it is used may be reported;
(d) whether funds raised on short term basis have been utilised for long term purposes, if yes, nature
and amount to be indicated;
(e) whether Co. has taken any funds from any entity or person on account of or to meet obligations of
its subsidiaries, associates or joint ventures, if so, details thereof with nature of such transactions
and the amount in each case;
(f) whether company has raised loans during the year on the pledge of securities held in its subsidiaries,
joint ventures or associate companies, if so, give details thereof and also report if company has
defaulted in repayment of such loans raised;
(b) whether any report under 143(12) of Companies Act has been filed by the auditors in Form ADT-4
as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central
Government;
(c) whether the auditor has considered whistle-blower complaints, if any, received during the year by
company;
Nidhi Company
(xii) (a) whether Nidhi Company has complied with the Net Owned Funds to Deposits in ratio of 1:20
to meet out liability;
(b) whether the Nidhi Company is maintaining 10% unencumbered term deposits to meet out the
liability;
(c) whether there has been any default in payment of interest on deposits or repayment thereof for
any period and if so, the details thereof;
Related Parties
(xiii) whether all transactions with related parties are in compliance with sections 177 and 188 of
Companies Act where applicable and the details have been disclosed in the financial statements, etc.,
as required by the applicable accounting standards;
Internal Audit
(xiv) (a) whether the company has internal audit system commensurate with the size and nature of its
business;
(b) whether reports of Internal Auditors for the period under audit were considered by the statutory
auditor;
RBI
(xvi) (a) whether company is required to be registered under section 45-IA of Reserve Bank of India
Act, 1934 (2 of 1934) and if so, whether the registration has been obtained;
(b) whether company has conducted any Non-Banking Financial or Housing Finance activities without a
valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of
India Act, 1934;
(c) whether company is a Core Investment Company (CIC) as defined in the regulations made by the
Reserve Bank of India, if so, whether it continues to fulfil the criteria of a CIC, and in case the company
is exempted or unregistered CIC, whether it continues to fulfil such criteria;
(d) whether the Group has more than one CIC as part of the Group, if yes,indicate the number of CICs
which are part of Group;
Going Concern
(xix) on basis of financial ratios, ageing and expected dates of realisation of financial assets and
payment of financial liabilities, other information accompanying the financial statements, auditor’s
knowledge of Board of Directors and management plans, whether the auditor is of the opinion that no
material uncertainty exists as on date of the audit report that company is capable of meeting its
liabilities existing at date of balance sheet as and when they fall due within a period of 1 year from BS
Date;
CSR Reporting
(xx) (a) whether, in respect of other than ongoing projects, company has transferred unspent amount
to a Fund specified in Schedule VII to the Companies Act within a period of six months of the expiry
of financial year in compliance with second proviso to section 135(5) of the said Act;
(b) whether any amount remaining unspent under section 135(5) of the Companies Act, pursuant to any
ongoing project, has been transferred to special account in compliance with section 135(6) of the said
Act;
Qualifications in CFS
(xxi) whether there have been any qualifications or adverse remarks by respective auditors in the
Companies (Auditor's Report) Order (CARO) reports of the companies included in the consolidated
financial statements, if yes, indicate details of companies and paragraph numbers of CARO report
containing qualifications or adverse remarks.
Current Asset
Asset shall be classified as current when it satisfies any of following criteria:
(a) expected to be realized, or consumed in, company’s normal operating cycle;
(b) held primarily for purpose of trading;
(c) expected to realize within 12 months after reporting period; or
(d) cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at
least 12 months after reporting period.
All other assets shall be classified as non-current.
Operating Cycle
An operating cycle is time b/w acquisition of assets and their realization in cash or cash equivalents.
Where normal operating cycle can’t be identified, it is assumed to have a duration of 12 months.
Current Liability
Liability shall be classified as current when it satisfies any of following criteria:
(a) expected to be settled in Co’s normal operating cycle;
(b) held primarily for purpose of trading;
(c) it is due to be settled within 12 months after reporting period; or
(d) Co. doesn’t have an unconditional right to defer settlement of liability for at least 12 months after
reporting date. Terms of a liability that could, at option of counterparty, result in its settlement by
issue of equity instruments do not affect its classification.
Balance Sheet
Non-Current Assets
Investment Property:
Reconciliation similar to PPE.
Investment
(i) Investments shall be classified as:
(a) Investments in Equity Instruments;
(b) Investments in Preference Shares;
(c) Investments in Government or trust securities;
(d) Investments in debentures or bonds;
(e) Investments in Mutual Funds;
(f) Investments in partnership firms; or
(g) Other investments (specify nature)
Under each classification, details shall be given of names of bodies corporate that are-
(i) subsidiaries,
(ii) associates,
(iii) joint ventures, or
(iv) structured entities,
in whom investments made and nature and extent of investment made in each body corporate (partly-
paid investments shown separately). lnvestment in partnership firms alongwith names of firms, their
partners, total capital and shares of each partner disclosed separately.
(ii) The following shall also be disclosed:
(a) Aggregate amt of quoted investment and market value thereof:
(b) Aggregate amt of unquoted investment: and
(c) Aggregate amt of impairment in value of investment.
Trade Receivables:
(i) Trade receivables shall be sub-classified as;
(a) Trade Receivables considered good - Secured;
(b) Trade Receivables considered good - Unsecured;
(c) Trade Receivables which have significant increase in Credit Risk; and
(d) Trade Receivables - credit impaired
(ii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
Loans;
(i) Loans shall be classified as-
(a) omitted
(b) Loans to related parties (giving details thereof); &
(c) Other loans (specify nature).
(ii) Loans Receivables shall be sub-classified as:
(a) Loans Receivables considered good - Secured;
(b) Loans Receivables considered good - Unsecured;
(c) Loans Receivables which have significant increase in Credit Risk; and
(d) Loans Receivables - credit impaired;
The above shall also be separately sub-classified as-
(a) Secured, considered good;
(b) Unsecured, considered good; and
(c) Doubtful. Allowance for bad and doubtful loans shall be disclosed under the relevant heads
separately.
(iv) Loans due by directors or other officers ….(same as Trade Receivables)
Current Assets
Inventories:
(i) Inventories shall be classified as-
(a) Raw materials;
(b) Work in-progress;
(c) Finished goods;
(d) Stock-in-trade (in respect of goods acquired for trading);
(e) stores and spares;
(f) Loose tools; and
(g) Others (specify nature).
(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.
(iii) Mode of valuation shall be stated.
Investment;
Similar to non-current
Trade Receivables
Similar to non-current
Loans:
Similar to non-current
Other current assets (specify nature): This is an all-inclusive heading, which incorporates current
assets that do not fit into any other asset categories. Other current assets shall be classified as-
(i) Advances other than capital advances
(1) Advances other than capital advances shall be classified as:
(a) Security Deposits;
(b) Advances to related parties (giving details thereof);
Contingent Liabilities and Commitments: (to the extent not provided for)
(i) Contingent Liabilities shall be classified as-
(a) claims against the company not acknowledged as debt;
(b) guarantees excluding financial guarantees; and
(c) other money for which the company is contingently liable.
(ii) Commitments shall be classified as-
(a) estimated amt of contracts remaining to be executed on capital account and not provided for;
(b) uncalled liability on shares and other investments partly paid; and
(c) other commitments (specify nature).
Equity
Other Equity:
(i) Other Reserves' shall be classified in the notes as-
(a) Capital Redemption Reserve;
(b) Debenture Redemption Reserve;
(c) Share Options Outstanding Account; and
(d) others- (specify the nature and purpose of each reserve and the amount in respect thereof);
(Additions and deductions since last balance sheet to be shown under each of the specified heads)
(ii) Retained Earnings represents surplus i.e. balance of relevant column in Statement of Changes in
Equity;
(iii) A reserve specifically represented by earmarked investments shall disclose the fact that it is so
represented;
(iv) Debit balance of Statement of P&L à shown as a negative figure under the head 'retained
earnings'. Similarly, balance of 'Other Equity', after adjusting negative balance of retained earnings,
if any, shall be shown under the head 'Other Equity' even if the resulting figure is in the negative;
and
(v) Under the sub-head 'Other Equity', disclosure shall be made for the nature and amount of each
item.
Non-Current Liabilities
Borrowings:
(i) borrowings shall be classified as-
(a) Bonds or debentures
(b) Term loans
(I) from banks
(II) from other Parties
(c) Deferred payment liabilities
(d) Deposits.
(e) Loans from related parties
(f) omitted
(g) Liability component of compound financial instruments
(h) Other loans (specify nature);
(ii) borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be
specified separately in each case.
(iii) where loans have been guaranteed by directors or others, aggregate amount of such loans under
each head shall be disclosed;
(iv) bonds or debentures (along with rate of intt, and particulars of redemption or conversion) shall be
stated in descending order of maturity or conversion, starting from farthest redemption or conversion
date where bonds/debentures are redeemable by instalments, the date of maturity for this purpose
must be reckoned as date on which first instalment becomes due;
(v) particulars of any redeemed bonds or debentures which company has power to reissue shall be
disclosed;
(vi) terms of repayment of term loans and other loans shall be stated; and
(vii) period and amt of default as on balance sheet date in repayment of borrowings and intt shall be
specified.
Current Liabilities
Borrowings:
(i) Borrowings shall be classified as-
(a) Loans repayable on demand
(I) from banks
(II) from other parties
(b) Loans from related parties
(c) Deposits
(d) Other loans (specify nature);
(ii) borrowings further sub-classified as secured and unsecured. Nature of security shall be specified
separately in each case;
(iii) where loans have been guaranteed by directors or others, agg. amt of loans under each head shall
be disclosed;
(iv) period and amt of default as on B.S. date in repayment of borrowings and intt, specified
separately in each case.
(v) Current maturities of long term debt shall be disclosed separately
'Long term debt is a borrowing having a period of more than twelve months at time of origination
Trade Payables
The following details relating to Micro, Small and Medium Enterprises(MSME) shall be disclosed in
notes:
The presentation of liabilities associated with group of assets classified as held for sale and non-
current assets classified as held for sale shall be in accordance with the relevant Ind AS.
Dividends
The amount of dividends proposed to be distributed to equity and preference shareholders for the
period and related amount per share shall be disclosed separately. Arrears of fixed cumulative
dividends on preference shares shall also be disclosed separately.
Where the company has not used borrowings from banks and financial institutions for specific
purpose for which it was taken at balance sheet date, company shall disclose details of where they
have been used.
(ii) The Co. shall disclose as to whether the fair value of investment property is based on valuation by
a regd valuer as defined under rule 2 of Companies (Registered Valuers and Valuation) Rules, 2017.
(iv) Where Co. has revalued its intangible assets, disclose as to whether revaluation is based on
valuation by a regd valuer.
(v) The following disclosures shall be made where Loans or Advances in nature of loans are granted to
promoters, directors, KMPs and related parties (as defined under Companies Act, 2013), either
severally or jointly with any other person, that are:
(a) repayable on demand; or
(b) without specifying any terms or period of repayment,
Aging Schedule
CWIP <1 1-2 years 2-3 years > 3 years Total
Year
Projects in Progress
Projects temporarily suspended
For CWIP, whose completion is overdue or exceeded its cost compared to original plan, following
CWIP completion schedule shall be given:
(A) Where company has advanced or loaned or invested funds (either borrowed funds or share
premium or any other sources or kind of funds) to any other person(s) or entity(ies), including
foreign entities (Intermediaries) with the understanding (whether recorded in writing or otherwise)
that the Intermediary shall
(i) directly or indirectly lend or invest in other persons or entities identified in any manner
whatsoever by or on behalf of the company (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like to or on behalf of the Ultimate Beneficiaries;
the company shall disclose the following:-
(I) date and amount of fund advanced or loaned or invested in Intermediaries with complete
details of each Intermediary.
(II) date and amount of fund further advanced or loaned or invested by such Intermediaries to
other intermediaries or Ultimate Beneficiaries along with complete details of ultimate
beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on behalf of the Ultimate
Beneficiaries
(IV) declaration that relevant provisions of Foreign Exchange Management Act, 1999 and
Companies Act has been complied with for such transactions and transactions are not violative of
Prevention of Money-Laundering act, 2002.
(B) Where a company has received any fund from any person(s) or entity(ies), including foreign
entities (Funding Party) with understanding (whether recorded in writing or otherwise) that Co.shall
(i) directly or indirectly lend or invest in other persons or entities identified in any manner
whatsoever by or on behalf of the Funding Party (Ultimate Beneficiaries) or
(ii) provide any guarantee, security or the like on behalf of Ultimate Beneficiaries, disclose the
following:-
(I) date and amount of fund received from Funding parties with complete details of each Funding
party.
(II) date and amount of fund further advanced or loaned or invested other intermediaries or
Ultimate Beneficiaries alongwith complete details of the other intermediaries‘ or ultimate
beneficiaries.
(III) date and amount of guarantee, security or the like provided to or on behalf of the Ultimate
Beneficiaries
(IV) declaration that relevant provisions of the FEMA,1999 and Companies Act has been
complied with for such transactions and transactions are not violative of PMLA, 2002
Preference Shares
Pref. shares including premium recd on issue, shall be classified and presented as 'Equity' or 'Liability'
in accordance with relevant Ind AS. Disclosure and presentation applicable to relevant class of equity
or liability shall be applicable mutatis mutandis to the pref. shares. For eg, plain vanilla redeemable
pref. shares shall be classified and presented under 'non-current liabilities' as 'borrowings' and
disclosure requirements in this regard applicable to such borrowings shall be applicable mutatis
mutandis to redeemable pref. shares.
Compound Financial Instruments such as convertible debentures, where split into equity and liability
components, as per requirements of relevant Ind AS, shall be classified and presented under relevant
heads in 'Equity' and 'Liabilities'
Regulatory Deferral Account Balances shall be presented in the Balance Sheet in accordance with the
relevant Indian Accounting Standards.
The provisions of this Part shall apply to income and expenditure account, in like manner as they apply
to a Statement of Profit and Loss,
Additional Information:
Disclose via notes, additional info regarding aggregate expenditure and income on following items:
(a) employee Benefits expense (showing separately (i) salaries and wages, (ii) contribution to PF and
other funds, (iii) share based payments to employees, (iv) staff welfare expenses).
(b) depreciation and amortisation expense;
(c) any item of income or expenditure which exceeds 1 % of revenue from operations or 10L whichever
is higher, in addition to consideration of 'materiality ‘;
(d) interest Income;
(e) interest Expense
(f) dividend income;
(g) net gain or loss on sale of investments;
(h) net gain or loss on foreign currency transaction and translation (other than considered as finance
cost);
(i) payments to the auditor as (a) auditor, (b) for taxation matters, (c) for company law matters, (d)
for other services, (e) for reimbursement of expenses;
(j) in case of companies covered under section 135, amount of expenditure incurred on CSR activities;
and
(k) details of items of exceptional nature;
The Company shall give details of any transaction not recorded in books of accounts that has been
surrendered or disclosed as income during the year in tax assessments under Income Tax Act, 1961
(such as, search or survey or any other relevant provisions of Income Tax Act, 1961), unless there is
immunity for disclosure under any scheme and shall also state whether the previously unrecorded
income and related assets have been properly recorded in the books of account during the year.
Where the company covered under section 135 of Companies Act, following shall be disclosed with
regard to CSR activities:-
(vii) details of related party transactions, e.g.,contribution to a trust controlled by the company in
relation to CSR expenditure as per relevant Accounting Standard,
(viii) where a provision is made with respect to a liability incurred by entering into a contractual
obligation, the movements in the provision during the year shall be shown separately.
Where the Company has traded or invested in Crypto currency or Virtual Currency during the financial
year, the following shall be disclosed:-
(iii) deposits or advances from any person for purpose of trading or investing in Crypto Currency or
virtual currency.
The provisions of these regulations which become applicable to listed entities on basis of market
capitalisation criteria shall continue to apply to such entities even if they fall below such thresholds.
Audit Committee(AC)
If auditor resigns within 45 days If auditor resigns after 45 If auditor has signed LR/AR
from end of Qtr of a FY, then days from end of Qtr of a FY, of 1st 3 Qtrs then before
auditor shall, before resignation, then auditor shall, before such resignation auditor
issue limited review/ audit resignation, issue limited shall issue LR/AR for last qtr
report for such Qtr. review/ audit report for such as well as AR for such FY
Qtr as well as next Qtr
Other Conditions:
• Concern with mgt such as non-availability of info/ non-cooperation by mgt àauditor approach
Chairman of Audit committee(AC) & AC shall receive concern directly not wait for Qtr
meeting
• If auditor propose to resign à all concerns brought to notice of AC
If due to non-receipt of info/expln à inform AC details info/expln sought & not provided by
mgt
• Deliberation by AC à Communicate views to mgt & auditor
The practicing CS shall certify compliance by listed entity on above in annual secretarial compliance
report
Disclosure requirements
• Pecuniary transn b/w NED & listed entity disclosed Annual Report
• Criteria for making payment to NED
• Following disclosures in add. to reqd by Cos. Act 2013
o All elements of remuneration package of individual directors summarized under major
groups, such as salary, benefits, bonuses, stock options, pension etc.
o Details of fixed component and performance linked incentives, along with the
performance criteria.
o Service contracts, notice period, severance fees.
o Stock option details, if any – and whether issued at a discount as well as the period
over which accrued and over which exercisable.
Audit Procedures:
1. Ascertain from minutes of BOD’s, shareholders’ meetings, relevant agenda papers, notices,
explanatory statements etc., whether remuneration of NEDs has been decided by BOD after
receiving prior approval of shareholders in GM;
Board Meetings
• Meet at least 4 times in a year max gap 120 days
• Quorum: Top 2000 listed entities à 1/3rd or 3 (higher) include 1 ID [VC & Audio visual means
counted]
• Director member 10 Committees or Chairperson of 5 committees of public ltd cos.
(Committee= Audit & stakeholder relationship comm.)
• ID hold at least 1 meeting in a FY w/o non IDs
• ID resigned replaced by next BM or 3 months (later)
Note:
1. IFSC public and private company, it shall hold first BM within 60 days of its incorporation and
thereafter hold at least one Board meeting in each half of a calendar year.
2. A ‘high value debt listed entity’ shall undertake Directors and Officers insurance (D and O
insurance) for all its independent directors for such sum assured and for such risks as may be
determined by its BOD.
Code of Conduct
(i) The Board shall lay down code of conduct for Board members and senior mgt of listed
entity.
(ii) All Board members and senior mgt personnel shall affirm compliance with code on annual
basis.
(iii) The Annual Report of co. shall contain declaration to this effect signed by CEO.
(iv) The code of conduct shall be posted on website of company.
(v) The Code of Conduct shall suitably incorporate duties of Independent Directors laid down
in Companies Act, 2013.
Auditor should check if such code is there & obtain copy of same & verify all board member + sr. mgt
have gven confirmation + its posted on website
Material Subsidiary
• Reg. 16(c) MSà Income/Net Worth >10% of consolidated Income/Net Worth
• Reg 24(1) At least 1 ID on BOD of listed entity àDirector of Unlisted material subsy.
(incorp India or not)
[Mat subsyàincome/NW >20% Consol income/NW of listed entity + all subsidiaries]
• AC review F/S in particular investments by unlisted mat. subsy (w/o reference to materiality)
• Minutes of BM of unlisted subsy laid b4 BM of listed entity
Auditor is just required to check disclosure requirements not reqd to verify facts of non-financial
info in MDA.
RPT Disclosures
• Qtr compliance report on Corporate Governance to RSE 21 days from end of Qtr
• The report shall be signed either by the Compliance Officer or Chief Executive Officer.
• Policy to be disclosed on website & weblink provided in annual report
• Disclose transn with promoter having 10% or more shareholding.
• Submit within 30 days from SFS & CFS half year results, disclosure of RPTs on consolidated
basis to RSE (format as per a/c std) & publish on website
(1) The listed entity shall submit to stock ex. following statement(s) on a quarterly basis for public
issue, rights issue, preferential issue etc:
a. indicating deviation in use of proceeds
b. Indicating category-wise variation (capital exp, sales and marketing, working capital etc.) b/w
projected utilisation of funds made in its offer document or explanatory statement to the notice
for general meeting, and actual utilisation of funds.
(2) The statement(s) shall be continued to be given till proceeds have been fully utilised or purpose
has been achieved.
(3) Where entity has raised funds through preferential allotment or qualified institutions placement,
listed entity shall disclose every year, utilization of such funds during that year in its Annual Report
until such funds are fully utilized.
The audit committee shall mandatorily review:
Compliance Certificate
(a) They have reviewed f/s and CFS for year and that to best of their knowledge and belief:
i. These statements do not contain any materially untrue statement or omit any material fact or
contain statements that might be misleading;
ii. These statements together present true and fair view of listed entity’s affairs and are in
compliance with existing accounting standards, applicable laws and regulations.
(b) There are, to best of their knowledge and belief, no transactions entered into by listed entity
during year which are fraudulent, illegal or violative of listed entity’s code of conduct.
(c) They accept responsibility for establishing and maintaining internal controls for financial
reporting and that they have evaluated effectiveness of internal control systems of listed entity
pertaining to financial reporting and have disclosed to auditors and Audit Committee, deficiencies in
design or operation of internal controls, if any, of which they are aware and steps taken to rectify
deficiencies.
Note: An investment entity need not present CFS if it measures subsys at FVTPL (Fair value through
P&L)
Example: Parent Ltd acquired 51% shares of Child Ltd during the year ended 31-3-2019. During the
financial year 2019-20, 20% shares of Child Ltd were sold by Parent Ltd. Parent Ltd while preparing
the financial statements for the year ended 31-3-2019 and 31-3-2020 did not consider the financial
statements of Child Ltd for consolidation. As a statutory auditor how would you deal with it?
Where enterprise owns majority of voting power by virtue of ownership of shares of another
enterprise and all shares are acquired and held exclusively with view to subsequent disposal in near
future, control by first mentioned enterprise would be considered temporary and investments in such
subsidiaries should be accounted in accordance with AS 13 “Accounting for Investments”.
In case of entity which is excluded from consolidation on ground that relationship of parent with other
entity as subsidiary is temporary, auditor should verify that intention of parent, to dispose subsidiary,
in near future, existed at the time of acquisition of subsidiary. The auditor should also verify the
reasons for exclusion are given in CFS.
As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operation under severe
long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant F.S.
Conclusion: In given case, Parent Ltd acquired 51% shares of Child Ltd during the year ended
31.03.2019 and sold 20% shares during the year ended 31.03.2020. Parent Ltd did not consolidate F.S.
of Child Ltd for year ended 31.03.2019 and 31.03.2020.
The intention of Parent Ltd is quite clear that control in Child Ltd is temporary as it disposed off
acquired shares in next year of its purchase. Therefore, Parent Ltd is not required to prepare CFS as
per AS 21, however, for compliance of provisions related to consolidation of financial statements given
under section 129(3) of Companies Act, 2013, Parent Ltd is required to make disclosures in F/S as per
provisions contained in Schedule III to Companies Act 2013.
However, if Parent Ltd is required to prepare its F/S under Ind AS, it shall have to prepare CFS in
accordance with Ind AS 110 as exemption for ‘temporary control’, or “for operation under severe long-
term funds transfer restrictions” is not available under Ind AS 110. It states that “Consolidation of
an investee shall begin from the date the investor obtains control of the investee and cease when the
investor loses control of the investee”.
Responsibility of Parent
(a) identifying components, and including financial information of components to be included in the CFS;
(b) where appropriate, identifying reportable segments for segmental reporting;
(c) identifying related parties and related party transactions for reporting;
(d) obtaining accurate and complete financial information from components;
(e) making appropriate consolidation adjustments;
(f) harmonization of accounting policies and accounting framework; &
(g) GAAP conversion, where applicable.
While considering observations of component auditor in his report on SFS, concept of materiality will
be considered.
It may happen, in case of one subsy, its goodwill & in case of other Capital Reserve, parent may net
off both & show single amt in B/Sheet as per FRF. Auditor should verify if gross amt of g/w &
capital reserve shown in notes to CFS.
Following information is also required to be disclosed in CFS separately for parent and each of its
components (including foreign component) which has been consolidated:
(i) amount of net assets and net assets as a percentage of consolidated net assets;
(ii) amount of share in profit or loss(P&L) and percentage share in P&L as percentage of consolidated
P&L;
(iii) amount in other comprehensive income (OCI) and percentage of OCI as a percentage of
Consolidated OCI
Examples of info. which is given in SFS of parent or subsy, need not be given in CFS
i. Source from which bonus shares are issued eg. Capitalization of profits or reserves or sec
prem a/c
ii. Disclosure of unutilized monies out of issue indicating form in which they have been invested
iii. Disclosure under MSME Development Act 2006
iv. Value of imports on CIF basis by Co. during FY in respect of:
a) Raw material
b) Components & spare parts
c) Capital Goods
v. Expenditure in forex during FY on account of Royalty, know how etc
vi. Value of imported Raw material, spare parts & components consumed & value of indigenous RM,
SP & C consumed & percentage of each to total consumption.
• Auditor should report whether principles and procedures for preparation and presentation of
CFS as laid down AS have been followed.
In case of any departure or deviation, auditor should consider requirements given in SA 705 in
audit report so that users are aware of such deviation.
• Auditor should issue an audit report expressing opinion whether CFS give true and fair view of
state of affairs of Group as on balance sheet date and whether consolidated P&L statement
gives true and fair view of results of consolidated P&L of Group for period under audit.
• Where CFS also include cash flow statement, auditor should also give his opinion on true and
fair view of cash flows presented by consolidated cash flow statements.
2. When the Parent’s Auditor is not the Auditor of all its Components
• Parent’s mgt performs conversion from component’s audited FS from FRF in which its
prepared to FRF for CFS.
• The conversion adjustments are audited by Principal Auditor.
• The component auditor might prepare FS as per parent’s accounting polices based on Group
Accounting Manual (GAM)
• Parent auditor shall check if GAM comply with GAAP applicable to Parent
Legal Framework
Most banks appoint 4 or more CA firms as Statutory Central Auditors. Appointment letter contains
following:
• Period of appointment.
• Particulars of other central auditors.
• Particulars of previous auditors.
• Procedural requirements to be complied with in accepting the assignment
• A statement of division of work and review and reporting responsibilities amongst joint auditors
in case of nationalised banks
• Scope of assignment which included spl certificates or reports to be given by CSAs
• Basis of computation of audit fee and scale of travel and related allowances and conveyance
charges and other expense reimbursement entitlements, if any.
1. Initial Considerations
• Acceptance & Continuance: Assessing engagement risk prior to acceptance.
• Declaration of Indebtness: Written confirmation that credit facilities obtained by auditors
& their family members have not become NPAs.
• Internal Assignments in Banks by Statutory Auditors: Not take stat audit assignment if
associated with internal audit assignment
• Terms of Audit Engagements: As per SA 210, agree terms of engg before beginning
fieldwork
• Communication with Previous Auditor: As per Clause 8 of Part I of First Schedule of CA Act
1949
• Planning: Documenting NTE of audit procedures & flexible to make changes
• Establish Engagement Team: Qualified & experienced professionals to manage engg risk
2. Understanding
• Understanding the Bank and Its Environment including Internal Control
• Understand Bank’s Accounting Process
• Understanding Risk Management Process
Ø Oversight by TCWG: They should approve risk mgt policies consistent with bank’s
objectives, strategies, regulatory requirement etc
Ø Identification, Measurement and Monitoring of Risks: Risks should be identified,
measured & monitored against pre-approved criteria
Ø Control Activities: Segregation of duties, verification & approval of transactions,
physical security
Ø Monitoring Activities: Conducted by independent risk mgt unit
Ø Reliable information systems: That provide adequate compliance, financial & operational
info
3. Risk Assessment
• Identifying and assessing ROMM: As per SA 315, Identifying & assessing ROMM at F.S.
level & assertion level for Class of transn, a/c balance & disclosures
• Assess the risk of fraud including Money Laundering: As per SA 240, assess risk due to
fraud
• Assess specific risk: ROMM at F level relating to banking industry & use of IT
• Risk of outsourcing activities: Used for reducing costs as well as making use of services of
an expert not available internally but risk associated with it.
Hence, based upon guidance and info received from SCAs, branch auditors need to ensure that data
review and analysis through CBS is carried out and TOCs and substantive checking of sample
transactions is carried out at branch level and results are shared with SCAs.
Key control aspects that an auditor needs to address while undertaking audit in a Computerised bank.
Stress Testing: These are designed to understand whether bank has enough capital to survive plausible
adverse economic conditions and to maintain enough buffer to stay afloat under extreme scenarios.
BASEL III framework :Basel III norms relate to Capital Adequacy requirement compliance which the
Bank has to achieve as contained in BASEL III accord.
Basel capital adequacy norms are meant for protection of depositors and shareholders by prescriptive
rules for measuring capital adequacy, thereby evolving methods of determining regulatory capital and
ensuring efficient use of capital.
Aim:
a) improving the banking sector's ability to absorb shocks arising from financial and economic
stress
b) improving risk management and governance practices
c) strengthening banks' transparency and disclosure standards.
Risk-based Internal audit is conducted based upon risk assessment of business and control risks of
branches.
General:
• The staff of bank shifted from one position to another frequently and without prior notice.
• Work of one person should always be checked by another person (Internal check)
• The arithmetical accuracy of books should be proved independently every day.
• All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques, foreign
currency cards etc.) should be kept in possession of an officer, and another officer should verify
issuance and stock of such stationery.
• Mail should be opened by a responsible officer. Signatures on all letters and advices received
from other branches of bank or its correspondence should be checked by officer with the
signature book.
• Signature and telegraphic code book kept with responsible officers and access should be allowed
only to authorised officers.
• The bank should take out insurance policies against loss due to all the risks such as fire, natural
calamities, theft and employees’ infidelity.
• Surprise inspection of HO & Branches by Internal Audit Dept
Cash:
• Cash should be kept in joint custody of 2 responsible officers.
• Test-checked daily and counted in full occasionally by a responsible officer other than those
handling the cash.
• The cashier should have no access to customer’s ledger accounts and the Day Book.
• Payments should be made only after vouchers (e.g. cheques, demand drafts etc.) have been
passed for payment
• High value cash receipts and payments should be verified by a higher officer/ branch manager
Clearings
• Under Cheque Truncation System (CTS) implemented by RBI, electronic image of cheque is
transmitted to paying branch through clearing house, along with relevant info. like data on
MICR band, date of presentation, presenting bank, etc. This effectively eliminates associated
cost of movement of physical cheques, reduces time reqd for their collection.
• As per RBI guidelines, branch is required to either call customer or email him for any cheque
recd for amt of 5L & above in respect of inward clearings. Auditor may verify compliance on
test check basis.
• Auditor is to check whether sign of drawer of cheque is being verified by staff or not as else
there will be liability of paying bank under all circumstances.
• The unpaid cheques received in outward clearing should be either sent to customers at their
recorded address or customers be informed to collect the same from bank branch.
Bills Purchased
• All documents of title should be assigned to bank
• Sufficient margin à cover decline in value of security
Demand Drafts
• Check signature with signature book
• DD sold/ issued confirmed by advice to paying branch
• Paying branch not receive confirmation or credit in account à steps to ascertain reasons
SLR/CRR Requirements
Cash Reserve Ratio: min. fraction of deposits in cash/ deposits with RBI. Check master circular of
RBI to check compliance.
• Audit procedure:
Ø Understand circular/direction of RBI
Ø Request branch auditor à weekly trial balance on Friday-consolidation at H.O. Also on
dates selected by auditor. Specific request examine cash balance on selected dates.
Ø Test basis examine consolidation Demand Time Liability position with reference to branch
returns
Ø Inclusions in liabilities:
o Net credit balance in branch adjustment accounts including relating to foreign
branches.
o Borrowings from abroad by banks in India considered as ‘liability to other’ taken at
gross level can’t be netted off (Adverse balance in Nostro Mirror A/C)
o interest accrued but not accounted for in books
Verification of Assets
Balance with RBI
• Verify ledger balance w.r.t confirmation certificates and reconciliations.
• Review recos. with spl. attention to:
Ø Cash transn unresponded
Ø Revenue items requiring adjustment/write off
Ø Other cr. and debit entries originated in Statement provided by RBI remaining responded
for more than 15 days.
• WR from mgt. for reasons of old outstanding bal. in BRS unadjusted for 1 year.
Note: There should be half yearly reviews of Investment portfolios (30th Sept & 31st Mar)
• Recoverability of advances
Ø Review periodic statements submitted by borrower
Ø Latest financial statements of borrower
Ø Reports on inspection of security
Ø Review audit report à borrower enjoying cr limit >=10 Lakh for working capital
Provisioning of NPA
Classification & Provision
• Verify whether bank has a system of ongoing identification and classification of advances
through CBS without manual intervention and its accuracy in crystallising date of NPA.
• Examine classification appropriate à particularly those advances with threat to recovery
• Examine-secured & unsecured portion segregated correctly and calculation of provision
• Review and compare date of NPA of loan a/cs mentioned in current year statements with that
of PY. Reasons for any change should be ascertained.
• A/c regularised before b/s date à payment from genuine sources à need not be classified as
NPA
• If subsequently, branch lends funds to borrower à auditor assess genuineness of source of
payment
• Inherent weakness in a/c à deemed NPA
• Classification as per position as on date and review of all std accounts on balance sheet date
• Recognition on basis of Past Due/Overdue Concept & not based on balance sheet date.
Agricultural Advance
• Ensure NPA norms applied in accordance with crop season determined by State Level Bankers’
Committee in each State. Depending upon the duration of crops – short term/ long term - raised by
an agriculturist, NPA norms would also be made applicable to agricultural term loans availed of by
them.
Also ensure that these norms are made applicable to all direct agricultural advances listed in Master
Circular on lending to priority sector.
• In respect of agricultural loans, other than those specified in circular, ensure that identification of
NPAs has been done on the same basis as non-agricultural advances.
Restructured Advance
Restructuring is an act in which a lender, for economic or legal reasons relating to borrower’s financial
difficulty, grants concessions to borrower.
It may involve modification of terms of advances including alteration of amount of
instalments/alteration of repayment period/rate of interest/sanction of additional credit facilities
etc. to help in curing of default.
• The auditor should verify compliance with requirements of circular issued in this regard.
• Banks may restructure a/cs classified under std, substandard or doubtful categories. Banks
can’t restructure a/cs with retrospective effect.
• Once bank receives an application/proposal in respect of an a/c for restructuring, it implies
that account is intrinsically weak. Accordingly, during the time account remains pending for
Upgradation of Account
• Examine all accounts upgraded from NPA to std. category during the year, to ensure that
upgrading of each account is strictly in terms of RBI guidelines.
• There can be a possibility of incorrect upgradation of a/c on basis of partial recoveries made in
the a/c and overdue portion might not have wiped out completely. There can also be a possibility
of recoveries being made in account after cut-off date and a/c being upgraded as on date of
balance sheet.
Verification of Liabilities
Deposits
• Verify balance on sample basis
• Examine bal. of subsy ledger tallies with general ledger
• Check calculation of interest on test check basis.
• Examine if periodic confirmations obtained, check on sample basis
• Conversion of foreign currency deposits at rates notified by H.O.
• Resultant increase/decrease taken to P&L
• Intt on deposits on basis of 360 days in year
• Intt accrued but no due shown under ‘other liab & provisions’
Borrowings
• Obtain & verify confirmation certificates & other docs
• SA 505, “External Confirmation” –audit evidence to respond to significant risks
• Examine- clear distinction b/w rediscount and refinance, as rediscount doesn’t appear in this
head
• Examine borrowing at call & short notice-authorised
Bills payable
• Evaluate the existence, effectiveness and continuity of internal controls over bills payable.
Controls should usually include the following-
Ø Drafts, mail transfers,etc. made out in std printed forms.
Ø Unused forms relating to drafts, traveller’s cheques, etc. kept under custody of
responsible officer.
Ø The bank have a reliable private code known only to responsible officers of branches,
coding and decoding of telegrams should be done only by such officers.
Ø The signatures on demand draft, checked by officer with specimen signature book.
Ø All TTs and DDs issued by a branch should be immediately confirmed by advices to the
branches concerned. On payment, paying branch should send a debit advice to originating
branch
• Examine sample of outstanding items comprised in bills payable accounts with relevant
registers.
Reasons for old outstanding debits in respect of drafts or other similar instruments paid
without advice should be ascertained.
• Correspondence with other branches after year-end should be examined specially for large
value items outstanding on balance sheet date .
Audit procedures:
Contingent Liability (CL)
• Adequte Internal Controls ensure transn executed by persons authorised
• Verify in case of Letter of Credits for import of goods, payments made in terms of LC
• Test completeness of recorded obligations
• Review reasonableness of year end contingent liab in light of prev experience
• Review whether comfort letters issued included in CL
Guarantees
• Check Internal Controls over issue of guarantees
• Controls over unused guarantee forms e.g. under custody of responsible officers
• Examine guarantee register- procedure of marking off expired guarantees
• Check guarantee register- ensure all included in disclosures
• If claim risen, provision as per AS 29
Auditor’s Reports
• Whether, in auditor’s opinion, balance sheet is full and fair balance sheet containing all
necessary particulars and is properly drawn up to exhibit true and fair view of affairs of bank.
The consolidation is done at head office level and LFAR for bank is submitted by SCAs to mgt. LFAR,
on the bank, after due examination, should be placed before ACB of bank indicating action
taken/proposed to be taken for rectification of irregularities, if any, mentioned therein; and a copy of
LFAR and relative agenda note, together with Board's views or directions, is submitted to RBI within
60 days of submission of LFAR by statutory auditors.
Notes:
• In case of fraud report to:
Ø RBI
Ø Chairman/MD/CEO of bank
Ø CG u/s 143(12)
Concurrent Audit
Scope of Concurrent Audit in Banks
Ø Cash
Ø Deposits Advances
Ø Investments
Ø Foreign Exchange House
Ø Keeping
Ø Other Items
Investments
• Purchase/sale of securities should as per:
Ø HO instructions
Ø Rates beneficial to bank
• Securities in books à should be physically held by it
• Compliance with RBI/HO guidelines
Advances
• Ensure proper sanction of advances
• Securities properly recd and regd in name of bank.
• Proper post disbursement supervision & follow-up
• LC issued within delegated power
• BG issued, properly worded & recorded in register
• Classification as per RBI guidelines
• Claims to ECGC & DICGC submitted in time
Foreign Exchange
• Check foreign bills negotiated under letters of credit.
• Check FCNR and other non-resident accounts whether debits and credits are permissible
under rules.
• Check whether inward/outward remittance have been properly accounted for.
• Examine extension and cancellation of forward contracts for purchase and sale of foreign
currency. Ensure that they are duly authorised and necessary charges have been recovered.
• Ensure that balances in Nostro accounts in different foreign currencies are within prescribed
limit.
• Ensure adherence to guidelines issued by RBI/HO of bank about dealing room operations.
• Ensure verification/reconciliation of Nostro and Vostro account transactions/balances.
Definition
• A Financial Institution which is a Company
• A non-banking institution (NBI) which is a Co. & principal business receiving deposits & lending
• Such other institution as RBI may with approval of CG & notif. in official gazette specify
Co.= NBFC, if,
Financial Assets (FA) > 50% of total assets & Income from FA > 50% of gross income. If both
criteria fulfilled, qualify as NBFC & regd. with RBI.
Sec 45 IA of RBI Act 1997, No NBFC can do business of NBI w/o
• Certificate of Reg (CoR) issued by RBI
• Min Net owned Funds (NOW) of 2 Cr.
Categories
• Deposit taking & Non-Deposit taking (NBFC-ND)
• Non Deposit taking further classified into Systemically important & Non systemically
important (NBFC-NDSI & NBFC-ND)
Cos exempt from RBI registration (Doing financial business but regulated by other regulators)
• Housing Fin Institution (regulated by NHB)
• Merchant banking cos. (SEBI)
• Stock ex. (sebi)
• Stock broking/sub-broking(sebi)
• Venture cap fund (SEBI)
• Nidhi (MCA, GOI)
• Insurance (IRDA)
• Chit (Chit fund Act)
• Alt Inv Fund Cos.
• Mutual Benefit Cos.
• Mortgage Guarantee Cos.
• Core investment Cos with asset size <=100 Cr not accessing public funds
Prudential Norms
Capital Adequacy Ratio
• Min capital ratio consisting of tier I & II capital not less than 15% of agg. Risk weighted
assets
• Tier I not less than 10% at any point of time. In case of lending against Gold jewellery, min
tier I cap 12%
Risk Weights
Nos Head Weight
1 Cash Bank 0
2 Approved securities 0
3 Loan & advances fully secured + loans to employees 0
Provisioning (%)
Loss Assets: 100%
Doubtful Assets: Unsecured 100%
Period for which Secured Asset has been % of Provision
considered as doubtful
Up to 1 year 20
1-3 years 30
More than 3 years 50
Sub std asset: 10%
Std asset: 0.40% for systemically imp. & 0.25% for non-systemically imp.
*3/12 months in case of NBFC-Systemically Imp. (Deposit taking or Non deposit taking)
Spl point for NPA: The lease rental and hire purchase instalment, which has become overdue for
period of 12 months or more; (NBFC SI its 3 months only)
Audit Procedures
1. Ascertaining business of Co
• Check MOA & AOA (Memorandum & Articles)
• Check business policy à ascertain main business of co.
• Minutes of Board Meeting & discuss with top level mgt
(II) The duty of Auditor under sub-para (I) shall be to report only contraventions of provisions of RBI
Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph (1) and such report
shall not contain any statement with respect to compliance of any of provisions.
Difference b/w Division II (Ind AS- Other than NBFC) & Division III (Ind AS NBFC) of Schedule III
a) NBFC allowed present items of b/sheet in order of liquidity
b) NBFC à disclose by way of note item of ‘other income/expense’ > 1% of total income. Div II
requires disclosure of item > 1% of Revenue or 10 L (whichever is higher)
c) NBFC separately disclose under receivables debt due from LLP à Director partner/member
d) Disclose items comprising Revenue from operations & other income on face of SPL instead of only
notes
e) Separate disclosure of T/R significant increase in cr risk or cr impaired
f) Condn or restrictions for distribution attached to stat reserves separately disclosed.
I. Whether during year company has made investments in, provided any guarantee or security or
granted any loans or advances in nature of loans, secured or unsecured, to companies, firms, LLPs or
other parties,
If so,
(b) whether investments made, guarantees provided, security given and terms and conditions of grant
of all loans and advances in nature of loans and guarantees provided are not prejudicial to company’s
interest;
(c) in respect of loans and advances in nature of loans, whether schedule of repayment of principal and
payment of interest has been stipulated and whether repayments or receipts are regular;
(d) if amount is overdue, state total amount overdue for more than 90 days, and whether reasonable
steps have been taken by company for recovery of principal and interest;
(f) whether company has granted any loans or advances in nature of loans either repayable on demand
or without specifying any terms or period of repayment, if so, specify aggregate amount, percentage
thereof to total loans granted, aggregate amount of loans granted to Promoters, related parties;
[Paragraph 3(iii)]
(II) (a) Whether company is required to be registered under section 45-IA of RBI Act, 1934 and if
so, whether registration has been obtained.
(b) Whether company has conducted any Non-Banking Financial or Housing Finance activities without a
valid Certificate of Registration (CoR) from RBI as per the RBI Act, 1934;
(c) Whether company is a Core Investment Company (CIC) as defined in regulations made by RBI, if
so, whether it continues to fulfil criteria of a CIC, and in case company is an exempted or unregistered
CIC, whether it continues to fulfil such criteria;
(d) Whether Group has more than one CIC as part of Group, if yes, indicate number of CICs which are
part of the Group; [Paragraph 3(xvi)]
Note: The minimum paid-up ESC of Indian Insurance co. should be 100 crores excluding preliminary
expenses incurred in formation and registration of company.
If, at any time, insurer or re-insurer doesn’t maintain required control level of solvency margin,its
required to submit financial plan to Authority indicating plan of action to correct deficiency. If, on
consideration of plan, Authority finds it inadequate, insurer has to modify financial plan.
Sec 64VA states that if insurer or re-insurer fails to comply with prescribed requirement of
maintaining excess of value of assets over amount of liabilities, it shall deemed to be insolvent and may
be wound up by Court on application made by authority.
The Insurance Act requires every insurer to furnish a statement of assets and liabilities as assessed
in manner laid down by sec 64V.
(1) No insurer shall assume any risk in India in respect of any insurance business on which premium is
not ordinarily payable outside India unless and until premium payable is received by him or guaranteed
to be paid by person in such manner and such time as may be prescribed or unless and until deposit of
prescribed amt.
(2) For purposes of this sec, in case of risks for which premium can be ascertained in advance, risk
may be assumed not earlier than date on which the premium has been paid in cash or by cheque to
insurer.
Appointment of Auditors
The appointment of stat auditors in GIC, and its subsys and divisions as well as other public sector
Insurance Companies is made by C&AG, as in case of other PSUs (For eg, New India Assurance Company
Ltd., United India Insurance Company Ltd.).
However, in case of others, auditor is appointed at AGM after ensuring that auditor satisfies
compliance requirements with relevant sections of IRDAI Guidelines on Corporate Governance. These
guidelines pose certain restrictions on number of insurance companies a statutory auditor can audit.
Currently, an auditor can conduct audit only for 3 insurance companies and not more than 2 life or 2
general. The Guidelines also mandate a mandatory joint audit for all insurance companies.
The job of actuary involves detailed analysis of data to quantify risk. It is calculating and modelling
hub of Co. Within the department, fundamentals of Insurance business are determined from pricing
to policy valuations techniques.
Role of Auditor: Auditors required to certify, whether actuarial valuation of liabilities is duly certified
by appointed actuary, assumptions for valuation are in accordance with guidelines and norms, if any,
issued by authority and/or Actuarial Society of India in concurrence with IRDA.
Hence, Auditors generally rely on Certificate issued by Appointed Actuary, certifying Policy liabilities.
However, Auditor may discuss with Actuaries with respect to process followed and assumptions made
by him before certifying Policy liabilities.
The primary objective of audit is to check and confirm that FLC requests are received within 15 days
from receipt of policy document by policy holder, verification of signatures of policy holder and
processing of FLC request within TAT( turnaround time) defined by insurer. Also checking of
appropriate a/c entries are recorded for refund.
In order to keep life insurance policy “in force” policy holder is reqd to pay premiums when due. If
payment is missed, insurer allows period of 15/30 days from premium due date for making the payment.
This period is termed as “grace period”. If the policy holder doesn’t make payment within grace period,
policy gets “lapsed”. Thus, payment within grace period is deemed to be payment on due date.
Lapsation affects all the stakeholders-policyholder, agent & insurer. Lapsed policy ceases to provide
insurance protection to insured. It forfeits benefits under the policy and cost of new policy is higher.
Agents do not get renewal premium commission if policy is lapsed.
The T&Cs of policy stipulate, where premium is not paid within grace period, policy lapses but may be
revived during life time of the life assured. Some insurers do not allow revival, if policy has remained
Role of Auditor: Check and confirm that due dates are recorded and monitored properly and polices
marked as “lapsed” on non-receipt of renewal premium within due dates/grace period. In case of revival
request, whether adequate checks in place for receipt of o/s amounts and documents are obtained
before reviving policy.
Policy Surrender
A policy becomes eligible for surrender on completion of 3 years from commencement of policy
provided that 3 years premium have been paid within due dates. The policy surrendered only when
insured person is alive.
Review of Investments
• Review Investment mgt structure to ensure adequate SODs b/w Investment front, mid and
back office
• Review SOPs prescribed by IRDA Reg
• Review insurer’s investment policy
• Review functioning, scope & minutes of Investment committee
• Compliance of all Investment regulations, various other circulars specified by IRDAI and
other regulations specified in Insurance Act, 1938;
• Review insurer’s Investment accounting & valuation policy
• Controls around personal dealings, insider trading & front running
Procedure to determine value of listed & unlisted Equity Securities & Derivative Instruments of
Insurance Co.
• Eq sec & Der instruments traded in active mkt à Fair Value on b/s date
• FV = lowest of last quoted closing prices at stock ex listed
• Unrealised gain/losses from change in FV of listed sec à Equity under ‘Fair Value Change A/C’
• On sale, p&l on sale including balance of above a/c which shall be recycled to Revenue a/c or P&L
on actual sale of security
• As per Auth. Directions, amt of Fair Value Change Account can be used for declaring bonus to
policyholders. Except for amount that is released to policyholders as per Authority’s
prescription, no other amount shall be distributed to shareholders out of Fair Value Change
Account.
• Also, any dr bal in FVC A/C shall be reduced from profit/free reserves while declaring
dividends.
• The insurer shall assess, on B/S date, whether any impairment has occurred. An impairment loss
shall be recognized as expense in Revenue/P&L to extent of difference between re-measured
fair value of security/investment and acquisition cost as reduced by any previous impairment
loss recognized as expense in Revenue/ P&L.
• Any reversal of impairment loss earlier recognized in Revenue/P&L shall be recognized in
Revenue/P&L.
• Unlisted equity securities and derivative instruments and listed equity securities and derivative
instruments that are not regularly traded in active markets shall be measured at historical cost.
Provision shall be made for diminution in value of investments. The provision shall be reversed
in subsequent periods if estimates based on external evidence show increase in value of
investment over carrying amount. The increased carrying amount of investment due to reversal
of provision shall not exceed historical cost.
Debt Securities – Debt securities, including govt securities and redeemable preference shares, shall
be considered as ‘held to maturity’ securities and shall be measured at historical cost subject to
amortization.
Audit of Premium
Following are certain illustrative points, Auditors are required to follow during Audit of Accounting
of Premiums:
I. Collection of Premium:
• The premium collections are credited to separate bank a/c and no withdrawals permitted from that
account for meeting general expenditure.
• Check whether there is daily reconciliation process to reconcile amounts collected, entered into
system and deposited into bank.
• Check that there is appropriate mechanism to ensure all collections deposited into Bank on timely
basis.
The remuneration of agent is paid by way of commission which is calculated by applying percentage to
premium collected by him. Agency commission contributes towards significant portion of expenses
incurred by Insurance Co. Commission is payable towards generation of new business and towards
settlement of renewal premium.
Role of Auditor: The Auditor during his review of Commission paid to Agents should mainly consider
following:
• Review system established by Insurer w.r.t calculation of commission to eligible agents
accurately and processing same in timely manner.
• Review commission payment system is in sync with premium collection system.
• Check whether commission paid is within limit prescribed under Insurance Act. Check whether
commission is clawed-back on cancelled policies.
• Check completeness of commission processing system.
Verification of Premiums
(i) Look into internal controls and compliance for collection and recording of premiums.
(ii) The auditor should ensure premium in respect of risks incepting during relevant year has been
accounted as premium income of that year on basis of premium revenue recognition. Also see
whether the premium received during the year but pertaining to risk commencing in following
year has been accounted for under the head ‘Premium Received in Advance’ and has been
disclosed separately.
(iii) The auditor should verify collections lodged by agents after balance sheet date to see whether
any collection pertains to risk commencing for year under audit. Check premium originally
recorded at gross figure i.e. without providing for unexpired risks & reinsurances.
(iv) The auditor should check whether Premium Registers have been maintained chronologically, for
each underwriting deptt. These fig. should tally with general ledger.
(v) The auditor should also check money collected by agents from policyholders have been received
by company as quickly as possible.
(vi) Where premium originally received has been refunded, the auditor should verify whether the
agency commission paid on such premium has been recovered.
(vii) The auditor should also check that in case of cancellation of policies/cover notes issued, no risk
has been assumed between the date of issue and subsequent cancellation thereof.
(viii) The auditor should also check whether the BGs against which policies are issued are valid and
there is tracking mechanism of amounts of policies issued against the guarantees.
Verification of Claims
Claims Provision
• Provision for all unsettled claims at year end on basis lodged/communicated by the parties
• Provision has been made for only such claims for which Co. is legally liable, considering
particularly, that
o risk was covered by policy,
o claims arose during currency of policy; and
o claim did not arise during period company was not supposed to cover the risk.
• Provision made should not be in excess of amount insured.
• Application of ‘average clause’ in case of under-insurance.
• In case of co-insurance arrangements, provisions should be made only in respect of its own
share of anticipated liability.
• Claims are provided for net of estimated salvage, wherever applicable.
Register of Claims
(i) Claims Intimation Register;
(ii) Claims Paid Register;
(iii) Claims Disbursement Bank Book;
(iv) Claims Dockets, normally containing the following records: Claim intimation, claim form,
particulars of policy, survey report, Photograph showing damage, repairer’s bills, letter of
subrogation, police report (in case of theft), fire service report, claim settlement note,
claim satisfaction note, salvage report, salvage disposal note, claims discharge voucher,
etc.;
(v) Report of quality assurance team; and
(vi) Salvage register.
Claims Paid
• Coinsurance : claims paid have been booked only in respect of co’s share and balance debited
to other insurance cos;
• Claim not paid if prem not recd as per Sec 64 VB
• If claim as per advise of other Cos whether Co recd its share of premium
• Salvage recovered accounted for and letter of subrogation obtained as per procedure
• For final settlement of claims claimant has given unqualified discharge note not involving Co
for further liability
• Whether payment made within 30 days of receipt of final doc & intt in case of delay as per
IRDAI regulation
Commission/Brokerage
(a) Ensure that commission/brokerage is not paid in excess of limits specified by IRDAI.
(b) Ensure that commission/brokerage is paid as per rates agreed with the agent and filed with
IRDAI.
(c) Ensure that commission/brokerage is paid to agent/broker who has solicited business.
(d) Ensure agent/broker not blacklisted by IRDAI
(e) Vouch disbursement entries with reference to the disbursement vouchers with copies of
commission bills and commission statements.
(f) Check whether vouchers are authorised by officers-in–charge and income tax deducted at
source.
(g) Test check correctness of amounts of commission allowed.
One is based on proportionate number of days of risk remaining to risk expired, which is called 1/365
method. The other method is by taking URR directly on 50% of premium amount.
As per Income Tax provisions, insurance companies are allowed deduction of 50 % of net premium
income in respect of Fire and Miscellaneous Business and 100 per cent of the net premium income
relating to Marine Insurance business.
Reinsurance Contracts
1) Facultative Reinsurance
It is that type of reinsurance whereby contract relates to one particular risk and is expressed in
reinsurance policy. Each transaction has to be negotiated individually. Each party has free choice i.e.,
ceding company to offer and re-insurer to accept.
Proportional Treaties- Such treaties are based on pro-rata apportionment of the sum insured,
premium and losses, according to pre-determined percentage/ratio.
Non-Proportional Treaties- Such treaties are characterised by distribution of liability b/w ceding
company and reinsurer on basis of losses rather than the sum insured, as is case in proportional
reinsurance.
The following are the other characteristics of non - proportional treaties:
• Premium is not calculated on each cession, but on whole portfolio of ceding company.
• The premium rate is predetermined.
• Cost of reinsurance can vary substantially each year, depending on premium income, loss ratio
and reinsurance marked situations.
• Normally no commission is paid.
• The auditor should check whether pattern of re-insurance underwriting for outward cessions
fits within parameters and guidelines applicable to relevant year.
• The auditor should check whether cessions been made as per stipulation applicable to various
categories of risk.
• The auditor should verify whether cessions been made as per agreements entered with
various companies.
• It should also be seen whether outward remittances to foreign re-insurers have been done as
per the foreign exchange regulations.
• Check whether commission on cession has been calculated as per terms of agreement with re-
insurers.
Re-insurance Inward:
Articles of Constitution
Article • Appointment of C&AG by President
148 • Special procedure for removal of C&AG, only on the ground of proven misbehaviors or
incapacity.
• Salary and other conditions of service to be determined by the Parliament.
Article • The C&AG’s (Duties, Powers and Conditions of Service) Act, 1971 defines these
149 functions and powers of C&G.
Article • On the advice of the C&AG, President to prescribe such form in which accounts of
150 the Union and States shall be kept.
Article • Audit reports of C&AG on A/Cs of Central/ State Government should be submitted
151 to President/Governor of State who shall cause them to be laid before
Parliament/State Legislative Assemblies.
C&AG shall hold office for term of six years or upto age of 65 years, whichever is earlier
Three Committees:
The various Ministries / Deptt of Govt are required to inform Committees of the action taken
by them on recommendations of Committees (which are generally accepted) and Committees
present Action Taken Reports to Parliament / Legislature;
[Financial committees à Report à Parliament/ State legislature
(observations/recommendations) Ministries/Dept à Inform action à Committees à Action
taken report à Parliament/State legislature]
• If A/R couldn’t be discussed in detail, written ans. obtained from dept/ministries to ensure
A/R not taken lightly by Govt even if entire report not deliberated by committee
Basic Elements of
PSU Audit
Auditor
Subject matter: This refers to information, condition or activity measured or evaluated against
certain criteria.
Subject matter information: This refers to outcome of evaluating or measuring subject matter
against criteria.
Financial audits are always attestation engagements, as they are based on financial information
presented by responsible party. Performance audits and compliance audits are generally direct
reporting engagements.
(a) Regularity- adherence of subject matter to formal criteria emanating from relevant laws,
regulations and agreements applicable to entity.
Performance Audit
A performance audit is objective and systematic examination of evidence for purpose of providing an
independent assessment of performance of govt organization, program, activity, or function in order
to provide info to improve public accountability and facilitate decision-making by parties with
responsibility to oversee or initiate corrective action.
(i) Economy: Minimize cost of resources used for an activity, having regard to qty, quality
andbest price.
(ii) Efficiency: Input-output ratio. Max output with min input. Or min input for given quality
& qtyof output
Following to be checked:
• Sound procurement policies
• Resources are protected & maintained
• Efficient utilization of physical, financial & HR
• Public sector prog/entities/ activities efficiently managed
• Objectives met cost effectively
(iii) Effectiveness: Extent to which objectives achieved & relation b/w intended & actual
impact of activity
Check:
• Objectives & means provided (legal, financial etc) for public sector prog. consistent
with policy
• Extent to which results achieved
• Assess & establish with evidence that social & economic impact due to policy or
other causes
• Identify factors inhibiting satisfactory performance
• Assess compliance with laws & regulations
• Assess effectiveness of prog or individual components
(i) Documents of the entity: Documents on administration and functions of entity, policy files,
annual reports, budget docs, accounts, minutes of meetings, information on website, internal audit
reports, electronic databases and MIS reports, RTI material etc.
(ii) Legislative documents: Legislation, parliamentary questions and debates, reports of Public
Accounts Committee, Committee on Public Undertakings, Estimates Committee and letters from MP.
(iv) Academic or special research: Independent evaluations on entity, academic research and similar
work done by other govts and other SAIs.
(v) Past audits: Past financial and performance audits of entity provide major source of info and
understanding.
(vi) Media coverage: Print and electronic media - their systematic documentation on regular basis in
a transparent manner.
• Deciding audit approach: Selection of approach also determines methods & means to conduct
performance audit.
Comprehensive Audit
Efficiency cum performance audit. Locate area of weakness and extravagance for mgt info.
Propriety Audit
Verification of transaction under test of public propriety, commonly accepted customs, & stds of
conduct.
Principles of Propriety
• Expenditure not prima facie more than what occasion demands + sufficient vigilance by
officers
• Authority utilising power to sanction expenditure not accruing to its own benefit
• Funds not to be utilised to benefit particular person(s)
• Apart from agreed remuneration & reward no other avenue benefit indirectly mgt person,
employee or others
1. Sec 143(1) requiring enquiry into certain specified matters (Covered in Co. Audit)
2. 143(6) & (7) à Supplementary & test audit
3. Sec 148 àCost records & Audit à Cost consciousness in mgt
4. Additional info. Part II of Schedule III
(1) Where person subscribed for securities of Co. acting on any statement included, or inclusion or
omission of any matter, in prospectus which is misleading and has sustained any loss or damage,
company and every person who—
(a) is a director of Co. at time of issue of prospectus;
(b) has authorized himself to be named in prospectus as director of company or has agreed to become
such director either immediately or after an interval of time;
(c) is promoter of company;
(d) has authorised issue of prospectus; and
(e) is expert referred to in sub-section (5) of sec 26, shall, without prejudice to any punishment to
which any person may be liable under sec 36, be liable to pay compensation to every person who has
sustained such loss or damage.
Where it is proved that prospectus has been issued with intent to defraud applicants for securities of
company or any other person, every person referred to in subsection (1) shall be personally responsible,
without any limitation of liability, for all or any of losses or damages that may have been incurred by
any person who subscribed to securities on the basis of such prospectus.
(b) that prospectus was issued without his knowledge or consent, and that on becoming aware of its
issue, he forthwith gave a reasonable public notice that it was issued without his knowledge or consent.
(c) that, as regards every misleading statement purported to be made by an expert or contained in
what purports to be a copy of or an extract from a report or valuation of an expert, it was a correct
and fair representation of the statement, or a correct copy of, or a correct and fair extract from,
report or valuation; and he had reasonable ground to believe and did up to the time of the issue of the
prospectus believe, that person making statement was competent to make it and that said person had
given the consent required by subsection (5) of section 26 to issue of the prospectus and had not
withdrawn that consent before delivery of a copy of prospectus for registration or, to the defendant's
knowledge, before allotment thereunder
Criminal Liability
Criminal liability for Misstatement in Prospectus –
As per Sec 34 of Companies Act, 2013, where prospectus issued, circulated or distributed includes any
statement which is untrue or misleading, every person who authorises issue of prospectus shall be
liable under section 447.
This section shall not apply to person if he proves that such statement or omission was immaterial or
that he had reasonable grounds to believe, that statement was true or inclusion or omission was
necessary.
Sec 278:
Any person who acts or induces another person to make & deliver to IT Authorities false a/c,
statement, or declaration, relating to taxable income which he knows to be false or does not believe
to be true is punishable:
• with imprisonment from 6 months to 7 years & fine if tax evaded exceeds ₹ 25 Lacs
• with imprisonment from 3 months to 2 years & fine if tax evaded is up to ₹ 25 Lacs
Rule 12A
• A CA who as authorised representative prepared return filed by assessee, has to furnish to
A.O., particulars of a/cs, statements and other docs supplied to him by assessee for preparation
of return.
• Where CA has conducted an examination of such records, he has also to submit a report on
scope and results of such examination.
• If this report contains any information which is false and which CA either knows or believes to
be false à liable to rigorous imprisonment which may extend to 7 years and fine.
Sec. 271J
For incorrect info in any report or certificate furnished under this Act or Rules, A.O. or CIT (Appeals)
may impose a penalty of ₹ 10,000 for each such report or certificate.
Internal Audit Function: A function of entity that performs assurance and consulting activities
designed to evaluate and improve effectiveness of entity’s governance, risk management and internal
control processes (GRC).
Direct Assistance: The use of internal auditors to perform audit procedures under direction,
supervision and review of external auditor.
Evaluating whether work of Internal Audit Function can be used for Audit Purpose
(a) The extent to which internal audit function’s organizational status and relevant policies and
procedures support objectivity of internal auditors;
(b) The level of competence of internal audit function; and
(c) Whether internal audit function applies a systematic and disciplined approach, including quality
control. (DISCO)
Determining Nature & Extent of work of Internal Audit Function that can be used
Types of Work of internal audit function that can be used by external auditor include following:
• Testing of operating effectiveness of controls.
• Substantive procedures involving limited judgment.
• Observations of inventory counts.
• Tracing transactions through the information system relevant to financial reporting.
• Testing of compliance with regulatory requirements.
• In some circumstances, audits or reviews of financial information of subsidiaries that are not
significant components to group (where this does not conflict with the requirements of SA
600).
To determine adequacy of specific work performed by internal auditors for external auditor’s
purposes, external auditor shall evaluate whether:
i. The work was performed by internal auditors having adequate technical training and
proficiency;
ii. The work was properly supervised, reviewed and documented;
iii. Adequate audit evidence has been obtained to enable internal auditors to draw reasonable
conclusions;
Written Agreements: Prior to using internal auditors to provide direct assistance for purposes of audit
(a) Obtain written agreement from authorized representative of entity that IA will be allowed to
follow external auditor’s instructions, and entity will not intervene in work the internal auditor
performs for external auditor; and
(b) Obtain written agreement from internal auditors that they will keep confidential specific matters
as instructed by external auditor and inform external auditor of any threat to their objectivity.
(b) Relate to higher assessed RMM where judgment required in performing relevant audit procedures
or evaluating audit evidence gathered is more than limited;
(c) Relate to work with which internal auditors have been involved and which has already been, or will
be, reported to Mgt or TCWG by internal audit function; or
(d) Relate to decisions external auditor makes in accordance with this SA regarding internal audit
function and use of its work or direct assistance.
“If you want to fly, give up everything that Weighs you down”
• Mgt audit is concerned with “Quality of managing”, whereas operational audit focuses on “Quality of
operations”.
• Management audit is “Audit of management” while operational audit is “Audit for the management”.
The focus of mgt audit is on “Quality of Decision Making” rather than effectiveness or efficiency of
operations.
• The basic difference b/w two audits, then, is not in method, but in level of appraisal. In a mgt audit,
the auditor is to make his tests to the level of top management, its formulation of objectives, plans
and policies and its decision making.
Example:
• If Co. facing issues due to long decision making cycles à Mgt Audit
• If issues due to policy implementation à Operational Audit
3. Allocation of Personnel
• Persons selected & assigned should have good understanding of audit theory, fundamentals
of organisation & mgt
• Basic knowledge of:
Ø Technology & commercial practices
Ø Commerce, law, tax, cost a/c, Economics, EDP systems
6. Frequency
Vary as per nature, size & structure of organisation. Interval shouldn’t exceed 3 years.
2. Control: Mgt auditor evaluates effectiveness of controls, auditees may feel that auditor’s
report might create incompetent impression on mgt, this creates feeling of antagonism
3. Resistance to change: Auditor’s study of systems & procedures give room for
recommendations for changes in systems.
1. The audit is part of an overall programme mandated by higher-level authority to meet higher-level
organisational needs for both protection and maximum constructive benefit.
2. The objective of review is to provide maximum service in all feasible managerial dimensions.
3. The review will be conducted with minimum interference with regular operations of the operating
personnel.
4. the responsible officers will be kept fully informed and have opportunity to review findings and
recommendations before any audit report is formally released.
It is essential to create an atmosphere of trust and friendliness so that audit reports will be
understood in their proper perspective.
1. Constructive criticism - He should also make obvious in his report the value of his comments in
tangible terms. Only then would suggestions carry weight with the auditees and they will feel convinced
that the auditor has been objective in his remarks in the report.
2. Reporting methods - Adopting friendly but firm tone in report. It is always possible to disagree
without being disagreeable and to criticise without being critical. The reports should concentrate on
areas that need improvement rather than listing inefficiencies and deficiencies in performance of
auditee.
3. Participative approach - Auditor’s reports have better acceptability if improvements suggested are
discussed with those who have to implement them and made to feel that they have participated in the
recommendations made for improvements.
It involves evaluating the effectiveness & efficiency of operations. Not a one-time activity should be
conducted at least once in 3 years.
XYZ, a manufacturing unit does not accept recommendations for improvements made by Operational
Auditor. Suggest an alternative way to tackle hostile management.
While conducting operational audit auditor has to come across many irregularities and areas where
improvement can be made and therefore gives his suggestions and recommendations.
These suggestions and recommendations may not be accepted by hostile managers and there may be
cold war between operational auditor and managers. This would defeat purpose of operational audit.
The Participative Approach comes to help of auditor. In this approach auditor discusses ideas for
improvements with those managers that have to implement them and make them feel that they have
participated in recommendations made for improvements. By soliciting views of operating personnel,
operational audit becomes a co-operative enterprise.
This participative approach encourages auditee to develop friendly attitude towards auditors and look
forward to their guidance in more receptive fashion. When participative method is adopted then
resistance to change becomes minimal, feelings of hostility disappear and gives room for feelings of
mutual trust. Team spirit is developed. Auditors and auditee together try to achieve common goal. The
proposed recommendations are discussed with auditee and modifications as may be agreed upon are
incorporated in operational audit report.
With this attitude of auditor, it becomes absolutely easy to implement proposed suggestions as auditee
themselves take initiative for implementing and auditor does not have to force any change on auditee.
Hence, the Operational Auditor of XYZ manufacturing unit should adopt the above mentioned
participative approach to tackle hostile management of XYZ.
Operational audit is considered as a specialised management information tool to fill the void that
conventional information sources fail to fill. Conventional sources of management information are
departmental managers, routine performance report, internal audit reports, and periodic special
investigation and survey. These conventional sources fail to provide information for best direction of
departments. The shortcomings of these sources can be stated as under:
(i) Executives and managers are too preoccupied with implementation of plans and achieving of
targets.
(ii) Managers or their aides are generally relied upon for transmitting information than for booking
for information or for analysing situations.
(iii) The information that is transmitted by managers is not necessarily objective - often it may be
biased for various reasons.
(iv) Conventional internal audit reports are often routine and mechanical in character and have definite
leaning towards accounting and financial information. They are also historical in nature.
(v) Other performance reports contained in annual audited accounts and routine reports prepared by
operating departments have own limitations.
1. Perception - Traditionally, internal auditors have been engaged in a sort of protective function. They
view and examine internal controls in financial and accounting areas to ensure that possibilities of loss,
wastage and fraud are not there; they check accounting books and records to see, whether internal
checks are properly working and resulting accounting data are reliable.
2. Issues - The basic difference that exists in technique of operational auditing is in auditor’s role in
recommending corrections or in installing systems and controls.
A further distinction lies in attitude and approach to whole auditing proposition. Every aspect of
operational auditing programme should be geared to management policies, objectives and goals.
3. Objectives - Main objective of operational auditing is to verify fulfilment of plans and sound business
requirements as also to focus on objectives and their achievement objectives; operational auditor
should not only have a proper business sense, he should also be equipped with thorough knowledge of
policies, procedures, systems and controls, he should be intimately familiar with business.
Today, however, concept of modern internal auditing suggests that there is no difference in internal
and operational auditing. The modern internal auditing performs both protective as well as constructive
functions.
2. He should ask the who, why, how of everything. He should try to visualise whether simpler alternative
means are available to do a particular work.
3. He should try to see everything as to whether that properly fits in business frame and organisational
policy. He should be persistent and should possess attitude of skepticism.
4. He should imbibe collaborative and constructive approach rather than fault-finding approach and
should give feeling that his efforts are to help to attain an improved operation and not merely fault
finding.
5. If auditor succeeds in giving feeling of help and assistance through constructive criticism, he will
be able to obtain co-operation of persons who are involved in operations. Try to develop a team
comprised of people of different backgrounds. The involvement of technical people in operational
auditing is generally helpful.
(ii) Area - Financial audits are restricted to matters directly affecting appropriateness of presented
financial statements but operational auditing covers all activities that are related to efficiency and
effectiveness of operations directed towards accomplishment of objectives of organization.
(iii) Reporting -The financial audit report is sent to all stockholders, bankers and other persons having
a stake in the Organisation. However, operational audit report is primarily for management.
(iv) End Task - The financial audit has to report findings to persons getting the report as its end
objective, however, the operational auditing is not limited to reporting only but includes suggestions
for improvement also.
To determine whether the system or procedure is meeting current requirements, the following among
other things should be considered:
1. Is the system or procedure designed to promote achievement of company’s objectives, and is it
accomplished effectively?
2. Does the system or procedure operate within framework of organisational structure?
3. Does system or procedure adequately provide methods of control in order to obtain maximum
performance with least expenditure of time and effort?
4. Does system or procedure provide means for effective coordination between one deptt and another?
5. Have all required functions been established?
Q. “In reviewing any System or Procedure, the management auditor must concern himself with its
purpose as well as its design.” Elucidate how you as a management auditor will study system and
procedural functions?
In the study of the systems and procedural functions, the auditor should ask himself:
1. Is the function properly located in organisation?
2. Do the staff personnel have necessary training and experience to perform the work?
3. Has a definite programme been established and has been taken for its attentive accomplishment?
4. Is productivity satisfactory?
“Believe you can & you are halfway there”
Importance
• To confirm that the business is what it appears to be;
• To identify potential ‘deal killer’ defects in target company and avoid bad business
transaction;
• To gain information that will be useful for valuing assets, defining representations and
warranties, and/on negotiating price concessions; and
• To verify that transaction complies with investment or acquisition criteria.
Classification
• Commercial/Operational: Evaluation from commercial, strategic and operational perspectives.
For example, whether proposed merger would create operational synergies.
• Financial: Analysis of books of accounts and other info pertaining to financial matters of
entity.
• Tax: The accountant has to look at tax effect of merger or acquisition.
• Information system: It pertains to all computer systems and related matter of entity.
• Legal: Legal aspects of functioning of Entity are reviewed.
• Environmental Due Diligence: It is carried out in order to study entity’s environment, its
flexibility and adaptiveness to acquirer entity.
• Personnel: to ascertain that entity’s personnel policies are in line or can be changed to suit the
requirements of restructuring.
Over-Valued Assets
• Uncollected/uncollectable receivables.
• Obsolete, slow non-moving inventories or inventories valued above NRV
• Underused or obsolete Plant and Machinery and their spares; asset values which have been
impaired due to sudden fall in market value etc.
• Intangible assets of no value
• Litigated assets and property.
• Investments carried at cost though realizable value is much lower.
• Investments carrying a very low rate of income / return.
• Infructuous project expenditure/deferred revenue expenditure etc.
Work approach to DD
• Reviewing & reporting on financials submitted by target Co.
• Assessing the business first hand by a site visit
• Working through the due diligence process with acquisitioning Co. or investor by defining key
areas
• Helping prepare an offer based on completing of due diligence
Contents of DD Report
• Executive summary
• Intro.
• Background of Co.
• Objective of DD
• Terms of reference & scope of verification
• Brief history of Co.
• Assessment of Financial Liabilities
• Assessment of valuation of assets
• Assessment of Net Worth
Periodicity Not limited by rigid time frame Qtrly, half yearly or annually
Steps in Investigation
1. Determination of objectives and establishment of scope of investigation.
2. Formulation of the Investigation programme.
Types of Investigation
Statutory Non-Statutory
Investigation on behalf of
individual or firm proposing to buy
a business
Order passed by court or Tribunal requiring investigation à CG shall order investigation into affairs
of Co.
Power of Inspector to conduct investigation into affairs of related companies etc (Sec 219)
It provides that an inspector may also investigate, subject to approval of CG, into affairs of—
a) any other body corporate which is, or has at any relevant time been company’s subsidiary or
holding Co, or a subsidiary of its holding Co;
b) any other body corporate which is, or has at any relevant time been managed by any person as
MD or as manager, who is, or was, at relevant time, MD or manager of company;
c) any other body corporate whose BOD comprises nominees of company or is accustomed to act
in accordance with directions or instructions of company or any of its directors; or
d) any person who is or has at any relevant time been Co’s MD or manager or employee.
Evidence from place o/s India: If in course of investigation, application made to competent court in
India by inspector stating that evidence may be available in a country or place o/s India, such court
may issue a letter of request to court or authority in such country or place for seeking such evidence.
Who can act as inspector: A Body Corporate, FIRM or Other association can’t be appointed as
inspector. Only Individual can be appointed.
MCQ: Inspector not to keep books & papers in custody for more than 180 days.
(a) Prepare condensed income statement from Statement of P&L for previous 5 years, showing items
of income and expenses, amounts of gross and net profits earned and taxes paid annually during each
of 5 years. Amount of maintainable profits determined on basis of foregoing statement should be
increased by amount by which these would increase on investment of borrowed funds.
(b) Compute under-mentioned ratios separately to show trend as well as changes that have taken
place in financial position of Co:
(i) Sales to Average Inventories held.
(ii) Sales to Fixed Assets.
(iii) Equity to Fixed Assets.
(iv) Current Assets to Current Liabilities.
(v) Quick Assets (the current assets that are readily realisable) to Quick Liabilities.
(vi) Equity to Long Term Loans.
(vii) Sales to Book Debts.
(viii) Return on Capital Employed.
Steps involved in the verification of assets and liabilities included in Balance Sheet of borrower
company which has been furnished to Bank
a. Fixed Assets: Gross value, Depreciation, Charge on asset, Revaluation
b. Inventory : Nature & types, if pledged for loan then disclose amt of loan
c. Trade Receivables:
• Debts where credit period not expired
• Debts due within 6 months
• Debts due but not recovered for over 6 months
d. Investments: Date of purchase, cost, nominal & market value
e. Secured & unsecured loans: Details of assets pledged should be disclosed
f. Provision for tax: PY upto which tax assessed
g. Insurance: Schedule of insurance policies
h. Contingent liabilities: Ensure completeness of disclosure
B. Inflating cash payment – Cash payment frauds may be in the form of:
(i) Making double payment of invoice or paying false invoice.
(ii) Paying personal expenses out of business by falsifying details. e.g., showing betting losses
as advertisement charges.
(iii) Withdrawing unclaimed credit balances of customers or amounts falsely credited in accounts
of parties.
(iv) Falsely adjusting refund in account of customer and withdrawing credit balance.
(v) Wrong totalling of wage sheets and misappropriating the excess amount withdrawn from the
bank for payment of wages.
Audit procedures:
ü All evidence as regards cash payments made, including acknowledgement by parties, should be
carefully scrutinised.
ü In case where a figure appears to have been erased or altered on receipts issued by party, on
reference to party concerned, actual amount paid to him should be confirmed.
ü All payments by bearer cheques should be examined.
ü The system of recording of wages should be reviewed, for possible over-totalling of wage
sheets, and entries in them of dummy workmen.
ü The system of ordering and receiving goods reviewed to confirm that no payment made in
respect of supplies not received.
ü Confirmations should be obtained from partners or Directors in respect of amounts shown to
have been paid to them.
D. Customers Ledger
(i) Teeming & lading
(ii) Misappropriating amount collected from customer and subsequently adjusting his account
by crediting amount on account of allowance or a rebate for excess price charged.
(iii) Crediting amount received from a customer to account of another customer and
subsequently withdrawing amount wrongly credited.
Audit procedures:
ü Spl attention should be paid to allowances adjusted on account of goods returned or difference
in price
ü To confirm that accounts of customers have been debited in respect of goods supplied to them,
entries in Order Book should be cross-checked with those in Sales Day Book where the same is
kept.
ü The accountant should obtain confirmation of customers in respect of amounts standing in
accounts.
ü Those of them who have no balance in accounts should be requested to confirm statement of
their account (which should be sent to them) for ascertaining that the entries shown therein
were genuine.
E. Inventory Fraud
• Employees remove goods from premises
• Theft of goods concealed by writing them off
• Inventory records manipulated by employees
• Inflating quantities issued for production for defalcating raw material
Verification Procedure for Defalcation of inventory - Such thefts usually are possible through collusion
among no. of persons. Therefore, for their detection, entire system of receipts, storage and despatch
of all goods, etc. should be reviewed to localise the weakness in system.
The determination of factors which have been responsible for theft and establishment of guilt would
be difficult in the absence of:
(a) a system of inventory control, and existence of detailed record of the movement of inventory, or
(b) availability of sufficient data from which such a record can be constructed.
The step in such an investigation is to establish the different items of inventory defalcated and their
quantities by checking physically the quantities in inventory held and those shown by Inventory Book.
For detecting such shortages, investigating accountant should take assistance of an engineer. For that
he will be more conversant with factors which are responsible for shortage in production and thus will
be able to correctly determine the extent to which the shortage in production has been inflated.
In this regard, guidance can also be taken from past records showing the extent of wastage in
production in the past. Similarly, he would be able to better judge whether the material issued for
production was excessive and, if so to what extent.
The per hour capacity of the machine and the time that it took to complete one cycle of production,
also would show whether the issues have been larger than those required.
B. Ltd Co.
ü Auth & issued share capital
ü Uncalled liability on shares
ü Capital divided in classes à rights of each class
ü Mortgage or charge on assets à registrar of charges
ü Price at which shares offered
• Public co -> quoted price
• Pvt co -> valuation
(1) Profit reports can be required as part of general investigation into purchase of a business or,
(2) By banks and financial institutions with regard to project cash flow and profitability statements
for appraisal of loan applications submitted by the intending borrowers.
• All forecasts depend on nature of business with its numerous and substantial uncertainties.
• Therefore, such forecasts are not capable of verification in same way as F.S. which present results
of a completed accounting period.
• Normally, such situations involve special review as these depart from auditor’s traditional role of
expressing an opinion in relation to past events.
Areas where services of Forensic Audit are in great demand in following areas
• Criminal Investigation: Matters relating to financial implications services of forensic
accountants are availed of. Report of accountants is considered in preparing and presentation
as evidence.
• Professional Negligence Cases: Professional negligence cases are taken up by forensic
accountants. Non confirmation to Generally Accepted Accounting Standards (GAAS) or
noncompliance to auditing practices or ethical codes of any profession, Forensic Auditors are
needed to measure loss due to such professional negligence or shortage in services.
• Fraud Investigation & Risk/Control Reviews: Forensic accountants render such services both
when called upon to investigate specific cases as well for review of or implementation of
Internal Controls. Another area of significance is Risk Assessment and Risk Mitigation.
• Settlement of Insurance claims: Insurance cos engage forensic accountants to have accurate
assessment of claims to be settled. In case policyholders seek help of forensic accountant when
they need to challenge claim settlement as worked out by insurance companies. A forensic
accountant handles claims relating to consequential loss policy, property loss due to various
risks, fidelity insurance and other types of insurance claims.
• Dispute settlement: Business firms engage forensic accountants to handle contract disputes,
construction claims, product liability claims, infringement of patent and trademarks cases,
liability arising from breach of contracts and so on.
2. Develop Plan: Consider the knowledge gained by meeting with client and carrying out initial
investigation and set out objectives to be achieved and methodology to be utilized to
accomplish them.
3. Obtain relevant evidence: The evidence should be sufficient to ultimately prove identity of
fraudster(s), mechanics of fraud scheme, and amount of financial loss suffered.
5. Reporting
• Issuing report is final step of fraud audit. Auditors will include info detailing fraudulent
activity, if any has been found.
• The client will expect report containing findings of investigation, including summary of
evidence, a conclusion as to amount of loss suffered as result of fraud and to identify those
involved in fraud.
6. Court Proceedings: Evidence gathered will be presented in court proceedings & team members
may be called.
(VIII) Laboratory Analysis of Physical and Electronic Evidences: Use of Computer Forensics &
protection of evidence.
2. RISK ANALYSIS
Internal Environment Risk & External Environment Forces
3. AUDIT PROCESS
3.1. Preliminary understanding of scope and incident coverage
(i) Identification of all related data elements
(ii) Preparation of a List of "persons of interest" for interview
(iii) Obtain management approval for scope
3.2. Collect Evidence
3.3. Conduct Interviews
3.4. Analyse findings
3.5. Validate Inferences and conclusions
5. AUDIT RECOMMENDATIONS
5.1 Logical Framework Approach
5.2 Preconditions and Risks
(iv) Training programmes for staff (including articled and audit assistants) concerned with
assurance functions, including availability of appropriate infrastructure.
(v) Compliance with directions and / or guidelines issued by Council to Members, including Fees
to be charged, Number of audits undertaken, register for Assurance Engagements
conducted during year.
(vi) Compliance with directions and / or guidelines issued by Council relating to article assistants
and / or audit assistants, including attendance register, work diaries, stipend payments.
Statement of Peer Review aims to confine scope of review to preceding 3 years since this would
establish the consistency or deviations, if any, in respect of procedures followed by PU.
Types of Entities
Level 1 : (Once in 3 years*)
PU which has undertaken audit of any of the below entities:
• SCA of any Banks or Insurance Cos.
• CSA of PSU & Central Coop societies with turnover > 250 Cr. Or NW > 5 Cr.
• SA of AMCs/ MFs
• Listed Enterprises (India or o/s India) whether equity/debt
• Body Corp. including trust covered under public interest entities
• NBFC with deposits >= 100 Cr
• Stat. Audit of Entities preparing the F.S. as per Ind AS
• Entities raised funds from public, banks or financial institutions of over 50 Cr
• Entities raised donations/contributions over 50 Cr
• N.W. > 100 Cr or turnover of 250 cr or above
• Funding by CG/SG of over 50 Cr
Any Practice Unit not selected for Peer Review, may suo moto apply to Board for conduct of Peer
Review. Board shall act upon same within 30 days from date of receipt of such request.
An auditee (Client) may request Board for conduct of Peer Review of its auditor (Practice Unit). Board
shall act upon same within 30 days from date of receipt of such request.
Qualified Assistant
• CA + No disqualification u/s 8 or 21 of CA Act 1949
• Name intimated to Board & PU b4 P/R
• Sign Declaration of Confidentiality
• No direct interface with PU or Board
• Should be from firm of reviewer as partner or Paid Asst as per records of ICAI
Obligation of Reviewer
• The reviewer shall not take PU’s client’s file or records examined by him
• Complete review in prescribed time & submit report to Board
• The Reviewer shall document all his working papers and submit a copy of his working papers to
the Board, if called for by the Board within 18 months of submission of Review Report.
(i) Notification to PU : PU which has been selected for Peer Review shall be notified by Board.
(ii) A detailed declaration cum questionnaire in the form approved by Board shall be submitted by PU
within 7 days from date PU has been notified by Board so that Reviewer to be allotted from Panel of
3 reviewers can be identified by Board as per declaration cum questionnaire submitted by PU.
(iv) PU shall select one out of three Reviewers & intimate to Board within 7 days of receipt of names.
(v)The Board shall intimate Reviewer so selected and seek consent within 7 days.
Planning:
i)Questionnaire: On intimation given by Board of Reviewer’s consent, PU shall within 2 days furnish
following info to reviewer:
Proceedings against PU or partners or qualified assistants during 3 yrs preceding period of review i.e.
till date of submission of questionnaire
ii) Information to be furnished by Peer Review Board: Board shall call for relevant infor. from the
UDIN Directorate and may share concerned details with Peer Reviewer which shall form part of Peer
Review.
Execution
Onsite Review: This on-site Review should not extend beyond 7 working days based on size of PU.
(b) From initial sample selected at planning stage, Reviewer, in consultation with Peer Review
Board, may reduce or enlarge initial sample size of assurance service engagements for Review.
Substantive Approach: Review of workpapers to check work done as per TPE Stds
Reporting
ü Before making report to Board communicate findings to PU if systems/procedures are deficient
or he needs clarification
ü PU shall reply back within 5 days
ü If reviewer satisfied à submit P/R Report to Board + initial findings + response of PU (A Copy
to PU)
ü Not satisfied à Modified report to Board + Initial findings + response of PU (Copy to PU)
ü Follow on Review after 1 year (maybe reduced to 6 months) from date of issue of MR
PU can’t continue with expired certificate and all docs will be invalid if signed in intervening period à
so PU should submit docs & get PR completed 1 month before expiry
In contrast, quality review is supposed to act as deterrent. Quality Review Board (QRB) is constituted
by CG and is independent of ICAI. As per Sec 28A of CA’s Act, CG has authority to constitute QRB
which carries out supervisory and disciplinary functions. Quality review normally pertains to one
particular audit conducted by audit firm. Main objective is to find errors or inadequacies committed
by auditor. Serious errors lead to disciplinary action against member.
Examples of Imp areas as per Quality Review Report 2018-19 in accordance with SQC-1 are:
• Whether audit firm establishes and implements policies and procedure on all element of
system of quality control
• Whether EQCR review at appropriate time for planning audit, significant audit judgement, and
expressions of audit opinion.
• Whether audit firm assigns person responsible for monitoring system of quality control with
appropriate experience & sufficient and appropriate authority.
• Whether audit firm obtain, at least annually, confirmation letter concerning compliance with
policies and procedure for maintenance of independence from all person required to maintain
independence.
• Whether audit firm perform independence confirmation procedure before acceptance and
continuance of audit engagement, and when issuing auditor’s report appropriately confirms
there was no change in status of independence.
• Whether audit firm develop and provides education/ training program that fully take into
account knowledge, experience, competence and capabilities of professional staff.
QRB Composition
• CP & 10 other members (CG nominates CP & 5 members, other 5 by Council ICAI)
QRB to review audit of Cos. under NFRA applicability only if referred by NFRA. For others it can do
suo moto.
Powers of QRB
• On its own or through spl arrangement with ICAI, evaluate quality of work of members
• Lay down evaluation criteria for evaluating the services of members
• Call for info from members, ICAI, Council, Clients etc.
• Invite experts for expert/technical advice or opinion
• Make recommendations to council to guide members to improve quality of service
Quality review excludes Internal/Tax/GST & other spl purpose audits. Also excludes employment
services.
Selection of Audit Firms (Criteria)
• Other than those covered by NFRA Rules
Ø risk based selection including regulatory concerns pointing towards stakeholder risk
Ø on account of being part of a sector identified as being susceptible to risk on basis of
market intelligence reports.
Ø reported fraud or likelihood of fraud.
Ø serious a/c irregularities in the f/s highlighted by the media and other reports
Ø major non-compliances under relevant statutes highlighted in past reviews
• Joint Audits à All joint auditors maybe reviewed
• Also review firms if recommendation by RBI, SEBI, IRDA, MCA, NFRA
• Not consider complaints by others à dealt by CA Act 1949
Submit 6 annual declarations along with relevant evidences, to QRB regarding participation in training
workshops/programmes.
(b) Elements relating to quality control framework adopted by audit firm in conducting audit:
i. An indication whether AFUR has implemented system of quality control with ref. to quality control
Stds.
ii. A statement indicating that system of quality control is responsibility of AFUR.
iii. An opinion on whether AFUR's system of quality control is designed to meet requirements of quality
control stds for attestation services and whether it was complied with during period reviewed to
provide reasonable assurance w.r.t complying with T/P/E stds, other guidance and laws and regulations
in all material respects.
iv. Where reviewer concludes modification in report is necessary, description of reasons with
suggestions.
v. A reference to preliminary report.
vi. An attachment which describes quality review including info on planning and performing the review.
(a) Make recommendations to Council of ICAI u/s 28B(a) of CA Act, 1949 for referring case to
Director (Discipline) of ICAI for consideration and necessary action under CA Act, 1949.
(b) Issue advisory and guidance to the AFUR u/s 28B(c) of CA Act, 1949 for improvement in quality of
services and adherence to various statutory and other regulatory requirements. A copy of such
advisory may also be sent to ICAI for information.
(c) Inform details of non-compliance to regulatory bod(y)/ies relevant to entity as may be decided by
Board.
(e) In case of review arising out of reference received from regulatory body, inform results of review
and details of action taken to the concerned regulatory body.
Audit Report
Form 3CA: Person carrying Business/profession + reqd audit under any other law (Eg Company)
Form 3CB: Person carrying business/profession but no audit reqd by other law
Form 3CD: Particulars to be furnished with Audit Report
Notes:
• 44AD isn’t applicable to commission income
• Computation of Turnover to determine eligibility of Tax Audit
(i) Discount allowed in sales invoice deducted from turnover.
(ii) Cash discount not allowed in a cash memo/sales invoice is in nature of a financing charge
and is not related to turnover. Therefore, should not be deducted from the turnover.
(iii) Turnover discount is normally allowed to a customer if sales made to him exceed a
particular quantity. As per trade practice, it is in nature of trade discount and should be
deducted from the figure.
(iv) Special rebate allowed to customer can be deducted from sales if it is in nature of trade
discount. If it is in nature of commission on sales, then it cannot be deducted.
NR Co. engaged in extraction of mineral oils claiming lower than deemed income u/s 44BB
Clause 8: Auditor reqd to mention clause of sec 44AB under which tax audit is conducted.
Clause 12: If p&l includes profits & gains assessable to tax on presumptive basis, indicate the amt &
relevant sections. Tax auditor will state clause (c) of sec 44AB under clause 8 & as per clause 12
report profits u/s 44BB of Income Tax Act 1961.
Non- Maintenance of Stock Register by Printing Entity that receives variety of Job Orders & having
variety of Materials à Is it fine?
• Explanation of entity for use of varieties of raw materials for different jobs undertaken may
be valid.
• Auditor needs to verify specified job-orders received and different raw materials purchased
for each job separately.
• The use of different papers (quality, quantity and size) ink, colour etc. may be examined.
• Auditor enquire with other similar printers in locality to ensure prevailing custom.
• At the same time, he has to report and certify under the clause 35(b) and clause 11(b) of Form
3CD read with the Rule 6G(2) of the Income-tax Act, 1961, about details of stock and account
books (including stock register) maintained.
• He (or his deputy) must verify closing stock of raw materials, work-in-progress and finished
goods of the concern, at least on date of its balance sheet.
• In case the said details are not properly maintained, he has to specifically mention the same
with reasons for non-maintenance of stock register by the entity.
Audit checklist:
• Ask assessee whether he has converted any capital asset into SIT during PY.
• Details of capital assets converted into SIT during the year to be given.
• Check whether assessee has converted any capital asset into SIT during year under audit.
• If yes, then obtain details as to nature of such capital asset, its date and cost of acquisition and
amount at which asset has been converted into stock-in-trade.
Clause 16: Amounts not credited to the profit and loss account, being,-
(a) the items falling within the scope of section 28;
(b) proforma credits, drawbacks, refund of duty of customs or excise or service tax, or sales tax or
VAT, where such credits, drawbacks or refunds are admitted as due by authorities concerned;
(c) escalation claims accepted during the previous year;
(d) any other item of income;
(e) capital receipt, if any.
• Auditor should obtain list of all properties trfd by assessee during PY and furnish amt of
consideration received or accrued, as disclosed in books of account of assessee.
• For reporting value adopted or assessed or assessable, auditor should obtain from assessee copy of
regd sale deed. In case property is not regd, auditor may verify relevant docs from relevant authorities
or obtain third party expert like lawyer, solicitor representation to satisfy compliance of sec 43CA /
section 50C of the Act.
Clause 25: Any amount of profit chargeable to tax under section 41 and computation thereof.
The tax auditor should obtain a list containing all the amounts chargeable under section 41 with the accompanying
evidence, correspondence, etc. He should in all relevant cases examine the past records to satisfy himself about
the correctness of the information provided by the assessee. The tax auditor has to state the profit chargeable
to tax under this section. This information has to be given irrespective of the fact whether the relevant amount
has been credited to the profit and loss account or not. The computation of the profit chargeable under this
clause is also to be stated.
The tax auditor should maintain the following in his working papers for the purpose of furnishing details required
in the format provided in the e-filing utility:
S No. Name of person Amt of income Section Description of transn Computation if any
Clause 26 (A) dealt GST/VAT payable pre-existed on the first day of previous year but was not
allowed in assessment of any preceding previous year and was either paid {clause 26(A) (a)}/ or/ and/
not paid during the previous year {clause 26(A)(b)}
Clause 27(a): Amount of GST credits availed of or utilized during the PY and its treatment in profit
and loss account and treatment of outstanding GST credits in the accounts.
The amount of CENVAT/GST availed and utilised should be reported under this sub-clause. In some
cases, CENVAT/GST availed may be lesser than the CENVAT /GST credit utilised during the year on
account of opening balance in CENVAT/GST account or vice-versa and as such it would be advisable, in
order to avoid any misleading conclusion and inferences, to report the opening and closing balances of
CENVAT/GST. Further the sub-clause requires reporting of the credits availed of or utilized during
the previous year, it is desirable to report both the credits availed and the credits utilized.
In so far as the reporting of accounting treatment of CENVAT/GST credit is concerned the clause
requires that its treatment in profit and loss account and the treatment of outstanding CENVAT/GST
credit in the account have to be reported upon.
The tax auditor should verify and maintain the following information in his working papers for the
purpose of reporting in the format provided in the e-filing utility:
CENVAT/GST Amount Treatment in P&L A/c
Opening Balance
GST Availed
GST Utilised
Closing balance
Sec 56(2)(x): where any person receives, in any PY, from any person or persons on or after 1.4.17,—
(a) any sum of money, w/o consideration, > 50,000, whole of aggregate value of such sum;
(b) any immovable property,—
(A) without consideration, SDV > 50,000, SDV of such property;
(B) for a consideration, (SDV- consideration), if amount of such excess is more than higher of
following amounts:—
(i) 50,000; and
(ii) amount equal to 10% of consideration:
(c) any property, other than immovable property,—
(A) without consideration, aggregate FMV of which exceeds 50,000, whole of aggregate FMV of such
property;
(B) for a consideration < aggregate FMV of property by an amount exceeding 50,000, à (FMV-
Consideration)
Clause 30: Details of any amount borrowed on hundi or any amount due thereon (including interest on
the amount borrowed) repaid, otherwise than through an account payee cheque. [Section 69D].
30A. (a) Whether primary adjustment to transfer price, as referred to in Sec 92CE(1), has been made
during the previous year? (Yes/No)
(b) If yes, please furnish the following details:-
(i) Under which clause of sub-section (1) of section 92CE primary adjustment is made?
(ii) Amount (in Rs ) of primary adjustment:
(iii) Whether excess money available with associated enterprise is required to be repatriated to
India as per the provisions of of section 92CE(2)? (Yes/No)
(iv) If yes, whether the excess money has been repatriated within the prescribed time (Yes/No)
(v) If no, the amount (in Rs) of imputed interest income on such excess money which has not been
repatriated within the prescribed time.
For reference:
Sec 269SS: Prohibits Accepting loan/deposit from a person(cumulatively) >= 20,000 otherwise than
by a/c payee cheque/bank draft
Section 269ST: no person shall receive >=2L from a person/day in a single
transaction/event/occasion during PY other than a/c payee cheque/bank draft/ECS
Clause 31 (ba) particulars of each receipt in an amount exceeding limit specified in Sec 269ST (i.e. 2L),
in aggregate from a person in a day or in respect of a single transaction or in respect of transactions
relating to one event or occasion from a person, during PY, where receipt is otherwise than by cheque
or bank draft or use of ECS through bank account:-
i. Name, address and PAN (if available with assessee) of payer
ii. Nature of transaction
iii. Amount of receipt
iv. Date of receipt
Particulars need not be given in case of receipt by or payment to a Govt. company, a banking Company,
a post office savings bank, cooperative bank
• Details reqd to be furnished for principal items of goods traded or manufactured or services
rendered.
Demand raised under Tax laws other than Income tax Act (Clause 41)
Please furnish details of demand raised or refund issued during PY under any tax laws other than
Income Tax Act, 1961 and Wealth tax Act, 1957 along with details of relevant proceedings.
• Tax auditor should obtain copy of all demand/ refund orders issued by govt authorities during
PY under other tax laws. Even though demand order issued in current PY it may relate to other
PY then also reporting reqd.
• Adjustments of refund against demand also to be reported.
With respect to Form 61, tax auditor should verify whether taxpayer has entered into any transaction
where the other party was required to quote PAN. He should verify whether taxpayer has obtained
declaration in Form No. 60 where the other party has not furnished his PAN. Wherever the taxpayer
has received declarations in Form No. 60, the auditor should verify if the taxpayer has filed Form No.
61 including therein all the necessary particulars.
With respect to Form 61A, the tax auditor should ascertain whether the taxpayer is required to report
any transactions under Section 285BA read with Rule 114E. It may be noted that specified transactions
under Section 285BA include the issue of bonds, issue of shares, buyback of shares by a listed
company, etc. These transactions may not happen every year and hence special attention should be
given in the year when a company taxpayer issues any security or a listed company undertakes buyback
of shares.
While verifying the same, the tax auditor should ensure that the provisions of Rule 114E(3) have been
properly considered and applied. Failure to do so may result in a certain transaction not being reported.
It may be noted that the payment may be received for various transactions and on different dates,
and hence these may not be covered under Section 269ST but will have to be reported under Section
285BA.
With respect to Form 61B, the tax auditor should review the due diligence procedures carried out by
the taxpayer in accordance with provisions of Rule 114H and the results of such procedures. The tax
auditor should review the list of Reportable Accounts identified by the due diligence process and the
information to be maintained and reported by the taxpayer.
In case any reportable account has been omitted, or there is any error or omission in Form 61B, the
same may be reported under the Form No. 3CD. The auditor should verify if the taxpayer has filed
Form No. 61B for correcting errors or omissions in the form filed originally. In such a case the auditor
The tax auditor should verify that Form 61B is duly signed by the designated director and filed.
Some situations where Audit Reports and Certificates are required is given below -
(1) Under the Payment of Bonus Act, 1965, CA may be required to issue a ‘report’ on computation of
bonus payable.
(2) Auditor’s Report in accordance with Regulation 54 of the SEBI (Mutual Fund) Regulations, 1993.
(i) All Mutual funds shall be required to get their accounts audited in terms of a provision to that
effect in their trust deeds. The Auditor’s Report shall form part of Annual Report. It should
accompany the Abridged Balance Sheet and Revenue Account. The auditor shall report to Board of
Trustees and not to unit holders.
d) Confidentiality: Not disclose info acquired from client or employer (including prospective).
Not use such info for personal advantage. Continues even after relationship has ended.
e) Professional Behaviour: avoid any conduct that accountant knows or should know might
discredit the profession.
If a professional accountant faces a situation when complying with one fundamental principle
conflicts with others, he should consult:
• Others within the organization
• TCWG
• ICAI
• Legal counsel
Examples of actions that in certain circumstances might be safeguards to address threats include:
• Assigning additional time and qualified personnel to reqd tasks when engagement has been
accepted.
• Having appropriate reviewer, not member of team, review work performed or advise to address
a self-review threat.
• Using different partners and engagement teams with separate reporting lines for provision of
non-assurance services.
• Involving another firm to perform or re-perform part of engagement .
• Separating teams when dealing with matters of a confidential nature.
Disabilities for the Purpose of Membership (Sec 8 of the CAs Act, 1949)
• Under 21 years
• Unsound mind and stands so adjudged by competent court;
• Undischarged insolvent;
• Being a discharged insolvent, has not obtained from court a certificate stating that
insolvency was caused by misfortune without any misconduct on his part;
• Convicted by competent Court within or without India, of offence involving moral turpitude
and punishable with transportation or imprisonment unless CG by order in writing, removed
disability;
• Removed from membership of ICAI been guilty of professional or other misconduct;
Types of Members
Associate Member: Person, whose name has been entered in Register, & entitled to use the letters
A.C.A. after his name.
Fellow Member: Following types of members shall be registered as Fellow of ICAI, on payment of
such fees along with the application-
(i) Associate member who has been in continuous practice in India for at least 5 years,
(ii) Member who has been associate for continuous period of not less than 5 years & who
possesses such qualification experience equivalent to continuous practice for period of 5 years
as CA.
Removal of Name from the Register: As per Sec 20 of Act, Council may remove, from Register, the
name of any member in following cases-
i. who is dead;
ii. from whom request received;
iii. not paid prescribed fee required to be paid by him;
iv. Disqualified u/s 8
Penalty for Falsely Claiming to be a Member- Sec 24 of the CAs Act, 1949 provides that any
person who-
(i) not being a member of ICAI;
(a) represents that he is member of ICAI; or
(b) uses designation CA;
(ii) being a member of ICAI, but not having certificate of practice, represents that he is in
practice or practice as a CA,
shall be punishable on first conviction with fine which may extend to 1000, and on any
subsequent conviction with imprisonment which may extend to 6 months or with fine which
may extend to 5,000, or with both.
Regulation 11 on restoration of COP states that, on an application made in approved Form and
payment of such fee, Council may restore COP w.e.f date on which it was cancelled, to member whose
certificate has been cancelled due to non-payment of the annual fee for the COP and whose
application, complete in all respects, together with fees, is received by the Secretary before expiry
of relevant year.
As per Sec 2(2): “A member of ICAI shall be deemed “to be in practice” if he:
(i) engages himself in practice of accountancy; or
(ii) offers to perform or performs service involving auditing or preparation, verification
or certification of F.S. or holds himself out as accountant; or
(iii) renders professional services about matters of principle or relating to accounting,
presentation or certification of financial facts/data; or
(iv) such other services in opinion of Council, are rendered by CA in practice;
The expression “Management Consultancy and other Services” shall include the following-
i. Financial management planning and financial policy determination.
ii. Capital structure planning and advice regarding raising finance.
iii. Working capital management.
iv. Preparing project reports and feasibility studies.
v. Preparing cash budget, cash flow statements, profitability statements, statements of
sources and application of funds etc.
vi. Budgeting including capital budgets and revenue budgets.
vii. Inventory management, material handling and storage.
viii. Market research and demand studies.
ix. Price-fixation and other management decision making.
x. Management accounting systems, cost control and value analysis.
xi. Control methods and management information and reporting.
xii. Personnel recruitment and selection.
xiii. Setting up executive incentive plans, wage incentive plans etc.
xiv. Management and operational audits.
xv. Valuation of shares and business and advice regarding amalgamation, merger and
acquisition. Acting as Registered Valuer under Cos. Act 2013.
xvi. Business Policy, corporate planning, organisation development, growth and diversification.
xvii. Organisation structure and behaviour, training programmes, work study, job-description,
job evaluation
xviii. Systems analysis and design, and computer related services and to carry out other
professional services relating to EDP.
xix. Acting as advisor or consultant to an issue, including such matters as:
a. Drafting of prospectus and memorandum containing salient futures of prospectus.
Drafting and filing of listing agreement and completing formalities with Stock
Exchanges, Registrar of Companies and SEBI.
b. Preparation of publicity budget, advice regarding arrangements for selection of (i) ad -
media, (ii) centres for holding conferences of brokers, investors, etc., (iii) bankers to
issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and the
underwriting arrangement.
c. Advice regarding selection of various agencies connected with issue, namely Registrars
to Issue, printers and advertising agencies.
d. Advice on the post issue activities, e.g., follow up steps which include listing of
instruments and dispatch of certificates and refunds.
Explanation – Portfolio mgt, underwriting & broking (PUB) not permitted.
xx. Investment counselling in respect of securities
xxi. Registrar to an issue and for transfer of shares/other securities.
xxii. Quality Audit.
xxiii. Environment Audit.
xxiv. Energy Audit.
Important Note:
A CA whose name has been removed from membership for prof. or other misconduct à during such
period of removal à will not appear before various tax authorities or other bodies before whom
he could have appeared in his capacity as a member of ICAI à Because once a person becomes a
member of ICAI; he is bound by provisions of CA Act, 1949 and its Regulations
Companies not to practice as CAs à If LLP has Co. as partner it can’t engage in practice
Sec 27 of Act: If a CA in practice or Firm of CAs has more than one office in India, each one of
such offices should be in separate charge of member of ICAI.
• Member to reside in place office situated/attends the office >= 182 days
• Member can be in-charge of two offices if they are in one and the same Accommodation
Council Decisions:
Clause (2):
Example: CA gave 50% of audit fees received by him to complainant, not a CA, under nomenclature
of office allowance and such arrangement continued for no. of years, held by Council that in
substance CA had shared his profits and was guilty of professional misconduct. It is not
nomenclature to a transaction that is material, but it is substance of transaction, which is to be
looked into.
Note: Paying % of profits to article as stipend not allowed even if financial condition weak
Partnership Firm: Legal representative (LR) will continue to receive share if Deed provides for it.
Sole Proprietorship(SP) Firm:
1. No sharing of fees between LR & purchaser of G/W on death of SP + payments in instalments
allowed if agreement allows
2. Goodwill can be transferred to other CA if:
• Sale completed within 1 year of death
• If dispute of legal heir à inform ICAI within 1 year about dispute & name preserved for 1
year from dispute settlement.
Sale of Goodwill: With reference to Clause (2) of Part I to First Schedule to Chartered
Accountants’ Act, 1949, Council of ICAI considered whether goodwill of proprietary concern of CA
can be sold to another member who is otherwise eligible, after death of proprietor.
It lays down that sale is permitted subject to certain conditions. It further resolved that legal heir
of deceased member has to obtain permission of Council within a year of the death of proprietor
concerned.
Conclusion: Thus, in a given case, the widow of Mr. Qureshi, who has proposed to sell the practice
for ` 5 lakhs is in effect proposing the sale of goodwill. Thus, the act of Mrs. Qureshi is
permissible and Mr. Pardeshi can continue to practice in that name as a proprietor.
Clause (3): accepts or agrees to accept any part of profits of professional work of person who is
not member of ICAI.
Provided that nothing herein contained shall be construed as prohibiting a member ‘from entering
into profit sharing or other similar arrangements, including receiving any share commission or
brokerage in the fees, with member of such professional body or other person having
qualifications, as is referred to in item (2) of this part.
Referral fees amongst members: It is not prohibited for a member in practice to charge Referral
Fees, being fees obtained by a member in practice from another member in practice in relation to
referring client to him.
Note: Accepting commission from regd valuer for referring valuation assignments à Guilty
Clause (4):
Eg: CA had engaged himself as partner in two business firms and MD in 2 Companies and holding
Certificate of Practice without obtaining permission of ICAI. Held that he was guilty of
professional misconduct inter under Clauses (4) and (11).
Clause (5) Secures either through the services of a person who is not an employee of such CA or
who is not his partner or by means which are not open to a CA, any professional business. Provided
that nothing herein contained shall be construed as prohibiting any agreement permitted in
terms of item (2), (3) and (4) of this part.
Clause (6) Solicits clients or professional work either directly or indirectly by circular,
advertisement, personal communication or interview or by any other means.
As per Council guidelines, member in practice shall not respond to any tender in areas of services
which are exclusively reserved for CAs, such as audit and attestation services. Such restriction
not applicable where min. fee of assignment prescribed in tender document or where areas are
open to other professionals along with CAs.
The members should not adopt any indirect methods to adventure their professional practice
with a view to gain publicity and thereby solicit clients or professional work.
Such a restraint must be practiced so that members may maintain their independence of
judgment and may be able to command respect of their prospective clients.
Note: It can be given if required by regulator (whether or not constituted under a statute in India
or o/s India) only to extent reqd & period reqd by regulator.
Where such disclosure of names of clients and/or fees charged is made on the website, the
member/ firm shall ensure that it is mentioned on the website [in italics], below such disclosure
itself, that
“This disclosure is in terms of the requirement of [name of the regulator] having jurisdiction in
[name of the country/ area where such regulator has jurisdiction] vide [Rule/ Directive etc. under
which the disclosure is required by the Regulator].
Exemptions:
• Advertisement for following purpose allowed:
ü For recruiting staff for own office
ü Inserted on behalf of client for staff for their office or acquisition or disposition
of property
ü For sale of business or property by member acting in prof capacity as trustee,
liquidator or receiver (litre)
ü When advertising for staff its desirable to avoid saying “Well known firm”.
Examples:
M/s XYZ, firm of CAs created website “www.xyzindia.com”. Website besides containing details of
firm and bio-data of partners also contains passport size photographs of all partners of firm.
Hosting Details on Website: As per Clause (6) of Part I of First Schedule to Chartered Accountants
Act, 1949, CA of firm can create its own website using any format subject to guidelines. However,
website should be so designed that it does not solicit clients or professional work and should not
amount to direct or indirect advertisement. Guidelines of ICAI allow a firm to put up the details of
firm, bio-data of partners and display of a passport size photograph.
Conclusion: In the case of M/s XYZ, all guidelines seem to have been complied and there appears to
be no violation of Chartered Accountants Act, 1949 and its Regulations.
M/s LMN, firm of Chartered Accountants responded to tender from State Government for
computerization of land revenue records. For this purpose, firm also paid ` 50,000 as earnest
deposit as part of terms of tender.
Responding to Tenders: Clause (6) of Part I of First Schedule to Chartered Accountants Act, 1949
lays down guidelines for responding to tenders, etc. As per guidelines if a matter relates to any
services other than audit, members can respond to any tender. Further, in respect of non-exclusive
area, members are permitted to pay reasonable amount towards earnest money/security deposits.
Conclusion: In instance case, since computerization of land revenue records does not fall within
exclusive areas for chartered accountants, M/s LMN can respond to tender as well as deposit `
50,000 as earnest deposit and shall not have committed any professional misconduct.
Mr. Honest, CAiP, wrote two letters to M/s XY Chartered Accountants firm of CAs; requesting them
to allot him some professional work. As he did not have significant practice or clients he also wrote
letter to M/s ABC, a firm of CAs for securing professional work. Mr. Clever, another CA, informed
Securing Professional Work: Clause (6) of Part I of First Schedule to Chartered Accountants Act,
1949 states that CAiP shall be deemed to be guilty of misconduct if he solicits clients or professional
work either directly or indirectly by a circular, advertisement, personal communication or interview or
by any other means.
Provided that nothing herein contained shall be construed as preventing or prohibiting any CA from
applying or requesting for or inviting or securing professional work from another CAiP. Such restraint
has been put so that members maintain their independence of judgment and may be able to command
respect from their prospective clients.
Conclusion: In given case, Mr. Honest wrote letters only to other CAs, M/s XY and M/s ABC requesting
them to allot some professional work to him, which is not prohibited under Clause (6). Thus, Mr. Honest
has not committed any professional misconduct by soliciting professional work.
Clause (7)
Ø Advertises his professional attainments or services, or
Ø uses any designation or expressions other than the CA on professional documents, visiting
cards, letter heads or sign boards unless it be a degree of a University established by law
in India or recognized by the Central Government or a title indicating membership of the
Institute of CAs or of any other institution that has been recognized by the Central
Government or may be recognized by the Council.
Member in practice may advertise through a write up, setting out service provided by him or firm
and particulars of his firm subject to such guidelines as issued by Council.
Notes:
• Giving names of all firms in which CA is partner on letterhead is allowed
• When CA while delivering speech at Conference talks about his expertise & services of firm &
requests audience to approach him à guilty under clause 6 & 7
• CA after Demonitisation messaged ppl that he offers cash conversion service à guilty of Prof
misconduct under Clause 6 & 7 + Other misconduct under clause 2 of Part IV of First Schedule
read with Sec 22 of CA Act 1949
Eg. The offer document of listed company in which Mr. D, practising CA is a director mentions name
of Mr. D as a director along with his various professional attainments and spheres of specialisation.
Council of ICAI has in communication to members stated that if public Co, in which CAiP is director,
issues prospectus or gives any announcement that gives descriptions about CA’s expertise,
specialisation and knowledge in any particular field, it shall constitute a misconduct under Clauses (6)
and (7) of Part I of the First Schedule to Chartered Accountants Act, 1949.
The Council further stated that in such cases member concerned has to take necessary steps to ensure
that such prospectus or public announcements or public communications do not advertise his
professional attainments and also that such prospectus or public announcements or public
Conclusion: Thus, Mr. D would be guilty of professional mis - conduct and liable for disciplinary action.
Clause (8) accepts a position as auditor previously held by another chartered accountant or a
certified auditor who has been issued certificate under the Restricted Certificate Rules, 1932
without first communicating with him in writing.
As a matter of professional courtesy and professional obligation it is necessary for new auditor
appointed to communicate with such earlier auditor.
Objective is to ascertain whether there are any circumstances which warrant him not to accept
appointment.
*may accept audit if satisfied that attitude of retiring auditor was not proper and justified. If he
feels that retiring auditor qualified report for good and valid reasons, refuse to accept audit. There
is no rule, written or unwritten, which would prevent auditor from accepting appointment offered
to him in these circumstances. Before accepting audit, ascertain full facts of case.
What should be the correct procedure to adopt when a prospective client tells you that he
wants to change his auditor and wants you to take up his work?
Company should be asked whether retiring auditor had been informed of intention to change. If
answer is ‘Yes’, then communication should be addressed to retiring auditor. If it is learnt that
old auditor hasn’t been informed, and client is not willing to inform, it would be necessary to ask
reason for proposed change. If no valid reason for change, it would be healthy practice to not
accept audit. If he decides to accept audit he should address a communication to retiring auditor.
*Letters posted under Certificate of Posting not considered valid (No positive evidence of delivery)
Firm not found at the given Regd address : Address of communication is same as regd with ICAI
on date of dispatch, letter will be deemed to be delivered, unless retiring auditor proves it was not
really served and he was not responsible for such non-service.
Special Audit under Income Tax Act, 1961: It would be healthy practice if Tax Auditor conducting
spl audit under Income Tax Act,1961 communicates with member who conducted Statutory Audit.
Council decisions:
• Requirement for communicating with previous auditor being CAiP would apply to all types
of Audit viz., Statutory Audit, Tax Audit, GST Audit, Internal Audit, Concurrent Audit
or any other kind of audit.
• Communication in case of Assignments done by other professionals: Communication is
mandatorily reqd for all types of Audit/Report where previous auditor is a CA.
For assignments done by other professionals not being CAs, it would be a healthy practice
to communicate.
• Lack of time in acceptance of Government Audits: No time to wait for reply from outgoing
auditor, incoming auditor may give conditional acceptance of appointment and commence
work.
In acceptance letter, make clear to client that acceptance of appointment is subject to
professional objections, from previous auditors and that he will decide about final
acceptance after considering information recd from previous auditor.
Clause (9) accepts an appointment as auditor of company without first ascertaining from it whether
requirements of Section 225 of the Companies Act, 1956 (1 of 1956), in respect of such appointment
have been duly complied with;
Clause (9) of Part I of the First Schedule to Chartered Accountants Act, 1949 provides that a
member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a Company without first ascertaining from it whether the requirements of
Sections 139 and 140 of the Companies Act, 2013, in respect of such appointment have been duly
complied with.
It would not be sufficient for incoming auditor to accept certificate from mgt that provisions of
above sections have been complied with. It is necessary to verify relevant records of Co. and
ascertain as to whether Co. has complied with provisions of above sections. If Co. is not willing to
allow incoming auditor to verify relevant records, should not accept audit assignment.
Note: Getting a loan sanctioned from bank is not covered under fund raising service à hence
CAiP can’t charge fees basis % of loan raised by client
Clause (11) Engages in business or occupation other than profession of chartered accountant unless
permitted by Council so to engage.
Provided that nothing contained herein shall disentitle a chartered accountant from being a director
of a company (Not being managing director or a whole time director*) unless he or any of his
partners is interested in such company as an auditor.
Subject to control of Council, CAiP may act as liquidator, trustee, executor, administrator,
arbitrator, receiver, adviser or representative for costing, financial or taxation matter, or may take
up appointment that may be made by the CG or a State Government or a court of law or any other
legal authority or may act as Secretary in his professional capacity, provided his employment is not
on a salary-cum-full-time basis.
Specific Resolution - Members in practice may engage in the following categories of business or
occupations, after obtaining the specific and prior approval of the Council in each case:
• Employment in business concerns provided member and/or his relatives do not hold “substantial
interest” in such concerns. (20% or more)
• Full-time or part-time employment in non-business concern.
• Office of MD or a WTD of body corporate provided member and/or any of his relatives don’t
hold substantial interest in such concern
• Interest in family business concerns (including such interest devolving on the members as a result
of inheritance / succession / partition of family business) or concerns in which interest has been
acquired as a result of relationships and in management of which no active part is taken.
• Interest in an educational institution.
• Part-time or full-time lectureship for courses other than those relating to Institute’s examinations
conducted under the auspices of the Institute or the Regional councils or their branches.
• Part-time or full-time tutorship under any educational institution other than coaching
organization of Institute.
• Editorship of journals other than professional journals.
• Any other business or occupation for which Executive Committee considers that permission may
be granted.
Notes:
• No bar for member to be promoter / signatory to Memorandum and Articles of Association of Co.
• No bar for such promoter / signatory to be Director Simplicitor of that Co.
• Teaching hours should not exceed 25 hrs a week in order to be able to undertake attest functions.
• Trading in commodity derivates treated as business
• Need specific permission of Council for becoming director if partner is Auditor of Co.
Q. Whether the auditor of a Subsidiary Company can be a Director of its Holding Company?
The Ethical Standard Board (ESB) via a clarification, decided that auditor of a Subsidiary Co. can’t
be a Director of its Holding Company, as it will affect independence of an auditor.
Public conscience needs to be kept ahead of the law.
Clause (12) Allows a person not being a member of the institute in practice or a member not being
his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss
account, report or financial statements.
Exceptions:
Council has clarified that power to sign routine documents on which professional opinion or
authentication is not required to be expressed may be delegated in the following instances and such
delegation will not attract provisions of this clause:
(i) Issue of audit queries during course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for purpose of audit.
Authority delegated by CA à But Authority not used à not a defence for firm/CAà Prof
misconduct
Sec-26 à No person other than member of ICAI will sign document on behalf of CAiP
Note: Issue of stock certificate by assistant shall also make CAiP guilty
A member of the Institute (other than a member in practice) shall be deemed to be guilty of
professional misconduct, if he being an employee of any company, firm or person:
Clause (1) pays or allows or agrees to pay directly or indirectly to any person any share in the
emoluments of the employment undertaken by him.
Can share with relatives,dependents,friends etc. if it’s not consideration for procuring or
retaining a job.
Job must be procured and retained with own professional capabilities and not by any financial
deal impairing professional dignity.
Clause (2) accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered
accountant or broker engaged by such company, firm or person or agent or customer of such
company,firm or person by way of commission or gratification.
(CAiP & Employment refers lawyer to employer à Gets referral fees from lawyer à Guilty in
this clause)
Clause (1) not being a fellow of the Institute, acts as a fellow of the Institute.
Clause (2) does not supply the information called for, or does not comply with the requirements
asked for, by the Institute, Council or any of its Committees, Director (Discipline), Board of
Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority.
Where a Chartered Accountant had continued to train an articled clerk though his name was
removed from the membership of the Institute and he had failed to send any reply to the Institute
Clause (3) while inviting professional work from another chartered accountant or while responding to
tenders or enquiries or while advertising through a write up, or anything as provided for in items (6)
and (7) of Part I of this Schedule, gives information knowing it to be false.
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he –
Clause (1) is held guilty by any civil or criminal court for offence which is punishable with
imprisonment for a term not exceeding six months.
Clause (2) in the opinion of the Council, brings disrepute to the profession or the Institute as a
result of his action whether or not related to his professional work.
CA is expected to maintain highest standards of integrity even in his personal affairs and any deviation
from these standards, even in his non-professional work, would expose him to disciplinary action.
Note: Before starting any ans. of this clause ICAI gives this line à Section 21 of the Chartered
Accountants Act, 1949 provides that a member is liable for disciplinary action if he is guilty of any
professional or “Other Misconduct.”
Director discipline opinion àmember guilty of prof/other misconduct in 2nd or both schedule
àDisciplinary Committee
Clause (1) Discloses Information acquired in the course of his professional engagement to any person
other than his client so engaging him without the consent of his client or otherwise than as required
by any law for the time being in force.
Exceptions:
• Disclosure allowed only with consent of client or as part of professional duties (Eg
submitting info to Exchange Control Authorities)
Eg. CA while presenting paper at event shared vital info of his client to help Nation à Held guilty
Note: When external party like Bank asks for info of your working papers à This clause + SA 200
Confidentiality is to be maintained + SA 230 Property of Auditor (discretion)
Clause (2) Certifies or submits in his name or in the name of his firm, a report of an examination of
financial statements unless the examination of such statements and the related records has been made
by him or by a partner or an employee in his firm or by another chartered accountant in practice.
Clause (3) Permits his name or the name of his firm to be used in connection with an estimate of
earnings contingent upon future transactions in manner which may lead to the belief that he vouches
for the accuracy of the forecast.
He can prepare profit forecast provided he indicates clearly in his report the
• sources of information,
• the basis of forecasts and
• major assumptions made in arriving at the forecasts, so long as he does not vouch for the
accuracy of the forecasts.
Clause (4) Expresses his opinion on financial statements of any business or enterprise in which he, his
firm, or a partner in his firm has a substantial interest.
• CA can’t certify f/s of concern where he’s employed
• Not audit a/c of college where he is part time lecturer
• Not audit trust if partner is either trustee or employee of trust
• Applicable to all types of Audit
• The client shouldn’t be relative of member
• Not permitted to prepare books of a/cs for auditee clients
• Stat auditor can’t be internal auditor
• Internal auditor can’t be appointed as Tax/GST Auditor
• Cooling off period: Not accept Audit of Co for 2 years from date of completion of
tenure/resignation as Director.
Note: Evaluating costs or other assignments of such nature à not covered in this clause
Clause (5) Fails to disclose a material fact known to him which is not disclosed in a financial statement,
but disclosure of which is necessary in making such financial statement not misleading where he is
concerned with that financial statement in a professional capacity.
Example:
• CA failed to report to shareholders of Co. about non-creation of sinking fund as per
Debenture Trust Deed and did not make clear that amounts shown as towards sinking fund
were borrowed from managing agents of the company -Held, that the chartered accountant
was duty bound to see that nature and subject matter of the charge over a security and the
nature and mode of valuation of the sinking fund investment were disclosed in Balance
Sheet, held guilty of misconduct.
Clause (6) Fails to report a material misstatement known to him to appear in a financial statement
with which he is concerned in a professional capacity.
Example:
The Respondent had failed to give disclosure of Contingent Liabilities in F.S. against Corporate
Guarantee given in favour of Group Company. Respondent should have verified charges created on
basis of material available with Company and Registrar of Companies. Further, charge of Rs.4.35
crores against the Balance Sheet size of Rs.26.12 crores was significant. Hence, omission of such
information from F/S makes them misleading and thereby reflects gross negligence on the part
of the Respondent in conducting audit and failing to report material misstatement in financial
statements of. Held guilty of professional misconduct under Clauses (6) and (7) of Part I of the
Second Schedule to the Chartered Accountants Act, 1949.
Clause (7) does not exercise due diligence, or is grossly negligent in the conduct of his professional
duties.
• It is a vital clause which gets attracted whenever it is necessary to judge whether accountant
has honestly and reasonably discharged his duties.
• The expression negligence covers a wide field and extends from frontiers of fraud to
collateral minor negligence.
Examples:
• CA fails to indicate mode of valuation of investments in shares reqd by Cos. Act 2013
• Conducted Stock audit without visiting the site, relied on mgt reports
• Wrongly certified increase in Paid up share capital of Pvt ltd Co in Balance Sheet (Clause 7/8/9
of Part 1 of Second Schedule to CA Act 1949)
• Issued turnover certificate of betel nuts to firm for import license w/o checking books & docs
but relying on article clerk à Guilty
• Issued certificate of consumption of Raw material based on minutes of BODà guilty clause 2 &
7 of this schedule
• Issued incorrect certificate of export of Onions
• Issued report subject to separate notes (No audit report is issued with Notes)
• Failure to examine cash balance & passbook i.e. basic audit procedure
• Not submitted his report in due time to enable Co to comply with Statutory requirement
• Wrong audit report issued to School, claimed correction slip sent but couldn’t prove
• Issued 2 certificates of circulation for 1 daily newspaper àclause 7 & 8 (Should have issued
only 1)
• A material prior period adjustment made to accounts àauditor didn’t consider materiality à
didn’t exercise due diligence + wrong opinion insufficient info + didn’t follow SA à Clause 7,8 & 9
• Failed to check a forged signature which he could have checked
• Shared password of his digital signature certificate with client àGuilty
Examples:
• Transaction took place between ABC Firm & R developers but reported in books of ABC
Construction. Loan amount was material. Guilty under clause 6, 7 & 8 of Part I of Second
Schedule to CA Act 1949
• CA issued false certificates to several parties for past exports for monetary consideration
without verifying any supporting records or documents which helped parties to make imports
free of duty.
Held that he was guilty of professional misconduct within the meaning of clauses (2), (7) & (8)
of Part I of the second schedule of CA Act, 1949 in terms of section 21 & 22 of the said Act
• CA audited books of A ltd that had investment of Rs 10L, later it was found real value was 25k à
CA guilty under clause 2, 7, 8 of Part I of Second Schedule of CA Act,1949
• Certificate of circulation of Periodical w/o verifying undelying record bank statements, printer
bills, sales records etc à Guilty under clause 7 & 8
Clause (9) Fails to invite attention to any material departure from the generally accepted procedure
of audit applicable to the circumstances
Generally accepted audit procedure = Engagement and Quality Control Standards, Statements,
General Clarifications, Guidance Notes Technical Guides, Practice Manuals, Studies and Other
Papers.
Special Points:
• Audit of listed cos : Done by Auditor subject to Peer Review process of ICAI & hold valid
certificate issued by Peer Review Board of ICAI
• Firm Reg No & Membership No to be mentioned on reports pursuant to attestation engagements
• UDIN is mandatory to be generated for all kinds of certifications
Examples:
• CA didn’t conduct sample checking of bank a/c of Co & didn’t do vouching & depended on work of
Article Assistant à guilty under clause 7,8,9
• CA didn’t check bank column totals, didn’t verify contra entries, test checked when no internal
check present,didn’t check Bank recos à guilty under clause 7,8,9
Clause (10) fails to keep moneys of his client other than fees or remuneration or money meant to be
expended in a separate banking account or to use such moneys for purposes for which they are
intended within a reasonable time.
Spl points:
• Advance received against services excluded from scope
• Money recd for expenses to be incurred in reasonably short time not to be deposited in bank a/c
• Money recd in capacity of trustee, executor liquidator, etc keep in separate bank a/c
Mazedar Kisse:
• Refund voucher issued by Income Tax dept in name of client credited to his a/c à Guilty under
clause 7 & 10
• CA acting as financial advisor to client converted his own a/c to joint a/c with client withouthis
consent & fraudulently discharged 3 FDRs in client’s name. Gulity à Clause 10 of Part I of
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional
misconduct, if he –
Clause (1) contravenes any of the provisions of this Act or the regulations made there under or
any guidelines issued by the Council.
Examples:
• CA certified in Form K-2 audit clerk in service with him, the article employed elsewhere 11-5 pm
& then come to office work till 8 pm.
• Took article intern under him even when no vacancy was there, intern got to know that
Articleship deed not regd.
• Issued certificate as a CA even if no COP there with him. Guilty as violation of Section 6
• In pvt circular to clients in addition to CA described himself as Investment Consultant Public
Accountant
• Took loan from firm where article & his father were interested
• Didn’t pay stipend as per Reg 48 to article, only paid when article left. Said he had agreement
to pay fees annually à held guilty
• Accepted audit even when UNDISPUTED audit fees wasn’t paid to earlier auditor à Guilty
under Clause 1 of Part II of Second Schedule of CA Act 1949
• Conducted more TAX audits than prescribed limit
Clause (2) being an employee of any company, firm or person, discloses confidential information
acquired in the course of his employment except as and when required by any law for the time
being in force or except as permitted by the employer.
Clause (3) Includes in any information, statement, return or form (SIRF) to be submitted to the
Institute, Council or any of its Committees, Director (Discipline), Board of Discipline.
Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars knowing
them to be false.
Examples:
• A CA manager in firm applied for admission as fellow to ICAI saying he’s partner in firmà made
a statement that’s false à Guilty
• In a hearing before Disciplinary Committee made a false statement on oath
• CA in full time employment in a Co while filling bank empanelment form gave declaration that he
was not in any occupation/business/vocation e t c
• CA being manager of Co devoting 30 hrs. per week showed himself as CA in full time practice for
employment for Bank branch Audits
Chapter I: Applicable to all the Members of the Institute whether in practice or not
Chapter II: A member of the ICAI who is an employee shall exercise due diligence and shall not be
grossly negligent in the conduct of his duties.
• Cash Book
• Ledger
Chapter VI: Tax Audit assignments under Section 44 AB of the Income-tax Act, 1961
A member of the Institute in practice shall not accept, in a financial year, more than the “specified
number of tax audit assignments” under Section 44AB of the Income-tax Act, 1961.
• As per clarification on Tax Audit Assignments, if there are 10 partners in a firm of CAs in
practice, then all
• partners of the firm can collectively sign 600 tax audit reports. This max. limit of 600 tax
audit assignments may be distributed between partners in any manner. For instance, 1 partner
can individually sign 600 tax audit reports & remaining 9 partners are not signing any tax audit
report.
• In computing “specified no. of tax audit assignments” each year’s audit would be taken as
separate
• assignment.
• Mr A partner in ABC as well as ADE, then also only 60 allowed for A
• Mr A partner in ABC & also in A proprietorship, then also 60 allowed to A
• Audits u/s 44AD, 44ADA, & 44AE of IT Act 1961 not counted
• Audit of H.O. & Branch office counted as 1 assignment
• Audit of More than 1 branch of same concern = 1 assignment
• Mr Badal is part time practicing partner then will he be considered for limit? No
Notes:
• Recovery of fees on progressive basis doesn’t mean indebtness.
• Limit as per Cos. Act for indebtness is 5L & for guarantee or security is 1L
Not applicable
• where minimum fee of the assignment is prescribed in tender document itself or
• where areas are open to other professionals along with CAs.
• Network can be constituted as a mutual entity which will act as a facilitator for
constituents of Network. In such case Network itself will not carry out any professional
practice.
• Network can be constituted as a partnership firm subject to condition that total number
of partners does not exceed 20.
• Network can be constituted as a LLP subject to provision of Chartered Accountant Act and
Naming of Network
1.The Network may have distinct name which should be approved by ICAI. To distinguish a “Network”
from a “firm” of CAs, the words “& Affiliates” shall be used after the name of network and words “&
Co.” /“& Associates” shall not be used. The prescribed format of application for approval of Name for
Network is at Form ‘A’ (enclosed). The names of the network may be as mentioned in Appendix II.
2.ICAI shall approve or reject name of Network and intimate to Network at its address mentioned in
Form ‘A’ within 30 days from date of receipt of said Form.
3.Mere approval of name of Network shall not entitle Network to carry on practice in its own name.
2. Proprietary/individual members, partnership firms as well as members in LLP or any such other
entity, shall be permitted to join such network with entities outside India provided that they can
join only one network and firms having common partners shall join only one such network.
1. If one firm of network is statutory auditor of entity then associate [including networked firm(s)] or
said firm directly/indirectly not accept internal audit or book-keeping or other assignments prohibited
for stat auditor firm.
2. Guidelines of ceiling on Non-audit fees is applicable in relation to Network as follows:
- i) For a Network firm who is doing statutory audit (including its associate concern and/or firm(s)
having common partnership), it shall be same as mentioned in said notification; and
ii) For other firms of same Network collectively, it shall be 3 times of fee payable for carrying out
statutory audit of same undertaking/ company.
3. In cases where rotation of firms prescribed by regulatory authority, no member firm of network
can accept appointment as auditor in place of any member firm of network which is retiring.
4. Network may advertise to extent permitted by Advertisement Guidelines issued by ICAI. Firms
constituting network are permitted to use words “Network Firms” on their professional stationery.
5. Constituent member firms of Network and Network shall comply with all Ethical Standards
prescribed by Council from time to time.
• Branch Audits
ü Branch audit of Co shouldn’t be conducted by Stat Auditors consisting 10 or more
members
ü But by local firms of auditors less than 10 members
ü Restriction not apply in following cases:
o A/c records of branch at HO
o Significant operations carried out at Branch
• Joint Audit
ü Large Cos should have practice of having firms with < 5 members as Joint Auditors
ü Senior firms shouldn’t object to such practice
• Ratio b/w Qualified & Unqualified Staff
ü Atleast 1 member for every 5 non-members excluding articled/audit assistants,
typists, peons, & others not engaged in professional work
• Disclosure of Interest by Auditors
ü Disclose the payments received for other services through medium of different
firm or firms where he maybe a partner or proprietor
• Recommended minimum scale of fees
Recommended Min. fees for professional services is to be charged
GUILTY NON-GUILTY
Board of Disciplinary
Discipline Committee Accept Reject
(BOD) (DC)
Close • Advise DD to
GUILTY* matter investigate further
GUILTY*
• May proceed if
matter of 1st
• Reprimand
• Reprimand Schedule
• Remove name
• Remove name • Refer to DC if 2nd
permanently
upto 3 months Schedule
or any
• Fine upto 1L
duration
• Fine upto 5L
Appeal:
Can be made by member or Director (Discipline) within 90 days à Appellate Authority
Orders possible:
• Confirm, modify or set aside order
• Impose, set aside, reduce or enhance penalty
• Remit case to BOD/DC to reconsider
• Such order it thinks fit
• Expertise of Laws not Required: A professional accountant is expected to apply knowledge and
expertise, and exercise professional judgment. However, he is not expected to have a level of
knowledge of laws and regulations greater than that which is required to undertake the
engagement. Whether an act constitutes non-compliance is ultimately a matter to be determined
by a court or other appropriate adjudicative body.
• Certain Matters Expressly out of Purview: Matters that are clearly inconsequential, or relating to
personal misconduct pertaining to business activities of client not covered.
• Disclosure, which is Contrary to Law not Required: As per IESBA Code, disclosure of the matter
to an appropriate authority would be precluded if doing so would be contrary to law or regulation.
Documentation Requirements in NOCLAR: Revised Code over and above require professional accountant
to follow additional documents requirements as under:
• How management / TCWG have responded to the matter.
• The course of action accountant considered, judgments made and decisions that were taken, having
regard to reasonable and informed third party test.
• How accountant is satisfied that responsibility of public interest has been fulfilled.
Coverage of Laws
2. SA 250 talks of auditor’s responsibilities for laws having direct effect on the determination of
material amounts and disclosures in the financial statements (such as tax and labour laws); and other
Definition of Stakeholders
3. SA 250 doesn’t define stakeholders. NOCLAR is related to effect of non-compliance on investors,
creditors, employees as also the general public.
However, as per the guideline issued by the Council of the Institute of Chartered Accountants
of India, a member of the Institute in practice shall not respond to any tender issued by an
organization or user of professional services in areas of services which are exclusively
reserved for chartered accountants, such as audit and attestation services.
However, such restriction shall not be applicable where minimum fee of the assignment is
prescribed in the tender document itself or where the areas are open to other professionals
along with the Chartered Accountants.
Clause (7) Advertises his professional attainments or services, or uses any designation or expressions
other than the Chartered Accountant on professional documents, visiting cards, letter heads or
sign boards unless it be a degree of a University established by law in India or recognized by
the Central Government or a title indicating membership of the Institute of Chartered
Accountants or of any other institution that has been recognized by the Central Government or
may be recognized by the Council.
Provided that a member in practice may advertise through a write up, setting out the service
provided by him or his firm and particulars of his firm subject to such guidelines as may be
issued by the Council.
Clause (8) Accepts a position as auditor previously held by another chartered accountant or a certified
auditor who has been Issued certificate under the Restricted Certificate Rules, 1932 without
first communicating with him in writing.