Final Course

(Revised Scheme of Education and Training)

Study Material
(Modules 1 to 3)

PAPER 3

Advanced Auditing and

Professional Ethics

MODULE – 3

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

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This study material has been prepared by the faculty of the Board of Studies. The objective of the
study material is to provide teaching material to the students to enable them to obtain knowledge
in the subject. In case students need any clarifications or have any suggestions for furth er
improvement of the material contained herein, they may write to the Director of Studies.
All care has been taken to provide interpretations and discussions in a manner useful for the
students. However, the study material has not been specifically discus sed by the Council of the
Institute or any of its Committees and the views expressed herein may not be taken to necessarily
represent the views of the Council or any of its Committees.
Permission of the Institute is essential for reproduction of any portion of this material.

© The Institute of Chartered Accountants of India

All rights reserved. No part of this book may be reproduced, stored in a retrieval system, or
transmitted, in any form, or by any means, electronic, mechanical, photocopying, rec ording, or
otherwise, without prior permission, in writing, from the publisher.

Edition : October, 2021

Website : www.icai.org

E-mail : bosnoida@icai.in

Committee/ : Board of Studies

Department

ISBN No. :

Price (All Modules) : `

Published by : The Publication Department on behalf of The Institute of Chartered

Accountants of India, ICAI Bhawan, Post Box No. 7100,
Indraprastha Marg, New Delhi 110 002, India.

Printed by :

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SIGNIFICANT ADDITIONS/ MODIFICATIONS

IN THE REVISED EDITION

Students are advised to refer Theoretical Questions under heading Test Your Knowledge inserted
at the end of each of the Chapters.
Chapter Chapter Name Section / Sub-Section wherein Page
No. Additions / Modifications have been Number
done
17 Peer Review and Quality Unit 1: Peer Review
Review 3. Scope of Peer Review 17.5
4. Applicability 17.7
5. Peer Review Board 17.9
5.1 Eligibility to be a Reviewer 17.9
6.2 Obligations of the Peer Reviewer 17.13
7.1. Selection of Practice Unit &
appointment of Reviewer 17.14
7.2 Planning 17.14
7.3. Execution 17.15
7.4. Reporting 17.16
7.5 Peer Review Certificate 17.19
18 Professional Ethics 2..3 Non-Compliance with Laws and 18.13
Regulations (NOCLAR)

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CONTENTS

MODULE – 1
Chapter 1: Auditing Standards, Statements and Guidance Notes – An Overview
Chapter 2: Audit Planning, Strategy and Execution
Chapter 3: Risk Assessment and Internal Control
Chapter 4: Special Aspects of Auditing in an Automated Environment
Chapter 5: Audit of Limited Companies
Chapter 6: Audit Reports
Chapter 7: Audit Committee and Corporate Governance
MODULE – 2
Chapter 8: Audit of Consolidated Financial Statements
Chapter 9: Audit of Banks
Chapter 10: Audit of Insurance Companies
Chapter 11: Audit of Non Banking Financial Companies
Chapter 12: Audit under Fiscal Laws

MODULE – 3
Chapter 13: Audit of Public Sector Undertakings
Chapter 14: Liabilities of Auditors
Chapter 15: Internal Audit, Management and Operational Audit
Chapter 16: Due Diligence, Investigation and Forensic Audit
Chapter 17: Peer Review and Quality Review
Chapter 18: Professional Ethics

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DETAILED CONTENTS MODULE - 3

CHAPTER 13: AUDIT OF PUBLIC SECTOR UNDERTAKINGS
LEARNING OUTCOMES .................................................................................................. 13.1
CHAPTER OVERVIEW .................................................................................................... 13.1
Contents:
1. Introduction .............................................................................................................. 13.2
2. Framework for Government Audit ............................................................................. 13.2
3. Objective and Scope of Public Enterprises Audit ....................................................... 13.6
3.1 Elements of PSU Audits ................................................................................... 13.8
3.2 Principles of PSU Audits ................................................................................... 13.9
4. Audit of Government Companies ............................................................................. 13.10
5. Financial Audit ........................................................................................................ 13.11
6. Compliance Audit .................................................................................................... 13.11
7. Performance Audit .................................................................................................. 13.12
7.1 Provisions contained in Companies Act, 2013 and C&AG’s
(Duties, Powers and Conditions of Service) Act, 1971 ...................................... 13.15
7.2 Objectives of Performance Auditing ................................................................. 13.15
7.3 Planning for Performance Audit ....................................................................... 13.16
8. Comprehensive Audit .............................................................................................. 13.23
9. Propriety Audit ........................................................................................................ 13.24
9.1 Definition and Principles .................................................................................. 13.24
9.2 Relevant provisions in the Companies Act, 2013 .............................................. 13.25
9.3 Propriety Elements under CARO, 2020 ............................................................ 13.27
10. Audit Report of the Comptroller and Auditor General ................................................ 13.31
TEST YOUR KNOWLEDGE ............................................................................................ 13.32
CHAPTER 14: LIABILITIES OF AUDITOR
LEARNING OUTCOMES .................................................................................................. 14.1
CHAPTER OVERVIEW .................................................................................................... 14.1

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Contents:
1. Nature of Auditor’s Liability ...................................................................................... 14.2
1.1 Taking assistance in the discharge of his duties ................................................ 14.2
1.2 Basis of liability ................................................................................................ 14.3
2. Professional negligence ........................................................................................... 14.4
3. Cases concerning the civil liability of auditors for negligence .................................... 14.15
4. Civil liabilities under the Companies Act .................................................................. 14.18
5. Criminal liability under the Companies Act ............................................................... 14.23
5.1 Cases in which an auditor has been held to have incurred criminal liability ....... 14.25
6. Case concerning the misconduct of auditors under the Chartered Accountants Act ... 14.27
7. Liabilities under Income-tax Act 1961 ...................................................................... 14.30
TEST YOUR KNOWLEDGE ............................................................................................ 14.32
CHAPTER 15: INTERNAL AUDIT MANAGEMENT AND OPERATION AUDIT
LEARNING OUTCOMES .................................................................................................. 15.1
CHAPTER OVERVIEW .................................................................................................... 15.2
Contents:
1. Internal Audit ........................................................................................................... 15.3
2. Management functions and scope of internal auditing ............................................... 15.7
3. Integrity, Objectivity and Independence of Internal Auditor ....................................... 15.11
4. Qualities of Internal Auditor ..................................................................................... 15.12
5. Internal Audit Report ............................................................................................... 15.12
5.1 Follow up ........................................................................................................ 15.14
6. Relationship between Internal and External Auditors ................................................ 15.15
6.1 Determining whether, in which areas, and to what extent the
work of the Internal Audit function can be used ................................................ 15.17
6.2 Determining the Nature and Extent of work of the
Internal Audit function that can be used ........................................................... 15.17
6.3 Determining whether in which areas, and to what extent Internal
Auditors can be used to provide direct assistance ........................................... 15.18

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6.4 If the External Auditor uses Internal Auditors to provide direct assistance on
the audit, the External Auditor shall include in the Audit Documentation ........... 15.18
7. Management Audit .................................................................................................. 15.19
7.1 Management and Operational Audit ................................................................. 15.20
7.2 Scope ............................................................................................................. 15.20
7.3 Desirability of Management Audit .................................................................... 15.22
7.4 Organising the Management Audit ................................................................... 15.23
7.5 Conducting a Management Audit ..................................................................... 15.25
7.6 Concluding a Management Audit ..................................................................... 15.26
7.7 Management Audit Reports ............................................................................. 15.27
7.8 Behavioral Aspects encountered in a Management Audit ................................. 15.30
8. Operational Audit ................................................................................................... 15.33
8.1 Relationship between Internal Auditing and Operational Auditing ..................... 15.34
8.2 Qualities of Operational Audit ......................................................................... 15.37
8.3 Why Operational Audit ..................................................................................... 15.37
8.4 Types of Operational Audit .............................................................................. 15.39
8.5 Objectives of Operational Audit ....................................................................... 15.39
9. Review of Systems and Procedures......................................................................... 15.41
9.1 Systems ........................................................................................................... 15.4
9.2 Procedures ..................................................................................................... 15.42
9.3 Review of Systems and Procedures ................................................................. 15.42
10. Management Audit Questionnaire ............................................................................ 15.44
APPENDIX ..................................................................................................................... 15.45
TEST YOUR KNOWLEDGE ............................................................................................ 15.46
CHAPTER 16-DUE DILIGENCE, INVESTIGATION & FORENSIC AUDIT
LEARNING OUTCOMES .................................................................................................. 16.1
CHAPTER OVERVIEW .................................................................................................... 16.1

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Contents:
UNIT 1: DUE DILIGENCE
1. Overview.......................................................................................................... 16.2
2. Difference between due diligence and audit ...................................................... 16.2
3. Importance of Due Diligence ............................................................................. 16.3
4. Classification of Due-Diligence ......................................................................... 16.3
5. Work Approach to Due diligence ...................................................................... 16.10
6. How to Conduct Due Diligence ........................................................................ 16.12
7. Contents of a Due Diligence Report ......................................................................... 16.13
UNIT 2: INVESTIGATION
1. Overview......................................................................................................... 16.14
2. Audit versus Investigation ................................................................................ 16.14
3. Steps in Investigation ...................................................................................... 16.16
4. Special Issues in Investigations ....................................................................... 16.19
5. Special Aspects in Connection with Business Investigations ............................. 16.21
6. Types of Investigation ..................................................................................... 16.28
6.1 Investigation under the Companies Act, 2013 ........................................... 16.29
6.2 Investigation on behalf of an incoming partner .......................................... 16.37
6.3 Investigation for valuation of shares in private companies ......................... 16.39
6.4 Investigation on behalf of a bank/Financial Institution proposing to advance
loan to a Company ....................................................................................... 16.41
6.5 Investigation of Frauds ............................................................................. 16.44
6.6 Investigation on behalf of an Individual or Firm proposing to buy
a Business .............................................................................................. 16.55
6.7 Investigation in connection with review of Profit/Financial Forecasts .......... 16.56
UNIT 3: FORENSIC AUDIT
1. Overview......................................................................................................... 16.57
2. Audit v/s Forensic Accounting/Forensic Audit ................................................... 16.58
3. Forensic Auditor .............................................................................................. 16.60

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3.1 A Forensic Auditor is often involved in ...................................................... 16.60

3.2 Who retains Forensic Auditors? ................................................................ 16.61
3.3 Importance of Forensic Auditors .............................................................. 16.61
3.4 Services rendered by Forensic Auditors .................................................... 16.61
4. Process of Forensic Accounting ....................................................................... 16.63
5. Forensic Audit Techniques .............................................................................. 16.65
6. Forensic Audit Report ...................................................................................... 16.68
TEST YOUR KNOWLEDGE .................................................................................... 16.71

CHAPTER 17: PEER REVIEW & QUALITY REVIEW

LEARNING OUTCOMES .................................................................................................. 17.1
CHAPTER OVERVIEW .................................................................................................... 17.1
Contents:
UNIT- 1: PEER REVIEW
1. Introduction .............................................................................................................. 17.2
2. Objectives of Peer Review ....................................................................................... 17.4
3. Scope of Peer Review .............................................................................................. 17.5
4. Applicability ............................................................................................................. 17.7
5. Peer Review Board .................................................................................................. 17.9
5.1 Eligibility to be a Reviewer ................................................................................ 17.9
5.2 Qualified Assistant .......................................................................................... 17.10
5.3 Confidentiality ................................................................................................. 17.11
6. Approach of the Reviewer ....................................................................................... 17.11
6.1 Obligations of the Practice Unit ........................................................................ 17.12
6.2 Obligations of the Peer reviewer ...................................................................... 17.13
7. The Peer Review Process ....................................................................................... 17.13
7.1 Selection of Practice Unit & Appointment of Reviewer ...................................... 17.14
7.2 Planning ......................................................................................................... 17.14
7.3 Execution ........................................................................................................ 17.15

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7.4 Reporting ........................................................................................................ 17.16

7.5 Peer Review Certificate ................................................................................... 17.19
7.6 Validity of Peer Review Certificate ................................................................... 17.19
8. Inherent Limitations of Review ................................................................................. 17.19
9. Difference between Peer Review and Quality Review .............................................. 17.19
UNIT 2: QUALITY REVIEW
1. Introduction ............................................................................................................. 17.20
2. Scope & Objectives of Quality Review ..................................................................... 17.21
3. The Quality Review Board (QRB) ............................................................................ 17.23
3.1 Constitution and Composition of Quality Review Board .................................... 17.23
3.2 Functions of Quality Review Board .................................................................. 17.23
3.3 Powers of Quality Review Board … ............. ……………………………………….17.25
3.4 Coverage of services for Quality Review ......................................................... 17.26
4. Selection of Audit Firms .......................................................................................... 17.26
5. The Quality Review Process .................................................................................... 17.28
5.1 Empanelment of Technical Reviewers ............................................................. 17.29
5.2 Various stages involved in the Conduct of the Quality Review Assignments ...... 17.30
5.3 Composition of the Review Team .................................................................... 17.31
5.4 Independence and Qualifications of Technical Reviewers ................................ 17.31
5.5 Independence of assistants (Qualified Assistance) ........................................... 17.32
5.6 Confidentiality ................................................................................................ 17.33
5.7 Guidelines for the Technical Reviewers (TR) .................................................... 17.33
5.8 Stage-wise approach of Quality Review Process .............................................. 17.34
6. Reporting and other procedures .............................................................................. 17.36
7. Considerations of the reports of the Quality Review Groups ..................................... 17.40
8. Actions that may be recommended by the Quality Review Board .............................. 17.40
9. Mechanism for follow-up of review findings .............................................................. 17.41
10. Changes to the Reporting Formats/ Questionnaire ................................................... 17.42
TEST YOUR KNOWLEDGE ............................................................................................ 17.42

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CHAPTER 18: PROFESSIONAL ETHICS

LEARNING OUTCOMES .................................................................................................. 18.1
CHAPTER OVERVIEW .................................................................................................... 18.2
Contents:
1. Introduction .............................................................................................................. 18.2
2. Overview of the Code of Ethics ................................................................................... 18.3
2.1 Fundamental Principles ..................................................................................... 18.5
2.2 Threats, Evaluation of Threats and Safeguards ................................................... 18.10
2.3 Non-Compliance with Laws and Regulations (NOCLAR) .................................. 18.13
3. Membership of the Institute ..................................................................................... 18.17
3.1 Disabilities for the Purpose of Membership ...................................................... 18.18
3.2 Types of Members of the Institute .................................................................... 18.18
3.3 Removal of Name from the Register ................................................................ 18.19
3.4 Restoration of Membership .............................................................................. 18.20
3.5 Penalty for Falsely Claiming to be a Member etc. ............................................ 18.20
4. Chartered Accountants in Practice ........................................................................... 18.21
4.1 Significance of the Certificate of Practice ......................................................... 18.21
4.2 Cancellation and Restoration of Certificate of Practice .................................... 18.22
4.3 Members - deemed to be in Practice ................................................................ 18.23
4.4 Companies not to Engage in Accountancy ....................................................... 18.27
4.5 Member in Practice Prohibited from using a designation Other Than
Chartered Accountant ..................................................................................... 18.28
4.6 Maintenance of Branch Offices ........................................................................ 18.29
4.7 KYC Norms for CA in Practice ......................................................................... 18.32
5. Chartered Accountants in Service ............................................................................ 18.33
6 Disciplinary Procedure ............................................................................................ 18.33
7 Types of Misconduct- Professional or Other ............................................................. 18.35
7.1 Professional Misconduct .................................................................................. 18.35
7.2 Other Misconduct ............................................................................................ 18.35

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8. Schedules to the Act ............................................................................................... 18.36

8.1 The First Schedule .......................................................................................... 18.37
8.2 The Second Schedule: .................................................................................... 18.86
9. Council Guidelines ................................................................................................ 18.112
9.1 Council Guidelines for Advertisement, 2008................................................... 18.128
10. Recommended Self-Regulatory Measures ............................................................. 18.135
10.1 Branch Audits ............................................................................................... 18.136
10.2 Joint Audit ..................................................................................................... 18.136
10.3 Ratio Between Qualified and Unqualified Staff ............................................... 18.136
10.4 Disclosure of Interest by Auditors in other Firms ............................................ 18.136
10.5 Recommended Minimum Scale of Fees ......................................................... 18.136
ANNEXURE – 1 ............................................................................................................ 18.137
ANNEXURE – 2 ............................................................................................................ 18.141
ANNEXURE – 3 ............................................................................................................ 18.146
TEST YOUR KNOWLEDGE .......................................................................................... 18.153

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