Unit 2: Planning of Audit and Control

Question: Where the accounts of the company do not present a ‘true and fair ‘ view, the auditor of the
company can give a qualified opinion.
Answer: The statement is false. An adverse opinion is appropriate where the reservations or the objections are so
substantial that the auditor feels, that the accounts do not give a ‘True and Fair’ view. Qualified opinion would
imply that the financial statement project a ‘True and Fair’ view subject to certain reservations.

Distinguish between Principles & Techniques of Auditing.

Answer:
Principles of Auditing Techniques of Auditing

It refers to the fundamental considerations It refers to the methods and means adopted by
the Auditor
that sustain the function of auditing and for collection and evaluation of
direct its activities. audit evidence in different auditing situations.
These are
As listed in SA - 200, these are - not listed exhaustively. Some
examples are
(a) Integrity, Objectivity & Independence, -
(a) Physical Inspection (of Fixed Assets),
(b) Confidentiality,
(b) Confirmation (of Debtors Balances),
(c) Skills and Competence,
(c) Inquiry (on Accounting Systems),
(d) Work performed by others,
(d) Calculation of Ratios (GP Ratio, NP Ratio).
(e) Documentation,

(f) Planning,

(g) Audit Evidence,

(h) Accounting System & Internal Control,

(i) Audit Conclusions and Reporting.

The principles are not liable to change Audit techniques may vary according to the
frequently. nature of propositions to be tested.

They do not vary with time. The techniques to be adopted vary with the
time / period of auditing.

Principles of auditing remain the same They may vary from Firm to Firm depending
irrespective of the nature of the Firm. upon the nature of business, number of
transactions, etc.

AUDITOR’S ENGAGEMENT
In case of a statutory audit the objective and scope of an audit is clearly described in the relevant law.
However, in a non -statutory audit it has to be stated with absolute clarity so as to avoid any kind of
ambiguity as to the objective and scope of audit. A misunderstanding may arise about the exact scope of
the work. For example, the client may be under an impression that while the auditor is preparing the
accounts, the audit is also being carried out. Therefore, in order to avoid any kind of misunderstanding or
dispute it is in the interests of both the auditor as well as the client to exactly define the scope of the
engagement and reduce the same in writing by way of audit engagement letter. An auditor’s engagement
letter signifies the confirmation by the auditor of his acceptance of appointment as auditor, the
documentation of the objective and scope of audit or other work, and the extent of his responsibilities to
the client and the form of any reports. ICAI (CA) has issued SAS 4410, SRS 4400 and SRE 2400 in this
regard. Although the form and content of the engagement letter differs from client to client but in general
the following references should be made in audit engagement letter:
The objective and the scope of the engagement.
Management’s responsibility for the financial statements.
The existence of inherent limitations of audit and resulting material misstatements that may remain
undiscovered,
The need for use of services of internal auditors and/ or other experts that may arise during the course
of the engagement.
The requirement of management confirmation letter as regards representations made by them
concerning audit.
Restriction of the auditor’s liability, if any.
Basis for computation of audit fees and billing arrangements.
The form of reports or other communication of results of the engagement.
The importance of audit engagement letter was highlighted in the case of Leech v Stokes. In this case the
auditors were instructed to prepare the annual profit and loss account of a firm of solicitors for
submission to the tax authorities. The evidence showed that proper books of account were not maintained
and though the firm collected large sums by way of rent on behalf of its clients, no proper cash book and
client’s ledger were maintained. On the basis of record of bills against clients as well as summary of
firm’s expenses, the profit and loss account was prepared. Subsequently, it was found that there was
misappropriation of the rents collected and the auditors were sued for negligence in their work. The
judgment, given purely on the basis of facts, held the auditors not guilty, as in their letter they had clearly
indicated the restricted nature of their engagement.

CONCEPT OF TRUE AND FAIR

The concept of true and fair is a fundamental concept in auditing. The phrase “true and fair” in auditor’s
report signifies that the auditor is required to express his opinion as to whether the state of affairs and
the results of the entity as ascertained by him in the course of his audit are truly and fairly represented in
the accounts under audit.
This requires that the auditor should examine the accounts with a view to verify that all assets,
liabilities, income and expenses are stated as amounts which are in accordance with accounting
principles and policies which are relevant and no material amount, item or transaction has been omitted.
What constitutes “true and fair”, however, has not been defined in any legislation. In the context of audit
of a company, however, section 129 of the Companies Act provides that the accounts of a company
shall be deemed as not disclosing a true and fair view, if they do not disclose any matters which are
required to be disclosed by virtue of provisions of Schedule III to the Act, or by virtue of a notification
or an order of the Central Government modifying the disclosure requirements.
It must be noted that the disclosure requirements as laid down by the law are the minimum
requirements. If certain information is vital for showing a true and fair view, the accounts should
disclose it even though there may not be a specific legal provision to do so. Thus, what constitutes a
‘true and fair’ view is a matter of an auditor’s judgment in the particular circumstances of a case. In
more specific terms, to ensure true and fair view, an auditor has to see the following;
That the assets are neither undervalued or overvalued, according to the applicable accounting
principles;
No material asset is omitted
The charge, if any, on assets are disclosed;
Material liability should not be omitted;
 The profit and loss account discloses all the matters required to be disclosed by Part II of Schedule
III and the balance sheet has been prepared in accordance with part I of Schedule III;
All unusual, exception or non- recurring items have been disclosed separately.

CONCEPT OF “MATERIALITY” IN PLANNING AND PERFORMING THE AUDIT

Materiality is one of the basic fundamental concepts in the process of Accounting and Auditing. It is a
continuous process and covers in its ambit all the stages from recording to classification and
presentation. An auditor has to constantly judge whether a particular item or transaction is material or
not.
SA 320 on Materiality in Planning and Performing an Audit lays down that “The concept of materiality is
applied by the auditor both in planning and performing the audit, and in evaluating the effect of identified
misstatements on the audit and of uncorrected misstatements, if any, on the financial statements.” It lays
down a Standard on Auditing (SA) on the concept of audit materiality in relationship with the audit risk
affecting the planning and procedures of the auditors.
Materiality of an item may influence the economic decision of the user: It is a relative terra, the
knowledge of which may influence the economic decision of the users of the Financial Statements. It
requires that the auditor should consider materiality and its relationship with audit risk while conducting
an audit and therefore an auditor requires more reliable evidence to support material items.
No item is material in all circumstances, what may be material in one circumstance may not be material
in another.
It may be a statement, silence (or omission) or a misstatement in the Financial Statements, materially
affected if such statement is erroneously stated or omitted to be stated therein and economic decision of
the users taken on the basis of such information is influenced by such misstatement or omission.

The main factors to be considered for determining materiality of an item are:

Individually: It may be determined individually. E.g., a payment of`1000 may be material in a small
business, but even `1 lac could be immaterial for a big business entity.
Aggregate: It may be determined in aggregate. E.g., total income from investment in mutual funds
could be more material than looking into each individual investment.
Legal Considerations: It depends on the statutory or legal considerations. E.g., where the terms of
appointment of a whole time director are not according to law, the remuneration paid to him is a
material item even if the financial implication is not much.
Legal Definition: It may be defined or described in law itself. E.g., Schedule III requires separate
disclosure of items of all expenses exceeding 1% of turnover or to write off capital assets purchased
for less than ` 5000.
Relative overall impact: It may depend on the relative degree of relevance to the overall accounts or
the group, or class of transactions to which it pertains. E.g., short recoveries from debtors.
Qualitative: It may be qualitative and not often reckoned with respect to quantitative details alone.
E.g., improper disclosure of an accounting policy in the Notes to the Annual Financial Statements
may affect economic decisions.
Insignificant quantity but special context: It maybe of an insignificant quantity otherwise, but
material inspecial circumstances. E.g., rounding off to the nearest rupee the fraction of 0.666 as 0.67
in computer software. It may be material in future due to cumulative effect even if insignificant
now.
Ind AS-I further states that any change in accounting policy which has a material effect should be
disclosed. The amount by which any item in the financial statements is affected by such change should
also be disclosed to the extent ascertainable and if it is not ascertainable, either wholly or in part, the fact
should be indicated. If a change is made in accounting policy(s) which has no material effect on the
financial statements for the current period but which is reasonably expected to have a material effect in
subsequent periods, the fact of such change should be appropriately disclosed in the period in which the
change is adopted.

Note:-Some of the areas where different accounting policies may be followed by the management are
enumerated below;
Valuation of inventories - FIFO, Weighted Average,
Methods of providing depreciation -Straight Line, WDV,
Translation of foreign currency items -Average rate, TT rate,
Treatment of retirement benefits,
Expenditure during the construction period,
Government grants, etc.

DIFFERENCE BETWEEN PRIVATE (VOLUNTARY) AUDIT AND STATUTORY (MANDATORY) AUDIT

SL Basis Private audit Statutory audit
NO.
i. Appointing Discretionary for the management. Mandatory and prescribed by
Authority different statute/ laws.
Object Conducted with the object of: Review of Conducted with the objective of
internal controls, Checks on employees, & ensuring truthfulness and fairness of
Checking financial or non financial the Financial Statements.
operations.
ii. Approach Proprietary oriented approach. Compliance oriented approach.
iii. Scope Scope is decided by the management Scope is prescribed by the
Scope is prescribed by the governing and governing law.
auditor through the Letter of
Engagement.
iv. Report Report is to be given to the management Report is to be given
within the stipulated time as mu shareholder or owner within
decided. However there is no spl stipulated time as stated by the statue
format for report. as per the Formatprescribed by the
Law.

DIFFERENCE BETWEEN STATUTORY AUDIT AND GOVERNMENT AUDIT

SL No. Basis Statutory Audit Government Audit

Applicable to Applicable to
i. Applicability (a) All private companies (a) Government departments
(b) All co-operative societies (b) Statutory corporations
(c) Proprietorship and partnership (c) Government companies
concerns in some cases. E.g. Tax
audit under section 44AB of the
Income Tax Act.
ii. Appointing (a) In case of private companies: (a) In case of government
Authority shareholders. departments: Comptroller and
(b) In case of sole proprietor and Auditor General
partnership: proprietor or (b) In case of statutory c o r por
partners. ation : as per the provisionsof
(c) In case of trust: trustee or the special statute for that
Managing corporation.
 Committee . (c) In case of government
(d) In case of co-operative societies: company: Company Law
Managing Committee with prior Board, on the ad- vice of the
approval of the Registrar. Comptroller and Auditor
General.
iii. Report Report is submitted to the owners/ Report is submitted to the
shareholders in a format prescribed shareholders and a copy is given
by the Companies Act, 2013, in the to the Comptroller and Auditor
case of Companies. General in a format prescribed
by the CAG.

SOCIAL AUDIT
Organizations, these days, focus on attaining economic growth through performing processes that ensure
social and environmental development simultaneously. A social audit is a way of measuring,
understanding, reporting and improving an organization’s performance towards meeting its social and
ethical objectives.
Objectives of Social Audit
Assessing the needs of the society and resources available for fulfilling them.
Spreading awareness among beneficiaries about the business’ efforts towards attaining social
objectives.
Increasing efficacy and effectiveness of the organization’s Corporate Social Responsibility (CSR)
programs.
Scrutiny of policy decisions, keeping in view the interests of stakeholders.
Advantages of Social Audit
Encourages community participation among different business entities.
Ensures continuous efforts towards environmental protection and use of environment friendly
production processes.
Builds customer satisfaction and trust through ethical business practices.
Promotes collective decision making and sharing responsibilities.
Develops human resources by working towards improvement of workers’ and the underprivileged
persons’ working/ living conditions.

ENVIRONMENTAL AUDIT
Definition and Meaning
According to the United States Environmental Protection Agency (USEPA), environmental audit may be
defined as a systematic, documented, periodic and objective review by a regulated entity of facility
operations and practices related to meeting environmental requirements,”
The Confederation of British Industry has defined environmental auditing as “the systematic examination
of the interactions between any business operation and its surroundings.”

EFFICIENCY – CUM- PERFORMANCE AUDIT

It is an objective examination of the financial and operational performance of an entity. It includes
identification of opportunities of greater economy as well as removal of weaknesses after evaluation.
Actual performance is compared with the standards set by the entity. If the auditor at the time of
evaluation comes across any deviations with respect to the pre-determined standards, it is further
investigated.
Scope of EPA
 Economy Audit It ensures that entity has acquired the financial, human and physicalresources
economically. It implies that resources have been procured in appropriate
quantity, quality and at minimum cost.
Efficiency Audit It ensures the economical execution of various schemes and policies. It refers to
the relationship between inputs and output i.e. the goods and services produced
and resources used to produce them, yielding the expected results.
Effectiveness It is an appraisal of the performance of schemes and projects with reference
to the overall targeted objectives as well as efficiency of the ways and methods
adopted for the attainment of objectives.
Approach
Various steps undertaken by the auditor while conducting EPA are identification of topic, obtain
necessary information, preliminary study, planning and execution of audit, reviewing internal control
system and reporting.

PROPRIETY AUDIT
A propriety audit is not just concerned with the truthfulness and fairness of the Financial Statements and
books of accounts of the client, but also ensures that the transactions entered into by the client, business
practices and activities undertaken are not against public interest. Its objective is to see that the business
lives upto standards of proper conduct. Legal, economic and financial are all equally important aspects
that require to be looked into during the course of the audit.
It is an essential element of a Government Audit. The Comptroller and Auditor General (CAG) examines
the propriety of all government expenditures to ensure that they have been incurred in the interest of the
general public, and are not influenced by personal interests of the government authorities sanctioning it.
Section 143 of the Companies Act, 2013 requires the auditor to look into some specified matters to
ensure that the Directors of the company do not engage in misappropriation and siphoning of funds.

OPERATIONAL AUDIT
Operational Audit involves examination of all the operations and activities of the entity under audit.
Objective: The objects of operational audit include the following:
The examination of the control structure of the entity. The relation of department controls to general
policies and its relation with control of other departments.
It provides an appraisal of whether the department is operating in conformity with prescribed standards
and procedures laid down by the management.
It checks whether standards of efficiency and economy are maintained. It is concerned with formulation
of plans and checking of the implementation of systems and controls in respect of other departments of
the entity.
It checks whether capacity utilization in production department and achievement of short term targets in
marketing departments and other activities are so economically performed to achieve the preset overall
goals of the entity.
Scope: Operational audit, in its initial stages, was developed as a branch of internal auditing. Internal
audit focuses on accounting operations of the entity but operational audit has a wider scope of working
and covers all other operations, such as production and marketing too.

INFORMATION SYSTEMS AUDIT

According to Ron Weber, “Information systems auditing is an organizational function that evaluates
asset safeguarding, data integrity, system effectiveness, and system efficiency in computer based
information systems. It has arisen for seven major reasons:
The consequences of losing the data resource;
The possibility of misallocating resources because of decision based on incorrect data or decision
rules;
The possibility of computer abuse if computer systems are not controlled;
The high value of computer hardware, software, and personnel;
The high costs of computer error;
The need to maintain the privacy of individual persons; and
The need to control the evolutionary use of computers.”

Qualities of an Auditor:
The Auditor must possess the following qualifications and qualities:
1. Only the qualified chartered accountant can be appointed as auditor of a limited company.
2. The auditor must have thorough knowledge of principles and practice of all aspects of accountancy.
He must be familiar with all systems of accountancy in use.
3. He should have adequate knowledge of financial management, industrial administration and
business organization.
4. He must have thorough knowledge of audit case laws as per the various cases decide by the courts
in and outside India.
5. He should be able to understand the technical details of business whose accounts he is going to
audit.
6. An auditor must be honest i.e. He must certify that he does not believe to be true and he must take
reasonable care and skill before he believes what he certifies is true.
7. He must act impartially and not influenced by others, directly or indirectly while discharging his
duties.
8. He should be hard working, systematic and methodical.
9. He must have capacity to hear arguments of others.
10. He should have adequate skills and courage to write audit report correctly clearly and concisely.
11. He should not disclose the secrets of his client.

Appointment of an Auditor
Appointment of Auditor in case of Sole proprietor: The appointment of Auditor in case of sole trader
is done by the owner of the business. In case of sole traders the auditor generally acts as an accountant
who also prepares accounts besides checking their accuracy. As He is appointed by an individual he must
get clear instructions from his client in writing as to what he is expected to do. His work and its scope will
depend upon the agreement with his client since the appointment of an auditor is not under any statute,
therefore the rights and the duties will depend upon the agreement.
Appointment of Auditor in case of partnership: The Auditor of a partnership firm is made by the
mutual consent of all the partners

Appointment of Companies Auditors: The provisions regarding appointment of the auditor are
contained in section 139 of Companies Act 2013
1. Appointment of auditor by members [Sec 139(1)]:
a. A company shall appoint an individual or a firm as an Auditor at the first annual general meeting
and each subsequent sixth annual general meeting.
b. Such auditors shall hold office till conclusion of sixth annual general meeting.
c. Such appointment shall be placed before the members at each annual general meeting for
ratification.
2. Period for which the appointment is made [Sec 139(2)]:
a. An individual can be appointed for a term no more than five years.
b. An audit firm can be appointed for a consecutive term not more than two terms of five years.
c. An individual or a firm which has completed its term shall not be eligible for reappointment as
auditor in the same company for five years from the completion of term.
3. Appointment of auditor of Government companies (Sec 139 (5)): The comptroller and Auditor
general shall in respect of financial year appoint an auditor duly qualified within 180 days from the
commencement of financial year who shall hold office till conclusion of annual general meeting.
Appointment of First Auditor by Board of Directors [Sec139 (6)]: The first auditor of a company
other than government company shall be appointed by the board of directors within 30 days of
registration of company. If the board fails to appoint first auditor it shall inform the members of company
who shall appoint auditor within 90 days at extra ordinary general meeting who shall hold the office till
conclusion of first annual general meeting.
5. Appointment of First Auditor of Government Company [Sec 139 (7)]: The first Auditor of a
Government Company shall be appointed by Comptroller and Auditor general within 60 days of
registration of company. In case of its failure to appoint first auditor, then board of directors shall appoint
auditor within next 30 days. The company shall inform the members if the board fails to appoint first
auditor who shall appoint the auditor within 60 days at extra ordinary general meeting who shall the
office till conclusion of the first general meeting.
6. Casual vacancy of an Auditor [Sec 139 (8)]:
a. The casual vacancy of auditor, except in case of Government Company, shall be filled by the board
of directors within 30 days but if it arises as a result of resignation of the auditor it shall be approved by
company at general meeting convened within 3 months o recommendation of board. Such auditor shall
hold office till conclusion of next annual general meeting.
b. Casual vacancy in case of Government Company shall be filled by Comptroller and Auditor
General within 30 days if he fails to fill the vacancy, the board shall fill the vacancy within next 30 days.

Reappointment of a retiring auditor [Sec 139 (9)]:

Such an auditor can be reappointed at annual general meeting if.
a. He is not disqualified for reappointment.
b. He has not given notice to company of his unwillingness.
c. A special resolution has not been passed at annual general meeting appointing some other person or
providing expressly that he shall not be reappointed.
All the above is subject to the provisions of Section 139 (1).
Qualifications of an Auditor:
1. A person shall be eligible for the appointment of an auditor of a company only if he is a chartered
accountant.
2. Where a firm including a limited liability partnership is appointed as an auditor of a company, only
the partners who are chartered accountants shall be authorized to act and sign on behalf of firm.
Disqualifications of an Auditor:
The following persons shall not be eligible for the appointment as an auditor of a company:
1. An officer or employee of the company.
2. A person who is a partner, or who is in employment or an officer or employee of the company.
3. A person or a firm who, whether directly or indirectly has business relationship with the company,
or subsidiary of such holding company or associate company of such nature as may be prescribed.
4. A person whose relative is director or is in the employment of the company as director or key
managerial personnel.
5. A person who is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment
holding appointment as auditor of more than 20 companies.
6. A person who has been convicted by a court of an offence involving fraud and a period of 10 years
has not elapsed from the date of such conviction.
Remuneration of an Auditor (Sec 142)
1. The remuneration of the Auditor of a company shall be fixed in its general meeting or in such
manner as may be determined therein.
2. The Remuneration under sub section (1) shall, in addition to the fee payable to an auditor, include
the expenses, if any, incurred by the auditor in connection with the audit of the facility extended to him
but does not include any remuneration paid to him by any other services rendered by him at the request of
the company.
Removal, Resignation of an Auditor
1. The Auditor appointed under section 139 may be removed from his office before expiry of is term
only by a special resolution of the company after obtaining the previous approval of the central
Government.
2. The Auditor who resigns from the company shall file within a period of thirty from the date of
resignation, a statement in a prescribed form with the company a registrar, the auditor shall also file such
statement with the comptroller and auditor –general indicating the reasons and other facts as may be
relevant with regard to his resignation.

Rights of an Auditor
1. Right to Access books of accounts: Every auditor of a company has right to free and complete
access at all the times to the books, accounts and vouchers of the company
2. Right to obtain the information and explanation: An auditor is authorized to obtain such
information and explanation as the auditor may think necessary for the performance of his duty as auditor.
3. Right to receive notice: All notices of the company and other communications relating to any
general meeting of the company shall be forwarded to the auditor of the company. He is also authorized
to attend the meetings and make any statement or explanation with regard to the accounts audited by him.
4. Right to sign audit report: only the person appointed as auditor of the company, where a firm so
appointed only a partner in the firm practicing in India, may sign the auditor’s report or authenticate any
other document of the company required law to be signed or authenticated by auditor.
5. Right to seek legal and technical advice: The auditor of a company is entitled to seek the legal
and technical advice which may be needed in the performance of his duties.
6. Right to remuneration: on completion of his work an auditor is entitled to his remuneration.
7. Right to be indemnified: for many purposes, an auditor is considered to be an officer the
company. An officer has a right to be indemnified out of the assets of the company against any liability.
Duties of an Auditor: Duties under section 143 (1):
a. The auditor has a duty to enquire whether loans and advances made by the company have been
properly secured whether the term and the conditions there of are prejudicial to the interest of the
company or its members.
b. Duty to enquire whether assets of the company being shares or debentures and other securities have
been sold at a price less than at which these were purchased.
c. Whether any shares have been allotted for cash, whether cash actually received and whether the
position in the account books and balance sheet is correct, regular and not misleading.
Duties under section 143 (2):
The auditor has the duty to report the members of the company, the accounts examined by him and every
financial statement to be laid before the company in the general meeting. The auditor shall state in his
report to the best of his information and knowledge, the said accounts and financial statements whether
give a true and fair view or not, of the state of company’s affairs
Duties under section 143(3):
1. He has the duty to sought and obtain all information and explanation which are necessary for his
audit.
2. He has a duty to ensure that the books of accounts as required by law have been kept by the
company.
3. He has a duty to see whether the company has adequate internal financial control systems in place
and their operative effectiveness.
4. He has a duty to ensure whether the company’s balance sheet and profit and loss account dealt
within the report or in agreement with the books of account and returns.
Liabilities of an Auditor:
The liabilities of an auditor can be summed under following heads:
1. Civil liabilities
2. Criminal Liabilities
1. Civil Liabilities:
(I) Liability for Negligence: The liability of an auditor arises where it is proved that hisclient has
suffered a loss due to his professional negligence. The auditor may be held personally liable, if it is
proved, that had he exercised reasonable care and skill, he must have discovered the discrepancy. In a
case it was held that if an auditor fails to show as much skill and diligence as is expected of a man of
ordinary prudence, he must suffer the consequences.
(ii) Liability for misfeasance: According to section (340), the court may assess damagesagainst
delinquent director and other officers of the company, including an auditor for misfeasance or breach of
trust. In case of an auditor who also comes within the definition of officer in section 2 (59) for purpose of
the section, if he is guilty of neglect of duty or misfeasance, so as to cause loss of company in any way,
proceedings may be taken under this section against him either independently or other officers or jointly
with them. This section provides a simple way to the company to recover damages where an auditor or
any other officer of the company is guilty of misfeasance. The time limit for bringing an action is 5 years.
2. Criminal Liabilities:
i) Misstatement in prospectus section 34: Where an auditor makes falsestatement with material
particulars in returns, reports, prospectus or other statements knowingly it to be false or omits any
material facts knowing them to be false, he shall be punishable with imprisonment for a minimum term of
6 months extendable to 10 years.
ii) Non-compliance by auditor with section 143 and 145: If the auditor does notcomply with section
143 and 145 regarding making his report or signing or authentication of any document and makes willful
neglect on his part he shall be punishable with imprisonment up to 1 year and with fine not less than
twenty thousand extendable to five lakhs.
In case an auditor knowingly or willfully with the intension to deceive the company or shareholders or
creditors or tax authorities, he shall be punishable with imprisonment up to 1 year and fine not less than 1
lakh extendable up to twenty five lakhs.
iii) Failure to assist in the investigation section 217 (6): Where the centralGovernment appoints an
inspector to investigate the affairs of the company, it is the duty of the auditor to preserve and produce to
the inspector all books and papers relating to the company. If an auditor fails to assist the inspector in
investigation he shall be punishable with imprisonment up to 1 year and with fine not less than twenty
five thousand extendable to 1 lakh
iv) Penalty for falsification of books section 336: Any officer including auditor ofa company which is
being wound up, with an intention to defraud or deceive any person, destroys, mutilates, alters, falsifies
any books, papers or securities. He shall be punishable with imprisonment fora term not less than 3 years
extendable to 5 years and with fine not less than 1 lakh extendable to three lakhs.
V) Penalty for deliberate act of commission or omission section 448: If anyofficer including auditor of
the company deliberately make a statement in any return, report, certificate, balance sheet, prospectus etc.
which false or which contains omission of material facts he shall be punishable with imprisonment for a
term not less than 6 months extendable to 10 years and fine not less than amount involved in fraud
extendable to 3 times of such amount.
Audit Program- Meaning and Definition:Audit program represents an outline of procedure to be
followed to support an opinion on financial statements. It is the auditor’s plan of action. It provides a plan
of work of examination and a set of audit procedures.
According to Megis, an audit program is a detailed plan of the auditing work to be performed, specifying
the procedure to be followed in verification of each item in the financial statements and giving the
estimated time required.
According to Holmes, Audit programme is a flexible planned procedure of examination. Thus audit
programme is a planning of audit by auditor so that he may be able to complete his work in a diligent
manner and complete the work without loss of time.
Advantages of audit program:
Some of the important advantages of thee audit programme are:
1. It enables the auditor to keep in touch with the work done and general progress of the work.
2. The auditor can be certain that the audit staff will cover whole of the ground.
3. It will help the audit assistants to know their duties.
4. It helps to increase the efficiency of audit assistants.
5. Fixing of the responsibility of audit assistants becomes easier.
6. It provides a check against the possibility of certain important items requiring verification which
are being omitted.
7. Continuity is not lost even if the person on the duty is changed.

Audit Note book:

Audit note book is a diary or register maintained by audit staff to note errors, doubtful quarries and
difficulties. The purpose is to note down the various points which need to be eitherclarified with the client
or the chief editor. The Audit note book is used for recording important points to be included in the
auditor’s report.
Contents of an Auditor’s Note Book:
1. A list of books of accounts maintained.
2. The names, duties and responsibilities of principal officers.
3. The particulars of missing receipts and vouchers.
4. Mistakes and errors detected.
5. The points which need clarifications and explanations.
6. The points deserving the attention of the auditor.
7. Various totals and balances.
8. The Points to be a part of auditor’s report.
Advantages of Audit Note book:
Some of the advantages of the audit note book are.
1. It ensures the uniformity and helps in knowing the amount of work performed.
2. Important matters relating to the audit work may be easily recalled.
3. Facilities and preparation of the audit report.
4. In case of the assistant in charge is changed, no difficulty is faced in continuing the incomplete
work.
5. The responsibility of the errors undetected can be fixed on clerk concerned.
6. The audit note book shows the extent of the interest and pain taken by the audit staff. It helps in
their appraisal.
7. It ensures that the audit programme has been sincerely followed. Deviations can be noticed.
8. It is reliable evidence in the court of law, If an auditor has to defend himself.

Audit working papers

Meaning and Definition: The term audit working papers designate the files of analysis, summaries,
comments and correspondence built by an auditor during the course of the field work of an audit
engagement. These papers contain essential facts about the accounts which are under audit.
According to Arnold W. Johnson, ‘’ Audit working papers are the written private materials, which an
auditor prepares for each audit. They describe the accounting information which he receives from his
client, the methods of examination used, the conclusions (and reasons thereof) and the financial
statements.”
According to Jack C. Robertson,“Working papers are auditor’s own evidence ofcompliance with
generally accepted auditing standards and of the decisions respecting all procedures necessary in the
circumstances unique to the audit engagement.”
They consist of draft copies of trial balances, adjusting entries, accounts analysis, schedules of debtors
and creditors summaries of reconciliation statements, certificates of official comments, copies of
correspondence between auditors and debtors, creditors and bank, detailed schedule of items like
depreciation, inventories previous audit reports, important quarries with explanation audit programme and
other important materials.
Objectives of Audit working papers
The working paper serves following purposes:
1. They represent the volume of work performed by the auditor and his staff, which helps in preparing
the report.
2. They show the extent of adherence to accounting principles and auditing standards.
3. They are useful as evidence against the charge of negligence.
4. They act as guide for subsequent examinations.
5. They enable the auditor to know the weakness of the internal check system in operation as also the
accounting system.
6. They assist the auditor in coordinating and organizing the work of audit clerks.
7. They assist in planning and performance of audit work.

Retention of Audit Working Papers: The Council of the Institute of Chartered Accountants of India had
in August 2009, pursuant to the provisions of Rule 12 of the Chartered Accountants (Procedures of
Investigations of Professional and Other Misconduct and Cases) Rules, 2007 had amended the audit
documentation retention period appearing as ten years in paragraph 83 of Standard on Quality Control 1
to seven years.

Because of the above decision of the Council, with the issuance of this announcement by the Auditing and
Assurance Standards Board, the audit documentation retention period appearing as ten years in paragraph
A23 of the Standard on Auditing (SA) 230, Audit Documentation, issued in January 2009, shall also stand
amended to seven years.

Internal Control- Meaning and Definition:Internal control is a broad term with a wide coverage. It
covers the control of whole management system. Internal control involves a number of checks and
controls exercised in a business to ensure its efficient and economic working.
According to The American Institute of Certified Public Accountants, “Internal controlcomprises of
the plan of organization and all the coordinate methods and measures adopted within a business to
safeguard its assets, check the accuracy and reliability of its accounting data to promote operational
efficiency and to encourage adherence to prescribed managerial policies.”
The system of internal control can be defined as, “the plan of organization and all the methods and
procedures adopted by the management of an entity to assist in achieving the management’s objectives of
ensuring, as far as practicable, the orderly and efficient conduct of its business.”
In brief it can be stated that internal control includes not only internal check and internal audit but the
whole system of controls, financial and otherwise, established by the management in order to carry on the
business of the company in an orderly manner, to safeguard its assets and to secure as far as possible the
accuracy and reliability of records.

Objectives/Need of the Internal Control:

1. Providing reliable data: Business decisions require accurate information o run the business
efficiently. Examples of significant areas where management requires reliable information are fixation of
selling prices production directives depending upon requirements etc. with the efficient internal control in
place the accurate, required and reliable information can be provided for taking the important decisions
and efficient performance of the activities.
2. To promote operational Efficiency: the controls within an organization are meant to prevent
unnecessary duplication of efforts, protect against waste in all aspects of business and discourage other
types of inefficient use of resources so as to promote the operational efficiency.
3. To encourage adherence to the prescribed policies: the system of internal control is meant to
provide reasonable assurance that procedures and rules of various institutes are followed by company
personnel.
4. Safeguarding assets and records: the physical assets of the company can be stolen, misused or
accidently destroyed if not properly protected by adequate controls. The internal control helps to
safeguard the physical assets and to secure the accuracy and reliabilities of the records of the company.

Internal Check
Meaning and Definition:Internal check is the valuable part of the internal control. It is an arrangement of
the duties of members of staff in such a manner that the work performed one person is automatically and
independently checked by the other.
According to F.R. Paula, “internal check means practically a continuous internalaudit Carried on by the
staff itself, by means of which the work of each individual is independently checked by other members of
the staff.”
According to D.R. Davar, “Internal check is a system or method introduced with definedinstructions
given to staff as to their sphere of work with a view to control and the verification of their work and also
the maintenance of accurate records as the ultimate aim.
According To Joseph Lancaster, “The internal check is a method of organizing the entireoperations,
office, warehouse, factory and the duties to the respective staff so that frauds and irregularities are
impossible without collusion.”
All the definitions of internal check give a common idea about system organized within the concern itself,
wherein the work of one employee is automatically checked up by the other and the possibility of error or
fraud is reduced to the minimum.
Objectives of internal check:
1. To exercise moral pressure over the staff.
2. To ensure that the accounting system produces reliable and adequate information.
3. To provide protection to the resources of the business against fraud, carelessness and in efficiency.
4. To distribute work in such a manner that no business is left unrecorded.
5. To allocate duties and responsibilities of each clerk in such a way that he may held responsible for
particular fraud or error.
6. To increase the efficiency of clerks because the allocation of duties is based on the principle of
division of labour.
7. To detect errors and frauds easily if it is committed, because in an efficient internal check system,
there is a provision for independent checking.
Advantages of Internal Check:
1. Proper division of work: internal check entails a proper and rational distribution of work among the
members of staff of the enterprise keeping in view their individual qualifications, experience and area of
specialization.
2. Detection of errors and frauds: since no individual worker is allowed to handle a job completely
from the beginning to the end, and the work of each clerk is automatically checked by the other, this helps
in the early detection and discovery of errors and frauds.
3. Increased efficiency coupled with economy: A good system of internal check increases the
efficiency of work among the staff and leads to overall economy.
4. Convenience to auditor: where an organization is operating the system of internal check, the
statutory auditor may conveniently avoid detailed checking of the transactions. He may apply a few tests
here and there and can relieve himself from detailed checking.
5. Accuracy of the accounts can be relied upon: If there is a good system of internal check the owner
of the concern may rely upon the genuineness and accuracy of the accounts.
6. Increase in Profits: overall efficiency and economy in operations result in more profits- thus
ensuring larger dividends for the owners or shareholders.
Internal Check With Regard To Sales:
The system of internal check regarding sales should take care of following:
1. On receipt of the order, it should be numbered and preserved in Orders Received Book with full
particulars.
2. The Despatch Department should be given a copy of the order with necessary particulars.
3. The Despatch Department should take steps to pack the goods as per order.
4. The statement of goods as prepared by the Despatch Department should be checked with the
customer’s order and then invoice will be prepared in triplicate by means of carbon papers.
5. A responsible official should check the invoice particularly the rates charged and calculations made.
6. With the help of the copy of invoices entries should be made in Sales Day Book.
7. On dispatch of the goods records should be made in the Goods Outward Book.
8. Two copies of the invoice may be sent to customer who will return one of them after signing it. It will
serve the purpose of delivery note. Third copy will be retained for further reference.
9. Entries should be made in Goods inward Book for all the goods returned by the customers. Credit
notes should be prepared and should be duly checked and initialed by the responsible official.
10. With the help of credit notes, records should be made in the Sales Return Book.

Internal Check With Regard To Purchases:

1. Requisition: the procedure for issuing purchase requisitions should be specified. The head of the
department, who is need of goods, should fill a requisition slip duly signed and then should send to the
purchase department. The details about the quality, quantity and the time by which the goods must be
supplied be clearly mentioned in the requisition slip.
2. Enquiry: Purchases department makes an enquiry about terms and conditions of the purchases from
different suppliers for these purposes tenders are generally invited. But, who shall open and accept the
tenders, should be clearly specified. As rule lowest tender should be accepted and decision be taken.
3. Purchase Order: the purchase department places orders which should be recorded in the purchase order
book. Four copies of purchase order should be prepared. One copy will be sent to vendor, the second to
the store department, third to the accounting department and fourth will be retained by the purchase
department itself. A responsible officer should review the purchase order, before signing by the
authorized person or director.
4. Receipt of goods: on receipt of goods, the purchase department should properly inspect them, and after
an entry in the goods inward (receipt) book, the same should be sent to the stores. Concerned department
should be informed about the receipt of goods.
5. Making the payments: the purchase department should thoroughly check the invoices and send the
same to accounting department for payment. The accounting department should compare the invoice with
the purchase order and incoming inspection report andshould verify the calculations. The accounts
department should enter the invoice in purchase book. Only responsible official should draw cheque for
the payment of invoice. At the time of signing, a signing authority must verify that correct payment is
made.

Internal check with regard to fixed assets:

1. A proper authority should be designated for the sanction of capital expenditure. The authority may
be given to managing director, a factory manager or a committee may be set up for this purpose.
2. A proper authority should be designated even for sale of fixed assets, transfer or even for
discarding of an asset.
3. Proper accounting records in respect of fixed assets should be maintained and it should be ensured
that the proper accounting distinction is observed between capital and review expenditure.
4. There should be a periodic inspection of assets.
5. A fixed asset register must be maintained giving details of all the fixed assets. In this register
description of the assets, their cost and location should be mentioned. Management should also ensure
that all the fixed assets are verified physically from time to time.
6. Perfect arrangements should be made to ensure that fixed assets are properly maintained and
applied in the service of the company.
7. Where the fixed assets are transferred between branches or members of the sale group, proper
arrangements in respect of their pricing, depreciation and accounting should be made.
8. Depreciation rates are to be authorized and evidenced and which persons are to be responsible for
carrying out and checking the necessary calculations.
9. Lastly it should be seen that these fixed assets should be adequately insured.

Internal check with regard to cash transactions

CASH RECEIPTS:
1. There should be a separate clerk known as cashier to deal with the receipts of cash. Immediately
upon receipts of cash a rough record of the amount should be made. The cashier should not be authorized
to keep cash with him. He should not be allowed to make expenditure out of it and to make entries in the
ledger an d other books of prime entry.

2. All receipts should be banked daily. From time to time the bank reconciliation statements should be
prepared to reconcile bank and cash balances.
3. Bank pay- in-slips should not be prepared by the same person who is incharge of making actual
deposits in the bank.
4. All receipts should be acknowledged by means of printed receipts. Counter-foils of all the receipts
issued should be properly maintained. Unused receipt must be kept with some responsible officer.
5. Spoiled receipts should be cancelled and not torn off. If some alterations is made in the receipts
already written, it should be properly initialed.
6. Copies of receipts previously issued must be marked duplicate.
7. Some responsible persons of the firm should verify the balance of cash by carrying out a surprise
physical check from time to time.

CASH PAYMENTS:
1. The person in charge of making payments should have no connection with the receipts of cash.
2. All payments should, as far as possible be by chance cheques excluding petty cash payments. The
cheques drawn for payment should be order cheques and as far as practicable they should be crossed.
3. Arrangements should be made to ensure that the vouchers supporting payments cannot be presented
for the payments twice, such vouchers should be stamped as paid before the cheques are signed.
4. An official should check up the statements received from creditors and verify with the invoices and
ledger accounts only after proper verifications cheques should be drawn in favour of the creditors.
5. For sanctioning the payments of special nature, only directors and senior officers should be
empowered.
6. Bank reconciliation statements should be prepared to reconcile bank and cash balances from time
to time by some authorities other than the cashier.
7. Bank cheques must be held under lock and key with a responsible officer.
8. Receipts duly signed and stamped should be obtained for each payment.
9. Receipts so obtained should be properly arranged and maintained through proper filing system.
10. To ensure the availability of cash discounts, monthly or periodic payments should be made on the
fixed dates.

Audit & Auditors – Companies Act, 2013 vs. Companies Act, 1956
S. Particulars Companies Act, 2013 Companies Act,
No. 1956
1. Compulsory Sec.138. No Such Provision
Internal Audit Prescribes companies of a particular class to appoint an existed
Internal auditor who can be a CA or CWA or of any
other professional as may be decided by the Board.
2. Rotation of Sec.139(3): No Such Provision
Statutory Auditors Members of a Company may resolve to rotate the audit existed
partner and his team of an audit firm at periodical
intervals or resolve to conduct audit by more than one
auditor.
3. Re- Appointment Sec. 139 (2) Sec. 224 (2)
of Statutory In case of Listed Companies or Companies of a Any Retiring auditor
Auditors particular class, may be re-appointed
-an individual auditor cannot be appointed or re- at any annual general
appointed for one term of more than five consecutive meeting the
years. provisions of sub-
- an audit firm cannot be appointed as auditor for more section (1B) and
than two consecutive terms of five consecutive years. section 224A of the
Also, no audit firm having a common partner/partners Act; unless;
to the other audit firm, whose tenure has expired in a (a) he is not qualified
company immediately preceding the Financial Year, for re-appointment;
shall be appointed as auditor of the same company for a (b) he has given the
period of 5 years. company notice in
writing of his
unwillingness to be
re-appointed;
(c) a resolution has
been passed at that
meeting appointing
somebody instead of
him or providing
expressly that he shall
not be re-appointed ;
or
(d) where notice has
been given of an
intended resolution to
appoint some person
 or persons in the
place of a retiring
auditor, and by reason
of the death,
incapacity or
disqualification of
that person or of all
those persons, as the
case may be, the
resolution cannot be
proceeded with.
4. Tenure of 5 years Sec. 139(1) Sec. 224(1)
An Audit firm or an individual including an LLP to be Auditors could be
appointed as an auditor for a period of 5 years, that is to appointed to hold
hold office up to the date of the 6th AGM. Appointment office only up to the
of auditors for 5 years shall be subject to ratification by date of the next AGM
members at every AGM and could be re-
appointed thereafter.
5. Automatic re- Section 139 (10) Sec. 224 (3)
appointment of Existing auditor to continue to be the auditor of the Provided that if no
existing auditors, company in such a scenario auditor was
when not appointed/ re-
appointed or re- appointed at the
appointed at the AGM, the Central
AGM Government could fill
up the vacancy.
6. Time Bound filing Sec 139(8)(i) Sec. 224 (6)
up of Casual Casual vacancy to be filled up by the Board within 30 Casual vacancies to
vacancy in the days. If due to resignation, then by the Company in its be filled up by the
office of Auditors meeting within 3 months from the date of Board. If due to
recommendation of the Board and such auditor to hold resignation, then by
office only up to the date of the next AGM members in their
meeting. And shall
hold such office until
the conclusion of the
next annual general
meeting.
7. Recommendations Sec. 139 (11): No Such Provision
of audit All the appointment of statutory auditors including case
committee for the of casual vacancy shall be made after considering the
appointments of recommendations of the Audit Committee in case where
auditors the Company is required to constitute an Audit
Committee.
8. Auditor’s duties Sec. 140 (2) No such provision
when they resign Retiring auditor to file a statement with the ROC as well existed.
as the Company, within 30 days of resignation,
indicating reasons and other facts that may be relevant
 with regard to his resignation.
9. Tribunal may Sec. 140 (5) Sec. 224 (7)
direct Company to The Tribunal may, by order, direct the Company to Provides for removal
change its change its auditors on being satisfied that the auditors of auditors before the
Auditors has acted in a fraudulent manner or abetted or colluded expiry of their term
in any fraud. only by the company
in the general
meeting, after
obtaining the prior
approval of the
Central Government.
10. Duties of Sec. 143 (12) No Such Provision
auditor/secretarial To inform the fraud to CG which prescribed time and
auditor/ cost manner and the same shall not be construed as a breach
auditor to report of duty
fraud to the CG
11. Limited liability Sec. 141(2) Sec. 226 (3)
Partnership as an Where a firm including an LLP is appointed as an LLP wasn’t treated as
auditor auditor of a company, only the partners who are a Body corporate for
chartered accountants shall be authorized to act and sign the limited purpose of
on behalf of the firm. this section and hence
couldn’t be appointed
as an Auditor.
12. Services not be Sec. 144: No such provision
rendered by the Auditor not to directly or indirectly render the following
auditor services to the company, it holding company or its
subsidiaries, or associate company:
-Accounting and book keeping service.
-Internal audit
-Design or implementation of any financial information
system
-Actuarial services.
-Investment advisory services
-Investment banking services
-Rendering of outsourced financial services.
- Management services
-Any other kind of consultancy services.
Provisions relating to restrictions on non-audit services
modified to provide that such restrictions shall not apply
to associate companies and further to provide for
transitional period for complying with such provisions.
13. Auditors Sec. 146 Sec. 231
attendance at Provides that auditor shall, unless otherwise exempted Provides for all
AGM proposed to by the Company, attend any general meeting. Either by notices of and other
be made himself or through his authorized representative who is communication
obligatory qualified to be an auditor. relating general
meeting of a company
 to be forwarded to the
auditor. The auditor
was thus entitled to
but not obliged to
attend any general
meeting.
14. Accountability of Sec.147 (2) Sec. 233
auditors Penalties significantly enhanced – Penalties were
Fine not less than 25000 INR but extendable up to 5 provided for violation
Lakhs. of section 227
Imprisonment up to 1 yr and fine in case there is an (dealing with powers
intention to deceive the company, its shareholders or and duties of
creditors. auditors) and section
Provisions relating to extent of criminal liability of 229 (dealing with
auditors particularly in case of partners of an audit firm signature of audit
reviewed to bring clarity. report). Meager
Sec. 147 (3) penalties of fine up to
Further, to ensure that the liability in respect of damages 10,000 INR.
paid by the auditor, as per the order of the court, is
promptly used for payment to affected parties including
tax authorities, Central Government has been
empowered to specify any statutory body/ authority for
such purpose.
15. Disqualification Sec. 141 (3)
of auditors (a) a body corporate other than a LLP,
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the
employment, of an officer or employee of the company;
(d) a person who, or his relative or partner—
(i) is holding any security of or interest in the company
or its subsidiary, or of its holding or associate company
or a subsidiary of such holding company: Provided that
such person may hold security or interest in the
company of face value not exceeding 1000 rupees or
such sum as may be prescribed;
(ii) is indebted to the company, or its subsidiary, or its
holding or associate company or a subsidiary of such
holding company, in excess of such amount as may be
prescribed; or
(iii) has given a guarantee or provided any security in
connection with the indebtedness of any third person to
the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding
company, for such amount as may be prescribed;
(e) a person or a firm who, whether directly or
indirectly, has business relationship with the company,
or its subsidiary, or its holding or associate company or
subsidiary of such holding company or associate
company of such nature as may be prescribed; (f) a
person whose relative is a director or is in the
employment of the company as a director or key
managerial personnel;
(g) a person who is in full time employment elsewhere
or a person or a partner of a firm holding appointment
as its auditor, if such persons or partner is at the date of
such appointment or reappointment holding
appointment as auditor of more than twenty companies;
(h) a person who has been convicted by a court of an
offence involving fraud and a period of ten years has
not elapsed from the date of such conviction;
(i) any person whose subsidiary or associate company
or any other form of entity, is engaged as on the date of
appointment in consulting and specialized services as
provided in section 144 (mentioned above in S. No. 12)