Emailing AUDITING & Assurance Nov21

INTER CA
AUDITING &
ASSURANCE
Nov. 2021
Revision Notes
INTER CA–Auditing & Assurance
INDEX
Nature Scope and
01 Objectives of Audit
01-10
Audit Evidence and

11-53
Documentations 02
03 Audit Sampling 54-61
62-69 Analytical Procedures 04
Audit of Items of
05 Financial Statements
70-82
83-127 Company Audit 06
07 Audit Report 128-143
144-161 Audit Of Banks 08

NATURE SCOPE AND

OBJECTIVES OF AUDIT
Q.1 DEFINITION OF AUDIT: ( N17) (RTP M 20)

• As per ICAI
• An audit is an independent examination
• Of financial information
• Of any entity, whether profit oriented or not,
• And irrespective of its size or legal form
• When such an examination is conducted with a view to expressing an opinion thereon.
QUESTIONS ASKED IN PAST/RTP/MOCK TEST/MODULE
Question:
An audit is independent examination of financial information of any entity, whether profit
oriented or not and irrespective of its legal size or form, when such an examination is conducted
with a view to expressing an opinion thereon.
Explain how the person conducting this task should care to ensure that FS would not mislead
Answer:
Analysis of Definition
Q.2 INHERENT LIMITATION OF AUDIT:(TOPIC 5)

• The auditor is not expected to,
• And cannot, reduce audit risk to zero &
• Therefore, obtain absolute assurance that the financial statements
• Are free from material misstatement due to fraud or error.
• This is because of inherent limitations of audit arise from (FATO)
1
OTHER FINANCIAL
MATTERS REPORTING
TIMELINESS AUDIT
PROCESURE

QUESTIONS ASKED IN PAST/RTP/MOCK TEST/MODULE
Question :
MNO Ltd requested the auditor CA P to provide for assurance in respect of its ten branches
scattered in Delhi and confirm that the financial statements are free from material
misstatement due to fraud or error. Advise.
Answer:
Inherent Limitations.
Question :
DEF & Co. Chartered Accountants successfully carried out the audit of Shree Garments for
the Fy. 2015. After the completion of audit, there were found material misstatements due
to fraud in the financial statements which were not noticed and reported by the auditor.
Management alleges that it is failure on the part of auditor. Comment
Answer:
Inherent Limitations.
Q.3 INDEPENDENCE OF AUDITOR ( TOPIC 8)
• Independence cannot be defined as it is a state of mind
• It means that auditors judgment should not be influenced in any situation.
2
• According to guidance note by ICAI independence implies that auditors judgment of a

person is not subordinate to wishes or directions of another person who might have
engaged him or to his own self interest.
• The code of ethics for professional accountants prepared by the International Federation
of Accountants (IFAC) identifies five types of threats:
Self Interest
Intimidation Self Review
Familiarity Advocacy

SAFEGUARDS TO INDEPENDENCE
The following are the guiding principles in this regard

• For the public to have confidence in the quality of audit, it is essential that auditors
should always be and appears to be independent of the entities that they are auditing
• In the case of audit, the key fundamental principles are integrity, objectivity and
professional skepticism, which necessarily require the auditor to be independent.
• Before taking on any work, an auditor must conscientiously consider whether it involves
threats to his independence
3
• When such threats exist, the auditor should either desist from the task or put in place
safeguards that eliminate them
• If the auditor is unable to fully implement credible and adequate safeguards, then he
must not accept the work
Questions asked in past/rtp/mock test/module
Question:
The Chartered Accountant has a responsibility to remain independent by taking into account
the context in which they practice, the threats to independence and the safeguards available
to eliminate the threats.
In the above context, explain the guiding principles
Answer:
Guiding Principles
Q.4 professional skepticism:

• Professional skepticism refers to 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.
Q.5 SA 210: AGREEING TO THE TERMS OF AUDIT ENGAGEMENTS(TOPIC 11)

5. LETTER OF APPOINTMENT
1. INQUIRY
3. TERMS OF ENGANGEMENT
X LTD ABC & CO
2. PROPOSAL
4. LETTER OF ENGAGEMENT
4
PRECONDITIONS
Determine whether FRF Obtain agreement from management

is acceptable or not regarding their responsibilities
1. For preparation of FS
2. Internal control (IC)
3. To provide auditor with
a. Access with Info
b. Access to additional Inf0
c. Unrestricted access to persons within the entity
Contents of Engagement letter

(FORAM)
F- Identification of the applicable FRF for the preparation of the FS
O- The objective and scope of audit of the financial statements
R- Reference to expected form and content of any reports to be issued by the auditor and
a statement that there may be circumstances in which a report may differ from its
expected form and content
A- The responsibilities of the auditor
M- The responsibilities of the management
limitation on scope of audit

If Management & TCWG imposes LOSA
↓
Auditor shall evaluate the possible effects
↓
If LOSA will result in the auditor disclaiming an opinion
↓
The auditor shall not accept such appointment, unless required by law or regulation
to do so
5
ACCEPTANCE OF CHANGE IN THE TERMS OF ENGAGEMENT

During the course of audit
↓
If management requests to change the TOE
↓
Inquire about the reasons

VALID INVALID
Inquire about the reasons

VALID INVALID
↓ ↓
Accept the change (In Writing) Donot accept. If management & TCWG
do not allow auditor to continue the
original engagement
↓
ROSA
Restriction on scope of audit
↓
WITHDRAW
After fulfilling legal obligation
RECURRING AUDIT. (morons)

M- Entity misunderstands the objective & scope
0- A significant change in ownership
R- A change in legal or regulatory requirement
0- A change in other reporting requirement
N- A change in nature & size of the entity’s business
S- Recent change of senior management
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MODULE KE PEEHCE KYA HAI? #TEST YOUR KNOWLEDGE

Question 1:
Explain clearly meaning of Auditing. How would you as an auditor perform the audit.
Answer:
Refer point 1 from page 2
Question 2:
“The independent audit of an entity’s financial statements is a vital service to investors,
trade payables, and other participants in economic exchange”. Explain
Answer:
Auditing along with other disciplines such as accounting and law, equips you with all the
knowledge that is required to enter into auditing as a profession. No business or institution
can effectively carry on its activities without the help of proper records and accounts, since
transactions take place at different of time with numerous persons and entities. The effect
of all transactions has to be recorded and suitably analysed to see the results as regards the
business as a whole. Periodical statements of account are drawn up to measure the success
of whole. Periodical statements of account are drawn up to measure the success or failure of
the activities in achieving the objective of the organization. This would be impossible without
a systematic record of transactions.
Financial statements are often the basis for decision making by the management and for
corrective action so as to even closing down the organization or a part of it. All this would be
possible only if the statements are reliable; decisions based on wrong accounting statements
may prove very harmful or even fatal to the business. For example, if the business has really
earned a profit but because of wrong accounting, the annual accounts show a loss, the
proprietor may take the decision to sell the business at a loss.
Thus from the point of view of the management itself, authenticity of financial statements is
essential. It is more essential for those who have invested their money in the business but cannot
take part in its management, for example, shareholders in a company, such persons certainly
need an assurance that the annual statements of accounts sent to them are fully reliable.
It is auditing which ensures that the accounting statements are authentic. In today’s
economic environment, information and accountability have assumed a larger role than ever
before. As a result, the independent audit of an entity’s financial statements is a vital service
to investors, trade payable, and other participants in economic exchange.
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Question 3:
State the objectives of Audit according to SA 200
Answer:
Refer point 2 page no 2
Question 4:
“The Code of Ethics for Professional Accountants, prepared by the International Federation
of Accountants (IFAC) identifies five types of threats”. Explain
Answer:
Refer 8.5 page 9
Question 5:
“There are practical and legal limitations on the auditor’s ability to obtain audit evidence.
Explain with examples.
Answer:
The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s
ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and
presentation of the financial statements or that has been requested by the auditor.
2. Fraud may involve sophisticated and carefully organised schemes designed to conceal
it. Therefore, audit procedures used to gather audit evidence may be ineffective for
detecting an intentional misstatement that involves, for example, collusion to falsify
documentation which may cause the auditor to believe that audit evidence is valid
when it is not. The auditor is neither trained as nor expected to be an expert in the
authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the auditor
is not given specific legal powers, such as the power of search, which may be necessary
for such an investigation.
Question 6:
In case of certain subject matters, limitations on the auditor’s ability to detect material
misstatements are particularly significant. Explain such assertions or subject matters.
Answer:
In the case of certain subject matters, limitations on the auditor’s ability to detect material
misstatements are particularly significant. Such assertions or subject matters include:
8
- Fraud, particularly fraud involving senior management or collusion.

- 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.
Question 7:
As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor
should obtain information considered necessary in the circumstances before accepting an
engagement with a new client, when deciding whether to continue an existing engagement
and when considering acceptance of a new engagement with an existing client.
Answer:
Information which assist the Auditor in accepting and continuing of relationship with
Client: As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor
should obtain information considered necessary in the circumstances before accepting an
engagement with a new client, when deciding whether to continue an existing engagement
and when considering acceptance of a new engagement with an existing client. The following
information would assist the auditor in accepting and continuing of relationship with the
client:
(i) The integrity of the principal owners, key management and those charged with
governance of the entity;
(ii) Whether the engagement team is competent to perform the audit engagement and
has the necessary capabilities, including time and resources;
(iii) Whether the firm and the engagement team can comply with relevant ethical
requirements; and
(iv) Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship.
Question 8:
“An auditor who before the completion of the engagement is requested to change the engagement
to one which provides a lower level of assurance should consider the appropriateness of doing
so.” Discuss.
Answer:
Refer 11.5 page 14
9
QUESTIONS ASKED IN PAST/RTP/MTP

Question 09:
“An audit is independent examination of financial information of any entity, whether profit
orientedor not, and irrespective of its size or legal form, when such an examination is
conducted with a view to expressing an opinion thereon.”Explain stating clearly how the
person conducting this task should take care to ensure that financial statements would not
mislead anybody
Answer:
Question 10:
The relationship between auditing and law is very close one.
Answer:
10
AUDIT EVIDENCE AND

DOCUMENTATIONS
SA230
q.1 meaning:
• The record of audit procedures performed,
• Relevant audit evidence obtained,
• And conclusions the auditor reached
STATE EXAMPLES OF AUDIT DOCUMENTATION:

• Audit programme.
• Engagement letter.
• External confirmations
• Copies of written representations given to management & TCWG
• Audit Checklist
• Significant matters Communicated to the client.
• copies of correspondence with experts & another auditor
• Analysis of significant ratios& trends.
Q.2 PURPOSE OFAUDIT DOCUMENTATION:

(FAD PIE)
F- Retaining a record of matters of continuing significance to Future audit.
A- Enabling the engagement team to be accountable for its work.
D- Assisting members of the engagement team to direct & supervise the audit work
P- Assisting the engagement team to plan & perform the audit.
I- Enabling the conduct of quality control reviews & inspections
E- Enabling the conduct of external Inspection in accordance with applicable legal

requirements
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Q.3 THE FORM, CONTENT & EXTENT OF AUDIT DOCUMENTATION:

(I Need DRS)
I- document how the auditor addressed the inconsistency to resolve the doubts as identified
during the course of audit
N- the nature, timing and extent of the audit procedures performed to comply with the SAs
and applicable legal and regulatory requirements. In documenting this, the auditor shall
record:
1. Identifying characteristics of the specific items or matters tested
2. Who performed the audit work and the date such work was completed
3. Who reviewed the audit work performed and the date and extent of such review
D- document discussions of significant matters with the management, those charged with
governance, and others, including the nature of the significant matters discussed and
when and with whom the discussions took place.
R- the result of the audit procedures performed, and the audit evidence obtained
S- significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgements made in reaching those conclusions.
Q.4 FACTORS AFFECTING THE FORM, CONTENT & EXTENT OF AUDIT DOCUMENTATION:
(Neha & Neetu MISS)
N- Nature of Audit procedures to be performed

N- Nature and extent of exceptions identified
M- The audit methodology and tools
I- The identified risk of MMS
S- The size & complexity of the entity.
S- The significance of audit evidence obtained.
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Q.5 working paper files:

PERMAMENT AUDIT FILE CURRENT AUDIT FILE
↓ ↓
It contains matters which don’t It contains matters relating to
change very often. audit of single period.
↓ ↓
EXAMPLES: (SLAM) EXAMPLES: (LIEN)
S: significant audit observation of L: Letter of representation or
earlier years. confirmation received from the client.
L: legal documents agreement & I: Important Matter in Minute of BM & GM.
Minutes relevant to the audit. E: Evidence of the planning process of
A: Analysis of significant ratios & audit & audit programme.
trends N: Nature, timing & extent of auditing
M: MOA & AOA procedures.

Q.6 OWNERSHIP & RETENTION OF AUDIT DOCUMENTATION
• As per SQC- 1 audit documentation is the property of the auditor.
• As per SQC- 1 he should retain documentation for at least 7 years
• He may at his discretion, make portions of, or extracts from, audit documentation available
to clients, provided such disclosure does not undermine the validity of the work performed,
or in the case of assurance engagement, the independence of the auditor or his personnel.
(i.e our papers should not be subject to undue scrutiny)
Q.7 ASSEMBLY & RETENTION OF THE FINAL AUDIT FILE

• As per SQC- 1 complete assembly of the final audit file within 60 days after the date of
the auditor’s report.
• After the assembly of the final audit file has been completed, the auditor shall not delete
or discard audit documentation of any nature before the end of its retention period
Q.8 COMPLETION MEMORANDUM

• The auditor may consider it helpful to prepare and retain as part of the audit documentation
a summary
• It describes:
• The significant matters identified during the audit
• How they were addressed
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QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 1:
Mr. A, a practicing CA, has been appointed as an auditor of True Pvt. Ltd. What factors would
influence the amount of working papers required to be maintained for the purpose of his audit?
Answer:
Factors affect form and content
N- Nature of Audit procedures to be performed
N- Nature and extent of exceptions identified
M- The audit methodology and tools
I- The identified risk of MMS
S- The size & complexity of the entity.
S- The significance of audit evidence obtained.
Question 2: (May 10)

Define audit documentation and also give some examples
Answer : Refer Q.1
Question 3: (May 11,15)

Audit documentation serves a number of additional purposes
Answer : Refer Q.2

Completion Memorandum is helpful as part of the audit documentation. Explain
Answer : Refer Q.8

Factors affecting form, content and extent of audit documentation
Answer : Refer Q.4
Question 6: (Nov 10)
R.K & Co is the auditor of PQR LTD. The MD of the company demands copies of the working
papers from the auditors. Are the auditors bound to oblige the MD?
Answer : Refer Q.6
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SA 505
EXTERNAL CONFIRMATION
Confirmation Request
AUDITOR 3RD PARTY
Direct written response

Q.1 MEANING
• Audit evidence obtained as a direct written response
• to the auditor for a third party (confirming party)
• in paper form or by electronic or other medium.
To The Accounts Manager,

Name of the business
Address of the Business City
Sub : Balance Confirmation as on 31st March 20_
Sir,
Our auditors, M/s. X Y z & Co. are now engaged on their annual audit. Would you please
confirm to them direct that the details of the amount due to us/due to you, on 31st March,
2xxx were as shown on the attached statement.
If you agree to the balance due, please sign the confirmation slip below and return this form
to our auditors in the enclosed reply-paid envelope. If you do not agree the balance due, please
write the amount shown by your records on the confirmation slip below, together with full
particulars of how the amount is made up.
This is not a request for payment but we should be grateful if you would reply as soon as
possible as the information is needed for audit purposes. Your co-operation in this matter is
greatly appreciated.
ThankingYou,
Yours Truly,
15
Q. 2 SITUATIONS WHERE EXTERNAL CONFIRMATIONS CAN BE USED

(BILLS PAT)
B- Bank Balance.
I- Investment purchased but delivery not taken.
L- Loan from lenders.
L- Long o/s share application money.
S- Stock hold by 3rd party.
P- Property title deeds held by 3rd parties.
A- Account balances.
T- Terms of agreements with 3rd parties.
Q.3 NEGATIVE & POSITIVE CONFIRNATION
POSITIVE CONFIRMATION NEGATIVE CONFIRMATION

A request that the confirming party A request that the confirming party
responds directly to the auditor indicating responds directly to the auditor only if
whether the confirming party agrees or confirming party disagrees with the info
disagrees with the info in the request in the request.

SITUATIONS WHERE NEGATIVE CONFIRMATIONS CAN BE USED
(SALA)
S- Substantial no. of errors are not expected.

A- Auditors have no reasons to believe that respondent will disregard this request.
L- Large no. of small balances involved.
A- Assessed level of Inherent Risk is low.
C. NON-RESPONSE:
A failure of the confirming party to respond, or fully respond, to a positive confirmation
request, or a confirmation request returned undelivered
D. EXCEPTION:
A response that indicates a difference between information requested to be confirmed, or
contained in the entity’s records, and information provided by the confirming party
16
Q. 5 MANAGEMENTS REFUSAL TO ALLOW THE AUDITOR TO SEND CONFIRMATIONS
(PIE)
P- Perform alternative audit procedures designed to obtain relevant & reliable audit
evidence.
I- Inquire as to management’s reason for refusal & seek audit evidence as to their validity
& reasonableness.
E- Evaluate the implications of management’s refusal on auditors assessment of ROMMS

including the risk of fraud
• If the auditor concludes that management’s refusal to allow the auditor to send a
confirmation request in unreasonable
• or the auditor is unable to obtain relevant & reliable audit evidence from alternative
procedures,
• the auditor shall communicate with TCWG,
• the auditor shall also determine the implications for the audit & auditors opinion in
accordance with SA 705.
Q. 6 FACTORS TO BE CONSIDERED WHEN DESIGNING A CONFIRMATION REQUEST

(ALARM2)
A- The assertions regarding which external confirmation is being prepared.
L- The layout and presentation of the confirmation request.
A- Ability & willingness of the intended confirming party to confirm.
R- Identified risk of material misstatement, including fraud risk factors, if any.
M1- The mode of communication, whether it is in paper form, or by electronic or other medium.
17
M2- Management’s authorisation for the 3rd parties to respond to the auditor. It may be
noted that confirming parties may not be willing to respond to a confirmation request
not having management’s authorisation.
Q. 7 FACTORS CREATING DOUBT OVER RELIABILITY OF EXTERNAL CONFIRMATION

(MUDIT)
M- Managements intervention in the confirmation send by 3rd party
U- Unauthorized confirmation
D- Delayed response from 3rd party
I- Incomplete information given by 3rd party
T- Doubt over integrity & reliability of third party.
Q. 8 EXTERNAL CONFIRMATION PROCEDURE

Determining the information to be confirmed
↓
Selecting the appropriate confirming Party
↓
Designing the confirmation request after considering the following
Factors:
♦ ROMMS involved in matters
♦ Method of communication
♦ Prior experience in the audit engagement
↓
Sending the requests, including the follow up requests
Questions asked in past/rtp/mock test
Question 1:
Write short notes on Situations where external confirmations can be used.
Answer : Refer Q.2
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Question 2:
Write short notes on reliability of audit evidence
Answer : Refer Q.7
Question 3:
The management of SLTd. Request you not to seek confirmation from its debtor. As the auditor
of S LTD., What can be appropriate response?
OR
Never Permit Limited refused to allow you to get direct confirmation of the outstanding balances
of trade receivables. You want to ensure on grounds of materiality that atleast outstanding
Above a threshold limits to be to be confirmed and reconciliation is to be carried out before
Finalizing audit. If the company does not relent, how will you respond.
Question 4:
M/s ABC & Co., LLP are appointed auditors of Sharp Company Ltd. for the year ended 31st
March, 2019. As part of the audit process, they want to use confirmation procedures as audit
evidence during the course of audit. In view of the fact that positive confirmations are not
responded favorably, the firm also intends to use negative confirmation requests. What are
the factors to be considered for the same?
Answer : Refer Q.3
19
SA 580:
WRITTEN REPRESENTATIONS
Q.1 MEANING
• It is a written statement by management provided to the auditor
• To confirm certain matters or
• To support other audit evidence.
• WR do not include FS, the assertions therein, or supporting books & records
Q.2. FORM AND CONTENT :

• It is a written statement by management provided to the auditor to confirm certain
matters or to support other audit evidence
• It does not include financial statements, the assertions therein, or supporting books and
records
• The auditor shall request management to provide a written representation that it has
fulfilled its responsibility for the preparation of the FS in accordance with then AFRF,
including where relevant their fair presentation, as set out in the terms of the audit
engagement
• The written representations shall be for all financial statements and period(s) referred
to in the auditor’s report
• IT must be obtained at the end of the audit but before signing out report
• It must be in a proper form as a representation letter (not electronic form)
• Contents of WR are
♦ As required by SA 580
♦ AS required by other SAs
♦ AS required by the auditor
20
Q.3 IF THE MANAGEMENT REFUSES TO PROVIDE WR

(DAR)
D- Discuss with management
A- Take Appropriate actions including determining the possible effect on the opinion in
auditors report .
R- Re-evaluate the integrity of management & evaluate the effect that this may have on
the reliability of representation (oral or written) on audit evidence in general.
The auditor should disclaim an opinion on the financial statement if the management
does not provide WR in accordance with SA 705.
Q.4. DOUBTS OVER RELIABILITY OF WR :
• If the auditor has concerns about the competence, integrity, ethical values or diligence
of management
• The auditor shall determine the effect that such concerns may have on the reliability of
representations. (oral or written)
• If WR are inconsistent with other AE, the auditor shall perform audit procedures to
attempt to resolve the matter.
• If auditor concludes that WR are not reliable, the auditor shall take appropriate actions,
including determining the possible effect on the opinion in auditors report in accordance
with SA 705
Q.5 RELIABILITY OF WR
faq: The auditor of ABC ltd. was not able to get the confirmation about the existence & value
of certain machines. However, the management gave him a certificate to prove the existence
& value of m/c as appearing in the books of accounts. the auditor accepted the same without
any further procedure & signed the audit report is he right in his approach.
Answer:
1 . As per SA 500 ‘Audit evidence” the auditor shall obtain sufficient and appropriate evidence.
21
2. Sufficiency refer to the quantum & appropriateness refers to the quality of the evidence.
3. Although WR provide necessary AE, they do not provide SAAE on their own about any of
the matters with which deal.
4. It can be considered just as on additional evidence. Thus, other evidences w.r.t specific
item shall be obtained by the auditor.
5. As written evidence cannot be considered as a substitute for other audit evidences, the
auditor shall also seek corroborative evidence from other sources whether internal or
external to entity.
6. In the present case study, it is given that the auditor of ABC LTd. Was not able to get
the confirmation about the existence & value of the machinery as appearing in books of
accounts.
The auditor accepted the same without any further procedure and signed the audit
report.
7. Machinery being a material item, he should have obtained sufficient & appropriate
evidences and should not have Merely, relied upon written representation alone.
8. In case, he is not able to obtain other corroborative evidences, he should either qualify
or disclaim his audit opinion.
9. Thus, he is not right in his approach as he violated SA 500 & SA 580 as explained.
22
SA500 :
AUDIT EVIDENCE
Q.1 SUFFICIENT & APPROPRIATE AUDIT EVIDENCE:
LARGE PIZZA DOUBLE CHEEZE BURST PIZZA

SUFFICIENT (Quantity) APPROPRIATE (Quality)
AUDIT EVIDENCE FOR AIR CONDITIONER
1) Invoice
2) Installment voucher
3) Bank statement
4) Physical Verification
Q.1 SUFFICIENT & APPROPRIATE AUDIT EVIDENCE:

SUFFICIENCY: It is the measure of quantity of audit evidence.
The quantity is affected by
• ROMMS
• Size & Characteristics of co.
• Materiality
• Population
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APPROPRIATENESS: It is measure of quality of audit evidence ie. Its relevance & reliability in
providing support for the conclusion on which auditors opinion is based.
q.2 methods of obtaining audit evidence

(ICAI observes, re performs, re calculates )
I- Inspection
C- Confirmation
A- Analytical Procedure
I- Inquiry
Observation
Re performance
Re calculate
Q.3 types of auidit evidence:
BASED UPON SOURCE BASED UPON NATURE

OF INFO OF INFO
Internal External • Visual evidence

• Oral Evidence
Originates from Originates from • Written evidence
sources within sources outside
the entity. For the entity. For eg:
eg: sales invoice & purchase invoice &
bank reconciliation bank statement
statement
Q.4 reliability of evidence:

(D2I2O)
D1- AE in documentary form is more reliable than evidence obtained orally.
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D2- AE obtained directly by the auditor is more reliable than AE obtained indirectly
I1- Reliability is more when it is obtained from independent sources outside the entity
I2- Reliability is more when internal controls are strong
O- Original documents are more reliable than photocopies
Question 1:
Write a short note on inquiry
Answer:
• Inquiry is used extensively throughout the audit in addition to other audit procedure
• Inquiries may range from formal written inquiries to informal oral inquiries. However, in
oral inquiries , the auditor may consider it necessary to obtain WR from management and
TCWG to confirm such responses
• Evaluating responses to inquiries is an integral part of the inquiry process
• Responses to inquiry may provide the auditor with information not previously possessed.
Alternatively, repsonses might provide information that differs significantly from other
information that the auditor has obtained.
• In some cases reponses to inquiries provide a basis for the auditor to modify or perform
additional audit procedure
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SA 501 :
AUDIT EVIDENCE- SPECIFIC
CONSIDERATIONS FOR SELECTED ITEMS
Q.1 . INTRODUCTION
• As per SA501 ‘Audit Evidence- specific considerations for selected items.’ The auditor
should perform audit procedures to obtain SAAE regarding ___________.
• SA501 is additional guidance to that contained in SA 500 ‘Audit Evidence’ wrt certain
specific financial statements amounts & other disclosures.
i) Attendance at physical counting: (Ekta Kapoor & Osama Bin Laden Is Performing)
E- Evaluate management’s instructions and procedures for recording and controlling the
results of the entity’s physical inventory counting;
O- Observe the performance of management’s count procedures
I- Inspect the inventory
P- Perform test counts
Q.2 INVENTORIES
ii) Counting at alternate date
• In addition to above
• Perform audit procedures to obtain audit evidence about whether changes in

inventory between the count date and the date of the financial statements are
properly recorded.
• If it is not possible to do so, the auditor shall modify the opinion in auditors report
in accordance with SA 705.
iii) When inventory is under the custody of 3rd party

• The auditor shall obtain SAAE by performing one or both of the following:
a. Request confirmation from the 3rd party as to the quantities & condition of inventory
held on behalf of the entry.
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b. Perform inspection or other audit procedures appropriate in circumstances. Examples

of other audit procedures include following:
i) Attending or arranging for another auditor to attend, the third party’s

physical counting of inventory, if practicable
ii) Obtaining another auditor’s report, or a service auditor’s report, on the

adequacy of third party’s internal control for ensuring that inventory is
properly counted and adequately safeguarded
iii) Inspecting documentation regarding inventory held by third parties, for

example, warehouse receipts.
iv) Requesting confirmation from other parties when inventory has been pledged
as collateral
iv) If attendance is impracticable

• The auditor shall perform alternative audit procedure to obtain SAAE regarding the
existence & condition of inventory.
• If it is not possible to do so, the auditor shall modify the Report in accordance with SA
705
Q.3 LITIGATIONS & CLAIMS

(I M Late)
I- Inquiry of management & where applicable, others within the entry, including in house legal
counsel.
M- Reviewing minutes of meeting of those charges with governance & correspondence between
entry & external legal counsel.
L-Reviewing legal expense account.
If the auditor assess a ROMMS regarding litigation/ claims that have been identified or
when audit procedures performed indicate that other material litigation/ claim may exist, the
auditor shall in addition to the procedures required by other SA’s seek direct communication
27
with the entry’s external legal counsel.
Q.4 SEGMENT REPORT
a Obtain an understanding of the methods used by management in determining segment

information, and
• Evaluating whether such methods are likely to result in disclosure in accordance with
AFRF
• Where appropriate, testing the application of such methods
b. Performing analytical procedures or other audit procedures appropriate in the

circumstances

Question 1:
LMN Ltd. supplies navy uniforms across the country. The company has 4 warehouses at
different locations throughout the India and 5 warehouses at the borders. The major stocks
are generally supplied from the borders. LMN Ltd. appointed M/S OPQ & Co. to conduct its
audit for the financial year 2019-20. Mr. O partner of M/S OPQ & Co., attended all the
physical inventory counting conducted throughout the India but could not attend the same at
borders due to some unavoidable reason.
• You are required to advise M/s OPQ & Co..
• How sufficient appropriate audit evidence regarding the existence and condition of inventory
may be obtained?
• How an auditor is supposed to deal when attendance at physical inventory counting is
impracticable?
28
SA 501 AMID COVID-19

PHYSICAL INVENTORY
VERIFICATION
ALTERNATIVE AUDIT PROCEDURE WHERE IT IS IMPRACTICABLE TO ATTEND

PHYSICAL INVENTORY COUNTING
Due to various restrictions imposed due to COVID-19 outbreak, in certain cases it could be
impracticable for auditors to physically attend the inventory counting. In such cases, the
auditor would need to comply with the procedures given below
PHYSICAL INVENTORY COUNTING IS IMPRACTICABLE

The auditor shall perform alternative audit procedures to obtain SAAE regarding the existence
and condition of inventory.
If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in
accordance with SA 705(Revised).
SA 610
01 Using the work of internal
auditor
02 OTHER CA
Engaging other Chartered
Accountant(s) to attend
03 physical verification
Virtual attendance
Use of technology in
inventory counting
01 SA 610
Using the work of internal auditor (Will be covered along with SA 610)s
If the external auditor intents to use the u=internal audit function, in addition to complying
with the requirements of SA 610, the external auditor shall perform the following procedures:
29
1. Understand and evaluate the competence, independence and objectivity of the internal
auditor
2. Obtain and evaluate the adequacy of the inventory physical verification Instructions
prepared and issued by the management to determine if the instructions provided are
appropriate and comprehensive.
3. Issue a copy of the instructions issued by the management (as stated in point 2 above)
to the internal auditor and instruct the internal auditor to assess compliance with the
instructions during the physical verification process.
4. Issue instructions to the internal auditor on the procedures to be performed by the
internal auditor, including indication of the samples selected by the external auditor for
verifying inventory from the books to the floor. The external auditor shall also specify
the sample size for verification by the internal auditor of inventory from the floor to the
books and the indicative qualitative / quantitative factors that should be considered by
the internal auditor when selecting the samples.
5. Issue any other instructions to the internal auditor regarding the inventory counting as
may be deemed necessary considering the external auditor’s assessment of the risk and
understanding of the entity’s business and operations.
6. Inform the internal auditor of the deliverables like inventory counting reports,
memorandum of observations on the inventory counting, conclusions reached, etc. that
are to be prepared and provided to the external auditor after the inventory counting.
02 OTHER CA
Engaging other Chartered Accountant(s) to attend physical verification
The auditor should also perform the following procedures:
Inquiring for any relationships that Determine the nature and extent of
may create a threat to objectivity of work to be assigned.
Chartered Accountant(s).
Communicate planned use of CA(s) Obtain written agreements from

with TCWG. the entity for the use of CA(s) and
from CA(s) for providing direct
assistance.
30
ALSO
1. The auditor should direct, supervise and review the work performed by Chartered
Accountant(s) providing direct assistance, including providing instruction / work program,
including sample selection.
2. For supervising the work of such Chartered Accountant(s), the auditor may use web or
mobile- based video-conferencing technologies (i.e., Microsoft Teams, Facetime, Whatsapp,
Zoom).
03 Virtual attendance
Use of technology in inventory counting
They may be able to observe the inventory counting remotely via video call with the help of
technology. Auditors would need to ensure the security on these applications.
Use of technology in inventory counting
This method of gathering audit evidence should be approached with caution as there are
inherent weaknesses with this. For example, obsolete or damaged stock may be hidden from
view and records-based alternative audit procedures may not detect this. This should be used
only in circumstances wherein the inventory items can be identified with a unique reference
number etc. so that there are no chances of replacement of inventory during/ after inventory
counting.
Virtual attenance
Standards on Auditing do not prohibit use of technology when performing inventory observations
Leveraging technology to help with inventory counting
31
SA 570
Going Concern
I: meaning
• Under the going concern basis of accounting,
• The FS are prepared on the assumption that the entity is a going concern and will
continue
• Its operations for the foreseeable future i.e for at least one more accounting period
II: INDICATORS
A. FINANCIAL INDICATORS (FOTO CAN WAN)
• F: fixed terms borrowing approaching maturity W/O realistic prospect of renewals.
• O: substantial operating loss
• T: inability to comply with terms of loan agreement
• O: Inability to obtain financing for essential new product
• C: Inability to pay creditors
• A: Adverse Key financial ratio
• N: Net liability position
• W: indication of withdrawal of financial support by creditors.
• A: Arrears of dividend
32
N: Negative operating cash Flows
B. OPERATING INDICATORS- (MK Sale)
• M: Management intentions to liquidate the entity.
• K: Loss of key management without Replacement.
• S: Shortage of important supplies
• L: Labour difficulties
• E: Emergence of a highly successful competitor
• C: Other indicators (no puc)
• N: Non-Compliance with statutory requirements
• P: Pending legal proceedings, if successful may result in claims that entity is unlikely to be
able to satisfy.
• U: Uninsured or underinsured catastrophes when they occur.
• C: changes in law.
33
III. Audit procedure:

Whether there are events or conditions may cast significant doubt
on entity’s ability to continue as a going concern
Request management to perform preliminary assessment about

entity’s plan to continue for going concern
Management Performs Management refuses to

the assessment Performs the assessment
Discuss with TCWG
TCWG refuses
Modify the opinion as per

SA 705 Or withdraw
Modify the opinion as per SA 705 Or withdraw Evaluate managements assessment
Going Concern is appropriate Going Concern is inappropriate
Management Management refuses to

Amends FS Amends FS
GC Para or EOM para Modify report as per

SA 705
Adverse opinion
34
Going Concern is appropriate
Material Uncertainty Exists Material Uncertainty Doesnot Exists
Provide Adequate disclosure The end
Management Management refuses to

provides provides disclosure
disclosure
The Auditor shall
• Modify the opinion as per SA 705

• In the Basis for Qualified(Adverse) opinion
section the auditor’s report, state that a material
uncertainty exists that may cast significant
doubt on the entity’s ability to continue as a GC
and that the FS do not adequately disclose the
matter
Management provides disclosure
The auditor shall determine whether the financial statements:
a. Adequately disclose
• the principal events or conditions that may cast doubt on entity’s ability
to continue as a GC &
• Managements plans to deal with these
b. Disclose clearly
• that there is a material uncertainty related to events or conditions that
may cast significant doubt on entity’s ability to continue as a GC
• & therefore, that it may be unable to realize its assets and discharge its
liabilities in the normal course of business
35
Evaluating management’s assessment
• In evaluating management’s assessment of the entity’s ability to continue as a going

concern, the auditor shall cover the same period as that used by management to make
its assessment as required by the applicable financial reporting framework, or by law or
regulation if it specifies a longer period.
• If management’s assessment of the entity’s ability to continue as a going concern covers

less than twelve months from the date of the financial statements ,the auditor shall
request management to extend its assessment period to at least twelve months from that
date
• The auditor shall consider whether management’s assessment includes all relevant
information of which the auditor is aware as a result of the audit
• The auditor shall inquire of management as to its knowledge of events or conditions

beyond the period of management’s assessment that may cast significant doubt on the
entity’s ability to continue as a going concern
• Evaluating management’s plans for future actions in relation to its going concern
assessment, whether the outcome of these plans is likely to improve the situation and
whether management’s plans are feasible in the circumstances
• Considering whether any additional facts or information have become available since the
date on which management made its assessment
• Where the entity has prepared a cash flow forecast, and analysis of the forecast is
a significant factor in considering the future outcome of events or conditions in the
evaluation of management’s plans for future actions:
 Evaluating the reliability of the underlying data generated to prepare the forecast; and
 Determining whether there is adequate support for the assumptions underlying the
forecast.
Iv. ADDITIONAL AUDIT PROCEDURE

When events & conditions of Identified auditor shall perform the following additional audit
procedure. (ACA KI FD)
36
• A: Determining whether there is adequate support for the assumptions underlying the
forecast
• C: Whether the entity has prepared a cash flow forecast
• A: Requesting management to make assessment of entity’s ability to continue as a going

concern.
• F: Evaluating management plan for future actions in relation to its going concern
assessment.
• D. Evaluating the reliability of the under-lying data generated to prepare the forecast
Question 1:
A Company’s net worth is eroded and trade payables are unpaid due to liquidity constraints.
The management represents to the unsecured loan to meet the liquidity constraints and that
negotiations are underway to secure large export orders.
Answer:
It is not a mitigiating factor, and hence modify opinion
Question 2:
Write short notes on financial indications to be considered for evaluating the assumption of
going concern
Answer:
Financial
Operating
Other
Question 3:
Mr. Ram, an auditor, identified some events that cast significant doubt on the entity’s ability
to continue as a going concern. What are the additional procedures he should perform as per
the related standard on auditing?
Answer:
Additional Audit procedures
37
SA 510
INITIAL AUDIT ENGAGEMENT
Q.1 WHAT ARE THE INITIAL AUDIT ENGAGEMENT?
Initial audit engagement are the one in which either
The financial statements for The financial statements for

the prior period were the prior period were
not audited Audited by a predecessor auditor
II: AUDIT PROCEDURE FOR OBTAINIG SAAE REGARDING OPENINIG BALANCES
The auditor shall obtain SAAE by (PAM Also)

P- Closing balance of the preceeding periods have been correctly brought forward to
current period
A- Appropriate accounting policies reflected in the opening balances have been consistently
applied in the current periods FS, or changes are properly accounted & disclosed
M- Opening balances do not contain any misstatement that materially affect the current
periods FS
ALSO Performing one or more of the following.
1. If Audited by another auditor:

• Auditor maybe able to obtain SAAE regarding opening balance by perusing the copies of
audited FS, including other relevant documents relating to prior period FS.
• Ordinarily, the current auditor can place reliance on the closing balance contained in the
FS for the preceding period, except when during performance of audit procedures for the
possibility of misstatements in opening balance is indicated.
2. Audit for first time:

• Since opening balances represents effect of transaction and events of the preceding
38
period and accounting policies applied in preceding period, the auditor need to obtain
evidence having regard to nature of opening balance materiality of opening balances and
accounting policies. (NAM)
• Since it will not be possible for auditor to perform certain procedures, eg. Observing
physical verification of inventory auditor may obtain confirmation and perform other
audit procedures w.r.t. fixed assets, investments, etc.
If the auditor obtains audit evidence that the opening balances contain misstatements that
could materially affect the current periods financial statements
The auditor shall perform such additional audit procedures as are appropriate in the
circumstances to determine the effect on the current period’s financial statement
If the auditor concludes that such misstatements exist in the current period’s financial
statements
The auditor shall communicate the misstatements with the appropriate level of management
and TCWG
iii. reporting
Unable to obtain SAAE Misstatement exist(Refer Cases)
Qualified Disclaim Qualified Adverse
Case 1:
If the auditor concludes that the opening balances contain a misstatement that materially
affects the current period’s financial statements, and the effect of the misstatement is not
properly accounted for or not adequately presented or disclosed, the auditor shall express a
qualified opinion or an adverse opinion, as appropriate, in accordance with SA 705
Case 2:
If the auditor concludes that/:
a. The current periods accounting policies are not consistently applied in relation to opening
balances in accordance with the applicable financial reporting framework; or
39
b. A change in accounting policies is not properly accounted for or not adequately presented
or disclosed in accordance with the applicable financial reporting framework, the auditor
shall express a qualified opinion or an adverse opinion as appropriate in accordance with
SA 705
Case 3:
If the predecessor auditor’s opinion regarding the prior period’s financial statements
included a modification to the auditor’s opinion that remains relevant and material to the
current period’s financial statements, the auditor shall modify the auditor’s opinion on the
current period’s financial statements in accordance with SA 705 (Revised) and SA 710
Question 1:
What are initial Audit Engagements.?
Answer:
Refer q. no 1 from notes
Question 2:
M/S Pankaj & Associates , have been appointed as an auditor of ABC Limited. CA Pankaj
did not apply any audit procedures regarding opening balances. He argued that since financial
statements were audited by the predecessor auditor therefore he is required to verify them. Is
CA Pankaj correct in his approach?
Answer:
Question 3:
Auditors of M/s Tender India(P) Ltd were changed for the accounting year 2019-20. The
closing inventory as on 31.03.2020. The auditors of the company propose to exclude from their
audit programme the audit of closing inventory of Rs.100 lacs on the understanding that it
pertains to the preceeding year which was audited by another auditor
Answer:
40
SA 560:
SUBSEQUENT EVENTS
Q.1 MEANING:
To events occurring between Facts that become known

The date of financial statements to the auditor after the
and the date of auditors report date of auditors report
↓
AS 4 ( Inquire IMP)
(inquire imp)
INQUIRE- Inquiring management and where appropriate TCWG as to whether any subsequent
events have occurred which might affect the financial statements.
I- Reading the entities latest subsequent interim financial statement.
M- Reading minutes if any, of the meetings of shareholders, management and TCWG that
have been held after the date of financial statements and inquiring about the matters
discussed at any such meetings for which minutes are not yet available.
P- obtaining any understanding of any procedure management has established to ensure

that subsequent events are identified.
41
Facts that become known

to the auditor after the
date of auditors report

Before issuing After issuing AGM notice
AGM notice ↓
If amendments are not possible Take
Management Management refuses appropriate action(if management
Amends* (if possible)FS To amend FS does Not inform users of FS)
Report Rev ↓
Modification Eg.: Discuss the matter
EOM Para at the AGM, issue public notice,
OM Para consider in the subsequent years
report
Q.2 EXAMPLES OF SPECIFIC INQUIRY: ( CS & CA CARE) (OFU)
C - Whether new commitments, borrowings or guarantees have been entered into
S - Whether sales or acquisitions of assets have occurred or are planned
C - Whether there have been increases in capital or issuance of debt instruments, such as
the issue of new shares or debentures, or an agreement to merge or liquidate has been
made or is planned
A - Whether any unusual accounting adjustments have been made or are contemplated
C – Whether there have been any developments regarding contingencies
A - Whether any events have occurred or are likely to occur that will bring into question
the appropriateness of accounting policies used in the financial statements, as would be
the case, for example, if such events call into question the validity of the going concern
assumption
R - Whether any events have occurred that are relevant to the recoverability of assets
42
E - Whether any events have occurred that are relevant to the measurement of estimates or
provisions made in the financial statements
Q3. FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE DATE OF THE
AUDITOR’S REPORT BUT BEFORE THE DATE THE FINANCIAL STATEMENTS ARE
ISSUED:
(A) The auditor has no obligation to perform any audit procedures regarding the financial
statements after the date of the auditor’s report. However, when, after the date of the
auditor’s report but before the date the financial statements are issued, a fact becomes
known to the auditor that, had it been known to the auditor at the date of the auditor’s
report, may have caused the auditor to amend the auditor’s report, the auditor shall:
(DIA)
D - Discuss the matter with management and, where appropriate, TCWG
I - Inquire how management intends to address the matter in the financial statements
A - Determine whether the financial statements need amendment
(B) If management amends the financial statements, the auditor shall:
• Carry out the audit procedures necessary in the circumstances on the amendment.
(Report rev, EOM,OM etc)
• Unless prohibited by law:
1. Extend the audit procedures referred to such events up to the date of the new
auditor’s report and
2. Provide a new auditor’s report on the amended financial statements. The new
auditor’s report shall not be dated earlier than the date of approval of
3. the amended financial statements.
Q4. Facts Which Become Known to the Auditor After the Financial Statements have been
Issued:
(A) After the financial statements have been issued, the auditor has no obligation to perform
any audit procedures regarding such financial statements. However, when, after the
financial statements have been issued, a fact becomes known to the auditor that, had
43
it been known to the auditor at the date of the auditor’s report, may have caused the
auditor to amend the auditor’s report, the auditor shall: (DIA)
D - Discuss the matter with management and, where appropriate, those charged with
governance.
I - Inquire how management intends to address the matter in the financial statements.
A - Determine whether the financial statements need amendment
(B) If the management amends the financial statements, the auditor shall:
1. Carry out the audit procedures necessary in the circumstances on the amendment.
2. Review the steps taken by management to ensure that anyone in receipt of the previously
issued financial statements together with the auditor’s report thereon is informed of the
situation
(C) In some entities, management may not be required by the applicable law, regulation
or the financial reporting framework to issue amended financial statements and,
accordingly, the auditor need not provide an amended or new auditor’s report. However,
when management does not amend the financial statements in circumstances where the
auditor believes they need to be amended, then:
1. If the auditor’s report has not yet been provided to the entity, the auditor shall modify
the opinion as required by SA 705 and then provide the auditor’s report; or
2. If the auditor’s report has already been provided to the entity, the auditor shall notify
management and, unless all of TCWG are involved in managing the entity, TCWG, not to
issue the financial statements to third parties before the necessary amendments have
been made.
• If the financial statements are nevertheless subsequently issued without the

necessary amendments, the auditor shall take appropriate action, to seek to prevent
reliance on the auditor’s report
44
(D) If management does not take the necessary steps to ensure that anyone in receipt of the
previously issued financial statements is informed of the situation and does not amend
the financial statements in circumstances where the auditor believes they need to be
amended, the auditor shall notify management and TCWG
• If, despite such notification, management or those charged with governance do

not take these necessary steps, the auditor shall take appropriate action to seek to
prevent reliance on the auditor’s report.
Q.4 FORMAT OF ANSWER

SA 560:
• Subsequent events refer to events occurring
• between the date of FS and the date of Auditor’s report,
• and facts that become known to the auditor after the date of auditors report
• AS 4 “Contingencies and Events occurring after the Balance Sheet Date”,
1. adjustments to assets and liabilities are required for events occurring after the
balance sheet date
2. that provide additional information
3. materially affecting the determination of the amounts
4. relating to conditions existing at the balance sheet date
5. or that indicate that the fundamental accounting assumption of going concern (i.e.,
the continuance of existence or substratum of the enterprise) is not appropriate.
AS 29:
1. AS 29 “Provisions, Contingent liabilities and Contingent Assets”,
2. future events that may affect the amount required to settle an obligation
3. should be reflected in the amount of a provision where there is sufficient objective evidence
that the will occur.

Question 1:
Briefly explain: Audit procedures on subsequent events
OR
Briefly describe the auditor’s responsibility regarding subsequent events?
Answer : Meaning + Inquire IMP
45
Question 2:
• Enquiry from management is helpful for the auditor to evaluate subsequent events. Discuss
specific enquiries in reference of SA 560, which might have affect on the financial
statement
OR
• M/s LMP Associates, Chartered Accountants while conducting the Audit of PQR Ltd.
Want to conduct an inquiry of management and those charged with Governance as
to whether any subsequent events have occurred which might affect the financial
statements. Guide M/s LMP Associates with the matters where the specific enquiry may
be conducted to evaluate subsequent events.
Answer : Examples
Question 3:
A Co Ltd. has not included in the balance sheet as on 31-03-2015 a sum of Rs 1.50 crores
being amount in the arrears of salaries and wages payable to the staff for the last 2 years
as a result of successful negotiations which were going on during the last 18 months and
concluded on 30-04-2015.The auditor wants to sign the said balance sheet and give the audit
report on 31-05-2015. The auditor came to know the result of the negotiations on 15-05-
2015.
Answer :
The facts indicate the events are of adjusting nature as per AS 4 and requires adjustment in
Assets & liabilities, which has not been made. Auditor shall request management to adjust, if
management does not he shall qualify his report
Question 4:
As the auditor of the company, comment on the following: A fire broke out on 15th May, 2019,
in which material worth Rs 50 lakhs which was lying in inventory since 1st March, 2019
was totally destroyed .The financial statements of the company have not been adopted till the
date of fire. The management of the company argues that since the loss occurred in the year,
2014-15., no provision for the loss needs to be made in the financial statements for 2018-19.
Answer:
The event will have no impact , subject to satisfaction in respect of non violation of going
concern concept. Hence management is correct.
Question 5:
Amudhan and Co., are the Auditors of XYZ Company Ltd., for the year ended on 31/03/2019.
46
the audit report for that year was signed by the Auditors on 04/05/2019. the Annual General
Meeting was decided to be held during the month of August 2019. On 06/05/2019, the
Company had received communication from the Central Government that an amount of Rs.
5800 Crore kept pending on account of incentives pertaining to financial year 2018-2019
had been approved and the amount would be paid to the company before the end of May 2019.
To a query to the Chief Financial Officer of the Company by the Board, …….
…..it was informed that this amount has not been recognised in the Audited Financial
Statements in view of the same not being released before the close of the financial year and
due to uncertainty of the receipt. Now, having received the amount, the Board of Directors
wished to include this amount in the Financial Statements of the company for the Financial
Year ended on 31/03/2019. On 08/05/2019, the Board amended the accounts, approved the
same and requested the Auditor to consider this event and issue a fresh Audit Report for the
year ended on 31/03/2019. Analyse the issues involved and give your views as to whether or
not the Auditor could accede to the request of the Board of Directors.
Answer:
• Facts which become known to the Auditor After the date of the Auditor’s report but
Before the Date the Financial Statements are Issued:
• As per SA 560, “Subsequent Events”, the auditor has no obligation to perform any audit
procedures regarding the financial statements after the date of the auditor’s report.
However, when, after the date of the auditor’s report but before the date the financial
statements are issued, a fact becomes known to the auditor that, had it been known to
the auditor at the date of the auditor’s report, may have caused the auditor to amend
the auditor’s report, the auditor shall:
i. Discuss the matter with management and, where appropriate, those charged with
governance
ii. Determine whether the financial statements need amendment and, if so
iii. Inquire how management intends to address the matter in the financial statements
• If management amends the financial statements, the auditor shall carry out the audit
procedures necessary in the circumstances on the amendment. Further, the auditor shall
extend the audit procedures and provide a new auditor’s report on the amended financial
statements. However, the new auditor’s report shall not be dated earlier than the date
of approval of the amended financial statements
47
• In the instant case, XYZ Company Ltd. received an amount of rupees 5800 crore on
account of incentives pertaining to year 2017-18 in the month of May 2018 i.e. after
finalisation of financial statements and signing of audit report. Board of Directors of
XYZ Ltd. amended the accounts, approved the same and requested the Amudhan &
Co. (auditor) to consider this event and issue a fresh audit report on the financial
statements for the year ended on 31.03.2018.
• After applying the conditions given in SA 560, Amudhan & Co. can issue new audit report
subject to date of audit report which should not be earlier than the date of approval of
the amended financial statements
48
SA 550:
RELATED PARTIES
Q.1 MEANING:
i. A related party as defined in the AFRF.
ii. Where the AFRF establishes minimal or no related party requirements
1.
PERSON X LTD PERSON PERSON
↓ ↓ ↓ ↓
X LTD X LTD
↓ ↓
Y LTD Y LTD Y LTD Y LTD
a person + or entity + directly + through one
has control or or indirectly or more
significant influence intermediaries
over the reporting
entity
2.
Y LTD Y LTD Y LTD Y LTD
↓ ↓ ↓ ↓
Person Person
↓ ↓
PERSON X LTD Z LTD Z LTD
Another entity + over which +directly or + through one
reporting entity has indirectly or more
control or significant intermediaries
influence
49
3. Another entity that is under common control with reporting entity.
X ltd Close Family Members BOD BOD
Y ltd Z ltd BOD BOD ABCD BCDE
X ltd Y ltd X LTD Y LTD
Common Controlling Owners who are close Common key management

ownership Family members personnel

Note: However, entities that are under common control by a state (i.e National , regional
or local government) are not considered related unless they engage in significant
transactions or share resources to a significant extent with one another.
Gujarat Govt

Agriculture Infra
However, Ind AS 24 does not give total exemption from reporting(refer question)
Q.2 RISK ASSOCIATED WITH RELATED PARTY RELATIONSHIPS & TRANSACTIONS:
i. A related party may operate through extensive and complex relationships and
structures, with a corresponding increase in the complexity of related party
transactions
ii. Information systems may be ineffective at identifying or summarizing transactions and

outstanding balances between an entity and its parties
iii. Related party transactions may not be conducted under normal market terms and
conditions
50
Q.3 AUDITORS RESPONSIBILITY
RISK ASSESSMENT FURTHER AUDIT

PROCEDURE PROCEDURE
↓
Understand Evaluate accounting 1. Whether RPT is at arm’s
RPR and RPT System regarding length price or not
RPR and RPT 2. Obtain SAAE for unusual
transactions
3. Verify whether RPR
and RPT has been
adequately disclosed.
4. Obtain WR regarding
completeness and disclosures.
AUDITOR’S RESPONSES IN CASE OF SPECIAL CASES
A) In case of identification of unidentified RPR or RPT:

a. Promptly communicate relevant info to other members of engagement team
b. Where FRF establishes RP requirements

• Request management to identify all transactions with newly identified RP
• Inquire reasons for failure of entity’s control to identify RP
C. Perform appropriate SAB
d. Re consider risk that other RP or significant RP transactions may exist that

management has not previously identified.
e. If non disclosure by management appears intentional, evaluate implications on

audit.
b) In case of identification of RPR or RPT outside the normal course of business

a. Inspect the underlying contracts or agreements and evaluate whether:
• Business rationale suggests that transaction entered to engage in fraudulent
51
financial reporting to conceal misappropriation of assets

• Terms of transactions consistent with managements explanation
• Transactions appropriately accounted for and disclosed in accordance with
FRF
b. Obtain evidence that the transactions have been appropriately authorized and
approved
d. Re consider risk that other RP or significant RP transactions may exist that

management has not previously identified.
e. If non disclosure by management appears intentional , evaluate implications on

audit.
Question 1:
Identification of significant related party transaction outside business
Answer : Refer Q.
52
CONCEPT OF TRUE AND

FAIR VIEW
• This is a fundamental concept in auditing.
• This requires that the auditor should examine accounts with a view to verify all the
assets, liabilities, income and expenses are stated in accordance with accounting principles
and policies which are relevant and no material amount, item or transaction has been
omitted.
• What constitutes a true and fair view is a matter of auditors judgment. To ensure true
and fair view the auditor has to see the following: (PO2DU2)
P- Profit and loss a/c and B/S discloses all matters required to be disclosed
O1- No material asset is omitted
O2- No material liability is omitted
D- The charge if any on assets are disclosed
U1- That the assets are neither undervalued or overvalued according to the applicable
accounting principles
U2- Unusual exceptional or non-recurring items have been disclosed separately.
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AUDIT SAMPLING
Q.1 MEANING:
Audit Sampling means

• Application of audit procedure
• To less than 100% of the items within a population
• Of audit relevance such that all sampling units have a chance of selection
Q.2 SAMPLING SELECTION METHOD
Random Sampling (May 15)

(i) Simple Random Sampling:
Under this method, each unit of the whole population has an equal chance of being
selected
Example: if trade receivable balance within 50,000-2,00,000 are selected
(ii) Stratified Sampling (Nov 2000)

This method involves diving the whole population to be tested in few separate groups
called “strata” & taking a sample from each of them.
Example: Debtors 10-100
100-200
200-300
Q.2 SAMPLING SELECTION METHOD(JKSC TB PG 60)
Random Sampling:
(ii) Stratified Sampling
• This method involves diving the whole population to be tested in few separate groups
called “strata” & taking a sample from each of them.
• Each stratum is treated as if it was a separate population and if proportionate of items
are selected from each of these stratum
54
Example: Debtors 10L-100L

100L-200L
200L-300L
Systematic Sampling
• Systematic selection is a selection method in which the number of sampling units in
the population is divided by the sample size to give a sampling interval, for example 50,
and having determined a starting point within the first 50, each 50th sampling unit
thereafter is selected
• Selected Sampling Interval = Sample Units/Sample Size
• Example: SI= 1,00,000/1,000 = 100th Item
Haphazard Selection
• Haphazard selection, in which the auditor selects the sample without following a structured
technique.
• Although no structured technique is used, the auditor would nonetheless avoid any
conscious bias or predictability
• For example, avoiding difficult to locate items, or always choosing or avoiding the first or
last entries on a page
Monetary unit Sampling

It is a type of value-weighted selection in which
sample size, selection and evaluation results in a conclusion in monetary amounts
Example: Amounts above Rs.10,000
Block selection
• This method 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.
Example: Take the first 200 sales invoices from the sales day book in the month of
September; alternatively take any four blocks of 50 sales invoices.
55
Q.3 SAMPLING RISK: (N10,M19,RTP N18)

The risk that that the auditor’s conclusion based on a sample may be different from the
conclusion
• If the entire population were subjected to the same audit procedure.
• Sampling risk can lead to two types of erroneous conclusions
SAMPLING RISK

• In case of test of controls that • In case of test of controls that
controls are more effective then controls are less effective then
they actually are they actually are
• In case of test of details that a • In case of test of details that a
material misstatement doesn’t material misstatement exist when
exist when in fact it does . in fact it doesn’t.
• The auditor is primarily concerned • This error affects audit efficiency
with this type of error because as it would lead to additional
it affects audit effectiveness work to establish that initial
& is more likely to lead to an conclusions were incorrect
inappropriate audit opinion

Q.3 SAMPLING RISK
Non Sampling Risk

• The risk that the auditor reaches an erroneous conclusion for any reason not related to
sampling risk
• Example: Examples of non-sampling risk include use of inappropriate audit procedures, or
misinterpretation of audit evidence and failure to recognize a misstatement or deviation
• Sources of Non sampling risk are:
 Human Mistakes
 Misinterpreting sample results
 Applying audit procedures not appropriate to objectives of audit
 Relying on erroneous information
Note: Non sampling risk can never be mathematically measured
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Q.4 FACTORS INFLUENCING SAMPLE SIZE (N18, RTP M19):

(SIA DT)
S- Size of the organization under audit
I- State of internal Control
A- Adequacy & reliability of books & records
D- Degree of the desired confidence
T- Tolerable error range
Q.5 PRECAUTIONS TO BE TAKEN WHILE APPLYING TEST CHECK TECHNIQUES (M16,

N07)
(SCAM PABI)
S- Sample size
The number of items in a sample should be appropriately determined
C- Classification
Transaction &balances should be classified and stratified if required
A- Thorough study of accounting system

The flow of transactions should be completely studied before adopting sampling
M- Analysis of Misstatement
Errors found in same should be analyzed properly.
P- Proper Planning
Proper plan for test checking should be devised & explained to audit staff
A- Areas not suitable for sampling

Auditor should take care to ensure that detailed complete checking is done for required items
B- No bias
Same should be checked in unbiased way.
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I- Thorough study of internal control system

Proper study of I.C system helps the auditor to devise further test check plans
Q.6 EVALUATING RESULTS OF AUDIT SAMPLING:

1. The auditor shall evaluate
• The results of the sample , and
• Whether the use of audit sampling has provided reasonable basis for conlcusion
2. Analyzing Deviation → Observe Common Features → Extend audit procedures to

all those items
3. Misstatement/Deviation → Anomaly → Obtain high degree of certainty that such

MS is not representative of population
4. In case auditor concludes that audit sampling has not provided a reasonable basis for
conclusions about the population, the auditor should tailor (i.e extend) the nature, timing
and extent of audit procedures.
58

Question 1:
What is the meaning of Sampling? Also discuss the methods of Sampling.
Explain in the light of SA 530 “Audit Sampling”.
Answer:
Refer Point 1 page no. 207
Question 2:
With reference to Standard on Auditing 530, state the requirements relating to audit
sampling, sample design, sample size and selection of items for testing.
Answer:
Question 3:
While planning the audit of S Ltd. you want to apply sampling techniques. What are the risk
factors you should keep in mind?
Answer:
Refer Q.no 4
Question 4:
Write short notes on the following:
• Advantages of Statistical sampling in Auditing.
• Stratified sampling
Answer:
Refer point no.6 page 210
Question 5:
What precautions should be taken by the auditor while applying test check techniques?
Answer:
Refer class notes
Question 6:
Explain the factors to be considered while determining the extent of checking on a sampling
plan.
Answer:
Refer class notes
59

Question 7:
XYZ ltd. Is engaged in trading of electronic goods and having huge accounts receivables.
For analyzing the whole accounts receivables, the auditor wanted to use sampling technique.
In considering the characteristics of the population from which sample will be draw, the
auditor determines that stratification or value weighted selection technique is appropriate.
SA 530 provides guidance to the auditor on use of stratification & value weighted sampling
techniques. Advice the auditor.
Answer:
Refer Point 5 page 208
Question 8:
The level of sampling risk that the auditor is willing to accept affects the sample size required.
The lower the risk the auditor is willing to accept, the greater the sample size will need to be.
Explain stating the examples of factors that the auditor may consider when determining the
sample size for tests of controls.
Answer:
Question 9:
The auditor is required to project misstatements for the population to obtain a broad view of
the scale of misstatement.
Answer:
Refer point 10 page 213
Question 10:
The auditor shall evaluate the results of the sample and whether the use of sample has provided
a reasonable basis for conclusions about the population that has been tested. Explain.
Answer:
Refer point 10 page 213
Question 11:
The sample size can be determined by the application of a statistically-based formula or
through the exercise of professional judgment. When circumstances are similar, the effect
on sample size of factors will be similar regardless of whether a statistical or non-statistical
approach is chosen.
Explain stating the examples of factors (any four) that the auditor may consider when
determining the sample size for tests of controls
Answer:
60
Question 12:
The extent of the checking to be undertaken is primarily a matter of judgment of the auditor.
It is in the interest of the auditor that if he decides to form his opinion on the basis of a
part checking, he should adopt standards and techniques which are widely followed. Explain
Answer:
The extent of the checking to be undertaken is primarily a matter of judgment of the auditor,
there is nothing statutorily stated anywhere which specifies what work is to be done, how it
is to be done and to what extent. It is also not obligatory that the auditor must adopt the
sampling technique. What he is to do is to express his opinion and become bound by that.
To ensure good and reasonable standard of work, he should adopt standards and techniques
that can lead him to an informed professional opinion. On a consideration of this fact, it
can be said that it is in the interest of the auditor that if he decides to form his opinion
on the basis of a part checking, he should adopt standards and techniques which are widely
followed and which have a recognized basis. Since statistical theory of sampling is based on
a scientific law, it can be relied upon to a greater extent than any arbitrary technique which
lacks in basis and acceptability.
Question 13:
The auditor is required to project misstatements for the population to obtain a broad view of
the scale of misstatement. Explain
Answer:
• The auditor is required to project misstatements for the population to obtain a broad
view of the scale of misstatement but this projection may not be sufficient to determine
an amount to be recorded. When a misstatement has been established as an anomaly,
it may be excluded when projecting misstatements to the population. However, the effect
of any such misstatement, if uncorrected, still needs to be considered in addition to the
projection of the non-anomalous misstatements.
• For tests of details, the auditor shall project misstatements found in the sample to the
population whereas for tests of controls, no explicit projection of deviations is necessary
since the sample deviation rate is also the projected deviation rate for the population
as a whole.
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ANALYTICAL
PROCEDURES
Chap 8: Analytical procedure sa 520
Substantive ( Risk assessment in SA 315 )
Q.1 MEANING: (JKSC TB Pg 65)

• Evaluation of Financial Info
• Through analysis of plausible relationship
• Among both financial & non financial data
• It also encompasses investigation of fluctuations or relationships
• that are inconsistent with other relevant info
Q.2 factors to be considered for sap(m 18)(JKSC Pg 65)

(PADNI)
P- Predictability
Example: Between sales & cost of sales
between trade receivables & cash receipts
A- Availability of data
D- Disaggretation
N- Nature of Assertion
Example: More effective for completeness or valuation than rights or obligations.
I- Inherent risk
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Q.3 techniques for sap (m18)(JKSC TB Pg 66)
TREND ANALYSIS RATIO ANALYSIS REASONABLENESS MODELLING

Example: Comparison Example: Trade TEST Example: Linear
of current date with receivables with Example: Occupancy regression
Prior period balance sales rates to room rentals (relationship between
or with trend of 2 or dependent variable
more periods and one or more
independent variable)
Q.4 precautions to be taken before applying anaytical procedure( jksc

TB Pg 66)
(REDS)
R- Evaluate reliability of data
E- Develop an expectation of recorded amounts or ratios
D- Determine the amount of any difference of recorded amounts from expected value that is
acceptable without further investigation
S- Determine suitability of a particular SAP for a given assertion
Q.5 extent of reliance on analytical procedure

(NSC2)
N- Nature & relevance of info
S- Source of information
C1- Comparability of the information available.
C2- Controls over the preparations
Q.6 results of analytical procedure:

If analytical procedures performed identify fluctuations, the auditor shall investigate such
differences by:
• Inquiring of management & obtaining appropriate AE for the same
• Performing other audit procedure
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Q.7 consideration specific to public sector entities( jksc 68)

1. May not be always relevant in audit of government or other non business public sector
entities
2. Public sector enterprises may have little direct relationship between revenue & expenditure
3. Also industry data or statistics for comparative purpose may not be available in the
public sector.
4. However, other relationships may be relevant

For example: Variations in the cost per km of road construction
Number of vehicles acquired compared with vehicles retired
Q.8 PURPOSE OF ANALYTICAL PROCEDURES

Analytical procedures use comparisons and relationships to assess whether account balances
or other data appear reasonable. Analytical procedures are used for the following purposes:
• To obtain relevant and reliable audit evidence when using substantive analytical procedures;
and
• To design and perform analytical procedures near the end of the audit that assist the
auditor when forming an overall conclusion as to whether the financial statements are
consistent with the auditor’s understanding of the entity.
64

Question 1:
Define Analytical Procedures
Answer:
Question 2:
What are the factors that determine the extent of reliance that the auditor places on results
of analytical procedures? Explain with reference to SA-520 on “Analytical procedures”.
Answer:
Question 3:
The statutory auditor of MNO Ltd., CA Kishore identifies certain inconsistencies while
applying analytical procedures to the financial and non financial data of MNO Ltd. What
should CA Kishore do in this case with reference to SA 520 on “Analytical Procedures”?
Answer:
Question 4:
While applying the Substantive Analytical Procedures what techniques can be used by the
statutory auditor of a company to obtain sufficient and appropriate audit evidence?
Answer:
Question 5:
Explain how a statutory auditor of a company can apply analytical procedures at the planning
phase of audit.
Answer:
In the planning stage, analytical procedures assist the auditor in understanding the client’s
business and in identifying areas of potential risk by indicating aspects of and developments
in the entity’s business of which he was previously unaware. This information will assist the
auditor in determining the nature, timing and extent of his other audit procedures.
65
• Analytical procedures in planning the audit use both financial data and non- financial
information, such as number of employees, square feet of selling space, volume of goods
produced and similar information.
• For example, analytical procedures may help the auditor during the planning stage to
determine the nature, timing and extent of audit procedures that will be used to obtain
audit evidence for specific account balances or classes of transactions.

Question 6:
Ratio analysis is useful for analysing asset and liability accounts as well as revenue and
expense accounts. An individual balance sheet account is difficult to predict on its own, but
its relationship to another account is often more predictable (e.g., the trade receivables
balance related to sales).
Explain stating the techniques available as substantive analytical procedures.
Answer:
Question 7:
Substantive analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time. Explain.
Answer:
Substantive analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time.
The application of planned analytical procedures is based on the expectation that relationships
among data exist and continue in the absence of known conditions to the contrary. However,
the suitability of a particular analytical procedure will depend upon the auditor’s assessment
of how effective it will be in detecting a misstatement that, individually or when aggregated
with other misstatements, may cause the financial statements to be materially misstated.
Question 8:
The reliability of data is influenced by its source and nature and is dependent on the
circumstances under which it is obtained. Accordingly, explain the factors that are relevant
when determining whether data is reliable for purposes of designing substantive analytical
procedures.
66
Answer:
Refer point no 7 page no 226
Question 9:
Routine checks cannot be depended upon to disclose all the mistakes or manipulation that
may exist in accounts, certain other procedures also have to be applied like trend and ratio
analysis. Analyse and Explain stating clearly the meaning of analytical procedures.
Answer:
Question 10:
Give examples of Analytical Procedures having consideration of comparisons of the entity’s
financial information
Answer:
• Comparable information for prior periods.
• Anticipated results of the entity, such as budgets or forecasts, or expectations of the
auditor, such as an estimation of depreciation.
• Similar industry information, such as a comparison of the entity’s ratio of sales to
accounts receivable with industry averages or with other entities of comparable size in
the same industry
Question 11:
If analytical procedures performed in accordance with SA 520 identify fluctuations or
relationships that are inconsistent with other relevant information or that differ from
expected values by a significant amount, explain how would the auditor investigate such
differences.
Answer:
Refer point no 8 page 226
Question 12:
The relationships between individual financial statements items traditionally considered in
the audit of business entities may not always be relevant in the audit of governments or
other non-business public sector entities. Analyse and Explain.
Answer:
67
Question 13:
Analytical procedures use comparisons and relationships to assess whether account balances
or other data appear reasonable. Explain stating the purpose of analytical procedures with
examples.
Answer:
Refer class notes
Question 14:
Ratio analysis is useful for analysing asset and liability accounts as well as revenue and
expense accounts. An individual balance sheet account is difficult to predict on its own, but
its relationship to another account is often more predictable (e.g., the trade receivables
balance related to sales). Explain stating the techniques available as substantive analytical
procedures
Answer:
Question 15:
Explain the commonly used technique in the comparison of current data with the prior
period balance or with a trend in two or more prior period balances.
Answer:
Refer point 5 page no 224 (Trend Analysis only)
Question 16:
When designing and performing substantive analytical procedures, either alone or in
combination with tests of details, as substantive procedures in accordance with SA 330,
the auditor shall determine the suitability of particular substantive analytical procedures for
given assertions, taking account of the assessed risks of material misstatement and tests of
details, if any, for these assertions. Explain the other relevant points in this context.
Answer:
Refer point 6 page no 225 (precautions)
Question 17:
Discuss the audit procedure to be considered by an auditor while performing analytical
procedure to obtain audit evidence as to overall reasonableness of purchase quantity and
price.
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Answer:
Auditor needs to perform analytical procedures to obtain audit evidence as to overall
reasonableness of purchase quantity and price which may include:
• Consumption Analysis: Auditor should scrutinize raw material consumed as per
manufacturing account and compare the same with previous years with closing stock
and ask for the reasons from management if any significant variations found.
• Stock Composition Analysis: Auditor to collect the reports from management for
composition of stock i.e. raw materials as a percentage of total stock and compare
the same with compare the same with previous years and ask for the reasons from
management if any significant variations found.
• Ratios: Auditor should compare the creditors turnover ratios and stock turnover ratios
of the current year with previous years.
• Auditor should review quantitative reconciliation of closing stocks with opening stock,
purchases and consumption.
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Audit Of Items OF
Financial Statements
BALANCE SHEET CAPTIONS
1.1 SHARES CAPITAL
Existence Completeness Valuation
PWC NR
P – Tally previous year’s share capital balance with period end
W – Written representation from CS if No change.
C – Compliance with provisions of companies Act.
N – No issue at Discount
R – Resolution copies authorising ↑ se / ↓ se share Capital
Disclosure – Acc. To sch III

DISC
D – Disclosure for period of 5 year imm
preceding B/S/ date
– Fully paid up Bonus Shares
– Bought back
– Allotment W/o payment in cash
I – Issue & Subscribed share cap

– Balance at began
– Changes
– Balance at end
70
S– Shares held in co. by

Holding
Ultimate Holding
Subs of Holding
Ass. Of Holding, . . .
C – each class of Capital

Rights
Preferences
Restrictions
1.2 RESERVES AND SURPLUS
P – In case of security premium, confirm if the shares are issued in excess of the nominal
value
I – Insure whether the disclosures are in compliance with schedule III of companies Act
2013.
V – Verify the resolutions passed by the BOD and the shareholders regarding recommendation
and declaration of dividend.
O – Obtain an evidence whether the reserves and surplus balances to be recorded in this year
have been recognized.
T – Trace and tally the opening balances to the previous year audited financial statements.
1.3 BORROWINGS
WIDEARM
W – Obtain Written Representation (SA 580) that all liabilities represent a valid claim by
lenders
I – Obtain Independent balance confirmations (SA 505) in respect of all the borrowings.
D – Ensure whether the Disclosure is in accordance with Schedule III of Companies Act
2013.
E – Examine the purpose of Borrowing and ensure that the amt is used in interest of the
company
A – Determine that the Accounting policies and methods of recording debt are appropriate
and consistent.
R – Recompute the interest and discount or premium on redemption, if any.
71
M – Review board Minutes for approval of new lending agreements.
1.4 TRADE RECEIVABLES
EXISTENCE COMPLETENESS VALUATION DISCLOSURE

AADI CM DAL CRR
A- Analytical C – Cut off D–Doubtful debts C – Transitions u/s
Procedures Procedures to allowance 189 reported
Prevent under -Compare with P.Y. properly in
A – A/cs Receivable /over statement -appropriateness CARO, 2016.
Ageing Report M – Match -reasons R- Related party
D – Direct Invoice to A – Ageing report transitions
Confirmation shipping / L – Debtors under R–Restatement
I – Original Invoice dispatch log/ to Litigation current
-recorded only verify - correct compare with of foreign
once Acting period P.Y transition
1.5 INVENTORIES
Refer SA : 501
1.6 TANGIBLE ASSETS

Tangible Assets
Existence – Physical verification
- entity’s Plan Own staff?
Own staff?
Periodicity?

RSDP
- Supervision
- Reconcile with working sheets
/ Fixed Assets Register
- Verify Disocepnities
72
1.6 TANGIBLE ASSETS
Completeness
Opening Balance → tally with P.Y. audited FS
+ Additions during the period listing of all from might
Reason for deletion - Deletions during the period Check compliance with AS-10
by mgmt Appeared by outhonised
Accurately recorded test documentation
Manner Obtain mgmt = Purchase in voice
of disposal appeared & Closing Balance (physical - Installation certificate
(quotes – discard note verification)
tenders) ↓
Tally with entity’s BOA
Valuation
ID
I – Impairment Assessment (AS – 28)
D – Depreciation
– Charged?
– Method?
RIGHT & OBLIGATIONS

C2 ON
C – Confirmation from lenders
C – Charge created against PPE
O – Original title deeds of immovable poop
N – Purchase Invoice in name of entity

DISCLOSURES
CRILD
C – PPE Classified Land (Land, Building, Furniture fixture)
R – Reconciliation of gross & net carrying amount at beginning & end of period
I – Impairment (opening asses reversals classis
L – “Under Lease” (operating / finance)
D – Depreciation Opening + Charge Depreciation closing
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1.7 INTANGIBLE ASSETS

Intangible Assets
Existence Completeness
- whether in altive use for Opening Balance → Last year closing balance
prodn or supply of goods + Additions Expenditure
/ services → Meets AS – 26
- if not active, deletion → No research cost recognized
recorded? →Certificate / report to verify
→ Appeared by authorized
Deletions → Reason? From ingest
Closing balance → Manner of Disposal
↓ → Disposal note
BOA → Accurately recorded.
Intangible assets
Valuation Rights & obligations Disclosure

Amortisation- Charged? Purchase Invoices CRIA
Method? / Expenses Invoice ↓
- Impairment (AS – 28) In name of entity Same as Tangible
Assessment C – Classified
R – Recondition
I – Impairment
A → amortization
1.8 TRADE PAYABLES AND OTHER CURRENT LIABILITIES

EXISTENCE COMPLETENESS
CAD CMA
C – Controls C – CUT OFF Procedures
Purchase / Expenses invoices not M – Match purchase invoice to gate entry dates.
entered more than once ↓
Correct alcing period
A – Analytical procedures A – Advance ageing & received nature – Verify
D – Direct Confirmation procedure document.
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VALUATION DISCLOSURES
AWW C MICRO
A – Ageing of payable balance C – Classification
W – identify any old balance needs to - Trade payable
be written back - other current liability
W – Write backs no longer payable Micro & Small Enterprise Details
appeared by outhoused
75
STATEMENT OF PROFIT AND

LOSS CAPTIONS
2.1 Other Income

Q. How will you verify other Income?
Ans. ___________ income earned by the entity is an income not linked to the entity’s core
business operations and is classified as other incomes it should be verified as follows:
I] “Common” points
Check for –
[Did OCM?]
D – Its Disclosure being as per the provisions of schedule III
O – Its Occurrence, ie if the income is earned during the period
C – Its completeness, ie appropriately stated or not
M – its MEASUREMENT being as per applicable accounting standards.

(II) Interest income
[CARL]
C – Obtain copy of Form 26AS to reconcile the interest reflected there in

A – Verify Arithmetical Accuracy of interest calculation
R – Reconcile amount with bank pass book
L – Obtain a List of all Fixed Deposits opened during the period of audit, along with applicable
interest rates and time period for which the deposit remains outstanding
II] “Different” Points

Gain / Loss from sale of investments
Check if [TDS]
T D S
Transfer of title Amount is determined by & obtain & reconcile with
completed the difference between mutual fund statement
redemption price & carrying
value of investment
76
2.2 PURCHASES
Occurrence Completeness Measurement Disclosures

(NOON) (CSR)
N – Purchases invoice C – Changes in Inv. of
name of entity FG, stock in trade
O - Not overstated WIP
O – Original copy of S – Purchases of Stock
purchase inv. -in –Trade
N – Goods Receipt R – Related party
C – Cut off test → Purchases
Note prepared & Transitions
recognized in correct Alcing period
signed by A – Analytical procedures
appropriate R – Written Representation from
personnel mgmt.

2.3 DEPRECIATION AND AMMORTIZATON

(PAID FUR)
P – Obtain an understanding about the process of chagrining Depreciation and amortization.

A – Perform Analytical procedures to obtain Audit evidence about the reasonableness of the
expenses.
J – Ensure Intangible assets have been properly amortized.
D - Ensure if the required Disclosures have been made
F – Obtain the Fixed assets register maintained by entity.
U – Ensure Depreciation and amm have been charged acc to the useful life of the asset.
R – Verity the Rates of Depreciation and the calculations.
2.4 OTHERS EXPENSES
I. RENT EXPENSE
N – Agreement in name of entity

E – specific consideration to escalation clause -SLM basis rec rent
A – Expenses recorded for all 12 months
R – Rent Agreement
77
II. Power & Fuel
L – Power units consumed link to FG produced ⇒ Reasons for variance

A – Arithmetical Accuracy of Bill [Units cons x Apple Rate]
A – Expense recorded for all 12 months
P – Power kills
III. Insurance Expense

IC
I – Insurance policies taken & validity

C – Expense classified correctly as prepaid
IV. Legal & Professional

CAPS
C – Consultant wise summary & monthly summary

A – Retainer ship Agreement →Expenses received for all 12 months Entity may not
have mode provision for disputes – cautious while vouching
S – Sample for Non – Recurring expenses & vouch
V. TRAVEL REPAIR & MAINTENANCE PRINTING & STATIONERY OTHER

SAC
S – Select sample & vouch / Prepare summary

A – Analytical procedures –
Expenditure per unit of production analyses.
C – compare with P.Y. Industry trends ⇒ reasons for variations from mgmt.
VI. DISCLOSURE
⇒ Proper Classification
Each heading →Rent
→ Power & Feel
→ Insurance
→ Legal & prof
78
→ Travel
→ Repair & Main
→ Print & Stationary
→ Misc. Expenses
1. In preparing financial statements, Company’s management makes implicit or explicit

claims (i.e. assertions) regarding:
• completeness;
• cut-off;
• existence/ occurrence;
• valuation/ measurement;
• rights and obligations; and
• presentation and disclosure
• of assets, liabilities, equity, income, expenses and disclosures in accordance with the
applicable accounting standards.
EXAMPLE:
• If Company X’s balance sheet shows building with carrying amount of ` 50 lakh, the
• auditor shall assume that the management has claimed/ asserted that:
• The building recognized in the balance sheet exists as at the period- end (existence
assertion);
• Company X owns and controls such building (Rights and obligations assertion);
• The building has been valued accurately in accordance with the
• measurement principles (Valuation assertion);
• All buildings owned and controlled by Company X are included within the
• carrying amount of ` 50 lakh (Completeness assertion).
2. INCOME STATEMENT CAPTIONS COMPRISING REVENUE AND EXPENSE

BALANCES
ASSERTIONS: EXPLANATION:
Occurrence Transactions recognized in the financial statements have occurred
and relateto the entity.
79
Completeness All transactions that were supposed to be recorded have been

recognized inthe financial statements.
Cut-off Whether all income and expenses are reported in the appropriate
period. Cut-off is a separate assertion because the substantive
procedures to verify it are typically different from those applied to
the other components of completeness.
Measurement Transactions have been recorded accurately at their appropriate
amounts in the financial statements.
Presentation and Transactions have been classified and presented fairly in the
Disclosure financial statements.
Presentation and disclosure assertions are considered during the
course of the audit by procedures to determine that disclosures are
complete and accurate.
The disclosures that are most susceptible to material misstatement
are those that require significant judgment and qualitative
assessments.
Audit teams assess the completeness and accuracy of disclosures
by determining that the disclosures provide information in a
manner that does not materially omit, distort or mislead the user.
3. BALANCE SHEET CAPTIONS COMPRISING ASSETS, LIABILITIES AND EQUITY

BALANCES
ASSERTIONS: EXPLANATION:
Existence Assets, liabilities and equity balances exist as at the period end.
Completeness All assets, liabilities and equity balances that were supposed to be
recorded have been recognized in the financial statements.
Cut-off Whether all assets and liabilities are reported in the appropriate
period.
Valuation Assets, liabilities and equity balances have been valued appropriately
Rights& Obligations Entity has the right to assets i.e. (whether the entity has ownership
and title to assets) and the liabilities recognized
in the financial statements represent all the entity’s the
obligations at a given date
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Presentation and Whether particular items in the financial statements are properly
Disclosure classified, described and disclosed.
Presentation and disclosure assertions are considered during the
course of the audit by procedures to determine that disclosures are
complete and accurate.
The disclosures that are most susceptible to material misstatement
are those that require significant judgment and qualitative
assessments.
Audit teams assess the completeness and accuracy of disclosures by
determining that the disclosures provide information in a manner
that does not materially omit, distort or mislead the user.
I. VOUCH P/L Items

V Chech the vouchers like
Also check Date
SR. No
Sign
Amount
O Check transaction has occurred. In the current period
U Check transaction has been approved under competent authority
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I. VOUCH
C Check proper distinguish is made between

Capital /Revenue Expenditure
Receipt
H Check it has been recorded in books of account
Sec 143(1) : Check transaction in genuine of not bogus
Sec 143(1) : Check personal expenses are not debited to Profit and Loss
Sec 143(12) : Check for frauds.
II. VERIFY
Assets Liabilities
V Check the valuation is done as per As per AS 4
E Check the asset existence by Physical verification 
R Check the asset is the right of company Obligation
I Check is there any charge on the asset 

If yes Disclosed
Also Regd. With ROC
F Check the schedule III Followed or not 
Y Yo / FRAUDS 
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COMPANY AUDIT
COMPANY ACT, 2013
Sec 141(1)& 141(2) : Eligibility & qualification ( Jksc Pg 89 )
Company Auditor
Proprietor PF (Incl LLP)
Majority
CA + COP Partner CA +
COP

CA PIYUSH GOYAL CA KUMAR MANGALAM BCOM DISHA
BIRLA PATNI

Question 1:
Praveen, a member of the ICAI, does not hold a certificate of practice. Is his appointment as
an auditor valid.
Answer:
Praveen does not hold a certificate of practice and hence cannot be appointment as an auditor
of the company.
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Sec 141(3): Disqualifications ( Jksc Pg 90 )

a) body corporate other than LLP
b) an officer or employee of the company
c) a person who is a partner or who is in employment of an officer or employee of the
company
d) Person/ partner / relative
Any security Indebtness to Guarantee to
in CHASS CHASS > 5 lac CHASS > 1 lac

Note 1: Relative can hold security Upto Rs.1,00,000

(All relatives in agg)
Note 2: Grace period of 60 days for corrective action shall apply only in respect of securities
held by relative. This would not apply to auditor or his partner.
Note 3: Relative can hold security in Company only and not in HASS as per bare reading.
No question asked so far on this controversial point.
Note 4: As per GN issued by ICAI, audit fees received onprogressive basis i. e after beginning
the engagement is not treated as an advance of the fees.
Note 5: Definition of Relative 2(77)

s Member of HUF
s Spouse
s father (Including step)
s Mother (Including step)
s Brother (Including step)
s Sister (Including step)
s Son (Including step)
s Daughter
s Son’s wife
s Daughter’s husband
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IMPORTANT CONCEPT
A lot of questions has been asked on the same!!!

Question 2:
“Mr. A” a practicing Chartered Accountant, is holding securities of “XYZ Ltd.” Having face
value of RS 900. Whether Mr. A is qualified for appointment as an auditor of “XYZ Ltd”?
Would your answer be different, if instead of Mr. A: Mr. B the Step father of Mr. A. holding
the securities?
Answer:
Mr. A is holding security of RS 900 in the XYZ LTD, therefore he is not eligible for appointment
as an auditor of “XYZ LTD”. However, in the second case, Mr. A is eligible, as relative may
hold securities of face value up to RS 1 lac.
Question 3:
A, a Chartered Accountant has been appointed as auditor of Laxman Ltd. In the AGM of
the company held in September2018, which assignment he accepted. Subsequently in January,
2019 he joined B, another Chartered Accountant, who is the manager Finance of Laxman
Ltd. as partner.
Answer:
In the present case A, an auditor of Laxman Ltd, joined as partner with B, who is manager
finance of Laxman Limited, will be disqualified by sec 141(3)(c)
Question 4:
An auditor purchased goods worth RS 5,01,500 on credit from a company being audited by
him. The company allowed him one month’s credit, which it normally allowed to all known
customers.
Answer:
In instant case, auditor has become indebted to the company and consequently he has deemed
to have vacated his office.
85
Question 5:
Mr.Aditiya, a practicing Chartered Accountant is appointed as a “tax consultant” of ABC
LTD, in which his father Mr.Singhvi is the Managing director?
Answer:
Mr. Aditiya can be appointed as a tax consultant irrespective that his father is the managing
director of the company.
Question 6:
Ram & Hanuman Associates, CA in practice have been appointed as Statutory Auditor of
Krishna Ltd. For the year 2019-20. Mr. hanuman holds 100 equity shares of Shiva Ltd, a
subsidiary company of Krishna Ltd.
Answer:
Disqualified, because one of the partner Mr. Hanuman is holding equity shares of its subsidiary.
Question 7:
CA Mr. X hey was indebted to ABC limited for a sum of rupees 5,00,000 as on 1/4/2019.
however Mr. X having come to know that he might be appointed as auditor of the company
, he squared the amount on 10/07/2019. Later on, he was appointed as an auditor of the
company for the year ended 31/3/2020 at the annual general meeting held on 16/07/2019.
Subsequently, one of the shareholders complaints that the appointment of Mr. X is invalid
because he incurred disqualifications under section 141 of the Companies Act, 2013. Comment.
Answer:
Appointment of Mr.X is valid as no disqualification attracts as on the date of appointment
Question 8:
Mr. Y, a practicing CA, has been appointed as an auditor of said limited on 12th June 2018
for the year ended 31st March 2019 .
Daughter of Mr. Y Purchased securities on 10th September 2018 of FV Rs. 45,000 (MV Rs.
90,000)
Husband of daughter of Mr. Y purchased securities on 10th December 2018 of FV Rs.
90,000 (MV Rs.1,90,000)
All the above share were sold on 10th March 2019 for rupees 3,00,000. Comment.
Answer:
Disqualified on expiry of 60 days from 10th Dec 2018 as he fails to take corrective action.
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SEC 141(3): DISQUALIFICATIONS
e) Person/firm Business Relationship CHASS
Exception 1: Commercial transaction which are in nature of services rendered by auditor

under CA Act 1949
Exception 2: ALP transaction with HATH

s H- Hospitals
s A-Airlines
s T- Telecommunications
s H- Hotels
GOODS BOUGHT ON CREDIT

> Rs 5,00,000 < Rs 5,00,000

Disqualified u/s
141(3)(d) On ALP Not ALP

Not disqualified Disqualified u/s 141(3) (e )
87

Question 9:
PQ and Co. is an audit firm with P and Q as partners. For the financial year 2018- 19, the
firm has been appointed as the statutory auditor of M/s Mango Orchards Hotel Ltd. The
audit firm is a regular customer of the hotel and the partners usually stays in the same
hotel at various location in the course of travelling for their various professional assignments.
Normally payments of such stay are settled against quarterly bills raised by the company.
Answer:
No disqualification arises as the services availed are in ordinary course of business of client

f) Person Relative DIR/KMP Co.
g) Audit of >20 company except (PODS)

s P- Pvt. Co have PSC < 100cr
s O- One person co.
s D- Dormant Company
s S- Small Company
Note1 : The above exemption is not available if the co. has not filed its annual statement
u/s 137 & 92of Co. Act 2013.
Note2 : If there are 3 partner, limit will be 60 & accordingly.
Note 3: Where any partner is also holding office in individual capacity or partner at various
firms number of assignments shall not exceed 20
Note 4: Number of partner of a firm on date of acceptance of audit assignment shall be

taken into account
Note 5: A CA in full time employment elsewhere shall not be taken into account
Note 6: Cant divide like in case of limit of 60 in tax audit
88

Question 10:
Can ABC & Co. accept the appointment as an auditor in 60 private companies having paid- up
share capital less than Rs.100 Cr. Which has not committed default in filling its financial
statement under section 137 or annual return under section 92 of the Companies Act with
the Registrar, 2 small companies and 1 dormant company?
Answer:
No disqualification arises as the services availed are in ordinary course of business of client
and cannot be considered as business relationship.
Question 11:
KBC & Co a firm of CA are 3 partners K,B & C, K Is also in Whole time employment elsewhere.
the form is offered the audit of ABC limited and is already holding audit of 40 companies.
comment
Answer:
Cant accept the offer for audit of ABC LTD.
Question 12:
Mr. A signs the balance sheet of 10 small companies and 10 private companies having paid up
share capital of less than RS 100 crores. Mr. B signs the balance sheet of 10 private company
having paid up share capital of less than RS 100 crore and 5 private companies having paid
up share capital of more than RS 100 crore. Mr. C signs the balance sheet of 10 private
companies having paid up share capital of more than RS 100 crore and 5 public companies.
what is the maximum number of audits that the firm as a whole can accept and what is the
maximum number of audits each individual partner can accept?
Answer:
l Firm can accept 40 more audit of public companies and private companies having paid
up capital of more than RS 100 crore. Audit of small companies and private companies
having paid up share capital less than RS 100 crore. are not considered for the purpose
of ceiling.
l Partner A can accept 20 audit of public companies and private companies having paid up
capital of more than RS 100 crore. Partner B can accept 15 audits of public companies
and private companies having paid up capital of more than RS 100 crore.
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l Partner c can accept 5 audits of public companies and private companies having paid
up capital of more than RS 100 crore. Audit of small companies and private companies
having paid up share capital less than RS 100 crore. are not considered for the purpose
of ceiling.

h) Convicted by court for fraud 10years have not elapsed
Only individual gets disqualified, not whole Partnership firm
I) Is engaged in consulting & specialized service as provided u/s 144
Sec144: Prohibited Services ( MA3RDI3)

M- Management service
A1- Accounting & book keeping services
A2- Actuarial Services
A3- Any other kind of services
R- Rendering of outsourced services
D-Design & implementation of any financial Info
I1- Internal Audit
I2-Investmebt advisory services
I3- Investment banking services
Question 13:
M/s Duster & co. chartered accountants, appointed as a statutory auditor of R Ltd. for the
financial year 2019-20.The company is also need of some actuarial services. consequently, the
board of directors of the company offered the same to M/s Srivastava & co., an associate to
M/s duster & co. which has been duly accepted by the firm. Comment.
Answer:
M/s Duster & co. Becomes disqualified u/s 141(3)(I) of companies Act, 2013 and needs to
vacate the office as required u/s141(4).
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SEC 139: APPOINTMENT OF AN AUDITOR OF GOVERNMENT CO.( PG 94)

SEC 139(7): FIRST AUDITOR SEC 139(5): SUBSEQUENT AUDITOR
C& AG shall appoint within 60days C&AG shall appoint an auditor an

of date of registration auditor within 180 days of the
commencement of financial year
Failing which BOD shall appoint
within 30 days Tenure up to Next AGM

Failing which SH’S shall appoint
within 60 days
Tenure up to 1ST AGM

NOTE 1: C&AG means Comptroller and Auditor of India. He has the same status as
that of Chief Justice of India
NOTE 2: In case the SH’s fail to appoint the 1st auditor for a govt. co the government co
will also have to pay penalty.
NOTE 3: For a govt. co, the subsequent auditor shall be appointed every year, i.e concept of
rotation is not applicable.
NOTE 4: If no new auditor is appointed, in absence of any provision existing auditor shall
continue to hold office.
If existing auditor does not want to hold the office, it will lead to casual vacancy.
91
SEC 139: APPOINTMENT OF AN AUDITOR OF NON GOVT CO.

SEC 139(6): FIRST AUDITOR SEC 139(1): SUBSEQUENT AUDITOR
BOD shall appoint within 30days BOD recommends

of date of registration
SH’S shall apoint susbequent
Failing which SH’S shall appoint auditor at 1ST AGM
within 90 days in an EGM
Who shall continue to hold office
Tenure up to 1 AGM
ST
up to the conclusion of 6th AGM

Tenure 5 AGMs

NOTE 1: SH’s can appoint by passing ordinary resolution
NOTE 2: Notice period for EGM is included in 90 days
NOTE 3: The Co. shall file form ADT-1 with ROC within 15 days from AGM
NOTE 4: Obtain written certificate from auditor stating

s Auditor is qualified
s Appointment is as per the act
s Appointment is within limits
s Details of pending proceedings against him or his partner
92
SEC 177: AUDIT COMMITTEE

The following companies need to constitute an audit committee:
s Listed Company
s Public Company if
s PUSC ≥ 10cr or
s T/O ≥ 100 cr or
s Borr ≥ 50 cr

Majority of members have to be independent
WHAT DOES AUDIT COMMITTEE DO? (SARI)

S – Determining scope of an auditor
A – Adoption & review of accounting policies
R- Reviewing related party transactions
I – Appointing Internal Auditor
SEC 139(11): MANNER OF SELECTION V
IS THE COMPANY SEC 177 CO

YES NO

The Audit Committee BOD shall appoint/
shall recommend the name recommend
of the auditor to the BOD

BOD Agrees BOD Disagrees

AC’s auditor gets appointed/ The BOD shall state its reasons
recommended & give their own recommendations
93
The BOD shall state its reasons &

give their own recommendations

AC agrees AC disagrees

BOD’s auditor gets BOD shall appoint/
appointed/recommended recommend

BOD’s auditor gets appointed/
recommended. The BOD shall submit a
statement in writing to SH reasons for
disagreement

SEC 139(2): EXTERNAL ROTATION
APPLICABILITY

Listed Public Co Pvt Co Borrowings

PUSC ≥ 10cr PUSC ≥ 50cr ≥ 50cr
Excluded:
l One person company
l Small co.
94
IS ROTATION APPLICABLE

Yes No
Auditor including network firms Auditor can be appointed for “N ” n
cannot be reappointed for a period umber of years
of 5 years after the term allowed
What is the term allowed

Proprietor Partnership Firm

1 term of 2 consecutive tenures
5 years of 5 years

Network Firm:
s Common Partner of 2 or more firms
s Firms under the same brand name
Cooling Period:
5 years from the date of expiry of term allowed.
If a partner, who is in charge of an audit firm &

also certifies the FS of the company, retires
from the said firm & joins another firm of
chartered accountants, such other firm shall also
be ineligible. (Cant say we r on a break)
95
SEC 139(4): TRANISITIONAL PROVISION

Grace period of 3 years allowed to comply with the provisions of sec 139( 2)
Period Already Served Grace Period Total

10 3
9 3
8 3
7 3
6 3
5 3
4 3
3 3
2 3
1 3

SEC 139(3): INTERNAL ROTATION (PG 97)
The company may resolve that in the audit firm appointed by it, the partners and his audit
team shall be rotated as may be resolved by the members of the company
SEC 139(8): CASUAL VACANCY
Non Govt Co Govt Co
Due to Due to any C&AG shall appoint

resignation other reason within 30 days
BOD shall file the BOD shall appoint an If failed, BOD shall
vacancy within 30 days auditor within 30 days appoint within 30 days
Members have to approve

within 3 months
96
SEC 139(9): REAPPOINTMENT OF A RETIRING AUDITOR

The retiring auditor may be reappointed. Provided that all of the following conditions are
compiled with:
l The auditor is not disqualified u/s 141
l The auditor has not shown his written unwillingness for reappointment
l A special notice has not been received by the company that
l The retiring auditor shall not be reappointed
l Specifically stating that some other auditor shall be appointed in place of the
retiring auditor
SEC 139(10): CONTINUANCE IN THE OFFICE OF THE AUDITOR

If in any AGM, the retring auditor has not been reappointed & no new auditor has been
appointed in his place, the retiring auditor shall continue to hold office of the auditor.

Question 14:
KM PVT LTD. Engaged in the manufacturing business of silk Shirts, is a newly incorporated
company dated 1-9-2019. On 28-9-2019, the members of KM PVT LTD. Themselves appointed
CA Raj, a renowned practitioner, as the first auditor of the company apposing that board
is not authorized to appoint the auditor. You are required to comment on the action of the
members.
Answer:
Appointment of CA Raj by the Members of the company is not in order as per provisions of
section 139(6) of companies Act, 2013.
Question 15:
THE First auditor of M/s Healthy Wealthy LTD. A government company, was appointed by
the Board of directors.
Answer:
The appointment of first auditors made by the board of directors of M/s Healthy Wealthy
LTD is invalid
Question 16:
At the AGM of ICI LTD, Mr. X was appointed as the statutory auditor. He, however, resigned
after 3 months since he wanted to give up practice and join industry. State, how the New
97
auditor will be appointed by ICI LTD. And the conditions to be compiled for
Answer:
In this case the casual vacancy has been created on account of resignation. Therefore, board
of directors will have to fill the vacancy within thirty days and such appointment shall be
approved by the company at the general meeting within three months of the recommendations
of the board, The new auditor so appointed shall hold office only till the conclusion of the Next
AGM.
Question 17:
M/S Young & co. chartered Accountant firm, a statutory Auditors of Old LTD.is dissolved on
1-4-2019 due to differences of opinion among the partners. The board of directors of Old
LTD. In its Meeting on 6-4-2019 appointed another Firm M/S sharp & co. as their New
auditors for one year.
Answer:
In the instant case the action of the board of Directors in appointing M/S sharp
co. to fill up the casual vacancy due to dissolution of M/S young & co. is correct.
Howevwe, the board of directors are not correct in giving them appointment for one year.
M/S sharp & co. can hold office until the conclusion of next AGM only.
Question 18:
X LTD. Is an unlisted public company. Its balance sheet shows paid up share capital of RS 7.5
crore and public deposits of RS 70 crore. The company appointed M/S ABC & co, a CA firm,
as the statutory auditor in its annual general meeting held at the end of september,2019 for
11 years. Comment.
Answer:
Company is covered u/s 139(2) as deposits exceeds RS 50 crore,so appointment can be only
for 1 term of 5 years( in case of individual) and 2 terms of 5 years each ( in case of firm).
Question 19:
C.A. Ashwin was a appointed as auditor of Bristol LTD. For the year 2019-20. Since he
declined to accept the appointment, the board of directors appointed C.A. John as the auditor
in place of C.A. Ashwin and the appointment was accepted by C.A john Discuss.
Answer:
Board of directors are not authorized to fill up the vacancy in case the auditors appointed at
AGM Refuse to accept the appointment.
98
Question 20:
CA.X is a partner in M/s AB & Associated and M/s MN & Associates simultaneously. M/s
AB & Associates has completely its tenure of 10 years as an auditor in XYZ Ltd. Immediately
preceding the current financial year. It may be noted that the provisions for applicability of
rotation of auditors are applicable to XYZ Ltd. Now, the company wants to appoint M/s MN
& Associates as auditor for 5 years.
Whether M/s MN & Associates is allowed to accept the appointment as auditor of XYZ Ltd?
Would your answer be different from above if CA. X being in- charge of M/s AB & Associates
and certifying authority of financial statement of XYZ Ltd., retries from the partnership in
M/s AB & Associates and Joins M/s MN & Associates?
Answer:
(a) Not allowed due to rotation provision of sec 139(2):
(b) Not allowed
Question 21:
ABC.Pvt. Ltd., a new company, incorporated on 1-7-2019 is engaged in the manufacturing
business. On 30-7-2019, the Managing director of ABC Pvt Ltd. himself appointed CA Mohan,
his daughter’s husband, as the first auditor of the company. you are required to-
State the provisions of the companies Act, 2013 relating to appointment of first auditor.
Comment on the action of the Managing director.
Answer:
Appointment of Mr. Mohan is not valid as per provision of section 139(6) of the companies
Act,2013.
SEC 140(1): REMOVAL OF AN AUDITOR BEFORE EXPIRY OF HIS TENURE

Call for a BOD meeting & pass Board resolution

File form ADT-2 within 30 days with CG for its prior approval

Call for an EGM within 60 days of approval of CG

At EGM members shall pass special resolution

Auditor shall be given reasonable opportunity of being heard
99
SEC 140 (2): RESIGNATION BY AUDITOR

The auditor who has resigned from the co. shall file within a period of 30 days
From date of resignation in form ADT – 3 indicating reasons and other facts to
l Registrar
l Company
l C&AG in case of govt co
SEC 140(3): PENALTY FOR NON COMPLIANCE OF 140 (2)

l Rs. 50,000 or
l An amount equal to the remuneration of the auditor
l whichever is less
SEC 140(4): REMOVAL OF AN AUDITOR AFTER EXPIRY OF HIS TENURE

If members have given a special notice stating that

l The retiring auditor shall not be reappointed or
l Specifically stating that other auditor shall be appointed in place of the retiring auditor

The co shall forward this to the auditor & seek his reply. The auditor can give his written
explanation which the co. needs to circulate to all its members along with a copy of the special
notice at least 7 days prior to AGM

If the co. fails to circulate the auditor can read his representation to the AGM
Note 1: If the tribunal is satisfied on an application either of the company or any other
aggrieved person that the rights are being abused by the auditor, then , the copy
of the representation may not be sent & representation need not be read out at
the meeting.
Note 2: Special Notice u/s 115

It can be sent by member or members holding 1% of voting power or shares with
paid up value of at least Rs.5,00,000
100
SEC 140(5): REMOVAL OF AN AUDITOR BY TRIBUNAL

In case an Auditor acted in a Fraudulent Manner

The tribunal may, by order, direct the co. to change its auditors
Either suo motto or
l On an application made to by CG
l by any person concerned

Auditor shall not be eligible to be appointed as an auditor of any co. for a period of 5 years
from date of passing of the order and shall be liable for action u/s 447

If application is made by CG & tribunal is satisfied, it shall within 15 days of receipt of such
application make an order that he shall not function as an auditor & CG may appoint another
auditor
Question 22:
PQR Company LTD. Removed their first auditor by passing a resolution in the meeting of
the board of directors for his removal without obtaining prior approval from the central
government. Offer your comments in this regard.
Answer:
Removal of Auditor is invalid as special resolution has not been passed and approval of central
Govt. not obtained.
SEC 142 REMUNERATION OF AN AUDITOR

1st Auditor: Shall be fixed by BOD
Subsequent Auditor: Shall be fixed in its GM

Remuneration includes expenses, if any incurred in connection with
the audit of the company

It does not include any remuneration paid to him for any other
services rendered by him at the request of the co.
101

As per Sch III of Companies Act 2013 detailed information
of amount paid to be given. These may be classified as

a) As Auditor
b) For taxation matters
c) For company law matters
d) For management services
e) For other services
f) For reimbursement expenses
RIGHTS OF AN AUDITOR
143(1): Right to access 142: Right to receive 146: Right to attend a

to BOA, records & remuneration GM (in person or proxy)
documents of the co at all
times including branch & 140(1)(4): Right to be 177(7): Right to attend
subsidiary at anytime heard in an AGM at on Audit committee
which he is being removed meeting in which a/c
143(1): Right to enquire are discussed
from any employee or officer 146: Right to receive
of the co. or any 3rd party all notices and
having a business relation communications for
with the co. general meeting
Note 1: Right of Lien

As clarified by council , CA cannot exercise right of lien on books of accounts on non
receipt of Fees.
102

As per Sch III of Companies Act 2013 detailed information
of amount paid to be given. These may be classified as

a) As Auditor
b) For taxation matters
c) For company law matters
d) For management services
e) For other services
f) For reimbursement expenses
RIGHTS OF AN AUDITOR
143(1): Right to access 142: Right to receive 146: Right to attend a

to BOA, records & remuneration GM (in person or proxy)
documents of the co at all
times including branch & 140(1)(4): Right to be 177(7): Right to attend
subsidiary at anytime heard in an AGM at on Audit committee
which he is being removed meeting in which a/c
143(1): Right to enquire are discussed
from any employee or officer 146: Right to receive
of the co. or any 3rd party all notices and
having a business relation communications for
with the co. general meeting

Note 1: Right of Lien
As clarified by council , CA cannot exercise right of lien on books of accounts on non
receipt of Fees.
103
DUTIES OF AN AUDITOR
143(1): DUTY TO ENQUIRE UPON CERTAIN MATTERS
(LT DIES)
L- Loans and advances
l Have been properly secured &
l Whether T&C are prejudicial to interest of members
T- Transactions
l Whether transactions are represented by mere book entries
l Whether transactions are prejudicial to interest of members
D- Deposits
l whether loans & advances made by company
l have been shown as deposits.
I-Investments
l where the company is not an investment company or banking co
l Whether shares, debentures and other securities
l Have been sold at a price less than at which they were purchased by the company
E-Expenses
l Whether personal expenses have been
l Charged to revenue accounts
S-Shares
l Where it is stated in the books and documents of the company that any shares have
been allotted for cash,

l Whether cash has actually been received, whether the position as stated in the accounts
books and the balance sheet is correct, regular and not misleading.
DUTIES OF AN AUDITOR
143(3): DUTY TO REPORY UPON CERTAIN MATTERS
(ABCDEF-O)
A- All the info & explanations which to the best of his knowledge & belief were necessary.
104
B- Whether in his opinion proper books of accounts as required by law have been kept.
C- Whether to company’s B/S & P/L dealth with in the report are in confirmation with the
books of accounts
D- Whether in his opinion, the financial statements are done with Accounting standards
E- Eligibility-Whether any director has been disqualified from being appointed as a director
under subsection(2) of sec 164
F- Whether the company has adequate internal financial controls with reference to financial
statements
O- Other matters to be included in the auditors report

(a) Whether the company has disclosed the impact, if any of the pending litigations or
financial position
(b) Whether the company has made provision, as required under any law or AS, for material
forseeable losses if any
(c) Whether there has been any delay in transferring any amounts, required to be transferred
to the Investor Education and Protection Fund by the co.
(d) Whether the co. had provided any requisite disclosures in its financial statements as to
holdings as well as dealings in specified bank notes during the period from 8th November
to 30th December 2016
143(2): Reporting over financial statements to members
143(4): Reasons to be given for qualifications
143 (5) : Auditor of govt. co to submit report to C&AG
143(6): C&AG shall within 60 days from receipt of audit report have right to conduct
supplementary audit by such person or any other person in this behalf
105
l And for the purpose of such audit, require information or additional information to be
furnished to any person so authorised
143 (9) : Duty to comply with auditing standards
143(11): Duty to report upon any other matter prescribed by CG
Question 23:
Directors of T LTD. draws an advance of US $200 per day in connection with the foreign trip
undertaken on behalf of the company. On his return he files a declaration stating that entire
advance was expended without any supporting or evidence. T LTD. books the entire expenses
on the basis of such declaration. As the auditor of T LTD. how do you deal with this?
Answer:
Auditor is required to inquire whether the payment made by the company for the foreign trip
is personal expense or not and collect the necessary supporting evidences. If it appears to be
personal expense, auditor is required to ascertain whether such expense is properly authorized
or not. If not authorized, auditor should state the matter in his report.
Question 24:
The auditor of X LTD. Did not report on the matters, specified u/s 143(1) of the companies
Act, 2013, on which he inquired into, because of the reason that he was satisfied. But the
Management of the company wanted the auditor to report on those matters so that the
members can also be aware of the true position of the company. Comment as to whether
the auditor is required to report the matters, specified under the Act, he inquired into and
whether the contention of the management is sustainable.
Answer:
The auditor of X LTD. Is correct in non-reporting on the matters specified in sec. 143(1) of
the act and hence, the contention of the management is not suitable.
143(12): DUTY TO REPORT FRAUD TO CG (PG 110)
1. CA Gabbar FRAUD Report Immediately AC or BOD seeking

(max 2 days) reply within 45 days
106
2. IF REPLY RECEIVED
Report
CA Gabbar ≤ 15 days* CG Reply

Comments
* Count from the date of reply
3. IF REPLY RECEIVED
≤ 15 days* Report
CA Gabbar CG Fact of non receipt of reply

* Count from end of 45 days
4. The report shall be sent to The Secretary, Ministry of Corporate Affairs, in a sealed
cover by RPAD or by speed post followed by an email in confirmation of the same
5. File form ADT – 4
6. Responsibility is on CA/CS/CMA
7. Penalty :
Min: 1,00,000
Max: 25,00,000
GUIDANCE NOTE BY ICAI
Fraud Detected

US Others ( CA/CMA)

<1 crore ≥1 crore <1 crore ≥1 crore

AC/BOD AC/BOD Generally no duty Generally no duty

CARO Reply CARO Whether fraud
remediated
CG – ADT4

CARO
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WHETHER FRAUD REMEDIATED

SATIESFIED UNSATIESFIED

No Duty Request management to
perform additional procedure

CARO
DONE NOT DONE

CARO Report to CG

CARO
SEC 143(8): BRANCH AUDIT (PG 112)

Accounts of branch office shall be audited either by
l The auditor of the company or
l Any person qualified as an auditor u/s 139 or
l Where branch is situated outside India, the A/c of the branch may be audited by person
qualified to act as auditor in that country
SEC 145: DUTY TO SIGN AUDIT REPORT

The person appointed as an auditor of the co. shall sign the auditor’s report or sign or certify
any other document of the co.
Question 25:
X Ltd. has a branch in Malaysia. The company has appointed Mr. X, who is qualified to audit
accounts as per Malaysia laws. Mr. Z, the statutory auditor objects to the same, contending
that he alone can audit the branch office accounts. Discuss.
Answer:
Mr. Z contention that he alone can audit the branch office accounts is not valid.
108
Question 26:
M/s. Seeman & Co. had been the company auditor for Amudhan Company Ltd. For the year
2018-19. The company had three branches located at Chennai, Deli and Mumbai. The audits
of branches Chennai, Delhi were looking after by the company auditors themselves. The audit
of Mumbai branch had been done by another auditor M/s.Vasan & Co., a lo0cal auditor
situated at Mumbai. The branch auditor had completed the audit and had given his report
too. After this, but before finalization, the company auditor wanted to visit the Mumbai
branch and have access to the inventory records maintained at the branch. The management
objects to this on the grounds of the company auditor is transgressing the scope of audit
areas agreed. Comment.
Answer:
Managements objection that the company auditor is transgressing the scope of audit areas
agreed, is absolutely, wrong. The right of company visiting and accessing the records of branch
cannot be forfeited. Even where the branch accounts are audited by another local auditor, the
company auditor has right to visit the branch and can have access to the books and vouchers
of the company maintained at the branch office.
SEC 147: PENALTIES (PG 111)

PENALTY UNDER CO’S ACT,2017 (FOR VIOLATING 139-146)
For Company For Auditor For Officer in default
Unintentional offence Intentional offence
Fine: Fine: Fine: Fine:

Min: 25,000 Min: 25,000 Min: 50,000 Min: 10,000
Max: 5,00,000 Max: Max: 25,00,000 Max: 1,00,000
5,00,000 Or 8 times Or
Or 4 times remuneration imprisonment
remuneration + imprisonment upto 1 year
upto 1 year Or
both
109
SEC 148: COST AUDIT ( PG 116)

RULE 3: (Cost records & audit) CRA Rules, 2014 – COST RECORDS
COMPANY (DOMESTIC + FOREIGN

REGULATED
NON-REGULATED
1. Sugar & industrial alcohol 1. Machinery used for defense
2. Generation, transmission & space atomic research
distribution of electricity 2. Turbo jets & turbo propellers
3. Telecommunication service 3. Arms & ammunition
4. Petroleum products 4. Aeronautical services
5. Drugs & pharma 5. Steel & cement
6. fertilizers 6. Rubber & allied products
7. Roads & other infra
projects
8. Ores & mineral products
9. Edible oil
10. Jute & jute products
REGULATED NON-REGULATED
Engaged in production of goods providing services

Overall T/o ≥ 35 crores

Maintain cost records

Exception: Micro & small enterprises per MSMED act
SEC 148: COST AUDIT ( PG 119)

RULE 4: CRA Rules, 2014 – COST AUDIT

REGULATED NON-REGULATED
Overall: 50 crores Overall: 100 crores
Individual: 25 crores Individual: 35 crores
110
Exception: (SEE)
S- Which is operating from a special economics zone
E- Generation of electricity
E- Whose revenue from experts, exceeds 75% of its total revenue
A B C D E F G
REGULATED
X 2 - - 5 - 15 20
Y 5 - - 10 - 10 30
NON-REGULATED
P - 40 - - 20 - 40
Q - 15 - - 30 - 50
OTHERS 30 15 50 60 60 20 100
TOTAL 37 70 50 75 110 45 240
FORMS:
CRA 1: Cost records
CRA 2: Appointment/ casual vacancy/removal
CRA 3: Auditor Report BOD
CRA 4: BOD Report CG
OTHER PROVISIONS:
148(3) Appointment of Cost auditor

By BOD within 180 days of commencement of FY

He must be a Cost Accountant in practice.
(Auditor appointed u/s 139 cannot be appointed)
148(5) Qualifications & disqualification same as 141(1),141(2),141(3)
148(8) Punishment same as 147
111

Question 27:
Sugar LTD.is a top sugar Manufacturer and exporter in India operating from Noida Specific
economic zone, Uttar Pradesh . its revenue from Sale/export for the preceding year is given
Below;
Sale within India RS 1157 Lakhs
Sale outside India (Export) RS 1353 Lakhs
Total revenue RS 2510 Lakhs
Mr.X the statutory auditor of sugar LTD, is of the view that the company is Mandatorily
required to include cost records in their books of accounts and consequently conduct cost
Audit. He also suggested the name of his friend, who is a cost Accountant in practice, for the
purpose of such cost Audit. However, the management is of the view that the company neither
required including cost records in their books of accounts nor conduct cost audit. Comment.
Answer:
Company is neither required to maintain cost records nor records cost Audit since he is from
SEZ.
Question 28:
XYZ LTD. Having place of business in Delhi, is engaged in the production, trading, import and
export of orthopedic implants and pacemaker. The company’s revenue from export is usually in
foreign currency. Its total revenue classification for the immediate preceding financial year is
as follows:
intra-state sale RS 1400 Lakhs
inter-state sale RS 1550 lakhs
Export to US RS 4900 Lakhs
Export to UK RS 6900 Lakhs
Total Revenue RS 14750 Lakhs
The management of the company is of the opinion that the company is not required to maintain
cost records in their books of account. Consequently, there is no need to appoint cost auditor
and conduct cost audit. Comment.
Answer:
XYZ LTD.Is required to include cost records in their books of accounts in accordance with
Rule 3 of the companies (cost records and audit) Rules, 2014.
However, the company is not required to conduct cost audit as its revenue from exports, in
foreign exchange, exceeds 75 per cent of its total revenue.
112
Question 29:
X.LTD Is engaged in the production of iron and steel. A CA Firm “M/s M & CO” was appointed
as the statutory auditor of X LTD. For the current financial year. During the year, the
management of the company realized that the company is required to maintain cost records in
their books of accounts and get it audited. Therefore, in a general meeting , the members of
the company appointed M/S M & CO. as the cost auditor of the company. You are required to
examine the validity of appointment of M/S M & CO. as the cost auditor.
Answer:
Appointment is not valid as a CA firm cannot be appointed as cost auditor. As per section
148(3) of companies Act, 2013 read with rule 6 of companies (cost records and audit) Rules,
2014, cost audit shall be conducted by a cost Accountant appointed by BOD.
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CARO 2020
FS AR CARO
1. Applicability : All companies including foreign companies
2. Excluded: (BIPS)
B- Banking Co
I- Insurance Co
PUSC + Res ≤ 1crore AND
P- Pvt Ltd C0 Loan ≤ 1crore AND

Revenue ≤ 10crore
S – Sec 8 co, small co, one person co
3. Status of the co shall be checked on the balance sheet date.
4. If applicable to holding co, it shall also apply to subsidiary.
5. The order shall not apply for Consolidated FS except in clause (xxi)
Question 23:
As an auditor, how would you deal with the following: L pvt. Ltd. Which has an outstanding
loss of more than Rs. 100 lakhs from financial institution defaulted in repayment thereof to
the extent of 50%. The company holds that it being a private limited company, the Companies
Auditor Report Order (CARO) is not applicable.
Answer:
Contention of L Pvt. Ltd is not correct as borrowing from financial institutuion exceeds Rs.
1 Cr., and auditor is required to report the period and amount of default in repayment of dues
under Para 3 (viii) of CARO 2016.
114
Question 24:
A Pvt. Ltd. Company reports the following position as on 31st March 2019:
Paid up capital: 60 Lacs
Revaluation reserves: 20 Lacs
Capital Reserves: 22 Lacs
P & LA /C(Dr. balance): 4 Lacs
The management of the company contends that CARO, 2016 is not applicable to it.
Answer:
CARO is not applicable as paid up capital and reserves does not exceed Rs. 1 Cr. (60 Lacs+ 20
Lacs + 22 Lacs – 4 Lacs).
Question 25:
Under CARO 2016, how as a statutory auditor would you comment on the following: X Pvt.
Ltd. Is a subsidiary of a listed entity. The management of the company believes that since X
Pvt. Ltd. is a private company and satisfies all condition under CARO 2016, reporting under
CARO is not applicable.
Answer:
CARO is applicable as extension is not available to a private company wich is a subsidairy or
holding of a public company.
(i) PROPERTY,PLANT, EQUIPMENT & INTANGIBLE ASSET
Quantitative Physical Deeds of immovable

details verification property in names of co
maintained conducted
at regular
intervals (ii) INVENTORY
Physical verification Material discrepancy is reported
(iii) LOAN U/S 189
T&C are not prejudicial Repayment of Int & If overdue> 90 day

To members prin is regular any steps for recovery
taken
115
(iv) Compliance of sec 185 & 186
(v) PUBLIC DEPOSIT
Directives of RBI Provisions of Co’s Act Order of CLB/Tribunal
(vi) Cost records maintained as per sec 148
(vii) STATUTORY DUES
Undisputed Disputed
If O/S > 6m then report Always report amount & authority
(viii) DEFAULT IN REPAYMENT OF LOANS & BORROWINGS
Banks/Financial Institute/ Govt
Report period & amount of default
(ix) PUBLIC OFFER & TERM LOANS
Money used for proper purpose
If not report
(x) FRAUD
On company or by the company
By officer or employee
Report Nature & Amount of fraud
(xi) MANAGERIAL REMUNERATION
116
Is as per sec 197 of Sch V of COA, 2013
If not, state amount involved and steps taken for refund of same
(xii) NIDHI COMPANY
Net owned funds: Deposits

1: 20
10% unencumbered term deposit (liquid)
(xiii) RELATED PARTY
Is as per sec 177, 188 and AS- 18
(xiv) Preferential Allotment/ Pvt placement/ Fully covertible debenture
As per sec 42
(xv) NON CASH TRANSACTION
With directors or persons connected with him
If so, whether the provisions of sec 192 of Co. Act 2013 have been complied with
(xvi) SEC 45 IA OF RBI, ACT 1934
NBFC Registration
117
CARO 2020
FS AR CARO
1. Applicability : All companies including foreign companies
2. Excluded: (BIPS)
B- Banking Co
I- Insurance Co
PUSC + Res ≤ 1crore AND
P- Pvt Ltd C0 Loan ≤ 1crore AND

Revenue ≤ 10crore
S – Sec 8 co, small co, one person co
3. Status of the co shall be checked on the balance sheet date.
4. If applicable to holding co, it shall also apply to subsidiary.
5. The order shall not apply for Consolidated FS except in clause (xxi)
The auditor’s report of holding company shall also be an indicative of the companies
included in the consolidated FS whose CARO reports contain qualifications/adverse
remarks
Question 1:
As an auditor, how would you deal with the following: L pvt. Ltd. Which has an outstanding
loss of more than Rs. 100 lakhs from financial institution defaulted in repaymentthereof to
the extent of 50%. The company holds that it being a private limited company, the Companies
Auditor Report Order (CARO) is not applicable.
118
Answer:
Contention of L Pvt. Ltd is not correct as borrowing from financial institutuion exceeds Rs.
1 Cr., and auditor is required to report the period and amount of default in repaymentof dues
under Para 3 (viii) of CARO 2020.
Question 2:
l A Pvt. Ltd. Company reports the following position as on 31st March 2019:
l Paid up capital: 60 Lacs
l Revaluation reserves: 20 Lacs
l Capital Reserves: 22 Lacs
l P & LA /C(Dr. balance): 4 Lacs
l The management of the company contends that CARO, 2020 is not applicable to it.
Answer:
l CARO is not applicable as paid up capital and reserves does not exceed Rs. 1 Cr. (60
Lacs+ 20 Lacs + 22 Lacs – 4 Lacs).
Question 25:
Under CARO 2020, how as a statutory auditor would you comment on the following: X Pvt.
Ltd. Is a subsidiary of a listed entity. The management of the company believes that since X
Pvt. Ltd. is a private company and satisfies all condition under CARO 2016, reporting under
CARO is not applicable.
Answer:
CARO is applicable as extension is not available to a private company which is a subsidiary or
holding of a public company.
119
Quantitative Physical Deeds of immovable Revalued its P, Proceedings

details verification property in names of co if P, E & IA initiated or
maintained conducted not , report in prescribed pending for
at regular format Revaluation holding benami
Of property, intervals based on property
plant & ü Description of property valuation by
equipment and Discrepancy ü Gross carrying value registered Disclosed in FS
intangible Are dealt with ü Held in name of valuer
assets Promoter, director Amount if
or their relative or change ≥ 10%
employee
ü Period held-indicate
range, where
appropriate
ü Reasons for not being
held in name of co
(ii) INVERNTORY
Physical verification Sanctioned working Capital limits

> 5 crores in aggregate, from banks or
Discrepancy ≥ 10% financial institutions
Discrepancy Whether quarterly returns or statements

Are dealt with are filed
Are in agreement with books of accounts
120
(iii) Investments, Guarantee,Security & loans granted by co
a) Whether co has b.) T&C are not prejudicial c.) Repayment of

provided loans, guarantee To interest of the company Interest & principal is
or provided security to any regular
other entity. (NA to co.
whose principal business is
to give loans)
Aggregate amount Aggregate amount

given to subsidiaries, given to other
joint ventures & parties
associates
(iii) Investments, Guarantee,Security & loans granted by co
d.) If overdue> 90 day any e.) Loans & advances f.) If loans or advances
steps for recovery taken has fallen due during the granted in nature of
year has been renewed or loans either repayable
extended or fresh loans on demand or without
granted to settle the specifying terms or period
overdues of existing loan of repayment
% of the aggregate to total Specify the aggregate

loans or advances(NA amount
to co. whose principal
business is to give loans) % of total loans to loans
to promoter &related
parties
121
(iv) Compliance of sec 185 & 186
(v) PUBLIC DEPOSIT(Including Deemed deposits)
Directives of RBI Provisions of Co’s Act Order of CLB/Tribunal
(vi) Cost records maintained as per sec 148
(vii) STATUTORY DUES (including GST)
Undisputed Disputed
If O/S > 6m then report Always report amount & authority
(viii) Disclosure of transactions not recorded
Whether any transactions not recorded in books have been surrendered or

disclosed as income during tax assessments under income tax act, 1961
If so, whether the previously unrecorded income has been properly recorded
in the books of accounts during the year
(ix) Default in repayment of loans or other borrowings
a. If default in repayment to any b. Whether the company c. Whether term loans

lender is declared willful defaulter were applied for which
by any bank or financial the loans were obtained
If yes, report the period and amount institute or other lender
of default as per prescribed format If not, the amount of
ü Nature of borrowing, including loan so diverted and the
debt securities purpose for which it is
ü Name of lender used.
ü Amount not paid on due date
ü Whether principal or interest
ü No. of days delay or unpaid
ü Remarks ,if any
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(ix) Default in repayment of loans or other borrowings
d. Whether funds e. Whether the funds are f. Whether the company

raised on short term used to meet obligations of has raised loans on the
basis have been its subsidiaries, associates pledge of securities held
utilized for long term or joint ventures in its subsidiaries, joint
purpose ventures or associate
If so, details thereof companies
If yes, the nature with nature of such
and amount to be transactions and the If so, give details thereof
indicated amount in each case. and also report default if
any
(x) Money raised by IPO, FPO & preferential allotment/private placement of

shares or convertible debentures
a. Whether money raised by IPO or FPO b. Whether the company has made any
are applied for the purpose for which they preferential allotment or private placement
are raised. of share or convertible debentures
If not, details together with delays or If so, whether sec 42 & 62 of companies
default and subsequent rectification, if any, Act,2013 have been complied with.
shall be reported
If not, provide details in respect of amount
involved and nature of non compliance
(xi) FRAUD
On company or by the 143(12) of companies Whether the auditor s

company is reported Act,2013 has been considered whistle blower
during the year complied with complaints, if any, received
during the year by the
If yes, Report Nature company
& Amount of fraud
123
(xii) NIDHI COMPANY
a. Net owned funds: b.10% unencumbered term c. Whether there has been
Deposits deposit (liquid) any default in payment
1: 20 of interest on deposit or
principal
If yes, details thereof
(xiii) RELATED PARTY
Is as per sec 177, 188 and AS- 18
Sec 177: of Companies Act, 2013 amended to empower Audit Committee to give omnibus
approvals for related party transactions on annual basis
Sec 188: Prior approval of Board of Directors of the Company is required so as to enter into
any contract or arrangement with related party
AS 18: Related party disclosure
(xiv) Internal Audit System
a. Whether co has an ICS commensurate b. Whether reports of IA were considered

with the size and nature of its business by statutory auditor
Sec 138 of Companies Act, 2013 – Internal Audit
Listed Co Public co Pvt co

PUSC≥50cr or T/O≥200cr or
T/O≥200cr or Borr≥100cr
Borr≥100cr
124
(xv) NON CASH TRANSACTION
With directors or persons connected with him
If so, whether the provisions of sec 192 of Co. Act 2013 have been complied with
Sec 192: prior approval for such arrangement is accorded by a resolution of the
company in general meeting
(xvi) SEC 45 IA OF RBI, ACT 1934
a. Whether the b. Whether the co. c. Whether the co. is d. Whether the co.
co. is required to has conducted any a Core Investment Co Group has more than
be registered u/s Non-banking Financial (CIC) as defined by one CIC
45-IA of RBI Act, or housing Finance RBI
1934 (i.e NBFC) activities without if yes, indicate the
a valid certificate of if so, whether it number of CIC which
If so, whether the registration continues to fulfil are part of the group
registration has the criteria & if it is
been obtained exempted, it continues
to fulfil such criteria
CORE INVESTMENT CO
Core Investment Company (CIC) is a non-banking financial company carrying on the
business of acquisition of shares and securities and which
(a) holds not less than 90 per cent of its net assets in the form of investment in equity
shares, preference shares, bonds, debentures, debt or loans in group companies and
(b) its investments in the equity shares in group companies constitutes not less than 60 per
cent of its net assets as on the date of the last audited balance sheet.
125
(xvii) Cash losses
Whether the co has incurred cash losses in the FY & immediately preceding FY
If so, state the amount of cash losses
(xviii) Resignation of Statutory Auditor
Whether there has been any resignation of the statutory auditors during the year
If so, whether the auditor has taken into consideration the issues, the objections or
concerns raised by the outgoing auditor
(xix) Capability of Co meeting its liabilities existing at the BS date
On the basis of the Financial ratios, ageing and expected dates of realization of financial
assets and payments of financial liabilities
Or other info, the auditors knowledge of BOD and managements plan
Whether the auditor is of the opinion that no material uncertainty exists as on the date of
Audit report that co is capable of meeting its liabilities existing at the date of BS
And when they fall due within a period of one year from the date of BS
(xx) Transfer amount remaining unspent u/s 135(5) to fund specified in Sch VII
Sec 135(5):The Board of every company shall ensure that the company spends, in
every financial year, at least two per cent. of the average net profits of the company made
during the three immediately preceding financial years, in pursuance of its Corporate Social
Responsibility Policy
SCH VII: Activities which may be included by companies in their Corporate Social Responsibility
Policies Activities
126
(xx) Transfer amount remaining unspent u/s 135(5) to fund specified in Sch VII
a. whether, in respect of other than b. whether any amount

ongoing projects, the company has remaining unspent pursuant to
transferred unspent amount to a any ongoing project, has been
Fund specified in Schedule VII to the transferred to special account
Companies Act within a period of six
months of the expiry of the financial year
(xxi) Reporting on Consolidated Financial Statements
Whether there have been any qualifications or adverse remarks by the respective auditors in
the CARO reports of the companies included in the consolidated financial statements
if yes, indicate the details of the companies and the paragraph numbers of the CARO report
containing the qualifications or adverse remarks.
The change in reporting requirements clearly shows that regulator’s expectations from the
auditors are increasing significantly.
More emphasis is added on utilization of funds, financial stability of the company and regulatory
compliances.
Auditors need to be more conscious, skeptical and accurate while discharging his/her duties.
KOI SHAK?????
127
AUDIT REPORT
I. SA 700: FORMING AN OPINION
Q.1 OBJECTIVES:
• Form an opinion on FS based on an evaluation of the conclusions drawn from the audit
evidence obtained and
• Express clearly the opinion through a written report that also describes the basics for
the opinion
Q.2 BASIC ELEMENTS OF AUDIT REPORT

• Title
• An addressee, as required by the circumstances of the engagement.
• Auditor’s Opinion: The Opinion section of the auditor’s report shall also:
• Identify the entity whose financial statements have been audited;
• State that the financial statements have been audited;
• Identify the title of each statement comprising the financial statements;
• Refer to the notes, including the summary of significant accounting policies; and
• Specify the date of, or period covered by, each financial statement comprising the
financial statements
• Basis for Opinion:

• The auditor’s report shall include a section, directly following the Opinion section,
with the heading “Basis for Opinion”, that:
 States that the audit was conducted in accordance with Standards on Auditing;
 Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs;
 Includes a statement that the auditor is independent of the entity in accordance with
128
the relevant ethical requirements relating to the audit and has fulfilled the auditor’s
other ethical responsibilities in accordance with these requirements.
 States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.
• Going Concern:
• Where applicable, the auditor shall report in accordance with SA 570 (Revised)
• Key Audit Matters:

• For audits of complete sets of general purpose financial statements of listed entities, the
auditor shall communicate key audit matters in the auditor’s report in accordance with
SA 701
• Management Responsibilities :
• The auditor’s report shall include a section with a heading “Responsibilities of Management
for the Financial Statements.”
• This section of the auditor’s report shall describe management’s responsibility for
• Other Information (OFU-CA final)

• Where applicable, the auditor shall report in accordance with SA 720
• Management Responsibilities for the Financial Statements
• Management Responsibilities :
a) Preparing the financial statements in accordance with the AFRF, and for such internal
control as management determines is necessary to enable the preparation of financial
statements that are free from material misstatement, whether due to fraud or error
b) Assessing the entity’s ability to continue as a going concern and whether the use of
the going concern basis of accounting is appropriate as well as disclosing, if applicable,
matters relating to going concern.
Note: Oversight of the financial reporting process:

This section of the auditor’s report shall also identify those responsible for the oversight of
the financial reporting process, when those responsible for such oversight are different from
Management. In this case, the heading of this section shall also refer to “Those Charged with
Governance”
129
• Auditor’s Responsibilities for the Audit of the Financial Statements:

• This section of the auditor’s report shall:
a. State that the objectives of the auditor are to:
i.) Obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error; and
ii.) Issue an auditor’s report that includes the auditor’s opinion.
b. State that reasonable assurance is a high level of assurance, but is not a guarantee that
an 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 the aggregate, they
could reasonably be expected to influence the economic decisions of users taken on
the basis of these financial statements; or
ii.) Provide a definition or description of materiality in accordance with the AFRF.
Auditor’s
responsibility
section to further

State that auditor exercises
Describe an audit by Describe auditor’s
professional judgement
stating that auditors responsibility in group
and maintains professional
responsibilities are audit
skepticism
To conclude the To evaaluate

To identify and To obtain an To evaluate the the overall
appropriateness
assess the understanding appropriateness presentation,
of
risks of material of the internal of accounting structure
management’s and content
misstatement control system policies
use of going of financial
concern statements
THE AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL STATEMENTS

SECTION OF THE AUDITOR’S REPORT ALSO SHALL
a) State that the auditor communicates with TCWG regarding, among other matters,
the planned scope and timing of the audit and significant audit findings, including any
significant deficiencies in internal control that the auditor identifies during the audit
b) For audits of FS of listed entities, state that the auditor provides TCWG with a statement
that the 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 the auditor’s independence, and where applicable, related safeguards; and
130
c) For audits of financial statements of listed entities and any other entities for which
key audit matters are communicated in accordance with SA 701, state that, from the
matters communicated with those charged with governance, the auditor determines
those matters that were of most significance in the audit of the financial statements of
the current period and are therefore the key audit matters. The auditor describes these
matters in the auditor’s report unless law or regulation precludes public disclosure.
Other Reporting Responsibilities:

• If the auditor addresses other reporting responsibilities in the auditor’s report on the
financial statements that are in addition to the auditor’s responsibilities under the SAs,
• these other reporting responsibilities shall be addressed in a separate section in the
auditor’s report with a heading titled“Report on Other Legal and Regulatory Requirements”
or otherwise as appropriate to the content of the section,
Other Reporting Responsibilities:

• unless these other reporting responsibilities address the same topics as those presented
under the reporting responsibilities required by the SAs in which case the other reporting
responsibilities may be presented in the same section as the related report elements
required by the SAs.
Signature of the auditor:

• The report is signed by the auditor (i.e. the engagement partner) in his personal name.
• Where the firm is appointed as the auditor, the report is signed in the personal name of
the auditor and in the name of the audit firm.
• The partner/proprietor signing the audit report also needs to mention the membership
number assigned by the Institute of Chartered Accountants of India
Place of auditors report:

• The auditor’s report shall name specific location, which is ordinarily the city where the
audit report is signed.
Date of auditors report:

• The auditor’s report shall be dated no earlier than the date on which the auditor has
obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on
the financial statements
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II. SA 705: MODIFICATIONS TO THE OPINION IN THE INDEPENDENT AUDITORS

REPORT
TYPE OF REPORT
Unmodified Modified
Modified without Modified by

modifying opinion modifying opinion
Emphasis on Others matter Auditor has SAAE Auditor is unable to

matters Para Para that misstatement obtain SAAE that
(EOM) (OM) exist in FS FS are free from
misstatement
Matter is Matter is matter is

material material material
and pervasive but not and pervasive
pervasive
ADVERSE QUALIFIED DISCLAIMER

OPINION OPINION OPINION
Pervasive :
Pervasive effects on the financial statements are those that, in the auditor’s judgment:
I. Are not confined to specific elements, accounts or items of the financial statements;
II. If so confined, represent or could represent a substantial proportion of the financial
statements; or
III. In relation to disclosures, are fundamental to users’ understanding of the financial
statements.
NOTE:
Unless required by law or regulation, when the auditor disclaims an opinion on the financial
statements, the auditor’s report shall not include a Key Audit Matters section in accordance
with SA 701.
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III. SA 706: EMPHASIS OF MATTER PARA & OTHE MATTERIN THE INDEPENDENT
AUDITOR’S REPORT
Q.1 OBJECTIVE:
The objective of the auditor, having formed an opinion on FS is to draw user’s attention, when
in the auditor’s judgement it is necessary to do so, by way of clear additional communication in
the auditor’s report, to:
• A matter, although appropriately presented or disclosed in FS, is that is of such importance

that it is fundamental to users understanding of the FS.
• As appropriate, any other matter that is relevant to users understanding of the audit,
the auditor’s responsibilities or the auditor’s report.
Q.2 EMPHASIS OF MATTER PARA IN THE AUDITOR’S REPORT

• Include it immediately after the opinion Para in auditor’s report.
• Use the heading ‘Emphasis of Matter’ or other appropriate heading
• Include in the Para a clear reference to matter being emphasized
• Indicate that the auditor’s opinion is not modified in respect of the emphasized matter
• Examples: (GAAL)
• G-There is substantial doubt about the entity’s ability to continue as a going concern.
• A-Early application of new accounting standard that has a pervasive effect on FS in

advance of is effective date.
• A-There has been a material, change between periods in accounting principles or in method
of their applications.
• L-An uncertainty relating to the future outcomes of an exceptional litigation or regulatory

action.
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q.3 OTHER MATTER PARA IN AUDITORS REPORT:
• If the auditor considers it necessary to communicate a matter other than those that are
presented or disclosed in FS that,
• in auditors judgement, is relevant to users understanding of the audit, the auditors

responsibilities or auditor’s report &
• this is not prohibited by law or regulation, the auditor shall do so in a Para in the
auditor’s report , with the heading ‘ others matter’ or other appropriate heading.
• The auditor shall include this Para immediately after the opinion Para & any EOM Para.
EXAMPLES: (RALI)
• R-Reasons why auditor is unable to resign from the engagement even though there is
limitation of scope.
• A-Another set of FS has been prepared by the same entity in accordance with another
general purpose framework & that the auditor had issued a report on those FS.
• L-Law, regulation or generally accepted practise that may require or permit the auditor
to elaborate on matters that provide further explanation.
• I-Auditors report is intended solely for indended users.
IV SA 710: COMPARATIVE INFORMATION-CORRESPONDING FIGURES AND

COMPARATIVE FINANCIAL STATEMENTS
Q.1 MEANING
A) Corresponding Figure
• Comparative information
• Where amounts & other disclosures for the preceding period
• Are included
• As part of current period financial statements
• And are intended to be read in relation to the amounts & other disclosures relating to the
current period.
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• These corresponding figures are not presented as complete financial statements capable
of standing alone, but are integral part of the current period financial statement intended
to be ready only in relationship to current period figures.
B) Comparative financial statement

• Comparative information where amounts and other disclosures for the prior period are
included for comparison with the financial statements of the current period but,
• if audited, are referred to in the auditor ’s opinion.
• The level of information included in those comparative financial statements is comparable
with that of the financial statements of the current period
III. PREVIOUS REPORT CONTAINS A QUALIFICATION:

AS PER SA 710
- When the auditors report on prior - when the auditor report on prior
period as previously issued. period as previously issued.
- included a modified opinion - included a qualified opinion.
- and the matter giving rise to - and matter giving rise to
modification is resolved & properly modification is unresolved.
accounted for & disclosed - The auditor shall modify the
in FS according to AFRF. auditor’s opinion on current
- The auditors opinion of the period FS.
current period need not refer to
modifications.
V. SA 701: Key Matter Paragraph

Q.1 MEANING
• Those matters that, in the auditor’s professional judgment, were of most significance in
the audit of the financial statements of the current period.
• Key audit matters are selected from matters communicated with those charged with
governance
APPLICABILITY:
• Listed entities
• Voluntary if auditor otherwise decides to communicate key audit matter
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q.2 purpose of communicating kam:

• To enhance the communicative value of the auditor’s report by providing greater
transparency about the audit that was performed.
• Communicating key audit matters provides additional information to intended users of
the financial statements to assist them in understanding those matters that, in the
auditor’s professional judgment, were of most significance in the audit of the financial
statements of the current period
• Communicating key audit matters may also assist intended users in understanding the
entity and areas of significant management judgment in the audited FS
q.3 Factors to be considered for determining key audit matters:

• Areas of higher assessed risk of material misstatement, or significant risks identified in
accordance with SA 315 (For examples Refer SA 315)
• Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been
identified
• The effect on the audit of significant events or transactions that occurred during the
period.
q.4 Communicating key audit matters in the auditor’s report is not:

• A substitute for disclosures in the financial statements that the AFRF requires management
to make, or that are otherwise necessary to achieve fair presentation
• A substitute for the auditor expressing a modified opinion when required by the circumstances
of a specific audit engagement in accordance with SA 705 (Revised)
• A substitute for reporting in accordance with SA 570 (Revised) when a material
uncertainty exists relating to events or conditions that may cast significant doubt on an
entity’s ability to continue as a going concern
• A separate opinion on individual matters
q.5 key matter para

• The auditor shall describe each key audit matter, using an appropriate subheading, in a
separate section of the auditor’s report under the heading “Key Audit Matters”.
• The introductory language in this section of the auditor’s report shall state that:
• (a) Key audit matters are those matters that, in the auditor’s professional judgment,
were of most significance in the audit of the financial statements [of the current period];
and
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• (b) These matters were addressed in the context of the audit of the financial statements
as a whole, and in forming the auditor’s opinion thereon, and the auditor does not provide
a separate opinion on these matters.
• If the auditor determines, depending on the facts and circumstances of the entity and
the audit, that there are no key audit matters to communicate or that the key audit
matters have been addressed by other paragraphs, the auditor shall include a statement
to this effect in a separate section of the auditor’s report under the heading “Key Audit
Matters”.
PARTICLUAR UNQUALIFIED QUALIFIED ADVERSE DICLAIMER

OPINION OPINION OPINION OPINION
Opinion Para We have audited We have audited We have audited We were engaged to
1st line audit
2nd Line Which comprises the balance sheet at March 31st20XX,and the P&L A/c,
(and statement of Cash flows) for the year ended, and notes to the FS,
including a summary of significant accounting policies.
3rd Line In our opinion and to the best of our information and according to the
explanations given to us,
4th Line Gives true and Except for the Because of the Because of the
fair view of the effects/possible significance of significance of the
financial position effects of the the matters matters described
matter described described in the in the basis of
in the basis for basis of adverse disclaimer of opinion
Qualified opinion opinion para para the auditor
para the FS are the FS are not doesnot express an
true & fair true & fair opinion on FS
Basis of We conducted our audit in accordance with the SAs issued by ICAI. Our
opinion para responsibilities under those standards are further described in the Auditor’s
Responsibilities for the Audit of the Financial Statements section of our
report. We are independent of the entity in accordance with the ethical
requirements that are relevant to our audit of the financial statements
in [jurisdiction], and we have fulfilled our other ethical responsibilities in
accordance with these requirements. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our
opinion.
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Basis of We believe we We believe we We believe we Because of the

opinion para that the audit that the audit that the audit matters described
Last line evidence we evidence we evidence we in the basis of
have obtained have obtained have obtained disclaimer of opinion
is sufficient and is sufficient and is sufficient and para, we were not
appropriate to appropriate to appropriate to able to obtain SAAE
provide a basis provide a basis provide a basis to provide a basis
for our opinion for our qualified for adverse for our opinion
opinion opinion

Question 1:
“The auditor shall form an opinion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework.” Explain
Answer:
The auditor shall form an opinion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework.
In order to form that opinion, the auditor shall conclude as to whether the auditor has
obtained reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error.
• That conclusion shall take into account:
a) Whether sufficient appropriate audit evidence has been obtained;
b) Whether uncorrected misstatements are material, individually or in aggregate;
c) The evaluations.
Question 2:
“The auditor shall evaluate whether the financial statements are prepared, in all material
respects, in accordance with the requirements of the applicable financial reporting framework.
This evaluation shall include consideration of the qualitative aspects of the entity’s accounting
practices, including indicators of possible bias in management’s judgments.” Discuss stating
clearly qualitative aspects of the entity’s accounting practices
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Answer:
Qualitative Aspects of the Entity’s Accounting Practices
i.) Management makes a number of judgments about the amounts and disclosures in the
financial statements.
ii.) SA 260 (Revised) contains a discussion of the qualitative aspects of accounting
practices.
iii.) In considering the qualitative aspects of the entity’s accounting practices, the auditor
may become aware of possible bias in management’s judgments.
The auditor may conclude that lack of neutrality together with uncorrected misstatements
causes the financial statements to be materially misstated. Indicators of a lack of neutrality
include the following:
a) The selective correction of misstatements brought to management’s attention during
the audit.
b) Possible management bias in the making of accounting estimates.
Question 3:
Discuss the factors affecting the decision of the auditor regarding which type of modified
opinion is appropriate.
Answer:
Question 4:
Discuss the objective of the auditor as per Standard on Auditing (SA) 705 “Modifications
to The Opinion in The Independent Auditor’s Report”
Answer:
As per Standard on Auditing (SA) 705 “Modifications To The Opinion In The Independent
Auditor’s Report”, the objective of the auditor is to express clearly an appropriately modified
opinion on the financial statements that is necessary when:
a) The auditor concludes, based on the audit evidence obtained, that the financial
statements as a whole are not free from material misstatement; or
b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that
the financial statements as a whole are free from material misstatement.
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Question 5:
In considering the qualitative aspects of the entity’s accounting practices, the auditor may
become aware of possible bias in management’s judgments. The auditor may conclude that
lack of neutrality together with uncorrected misstatements causes the financial statements
to be materially misstated. Explain and analyse the indicators of lack of neutrality with
examples, wherever required.
Answer:
In considering the qualitative aspects of the entity’s accounting practices, the auditor may
become aware of possible bias in management’s judgments. The auditor may conclude that
lack of neutrality together with uncorrected misstatements causes the financial statements
to be materially misstated. Indicators of a lack of neutrality include the following:
a) The selective correction of misstatements brought to management’s attention during
the audit.
Example
 Correcting misstatements with the effect of increasing reported earnings, but not
correcting misstatements that have the effect of decreasing reported earnings.
 The combination of several deficiencies affecting the same significant account or
disclosure (or the same internal control component) could amount to a significant
deficiency (or material weakness if required to be communicated in the jurisdiction).
This evaluation requires judgment and involvement of audit executives.

b) Possible management bias in the making of accounting estimates.
Question 6:
The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion.” The Opinion section of the auditor’s report shall also identify the entity
whose financial statements have been audited. Apart from the above, explain the other
relevant points to be included in opinion section.
Answer:
Refer point 1.3.3 page 343
Question 7:
Define Emphasis of Matter Paragraph and how it should be disclosed in the Independent
Auditor’s Report?
Answer:
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Question 8:
“An auditor is required to make specific evaluations while forming an opinion in an audit
report.” State those evaluations.
Answer:
• In particular, the auditor shall evaluate whether :
i.) The financial statements adequately disclose the significant accounting policies selected
and applied;
ii.) The accounting policies selected and applied are consistent with the AFRF and are
appropriate;
i) The accounting estimates made by management are reasonable;
ii) The information presented in the financial statements is relevant, reliable, comparable,
and understandable;
iii) The financial statements provide adequate disclosures to enable the intended users to
understand the effect of material transactions and events on the information conveyed
in the financial statements; and
iv) The terminology used in the financial statements, including the title of each financial
statement, is appropriate.
Question 9:
The auditor’s report shall include a section with a heading “Responsibilities of Management
for the Financial Statements.” SA 200 explains the premise, relating to the responsibilities
of management and, where appropriate, TCWG on which an audit in accordance with SAs
is conducted. Explain
Answer:
Refer point no 1.3.7 page no 344
Question 10:
Communicating Key Audit Matter is not a substitute for disclosure in the Financial Statements
rather Communicating key audit matters in the auditor’s report is in the context of the
Auditor having formed an opinion on the financial statements as a whole. Analyse
Answer:
Refer point 4.4 page no 348
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Question 11:
The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”. Explain what is included in this “Basis for Opinion” section
Answer:
Refer point no 1.3.4 on page 343
Question 12:
Give a brief description about the management responsibility to be mentioned in the statutory
auditor’s report.
Answer:
Refer point no 1.3.7 page no 344
Question 13:
Distinguish between an adverse opinion and a qualified opinion. Also draft an opinion
paragraph for both types of opinion.
Answer:
Refer point 2.2 page 346
Question 14:
What is meant by Emphasis of Matter Paragraph and how it should be disclosed in the
independent auditor’s report?
Answer:
Refer point no 3.1 page 347
142

Question 15:
When corresponding figures are presented, the auditor’s opinion shall not refer to the
corresponding figures except in some circumstances. Explain those circumstances.
Answer:
Refer point no 5.1 page 349
Question 16:
The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”. Explain what is included in this “Basis for Opinion” section.
Answer:
Refer point 1.3.4 page no 343
Question 17:
The nature of the comparative information that is presented in an entity’s financial statements
depends on the requirements of the AFRF. There are two different broad approaches to the
auditor’s reporting responsibilities in respect of such comparative information: corresponding
figures and comparative financial statements. Explain clearly stating the essential audit
reporting differences between the approaches. Also define comparative information and
audit procedures regarding comparative information.
Answer:
• The nature of the comparative information that is presented in an entity’s financial
statements depends on the requirements of the applicable financial reporting framework.
• There are two different broad approaches to the auditor’s reporting responsibilities
in respect of such comparative information: corresponding figures and comparative
financial statements.
• The approach to be adopted is often specified by law or regulation but may also be
specified in the terms of engagement. The essential audit reporting differences between
the approaches are:
- For corresponding figures, the auditor’s opinion on the financial statements refers
to the current period only; whereas
- For comparative financial statements, the auditor’s opinion refers to each period
for which financial statements are presented.
Question 18:
Explain clearly the purpose of communicating key audit matters.
Answer:
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AUDIT OF BANKS
Q.1 BANK AUDIT PROVISIONS
A. Eligibility and Qualification

Same as Section 141 of the Companies Act, 2013
B. Appointment
 Nationalized Bank - Board of Directors (prior approval of RBI)
 State Bank of India – C&AG(in consultation with Central Government)
 Subsidiaries of SBI-Board of Directors of SBI
 Regional Rural Bank- Board of Directors (prior approval of CG)
 Any other Case-SHs in GM (prior approval of RBI)
C. Remuneration
• Nationalized Bank and SBI- Remuneration is fixed by RBI in consultation with Central
Government
• Apart from the above specific provisions, in other cases Remuneration is governed by Sec
• 142 of Companies Act, 2013.
D. Powers of Auditor
As per Companies Act, 2013
E. Audit Report:
i.) In the case of a nationalised bank, the auditor is required to make a report to the
Central Government in which he has to state the following:
• whether, in his opinion, the financial statements present a true and fair view of the
affairs of the bank and in case he had called for any explanation or information, whether
it has been given and whether it is satisfactory;
144
• whether or not the transactions of the bank, which have come to his notice, have been
within the powers of that bank;
• whether or not the returns received from the offices and branches of the bank have been
found adequate for the purpose of his audit; and
• any other matter which he considers should be brought to the notice of the Central
Government.
• The report of auditors of State Bank of India is also to be made to the Central Government
and is almost identical to the auditor’s report in the case of a nationalised bank.
ii) Format of Report

• The auditors, central as well as branch, should also ensure that the audit report issued
by them complies with the requirements of Standards on Auditing discussed in SA 700
• The auditor should ensure that not only information relating to number of unaudited
branches is given but quantification of advances, deposits, interest income and interest
expense for such unaudited branches has also been disclosed in the audit report
iii) Long Form Audit Report

• Besides the audit report as per the statutory requirements discussed above, the terms of
appointment of auditors of public sector banks, private sector banks and foreign banks
(as well as their branches), require the auditors to also furnish a long form audit report
(LFAR).
• The matters which the banks require their auditors to deal with in the long form audit
report have been specified by the Reserve Bank of India.
• The LFAR is to be submitted before 30th June every year.
• To ensure timely submission of LFAR, proper planning for completion of the LFAR is
required
• While the format of LFAR does not require an executive summary to be given, members may
consider providing the same to bring out the key observations from the whole document.
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Q.2 ADVANCES:
i) Types of Advances:
Funded Non-Funded
facilities are those which do not
loans are those loans where there is an involve such transfer.
actual transfer of funds from the bank Examples of non-funded loans are
to the borrower. Examples of funded Letters of credit, Bank guarantees, etc.
loans are Term loans,
Cash credits, Overdrafts, Demand
Loans, Bills Discounted and Purchased,
Participation on Risk Sharing basis,
Interest-bearing Staff Loans.

II Disclosure Requirements
Nature Wise Security Wise Location Wise

• Bills purchased and • Secured by tangible • Advances in India:
discounted assets Priority sectors
Public sector
• Cash credits, Overdrafts • Covered by Bank/ Banks
and loans repayable on Government guarantees Others
demand
• Unsecured • Advances outside
• Term Loans India:
Due from Banks
Due from Others:
Bills Purchased and
discounted
Syndicated loans
Others
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III. Classification as per Prudential norms
Standard Sub Standard Doubtful Assets Loss Assets

The asset exhibits no Asset which has been Asset which has Asset in respect
problem in the normal classified as NPA for remained NPA for a of which loss has
course other than the a period not exceeding period exceeding 12 been identified
usual business risk 12 months. months
SMA(special mention A/c)  15% of total  Doubtful upto 1 100%

SMA 0 (A/c showing O/S year= 25%
stress signal)  U n s e c u r e d  Doubtful from 1 to
SMA 1(Overdue 31 to 60 exposures – 3 years= 40%
days) 10% additional  Doubtful more than
SMA 2(Overdue 61 to 90 provision(i.e 3 years = 100%
days) total 25%)  100% for
unsecured
Q.3. Nature of security against advances
Primary Collateral
This security is the principal Collateral security is an additional
security for an advance. security.
MODE OF CREATION OF SECURITY
i) Mortgage: Mortgage are of several kinds but the most important are the Registered
Mortgage and the Equitable Mortgage.
 A Registered Mortgage can be affected by a registered instrument called the ‘Mortgage
Deed’ signed by the mortgagor. It registers the property to the mortgagee as a security.
 Equitable mortgage, on the other hand, is effected by a mere delivery of title deeds or other
documents of title with intent to create security thereof
ii) Pledge:
 A pledge thus involves bailment or delivery of goods by the borrower to the lending bank
with the intention of creating a charge thereon as security for the advance.
 The legal ownership of the goods remains with the pledger while the lending banker gets
certain defined interests in the goods.
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 The pledge of goods constitutes a specific (or fixed) charge
iii) Hypothecation
 The hypothecation is the creation of an equitable charge ,a charge created in favour of
the lending bank by execution of hypothecation agreement
 in respect of the moveable securities belonging to the borrower.
 Neither ownership nor possession is transferred to the bank. However, the borrower
holds the physical possession of the goods as an agent/trustee of the bank
iv) Assignment
 Assignment represents a transfer of an existing or future debt, right
 or property belonging to a person in favour of another person. Book debts and life
insurance policies are accepted by banks as security by way of assignment.
 An assignment gives the assignee absolute right over the moneys/debts assigned to him
v) Set-off
 Set-off is a statutory right of a creditor to adjust, wholly or partly, the debit balance in
the debtor’s account against any credit balance lying in another account of the debtor
 The right of set-off enables a bank to combine two accounts (a deposit account and a
loan account) of the same person provided both the accounts are in the same name and
in the same right
vi) Lien
 Lien is creation of a legal charge with consent of the owner, which gives lender a legal
right to seize and dispose / liquidate the asset under lien
Q. 4 CRITERIA FOR CLASSIFYING ASSET AS NON-PERFORMING ASSET
i) Term Loan: Interest and/ or installment of principal remain overdue for a period of more
than 90 days
ii) Overdraft/Cash Credit: An account should be treated as 'out of order' if a.O/S balance
remains continuously in excess of the sanctioned limit/drawing power for 90 days.
b. In cases where the outstanding balance in the principal operating account is less than
the sanctioned limit/drawing power, but there are no credits continuously for 90 days
148
as on the date of Balance Sheet or credits are not enough to cover the interest debited
during the Same period
iii) Agricultural advances:

 Short duration crops: The installment of principal or interest thereon remains overdue
for two crop seasons
 Long duration crops: The installment of principal or interest thereon remains overdue
for one crop season
iv) Credit Card Accounts: A credit card account will be treated as non-performing asset if
the minimum amount due, as mentioned in the statement, is not paid fully within 90 days
from the next statement date.
v) Erosion in the value of security

Accounts where there is erosion in the value of security / frauds committed by borrowers:
Not prudent to follow stages of asset classification. It should be straight-away classified as
doubtful or loss asset as appropriate
 when the realizable value of the security is less than 50 percent of the value assessed by
the bank or accepted by RBI at the time of last inspection
 If the realizable value of the security, as assessed by the bank/ approved valuers / RBI
is less than 10 percent of the outstanding in the borrowal accounts
vi) Central Government Guaranteed advances

 Loan is guaranteed by Central government (here there is no need to create NPA provision
on the amount of asset however, income accrued but not realized must be reversed).
 State Government guaranteed advances and investments in State Government guaranteed

securities would attract asset classification and provisioning norms if interest and/or
principal or any other amount due to the bank remains overdue for more than 90 days
vii) Accounts regularized near the Balance Sheet Date:

 The asset classification of borrower accounts where a solitary or a few credits are
recorded before the balance sheet should be handled with care and without scope for
subjectivity.
 Where the account indicates inherent weakness on the basis of the data available the
account should be deemed as NPA.
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viii) Advances under Consortium :

 Consortium advances mean advancing loans to a borrower by two or more Banks jointly
by forming a Consortium.
 Joint appraisal, control and monitoring will facilitate for exchange of valuable information
among the Banks. Usually, a Bank with a higher share will lead the consortium.
 Consortium advances should be based on the record of recovery of the respective
individual member banks and other aspects having a bearing on the recoverability of the
advances.
viii) Advances under Consortium :

 Where the remittances by the borrower under consortium lending arrangements are
pooled with one bank and/or where the bank receiving remittances is not parting with
the share of other member banks, the account should be treated as not serviced in the
books of the other member banks and therefore, an NPA.
 The banks participating in the consortium, therefore, need to arrange to get their share
of recovery transferred from the lead bank or to get an express consent from the lead
bank for the transfer of their share of recovery, to ensure proper asset classification in
their respective books
ix) Advances Against Term Deposits, NSCs, KVPs/ IVPs, etc :

 Advances against Term Deposits, NSCs eligible for surrender, KVP/IVP and life policies
need not be treated as NPAs, provided adequate margin is available in the accounts
x) Advances to staff:
 Interest-bearing staff advances as a banker should be included as part of advances
portfolio of the bank.
 In the case of housing loan or similar advances granted to staff members where interest
is payable after recovery of principal, interest need not be considered as overdue from
the first quarter onwards.
 Such loans/advances should be classified as NPA only when there is a default in
repayment of installment of principal or payment of interest on the respective due dates.
 The staff advances by a bank as an employer and not as a banker are required to be
included under the sub-head ‘Others’ under the schedule of Other Assets.
Exception:
 Temporary deficiencies e.g non submission of stock statement.
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 On lending arrangement (when bank lends money that they have received from another
person.) Hence bank is merely transferring the funds
 Where natural calamities impair the repaying capacity of agricultural borrowers, banks
may decide on their own as a relief measure conversion of the short-term production loan
into a term loan or re-scheduling of the repayment period; and the sanctioning of fresh
short-term loan, subject to guidelines.
Q.5. REVERSAL OF INCOME
 If any advance, including bills purchased and discounted, becomes NPA, the entire
interest accrued and credited to income account in the past periods, should be reversed
if the same is not realized. This will apply to Government guaranteed accounts also
 In respect of NPAs, fees, commission and similar income that have accrued should cease
to accrue in the current period and should be reversed with respect to past periods, if
Uncollected
 Further, in case of banks which have wrongly recognised income in the past should
reverse the interest if it was recognised as income during the current year or make
a provision for an equivalent amount if it was recognized as income in the previous
year(s).
 Furthermore, the auditor should enquire if there are any large debits in the Interest
Income account that have not been explained. It should be enquired whether there
are any communications from borrowers pointing out differences in interest charge and
whether appropriate action has been taken in this regard.
Q.6 AUDIT OF ADVANCES:

Advances generally constitute the major part of the assets of the bank. There are large
number of borrowers to whom variety of advances are granted. The audit of advances requires
the major attention from the auditors (ODD UV RAP)
O - Amounts included in balance sheet in respect of advances which are outstanding at the
date of the balance sheet
D- Advances represent amount due to the bank
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D- Amounts due to the bank are appropriately supported by loan documents and other
documents as applicable to the nature of advances.
U- There are no unrecorded advances
V- The stated basis of valuation of advances is appropriate and properly applied
R- The recoverability of advances is recognised in their valuation
A- The advances are disclosed, classified and described in accordance with recognised
accounting policies and practices and relevant statutory and regulatory requirements.
P- Appropriate provisions towards advances have been made as per the RBI norms,
Accounting Standards and generally accepted accounting practices
The auditor can obtain sufficient appropriate audit evidence about advances by study and
evaluation of internal controls relating to advances, and by: (CA ViDEO)
C- checking compliance with RBI norms including appropriate classification and provisioning;
A- carrying out appropriate analytical procedures
V- examining the validity of the recorded amounts
D- examining loan documentation;
E- examining the existence, enforceability and valuation of the security
O- reviewing the operation of the accounts
Q.7. EVALUATION OF INTERNAL CONTROL OVER ADVANCES

(C2 DEAR DROPS)
C- The bank should make an advance only after satisfying itself as to the credit worthiness
of the borrower and after obtaining sanction from the appropriate authorities of the
bank.
152
C- The compliance with the terms of sanction and end use of funds should be ensured
D- All the necessary documents (e.g., agreements, demand promissory notes, letters of
hypothecation, etc.) should be executed by the parties before advances are made.
E- All the accounts which exceed the sanctioned limit or drawing power or are otherwise
irregular should be brought to the notice of the controlling authority regularly
A- Sufficient margin as specified in the sanction letter should be kept against securities
taken so as to cover for any decline in the value thereof. The availability of sufficient
margin needs to be ensured at regular intervals.
R- All securities requiring registration should be registered in the name of the bank or
otherwise accompanied by documents sufficient to give title to the bank
D1- Drawing Power Register should be updated every month to record the value of securities
hypothecated. These entries should be checked by an officer
D2- The accounts should be kept within both the drawing power and the sanctioned limit.
R- The operation of each advance account should be reviewed at least once a year and at
more frequent intervals in the case of large advances
O- If the securities taken are in the nature of shares, debentures, etc., the ownership
of the same should be transferred in the name of the bank and the effective control
of such securities be retained as a part of documentation
P- In the case of goods in the possession of the bank, contents of the packages should
be test checked at the time of receipt. The godowns should be frequently inspected by
responsible officers of the branch concerned, in addition to the inspectors of the bank
S- All the accounts which exceed the sanctioned limit or drawing power or are otherwise
irregular should be brought to the notice of the controlling authority regularly
153
XII. AUDIT OF REVENUE ITEMS:

(BABU C RAM)
B- Bills Purchased :
• In the case of bills purchased outstanding at the close of the year the discount received
thereon should be properly apportioned between the two years.
A-Auditor’s Concern :
• In carrying out audit of income, the auditor is primarily concerned with obtaining
reasonable assurance that the recorded income arose from transactions, which took
place during the relevant period and pertained to the bank, there is no unrecorded
income and the income is recorded at appropriate amount
B- Bills for Collection :

• In the case of bills for collection, the auditor should also examine the procedure for
crediting the party on whose behalf the bill has been collected.
• The procedure is usually such that the customer’s account is credited only after the
bill has actually been collected from the drawee either by the bank itself or through its
agents, etc.
• The commission of the branch becomes due only when the bill has been collected..
• The commission of the branch becomes due only when the bill has been collected.
U- Revenue Uncertainty:
• In view of the significant uncertainty regarding ultimate collection of income arising in
respect of non-performing assets, the guidelines require that banks should not recognize
income on non- performing assets until it is actually realised.
• When a credit facility is classified as non-performing for the first time, interest
accrued and creditedto the income account in the corresponding previous year
which has not been realized should be reversed or provided for.
• This will apply to Government guaranteed accounts also.
C- Revenue Certainty:
• Banks recognise income (such as interest, fees and commission) on accrual basis, i.e., as
it is earned.
• It is an essential condition for accrual of income that it should not be unreasonable to
expect its ultimate collection.
154
• In modern day banking, the entries for interest income on advances are automatically
generated through a batch process in the CBS system
R1- RBI’s Directions:

• RBI has advised that in respect of any income which exceeds 1% of the total income of
the bank if the income is reckoned on a gross basis or 1% of the net profit before taxes
if the income is reckoned net of costs, should be considered on accrual as per AS 9.
R2-Renegotiations:
• Fees and commissions earned by the banks as a result of re-negotiations or rescheduling
of outstanding debts should be recognised on an accrual basis over the period of time
covered by the re-negotiated or rescheduled extension of credit.
A- Advances against Securities :

• Interest on advances against Term Deposits, National Savings Certificates (NSCs),
Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken
to income account on the duedate, provided adequate margin is available in the accounts
M-Materiality:
• If any item of income is not considered to be material as per the above norms, it may
be recognised when received and the auditors need not qualify their report in that
situation.
XIII. AUDIT OF EXPENSES:

(IFRS Me)
I- Interest provided on all Fixed deposits
F- Fixed deposit – interest as per receipt/certificate
R- Rates as per RBI & bank internal regulations
S- Savings account – interest as per rules of bank
M- Matured deposits- interest provided
155
Question 1:
The functioning of banking industry in India is regulated by the Reserve Bank of India
(RBI) which acts as the Central Bank of our country. Explain
Answer:
Question 2:
“The engagement team should hold discussions to gain better understanding of the bank
and its environment, including internal control, and also to assess the potential for material
misstatements of the financial statements. All these discussions should be appropriately
documented for future reference”. Explain
Answer:
Question 3:
Write a short note on reversal of income under bank audit.
Answer:
Question 4:
What are the general requirements of an effective Risk Management System in Banks ?
Answer:
(a) Oversight and involvement in the control process by those charged with governance:
Those charged with governance (Board of Directors/Managing Director) should approve
written risk management policies. The policies should be consistent with the bank’s business
objectives and strategies, capital strength, management expertise, regulatory requirements
and the types and amounts of risk it regards as acceptable.
(b) Identification, measurement and monitoring of risks: Risks that could significantly
impact the achievement of bank’s goals should be identified, measured and monitored
against pre-approved limits and criteria.
(c) Control activities: A bank should have appropriate controls to mitigate its risks including
effective segregation of duties (particularly between front and back offices), accurate
measurement and reporting of positions, verification and approval of transactions,
reconciliation of positions and results, setting up limits, reporting and approval of
exceptions, physical security and contingency planning.
156
(d) Monitoring activities: Risk management models, methodologies and assumptions used to
measure and mitigate risk should be regularly assessed and updated. This function may
be conducted by the independent risk management unit.
(e) Reliable information systems: Banks require reliable information systems that provide
adequate financial, operational and compliance information on a timely and consistent
basis. Those charged with governance and management require risk management
information that is easily understood and that enables them to assess the changing
nature of the bank’s risk profile.
Question 5:
Explain the audit approach you would follow to check the Operating Expenses of a Bank.
Answer:
(a) Internal Controls:-The auditor should study and evaluate the system of internal
control relating to expenses, including authorization procedures in order to determine
the nature, timing and extent of his other audit procedures.
(b) Divergent Trends:-The auditor should examine whether there are any divergent trends
in respect of major items of expenses.
(c) Substantive analytical Procedures:-The auditor should perform substantive analytical
procedures in respect of these expenses. eg. assess the reasonableness of expenses
by working out their ratio to total operating expenses and comparing it with the
corresponding figures for previous years.
(d) Vouching & Verification:- The auditor should also verify expenses with reference to
supporting documents and check the calculations wherever required.
Question 6:
The auditor should examine the efficacy of various internal controls over advances to determine
the nature, timing and extent of his substantive procedures. Explain this statement.
Answer:
The auditor should examine the efficacy of various internal controls over advances to
determine the nature, timing and extent of his substantive procedures. In general, the
internal controls over advances should include, inter alia, the following:
• The bank should make an advance only after satisfying itself as to the credit worthiness
of the borrower and after obtaining sanction from the appropriate authorities of the
bank.
157
• All the necessary documents (e.g., agreements, demand promissory notes, letters of
hypothecation, etc.) should be executed by the parties before advances are made.
• The compliance with the terms of sanction and end use of funds should be ensured.
• Sufficient margin as specified in the sanction letter should be kept against securities
taken so as to cover for any decline in the value thereof. The availability of sufficient
margin needs to be ensured at regular intervals.
• If the securities taken are in the nature of shares, debentures, etc., the ownership of
the same should be transferred in the name of the bank and the effective control of
such securities be retained as a part of documentation.
• All securities requiring registration should be registered in the name of the bank or
otherwise accompanied by documents sufficient to give title to the bank.
• In the case of goods in the possession of the bank, contents of the packages should
be test checked at the time of receipt. The godowns should be frequently inspected by
responsible officers of the branch concerned, in addition to the inspectors of the bank.
• Drawing Power Register should be updated every month to record the value of securities
hypothecated. These entries should be checked by an officer.
• The accounts should be kept within both the drawing power and the sanctioned limit.
• All the accounts which exceed the sanctioned limit or drawing power or are otherwise
irregular should be brought to the notice of the controlling authority regularly.
• The operation of each advance account should be reviewed at least once a year and at
more frequent intervals in the case of large advances.
158
Question 7:
Your firm of Chartered Accountants has been appointed as the Auditor of two branches
of OBC which are located in the Industrial area. Considering that the location of the
branches of bank in industrial area, these would be “advances oriented branches and audit
of advances would require the major attention of the auditors. Advise how would you proceed
to obtain evidence in respect of audit of advances.
Answer:
The engagement team should hold discussions to gain better understanding of the bank and
its environment, including internal control, and also to assess the potential for material
misstatements of the financial statements. All these discussions should be appropriately
documented for future reference. The discussion provides:
• An opportunity for more experienced engagement team members, including the audit
engagement partner, to share their insights based on their knowledge of the bank and
its environment.
• An opportunity for engagement team members to exchange information about the
bank’s business risks.
• An understanding amongst the engagement team members about effect of the results
of the risk assessment procedures on other aspects of the audit, including decisions
about the nature, timing, and extent of further audit procedures.
The discussion between the members of the engagement team and the audit engagement
partner should be done on the susceptibility of the bank’s financial statements to material
misstatements.
These discussions are ordinarily done at the planning stage of an audit.
The engagement team discussion ordinarily includes a discussion of the following matters:
Errors that may be more likely to occur;
Errors which have been identified in prior years; Method by which fraud might be perpetrated
by bank personnel or others within particular account balances and/or disclosures;
Audit responses to Engagement Risk, Pervasive Risks, and Specific Risks; Need to maintain
professional skepticism throughout the audit engagement;
Need to alert for information or other conditions that indicates that a material misstatement
may have occurred (e.g., the bank’s application of accounting policies in the given facts and
circumstances).
159
Question 8:
The auditor should examine the efficacy of various internal controls over advances in case
of Banks to determine the nature, timing and extent of his substantive procedures. Explain
what is included in the internal controls over advances.
Answer:
Question 9:
Ramjilal & Co. had been allotted the branch audit of a nationalized bank for the year ended
31st March, 2018. In the audit planning, the partner of Ramjilal & Co., observed that the
allotted branches are predominantly based in rural areas and major portion of the advances
were for agricultural purpose.”
Now he needs your assistance on the following points so as to incorporate them in the audit
plan:
(i) for determination of NPA norms for agricultural advances
(ii) for accounts where there is erosion in the value of security/frauds committed by the
borrowers.
Answer:
Question 10:
At the AGM of HDB Pvt. Ltd., Mr. R was appointed as the statutory auditor. He, however,
resigned after 3 months since he wanted to pursue his career in banking sector. The Board
of Director has appointed Mr. L as the statutory auditor in board meeting within 30 days.
Comment on the matter with reference to the provisions of Companies Act, 2013.
Answer:
Nature of Security :
I. Primary security refers to the security offered by the borrower for bank finance or the
one against which credit has been extended by the bank. This security is the principal
security for an advance.
II. Collateral security is an additional security. Security can be in any form i.e. tangible or
intangible asset, movable or immovable asset.
160
Examples of most common types of securities accepted by banks are the following.
• Personal Security of Guarantor • Goods / Stocks / Debtors / Trade Receivables
• Gold Ornaments and Bullion • Immovable Property
• Plantations (For Agricultural Advances)
• Third Party Guarantees • Banker’s General Lien
• Life Insurance Policies • Stock Exchange Securities
and Other Instruments
Question 11:
In view of the significant uncertainty regarding ultimate collection of income arising in respect
of non- performing assets, the guidelines require that banks should not recognize income on
non-performing assets until it is actually realised. When a credit facility is classified as non-
performing for the first time, interest accrued and credited to the income account in the
corresponding previous year which has not been realized should be reversed or provided for.
This will apply to Government guaranteed accounts also. Analyse and Explain.
Answer:
161

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INTER CA

Audit Evidence and

03 Audit Sampling 54-61

62-69 Analytical Procedures 04

83-127 Company Audit 06

07 Audit Report 128-143

144-161 Audit Of Banks 08

NATURE SCOPE AND

Q.1 DEFINITION OF AUDIT: ( N17) (RTP M 20)

QUESTIONS ASKED IN PAST/RTP/MOCK TEST/MODULE

Q.2 INHERENT LIMITATION OF AUDIT:(TOPIC 5)

• And cannot, reduce audit risk to zero &

• Therefore, obtain absolute assurance that the financial statements

• Are free from material misstatement due to fraud or error.

• This is because of inherent limitations of audit arise from (FATO)

• Independence cannot be defined as it is a state of mind

• It means that auditors judgment should not be influenced in any situation.

• According to guidance note by ICAI independence implies that auditors judgment of a

Intimidation Self Review

The following are the guiding principles in this regard

Questions asked in past/rtp/mock test/module

Q.4 professional skepticism:

Q.5 SA 210: AGREEING TO THE TERMS OF AUDIT ENGAGEMENTS(TOPIC 11)

Determine whether FRF Obtain agreement from management

Contents of Engagement letter

limitation on scope of audit

ACCEPTANCE OF CHANGE IN THE TERMS OF ENGAGEMENT

Inquire about the reasons

RECURRING AUDIT. (morons)

0- A significant change in ownership

R- A change in legal or regulatory requirement

0- A change in other reporting requirement

N- A change in nature & size of the entity’s business

S- Recent change of senior management

MODULE KE PEEHCE KYA HAI? #TEST YOUR KNOWLEDGE

- Fraud, particularly fraud involving senior management or collusion.

QUESTIONS ASKED IN PAST/RTP/MTP

AUDIT EVIDENCE AND

STATE EXAMPLES OF AUDIT DOCUMENTATION:

Q.2 PURPOSE OFAUDIT DOCUMENTATION:

F- Retaining a record of matters of continuing significance to Future audit.

A- Enabling the engagement team to be accountable for its work.

P- Assisting the engagement team to plan & perform the audit.

I- Enabling the conduct of quality control reviews & inspections

E- Enabling the conduct of external Inspection in accordance with applicable legal

Q.3 THE FORM, CONTENT & EXTENT OF AUDIT DOCUMENTATION:

N- Nature of Audit procedures to be performed

Q.5 working paper files:

Q.7 ASSEMBLY & RETENTION OF THE FINAL AUDIT FILE

Q.8 COMPLETION MEMORANDUM

QUESTIONS ASKED IN PAST/RTP/MOCK TEST

Question 2: (May 10)

Question 3: (May 11,15)

Question 4: (May 19)

Question 5: (May 13)

AUDITOR 3RD PARTY

Direct written response

To The Accounts Manager,

Q. 2 SITUATIONS WHERE EXTERNAL CONFIRMATIONS CAN BE USED

Q.3 NEGATIVE & POSITIVE CONFIRNATION

POSITIVE CONFIRMATION NEGATIVE CONFIRMATION

S- Substantial no. of errors are not expected.

Q. 5 MANAGEMENTS REFUSAL TO ALLOW THE AUDITOR TO SEND CONFIRMATIONS

E- Evaluate the implications of management’s refusal on auditors assessment of ROMMS

Emailing AUDITING & Assurance Nov21

Emailing AUDITING & Assurance Nov21