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 Auditing and Assurance
CA Inter
Volume 2

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“Live as if you were to die tomorrow. Learn as if you were to live forever.”

Mahatma Gandhi

© SJC Institute LLP

This book shall not be reproduced or shared by photocopying, recording, or otherwise by

any unauthorised person without prior written permission from the publisher.
 About
Auditing and Assurance
Auditing and assurance is one of the most significant and core paper in the CA
curriculum. Intermediate level of the Chartered Accountancy exam introduces

Final level. T E
the concept of Auditing to the students, which is further elevated at the CA

T U
T I
Auditing, in the modern-day, has become an ever-evolving subject. It is not
just limited to statutory company audit, internal audit, tax audit, bank audit,
S
and cost audit but has its wings spread to almost every aspect of commerce
N
I
and business. The horizon of Auditing has widened with the introduction of
audits like Forensic audit, IS audit, Social Audit, Environmental audit and so on.

J C
Auditing is one of the key areas of work for practicing Chartered Accountants.

S
Hence, a sound understanding of this subject becomes imperative for all aspiring
Chartered Accountants.

A strong foundation of this subject with a good understanding of key auditing

concepts will also help students during their practical training. A sound
theoretical knowledge will enrich their application skills.

Auditing is a multi-disciplinary approach. Integration of knowledge of accounting

standards, corporate laws, direct and indirect taxation (360° view) will help
students become better professionals.

While studying audit, students should emphasize the concepts and key
terminologies used. A 360° approach should always be followed.
About this Book
Know Your CA Inter Auditing and Assurance Study Material
Your CA Inter Auditing and Assurance study material has been handwritten to

T E
make it easier for you to study, understand and grasp the concepts of auditing
in a simple yet comprehensive manner. It covers all the concepts in colourful

T U
and lucid charts. The attractive notebook style presentation and colorful charts

for students. T I
will make learning fun and do away with the monotony of the subjective paper

N S
Engagement and Quality Control Standards (as per ICAI New syllabus) have
I
been included as part of the chapters for simplification and to avoid repetitive
study.
J C
S
Few highlights of this Study Material are :
 Each chapter begins with a Roadmap of all the topics to be covered in the
chapter
 All keywords have been marked in Orange color for easy identification
 Topic wise question and answers for detailed study
 Exam style objective questions with each chapter
 Strictly aligned with CA Intermediate (New Syllabus) Paper 6: Auditing and
Assurance

Happy and Fun Learning!

 How to Study Theories

FOLLOW these - to able to Score

T
1. Read to understand the Concept
E
TU
T I
2. Note your understanding aside the para

N S
I
3. Read it again to check the english used

J C
S
4. Memorise it- At least to the extent of 50%
- This helps to write concrete answer
To Memorise
€€ Make a Summary Chart
€€ Use Mnemonics
€€ Teach someone or yourself

5. Keep Revising

 Revision during walk, eat, commuting, whenever

you are free
List of Abbreviations
Acronym Fullform Acronym Fullform
Account Balances, Classes of FDI Foreign Direct Investment
ABCD

AC
transactions and disclosures
Audit committee
FG
FI
T E
Finished Goods
Financial institutions
AE Audit Evidence FIFO
U
First In First Out
T
AFRF
Applicable Financial Reporting
Framework
FS
FY T I
Financial statements
Financial Year
AGM Annual General meeting GRN
N S Goods received note
AO
AOA
Adverse opinion
Articles of Association I
GST Goods and Services Tax

AP Audit Procedures
J C HR
IC
Human Resources
Internal Controls
AS
B/S
Accounting Standard
Balance Sheet
S IEPF
Investor education and
protection fund
BOD Board of directors IFC Internal financial controls
BRS Bank Reconciliation Statement KAM Key Audit Matters
Comptroller and Auditor KMP Key managerial personnel
CAG
General of India LLP Limited liability partnership
CG Central Government MCA Ministry of Corporate Affairs
COGS Cost of goods sold MMS Material misstatements
CS Company Secretary MNC Multinational corporations
DO Disclaimer of opinion MOA Memorandum of Association
EGM Extraordinary General meeting Micro,Small and Medium
MSME
EOM Emphasis of Matters Enterprises
EP Engagement partner MV Market Value
ESI Employee’s State Insurance NCLT National company law tribunal
FAP Further audit procedure NET Nature extent and timing
Foreign Currency General National financial reporting
FC GPR NFRA
Purpose Return authority
 List of Abbreviations
Acronym Fullform Acronym Fullform
NPA Non performing assets ROC Registrar of Companies

TE
NRI Non resident indian SA Standards on Auditing
OM Other Matters Sufficient appropriate audit
P/L Statement of Profit and Loss
T U
SAAE
evidence

TI
PF Provident Fund SG State Government
PO Purchase Order SR Special Resolution
PPE S
Property, Plant and Equipment
N
TCWG Those charged with governance
PUSC I
Paid up share capital TDS Tax deducted at source

JC
QO Qualified opinion WIP Work in progress
RAP Risk assessment procedures Extensible Business Reporting
RBI S
Reserve Bank of India
xBRL
Language

Symbols and Icons used in the book Food for thought :

Example : Note : Case Study :

 List of SAs

List of Standards applicable for CA Intermediate examinations

Number of
standard
Name
T EReference

Quality Control

T U
SQC -1
T I
Quality Control for Firms that Perform Audits
and Reviews of Historical Financial Information,
Chapter 2

Engagements
N S
and Other Assurance and Related Services

I
General principles and responsibilities
SA 200
J C
Overall Objectives of the Independent Auditor Chapter 2

S
and the Conduct of an Audit in Accordance with
Standards on Auditing
SA 210 Agreeing the Terms of Audit Engagements Chapter 2
SA 220 Quality Control for an Audit of Financial Chapter 2
Statements
SA 230 Audit Documentation Chapter 4
SA 240 The Auditor's responsibilities relating to Fraud in Chapter 6
an Audit of Financial Statements
SA 250 Consideration of Laws and Regulations in an Chapter 5
Audit of Financial Statements
SA 299 Responsibility of Joint Auditors Chapter 11
Risk Assessment and responses to assessed risks
SA 300 Planning an Audit of Financial statements Chapter 3
SA 315 Identifying and Assessing the Risks of Material Chapter 5
Misstatement through Understanding the Entity
and Its Environment
SA 320 Materiality in Planning and Performing an Audit Chapter 3
 List of SAs

Number of
Name Reference
standard

SA 500 Audit Evidence

E
Audit Evidence
T Chapter 4
SA 501 U
Audit Evidence - Specific Considerations for
T Chapter 4

SA 505
Selected Items
T I
External Confirmations Chapter 4
SA 510 S
Initial Audit engagements -Opening balances
N Chapter 4
SA 520 I
Analytical Procedures Chapter 8

JC
SA 530 Audit Sampling Chapter 7
SA 550 Related Parties Chapter 4
SA 560 S Subsequent Events Chapter 4
SA 570 Going Concern Chapter 4
SA 580 Written Representations Chapter 4
Using the work of Others
SA 610 Using the work of Internal Auditors Chapter 5
Audit Conclusions and Reporting
SA 700 Forming an Opinion and Reporting on Financial Chapter 12
Statements
SA 701 Communicating Key Audit Matters in the Chapter 12
Independent Auditors' report
SA 705 Modification to the Opinion in the Independent Chapter 12
Auditor’s Report
SA 706 Emphasis of Matter Paragraphs and Other Matter Chapter 12
Paragraphs in the Independent Auditor’s Report
SA 710 Comparative Information – Corresponding Figures Chapter 12
and Comparative Financial Statements
 T E
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Contents

10 Audit of items of
Financial Statements 10.1-10.72
T E
11
T U
Company Audit

T I11.1-11.80

12
N S
I
Audit Report 12.1-12.40

J C
13 S Audit of Banks 13.1-13.42

14
Audit of Different Entities 14.1-14.74
 T E
TU
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 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
Chapter AUDIT OF ITEMS OF

AUDIT OF ITEMS OF
10
FINANCIAL STATEMENTS

Chapter Roadmap

T E
T U
T I
N S
I
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S

| 10.1
Auditing and Assurance
 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

BRIEF OVERVIEW

1 FINANCIAL STATEMENTS ASSERTIONS

Meaning and Use of Assertions

T E
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N S
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10.2 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
AUDIT OF ITEMS OF
Income Statement or Statement of P/L Assertions

Transactions recognized
have actually occured
and relate to the entity

Transactions have been Occurrence All transactions relating

classified appropriately as to the entity have been
per AFRF recorded

Classification Completeness
Income Statement
Assertions

Cut-off T E
Transactions have been
U
Accuracy Transactions have been
recorded in the appropriate
accounting period

T IT accurately recorded at
correct amounts

S
IN
Assertions pertaining to Sales include:

J C
Occurrence: Sales transactions recorded in the books of accounts have


S
actually occurred (no fictitious transactions recorded)
Completeness: ALL the sales transactions have been recorded (no omission
has been made)
 Accuracy: The sales transactions have been appropriately measured and
recorded at correct amounts (no understatement or overstatement)
 Cut-Off: Revenue from sales has been recorded in the correct accounting
period as per AS 9 Revenue recognition or generally accepted revenue
policies.
 Classification: Revenue from sales (Gross and Net) should be properly
classified and disclosed.

Auditing and Assurance | 10.3

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

Balance Sheet Assertions

Rights & Obligations Existence

Entity has Right of Assets and Liabilities
ownership of its assets exist as on the
balance sheet date
and is Obligated
toward the
liabilities
Balance Sheet
Assertions

Valuation
Assets and Liabilities
T E
Completeness
All assets and liabilities
have been valued
appropriately U
relating to the entity have

T
T I been recorded

N S
I
Assertions pertaining to Buildings include:

J C
Existence: Buildings recorded actually exist as on the Balance Sheet date


S
(no fictitious buildings recorded)
Completeness: ALL the buildings owned by the company have been
recorded (no omission has been made)
 Valuation: The buildings have been appropriately valued and recorded at
correct amounts (no undervaluation or overvaluation). Capital expenditures
have been capitalised with the value of the building.
 Rights and Obligations: The buildings recorded in the balance sheet are
owned by the company.(The title deeds are in the name of the company)

10.4 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
AUDIT OF ITEMS OF
Presentation and Disclosure Assertions

Transactions and events disclosed in FS

occur as on the balance sheet date

All transactions and events relating to

the entity have been disclosed in FS

Transactions and events have been

Occurrence and Existence

classified appropriately and lead to a
proper understanding

Classification and
Understandability
Transactions and events have been measured
and disclosed at appropriate values

Completeness
T E
U Valuation
I T
S T
I N
J C
S
Assertions pertaining to Presentation and Disclosure of Related Parties and

Related Party Transactions include:

 Occurrence and Existence: Transactions with related parties disclosed
have occurred during the period and the closing balance exist as at the
Balance Sheet date
 Completeness: ALL the related parties and transactions have been disclosed
(no omission has been made)
 Classification and Understandability: Related Parties and transactions
have been classified appropriately that enhances the understandability of
the information
 Valuation: The related party transactions have been disclosed accurately at
appropriate amounts

Auditing and Assurance | 10.5

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

2 BALANCE SHEET CAPTIONS

AUDIT OF ITEMS OF

Share Capital
General Audit Procedures

Obtain written

T E
T U
T I
N S
I
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S

10.6 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
Audit Procedures for Shares issued at Premium

AUDIT OF ITEMS OF
 Towards issue of unissued shares
as bonus shares
Verify whether Verify utilisation  In writing off preliminary expenses
amount of of Securities  In writing off expenses on issue of
premium Premium Account
shares or debentures
transferred to as per Section 52
separate account  In providing for premium on
redemption of debentures or
preference shares
 For buyback of shares as per

E
Section 68

T
Audit Procedures for Shares issued at Discount
T U
T I  No shares can be issued at discount

Verify whether
N S except Sweat Equity Shares
any shares have I  Penalty –
been issued at a
discount by
J C
Verify compliance  Lower of amount raised
reading minutes of
directors' or
S with Section 53 through issue of shares at
discount or ` 5 lakhs
shareholders'
meetings  Company shall also refund
the amount so raised along
with interest @12%

Audit Procedures for Sweat Equity Shares (SES)

Meaning

Equity shares issued employees or at a discount or for for providing knowhow

to directors consideration other or intellectual
than cash property rights

Auditing and Assurance | 10.7

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

Verification Aspects by the auditor

Shares issued as SES are of a class of shares already issued

Issue is authorized by a Special Resolution (SR)

The resolution specifies the number of shares, current market price, consideration (if any),
and classes of employees or directors

In case of a listed entity, SEBI Regulations have been followed

The rights, limitations and restrictions of these shareholders shall be same a equity
shareholders

Audit Procedures for Reduction of Share Capital T E

Verification aspects include the following:
T U
T I
Verify that SR in shareholders' meeting has been passed

N S
I
Verify that Articles of Association (AOA) has authorised such reduction

J C
S
Examine the Order of Tribunal and a copy of such order and minutes filed with ROC

Check ROC's Certificate

Vouch accounting entries and compliance with Schedule III

Check whether revaluation of assets disclosed properly

Verify that Memorandum of Association (MOA) has been amended

Confirm that words "and reduced" have been added in the Balance Sheet

10.8 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
Reserves and Surplus

AUDIT OF ITEMS OF
Types of Reserves

Reserves
Amounts set aside
from profit not
intended to meet
any liability

Revenue Reserve
Free Reserve T E
Capital Reserve
Specific Purpose Reserves
U
IT
For writing down fictitious
Free for dividend distribution assets or losses

To finance an extension
S T For writing down losses

To augment working capital

requirements
IN For issue of bonus shares

J C
To strengthen company's
S
financial position

Audit Procedures

Trace and tally opening balance with previous year's audited balance sheet

For addition/ utilisation trace the surplus/ deficit as per Statement of Profit and Loss, additions
in Securities Premium or other reserves

Verify director's resolution for dividend and tax related matters

Check the disclosure regarding Proposed Dividend as per AS 4

Check whether proper disclosure and classification as required by Schedule III made or not

Auditing and Assurance | 10.9

 Contact: 033-4059-3800 Website: sjc.co.in

For each component of Reserves and Surplus, opening balance, changes during the year,
FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

Closing balance, dividend adjustment, transfer to retained earnings or other reserves and
Closing balance made or not

Borrowings

Audit Procedures
 Review board minutes for approval of new loans

 Check terms and conditions of the agreement -

interest rate, repayment schedule, borrowing limits,
restrictions, security etc.
To check that claims are valid
(Existence)

limits
T E
Verify that actual borrowings are within prescribed


T U
Obtain External Confirmations


T I
When debt is retired, ensure that secured assets are

S
discharged

N

I
Obtain a list of short term and long term borrowings

J C  Check the opening balance, additions or repayments

during the year and closing balance

To check all borrowings

S  In case of additional borrowings, verify board minutes
books, lenders' confirmations etc.
accounted for
(Completeness)  Review transactions after year end to verify if there are
any unrecorded liabilities

 Apply External Confirmation Procedures as per SA 505

- Send confirmations for all relevant details, reminders
for non-replies, compare the replies with ledger balance,
seek reconciliations for differences

10.10 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
 Check consistency in application of accounting policies

AUDIT OF ITEMS OF
 Agree loan balance with confirmation, agreement etc.
To check the valuation of  Recalculate interest on borrowings etc. (Check
liabilities compliance with AS 16)
(Valuation)  Check amortization of premium or discount on
debentures
 Check Foreign currency rate translation in case of
loans in foreign currency
 Determine appropriate classification as per AFRF -
Bonds, debentures,Term loans (from banks, related
parties), Deposits, Loan and Advances from related


parties etc.

T E
Examine classification between short term and long
U
term loans as per due dates
T

T I
Ensure sub-classification as secured and unsecured -

S
Specify nature of security in case of secured loans

N

I
Review restrictive covenants in debt agreements,
provisions in case of default and their disclosure

J C  Charges on assets are properly disclosed

disclosures S
To check presentation and
 If MV of security falls below amount outstanding as
(Presentation and Disclosure) loan, check for its classification as secured loan
 Examine hire purchase and lease agreements and
appropriate disclosures
 Verify compliance with Section 180, 185 and 186 of
Companies Act, 2013 with respect to borrowings
 Check whether loans are utilised for the purposes as
per the agreement
 In case of deposits, provisions of Section 73 to 76 and
RBI directives are complied with
 In case of default in repayment, period and amount of
default to be disclosed

Auditing and Assurance | 10.11

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

Trade Payables and Other Current Liabilities

Audit Procedures

To check Existence as at period end

 Check whether internal controls are in place to record a liability at the time of recording
the expense
 Obtain ageing report of accounts payable and trace the balances to General Ledger
 Obtain Direct Confirmation from vendors at at balance sheet or any other date, in any
form (to confirm the balance as per confirmation or blank confirmation)
 Significant Account balance confirmations should necessarily be done
 Method of selection of creditors for confirmation should not be disclosed to the
entity
T E
T U
 Strict control should be maintained to ensure proper dispatch of letters
 Investigation and reconciliation of discrepancies should be done
 Further audit tests to be planned
T I
S
 In case no reply has been received, additional testing of subsequent payments made,
N
I
agreement of balance with invoices, detailed analysis of occurence of transactions
should be done.

J C
 In case of related party transactions, check whether they are reasonable, at arm's length


price and authorised S
Conduct Trend Analysis of Purchases/Expenses and investigate the deviations
To check Completeness of recording
 Cut-off procedures - Check whether goods received/risks or rewards transferred to the
entity for invoices received near year end
 Ensure that purchase booked for all goods received prior to year end
 Test purchases/expenses on sample basis and tally them with accounts payable and
supporting evidences
 Tally purchase invoice date and date of goods received note
 Review few transactions and vouchers of the subsequent year to check if they are
recorded in correct period
 Verify liability recorded for incomes received in advance with the relevant supporting
evidence
 Verify liability for statutory dues like GST, TDS, Professional Tax, ESI, PF etc. with a
reasonableness test

10.12 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
To check proper Valuation

AUDIT OF ITEMS OF
 Review the method of writing back old liabilities no longer payable
 Check if such method is consistent with earlier years
 Liabilities to be written off are authorised by the management
 Check that restatement of foreign currency trade payables is properly done
 Obtain ageing report to identify unpaid old creditors. Check for disputes, if any

To check Presentation and Disclosure requirements

 Check classification of trade payables as creditors for goods and creditors for expenses
 Check disclosures relating to micro, small and medium enterprises -
 Principal and interest due disclosed separately
 Amount of interest paid as per Section 16 of MSME Act, 2006 and payment of
principal amount beyond due date
T E
 Interest amount accrued and remaining unpaid at the year end

T U
 Interest paid as above is not allowable as a deduction under Income Tax Act

T I
Classification of Other current liabilities as required by Schedule III to be checked

N S
I
Provisions and Contingent Liabilities

J C
Meaning of Provision
S
Present obligation Reliable estimate Probability that an outflow
due to past event of amount of resources will be
of obligation required to settle the
obligation

Provision for taxation, Provision for gratuity etc.

Auditing and Assurance | 10.13

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

Meaning of Contingent Liability

AUDIT OF ITEMS OF

Contingent Liability

Occurrence
Possible obligation or non occurence
due to past event dependent on future
uncertain event(s)

Not probable that

Amount of obligation
outflow of resources
cannot be esitimated
will be required to
with reliability
settle the obligation

T E
T U
T I
S
Product warranties, Potential litigations and claims etc.
N
I
J C
Audit Procedures S
To check Existence as at period end and Completeness

 Obtain list of provisions and compare with ledger accounts

 Obtain the workings of management regarding the basis for provisions made
 Inspect agreements with customers etc. to assess for warranty claims

To check Valuation

 Check management's basis for valuation of provisions and contingent liabilities

 Obtain expert's report (Actuary, legal counsel), if required - to check complex calculations,
identify possible legal obligations etc. (Comply with SA 500 when using a Management
Expert as per Note 1)
 Verify assumptions used by expert with data provided by management

10.14 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
To check proper disclosures

AUDIT OF ITEMS OF
 Check whether disclosures as required by Schedule III made or not
 Check classification between current and non-current provisions
 Check disclosures of amounts of provision has been made for -
 Carrying amounts at the beginning
 Additions during the year
 Amounts used during the year
 Unused amounts reversed back
 Carrying amount at the year end
 Verify disclosure of the nature of provision, expected timing of outflow, major assumptions


made, any expected reimbursement.
Check disclosure of contingent liabilities including - T E
 a brief description of the nature
T U
 an estimate of its financial effect
T I

N S
indication of uncertainty as to the timing and amount
 any expected reimbursement I
J C

S
As per SA 500, when using the work of Management’s expert auditor shall –
Evaluate the competence and capability of the expert (Independence of the
expert, knowledge, qualification, auditor’s previous experience with expert)
 Understanding of the work of expert (Data used, assumptions and methods
used, expertise)

Auditing and Assurance | 10.15

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

Fixed Assets
AUDIT OF ITEMS OF

Property, Plant and Equipment (Tangible Assets)

Tangible items with

physical existence

Tangible Held for use in production,

supply, rental use,
Assets administrative use

Expected to be used
for > 12 months

Land, Buildings, Plant & Equipment, Furniture and Fixtures, Motor Vehicles,
Office equipment etc.

T E
T U
Intangible Assets
T I
S
Intangible Assets

Identifiable IN
JC
non-monetary
asset Held for use in

without physical
S production,
supply, rental use,
administrative use
existence

Patent rights, copyrights, goodwill, computer software, formulae, motion picture

films, customer lists, mortgage servicing rights, fishing licenses, import quotas,
and marketing rights

10.16 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
Audit Procedures

AUDIT OF ITEMS OF
Assertions Tangible Assets (PPE as per AS 10) Intangible Assets (As per AS 26)

Establishing  Review entity's plans and policies  Verify whether such assets are
existence at for performing physical verification- in active use and the purpose
period end for which it is used
 Conducted by - self or third
party  If an asset is not in active use
 Periodicity - Annual, Once in it should be deleted from the
2-3 years records after proper approval
 Evidence of supervision of PV
to be examined
 Obtain PV reports and working
sheets
 Assess tagging of all items
and check whether working
T E
papers include the reference
T U
T I
 Reconciliation of physically
verified fixed assets with fixed
asset register

N S
 Check whether all additions
I
have been updated in the

J C
fixed assets register
 Verify discrepancies (if any)
S
and the manner in which they
were dealt by management
Verification of  Verify all additions and deletions in the PPE/ intangible assets schedule
Additions to tally the closing balance
 Check the arithmetical accuracy of all additions
 Obtain a list from management of all the additions during the year
 Check whether all additions meet the criteria of PPE/ intangible assets
as per AS 10 or AS 26
 Verify that cost of the PPE/ intangible assets has been arrived at as per
AS 10/ AS 26 - ensure that recurring expenses/ research expenses have
not been capitalized
 Test the purchase invoice, contract, installation certificate (in case of
PPE) etc.
 Verify approvals and internal controls relating to acquisition of PPE/
intangibles - inviting quotations, analysis of alternatives, selecting the
best alternative

Auditing and Assurance | 10.17

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

 Verify that spare parts and stand -

AUDIT OF ITEMS OF

by equipment have been included

in PPE only if held for more than
one year
Verification of  Obtain list of the disposal of assets made during the year
deletions  Understand reason for disposal (New asset purchased, Obsolescence,
etc.)
 Check whether disposal was authorised
 Check internal controls pertaining to disposal
 Check arithmetical accuracy - accurate recording of original cost,
accumulated depreciation/amortization and profit/loss on disposal of
asset
Establishing  Verify that all purchase invoices (for additions during the year) are in
ownership rights
of entity
the name of the entity
 Verify that title deeds are T E -
transferred in the name of the
T U
entity
T I
N S
 Verify original title deeds for all
immovable properties. In case
I
immovable property is provided as

J C
a security to any lender, obtain
confirmation from the lenders
S
about the original title deeds
 Verify Register of charges to
assess charges created on the
entity's assets
Checking Proper  Verify that all assets existing at the beginning have been brought
Valuation forward at correct amounts
 Verify that all additions and deletions have been properly valued
 Verify that depreciation/amortization charged on all depreciable PPE/all
intangibles
 Assess the appropriateness of the depreciation/amortization method
used
 Check for any revaluation of assets. If any revaluation has been made,
assess the approval and appropriateness of the same
 Verify whether any asset has been impaired as per AS 28. If yes,
check the correctness of the accounting treatment

10.18 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
Checking  Ensure disclosures as required by Schedule III been made

AUDIT OF ITEMS OF
adequate  Check appropriate classification of assets
presentation  Check the PPE/intangible assets schedule for a reconciliation of the
and disclosure gross and net carrying amounts of each class of PPE/intangible assets
 Opening balance
 Additions/Acquisition through business combinations
 Disposals/ Disposals through demergers
 Other adjustments
 Closing balance
 Check for each class of PPE/intangible assets following disclosures
relating to depreciation/amortization and impairment loss made-
 Opening accumulated balance
 Amount charged during the year
 Deductions/Amounts reversed T E
 Closing balance
T U
T I
Inventories
N S
I
Current Assets J C
held for sale
in the process
for consumption
in the production
S
in ordinary course
of business or
of production
process as materials

Meaning
Audit Procedures
Establishing existence as at period end
 Review entity's plan for performing inventory counts
 Attend the Physical Inventory count procedures (compliance with SA 501)
 Evaluate management's instructions
 Observe that employees follow all instructions
 Check tagging of all items
 Determine that tags and summary sheets are reconciled - discrepancies, if any, to
be resolved

Auditing and Assurance | 10.19

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

 Maintaining professional skepticism regarding obsolete, damaged items

 Ensure that third party, damaged, obsolete stock is excluded
 Ensure that all stock sheets are signed by the entity's personnel and variances are
agreed
 Performing cut-off testing by checking last 5-10 receipt and dispatch reports
 Inquire about inventories held with third parties

Establishing completeness of recorded inventories

 Check all disclosures as required by Schedule III
 Perform Analytical Procedures -
 Compute inventory ratios (COGS/Average Inventory) and compare with industry
average, budgets etc.
 Compare budgets with actuals T E
T U
 Conduct Vertical analysis with Total Revenue as the base figure

T I
 Examine non-financial information related to inventory

N S
Trace documentary evidence to actual records
 I
Reconcile physical inventory counts with general ledger totals

J C
Perform tests for omitted and invalid transactions

S
Establishing ownership rights
 Check underlying documentation like purchase requisition, purchase order, receipt report,
invoices etc.
 Examine sales and receivables documentation
 Determine existence of collateral agreements
 Obtain confirmation from third party on its business letterhead and signed by an authorized
personnel regarding inventories held with them.

Determining proper valuation

 Check the basis of inventory issuance - FIFO, Weighted average
 For Raw materials and consumables
 Ascertain that inventory has been valued as per AS 2 - only eligible costs have been included
 If standard costs are used, inquire the basis of setting standards, compare actuals with
standards and analyze variances

10.20 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
AUDIT OF ITEMS OF
 Check valuation of obsolete and damaged items
 Test cost prices applied for valuation with purchase invoices
 For work-in-progress
 Ascertain determination of stages of production
 Ascertain determination of costs and computation of such costs
 Ensure that material costs exclude any abnormal losses
 For finished goods

 Inquire about the costs included in the valuation and its reasonableness
 Ensure valuation as per AS 2
 Review inventory ageing report to check for obsolete and damaged items

T E
 Follow up for inventories noted as obsolete or damaged at the time of physical count
 Examine prices at which finished goods have been sold after the year end to

T U
ascertain whether any finished goods need to be written down

T I
 Examine current price list of vendors to determine if recorded cost is less than current

market price
N S
I
 Test overhead allocation rates and compare it with prior periods

J C

S
Checking adequate presentation and disclosure

Ensure that disclosures as per Schedule III have been made

 Whether mode of valuation disclosed for each class of inventory
 Whether appropriate classifications have been made
 Whether goods-in-transit have been disclosed separately

Auditing and Assurance | 10.21

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

Trade Receivables
AUDIT OF ITEMS OF

Important points to be considered

Only bonafide sales are recorded

All sales made to approved customers

All sales recorded

Debtors can be settled either by cash

receipt or approval of appropriate authority

Debtors are collected on time

T E
System of follow up for collection and

U
bad debts assessment

T
Audit Procedures
T I
To establish existence as at period end
N S
 I
Check the internal controls to ensure that all invoices are recorded only once

J C
Check that debtors are automatically recorded when sales invoice is recorded
Trace the balances of receivables with the ageing report

 S
Check whether realization is recorded invoice wise or on account basis (if on account
ensure FIFO basis is followed)
 Perform external confirmation procedures as per SA 505
 All significant outstanding balances should be covered
 Smaller amounts outstanding may be checked on a random basis
 Balance as at balance sheet date or other selected date as per consultation with the
company may be confirmed
 Method of circularisation should not be revealed to the company until Trial Balance
is provided to the auditor
 Auditor may use Blank confirmation or Confirmation with Balances
 Company should be asked to investigate into discrepancies, if any
 If no reply is received -alternate procedures to be performed
 Review related party receivables for proper approval and ensure that timely collection
been made
 Conduct a Trend analysis, calculate average collection period and compare with prior
periods

10.22 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
AUDIT OF ITEMS OF
To check completeness and cut-off
 Auditor should perform cut-off tests-
 Check goods dispatched for invoices issued during the last 5-7 days of the reporting
period
 Ensure that invoices have been raised for all goods dispatched prior to year end
 Ensure that debtors have not been recognised for goods dispatched after year end
 Test few invoices to check that amounts were recorded correctly, in the correct account
and the correct dates
 Check supporting documentation for Bill and Hold sales
 Review the sales return after year end
 Check that all discounts and rebates were given as per company policy
 Check credit notes being issued and inquire for the reasons

To check proper valuation

T E

T U
Test few invoices to ensure that debtors are recorded at appropriate amounts


T I
Compare receivables turnover ratio and average collection period with previous years
Review the policy of the company to make an allowance for doubtful accounts and
compare with the prior period
N S

with industry data I
Compare the bad debt expense as a percentage of sales with the previous year and/or


J C
Obtain an ageing report of debtors and a list of debtors under litigation and compare


them with previous years
S
Scrutinize the debtors which appear doubtful and discuss with management regarding
their recoverability
 Check that debtors written off have been approved by the Board or appropriate
authority.

To check for adequate presentation and disclosure

 Ensure split of debtors as more than 6 months and less than 6 months from due date
as required by Schedule III
 Check classification of amount as - Secured (considered good), Unsecured (considered
good) and Doubtful
 Check that restatement of debtors in foreign currency has been done at the exchange
rate on closing date
 Verify disclosures of amounts due from Directors, Other officers, private companies in
which director is a partner or director

Auditing and Assurance | 10.23

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

Cash and Cash Equivalents

AUDIT OF ITEMS OF

Components

Cash in hand

Cheques Balance in
in hand current bank
Components account

Fixed deposits T E
Balance of
Cash Credit

T U
account

T I
Audit Procedures
N S
To establish existence at year end I
J C
 Conduct Physical verification of cash at the year end and also surprise checks after year
end
S
 Check cash balances for all cash balances (with cashier, petty cashier, branch cashier)
simultaneously and get the statements signed by the cashiers
 Trace entries from Rough cash book to the main cash book
 If any temporary advances are made to employees but included in cash balance, check
approval for the same
 Perform a Trend Analysis by comparing month-to-month cash receipts and payments and
investigate for variances
 Obtain Bank Reconciliation Statement for all bank accounts and understand client's
periodicity and process of BRS preparation
 Verification of BRS shall include-
 Ensure BRS is signed by appropriate personnel

10.24 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
AUDIT OF ITEMS OF
 Tally the balance in books with the bank statement/ confirmation letter
 Check all material reconciling items under
 Cheques issued but not presented: Check with subsequent bank statements,
check that stale cheques are not included in the BRS
 Cheques deposited but not cleared: Seek bank deposits slips and explanation
for the same
 Amounts debited/credited by bank but not accounted for: Tally the amounts
with bank statements and ensure that management has made adjustments

for material amounts

 Perform Direct Confirmation procedures as per SA 505-


T E
Confirm amounts in accounts with banks and other financial institutions
 Seek written explanations from management with regard to discrepancies

T U
Perform additional testing if no reply received -Agreeing the balance to bank statement

T I
or online account, sending audit team member to bank branch for confirmation

To check for proper valuation

N S
 I
Check that all foreign currency balances have been restated at closing date

J C
To check for adequate presentation and disclosures


S
Ensure that disclosures as per Schedule III have been made.
Check proper classification -

 Cash and Cash Equivalents: Balances with bank, cheques, drafts, cash on hand,
Others
 Earmarked balances with banks
 Margin money with banks or security
 Repatriation restrictions shall be stated separately
 Bank deposits with more than 12 months maturity

Auditing and Assurance | 10.25

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

Loans and Advances and Other Current Assets

AUDIT OF ITEMS OF

Loans and advances

Loans and to related parties
Advances
Security deposits

Amounts recoverable
in cash or kind

Balances with
Other Current statutory authorities
Assets
Audit Procedures T E
T U
To establish existence as at period end
 T I
Perform Direct Confirmation Procedures regarding amount of principal and interest
receivable
N S
To check completeness I

J C
Obtain list of advances and other current assets and compare them with ledger balances


S
Verify loan agreements and confirmations from parties
Check whether loans and advances were appropriately authorised
 Inspect minutes of meetings to confirm all approvals by Board
 Check whether any security has been deposited by the party and inspect the
acknowledgement
 For related party loans and advances, check for requisite approvals and reasonableness of
the transactions
 Conduct a reasonability test for dues with statutory authorities and assess the variances
 Inspect the copies of returns filed with the statutory authorities for verifying amounts of
claims, if any

10.26 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
To check for proper valuation

AUDIT OF ITEMS OF
 Obtain an ageing report of loans and advances to assess the doubtful accounts
 Obtain list of account under litigation
 Review the process of providing for an allowance for bad and doubtful debts
 Scrutinize the accounts which appear doubtful and discuss with management regarding
their recoverability
 Check that accounts written off have been approved by the Board or appropriate
authority.
 Check whether restatement of foreign currency balances done appropriately

To check adequate presentation and disclosure

 Ensure whether disclosures made as per Schedule III
 Check proper classification as -
T E
 Security deposits

T U
 Loans to related parties
 Capital advances T I
 Other loans (specify nature).
N S

I
Check classification of amount as - Secured (considered good), Unsecured (considered
good) and Doubtful
J C

category of loans
S
Whether allowance for bad and doubtful loans has been disclosed separately for each

 Verify disclosures of amounts due from Directors, Other officers, private companies in
which director is a partner or director

Auditing and Assurance | 10.27

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

3 STATEMENT OF PROFIT AND LOSS CAPTIONS

AUDIT OF ITEMS OF

Sale of Products and Services

Important points to be considered

Obtain clear understanding of the entity, its revenue cycle and revenue centres
 Types of products and services sold
 Introduction of New products, discontinuance of old products
 Major customers
 Sales policy and credit period allowed

Obtain understanding of Internal controls w.r.t. sales process

 Existence of segregation of duties
T E
 Credit limit checks
T U
 Master price lists
 Authorizations of sales orders and invoices T I
Testing of controls
N S
I
 If controls are strong and reliable, substantive testing may be reduced

J C
Examine few selected transactions to test operating effectiveness of controls
S
 To check Serial numbering of invoices - check that all serial numbers are accounted and
none are missing

Perform substantive audit procedures

 Test of details
 Substantive Analytical Procedures - Trend analysis, product wise sales, comparison with
prior periods

10.28 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
Audit Procedures

AUDIT OF ITEMS OF
To establish Occurence during the year
 Ensure that revenue is not overstated by checking whether:
 Invoice recorded twice or cancelled invoice also recorded
 Fictitious customers have been recorded
 Goods shipped without customer's consent
 Unearned revenue recorded as earned
 Substantial uncertainty about collection exists
 Ensure that invoices are serially numbered
 Review journal entries for unusual transactions
 Compare sales return to sales ratio with that of previous year
Check sales return with challans etc.


To check Completeness of recording T E

T U
Perform cut-off procedures to ensure that revenues are recognised in the current

accounting period
T I


N S
In order to perform a robust sales cut-off test, auditors need to understand and consider
the specific cut-off error risk of each engagement - if sales recognised when invoice is
prepared I

transactions were genuine J C
Verify credit notes issued after period end and check whether the corresponding sales

 S
Trace goods dispatched register with sales journal
 Reconcile quantitative records of goods dispatched with inventory records and financial
records
 Reconcile sales recorded in books with GST returns.
 Conduct reasonability test by applying applicable GST rate to gross sales value and
compare with actual GST as per return to verify completeness

To check for accuracy in measurement and accounting

 Trace few transactions from inception to completion
 Obtain understanding of the entity's operations and point of revenue recognition
 Check the proportion of sales with related parties and verify whether they were properly
authorized and at reasonable prices

Auditing and Assurance | 10.29

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

To check required presentation and disclosures

AUDIT OF ITEMS OF

 Ensure disclosures as per Schedule III

 Check whether disclosure of each class of goods made
 Revenue from operations disclosed separately for sale of goods, sale of service and
other operating revenue
 Whether brokerage, discount and recoverable taxes disclosed separately
 Whether sales to related parties disclosed in notes

Other Income
Constituents

Interest on
Fixed deposits
T E
Interest on
loans

T U
T I
Other income-
Income not linked to
S
core business
N
I
operations

J C
Profit on sale Dividend on
S
of investments,
fixed assets etc.
share investment
and mutual funds

Audit Procedures

To check for occurence

 To verify interest on fixed deposits -
 Obtain list of fixed deposits and verify the interest amount thereon
 Obtain direct confirmations for deposits outstanding
 Obtain copy of Form 26AS and reconcile the interest amount
 For Dividend income -
 Verify that they are recognised only when right to receive dividend is established,
it is probable that economic benefits will flow to the entity and amount can be
measured

10.30 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
AUDIT OF ITEMS OF
To check for accurate measurement
 Obtain interest certificate from bank and tally the amount recorded in the books with the
certificate and Form 26AS
 Trace the amount of dividends received with Demat statement or Mutual Fund statements
 Verify that gain on sale of investments and fixed assets is recorded only on transfer of title.
 Check correctness of amount of gain recognised
To check adequate presentation and disclosure
 Ensure disclosure as per Schedule III -
 Appropriate classification as interest income, dividend income and other non-operating
incomes

Purchases T E
Important points to be considered
T U
T I
Obtain clear understanding of the entity, its purchase cycle and
purchase centres

N S
I
Types of products and services they purchase

J C
Sources of procurement - domestic or overseas


Major vendors
S
Purchase policy and credit period allowed by vendors

Obtain understanding of Internal controls w.r.t. purchase process

Existence of segregation of duties

Whether quotations invited by vendors
Authorizations of purchase orders
How are goods received and how are they checked
Approval of vendors invoice and 2/3 way match

Auditing and Assurance | 10.31

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

Testing of controls

If controls are strong and reliable, substantive testing may be reduced

Examine few selected transactions to test operating

effectiveness of controls

Examine few invoices and check related documentation like P.O., GRN, vendor reconciliation
statements etc.

Perform substantive audit procedures

Test of details

E
Substantive Analytical Procedures - Trend analysis, product wise purchases, comparison
with prior periods T
T U
Audit Procedures
T I
To establish Occurrence during the year
N S
I
 Ensure that purchase is not overstated/understated by checking whether:

J C
 Fictitious vendors have been recorded

S
 Goods received and entered in the security gate inwards register
 Quality inspection of goods done or not
 GRN received and signed by appropriate personnel or not
 Purchase invoice approved or not
 Stock record updated or not
 Check whether purchase recorded as per Original purchase invoice or not
 Ensure that invoices are recorded only once after risks and rewards transferred to the
entity
 Ensure that purchase invoice is in the name of the entity
 Input GST should be recorded in a separate ledger and not in Purchase ledger
 Purchases made from related parties should be verified for approval and reasonableness
 Review whether purchases which should be capitalised are not recorded in the Revenue
account
 Review journal entries for unusual transactions

10.32 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
AUDIT OF ITEMS OF
To check Completeness of recording
 Perform cut-off procedures to ensure that purchases are recognised in the current
accounting period
 Examine last 5-7 entries in the material inward register and trace the corresponding
purchase transactions
 Ensure correct accounting treatment of goods in transit
 Reconcile quantitative records of goods received with inventory records and financial
records

To check for accuracy in measurement and accounting

 Check that invoices have been recorded at correct values
 Perform analytical procedures to check reasonability of quantity and prices -

year and investigate for variances T E

 Consumption Analysis - Scrutinize raw material consumed, compare with previous

U
 Stock Composition Analysis - Collect report of components of stock (raw materials,
T
I
WIP, FG), compare with previous year and inquire management in case of variances
T
years
N S
 Ratio Analysis - Compare creditor turnover and stock turnover ratios with previous

I
 Review quantitative reconciliation of closing stocks with opening stock, purchases
and consumption
J C
S
To check required presentation and disclosures
 Ensure disclosures as per Schedule III and check whether
 Purchase of stock-in-trade disclosed separately
 Changes in inventories of stock in trade, WIP and FG separately disclosed
 Whether purchases from related parties disclosed in notes

Auditing and Assurance | 10.33

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

Employee Benefit Expenses

AUDIT OF ITEMS OF

Important points to be considered

Components of Payroll expenses

 Sums that entity pays to employees as salary or wages

 Perquisites
 Retirement benefits - gratuity, PF, Superannuation
 Expenses towards hiring, training etc.

Obtain clear understanding of the entity's hiring, appraisal,

pay and retirement process

attendance process
T E
Obtain understanding of Internal controls w.r.t. employee

 Maintenance of attendance records

T U
 Payroll list / Employee master schedule
T I
S
 Authorisation and approval of monthly payroll
N
 Processing and disbursement, I
J C
 Computation of employee deductions like payroll taxes and other benefits like gratuity etc.

Testing of controlsS
 If controls are strong and reliable, substantive testing may be reduced

Examine few selected transactions to test operating

effectiveness of controls

 Examine related appointment letters, attendance records, HR policies, employee master etc.

Perform substantive audit procedures

 Test of details
 Substantive Analytical Procedures - Comparison with prior periods, monthly expense
reasonability test as per number of employees and average salary

10.34 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
Audit Procedures

AUDIT OF ITEMS OF
To establish Occurrence during the year

 Meet employees in person to check that no fictitious employees are recorded

 Request identity proofs and bank statements of selected employees
 Check that no understatement or overstatement of employee benefit expense

To check Completeness of recording

 Obtain a list of employees as at the period- end and a monthly statement of new
joinees, resigned employees and continuing employees
 For a sample of new joinees, obtain the appointment letter and verify whether the salary
for first month and subsequent months was processed as per the agreed terms

To check for accuracy in measurement and accounting

Obtain the monthly salary registers for all 12 months. T E



T U
Conduct a reasonability test, compare the average salary of current year with the
previous year and inquire for variances
T I


N S
Verify if all employee benefit expenses have been provided/ recorded

analyse for variances
I
If PF/ ESI applicable, conduct reasonability test by applying rate to basic wages and


J C
Obtain monthly challans to verify month to month liability deposited timely
 S
Perform analytical procedures to obtain evidence as to overall reasonableness of employee
benefit expenses which may include production per employee analysis
 For a sample of resigned employees, obtain their full and final computation and
verify whether all their dues have been paid and whether respective employee’s
acknowledgement on final computation has been obtained
 Compare the expense with previous year trend and industry trend

To check for adequate presentation and disclosure

 Ensure disclosures as per Schedule III,

 Whether classification made as salaries and wages, contributions to provident and
other funds and staff welfare expenses

Auditing and Assurance | 10.35

 Contact: 033-4059-3800 Website: sjc.co.in
FINANCIAL STATEMENTS

Depreciation and Amortisation

AUDIT OF ITEMS OF

Important points to be considered

Obtain understanding of entity's accounting policies

Ensure company's policy for charging depreciation/amortisation

as per Companies Act

Verify depreciation calucated after reduction of residual value

Check whether such charges are valid and recorded appropriately

Ensure that such charges recorded in appropriate period

T E
Ensure components of PPE identified and depreciated separately

T U
pattern of consumption T I
Whether depreciation method selected appropriately as per

N S
I
Audit Procedures
J C
S
To establish Occurence during the year

Obtain the fixed asset register maintained by the entity to check for capitalisation of
assets
Ensure that no fake assets have been recorded
Conduct physical verification of assets
Obtain list of all additions/ deletions along with their proper approval from the authorised
person for the same

10.36 | Auditing and Assurance

 Contact: 033-4059-3800 Website: sjc.co.in

FINANCIAL STATEMENTS
To check Completeness of recording

AUDIT OF ITEMS OF
Obtain list of all additions/ deletions along with their proper approval from the authorised
person for the same.

To check for accuracy in measurement and accounting

Select a sample from Fixed assets register and verify the rates of depreciation applied
Obtain the list of all the components identified by the management.
Ensure Intangible assets like patents, goodwill, copy rights have been properly amortized
over the period.

Ensure depreciation is charged on the assets from the date when it is ready to use

T E
Ensure that depreciation and amortisation charged as per useful life of assets
Ensure depreciation on revalued amount has been properly accounted from revaluation

reserve
T U
T I
Depreciation computation as per Income tax Act, 1961 - Ensure that additions are tallying
S
with the additions as per Companies Act.
N
Conduct a reasonability test I
J C
Recompute to check the arithmetical accuracy

S
Check compliance with AS 10 and AS 26

To check for adequate presentation and disclosure

Ensure disclosures as per Schedule III -

 Accounting policy for depreciation and amortization
 Useful lives of assets as per Schedule II to the Companies Act, 2013
 Residual value of assets
 Depreciation method

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FINANCIAL STATEMENTS

Other expenses
AUDIT OF ITEMS OF

Common considerations
The auditor should verify whether the expenditure-

Pertained to current period under audit

Qualified as a revenue and not capital expenditure

Had a valid supporting like travel tickets, insurance policy,

third party invoice etc.

Has been classified under the correct expense head

E
Was authorised as per the delegation of authority matrix
T
U
Was in relation to the entity’s business and not a personal
T
expenditure
T I
S
Has been disclosed properly as per requirements of Schedule III

N
I
and the materiality context

C
Audit Procedures for Specific expenses
J
Rent Expense
S
 Obtain rent agreements and verify the terms
 Verify if the agreement is in the entity's name and whether the expense pertains to premises
used for running business operations of the entity
 Verify the rent expense as per agreement and whether expense for all 12 months recorded or not
 Consider the escalation clause in the agreement for increments
 Perform trend analysis

Power and fuel expenses

 Obtain a month wise expense schedule along with the power bills.
 Verify if expense has been recorded for all 12 months.

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 Compile month wise summary of power units consumed and the applicable rate and check
the arithmetical accuracy
 Analyse the monthly power units consumed by linking it to units of finished goods produced
and investigate reasons for variance in monthly trends
 Perform trend analysis

Insurance Expense

 Obtain a summary of insurance policies taken along with their validity period.
 Verify whether expense has been correctly classified between prepaid and expense for the
period


T E
Check that adjustments for outstanding and prepaid amount made properly

Legal and Professional expenses

T U

T
Obtain a month wise and consultant wise summary.
I

N S
Verify if expense has been recorded for all 12 months (for retainership)

I
 Maintain professional skepticism as legal expense may highlight a dispute requiring provision/
disclosure in FS
J C
S
Conveyance, Repairs, Stationery etc.

 Check the monthly summary statements

 Perform analytical procedures for comparing monthly trends
 Perform analytical procedures (expense per unit of production ratio) to consider overall

reasonableness of the expense

 Compare the ratios with prior periods and industry trends and inquire management for
variances

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FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

QUESTIONS AND ANSWERS

1 FINANCIAL STATEMENTS ASSERTIONS

Q1 Companies prepare their financial statements in accordance with the framework
of generally accepted accounting principles (Indian GAAP), also commonly referred
to as accounting standards (AS). In preparing financial statements, Company’s
management makes implicit or explicit claims (i.e. assertions) regarding assets,
liabilities, equity, income, expenses and disclosures in accordance with the applicable
accounting standards. Explain with example stating the relevant assertions involved

TE
in this regard. Also explain financial statement audit. RTP May 20

T U
A financial statement audit comprises the examination of an entity’s financial statements

T I
and accompanying disclosures by an independent auditor. The result of this examination is

S
a report by the auditor, attesting to the truth and fairness of presentation of the financial
statements and related disclosures.IN

J C
In preparing financial statements, Company’s management makes implicit or explicit claims

S
(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:

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 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).

Q2 What does the Valuation assertion mean in respect of Assets, liabilities and equity
balances? Explain with the help of example in respect of Inventory. RTP May 20

E
Meaning of Valuation Assertion– Assets, liabilities, and equity interests are included in

T
the financial statements at appropriate amounts and any resulting valuation or allocation
adjustments are appropriately recorded.
T U

T I
Example of Inventory explaining the valuation assertion is given hereunder: Inventory
S
has been recognized at the lower of cost and net realizable value in accordance with AS
N
I
2 - Inventories. Any costs that could not be reasonably allocated to the cost of production

J C
(e.g. general and administrative costs) and any abnormal wastage have been excluded

S
from the cost of inventory. An acceptable valuation basis (e.g. FIFO, Weighted average
etc.) has been used to value inventory as at the period-end.

Q3 State assertions that are implied in the extract of financial statement given below:
(`)
Plant & Machinery (at Cost) 4,00,000
Less: Depreciation:
Up to Previous year 1,40,000
For the year 26,000 (1,66,000)
2,34,000
(i) Indicate assertions in respect of transactions and events for the period relating
to Fixed Assets.
(ii) State specific assertions relating to the above extract of financial statement.

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i. Assertions about transactions and events for the period relating to fixed assets :
a. Occurrence—transactions and events relating to fixed assets have been
recorded, have occurred and pertain to the entity.

b. Completeness—all transactions and events relating to fixed assets that should

have been recorded have been recorded.
c. Accuracy—amounts and other data relating to recorded transactions and
events have been recorded appropriately.
d. Cut-off—transactions and events have been recorded in the correct accounting
period.
e. Classification—transactions and events have been recorded in the proper

ii.
accounts.

The specific assertions are as follows: T E

a.
T
the firm owns the plant and machinery U
b.
T I
the historical cost of plant and machinery is ` 4 lacs
c. S
the plant and machinery physically exists
N
d. I
the asset is being utilised in the business of the company productively
e.
J C
total charge of depreciation on this asset is ` 1,66,000 to date on which `

f.
S
26,000 relates to the year in respect of which the accounts are drawn up; and
the amount of depreciation has been calculated on recognised basis and the
calculation is correct

Q4 What are the obvious assertions in the following items appearing in the Financial
Statements?

i) Statement of Profit and Loss

Travelling Expenditure ` 50,000

ii) Balance Sheet

Trade receivable ` 2,00,000

i. Travelling Expenditure ` 50,000

 Expenditure has been actually incurred for the purpose of travelling.
 Travelling has been undertaken during the year under consideration.

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 Total amount of expenditure incurred is ` 50,000 during the year.
 It has been treated as revenue expenditure and charged to Statement of Profit
and Loss.

ii. Trade receivable ` 2,00,000

 These include all sales transaction occurred during the year.
 These have been recorded properly and occurred during the year.
 These constitute assets of the entity.
 These have been shown at proper value, i.e. after showing the deduction on
account of provision for bad and doubtful debts.

2 BALANCE SHEET CAPTIONS

T E
Q5
T U
The securities premium account may only be applied by the company towards the

T I
issue of unissued shares of the company to the members of the company as fully
paid bonus shares. Comment.
N S May 19
I

J C
It is not correct to say that the securities premium account may only be applied by the

S
Company towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares, other purposes for which securities premium account
can be applied are-
i. in writing off the preliminary expenses of the Company;
ii. in writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company;
iii. in providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company; or
iv. for the purchase of its own shares or other securities under section 68.

Q6 Reserves are amounts appropriated out of profits whereas on the contrary, provisions
are amounts charged against revenue. Discuss explaining the difference between the
two and also explain clearly revenue reserve and capital reserve. RTP May 19

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Reserves are amounts appropriated out of profits that are not intended to meet any
liability, contingency, commitment or diminution in the value of assets known to exist as
at the date of the Balance Sheet.
On the contrary, provisions are amounts charged against revenue to provide for:
i. Renewal or diminution in the value of assets; or
ii. a known liability, the amount whereof could only be estimated and cannot be deter-
mined with accuracy; or
iii. a claim which is disputed.
Amounts contributed or transferred from profits to make good the diminution in value of
assets due to the fact that some of them have been lost or destroyed as a result of some

T E
natural calamity or debts have proved to be irrecoverable are also described as provisions.
Provisions are normally charged to the Statement of Profit and Loss before arriving at the

T U
amount of profit. Reserves are appropriations out of profits.
Difference between Reserves and Provisions
T I
S
The difference between the two is that provisions are amounts set aside to meet specific/
N
I
identified liabilities or diminution in recoverable value of assets. These must be provided

J C
for regardless of the fact whether the Company has earned profit or not.

S
Reserves on the other hand, represent amounts appropriated out of profits, held for
equalising the dividends of the company from one period to another or for financing the
expansion of the company or for generally strengthening the company financially. the
reserves again will be segregated as revenue or capital reserves.
Revenue reserves represent profits that are available for distribution to shareholders held
for the time being or any one or more purpose

Examples- to supplement divisible profits in lean years, to finance an extension of business,

to augment the working capital of the business or to generally strengthen the company’s
financial position.
Capital Reserve, on the other hand represents a reserve which does not include any
amount regarded as free for distribution through the Statement of Profit and Loss
Examples- share premium, capital redemption reserve.
It may be noted that if a company appropriates revenue profit for being credited to the

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AUDIT OF ITEMS OF
asset replacement reserve with the objective that these are to be used for a capital
purpose, such a reserve shall also be in the nature of a capital reserve.

A capital reserve, generally, can be utilised for writing down fictitious assets or losses or
subject to provisions in the Articles) for issuing bonus shares if it is realised. But the
amount of share premium or capital redemption reserve account can be utilised only for
the purpose specified in Sections 52 and 55 respectively of the Companies Act, 2013.

Q7 Validity and consequence of issue of shares at discount, check with respect to the
provisions of the Companies Act, 2013. Nov 19
Shares issued at discount:

i.
E
As per section 53 of the Companies Act, 2013, a company shall not issue share at a
T
discount, except in the case of an issue of sweat equity shares given under section

T U
54 of the Companies Act, 2013. Any share issued by a company at a discounted
price shall be void.
T I
ii. S
The auditor needs to verify that the company has not issued any of its shares at
N
I
a discount by reading the minutes of meeting of its directors and shareholders

J C
authorising issue of share capital and the issue price.

S
iii. Where a company contravenes the provisions of this section, the company and every
officer who is in default shall be liable to a penalty which may extend to an amount
equal to the amount raised through the issue of shares at a discount or five lakh
rupees, whichever is less, and the company shall also be liable to refund all monies
received with interest at the rate of 12 per cent per annum from the date of issue
of such shares to the persons to whom such shares have been issued.

Q8 Explain the disclosure requirements of IND AS compliant Schedule III to Companies

Act, 2013 for each component of "Other Equity." Nov 19
For each component of other equity, whether the company has disclosed the following to

the extent applicable):

i. Balance at the beginning of the reporting period
ii. Changes in accounting policy or prior period error

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AUDIT OF ITEMS OF

iii. Restated balance at the beginning of the reporting period

iv. Total comprehensive income for the year end
v. Dividends
vi. Transfer to retained earnings
vii. Any other change (to be specified)
viii. Balance at the end of reporting period

Q9 Verification of liabilities is as important as that of assets, considering if any liability

is omitted (or understated) or overstated, the Balance Sheet would not show a true
and fair view of the state of affairs of the entity. Explain stating also criteria for a

TE
liability to be classified as current liability. RTP Nov 18
Liabilities in addition to borrowings, include trade payables and other current liabilities,

T U
deferred payment credits and provisions. Verification of liabilities is as important as that of

T I
assets, considering if any liability is omitted (or understated) or overstated, the Balance

S
Sheet would not show a true and fair view of the state of affairs of the entity.
IN
Further, a liability is classified as current if it satisfies any of the following criteria:

C
 It is expected to be settled in the entity’s normal operating cycle
J


S
It is held primarily for the purpose of being traded
It is due to be settled within twelve months after the reporting period

 The entity does not have an unconditional right to defer settlement of the liability
for at least twelve months after the reporting period. Terms of a liability that could,
at the option of the counter party, result in its settlement by the issue of equity
instruments does not affect its classification.

Q 10 Define the different types of lease agreements as per Accounting Standard/ Ind-AS.
May 19
AS-19/ Ind-AS 17 defines that lease arrangements could be of 2 types i.e.
i. Finance Lease and
ii. Operating Lease.
Finance Lease: An arrangement with the following attributes qualifies as a Finance Lease:

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a. The lease arrangement transfers ownership of the asset to the lessee at the
end of the lease term;
b. The lessee has the option to purchase the asset at a price that is expected
to be sufficiently lower than the fair value at the date the option becomes
exercisable for it to be reasonably certain, at the inception of the lease, that
the option will be exercised;
c. The lease term is for the major part of the economic life of the asset even if
title is not transferred;
d. At the inception of the lease, the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset; and
e.
E
the leased assets are of such a specialized nature that only the lessee can use

T
them without major modifications Operating Lease.

T U
An arrangement that does not transfer substantially all the risks and rewards

T I
incidental to ownership qualifies as an Operating Lease. In other words, an
S
operating lease is a lease arrangement “Other than finance lease”.
N
I
Q 11 C
Liabilities include trade payables and other current liabilities, deferred payment
J
S
credits and provisions. Verification of liabilities is as important as that of assets,

considering if any liability is omitted (or understated) or overstated, the Balance

Sheet would not show a true and fair view of the state of affairs of the entity.
Advise stating clearly the audit procedure to establish the existence of trade payables
and other current liabilities as at the period-end.
Audit Procedure to establish the existence of trade payables and other current
liabilities:
i. Check whether there are controls in place to ensure that the same purchase/ expense

invoice cannot be recorded more than once and payable balances are automatically

recorded in the general ledger at the time of recording of expense.

ii. To ensure that trade payable ledger reconciles to general ledger, ask for a period
- end accounts payable aging report and trace the grand total to the amount in the
accounts payable account in the general ledger.

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FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

iii. Calculate the accounts payable report total. Add up the expense/ liability items on
the accounts payable aging report to verify that the total traced to the general
ledger is correct.
iv. Investigate reconciling items. If there are journal entries in the accounts payable
account in the general ledger, review the justification for larger amounts. This
implies that these journal entries should be fully documented.
v. Direct confirmation procedures

a. The auditor shall obtain external confirmations from all significant account
payables and for parties from whom material purchases have been made.
b. If the management of the entity requests the auditor not to seek confirmation

T E
from certain trade payables, the auditor should consider whether there are
valid grounds for such a request. In appropriate cases, the auditor may also

T U
need to reconsider the nature, timing and extent of his audit procedures.
c.
T I
The trade creditors may be requested to confirm the balances either (a) as at
S
the date of the balance sheet, or (b) as at any other selected date which is
N
I
reasonably close to the date of the balance sheet. The date should be decided

J C
by the auditor in consultation with the Company.
d.
S
The form of requesting confirmation from the trade creditor may be either
(a) the ‘positive’ form of request, wherein the trade creditor is requested to
respond whether or not he is in agreement with the balance shown, or (b) the
‘negative’ form of request wherein the trade creditor is requested to respond
only if he disagrees with the balance shown.
e. The method of selection of the trade creditors to be circularised should not be
revealed to the Company until the trial balance of the trade payables’ ledger
is handed over to the auditor. The auditor should maintain strict control to
ensure the correctness and proper despatch of request letters.
f. Any discrepancies revealed by the confirmations received or by the additional
tests carried out by the auditor may have a bearing on other accounts not
included in the original sample. The entity should be asked to investigate and
reconcile the discrepancies.

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g. Where no reply is received, the auditor should perform additional testing
regarding the balances. This testing could include:
 Agreeing the balance to subsequent cash paid
 Agreeing the detail of the respective balance to the underlying vendor
invoices
 Preparing a detailed analysis of the balance, ensuring it consists of
identifia ble transactions and confirming that these purchases/ expense
transactions actually occurred
 Prepare a final summary of the results of the circularization and draw
the final conclusion
vi.
E
If there are any related party payables, review whether they were properly authorized

T
and the value of such transactions were reasonable and at arm’s length.

T U
vii. Review a trend line of purchases/ expenses and accounts payable, or a comparison

T I
of the two over time, to see if there are any unusual trends. Make inquiries about

S
reasons for changes in trends from the management and document the same in
N
audit work papers. I
Q 12 What C
are the different situation where auditor should use positive and negative
J

S
confirmation for verification of trade payable
The use of the positive form is preferable when individual account balances are relatively
large, or where the internal controls are weak, or where the auditor has reasons to believe that
there may be a substantial number of accounts in dispute or inaccuracies or irregularities.
The negative form is useful when internal controls are considered to be effective, or when
a large number of small balances are involved, or when the auditor has no reason to believe
that the trade creditors are unlikely to respond. If the negative rather than the positive
form of confirmation is used, the number of requests sent and the extent of the other
auditing procedures to be performed should normally be greater so as to enable the auditor
to obtain the same degree of assurance with respect to the trade payable balances. In
many situations, it may be appropriate to use the positive form for trade creditors with large
balances and the negative form for trade creditors with small balances.

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FINANCIAL STATEMENTS

Q 13 On
AUDIT OF ITEMS OF

going through the financial statements of ABC Ltd, its auditors Deepa Raj
and Associates observed that company has taken Loans from banks and financial
institutions. Further, the audit team discusses the following about Liabilities:
“Liabilities are the financial obligations of an enterprise other than owners’ funds.
Liabilities include loans/ borrowings, trade payables and other current liabilities,
deferred payment credits and provisions.
Verification of liabilities is as important as that of assets, for, if any liability is
omitted (or understated) or over stated, the Balance Sheet would not show a true
and fair view of the state of affairs of the company.”
Advise stating clearly the audit procedures generally required to be undertaken for
verification of existence of Borrowings.

T E
i. Review board minutes for approval of new lending agreements. During review, make

T U
sure that any new loan agreements or bond issuances are authorized. Ensure that

T I
significant debt commitments should be approved by the board of directors

S
ii. Agree details of loans recorded (interest rate, nature and repayment terms) to
N
I
the loan agreement. Verify that borrowing limits imposed by agreements are not

exceeded.
J C
iv.
S
iii. Agree overdrafts and loans recorded to bank confirmation / confirmation to lenders.
Agree details of leases and hire purchase creditors recorded to underlying agreement.
v. Examine trust deed for terms and dates of redemption, borrowing restrictions and
compliance with covenants.
vi. When debt is retired, ensure that a discharge is received on assets securing the debt.
vii. If any significant transactions are outside the normal course of business or otherwise
appear to be unusual given the understanding of the entity and its environment,
perform the following procedures:
a. Gain an understanding of the business rationale for such significant unusual
transaction.

b. Consider whether the transactions involve previously unidentified related parties

or parties that do not have the substance or the financial strength to support
the transaction without assistance from the entity.

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Q 14 The

AUDIT OF ITEMS OF
auditor A of ABC & Co.- firm of auditors is conducting the audit of XYZ Ltd
and while performing testing of additions wanted to verify that all PPE (Property
Plant and Equipment) purchase invoices are in the name of the entity he is auditing.
For all additions to land, building in particular, the auditor desires to have concrete
evidence about ownership. The auditor is worried about whether the entity has valid
legal ownership rights over the PPE claimed to be held by the entity and recorded
in the financial statements. Advise the auditor. RTP Nov 19
In addition to the procedures undertaken for verifying completeness of additions to PPE
during the period under audit, the auditor while performing testing of additions should also
verify that all PPE purchase invoices are in the name of the entity that entitles legal title

auditor should T E
of ownership to the respective entity. For all additions to land, building in particular, the

i.
T U
Obtain copies of conveyance deed/ sale deed to establish whether the entity is

T I
mentioned to be the legal and valid owner.

S
ii. The auditor should insist and verify the original title deeds for all immoveable
N
I
properties held as at the balance sheet date.
iii.
J C
In case the entity has given such immoveable property as security for any borrowings

S
and the original title deeds are not available with the entity, the auditor should
request the entity’s management for obtaining a confirmation from the respective
lenders that they are holding the original title deeds of immoveable property as
security.
iv. In addition, the auditor should also verify the register of charges, available with the

entity to assess the PPE that has been given as security to any third parties

Q 15 Explain with examples the audit procedure to establish the existence of intangible
fixed assets as at the period- end. RTP Nov 18

Since an Intangible Asset is an identifiable non-monetary asset, without physical substance,

for establishing the existence of such assets, the auditor should verify whether such

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intangible asset is in active use in the production or supply of goods or services, for rental
to others, or for administrative purposes.
Example -
i. for verifying the existence of software, the auditor should verify whether such
software is in active use by the entity and for the purpose, the auditor should verify
the sale of related services/ goods during the period under audit, in which such
software has been used.
ii. For verifying the existence of design/ drawings, the auditor should verify the
production data to establish if such products for which the design/ drawings were
purchased, are being produced and sold by the entity.

E
In case any intangible asset is not in active use, deletion should have been recorded

T
in the books of account post approvals by the entity’s management and amortization

T U
charge should have ceased to be charged beyond the date of deletion.

T I
S
Q 16 You are an auditor of PQR Ltd. which has spent ` 10 lakhs on Research activities of
N
I
the product during period under audit. Board of Directors want to recognize it as an

J C
internally generated intangible assets. Advise and discuss the conditions necessary

S
to be fulfilled to recognize the intangible assets in the financial statements. May 19
No Intangible asset arising from research (or from the research phase of an internal
project) shall be recognised. Expenditure on research shall be recognised as an expense
when it is incurred since in the research phase of an internal project, an entity cannot
demonstrate that an intangible asset exists that will generate probable future economic
benefits. Thus, board of directors of PQR Ltd cannot recognize the expense as internally
generated intangible asset.
An intangible asset shall be recognised if, and only if:

i. the said asset is identifiable

ii. the entity controls the asset i.e. the entity has the power to obtain the future
economic benefits flowing from the underlying resource and to restrict the access of
others to those benefits

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iii. it is probable that future economic benefits associated with the asset will flow to
the entity
iv. the cost of the item can be measured reliably

Q 17 Write the audit procedures to be performed as an auditor for valuation (assertion)

of following:

(i) Loans and Advances and other current assets.

(ii) Finished goods and goods for resale Nov 18
i. Audit procedure for valuation of Loans and Advances and other current assets
a. Review the process followed by the Company to derive an allowance for doubtful

T E
accounts. This will include a consistency comparison with the method used in
the last year, and a determination of whether the method is appropriate for
the underlying business environment.
T U
b.
T I
Obtain the ageing report of loans and advances, split between not currently

S
due, 30 days old, 30-60 days old, 60- 180 days old, 180- 365 days old and
N
I
more than 365 days old. Also, obtain the list of loans and advances under

J C
litigation and compare with previous year.

S
c. Scrutinize the analysis and identify those loans and advances that appear
doubtful; and discuss with management their reasons, if any of these loans/
advances are not included in the provision for bad recoverable. Perform further
testing where any disputes exist; Reach a final conclusion regarding the
adequacy of the bad and doubtful loans/ advances provision.
d. Prepare schedule of movements on Bad loans/ advances – Provision Accounts
and loans/ advances written off.
e. Check that write-offs or other reductions in the recoverable balances have been
approved by an appropriate and authorised member of senior management, for
example the financial controller or finance director.
f. Check that the restatement of foreign currency loans and advances/ other
current assets has been done properly.

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FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

ii. Audit procedure for valuation of finished goods and goods for resale
a. Inquire into what costs are included, how these have been established and
ensure that the overheads included have been determined based on normal
costs and appear reasonable in relation to the information disclosed in the
draft financial statements.

b. Ensure that inventories are valued at net realizable value if they are likely
to fetch a value lower than their cost. For any such items, also verify if
the relevant semi/ partly processed inventories (work in progress) and raw
materials have also been written down.
c. Follow up for items that are obsolete, damaged, slow moving and ascertain

T E
the possible realizable value of such items. For the purpose, request the client
to provide inventory ageing split between less than 30 days, 30-60 days old,

T U
60- 90 days old, 90- 180 days old, 180- 385 days old and more than 365 days
old (refer screenshot below)
T I
S
d. Follow up any inventories which at time of observance of physical counting
N
I
were noted as being damaged or obsolete.
e.
J C
Compare recorded costs with replacement costs. Examine vendor price lists to

S
determine if recorded cost is less than current prices.
f. Calculate inventory turnover ratio. Obsolete inventory may be revealed if ratio
is significantly lower.
g. In manufacturing environments, test overhead allocation rates and ensure that
only direct labor, direct material and overhead have been included.
f. Verify the correct application of lower-of-cost-or-net realizable value principles.

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FINANCIAL STATEMENTS
Q

AUDIT OF ITEMS OF
18 “Trade receivable are an essential part of any organisation's balance sheet. Often
referred to as debtors, these are monies which are owed to an organisation by a
customer. The most common form of an account receivable is a sale made on credit,
via an invoice, to a customer.”
It is important to carry out compliance procedures in the sales audit as part of the
debtors’ audit procedure.
Verify to ensure that the system for receivables has the necessary features.
Trade receivable are an essential part of any organisation's balance sheet. Often referred
to as debtors, these are monies which are owed to an organisation by a customer. The
most common form of an account receivable is a sale made on credit, via an invoice, to

T E
a customer. Typically, an invoice is raised and issued to the customer with the invoice
amount being recorded as a debtor balance. Until the invoice is paid, the invoice amount

T U
is recorded on the organization’s balance sheet as accounts receivable. If balances are not

T I
recoverable, then these amounts will need to be written off as an expense in the income
statement/ profit and loss account.
N S
I
It is important to carry out compliance procedures in the sales audit as part of the debtors’

J C
audit procedure. In summary, check to ensure that the system for receivables has the
following features:

S
Only bona fide sales lead to receivables
 All such sales are to approved customers
 All such sales are recorded
 Once recorded, the debts can only be eliminated by receipt of cash or on the
authority of a responsible official
 Debts are collected promptly
 Balances are regularly reviewed and aged, a proper system of follow up exists and if
necessary adequate provision for bad debt exists
 Clear segregation of duties relating to identification of debt, receipt of income,
reconciliation and write off of debts

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FINANCIAL STATEMENTS

3 STATEMENT OF PROFIT AND LOSS CAPTIONS

AUDIT OF ITEMS OF

Q 19 As statutory auditor of the company, list out audit procedures required to be

undertaken for the following:
(i) Interest income from fixed deposits.
(ii) Dividend income.
(iii) Gain/ (loss) on sale of investment in Mutual funds.
Also indicate disclosure requirements of above as per Companies Act, 2013 May 18
i. For verifying interest income on fixed deposits:
a. Obtain a listing of fixed deposits opened during the period under audit along
with the applicable interest rate and the number of days for which the deposit

T E
was outstanding during the period. Verify the arithmetical accuracy of the
interest calculation made by the entity by multiplying the deposit amount

T U
with the applicable rate and number of days during the period under audit.
b.
T I
For deposits still outstanding as at the period- end, trace the same to the

S
direct confirmation obtained from the respective bank/ financial institution.
N
c. I
Obtain a confirmation of interest income from the bank and verify that the

J C
interest income as per bank reconciles to the calculation shared by the entity.
d.
S
Also, obtain a copy of Form 26AS (TDS withholding by the bank/ financial
institution) and reconcile the interest reflected therein to the calculation
shared by client.
ii. Dividend Income: For Dividends, verify that the same are recognised in the statement
of profit and loss only when the entity’s right to receive payment of the dividend is
established, provided it is probable that the economic benefits associated with the
dividend will flow to the entity and the amount of the dividend can be measured
reliably.
iii. Gain/ (loss) on sale of investment in mutual funds: Verify that Gain/(loss) on
sale of investment in mutual funds is recorded as other income only on transfer of
title from the entity and is determined as the difference between the redemption
price and carrying value of the investments. For the purpose, obtain the mutual fund

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FINANCIAL STATEMENTS
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statement and trace the gain / loss as recorded in the books of account to the gain/
loss as reflected in the statement.
Disclosure Requirements: Ensure whether the following disclosures as required under
Ind AS compliant Schedule III to Companies Act, 2013 have been made:
Whether ‘other income’’ has been classified as:
 Interest income
 Dividend income
 Other non-operating income (net of expenses directly attributable to such
income)

Q 20 While auditing purchases which types of analytical procedures will be performed by

T E
the auditor to obtain audit evidence as to overall reasonableness of purchase quantity
U

and price.

T IT May 19 and Nov 19

Analytical procedures to obtain audit evidence as to overall reasonableness of purchase
quantity and price may include: S
i. IN
Consumption Analysis: Auditor should scrutinize raw material consumed as per

J C
manufacturing account and compare the same with previous years with closing stock

ii.
S
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 previous year and ask for reasons from management in case of
significant variations.
iii. Ratios: Auditor should compare the creditors turnover ratios and stock turnover
ratios of the current year with previous years.
iv. Auditor should review quantitative reconciliation of closing stocks with opening stock,
purchases and Consumption.

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Q 21 Expenses which are essentially of a revenue nature if incurred for creating an asset
AUDIT OF ITEMS OF

or adding to its value for achieving higher productivity are regarded as expenses of a
capital nature. Describe any five such expenses. May 18
Expenses which are essentially of a Revenue Nature, if incurred for creating an asset

or adding to its value for achieving higher productivity, are regarded as expenditure of a

capital nature. Examples of capital expenditure are-

i. Material and wages- capital expenditure when expended on the construction of a
building or erection of machinery.
ii. Legal expenses- capital expenditure when incurred in connection with the purchase
of land or building.

machinery. T E
iii. Freight- capital expenditure when incurred in respect of purchase of plant and

T U
iv. Repair- Major repairs of a fixed asset that increases its productivity.

T I
v. Wages- Wages paid on installation costs incurred in Plant & machinery.

S
vi. Interest- Interest paid for the qualification period as per AS-16 i.e. before the asset
N
is constructed. I
J C
Whenever, therefore, a part of the expenditure, ostensibly of a revenue nature, is capitalised

S
it is the duty of the auditor not only to examine the precise particulars of the expenditure
but also the considerations on which it has been capitalised.

Q 22While reviewing Employee benefits expenses of a company, how you as an auditor you
will evaluate its hiring, appraisal and retirement process? May 19
While reviewing Employee Benefits expenses auditor needs to obtain a clear understanding
about the organisation and its hiring, appraisal and retirement process in the following manner:
i. The auditor first tests the controls the company has set around the employee benefit
payment process to determine how strong and reliable they are. If they are strong,
the auditor can minimize the amount of transaction testing he must do. Common
internal controls over the employee benefit payment cycle includes maintaining of
attendance records, authorisation and approval of monthly payroll processing and
disbursement.

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FINANCIAL STATEMENTS
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ii. The auditor selects a random sample of transactions and examines the related
appointment letters, appraisal letters, attendance records, HR policies, employee
master etc.

iii. The auditor performs Substantive analytical procedure consisting of monthly expense
reasonability, comparison with previous accounting period, any analysis auditor may
find relevant and most important of all setting an expectation in relation to the
expense incurred during the period under audit and compare that with the client’s
business operations and overall trend in the industry.

Q 23Mention any five attributes to be considered by an auditor while verifying for a

TE
depreciation and amortisation expenses. May 18

Auditor needs to consider the following attributes while verifying for depreciation and
amortisation expenses:
T U
i.
T I
Obtain the understanding of entity’s accounting policy related to depreciation and
amortisation. S
IN
ii. Ensure that the Company’s policy for charging depreciation and amortisation is as

C
per the relevant provisions of Companies Act and applicable accounting standards.
J
S
a. Whether the depreciation has been calculated after making adjustment of
residual value from the cost of the assets.
b. Whether depreciation and amortisation charges are valid.
c. Whether depreciation and amortisation charges are accurately calculated and
recorded.
d. Whether all depreciation and amortisation charges are recorded in the
appropriate period.
e. Ensure the parts (components) of each item of property, plant and equipment
that are to be depreciated separately has been properly identified.
f. Whether the most appropriate depreciation method for each separately
depreciable component has been used.

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Q 24 "While the auditor may choose to analyse the monthly trends for expenses like rent,
AUDIT OF ITEMS OF

power and fuel but for other expenses, an auditor generally prefers to verify other
attributes." Mention those attributes. Nov 18

While the auditor may choose to analyse the monthly trends for expenses like rent, power
and fuel, an auditor generally prefers to vouch for other expenses to verify following
attributes:
i. Whether the expenditure pertained to current period under audit
ii. Whether the expenditure qualified as a revenue and not capital expenditure
iii. Whether the expenditure had a valid supporting like travel tickets, insurance policy,
third party invoice etc.

v. T E
iv. Whether the expenditure has been classified under the correct expense head
Whether the expenditure was authorised as per the delegation of authority matrix

T U
vi. Whether the expenditure was in relation to the entity’s business and not a personal
expenditure
T I
N S
I
Q 25 Explain the audit procedure to vouch/ verify :
(i) Rent expenses
J C
i. Rent expense-
S
(ii) Power and Fuel expenses RTP May 19

a. Obtain a month wise expense schedule along with the rent agreements.
b. Verify if expense has been recorded for all 12 months and whether the rent
amount is as per the underlying agreement.
c. Specific consideration should be given to escalation clause in the agreement to
verify if the rent was to be increased/ adjusted during the period under audit.
d. Also, verify if the agreement is in the name of the entity and whether the
expense pertains to premises used for running business operations of the
entity
ii. Power and fuel expense-
a. Obtain a month wise expense schedule along with the power bills.
b. Verify if expense has been recorded for all 12 months.

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c. Also, compile a month wise summary of power units consumed and the
applicable rate and check the arithmetical accuracy of the bill raised on
monthly basis.
d. In relation to the units consumed, analyse the monthly power units consumed
by linking it to units of finished goods produced and investigate reasons for
variance in monthly trends

T E
T U
T I
N S
I
J C
S

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FINANCIAL STATEMENTS
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CORRECT / INCORRECT STATEMENTS

State with reasons (in short) whether the following statements are correct or incorrect:

i. Dividends are recognised in the statement of profit and loss only when theentity’s
right to receive payment of the dividend is established.
Incorrect.
Reason: Dividend are recognised only when right to receive dividend is established, it is

probable that economic benefits will flow to the entity and amount can be measured.
ii. Sweat Equity Shares” means equity shares issued by the company to employees or

T E
directors at a premium or for consideration other than cash for providing know-how or
making available right in the nature of intellectual property rights or value additions,
by whatever name called.
T U
Incorrect.
T I

N S
Reason: Sweat Equity Shares” means equity shares issued by the company to employees

I
or directors at a discount or for consideration other than cash for providing know-how or

J C
making available right in the nature of intellectual property rights or value additions, by

iii.
whatever name called.
S
Capital reserves represent profits that are available for distribution to shareholders
held for the time being or any one or more purpose.
Incorrect.
Reason: Revenue reserves represent profits that are available for distribution to shareholders.
iv. A capital reserve, generally, can be utilised for writing down fictitious assets or losses
or (subject to provisions in the Articles) for issuing bonus shares if it is realised.
Incorrect.
Reason: A capital reserve, generally, can be utilised for writing down fictitious assets or
losses or (subject to provisions in the Articles) for issuing bonus shares if it is realised.
But the amount of share premium or capital redemption reserve account can be utilised
only for the purpose specified in Sections 52 and 55 respectively of the Companies Act,
2013.

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FINANCIAL STATEMENTS
v. If Company X’s balance sheet shows building with carrying amount of ` 100 lakh, the

AUDIT OF ITEMS OF
auditor shall assume only one point that the management has only asserted that the
building recognized in the balance sheet exists as at the period-end.

Incorrect.
Reason: If Company X’s balance sheet shows building with carrying amount of ` 100 lakh,
the auditor shall assume only one point that the management has asserted that –
a. The building recognized in the balance sheet exists as at the period-end (Existence)
b. Company X owns and controls such building (Rights and obligations)
c. The building has been valued accurately in accordance with the measurement
principles (Valuation)
d.
E
All buildings owned and controlled by Company X are included within the carrying
amount of ` 100 lakh (Completeness) T
vi.
T U
The securities premium account may only be applied by the Company towards the

T I
issue of unissued shares of the company to the members of the company as fully
paid bonus shares.
N S
Incorrect. I

J C
Reason: The securities premium account may be applied by the Company:

S
a. towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares
b. in writing off the preliminary expenses of the Company;
c. in writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company;
d. in providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company; or
e. for the purchase of its own shares or other securities under section 68.
vii. According to Section 53 of the Companies Act, 2013, a company can issue shares at
a discount.
Incorrect.

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Reason: According to Section 53 of the Companies Act, 2013, a company shall not issue
shares at a discount, except in the case of an issue of sweat equity shares given under
Section 54 of the Companies Act, 2013.

viii. An intangible asset is an identifiable monetary asset.

Incorrect.
Reason: An intangible asset is an identifiable non-monetary asset, without physical
substance, held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes.

MULTIPLE CHOICE QUESTIONS

i. T E
Which assertion is common among the statement of profit and loss and balance sheet
captions?
T U
a. Existence
T I
b. Valuation
N S
c. Completeness I
d. Measurement
J C
ii.
S
Direct confirmation procedures are performed during audit of accounts receivable
balances to address the following balance sheet assertion:
a. Rights and obligations
b. Existence
c. Valuation
d. Completeness
iii. Obtaining trade receivables ageing report and analysis and identification of doubtful
debts is performed during audit of accounts receivable balances to address the
following balance sheet assertion:
a. Valuation
b. Rights and obligations
c. Existence

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d. Completeness
iv. Observing inventory being counted and personally performing test counts to verify
counts is performed during audit of inventory balances to address the following
balance sheet assertion:
a. Rights and obligations
b. Valuation
c. Completeness
d. Existence
v. During the course of audit of intangible assets, expenditure incurred during following
phase is not capitalised:
a.
b.
Development phase
Research phase T E
c. None of the above
T U
d. Both (a) and (b)
T I
vi. S
Search for unrecorded liability is performed during audit of current liabilitiesto address
N
I
the following balance sheet assertion:
a. Valuation
J C
b. S
Rights and obligations
c. Existence
d. Completeness
vii. Cut-off testing is performed during audit of sales to address the following assertion:
a. Occurrence
b. Measurement
c. Cut-off
d. All of the above
viii. ABC’s investee company- XYZ declares final dividend for financial year 2018- 19 in
the meeting of board of directors held on April 10, 2019. In which financial year should
ABC account for the dividend income?
a. Proportionately i.e. considering 10 days of financial year 2019-20 and 355 days of
financial year 2018-19

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b. Financial year 2018- 19

c. Financial year 2019- 20
d. Equally between financial year 2018-19 and financial year 2019-20
ix. All inventory units held by the audit entity and that should have been recorded, have
been recognized in the financial statements. The assertion involved is:
a. Existence
b. Completeness
c. Rights and Obligations
d. Valuation
x. Which of the following is not an example of revenue expenditure?

b. Repairs, maintenance and renewals of fixed assets T E

a. Salaries and wages of employees engaged directly or in-directly in production

c. Legal and professional expenses

T U
d. development expenditure on land
T I
xi. S
Marvin Ltd. is a renowned food chain supplier in a posh area providing restaurant
N
I
facility along with food delivering. CA. Felix was appointed as an auditor of the

C
company for the Financial Year 2017-18. While examining the books of account of the
J
S
company, CA. Felix came to know about one of the major expenses of the company
i.e. rent expense of ` 1,20,000 per month, for which he applied substantive analytical
procedure for verification purpose. Explain, how would CA. Felix perform substantive
analytical procedure in the given scenario?
a. CA. Felix would inspect every single rent invoice per month of ` 1,20,000 and verify
other elements appropriately.
b. CA. Felix would compare the rental expense of the company with that of another
nearby company having corresponding dimensions, for high degree of accuracy.
c. CA. Felix would select the first month rent invoice of ` 1,20,000 and appropriately
verifying other elements would predict that the rent for the whole year would be `
14,40,000 (i.e. ` 1,20,000 * 12). Thereafter, he would compare the actuals with his
prediction and follow-up for any fluctuation.
d. (a) and (b), both.

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xii. Coyote Ltd. is dealing in trading of electronic goods. Huge inventory (60% approximately)
of the company is lying on consignment (i.e. under the custody of third party).
CA. Star, the auditor of the company, wants to obtain sufficient appropriate audit
evidence regarding the existence and condition of the inventory lying on consignment.
Thus, he requested &obtained confirmation from the third party as to the quantities
and condition of inventory held on behalf of the entity, however, it raised doubts
about the integrity and objectivity of the third party. Which of the following other
audit procedures may be performed by CA. Star to obtain sufficient appropriate audit
evidence regarding the existence and condition of the inventory under the custody of
third party?
a.
b.
Attend third party’s physical counting of inventory.

T E
Arrange for another auditor to attend third party’s physical counting of inventory.
c.
T U
Inspect warehouse receipts regarding inventory held by third parties.
d. All of the above.
T I
S
xiii. In July, 2018, M/s Tom & Co. entered into an agreement with M/s Jerry & Co. under
N
I
which a machinery would be let on hire and M/s Jerry & Co. would have the option to

C
purchase the machinery in accordance with the terms of the agreement. Thus, M/s
J
S
Jerry & Co. agreed to pay M/s Tom & Co. a settled amount in periodical instalments.
The property in the goods shall be passed to M/s Jerry & Co. on the payment of last
of such instalments. While checking such hire-purchase transaction, what would the
auditor examine?
a. That the periodical instalments paid are charged as an expenditure by M/s Jerry &
Co.
b. That the hire purchase agreement specifies clearly the hire-purchase price of the
machinery to which the agreement relates.
c. That M/s Tom & Co. charges depreciation throughout the life of the machinery.
d. All of the above.
xiv. The management of Magoo Ltd. has developed a strong internal control in its
accounting system in such a way that the work of one person is reviewed by another.
Since no individual employee is allowed to handle a task alone from the beginning

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FINANCIAL STATEMENTS
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to the end, the chances of early detection of frauds and errors are high. CA. Olive

has been appointed as an auditor of the company for current Financial Year 2017-
18. Before starting the audit, she wants to evaluate the internal control system of
Magoo Ltd. To facilitate the accumulation of the information necessary for the proper
review and evaluation of internal controls, CA. Olive decided to use internal control
questionnaire to know and assimilate the system and evaluate the same. Which of the
following questions need not be framed under internal control questionnaire relating

to purchases?
a. Are authorized signatories for purchases limited to elected officials?
b. Are payments approved only on original invoices?
c.
d. T E
Does authorized officials thoroughly review the documents before signing cheques?
Are monthly bank reconciliations implemented for each and every bank accounts of
the company?
T U
xv.
T I
While auditing the books of accounts of QHMP Ltd., CA. Ranker, the statutory auditor
S
of the company, came to know that the management of the company has recognized
N
I
internally generated goodwill as a fixed asset. CA. Ranker discussed with the

J C
management that according to accounting standards, internally generated goodwill

S
is not recognized asan asset because it is not an identifiable resource controlled by
the enterprise that can be measured reliably at cost. However, the management is
quite rigid to the accounting treatment followed for internally generated goodwill and
not paying attention to the auditor. Thus, through an example, CA. Ranker explained
which type of goodwill may be recognized as a fixed asset for which the management
got justified. State which of the following examples the auditor must have given to
the management?
a. If an item meeting the definition of an intangible asset is acquired in a business
combination, it forms part of the goodwill to be recognized at the date of the
amalgamation.

b. Only those goodwill needs to be recognized as a fixed asset which can be touched
like physical assets, for example, land and buildings.
c. Goodwill is recognised only when there is a contractual or other legal rights for a

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FINANCIAL STATEMENTS
AUDIT OF ITEMS OF
physical asset which shall not be amortized over the period.
d. All of the above.
xvi. The notes to the account statement of ASD Ltd. shows the break-up of accounts
payable for the Financial Year 2016-17 as follows:
Accounts Payable Amount (in `)
Mr. Kraby 1,20,000
Mr. Runny 40,000
Mr. Bluffy 14,56,000
Total 16,16,000
CA. Sandy, the auditor of ASD Ltd., wants to investigate the valuation of accounts

T E
payable of Mr. Bluffy amounting to ` 14,56,000. Which of the following procedures is
best fitted & more reliable to be followed by CA. Sandy to get more reliable evidence

T U
for the existence of such balance as on 31st March, 2017?
a.
T I
Inspect each and every journal entry passed in the books of ASD Ltd.
b. S
Ask ASD Ltd. to provide the details of payment made during the year 2017-18.
N
c. I
Inspect the invoices issued by Mr. Bluffy and the payments made.
d.
J C
Interrogate the cash manager of ASD Ltd.

S
xvii. An entity in addition to undertaking purchases and incurring employee benefit expenses
also spends on other expenditure that are essential and incidental to running of
business operations. One of such expenses is the legal and professional expenses.
These are the fees paid for professional advices regarding specific deals.
Iconic Ltd. is having a retainership agreement with a lawyer, Mr. Avi, to whom the
company is paying a huge sum as legal and professional expenses on monthly basis.
While vouching such expenses, what should be kept in mind by the auditor?
a. In case of monthly retainership agreements, only verify if the expenditure for all 12
months has been recorded correctly.
b. The auditor should verify that the payments have been only through bank vouchers.
c. The auditor should be cautious while vouching for legal expenses as the same may
highlight a dispute for which the entity may not have made any provision and the
matter may also not have been discussed/ highlighted to the auditor for his specific
consideration.
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FINANCIAL STATEMENTS
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d. In case of monthly retainership agreements, only verify that all the payments have
been made and there is no outstanding balance to be shown as liability in the
Balance Sheet.
xviii. The management of BOB Ltd. could not differentiate between any obligation for
which either provisions need to be made or the contingent liability to be shown. The
auditor of the company clarifies the management that the provisions are the amounts
charged against revenue to provide for a known liability, the amount whereof cannot
be determined with substantial accuracy. On the other hand, a contingent liability
is a possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future

T E
events not wholly within the control of the entity; or a present obligation that arises
from past events but is not recognized because it is not probable that an outflow of

T U
resources embodying economic benefits will be required to settle the obligation or the

T I
amount of the obligation cannot be measured with sufficient reliability. The auditor
S
further explains the concept with the help of examples. State which of the following
N
I
examples the auditor must have provided in respect of contingent liability?
a. Depreciation.
J C
b.
c.
S
Clean-up costs for unlawful environmental damage.
Product warranties.
d. Lawsuit against the company where it is more likely that no present obligation
exists.
Answers
i. c. Completeness
ii. b. Existence
iii. a. Valuation
iv. d. Existence
v. b. Research Phase
vi. d. Completeness
vii. c. Cut-off

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viii. c. Financial year 2019- 20
ix. b. Completeness
x. d. Development expenditure on land
xi. c. CA. Felix would select the first month rent invoice of ` 1,20,000 and appropriately verifying
other elements would predict that the rent for the whole year would be ` 14,40,000 (i.e. `
1,20,000 * 12). Thereafter, he would compare the actuals with his prediction and follow-up
for any fluctuation.
xii. d. All of the above.
xiii. b. That the hire purchase agreement specifies clearly the hire-purchase price of the
machinery to which the agreement relates.

company? T E
xiv. d. Are monthly bank reconciliations implemented for each and every bank accounts of the

T U
xv. a. If an item meeting the definition of an intangible asset is acquired in a business

T I
combination, it forms part of the goodwill to be recognized at the date of the amalgamation.
S
xvi. c. Inspect the invoices issued by Mr. Bluffy and the payments made.
N
I
xvii. c. The auditor should be cautious while vouching for legal expenses as the same may

J C
highlight a dispute for which the entity may not have made any provision and the matter

S
may also not have been discussed/ highlighted to the auditor for his specific consideration.
xviii. d. Lawsuit against the company where it is more likely that no present obligation exists

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FINANCIAL STATEMENTS
AUDIT OF ITEMS OF

T E
TU
T I
N S
I
J C
S

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Chapter
Company Audit

COMPANY AUDIT
11
Chapter Roadmap
1 Section 139 - Appointment of auditors

2 Section 140 – Removal, Resignation of Auditor

and giving of Special Notice

T E
3
U
Section 141 – Eligibility, Qualifications and
Disqualifications of Auditor
T
4
T I
Section 142 – Remuneration of Auditors

N S
5
I
Section 143 – Powers / Rights and Duties
of Company Auditor

6
J C
Section 144 – Auditor not to render

7
S
certain services

Section 145 - Signing of Audit Reports

8
Section 146 – Attending of General meetings

9 Section 147 – Punishment for Contravention

10 Section 148 – Cost Audit

11
Audit of Branch Accounts

12
Joint Audit

13 Reporting under Companies (Auditor’s

Report Order), 2016 [CARO, 2016]

| 11.1
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BRIEF OVERVIEW
COMPANY AUDIT

1 SECTION 139 - APPOINTMENT OF AUDITORS

Appointment of Auditor

Appointment of Auditor

Appointment of Appointment of
Subsequent Auditor
E
First Auditor

T
Non-Government Companies
– Section 139(1)
T U Non-Government Companies
– Section 139(6)

T I
Government

N S
Companies – Section 139(5)
Government
Companies – Section 139(7)
I
Appointment of Subsequent Auditor
J C
S
Non-Government Companies – Section 139(1)
Appointment will be at First AGM
till conclusion of 6th AGM; and
thereafter till conclusion of every 6th AGM
Subject to following conditions:

Condition Details of condition

1. Ratification Omitted
2. Written consent Before appointment company shall obtain
(a) Written consent
(b) Certificate
3. Certificate Content of Certificate
 Individual or firm is not disqualified under Companies Act,
Chartered Accountants Act and any Rules
 Proposed appointment is as per term
 Proposed appointment is within limits laid in the Act
 List of proceedings as disclosed in certificate is true and fair

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4. Intimation to ROC  Inform auditor and ROC within 15 days of appointment.

Intimation to ROC in Form ADT-1

COMPANY AUDIT


Manner and Procedure of selection and appointment

As per Rule 3 of Companies Audit and Auditors Rules, 2014

T E
T U
T I
N S
I
J C
S

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Section 177 -Constitution of Audit Committee

COMPANY AUDIT

Applicability of Section 177

Following companies are required to constitute an Audit Committee:

Every Listed Public company

All public companies with a

paid up capital of ten crore
rupees or more

All public companies having

turnover of one hundred crore
Applicability of rupees or more
Section 177

T E
All public companies, having in
aggregate, outstanding loans or

T U
borrowings or debentures or deposits
exceeding fifty crore rupees or more

T I
N S
The paid-up share capital, turnover or outstanding loans, or borrowings or debentures
I
or deposits, as the case may be, as existing on the date of last audited Financial
C
Statements shall be taken into account.
J
S
Government Companies – Section 139(5)

Within a period
By CAG
of 180 Days

Tenure: till the From

conclusion of next commencement of
AGM financial year

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Appointment of First Auditor

COMPANY AUDIT
Non-Government Companies – Section 139(6)
By Board of Directors
Within 30 days of registration of company
If Board fails, Board shall inform the members
Members shall within 90 days
at an EGM
appoint the first auditor
Tenure : till conclusion of first AGM

Government Companies – Section 139(7)

by CAG T E
Within 60 days of registration of company
T U
If CAG fails
T I

N S
BOD will appoint within next 30 days

I
If Board fails, Board shall inform the members

J C Members shall within 60 days at an EGM

S appoint the first auditor
Tenure: till conclusion of first AGM

Rotation of Auditor

Rotation of Auditor

Section 139(2) Section 139(3)

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Section 139(2)
COMPANY AUDIT

Listed companies and

Other prescribed
companies Shall not
appoint

An individual as An Audit Firm as an

auditor for more than auditor for more than
one term of five two terms of five
consecutive years consecutive years

1st Proviso Cooling Period Individual Auditor for 5 years after completing of tenure

Audit Firm
T E
for 5 years after completing of tenure
2nd Proviso Common
U
 Audit Firm having common partner with firm
T
Partner
I
 Whose tenure has just expired
T
 Shall not be appointed as auditor of same company
S
 For a period of five years
N
3rd Proviso Company I
 Comply with requirement of Section 139(2)
existing before
commencement J C
 Within a period not later 3 years from the date of

S
of this Act
commencement of this Act

4th Proviso Section 139(2)  Right of company to remove auditor

shall not  Right of auditor to resign
prejudice the

Section 139(3)
Members may resolve the following:

(a) Rotation of auditing partner & his team at such interval as may be prescribed.
(b) That audit shall be conducted by more than one auditor : Joint Audit

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Rule 5 : Prescribed Company

COMPANY AUDIT
Unlisted Public Companies with PUSC ≥ ` 10 Crore

Private Companies with PUSC ≥ ` 50 Crore

Companies not covered above if public borrowings from banks and

FI/ public deposits ≥ ` 50 Crore

The concept of rotation shall not be applicable to One Person and Small Companies.

Rule 6 : Manner of Rotation

T E
U
If company is required to constitute Audit Committee, the AC shall recommend
T
1.
T I
name of the auditor who may replace the incumbent; BOD shall consider the
recommendation and propose the name of the auditor in the AGM.

S
If AC is not required to be constituted, BOD shall recommend and propose the
N
2.
I
name of the auditor in the AGM.

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For calculating period of 5 years / 10 years, period served prior to commencement
3.
S
of this Act, shall also be considered.

Individual auditor / Audit Firm not eligible for appointment for a period of 5 years
4. if it belongs to same network to whom retiring auditor belong to.

5. Break in the term should be for a continuous period of 5 years.

Auditing partner retires from Firm and joins Other Firm, latter becomes
6. ineligible.

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Other Provisions of Section 139

COMPANY AUDIT

Filling of Casual vacancies – Section 139(8)

Non Govt. Co. – Section 139(8)(i) Govt. Co.- Section 139(8)(ii)

Filled by
↓
Due to resignation Other Reasons CAG
Filled by BOD Filled by BOD ↓
↓ ↓ Within 30 days
Within 30 days ↓
Within 30 days
↓
Approval by members
T E If CAG fails
↓
in GM
↓
T U Filled by BOD

Convened within
3 months T I ↓
Within next 30 days

N S
I
Casual Vacancy may arise due to death, resignation of the auditor and dissolution of
the audit firm.

J C
S
Reappointment of Auditor – Section 139(9)
Retiring auditor may be reappointed if-

 Not disqualified under law

 Not unwilling to continue
AND

 No SR has been passed w.r.t.

(a) Appointing someone else as auditor

(b) providing expressly that retiring auditor shall not be reappointed.

No auditor Appointed at AGM – Section 139(10)

If no Auditor appointed
at AGM
Existing auditor will continue

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Recommendation of Audit Committee – Section 139(11)

COMPANY AUDIT
Where a company is required to constitute an audit committee (Sec. 177)
All appointments including filling casual vacancies
Shall be made only after considering the recommendations of audit committee.

2 SECTION 140 – REMOVAL, RESIGNATION OF AUDITOR AND

GIVING OF SPECIAL NOTICE

Sec. 140(1) Sec. 140(2) & (3)

Removal before expiry Resignation

Sec. 140(4)
Removal at AGM
T E
Sec. 140(5)
Removal by Tribunal

T U
T I
Sec. 140(1) – Removal before expiry
N S
I
C
SR of Company & prior approval of CG in prescribed manner (Rule 7)
J
S
auditor concerned should be provided an opportunity of being heard.

Application to CG in Form ADT-2.

Requires

Within 60 days of approval by CG

convene a general meeting

to pass SR

Opportunity → Board Resolution → Application to CG → General Meeting

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Sec. 140(2) & (3) – Resignation

COMPANY AUDIT

Shall file

Within 30 days of resignation

Form ADT-3

To Company & ROC (Also to CAG – in case of Govt. Companies)

Indicating the reasons and other facts relating to resignation.

Sec. 140(3): Fine for non compliance

T E
Lower of Audit fees or `50,000 T U
T I
Continuing Failure- `500 per day
N S
I
Subject to maximum `5 lakhs
J C
S
Sec. 140(4) – Removal at AGM

Special notice shall be required

to pass the SR at AGM that-

 Retiring Auditor shall not be re-appointed or,
 To appoint as auditor any person other than retiring auditor

Copy of notice to be sent immediately to concerned auditor

Auditor has a right of representation

Copy of notice and representation needs to be sent to every

person to whom notice of AGM was given

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If copy of representation not sent to members

• Auditor may demand for reading the representation in meeting

COMPANY AUDIT
• Copy shall be filed with ROC

Representation need not be sent or read out at meeting, if on

application of company or other person, Tribunal pass such order

Sec. 140(5) – Directions for change of Auditor

Tribunal may, by order, direct the company to change its auditors

Either suo motu or on an application made to it by C.G.

or by any person concerned

T E
If it is satisfied that the auditor has acted in a fraudulent manner or abetted
U
or colluded in any fraud, it may direct company to change its auditors
T
T I
If the application is made by the C.G.

N S Tribunal shall within 15 days of

receipt of such application, make an order that
I
he shall not function as an auditor and
C
C.G. may appoint another auditor in his place
J
S
Such auditor shall be ineligible to be appointed as an auditor of any
company for a period of 5 years from the date of passing of the order
and the auditor shall also be liable for action u/s 447

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3 SECTION 141 – ELIGIBILITY, QUALIFICATIONS AND

COMPANY AUDIT

DISQUALIFICATIONS OF AUDITOR

Sec. 141 (1) & 141 (2) – Eligibility to be appointed as Auditor

Eligible persons-

 Only Chartered Accountant

 A Firm whereof Majority of Partners

TE
Practicing in Signing partner
including
are qualified = CA
India LLP

T U
T I
Sec. 141 (3) DisqualificationsS
IN
(a)
J C
Body Corporate other than LLP
(b)
(c)
S
Officer or Employee of the company
Partner/ Employee of Officer/ Employee of the
company
(d) person/ (i) is holding any security * or interest in the Company /
relative/ (ii) is indebted > ` 5 Lacs in the subsidiary /
partner (iii)has given a guarantee in connection with holding /
(PRP) associate, or
indebtedness of 3rd person > ` 1 Lac in the
* Refer subsidiary of same holding.
*no disqualification if relative holds any security
Note 1 (5 Companies)
in the company of face value upto ` 1 Lac.
After appointment, if relative acquires securities
above the threshold, corrective action can be taken
within 60 days
(e) Person or firm having business relationship with Company / Subsidiary
* Refer Note 2 / Holding / Associate /
Subsidiary of Such Holding
or Associate Company
(6 Companies)

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(f) A Person whose relative is a director or is in employment of

COMPANY AUDIT
the company as a Director or KMP.
(g) A person who is in full time employment elsewhere
Or, A person holding appointment as auditor or more than
20 companies other than OPC, dormant companies, Small
Companies and private companies having paid up capital
< 100 Cr.
(h) A person who has been convicted of an offence involving fraud
and a period of 10 years has not elapsed.
(i) Any person who directly or indirectly renders any service Company, holding,
referred to in Section 144. subsidiary
(3 Companies)

T E
1. Meaning of Relative: As per Section 2(77) of the Companies Act, 2013, Relative
means -

T U
 husband and wife T I
 anyone who is related to another as members of a Hindu Undivided Family

S
 Father (including step- father), Mother (including step-mother)
N
I
 Son (including step- son), Son's wife
C
 Daughter, Daughter's husband
J
S
 Brother (including step- brother)
 Sister (including step-sister)

2. Meaning of Business Relationship: “Business relationship” shall be construed as

any transaction entered into for a commercial purpose, except –
(i) commercial transactions which are in the nature of professional services
permitted to be rendered by an auditor or audit firm under the Act and the
Chartered Accountants Act, 1949 and the rules or the regulations made under
those Acts;
(ii) commercial transactions which are in the ordinary course of business of
the company at arm's length price - like sale of products or services to
the auditor, as customer, in the ordinary course of business, by companies
engaged in the business of telecommunications, airlines, hospitals, hotels and
such other similar businesses.

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Sec. 141 (4) Vacation of Office

COMPANY AUDIT

Disqualifications
After Auditor to vacate To be deemed as
incurred (Sec 141
appointment office Casual Vacancy
triggered)

4 SECTION 142 – REMUNERATION OF AUDITORS

Authority to Fix remuneration

 T E
Shall be fixed in General meeting or in such manner as may be determined therein.

T U
May be fixed by BOD in case of first auditor if appointed by BOD

T I
Elements of remuneration
N S
 I
Shall include all expenses incurred in connection with audit and any facility extended to
auditor.
J C

S
Does not include remuneration paid for any other service.

5 SECTION 143 – POWERS / RIGHTS AND DUTIES OF COMPANY

AUDITOR

RIGHTS OF AUDITOR –
Section 143(1)
DUTIES OF AUDITOR

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RIGHTS OF AUDITOR – Section 143(1)

COMPANY AUDIT
Right of Access
 at all times
 to books of Account & Vouchers
 whether kept at Registered Office or at any other place.

Right to Obtain Information

 From the officers of the company
 As considered necessary
 For performance of his duties

E
Right to receive notices and to attend general meeting as per Section 146
T
U
Right to report to members on accounts and financial statements examined
T
Right to Lien T I

N S
Auditor can exercise lien on books and documents placed at his possession by the client
I
for non payment of fees, for work done on the books and documents.

J C
 However as per Section 128 of Companies Act, 2013 books of account of a company
must be kept at the registered office. Hence, it is practically not possible for auditor to
S
exercise his right to lien.

DUTIES of AUDITOR

Inquire into Propriety Matters

Whether -
 Loans and advances are properly secured and terms are prejudicial, to interest of
members
 Book entries are prejudicial.
 Shares, debentures and other securities are sold at a price less than acquisition cost in
case of non banking and non investment company.
 Loans and advances made are shown as deposits.
 Personal expenses charged to revenue account.
 Cash has actually been received on shares allotted for cash, if not received, correct
position shown in books and balance sheet.

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Reporting on Accounts and FS - Sec 143(2)

COMPANY AUDIT

 Auditor should report to members on

♦ Accounts examined by him
♦ Every FS as required under the Act

Reporting u/s 143(3)

 Obtained all necessary information for the audit.
 Proper books of accounts have been maintained.
 Branch audit report has been received and manner of dealing with it.
 Balance Sheet and P & L Account agree with the books of accounts.
 Financial statements comply with AS.
 Comments on financial transactions having any adverse effect on functioning of
company.
 Directors disqualified u/s 164(2).
Qualifications w.r.t. maintenance of accounts. T E


T U
Adequacy and operative effectiveness of Internal Financial Controls with reference to FS
*(Refer Note 1)
T I
 Other matters as prescribed. (Rule 11)

N S
 Disclosure of impact of pending litigations on financial position.
I
 Provisions for Material Forseeable losses on long term contracts made.

J C
 Any delay in transferring amounts to IEPF.

S
1. Auditors of following companies are exempted from reporting regarding adequacy
of IFC:

Exemption from reporting on IFC adequacy

Private Company

One Person Company Small Company Having Turnover < ` 50 crore

or borrowings at any point of
FY < ` 25 crore

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Reasons for reservation - Sec 143(4)

COMPANY AUDIT
 Where any of the above matters are answered in negative, auditor should state the
reason for the same.

Duties of Auditor of Government Companies – Section 143(5)

 CAG – direct the auditor the manners in which accounts are to be audited. Auditor
report shall include:
♦ Directions issued by CAG.
♦ Action taken thereon
♦ Its impact on Accounts and FS

Supplementary Audit – Section 143(6)

 Within 60 days of days of receipt of Audit Report
♦ CAG has a right
T E
♦ To order for supplementary audit of FS

T U
♦ By such persons as authorized by him

T I
Test Audit – Section 143(7)

N S
 CAG may, if considered necessary
♦ by an order
I
♦ cause test audit
J C
♦ S
of accounts of Government companies

Section 143(8)
Audit of Branch Accounts - Discussed in detail later.

Section 143(9)
Auditor to comply with Auditing Standards

Section 143(10)
SAs to be formulated in consultation with NFRA

Section 143(11)
CARO, 2016 - Discussed in detail later.

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Reporting u/s 143(12)

COMPANY AUDIT

 Fraud involving prescribed amount committed by officers or employees

 Reported to CG in prescribed manner (Rule 13)
 Frauds below prescribed amount
 Should be reported to Audit Committee or BOD
 Details of such Frauds need to be disclosed in Board's report.

Nature of Fraud with description Approx. amount involved

Parties involves, if no remedial actions taken Remedial action taken

Rule 13
Fraud ≥ ` 1 Crore.


Reported to Audit Committee / BOD within 2 days
Seeking their reply within 45 days T E
Reply T U
T I
N S
Received
I Not Received

JC
Forward to CG Forward to CG
Report, Reply of BOD/AC, Report
Comments on Reply S Note that no reply received

Within 15 days in ADT-4

6 SECTION 144 – AUDITOR NOT TO RENDER CERTAIN SERVICES

Other Services that may be rendered

 As approved by the BOD
 or Audit Committee

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Services that cannot be rendered directly or indirectly

COMPANY AUDIT
to Company, Holding or Subsidiary
 Accounting & Book Keeping
 Internal Audit
 Design & Implementation of Financial Information System.
 Actuarial Services.
 Investment advisory.
 Investment Banking
 Outsourced Financial Services
 Management Services
 Other services as may be prescribed.

T E
7 U
SECTION 145 - SIGNING OF AUDIT REPORTS
T
T I
Shall be in accordance with Section 141(2)
 S
Person appointed as auditor shall sign the report
 IN
Any qualification, observation or comment shall be read out in the general meeting and be

J C
open for inspection by members.

S
8 SECTION 146 – ATTENDING OF GENERAL MEETINGS
 All Notices & other communications of general meetings shall be forwarded to Auditor.
 Unless exempted auditor shall attend either himself or through his authorized representative
any general meeting. The authorized representative should also be qualified to be appointed
as auditor.

 Auditor shall have right to be heard at such meeting on part of business which concerns
him as auditor.

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9 SECTION 147 – PUNISHMENT FOR CONTRAVENTION

COMPANY AUDIT

On the Company & Officer in default – 147(1)

 Violation of Section 139-146
 Company – Fine from ` 25,000 to ` 5,00,000
 Officer in default–Imprisonment upto 1 year or fine from ` 10,000 to ` 1 Lac or both

On the Auditor – 147(2)

 Violation of Section 139, 143, 144, 145.
 Fine from ` 25,000 to (` 5 Lacs or 4 times the remuneration, whichever is less).

or 8 times the remuneration, whichever is less). T E
In case of wilful default – Imprisonment upto 1 year and fine from ` 50,000 to (` 25 Lacs

If auditor convicted u/s 147(2)

T U
 He shall be liable to
T I

N S
Refund the remuneration and Pay for damages
 I
Pay for damages to company, statutory bodies or members or creditors

J C
10 S
SECTION 148 – COST AUDIT

Meaning

utilisation of
verifying the cost of
Audit material or labour or other
For manufacture or With Regard to
Process items of costs, maintained by
production
the company

It is governed by Section 148 of Companies Act, 2013 and Companies (Cost Records
and Audit Rules, 2014)

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Applicability of Cost Records and Cost Audit

COMPANY AUDIT
Section 148 of Companies Act, 2013 read with Companies (Cost Records and Audit Rules, 2014)

Maintenance of Cost Records

 CG may specify companies engaged in the production of certain goods or providing
certain services to maintain particulars relating to the utilisation of material or labour
or to other items of cost as may be prescribed in the books of account.
 Rule 3 of Companies (Cost Records and Audit Rules, 2014) prescribes the classes of
companies which are required to maintain Cost Records
 Companies covered under Table A (Regulated sectors) or Table B (Non-Regulated
sectors) as specified in this rule and,
 Having Overall turnover from all its products and services of ` 35 crore or more


during the immediately preceding FY
T E
Includes Foreign companies but excludes Micro enterprise or a Small enterprise as
defined in MSME Development Act, 2006
T U

CRA -1 T I
Cost Records shall be maintained by all units and branches of the company in Form


N S
Cost Records shall facilitate calculation of per unit cost of production or cost of
I
operations, cost of sales and margin for each of its products or activities for every FY
on monthly, quarterly, half-yearly or annual basis.

J C
S
Applicability of Cost Audit

 Rule 4 of Companies (Cost Records and Audit Rules, 2014) states the provisions
related to the applicability of cost audit depending on the turnover of the company.
 Companies covered under Regulated Sectors (Table A) - Cost Audit required if Overall
Annual Turnover during immediately preceding FY is `50 crore or more AND aggregate
turnover of the individual product(s) or service(s) for which cost records are required
to be maintained under rule 3 is ` 25 crore or more.
 Companies covered under Non-Regulated Sectors (Table B) - Cost Audit required if
Overall Annual Turnover during immediately preceding FY is `100 crore or more AND
aggregate turnover of the individual product(s) or service(s) for which cost records
are required to be maintained under rule 3 is ` 35 crore or more.
 It shall not apply to companies -
 whose revenue from exports, in foreign exchange, exceeds 75% of its total
revenue;
 which is operating from a Special Economic Zone.
 which is engaged in generation of electricity for captive consumption through
Captive Generating Plant.
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Cost Auditor
COMPANY AUDIT

Eligibility, Qualifications and Disqualifications

Shall be a Cost Accountant

Statutory Auditor appointed under Section 139

cannot be the company's cost auditor

Cost Auditor shall comply with Cost Auditing

standards

Other qualifications, disqualifications, rights, duties

and obligations as applicable to statutory company

they may apply T E

auditor shall also apply to Cost Auditor to the extent

T U
Appointment and Removal of Cost Auditor
T I
S
As per Rule 6: Cost Auditor shall be appointed by the Board-
N

I
JC
Date of Financial Year Within 180 Days
commencement

S
Written Consent and Certificate (similar to that of Statutory Auditor) shall be obtained
from cost auditor

Company shall inform cost auditor regarding the appointment and file Form CRA -2 with
the CG within 30 days of appointment of Cost Auditor

Tenure of Cost Auditor: Cost Auditor shall hold office till 180 days from closure of FY or
till he submits the Cost Audit Report
Cost Auditor may be removed before expiry of term by-
 Passing a Board Resolution
 Giving the auditor a reasonable opportunity of being heard
 CRA -2 shall be filed for appointment of another cost auditor
Any casual vacancy shall be filled by Board within 30 days of such vacancy

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Remuneration of Cost Auditor

COMPANY AUDIT
Audit Committee

Is consituted Is not required

to be constituted

Audit Committee BOD considers

recommends and approves it
the remuneration and is finally ratified
by the shareholders

T E
BOD considers and approves it

T U
and is finally ratified by the shareholders

T I
N S
Cost Audit Report I
J C
S To the BOD

Responsibility To be submitted by the Cost Auditor

To the CG

Shall be submitted by the company

Time period Within 180 days of closure of FY Within 30 days of receipt of cost
audit report from the Cost Auditor

Format Form CRA - 3 Form CRA -4 to be filed in xBRL

(Extensible Business Reporting
Language) format

Content The report shall contain the Full information and explanation
reservations, observations, qualifications on every reservation or qualification
or suggestions, if any. made by the cost auditor

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1. After considering the cost audit report and the information and explanation
furnished by the company if the CG is of the opinion, that any further
COMPANY AUDIT

information or explanation is necessary, it may call for such further information

and explanation and the company shall furnish the same within such time as
may be specified.
2. Provisions of Section 143(12) to report frauds shall mutatis mutandis apply to
the cost auditor.

11 AUDIT OF BRANCH ACCOUNTS

Meaning of Branch


Defined in Section 2(14)

T E
Branch is any establishment described as such (as a branch) by the company

T U
Branch Accounts T I
N S
I
Books of Accounts shall be prepared for all the branch offices on accrual basis and

J C
according to the double entry system of accounting (Section 128(1))

S
Proper books of accounts and other relevant papers and documents of the branch may be
kept-
 At the registered office or
 May also be kept at the branch office and periodical summarised returns sent to the
registered office.

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COMPANY AUDIT
Section 143(8) - Branch Audit
Who can be appointed as Branch Auditor?

Branch Auditor

If branch is located If branch is located

within India outside India

OR, OR,

By the By any other person By the

T E By an accountant or any
other person duly qualified
company auditor qualified for appointment
as an auditor
T U
company auditor
to act as an auditor
of the company
under this Act
T I in accordance with
the laws of that country

N S
Duties of the Branch Auditor I
J C
S
Prepare a report on the accounts Submit his report to the
of the branch examined by company’s auditor
him

Duty to report fraud as per

Section 143(12)

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Duties of Company auditor with reference to Branch Audit

COMPANY AUDIT

Duties and powers of company auditor with reference to the audit of the branch and the branch
auditor shall be as stated in Section 143 (1) to 143(4).

The Company Auditor should comply with the requirements of SA 600 – Using the Work of
another Auditor while making use of the branch auditor's work.

SA 600 – Using the work of another Auditor (Only portion relevant w.r.t. Branch Audit has
been included)

Applicability This SA applies in situations where an auditor reporting on FI

(principal auditor) uses the work of another auditor (component
auditor).
It does not apply to situations of Joint Audit.
Principal Auditor's
procedures
E
Determine how the work of the other auditor will affect the audit.
T
U
The principal auditor would generally be entitled to rely upon the

T
T I
work of the component (branch) auditor unless there are special
circumstances to make it vital for him to visit the component and/or

S
to examine the books of account and other records.

N
I
Visit a component(branch) and examine the books of account and
other records, if he thinks it necessary to do so.

J C
The principal auditor should perform procedures to obtain SAAE, that
S
the work of the other auditor is adequate for the principal auditor's
purposes, in the context of the specific assignment.
The principal auditor shall perform the following:
 Advise the other auditor of the use that is to be made of the
other auditor's work and report and make sufficient arrangements
for co-ordination
 Inform the other auditor of matters requiring special considerations,
inter component transactions and timetable for completion of audit
 Advise the other auditor of the significant accounting, auditing
and reporting requirements and obtain representation as to
compliance of them
Discuss audit procedures applied or review a written summary of other
auditor's procedures

Coordinate with the other auditor

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12 JOINT AUDIT

COMPANY AUDIT
Meaning

Pooling provide an expert

more than one
resources and service in a
auditor or firm to
expertise of limited time
period

T E
Reliance Industries has appointed D T S and Associates and S R B C and Co LLP

T U
as its joint auditors (Financial Year 2019-20).

T I
Advantages N S
I
J C
S
In case of rotation/
Sharing of
expertise
displacement of auditor,
one of the auditors may Less Workload
be retained

In case of MNCs, Better quality of

expertise of local Advantages work
firms

Sense of Improved
healthy service
competition
Mutual
consultation

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Disadvantages
COMPANY AUDIT

Hugefees
Shared volumes
among and complexity
auditors; of transactions
Higher cost for company

Wide geographical
Superiority spread of banks’ network
complex in auditors

Large range
Psychological of products
problems and
between services offered
auditors

Extensive
Problem use of technology
of coordination

Strict vigilance
Difficulty byofthe
in allocation banking regulators
work
T E
T U
Huge work
Common volumes
areasand complexity of transactions
neglected
T I
Wide geographical
Uncertainty about liability
N S
spread of banks’ network
I
J C
Large range of products and services offered
SA 299: Joint S
Audit
Extensive use of technology
Objectives
Strict vigilance by theObjectives
banking regulators
of SA 299

To lay down broad principles for To provide a uniform

the joint auditors in conducting approach to the process of
joint audit joint audit

To identify the distinct To identify individual and

areas of work and coverage joint responsibility of the joint
by each joint auditor auditors

SA 299 does not deal with the relationship between a principal auditor and another
auditor who is appointed to report on the financial statements of one or more
component like divisions, branches, subsidiary, joint venture and associates.

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Audit Planning, Risk Assessment and Allocation of work

COMPANY AUDIT
Involvement of Engagement Partner (EP)

EP and other key members of team shall be involved in planning.

Overall Audit Strategy

Joint auditors shall develop audit strategy which sets scope, timing and direction of audit and
guides in development of Audit Plan.

Audit Plan

T E
Joint Auditors shall discuss and develop a joint audit plan. In developing the plan they shall:
Identify division of specific and common work areas that defines the scope of work (in

T U
terms of identifiable units e.g., branch / division or with reference to items of assets or
liabilities or income or expenditure
T I
S
Ascertain the reporting objectives to plan the timing of the audit
N
I
Consider and communicate the significant factors that will direct the engagement team's
efforts
J C

S
Consider the results from preliminary engagement activities and knowledge from previous
engagements
Ascertain NET of resources required for performing the engagement

RMM

RMM need to be considered and assessed by each of the joint auditors whether pertaining to
the overall FS level or to the area of allocation among the other joint auditors; shall also be
communicated to all joint auditors and shall be documented.

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Audit Procedures
COMPANY AUDIT

Joint auditors shall discuss the NET of APs for common and specific audit areas and shall
communicate it with TCWG.

Engagement Letter, MRL and Work allocation document

The auditor shall:

Obtain a common engagement letter

Obtain a common management representation letter

Work allocation document shall be signed by all joint auditors and communicated with
TCWG to avoid any dispute or confusion with regard to scope of work

Responsibilities of Joint Auditors and Coordination T E

Individual Responsibility of each Joint Auditor
T U
 T I
Specific audit area(s) allocated including proper execution of APs for the
specified areas
N S
 I
Determine NET of APs for specific areas allocated

J C
Study and evaluate IC system and risk assessment of the specific work areas

S
To obtain information and explanations from the management in respect of
such divisions/zones/units and to evaluate the information and explanations so
obtained
 To review the audit reports/returns of the divisions/branches allocated to said
joint auditor and to ensure that they are properly incorporated into the accounts
of the entity

Joint and Several responsibility of all joint auditors

 Audit work not divided and carried by all

 Decisions taken by all regarding NET of APs in respect of common work areas
matters brought to the notice of the joint auditors by any one of them and
on which there is an agreement among the joint auditors
 Examining that entity's FS comply with statutory requirements
 Compliance of presentation and disclosure requirements of FRF
 Ensuring that Audit Report complies with statutory requirements and SAs

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In the course of the audit, if a joint auditor comes across matters which are relevant

COMPANY AUDIT
to the areas of responsibility of other joint auditors and which deserve their attention,
or require disclosure or discussion with, or application of judgment by other joint
auditors, the said joint auditor shall communicate the same to all the other joint
auditors in writing prior to the completion of the audit.

Audit Conclusion and Reporting

Joint auditors agree on a Disagreement with regard to

common opinion the opinion or any matters

Issue common Audit Report

T E
Not bound by the views of
majority joint auditors

T U
T I Express opinion in a

N S separate audit report

I
J C Make reference to the audit
S report issued by other joint
auditors in Other Matters
Paragraph (OMP)

Before finalizing their audit report, the joint auditors shall discuss and communicate
with each other their respective conclusions that would form the content of the audit
report.

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Assumptions w.r.t work of other joint auditors

COMPANY AUDIT

Each joint auditor is entitled to assume that the other joint auditors have -

Carried out their part of the audit

work and it is not necessary to review
the work of others

Brought to their notice any

Performed the work in accordance departure from applicable FRF or
with the SAs significant observations that are
relevant to their responsibilities

In case of Branch / Division - FS comply

with legal and regulatory requirements

T
and give a true and fair view E
T U
Communication with TCWG
T I
S
The auditor shall communicate the following with TCWG:
N
I
J C
Work allocation and common work areas

S
In case of issuing a modified opinion - circumstances
causing the issuance of such opinion and the proposed
wording of the opinion

If EMP or OMP is expected to be included in the report -

communicate the same and the proposed wording

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13 REPORTING UNDER COMPANIES (AUDITOR’S REPORT

COMPANY AUDIT
ORDER), 2016 [CARO, 2016]

Applicability
As per Paragraph 2 of the Order, the additional reporting requirements under CARO 2016 shall:

 Apply to
Every Company

Including foreign company defined under Section 2(42)

 Not Apply to T E
T U
a banking company as defined Section 5(c) of the Banking Regulation Act, 1949

T I
an insurance company as defined under the Insurance Act, 1938

N S
a company licensed to operate under section 8 of the Companies Act
I
a One Person Company as defined under Section 2(62) of the Companies Act

J C
a small company as defined under section 2(85) of the Companies Act
S
a private limited company -
 not being a subsidiary or holding company of a public company and,
 having a paid up capital and reserves and surplus not more than ` 1 crore
as on the balance sheet date and,
 which does not have total borrowings exceeding ` 1 crore from any bank
or financial institution at any point of time during the financial year and,
 which does not have a total revenue as disclosed in Scheduled III to the
Companies Act, 2013 (including revenue from discontinuing operations)
exceeding ` 10 crore during the financial year as per the FS

The Order shall not be applicable to the auditor's report on Consolidated FS (CFS).

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Matters to be reported
COMPANY AUDIT

Paragraph 3 of the Order requires the auditor to include a statement in the auditor's report on
the following matters:

Clause i - Fixed Assets

Records:
Whether company is maintaining proper records showing full particulars,
 including quantitative details and

 situation of fixed assets

Physical Verification:

reasonable intervals T E
 Whether these fixed assets have been physically verified by the management at

T U
 whether any material discrepancies were noticed on such verification and if so,

 whether the same have been properly dealt

T I
Title Deeds:
N S
I
 Whether the title deeds of immovable properties are held in the name of the company.

C
If not, provide the details thereof
J
Clause ii - Inventories
S
Physical Verification:

 whether physical verification of inventory has been conducted at reasonable intervals by

the management and

 whether any material discrepancies were noticed and if so, whether they have been

properly dealt with in the books of account;

Clause iii - Loans and Advances granted

Secured or unsecured loans:

 whether the company has granted any loans, secured or unsecured to companies, firms,
Limited Liability Partnerships or other parties covered in the register maintained under
section 189 of the Companies Act, 2013. If so,

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Terms and Conditions: whether the terms and conditions of the grant of such loans are not

COMPANY AUDIT
prejudicial to the company's interest
Repayment schedule:
 whether the schedule of repayment of principal and payment of interest has been

stipulated and
 whether the repayments or receipts are regular;

Overdue amount:
 if the amount is overdue, state the total amount overdue for more than ninety days,

 whether reasonable steps have been taken by the company for recovery of the principal

and interest;

Clause iv - Compliance with Section 185 and 186

T E
T U
in respect of loans, investments, guarantees, and security whether provisions of section 185 and

T I
186 of the Companies Act, 2013 have been complied with. If not, provide the details thereof.

N S
Clause v - Deposits
I
J C
Sections 73 to 76: In case the company has accepted deposits, whether the directives issued

S
by the RBI and the provisions of sections 73 to 76 or any other relevant provisions of the
Companies Act, 2013 and the rules where applicable, have been complied with? If not, the
nature of such contraventions be stated
Order by NCLT, RBI or any other court: If an order has been passed by NCLT or RBI or any
court or any other tribunal, whether the same has been complied with or not?

Clause vi - Cost Records

Maintenance of Cost Records: Where CG has specified maintenance of cost records under
section 148(1) of the Companies Act, 2013 whether such accounts and records have been so
made and maintained.

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Clause vii - Statutory Dues

COMPANY AUDIT

Undisputed Dues:
 whether the company is regular in depositing undisputed statutory dues including provident

fund, employees' state insurance, income-tax, sales-tax, service tax, duty of customs,
duty of excise, value added tax, cess and any other statutory dues with the appropriate
authorities and if not, indicate-
 the extent of the arrears of outstanding statutory dues as at the last day of the FY

concerned for a period of more than six months from the date they became payable
Disputed Dues:
 where dues of income tax or sales tax or service tax or duty of customs or duty of excise

 the amounts involved and T E

or value added tax have not been deposited on account of any dispute, then mention-

 the forum where dispute is pending.

T U
T I
 A mere representation to the concerned Department shall not constitute a dispute.

N S
I
Clause viii - Default in repayment of borrowings

C
Repayment of borrowings: whether the company has defaulted in repayment of loans or
J
S
borrowing to a financial institution, bank, Government or dues to debenture holders? If yes,
report-
 the period and

 the amount of default

 In case of defaults to banks, financial institutions, and Government, lender wise details
to be provided.

Clause ix - End use of Money raised

Utilisation of moneys raised: whether moneys raised by way of initial public offer or further
public offer (including debt instruments) and term loans were applied for the purposes for
which those are raised. If not, report
 the details and

 delays or default and subsequent rectification, if any, as may be applicable

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Clause x - Fraud by / on the company

COMPANY AUDIT
whether any fraud by the company or any fraud on the Company by its officers or employees
has been noticed or reported during the year; If yes, indicate -
 the nature and

 the amount involved

Clause xi - Managerial Remuneration within limits

As per Section 197 read with Schedule V: whether managerial remuneration has been paid
or provided in accordance with the requisite approvals mandated by the provisions of section
197 read with Schedule V to the Companies Act, 2013? If not, state -


 the amount involved and

T E
 steps taken by the company for securing refund of the same

T U
Clause xii - Nidhi Company
T I
S
Net Owned Funds to Deposits ratio: whether the Nidhi Company has complied with the Net
N
I
Owned Funds to Deposits in the ratio of 1:20 to meet out the liability and

J C
Unencumbered Term Deposits: whether the Nidhi Company is maintaining ten per cent

S
unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability

Clause xiii - Related Party Transactions

Section 177 and 188: whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act, 2013 where applicable and the details have been
disclosed in the FS etc., as required by the applicable AS.

Clause xiv - Preferential Allotment or Private Placement

Private Placement: whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the year under review
and if so-
Compliance with Section 42: whether the requirement of section 42 of the Companies Act,
2013 have been complied with and

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Use of funds: the amount raised have been used for the purposes for which the funds were
COMPANY AUDIT

raised. If not,
 provide the details in respect of the amount involved and

 nature of non- compliance

Clause xv - Non cash transactions with Directors etc.

whether the company has entered into any non-cash transactions with directors or persons
connected with him and if so, whether the provisions of section 192 of Companies Act, 2013
have been complied with.

Clause xvi - NBFC Registartion

T E
whether the company is required to be registered under section 45 -IA of the Reserve Bank

T U
of India Act, 1934 and if so, whether the registration has been obtained.

T I
S
Reasons to be Stated for Unfavourable or Qualified Answers
N
I
As per Paragraph 4 of the Order, the auditor shall -

J C
Where answer to any of the questions is Where auditor is unable to express any

S
unfavourable or qualified opinion on any specified matter

State the basis for such unfavourable or Indicate such fact together with the reasons
qualified answer, as the case may be why it is not possible for him to give his
opinion on the same.

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QUESTIONS AND ANSWERS

COMPANY AUDIT
1 SECTION 139 – APPOINTMENT OF AUDITORS

Q1 Examine the following:

(a) Section 139(1) of the Companies Act, 2013 provides that every company shall, at

the first annual general meeting appoint an auditor who shall hold office till the
conclusion of its sixth annual general meeting.
(b) Filling of a casual vacancy of auditor in respect of a company audit.

TE
RTP May 18

(a) Section 139(1) of the Companies Act, 2013 provides that every company shall, at the

T U
first annual general meeting appoint an individual or a firm as an auditor who shall

T I
hold office from the conclusion of that meeting till the conclusion of its sixth annual

S
general meeting and thereafter till the conclusion of every sixth meeting.

IN
The following points need to be noted in this regard -

J C
i. Before such appointment is made, the written consent of the auditor to such

S
appointment, and a certificate from him or it that the appointment, if made, shall
be in accordance with the conditions as may be prescribed, shall be obtained from
the auditor.
ii. The certificate shall also indicate whether the auditor satisfies the criteria provided
in section 141.
iii. The company shall inform the auditor concerned of his or its appointment, and
also file a notice in Form ADT-1of such appointment with the Registrar within 15
days of the meeting in which the auditor is appointed.
(b) Filling of a Casual Vacancy
As per Section 139(8), any casual vacancy in the office of an auditor shall -
i. In the case of a Non- Government company: Casual vacancy to be filled by the
Board of Directors within 30 days.
If such casual vacancy is as a result of the resignation of an auditor, such ap-

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pointment shall also be approved by the company at a general meeting convened
within three months of the recommendation of the Board and he shall hold the
COMPANY AUDIT

office till the conclusion of the next annual general meeting.

ii. In the a Government company: : Casual vacancy to be filled by the Comptroller
and Auditor-General of India within 30 days. It may be noted that in case the
Comptroller and Auditor-General of India does not fill the vacancy within the said
period the Board of Directors shall fill the vacancy within next 30 days.
iii. In case of Casual Vacancy by Resignation: As per section 140(2) the auditor who
has resigned from the company shall file within a period of 30 days from the
date of resignation, a statement in the prescribed Form ADT– 3 (as per Rule
8 of CAAR) with the company and the Registrar, and in case of the companies

T E
referred to in section 139(5) i.e. Government company, the auditor shall also file
such statement with the Comptroller and Auditor-General of India, indicating the

T U
reasons and other facts as may be relevant with regard to his resignation. In case

T I
of failure the auditor shall be punishable with fine which shall not be less than

S
fifty thousand rupees or the remuneration of auditor, whichever is less and in case
N
I
of continuing failure, fine of `500 per day subject to a maximum of `5 lakhs.

J C
Q2 S
Explain the manner and procedure of selection and appointment of auditors as per

Rule 3 of Companies (Audit and Auditors) Rules, 2014. RTP May 19

Rule 3 of Companies(Audit and Auditor's) Rules, 2014 prescribes the manner and procedure
of selection and appointment of auditors as follows-

1) The Audit Committee (in case of a company that is required to constitute an Audit
Committee under section 177) or the Board of Directors (in case Audit Committee is not
required), shall take into consideration the qualifications and experience of the individual
or the firm proposed to be considered for appointment as auditor and whether such
qualifications and experience are commensurate with the size and requirements of the
company. It may be noted that while considering the appointment, the Audit Committee
or the Board, as the case may be, shall have regard to any order or pending proceeding
relating to professional matters of conduct against the proposed auditor before the
Institute of Chartered Accountants of India or any competent authority or any Court.

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2) The Audit Committee or the Board, as the case may be, may call for such other in-

COMPANY AUDIT
formation from the proposed auditor as it may deem fit.
3) Subject to the provisions of sub-rule (1), where a company is required to constitute the
Audit Committee, the committee shall recommend the name of an individual or a firm
as auditor to the Board for consideration and in other cases,the Board shall consider
and recommend an individual or a firm as auditor to the members in the annual general
meeting for appointment.
4) If the Board agrees with the recommendation of the Audit Committee, it shall further
recommend the appointment of an individual or a firm as auditor to the members in
the annual general meeting.

T E
5) If the Board disagrees with the recommendation of the Audit Committee, it shall refer
back the recommendation to the committee for reconsideration citing reasons for such
disagreement.
T U
T I
6) If the Audit Committee, after considering the reasons given by the Board, decides

S
not to reconsider its original recommendation, the Board shall record reasons for its
N
I
disagreement with the committee and send its own recommendation for consideration

J C
of the members in the annual general meeting; and if the Board agrees with the rec-

S
ommendations of the Audit Committee, it shall place the matter for consideration by
members in the annual general meeting.
7) The auditor appointed in the annual general meeting shall hold office from the conclusion
of that meeting till the conclusion of the sixth annual general meeting,with the
meeting wherein such appointment has been made being counted as the first meeting.

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Q3 Rano Pvt. Ltd. is a private limited Company, having paid up share capital of ` 45 crore
COMPANY AUDIT

but having public borrowing from nationalized banks and financial institutions of ` 40

crore. Advise the company on the applicability of rotation of auditors. RTP May 18
Facts of the case: Rano Pvt. Ltd. is a private limited Company, having paid up share
capital of ` 45 crore but having public borrowing from nationalized banks and financial
institutions of ` 40 crore. Applicability of the concept of rotation of auditors needs to be
checked.
Legal Provisions: As per rules prescribed in Companies (Audit and Auditors) Rules, 2014,
for applicability of section 139(2) the class of companies shall mean the following classes
of companies excluding one person companies and small companies-

T E
(i) all unlisted public companies having paid up share capital of rupees ten crore or more;
(ii) all private limited companies having paid up share capital of rupees fifty crore or more;

T U
(iii) all companies having paid up share capital of below threshold limit mentioned above,

T I
but having public borrowings from financial institutions, banks or public deposits of
rupees fifty crores or more.
N S
I
Conclusion: Since Rano Pvt. Ltd is a private company having paid up share capital of ` 45

J C
crores (Less than ` 50 crores) and public borrowings or public deposits of ` 40 crores (less

S
than ` 50 crores), it can be concluded that rotational provisions would not be applicable.

Q 4 The first auditor of Bhartiya Petrol Ltd., a Government company, was appointed by
the Board of Directors. Analyse and Explain. RTP May 19
Facts of the case: The first auditor of Bhartiya Petrol Ltd., a Government company, was
appointed by the Board of Directors. We need to analyse whether the procedure followed
is correct as per the provisions of Companies Act, 2013.
Legal Provisions: In the case of a Government Company, the appointment of first auditor
is governed by the provisions of Section 139(7) of the Companies Act, 2013which states
that in the case of a Government company, the first auditor shall be appointed by the
Comptroller and Auditor-General of India within 60 days from the date of registration of
the company. Hence, in the case of Bhartiya Petrol Ltd., being a government company,the
first auditor shall be appointed by the Comptroller and Auditor General of India.

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Conclusion: Thus, the appointment of first auditor made by the Board of Directors of

COMPANY AUDIT
Bhartiya Petrol Ltd., is null and void.

Q5 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. May 18
Facts of the case: In the instant case, R resigned after three months of his appointment
as statutory auditor as he wanted to pursue his career in banking sector. Therefore, the

T E
board of director has appointed Mr. L as the statutory auditor within 30 days.
Legal Provisions: As per Section 139(8), any casual vacancy in the office of an auditor

T U
shall in the case of a company other than a Government company (whose accounts are

T I
subject to audit by an auditor appointed by the Comptroller and Auditor-General of India),
S
be filled by the Board of Directors within 30 days. If such casual vacancy is as a result
N
I
of the resignation of an auditor, such appointment shall also be approved by the company

J C
at a general meeting convened within three months of the recommendation of the Board

S
and he shall hold the office till the conclusion of the next annual general meeting. Further,
as per section 140(2) the auditor who has resigned from the company shall file within a
period of 30 days from the date of resignation, Form ADT-3 with the company and the
Registrar.
Conclusion: In light of the above provisions, R resigned after three months of his
appointment as statutory auditor as he wanted to pursue his career in banking sector.
Therefore, the board of director's appointment of Mr. L as the statutory auditor within 30
days is in order subject to the condition that such appointment shall also be approved by
the company at a general meeting convened within three months of the recommendation
of the Board. Further, it is also the duty of the auditor to file Form ADT -3, within a period
of 30 days from the date of resignation with the company and the Registrar in compliance
with section 140(2) of the Companies Act, 2013.

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2 SECTION 140 – REMOVAL, RESIGNATION OF AUDITOR AND

COMPANY AUDIT

GIVING OF SPECIAL NOTICE

Q6 Why Central Government permission is required, when the auditors are to be removed
before expiry of their term, but the same is not needed when the auditors are
changed after expiry of their term? RTP Nov 18

Removal of auditor before expiry of his term i.e. before he has submitted his report is a
serious matter and may adversely affect his independence.
Further, in case of conflict of interest the shareholders may remove the auditors in their
own interest.

T E
Therefore, law has provided this safeguard so that central government may know the rea-
sons for such an action and if not satisfied, may not accord approval. On the other hand

T U
if auditor has completed his term i.e. has submitted his report and thereafter he is not

T I
re-appointed then the matter is not serious enough for central government to call for its
intervention.
N S
I
In view of the above, the permission of the Central Government is required when auditors

C
are removed before expiry of their term and the same is not needed when they are not
J
S
re-appointed after expiry of their term.

Q7 CA. Donald was appointed as the auditor of PS Ltd. at the remuneration of ` 30,000.

However, after 4 months of continuing his services, he could not continue to hold his
office of the auditor as his wife got a government job at a distant place and he needs
to shift along with her to the new place. Thus, he resigned from the company and
did not perform his responsibilities relating to filing of statement to the company and
the registrar indicating the reasons and other facts as may be relevant with regard
to his resignation.
How much fine may he be punishable with under section 140(3) for non -compliance
of section 140(2) of the Companies Act, 2013? RTP May 19
Facts of the case: CA. Donald resigned after 4 months of continuing his services as an
auditor of PS Ltd as his wife got a government job at a distant place and he needs to shift

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along with her to the new place. His remuneration was ` 30,000. He did not perform his

COMPANY AUDIT
responsibilities relating to filing of statement to the company and the registrar indicating
the reasons and other facts as may be relevant with regard to his resignation. We need to
state the fine applicable in this circumstance.

Legal Provisions: For non-compliance of Section 140(2) of the Companies Act, 2013, the
auditor shall be punishable with fine, which shall not be less than fifty thousand rupees
or the remuneration of the auditor, whichever is less and in case of continuing failure, fine
of `500 per day subject to a maximum of `5 lakhs.
Conclusion: Thus, the fine under section 140(3) of the Companies Act, 2013 shall not be
less than ` 30,000 but which may extend to ` 5,00,000.

Q8 T E
Under what circumstances the retiring Auditor cannot be reappointed?

T U
Circumstances where Retiring Auditor Cannot be Reappointed: In the following

T I
circumstances, the retiring auditor cannot be reappointed-

S
A specific resolution has not been passed to reappoint the retiring auditor.
N
i. I
The auditor proposed to be reappointed does not possess the qualification prescribed
C
under section 141 of the Companies Act, 2013.
J
ii.
S
The proposed auditor suffers from the disqualifications under section 141(3), 141(4)
and 144 of the Companies Act, 2013.
iii. He has given to the company notice in writing of his unwillingness to be reappointed.
iv. A resolution has been passed in AGM appointing somebody else or providing expressly
that the retiring auditor shall not be reappointed.
v. A written certificate has not been obtained from the proposed auditor to the effect
that the appointment or reappointment, if made, will be in accordance within the
limits specified under section 141(3)(g) of the Companies Act, 2013.

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3 SECTION 141 – ELIGIBILITY, QUALIFICATIONS AND

COMPANY AUDIT

DISQUALIFICATIONS OF AUDITOR
Q9 M/s RM & Co. is an audit firm having partners CA. R and CA. M. The firm has been
offered the appointment as an auditor of Enn Ltd. for the Financial Year 2019-20.
Mr. Bee, the relative of CA. R, is holding 5,000 shares (face value of ` 10 each) in
Enn Ltd. having market value of ` 1,50,000. Whether M/s RM & Co. is disqualified to
be appointed as auditors of Enn Ltd.? Advise. RTP May 18
Facts of the Case: In the instant case, M/s RM & Co. is an audit firm having partners
CA. R, CA. M and CA. C. Mr. Bee is a relative of CA R and he is holding shares in Enn
Ltd. of face value of ` 50,000 (5,000 shares x rupees 10 per share)

T E
Legal provisions: As per section 141(3)(d)(i), a person shall not be eligible for appointment
as an auditor of a company, who, or his relative or partner is holding any security of or

T U
interest in the company or its subsidiary, or of its holding or associate company or a

T I
subsidiary of such holding company. However, as per proviso to this section, the relative of
S
the person may hold the securities or interest in the company of face value not exceeding
N
of ` 1,00,000. I
J C
Conclusion: Therefore, M/s RM& Co. is not disqualified for appointment as an auditor of

S
Enn Ltd. as the relative of CA. R (i.e. partner of M/s RM& Co.) is holding the securities
in Enn Ltd. which is not exceeding the limit mentioned in proviso to section 141(3)(d)(i)
of the Companies Act, 2013. Market value of ` 1,50,000 would not be relevant.

Q 10 M/s. ABC & Co. is an Audit firm, having partners CA. A, CA. B and CA. C. The firm has
been offered the appointment as an Auditor of XYZ Ltd. for the Financial Year 2017-
18. Mr. D, the relative of CA. A, is holding 25,000 shares (face value of ` 10 each) in
XYZ Ltd. having market value of ` 90,000. Are M/s. ABC & Co. qualified to be appointed
as Auditors of XYZ Ltd.? May 18
Facts of the Case: In the instant case, M/s ABC & Co. is an audit firm having partners
CA. A, CA. B and CA. C. Mr. D is a relative of CA. A and he is holding shares in XYZ Ltd.
of face value of ` 2,50,000 (25,000 shares x rupees 10 per share)

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Legal provisions: As per section 141(3)(d)(i), a person shall not be eligible for appointment

COMPANY AUDIT
as an auditor of a company, who, or his relative or partner is holding any security of or
interest in the company or its subsidiary, or of its holding or associate company or a
subsidiary of such holding company. However, as per proviso to this section, the relative of
the person may hold the securities or interest in the company of face value not exceeding
of ` 1,00,000.
Conclusion: Therefore, M/s ABC & Co. is disqualified for appointment as an auditor of XYZ
Ltd. as the relative of CA. A (i.e. partner of M/s ABC & Co.) is holding the securities in
XYZ Ltd. which is exceeding the limit mentioned in proviso to section 141(3)(d)(i) of the
Companies Act, 2013. Market value of ` 90,000 would not be relevant.

Q 11 T E
The auditor of Wee Ltd. purchased goods worth ` 500,200 on credit from a company

T U
being audited by him. The company allowed him one month's credit, which is normally
allowed to all known customers. Comment.
T I
S
Facts of the case: The auditor of Wee Ltd. purchased goods worth ` 500, 200 on credit
N
I
from a company being audited by him. The company allowed him one month's credit,

J C
which is normally allowed to all known customers.

S
Legal Provisions and Explanation: Section 141(3)(d)(ii) of the Companies Act, 2013
specifies that a person shall be disqualified to act as an auditor if he is indebted to the
company for an amount exceeding five lakh rupees. It will not make any difference if the
company allows him the same period of credit as it allows to other customers on the
normal terms and conditions of the business. The auditor cannot argue that he is enjoying
only the normal credit period allowed to other customers.
Conclusion: Therefore, the auditor purchases goods or services from a company audited by
him on credit, he is definitely indebted to the company and if the amount outstanding
exceeds rupees five lakh, he is disqualified for appointment as an auditor of the company.
In fact, in such a case he has become indebted to the company and consequently he has
deemed to have vacated his office.

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Q 12 Under sub-section (3) of section 141 of the Companies Act, 2013 along with Rule 10
COMPANY AUDIT

of the Companies (Audit and Auditors) Rules, 2014, state the persons who shall not
be eligible for appointment as an auditor of a company. RTP May 19

Under Section 141(3) along with Rule 10 of the Companies (Audit and Auditors) Rules,
2014 (hereinafter referred as CAAR), the following persons shall not be eligible for ap-
pointment as an auditor of a company, namely-
(a) a body corporate other than a limited liability partnership registered under the Limited
Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of
the company;
(d) a person who, or his relative or partner– T E
i.
T U
is holding any security of or interest in the company or its subsidiary, or of its

T I
holding or associate company or a subsidiary of such holding company.
S
However, the relative may hold security or interest in the company of face value
N
I
not exceeding ` 1,00,000 in the company.

J C
In the event of the relative acquiring any security or interest by a relative, above

S
the threshold prescribed, the corrective action to maintain the limits as specified
above shall be taken by the auditor within 60 days of such acquisition or interest.
ii. is indebted to the company, or its subsidiary, or its holding or associate company
or a subsidiary of such holding company, in excess of ` 5,00,000; or
iii. has given a guarantee or provided any security in connection with the indebted-
ness of any third person to the Company or its Subsidiary, or its Holding or Asso-
ciate Company or a Subsidiary of such Holding Company, in excess of ` 1,00,000.
(e) a person or a firm who, whether directly or indirectly has business relationship with
the Company, or its Subsidiary, or its Holding or Associate Company or Subsidiary of
such holding company or associate company, of such nature as may be prescribed;
(f) a person whose relative is a Director or is in the employment of the Company as a
director or key Managerial Personnel.

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(g) a person who is in full time employment elsewhere or a person or a partner of a firm

COMPANY AUDIT
holding appointment as its auditor, if such person or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies other than one person companies, dormant companies, small companies
and private companies having paid-up share capital less than ` 100 crore.
(h) a person who has been convicted by a Court of an offence involving fraud and a period
of ten years has not elapsed from the date of such conviction.
(i) any person whose subsidiary or associate company or any other form of entity,is en-
gaged as on the date of appointment in consulting and specialized services as provided
in section 144.

Q 13 Mr. T E
A, a chartered accountant, has been appointed as an auditor of Laxman Ltd.

T U
in the Annual General Meeting of the company held in September, 2016, which

T I
assignment he accepted. Subsequently in January, 2017 he joined Mr. B, another

S
chartered accountant, who is the Manager Finance of Laxman Ltd., as partner.
N
Analyse and explain. I RTP May 19

J C
Facts of the case: Mr. A, a chartered accountant, has been appointed as an auditor of

S
Laxman Ltd. in the Annual General Meeting of the company held in September, 2016.
Subsequently in January, 2017 he joined Mr. B, another chartered accountant, who is the
Manager Finance of Laxman Ltd., as partner. We need to check whether any disqualifica-
tion is attracted as per the provisions of Companies Act, 2013.
Legal Provisions: Section 141(3)(c) of the Companies Act, 2013 prescribes that any
person who is a partner or in employment of an officer or employee of the company will
be disqualified to act as an auditor of a company. Section 141(4) provides that an auditor
who becomes subject, after his appointment, to any of the disqualifications specified in
Section 141(3), he shall be deemed to have vacated his office as an auditor.
Conclusion: In the present case, Mr. A, an auditor of Laxman Ltd., joined as partner with
Mr. B, who is Manager Finance of Laxman Limited. The given situation has attracted
sub-section (3)(c) of Section 141 and, therefore, he shall be deemed to have vacated
office of the auditor of Laxman Limited in accordance with sub -section (4) of section 141.

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Q 14 PQR & Co. is an Audit Firm having partners Mr. P, Mr. Q and Mr. R, Chartered
COMPANY AUDIT

Accountants. Mr. P, Mr. Q and Mr. R are holding appointment as an Auditor in 4, 6

and 10 Companies respectively.
(i) Provide the maximum number of Audits remaining in the name of PQR & Co.
(ii) Provide the maximum number of Audits remaining in the name of individual
partner i.e. Mr. P, Mr. Q and Mr. R.
(iii) Can PQR & Co. accept the appointment as an auditor in 60 private companies
having paid-up share capital less than ` 100 crore, 2 small companies and
1dormant company?
(iv) Would your answer be different, if out of those 60 private companies, 45 companies

T E
are having paid-up share capital of ` 110 crore each?
Facts of the Case: In the instant case, Mr. P is holding appointment in 4 companies,

T U
whereas Mr. Q is having appointment in 6 Companies and Mr. R is having appointment in

T I
10 Companies. In aggregate all three partners are having 20 audits.
S
Legal Provisions and Explanations: Section 141(3)(g) of the Companies Act, 2013 states
N
I
that the following persons shall not be eligible for appointment as an auditor of a company

J C
i.e. a person who is in full time employment elsewhere; or a person, or a partner of a

S
firm holding appointment as its auditor, if such person, or partner is at the date of such
appointment, or reappointment holding appointment as auditor of more than twenty
companies other than one person companies, dormant companies,small companies and
private companies having paid-up share capital less than '100crore.
As per section 141(3)(g), this limit of 20 company audits is per person. In the case of
an audit firm having 3 partners, the overall ceiling will be 3 × 20 = 60 company audits.
Sometimes, a chartered accountant is a partner in a number of auditing firms. In such a
case, all the firm in which he is partner or proprietor will be together entitled to 20 com-
pany audits on his account.
Conclusion:
(i) Therefore, PQR & Co. can hold appointment as an auditor of 40 more companies:
Total Number of Audits available to the Firm Number = 20*3 = 60

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Audits already taken by all the partners in their individual capacity = 4+6+10 = 20

COMPANY AUDIT
Remaining number of Audits available to the Firm = 40
(ii) With reference to above provisions an auditor can hold more appointment as auditor
= ceiling limit as per section 141(3)(g)- already holding appointments as an auditor.
Hence
(1) Mr. P can hold 20 - 4 = 16 more audits.
(2) Mr. Q can hold 20-6 = 14 more audits and
(3) Mr. R can hold 20-10 = 10 more audits.
In view of above discussed provisions, ABC & Co. can hold appointment as an
auditor in all the 60 private companies having paid-up share capital less than

T E
` 100 crore, 2 small companies and 1 dormant company as these are excluded
from the ceiling limit of company audits given under section 141(3)(g) of the
Companies Act, 2013.
T U
T I
(iv) As per fact of the case, PQR & Co. is already having 20 company audits and they
S
can also accept 40 more company audits. In addition, they can also conduct the audit
N
I
of one person companies, small companies, dormant companies and private companies

J C
having paid up share capital less than ` 100 crores. In the given case, out of the 60

S
private companies, PQR & Co. is offered 45 companies having paid-up share capital
of ` 110 crore each. Therefore, PQR & Co. can also accept the appointment as an
auditor for 2 small companies, 1 dormant company, 15 private companies having paid-
up share capital less than ` 100 crore and 40 private companies having paid-up share
capital of ` 110 crore each in addition to above 20 company audits already holding.

4 SECTION 142 – REMUNERATION OF AUDITORS

Q 15 Explain the provisions with respect to Remuneration of auditors.
As per Section 142, The remuneration of the auditor of a company shall be fixed in its
general meeting or in such manner as may be determined therein. However, board may fix
remuneration of the first auditor appointed by it.
Further, the remuneration, in addition to the fee payable to an auditor, include the
expenses, if any, incurred by the auditor in connection with the audit of the company

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and any facility extended to him but does not include any remuneration paid to him for
COMPANY AUDIT

any other service rendered by him at the request of the company. Therefore, it has been
clarified that the remuneration to Auditor shall also include any facility provided to him.

5 SECTION 143 – POWERS / RIGHTS AND DUTIES OF COMPANY

AUDITOR
Q 16 Explain the duties of Auditor to inquire under Section 143(1) of the Companies Act,
2013. RTP Nov 18

As per Section 143(1), it is the duty of auditor to inquire into the following matters-
(a) whether loans and advances made by the company on the basis of security have been

to the interests of the company or its members; T E

properly secured and whether the terms on which they have been made are prejudicial

T U
(b) whether transactions of the company which are represented merely by book entries

T I
are prejudicial to the interests of the company;

S
(c) where the company not being an investment company or a banking company, whether
N
I
so much of the assets of the company as consist of shares, debentures and other

J C
securities have been sold at a price less than that at which they were purchased by
the company; S
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any shares have
been allotted for cash, whether cash has actually been received in respect of such

allotment, and if no cash has actually been so received, whether the position as stated
in the account books and the balance sheet is correct, regular and not misleading.

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Q 17 Explain Auditor's right to-

COMPANY AUDIT
(a) Report to the members of the company on the accounts examined by him
(b) Obtain information and explanation from officers RTP Nov 18 and RTP Nov 19
(a) The auditor shall make a report to the members of the company on the accounts
examined by him and on every financial statements which are required by or under
this Act to be laid before the company in general meeting and the report shall after
taking into account the provisions of this Act, the accounting and auditing standards
and matters which are required to be included in the audit report under the provisions
of this Act or any rules made there under or under any order made under this section
and to the best of his information and knowledge, the said accounts, financial

T E
statements give a true and fair view of the state of the company's affairs as at the
end of its financial year and profit or loss and cash flow for the year and such other
matters as may be prescribed.
T U
T I
(b) Right to obtain information and explanation from officers - This right of the auditor
S
to obtain from the officers of the company such information and explanations as
N
I
he may think necessary for the performance of his duties as auditor is a wide and

J C
important power. The auditor may obtain such information which may not be known

S
from an examination of the books. It is for the auditor to decide the matters in
respect of which information and explanations are required by him. When the auditor
is not provided the information required by him or is denied access to books, etc.,
his only remedy would be to report to the members that he could not obtain all
the information and explanations he had required or considered necessary for the
performance of his duties as auditors.

Q 18 Mr. A is appointed as statutory auditor of a company for the Financial Year ended 31st
March, 2018. During the course of audit, it was found that few doubtful transactions
had been committed by finance manager who retired in March, 2018. The fraud was
going on since last 2-3 years and the total amount misappropriated exceeding ` 100
lakhs. As a statutory auditor, what would be reporting responsibilities of Mr. A?
May 18

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Facts of the case: During the course of audit, Mr. A it found that few doubtful transactions
COMPANY AUDIT

had been committed by finance manager who retired in March, 2018. The fraud was going
on since last 2-3 years and the total amount misappropriated exceeding ` 100 lakhs.
Legal Provisions: As per section 143(12) of the Companies Act, 2013 read with Rule 13
of the Companies (Audit and Auditors) Rules, 2014, if an auditor of a company in the
course of the performance of his duties as auditor, has reason to believe that an offence
of fraud, which involves or is expected to involve individually an amount of ` 1 crore or
above, is being or has been committed in the company by its officers or employees, the
auditor shall report the matter to the Central Government within such time and in such
manner as prescribed.

T E
The manner of reporting the matter to the Central Government is as follows:
i. the auditor shall report the matter to the Board or the Audit Committee, as the case

T U
may be, immediately but not later than 2 days of his knowledge of the fraud, seeking

T I
their reply or observations within 45 days;
S
ii. on receipt of such reply or observations, the auditor shall forward his report and the
N
I
reply or observations of the Board or the Audit Committee along with his comments

J C
(on such reply or observations of the Board or the Audit Committee) to the Central

S
Government within 15 days from the date of receipt of such reply or observations;
iii. in case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of 45 days, he shall forward his report to the
Central Government along with a note containing the details of his report that was
earlier forwarded to the Board or the Audit Committee for which he has not received
any reply or observations;
iv. the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed
cover by Registered Post with Acknowledgement Due or by Speed Post followed by
an e-mail in confirmation of the same;
v. the report shall be on the letter-head of the auditor containing postal address,
e-mail address and contact telephone number or mobile number and be signed by
the auditor with his seal and shall indicate his Membership Number; and
vi. the report shall be in the form of a statement as specified in Form ADT-4.

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The auditor is also required to report under clause (x) of paragraph 3 of Companies

COMPANY AUDIT
(Auditor's Report) Order, 2016 [CARO, 2016], whether any fraud by the company or
any fraud on the Company by its officers or employees has been noticed or reported
during the year. If yes, the nature and the amount involved is to be indicated.
Conclusion: In accordance with the provisions of Section 143(12), Mr. A should report
the matter regarding fraud to the Central Government by following the prescribed
procedure as per Rule 13 of the Companies (Audit and Auditors) Rules, 2014. Moreover,
if CARO 2016 is applicable on the company, the same should also be reported under
clause (x) of paragraph 3 of CARO 2016.

Q 19 E
The head accountant of a company entered fake invoices of credit purchases in the

T
books of account aggregate of ` 50 lakh and cleared all the payments to such bogus
U

creditor. How will you deal as an auditor?

T IT RTP May 2020

Facts of the case: The head accountant of a company entered fake invoices of credit

S
purchases in the books of account aggregate of ` 50 lakh and cleared all the payments to

IN
such bogus creditor. We need to analyse the auditor's responsibilities in relation to such
fraud.
J C
S
Legal Provisions: Write the provision of Section 143(12)
Conclusion: Here, the auditor's responsibilities are as follows:
i. To report the fraudulent activity to the Board or Audit Committee (as the case may
be) within2 days of his knowledge of fraud. Further, the company is also required to
disclose the same in Board's Report.
ii. Although, the auditor need not to report the central government as the amount of
fraud involved is less than ` 1 crore, however, reporting under CARO, 2016 is required
(if CARO, 2016 is applicable on the company).

Q 20 Though legally auditor may exercise right of Lien in case of companies, it is mostly
impracticable for legal and practicable constraints. Do you agree? May 19
Right of Lien means any person having the lawful possession of somebody else's property,
on which he has worked, may retain the property for non-payment of his dues on account

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of the work done on the property. On this premise, auditor can exercise lien on books and
COMPANY AUDIT

documents placed at his possession by the client for non-payment of fees, for work done
on the books and documents.
Under section 128 of the Companies Act 2013, In case of company, books of accounts
must be kept at the registered office. These provisions ordinarily make it impracticable
for the auditor to have possession of the books and documents. The company provides
reasonable facility to auditor for inspection of the books of account by directors and
others authorised to inspect under the Companies Act 2013. Taking an overall view of the
matter, it seems to be correct that though legally, auditor may exercise right of lien in
cases of companies, it is mostly impracticable for legal and practicable constraints.

6 SECTION 144 – AUDITOR NOT TO RENDER CERTAIN SERVICES

T E
Q 21
T U
CA. Poshin is providing the services of investment banking to C Ltd. Later on, he was

T I
also offered to be appointed as an auditor of the company for the current financial
year. Advise.
N S RTP May 18
I
Facts of the case: CA. Poshin who is rendering investment banking service to C Ltd. wants

J C
to accept offer letter for appointment as an auditor of the LA Ltd. for the next financial

year.
S
Legal Provisions: According to Section 141(3)(i) of the Companies Act, 2013 a person
shall be disqualified from being appointed as the auditor if he/she/it renders any of
the services mentioned in Section 144 of the Companies Act, 2013 (which prescribes
certain services not to be rendered by the auditor). The list of notified services include
Investment Banking services.
Conclusion: Therefore, CA. Poshin is advised not to accept the assignment of auditing
as the investment banking service is specifically notified in the list of services not to be
rendered by him as per section 141(3)(i) read with section 144 of the Companies Act,
2013.

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Q 22 CA. NM who is rendering management consultancy service to LA Ltd. wants to accept

COMPANY AUDIT
offer letter for appointment as an auditor of the LA Ltd. for the next financial year.
Discuss with reference to the provision of the Companies Act, 2013. Nov 18
Facts of the case: CA. NM who is rendering management consultancy service to LA Ltd.
wants to accept offer letter for appointment as an auditor of the LA Ltd. for the next
financial year.
Legal Provisions: According to Section 141(3)(i) of the Companies Act, 2013 a person
shall be disqualified from being appointed as the auditor if he/she/it renders any of the
services mentioned in Section 144 of the Companies Act, 2013 (which prescribes certain
services not to be rendered by the auditor) which are as under:
(i) Accounting and book keeping services
(ii) Internal audit. T E
T U
(iii) Design and implementation of any financially information system.
(iv) Actuarial services
T I
(v) Investment advisory services.
N S
(vi) Investment banking services.I
J C
(vii) Rendering of outsourced financial services

S
(viii) Management services and
(ix) Any other kind of services as may be prescribed
Conclusion: Therefore, CA. NM is advised not to accept the assignment of auditing as
the management consultancy service is specifically notified in the list of services not to
be rendered by him as per section 141(3)(i) read with section 144 of the Companies
Act, 2013.

7 SECTION 145 - SIGNING OF AUDIT REPORTS

Q 23 According to Companies Act, 2013, the person appointed as an auditor of the company
shall sign the auditor's report in accordance with the relevant provisions of the Act.
Explain clearly the relevant provisions relating to signing of report. RTP Nov 19
As per section 145 of the Companies Act, 2013, the person appointed as an auditor of
the company shall sign the auditor's report or sign or certify any other document of the

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company, in accordance with the provisions of section 141(2).

COMPANY AUDIT

Section 141(2) of the Companies Act, 2013 states that where a firm including a limited
liability partnership is appointed as an auditor of a company, only the partners who are
chartered accountants shall be authorised to act and sign on behalf of the firm. The
qualifications, observations or comments on financial transactions or matters, which have
any adverse effect on the functioning of the company mentioned in the auditor's report
shall be read before the company in general meeting.

8 SECTION 146 – ATTENDING OF GENERAL MEETINGS

Q 24 Auditors
audited by them are to be discussed. Comment. T E
have right to attend only those general meetings at which the accounts
May 19

T U
The auditors of a company are entitled to attend any general meeting of the company

T I
and the right is not only restricted to those at which the accounts audited by them are
S
to be discussed, he is also entitled to receive all the notices and other communications
N
I
relating to the general meetings, which members are entitled to receive and to be heard

J C
at any general meeting in any part of the business of the meeting which concerns them

as auditors.
S
According to the section 146 of the Companies Act 2013,all notices of, and other
communications relating to, any general meeting shall be forwarded to the auditor of
the company, and the auditor shall, unless otherwise exempted by the company, attend
either by himself or through his authorised representative, who shall also be qualified to
be an auditor, any general meeting and shall have right to be heard at such meeting on
any part of the business which concerns him as the auditor.
Thus, it is right of the auditor to receive notices and other communications relating to
any general meeting and to be heard at such meeting, relating to the matter of his
concern,however, it is duty of the auditor to attend the same or through his authorised
representative unless otherwise exempted.

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10 SECTION 148 – COST AUDIT

COMPANY AUDIT
Q 25 Briefly discuss the following with respect to applicable provisions under the Companies
Act, 2013 and rules made there under:
a) Maintenance of Cost Records
b) Applicability of Cost Audit
c) Non-applicability of Cost Audit.
a) Rule 3 of the Companies (Cost Records and Audit Rules, 2014 provides the classes
of companies, engaged in the production of goods or providing services, having an
overall turnover from all its products and services of ` 35 crore or more during the
immediately preceding financial year, required to include cost records in their books

T E
of account. These companies include Foreign Companies defined in sub-section (42)
of section 2 of the Act, but exclude a company classified as Micro enterprise or a

T U
Small enterprise including as per the turnover criteria provided under Micro, Small

T I
and Medium Enterprises Development Act, 2006. The said rule has divided the list

S
of companies into regulated sectors and non-regulated sectors. The rules require the
N
I
cost records to be maintained in Form CRA-1.

J C
b) Rule 4 of the Companies (Cost Records and Audit) Rules,2014 states the provisions

S
related to the applicability of cost audit depending on the turnover of the company
as follows-
i. Classes of companies specified under item (A) “Regulated Sectors” are required
to get its cost records audited if the overall annual turnover of the company
from all its products and services during the immediately preceding financial year
is ` 50 crore or more and the aggregate turnover of the individual product(s)
or service(s) for which cost records are required to be maintained under rule 3
is ` 25 crore or more.
ii. Classes of companies specified under item (B) “Non-Regulated Sectors” are
required to get its cost records audited if the overall annual turnover of the
company from all its products and services during the immediately preceding
financial year is ` 100 crore or more and the aggregate turnover of the individual
product(s) or service(s) for which cost records are required to be maintained

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under rule 3 is ` 35 crore or more.

COMPANY AUDIT

c) The requirement for cost audit under these rules shall not be applicable to a company
which is covered under rule 3, and,
(i) whose revenue from exports, in foreign exchange, exceeds 75% of its total
revenue; or
(ii) which is operating from a special economic zone.

11 AUDIT OF BRANCH ACCOUNTS

Q 26 ABC Ltd is a company incorporated in India. It has branches within and outside
India. Explain who can be appointed as an auditor of these branches within and

T E
outside India. Also explain to whom branch auditor is required to report.
RTP May 2020

T U
Sub-section (8) of section 143 of the Companies Act, 2013, prescribes the duties and

T I
powers of the company's auditor with reference to the audit of the branch and the

S
branch auditor. Where a company has a branch office, the accounts of that office shall
N
I
be audited either by the auditor appointed for the company (herein referred to as the

C
company's auditor) under this Act or by any other person qualified for appointment as
J
S
an auditor of the company under this Act and appointed as such under section 139, or
where the branch office is situated in a country outside India, the accounts of the branch
office shall be audited either by the company's auditor or by an accountant or by any
other person duly qualified to act as an auditor of the accounts of the branch office in
accordance with the laws of that country and the duties and powers of the company' s
auditor with reference to the audit of the branch and the branch auditor, if any, shall be
such as may be prescribed.

The branch auditor shall prepare a report on the accounts of the branch examined by
him and send it to the auditor of the company who shall deal with it in his report in
such manner as he considers necessary. Further, as per rule 12 of the Companies (Audit
and Auditors) Rules, 2014, the branch auditor shall submit his report to the company's
auditor and reporting of fraud by the auditor shall also extend to such branch auditor to
the extent it relates to the concerned branch.

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Q 27 When the accounts of the branch are audited by a person other than the company's

COMPANY AUDIT
auditor, there is need for a clear understanding of the role of such auditor and the
company's auditor in relation to the audit of the accounts of the branch and the
audit of the company as a whole. Explain RTP Nov 18
When the accounts of the branch are audited by a person other than the company's
auditor, there is need for a clear understanding of the role of such auditor and the
company's auditor in relation to the audit of the accounts of the branch and the audit
of the company as a whole. There is necessity for a proper rapport between these two
auditors for the purpose of an effective audit. Where another auditor has been appointed
for the component, the principal auditor would normally be entitled to rely upon the work

T E
of such auditor unless there are special circumstances to make it essential for him to
visit the component and/or to examine the books of account and other records of the

T U
said component. Further, it requires that the principal auditor should perform procedures

T I
to obtain sufficient appropriate audit evidence, that the work of the other auditor is

S
adequate for the principal auditor's purposes, in the context of the specific assignment.
N
I
When using the work of another auditor, the principal auditor should ordinarily perform
the following procedures:
J C
S
i. advise the other auditor of the use that is to be made of the other auditor's work
and report and make sufficient arrangements for co-ordination of their efforts at the
planning stage of the audit. The principal auditor would inform the other auditor of
matters such as areas requiring special consideration, procedures for the identifica-
tion of inter-component transactions that may require disclosure and the time-table
for completion of audit; and
ii. advise the other auditor of the significant accounting, auditing and reporting require-
ments and obtain representation as to compliance with them. The principal auditor
might discuss with the other auditor the audit procedures applied or review a written
summary of the other auditor's procedures and findings which may be in the form
of a completed questionnaire or check-list.
The principal auditor may also wish to visit the other auditor. The nature, timing and
extent of procedures will depend on the circumstances of the engagement and the

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principal auditor's knowledge of the professional competence of the other auditor. This
COMPANY AUDIT

knowledge may have been enhanced from the review of the previous audit work of the
other auditor.

12 JOINT AUDIT

Q 28 The practice of appointing Chartered Accountants as joint auditors is quite widespread

in big companies and corporations. Explain stating the advantages of the joint audit.
RTP Nov 19
The practice of appointing Chartered Accountants as joint auditors is quite wide spread

T E
in big companies and corporations. Joint audit basically implies pooling together the
resources and expertise of more than one firm of auditors to render an expert job in a

T U
given time period which may be difficult to accomplish acting individually. It essentially

T I
involves sharing of the total work. This is by itself a great advantage. In specific terms

S
the advantages that flow may be the following:
N
i. Sharing of expertise. I
J C
ii. Advantage of mutual consultation.
iii. Lower workload.
S
iv. Better quality of performance.
v. Improved service to the client.
vi. Displacement of the auditor of the company taken over in a takeover often obviated.
vii. In respect of multi-national companies, the work can be spread using the expertise
of the local firms which are in a better position to deal with detailed work and the
local laws and regulations.
viii. Lower staff development costs.
ix. A sense of healthy competition towards a better performance

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Q 29 Before the commencement of the audit, the joint auditors should discuss and develop

COMPANY AUDIT
a joint audit plan. In developing the joint audit plan, the joint auditors should identify
division of audit areas and common audit areas. Explain stating the other relevant
considerations in this regard. RTP May 2020
Before the commencement of the audit, the joint auditors should discuss and develop a

joint audit plan. In developing the joint audit plan, the joint auditors should:
i. identify division of audit areas and common audit areas;
ii. ascertain the reporting objectives of the engagement;
iii. consider and communicate among all joint auditors the factors that are significant
in directing the engagement team's efforts;

performed earlier. T E
iv. consider the results of preliminary engagement activities, or similar engagements

T U
v. ascertain the nature, timing and extent of resources necessary to accomplish the
engagement.
T I
N S
13 CARO, 2016
I
C
Q 30 Discuss the matters to be included in the auditor's report regarding statutory dues
J
S
and repayment of loans or borrowing to a financial institution, bank, Government or
dues to debenture holders as per CARO, 2016. RTP May 18
As per Clause (vii) and Clause (viii) of Paragraph 3 of CARO 2016, the auditor is required
to report the following matters in the auditor's report with regard to statutory dues and
repayment of loans or borrowing to a financial institution, bank, Government or dues to
debenture holders respectively-
Clause (vii)
(a) whether the company is regular in depositing undisputed statutory dues including
provident fund, employees' state insurance, income-tax, sales-tax,service tax, duty of
customs, duty of excise, value added tax, cess and any other statutory dues with the
appropriate authorities and if not, the extent of the arrears of outstanding statutory
dues as at the last day of the financial year concerned for a period of more than six
months from the date they became payable, shall be indicated;

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(b) where dues of income tax or sales tax or service tax or duty of customs or duty of
COMPANY AUDIT

excise or value added tax have not been deposited on account of any dispute,then
the amounts involved and the forum where dispute is pending shall be mentioned.
(A mere representation to the concerned Department shall not constitute a dispute).
Clause (viii)
whether the company has defaulted in repayment of loans or borrowing to a financial
institution, bank, Government or dues to debenture holders? If yes, the period and the
amount of default to be reported (in case of defaults to banks, financial institutions, and
Government, lender wise details to be provided).

Q 31
related to fixed assets. T E
Explain the Reporting requirements the auditor should ensure under CARO 2016
May 19

T U
As per Clause (i) of Paragraph 3 of CARO 2016, the auditor is required to include a

T I
statement in the auditor's report on the following matters, namely-

S
i. whether the company is maintaining proper records showing full particulars, including
N
I
quantitative details and situation of fixed assets;

J C
ii. whether these fixed assets have been physically verified by the management at

S
reasonable intervals; whether any material discrepancies were noticed on such
verification and if so, whether the same have been properly dealt with in the books
of account;
iii. whether the title deeds of immovable properties are held in the name of the company.
If not, provide the details thereof.

Q 32 The company has dispensed with the practice of taking inventory of their inventories
at the year-end as in their opinion the exercise is redundant, time consuming and
intrusion to normal functioning of the operations. Explain reporting requirement
under CARO, 2016.

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Facts of the case:

COMPANY AUDIT
company has dispensed with the practice of taking inventory of their inventories at the
year-end as in their opinion the exercise is redundant, time consuming and intrusion to
normal functioning of the operations.
Legal Provisions: Clause (ii) of Para 3 of CARO, 2016, requires the auditor to report
whether physical verification of inventory has been conducted at reasonable intervals by
the management and whether any material discrepancies were noticed and if so, whether
they have been properly dealt with in the books of account.
The physical verification of inventory is the responsibility of the management of the
company which should verify all material items at least once in a year and more often
in appropriate cases.

T E
Conclusion: In the given case, the above requirement of physical verification of inventory

T U
by the management has not been taken place and therefore the auditor should point out

T I
the same under CARO, 2016. He may consider the impact on financial statement and
report accordingly.
N S
I
C
Q 33 “The company has raised funds by issuing fully convertible debentures. These funds
J
S
were raised for the expansion and diversification of the business. However, the company
utilized these funds for repayment of long term loans and advances.” Advise the
auditor regarding reporting requirements under CARO, 2016. Nov 18
Legal Provisions: The auditor is required to report as per clause xiv of paragraph 3
of CARO 2016, whether the company has made any preferential allotment or private
placement of shares or fully or partly convertible debentures during the year under review
and if so, as to whether the requirement of section 42 of the Companies Act, 2013 have
been complied with and the amount raised have been used for the purposes for which
the funds were raised. If not, provide the details in respect of the amount involved and
nature of non -compliance.

Conclusion: In view of the above clause, the auditor would report that funds raised by
the company for expansion and diversification of business have not been used for the said
purpose rather the company has utilised these funds for repayment of long-term loans
and advances.
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Q 34 State the matters to be included in the auditor's report as per CARO, 2016, regarding:
COMPANY AUDIT

Private Placement of Preferential Issues. Utilisation of IPO and further public offer
May 18
As per clause xiv of paragraph 3 of CARO 2016, the auditor is required to report whether
the company has made any preferential allotment or private placement of shares or fully
or partly convertible debentures during the year under review and if so, as to whether the
requirement of section 42 of the Companies Act, 2013 have been complied with and the
amount raised have been used for the purposes for which the funds were raised. If not,
provide the details in respect of the amount involved and nature of non-compliance.
(i) As per clause ix of paragraph 3 of CARO 2016, the auditor should report whether

T E
moneys raised by way of initial public offer or further public offer (including debt
instruments) and term loans were applied for the purposes for which those are raised.

T U
If not, the details together with delays or default and subsequent rectification, if
any, as may be applicable.
T I
N S
Q 35 M I
Ltd. has given certain loans to related parties and also has accepted certain

C
deposits. As an auditor, how will you include the above items in paragraph 3 of CARO,
J

2016?
S
Facts of the case: M Ltd. has given certain loans to related parties and also has
Nov 19

accepted certain deposits

Legal Provisions: As per Clause (iii) of paragraph 3 of CARO, 2016 the auditor shall state
Whether the company has granted any loans, secured or unsecured to companies, firms,
Limited Liability Partnerships or other parties covered in the register maintained under
section 189 of the Companies Act, 2013. If so,
i. Whether the terms and conditions of the grant of such loans are not prejudicial to
the company's interest;

ii. Whether the schedule of repayment of principal and payment of interest has been
stipulated and whether the repayments or receipts are regular;
iii. if the amount is overdue, state the total amount overdue for more than ninety days,
and whether reasonable steps have been taken by the company for recovery of the

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principal and interest.

COMPANY AUDIT
Further, Clause (v) of paragraph 3 of CARO, 2016 states in case the company has ac-
cepted deposits,

i. whether the directives issued by the Reserve Bank of India and the provisions of
sections 73 to 76 or any other relevant provisions of the Companies Act, 2013 and
the rules framed there under, where applicable, have been complied with? If not,
the nature of such contraventions be stated;

ii. If an order has been passed by National Company Law Tribunal or Reserve Bank of
India or any court or any other tribunal, whether the same has been complied with
or not?

T E
Conclusion: In the given situation, M Ltd. has given certain loans to related parties and
also has accepted certain deposits. Thus, the auditor is required to report the same as per
clause(iii)and (v) of Paragraph 3 of CARO, 2016.
T U
T I
N S
I
CORRECT / INCORRECT STATEMENTS
J C
i.
S
State with reasons (in short) whether the following statements are correct or incorrect:
Manner of rotation of auditor will not be applicable to company A, which is having
paid up share capital of ` 15 crores and having public borrowing from nationalized bank
of ` 50 crore because it is a Private Limited Company.
Incorrect.
Reason: According to section 139 of the Companies Act, 2013, the provisions related to
rotation of auditor are applicable to all private limited companies having paid up share
capital of ` 50 crore or more; and all companies having paid up share capital of below
threshold limit mentioned above, but having public borrowings from financial institutions,
banks or public deposits of ` 50 crore or more.
Although company A is a private limited company having paid up share capital of ` 15
crores yet it is having public borrowings from nationalized bank of ` 50 crores, therefore
it would be governed by provisions of rotation of auditor.

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ii. Avid Ltd., a listed company, appointed M/s David& Co., a Chartered Accountant firm,as
COMPANY AUDIT

the statutory auditor in its AGM held at the end of September, 2019 for 11 years.
Incorrect.
Reason: The appointment of M/s David& Co. is not valid as the appointment can be
made only for one term of five consecutive years and then another one more term of
five consecutive years. It can't be appointed for two terms in one AGM only. Further, a
cooling period of five years from the completion of term is required i.e. the firm can't be
re-appointed for further 5 years after completion of two terms of five consecutive years.
iii. Bhartiya Gas Ltd. a Government Company, the Comptroller and Auditor-General of
India shall, in respect of a financial year, appoint an auditor duly qualified to be

T E
appointed as an auditor of companies under this Act, within a period of 180 days from
the end of the financial year, who shall hold office till the end of the next Financial
year.
T U
Incorrect.
T I
S
Reason: As per Section 139(5), in the case of a Government company or any other
N
I
company owned or controlled, directly or indirectly, by the Central Government, or by any

J C
State Government or Governments, or partly by the Central Government and partly by

S
one or more State Governments, the Comptroller and Auditor-General of India shall, in
respect of a financial year, appoint an auditor duly qualified to be appointed as an auditor
of companies under this Act, within a period of 180 days from the commencement of the
financial year, who shall hold office till the conclusion of the annual general meeting.
iv. K Ltd., a non-government company, was incorporated on 01 -10-2019. Mr. B, Managing
Director of K Ltd., himself appointed the first auditor of the company on 31 -12-2019.
Incorrect.
Reason: Section 139(6) of the Companies Act, 2013 lays down that the first auditor of
a company shall be appointed by the Board of Directors within 30 days from the date of
registration of the company. In view of the above, the appointment of first auditor made
by the managing director is in violation of the provisions of the Companies Act, 2013.

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v. As per Section 139(6), the first auditor of a company, including a Government

COMPANY AUDIT
company, shall be appointed by the Board of Directors within 60 days from the date
of registration of the company.
Incorrect.
Reason: As per Section 139(6), the first auditor of a company, other than a Government
company, shall be appointed by the Board of Directors within 30 days from the date of
registration of the company.
vi. The Board of Director of ABC Ltd., a listed company at Bombay Stock Exchange, is
required to fill the casual vacancy of an auditor only after taking into account there
commendations of the audit committee.
Correct.

T E
Reason: Where a company is required to constitute an Audit Committee under section 177,

T U
all appointments, including the filling of a casual vacancy of an auditor under this section

T I
shall be made after taking into account the recommendations of such committee.

S
Moreover, ABC Ltd. being a public listed company is required to constitute an Audit
N
I
Committee as per Section 177. Therefore, the procedure being followed is in compliance

J C
with Section 139 of Companies Act, 2013.
vii. S
All public companies, having in aggregate, outstanding loans or borrowings or
debentures or deposits exceeding hundred crore rupees or more shall constitute an
Audit Committee.
Incorrect.
Reason: As per Section 177 read with Companies (Management and Administration)
Rules, 2014 all public companies, having in aggregate, outstanding loans or borrowings
or debentures or deposits exceeding fifty crore rupees or more shall constitute an Audit
Committee.
viii. According to Section 140(1), the auditor appointed under section 139 may be removed
from his office before the expiry of his term only by a general resolution of the
company.
Incorrect.
Reason: According to Section 140(1), the auditor appointed under section 139 maybe

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removed from his office before the expiry of his term only by a special resolution of the
COMPANY AUDIT

company, after obtaining the previous approval of the Central Government in that behalf
as per Rule 7 of CAAR, 2014.
ix. PQR & Co., Chartered Accountants, resigned from the audit of a Government Company
and filed the resignation with the company and the registrar within 30 days. Comment,
whether PQR & Co. has complied with the provisions of the Companies Act, 2013.
Incorrect.
Reason: As per section 140(2) the auditor who has resigned from the company shall file
within a period of 30 days from the date of resignation, a statement in the prescribed Form
ADT-3 with the company and the Registrar, and in case of a Government company, the

T E
auditor shall also file such statement with the Comptroller and Auditor-General of India,
indicating the reasons and other facts as may be relevant with regard to his resignation. In

T U
this case, the PQR & Co., was also required to file prescribed Form with C & AG of India but

T I
it did not file the same. Therefore,it did not comply with the provisions of the Companies
Act, 2013.
N S
x. I
CA K has resigned as an auditor after 2 months of his appointment in NML Ltd. He needs

C
to file ADT-3 with the Registrar within 60 days from the date of resignation.
J
Or

S
As per section 140(2) of the Act, the auditor who has resigned from the company
need not inform the Registrar of Companies.
Incorrect.
Reason: As per section 140(2) of the Companies Act, 2013, the auditor who has resigned
from the company shall file within a period of 30 days from the date of resignation,
a statement in the prescribed Form ADT–3 (as per Rule 8 of Companies (Audit And
Auditor's) Rules, 2014) with the company and the Registrar.
xi. As per sub-section (5) of the section 140, the Tribunal cannot direct the company
to change its auditors.
Incorrect.
Reason: As per Section 140(5), the Tribunal either suomotu or on an application made to
it by the Central Government or by any person concerned,if it is satisfied that the auditor

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of a company has, whether directly or indirectly, acted in a fraudulent manner or abetted

COMPANY AUDIT
or colluded in any fraud by, or in relation to, the company or its directors or officers, it
may, by order, direct the company to change its auditors.
xii. A Chartered Accountant holding securities of S Ltd. having face value of ` 950 is
qualified for appointment as an auditor of S Ltd.
Incorrect.
Reason: As per the provisions of Section 141(3)(d) of the Companies Act, 2013, a person
is disqualified to be appointed as an auditor of a company if he is holding any security of
or interest in the company. As the chartered accountant is holding securities of S Ltd.
having face value of ` 950, he is not eligible for appointment as an auditor of S Ltd.

with shares and securities of the audited entity. T E

xiii. An Auditor is considered to lack independence if the partner of the audit firm deals

Correct.
T U
T I
Reason: As per section 141 (3)(d), a person or his relative or partner shall not be eligible
S
for appointment as an auditor of a company if they hold any security of or interest in
N
I
the company or its subsidiary, or of its holding or associate company or subsidiary of such

holding company.
J C


S
Relative can hold securities upto face value of rupees one lakh in the company.
From the above it can be concluded that if the partner deals with shares and securities of
the audited entity, he would be lacking independence, hence, disqualified to be appointed
as an auditor.
Further, if partner of the firm deals with shares and securities of the audited firm then it
leads to a threat to Independence which is known as the Advocacy Threat and auditor will
be lacking independence.
xiv. Any partner of an LLP, who is appointed as an auditor of a company, can sign the
audit report.
Incorrect.
Reason: Section 141(2) of the Companies Act, 2013 states that where a firm including a
limited liability partnership is appointed as an auditor of a company, only the partners who
are chartered accountants shall be authorised to act and sign on behalf of the firm.

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xv. All entities that are under common control by a state (i.e., national, regional or local
COMPANY AUDIT

government) are considered related party.

Incorrect.

Reason: Entities that are under common control by a state (i.e., a national, regional or
local government) are not considered related unless they engage in significant transactions
or share resources to a significant extent with one another.
xvi. The auditor of a Ltd. Company wanted to refer to the minute books during audit but
board of directors refused to show the minute books to the auditors.
Incorrect.
Reason: The provisions of Companies Act, 2013 grant rights to the auditor to access books

T E
of account and vouchers of the company. He is also entitled to require information and
explanations from the company. Therefore, he has a statutory right to inspect the minute
book.
T U
T I
xvii. The auditor should study the Memorandum and Articles of Association to seethe
validity of his appointment.
N S
Incorrect. I
J C
Reason: The auditor should study the Memorandum of Association to check the objective

S
of the company to be carried on, amount of authorized share capital etc. and Articles of
Association to check the internal rules, regulations and ensuring the validity of transactions
relating to accounts of the company.
To ensure the validity of appointment, the auditor should ensure the compliance of the
provisions of Section 139, 140 and 141 of the Companies Act, 2013.
In addition, the auditor should study the appointment letter & the prescribed Form
submitted to the Registrar of the Companies to see the validity of his appointment.
xviii. Management of the organization is solely responsible for the compliance of auditing

standards while preparing financial statements.

Incorrect.

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Reason: As per Section 143(9) of the Companies Act, 2013, every auditor shall comply

COMPANY AUDIT
with the auditing standards.
xix. The auditor's reporting on internal financial control will be applicable with respect to

interim financial statements.

Incorrect.
Reason: Section 143(3)(i) of the Act requires the auditors' report to state whether
the company has adequate internal financial controls system in place and the operating
effectiveness of such controls.
It may be noted that auditor's reporting on internal financial controls is a requirement
specified in the Act and, therefore, will apply only in case of reporting on financial

T E
statements prepared under the Act and reported under Section 143.
Accordingly, reporting on internal financial controls will not be applicable with respect to

T U
interim financial statements, such as quarterly or half-yearly financial statements, unless

T I
such reporting is required under any other law or regulation.
xx. S
Where the firm is appointed as an auditor of the entity the audit report is signed only
N
in the name of audit firm. I
Incorrect.
J C
S
Reason: 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 along-with registration number for the firm.
xxi. Rule 3 of the Companies (Cost Records and Audit) Rule, 2014 provides the classes
of companies, engaged in the production of goods or providing services, having an
overall turnover of ` 25 crore or more during the immediately preceding financial year,
required to include cost records in their books of account.
Incorrect.
Reason: Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides the
classes of companies, engaged in the production of goods or providing services, having
an overall turnover from all its products and services of ` 35 crore or more during the
immediately preceding financial year, required to include cost records in their books of
account.
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xxii. Joint auditor is always bound by the views of majority of the joint auditors regarding
COMPANY AUDIT

matters to be covered in report.

Incorrect.
Reason: Where the joint auditors are in disagreement with regard to the opinion or any
matters to be covered by the audit report, they shall express their opinion in a separate

audit report. In such circumstances, the audit report(s) issued by the joint auditor(s) shall
make a reference to each other's audit report(s). Therefore, joint auditor is not bound by
the views of the majority of the joint auditors regarding the matters to be covered in the
audit report.
xxiii. Provision of CARO, 2016 is not applicable to ABC Pvt. Ltd., a subsidiary of XYZ Ltd.

T E
(apublic company) having fully paid up Capital and Reserves & Surplus of ` 50 lakhs,
Secured loan from bank of ` 90 Lakhs and Turnover of ` 5 Crore, for the financial year
2018-19.
T U
Incorrect.
T I
S
Reason: The CARO specifically exempts a private limited company, not being a subsidiary
N
I
or holding company of a public company, having a paid up capital and reserves and surplus

J C
not more than rupees 1 crore as on the balance sheet date and which does not have total

S
borrowings exceeding rupees 1 crore from any bank or financial institution at any point
of time during the financial year and which does not have a total revenue as disclosed in
Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations)
exceeding rupees 10 crore during the financial year as per the financial statements.
From the above, it is clear that ABC Pvt. Ltd. is a subsidiary of XYZ Ltd. and hence not
exempt from CARO, 2016 although it is satisfying the conditions that allow exemption to
private limited company which is not a subsidiary or holding company of a public company.

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MULTIPLE CHOICE QUESTIONS

COMPANY AUDIT
i. In case of a company that is required to constitute an Audit Committee under section
177, the committee, and, in cases where such a committee is not required to be
constituted,________, shall take into consideration the qualifications and experience
of the individual or the firm proposed to be considered for appointment as auditor
and whether such qualifications and experience are commensurate with the size and
requirements of the company.
a. the board
b.
c.
any director
Managing Director T E
d. Whole time director
T U
ii.
T I
CA. Daffy is the auditor of xBose Ltd. for the previous 2 years. However, due to
S
certain unavoidable circumstances, no Annual General Meeting (AGM) was held for
N
I
the current Financial Year ending on 31st March, 2019 within every possible time limit

J C
and thus, the ratification procedure for her appointment in the AGM could not be

a.
S
performed. Whether she may continue to hold the office of the auditor?
CA. Daffy may continue to hold the office of the auditor for the current Financial
Year only and thereafter shall resign herself as the ratification procedure could not
be completed.

b. CA. Daffy shall continue to hold the office of the auditor and ask the Board to re-
appoint her in a private meeting.

c. CA. Daffy shall continue to hold the office of the auditor as no such ratification
provisions for appointment by members at every AGM exist.

d. CA. Daffy shall not continue to hold office of the auditor as the ratification procedure
could not be completed as per proviso to section 139(1) of the Companies Act, 2013
iii. CA. Sylvester, the statutory auditor of Yosemitee Pvt. Ltd., encountered unavoidable
circumstances that bring into question his ability to continue holding office of the
auditor. Considering it appropriate, CA. Sylvester resigned from the office of auditor

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of Yosemitee Pvt. Ltd. and thus, the Board of Directors itself appointed CA. Granny,
COMPANY AUDIT

a practicing Chartered Accountant, as the statutory auditor of the company to

hold office of the auditor till the conclusion of 6th meeting. Which of the following
statement is true in the given scenario?
a. The appointment of CA. Granny made by the Board of Directors is invalid.
b. Casual vacancy can be filled by the Board of Directors subject to approval by the
company at a general meeting convened within 3 months of the recommendation
of the Board.
c. CA. Granny cannot hold the office of auditor till the conclusion of 6th meeting i.e.
the appointment cannot be made for five years. The auditor can hold office only till

d.
the conclusion of the next AGM.
All of the above. T E
iv.
T U
Miss Betty, relative of CA. Tweety (one of the partners of M/s AB & Co.), owed
`
T I
1,50,000 to Satyan Ltd. for goods purchased in the normal course of business. Later
S
on, M/s AB & Co. was appointed as statutory auditors of Prakash Ltd. (which holds
N
I
51% shares in Satyan Ltd.). On discovering the said fact, Miss Betty cleared the

J C
dues to Satyan Ltd. on 59th day following the date of appointment of M/s AB & Co.

S
as statutory auditors of Prakash Ltd. Which of the following statement is true in the
given scenario with respect to validity of appointment of M/s AB & Co.?
a. Miss Betty, relative of CA. Tweety (one of the partners of M/s AB & Co.) is
indebted to the subsidiary of Prakash Ltd. but not to the company itself. Thus, the
appointment of M/s AB & Co. as the statutory auditors of Prakash Ltd. is valid.

b. M/s AB & Co. is not eligible for appointment as an auditor of Prakash Ltd. as Miss
Betty, relative of CA. Tweety (one of the partners of M/s AB & Co.) is indebted to
Satyan Ltd. (subsidiary of Prakash Ltd.) Thus, the appointment made is not valid.

c. As the corrective action has been taken regarding indebtness to Satyan Ltd.
(subsidiary of Prakash Ltd.) within 60 days of such appointment, the appointment
of M/s AB & Co. is valid.

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d. There is no such contravention of the provisions of the Companies Act, 2013 in the

COMPANY AUDIT
given scenario. Thus, the appointment of M/s AB & Co. as the statutory auditors of
Prakash Ltd. is valid.

v. Statement I: A firm whereof majority of partners practising in India are qualified for
appointment may be appointed by its firm name to be auditor of a company.
Statement II: Where a firm including a limited liability partnership is appointed as an
auditor of a company, all the partners shall be authorised to act and sign on behalf
of the firm.
a. Only Statement I is correct
b. Only Statement II is correct
c.
d.
Both statements are correct
Both Statements are incorrect T E
vi.
T U
With respect to the forms specified by companies (Cost Records & Audit) Rule 2014,

T
which of the following is incorrect combination: I
a. S
Form CRA 1 - Maintenance of cost records by the Company.
N
b. I
Form CRA 2- Intimation of appointment of another cost auditor to Central
Government.
J C
c.
S
Form CRA 3- Submission of Cost Audit Report to the Board of Directors of the
company.
d. Form CRA 4- Submission of Cost Audit Report by the company to the Registrar.
vii. Eeyore Pvt. Ltd. is incorporated on 1st July, 2019. During the Financial Year ending on
31st March, 2020, the company did not opt for any borrowing at any point of time
and have a total revenue of ` 60 Lakh. At the year end, it provides the following
information regarding its paid-up capital and reserve & surplus-
Particulars Amount (in `)
Paid-up Capital
- Consideration received in cash for equity shares 40,00,000
(including unpaid calls of ` 5,00,000)
- Consideration received in cash for preference shares 25,00,000

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- Bonus shares allotted 7,00,000

COMPANY AUDIT

- Share application money received pending allotment 10,00,000

Sub-Total 82,00,000
Reserve & Surplus
- Balance in Statement of Profit and Loss 15,00,000
- Capital Reserves 10,00,000
Sub-Total 25,00,000
GRAND TOTAL 1,07,00,000

You are provided with the provisions regarding applicability of Companies (Auditor's
Report) Order, 2016, (CARO, 2016) issued under section 143(11) of the Companies

T E
Act, 2013 to a private limited company that it specifically exempts a private limited
company having a paid up capital and reserves and surplus not more than ` 1 crore

T U
as on the Balance Sheet date and which does not have total borrowings exceeding
`
T I
1 crore from any bank at any point of time during the financial year and which does

S
not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013
N
I
exceeding ` 10 crore during the financial year.

J C
Considering the information given above, which of the following shall be considered as

a.
S
a reason regarding applicability or non-applicability of CARO, 2016?
Reporting under CARO, 2016 shall be applicable as the company is having a paid up
capital and reserves and surplus of ` 1.07 crore i.e. more than ` 1 crore as on the
Balance Sheet date.
b. Reporting under CARO, 2016 shall be applicable as the company is having a paid up
capital and reserves and surplus of ` 1.02 crore i.e. more than ` 1 crore as on the
Balance Sheet date.
c. Reporting under CARO, 2016 shall not be applicable as the company is having a paid
up capital and reserves and surplus of ` 0.92 crore i.e. not more than ` 1 crore as
on the Balance Sheet date.
d. Reporting under CARO, 2016 shall not be applicable as the company is having a paid
up capital and reserves and surplus of ` 0.82 crore i.e. not more than ` 1 crore as
on the Balance Sheet date.

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Answers

COMPANY AUDIT
i. a. the board

ii. c. CA. Daffy shall continue to hold the office of the auditor as no such ratification provi-
sions for appointment by members at every AGM exist.
iii. d. All of the above.
iv. d. There is no such contravention of the provisions of the Companies Act, 2013 in the given
scenario. Thus, the appointment of M/s AB & Co. as the statutory auditors of Prakash
Ltd. is valid.
v. a. Only Statement I is correct
vi. d. Form CRA 4- Submission of Cost Audit Report by the company to the Registrar.
vii.
E
c. Reporting under CARO, 2016 shall not be applicable as the company is having a paid

T
up capital and reserves and surplus of ` 0.92 crore i.e. not more than ` 1 crore as on the
Balance Sheet date.
T U
T I
N S
I
J C
S

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COMPANY AUDIT

T E
TU
T I
N S
I
J C
S

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Chapter
Audit Report
12

AUDIT REPORT
Chapter Roadmap

1 Introduction
T E
TU
2
T I
SA 700: Forming an opinion
S
and reporting on FS
N
I
3
J C
SA 701: Communicating
SKey Audit Matters

4 SA 705: Modifications
to the opinion

5 SA 706: Emphasis of Matter paragraphs

and other matter paragraphs

6 SA 710 : Comparative information –

corresponding figures and comparative FS

| 12.1
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BRIEF OVERVIEW
AUDIT REPORT

1 INTRODUCTION

Meaning of Audit Report

Opinion on FS whether

Records show a true and fair view

FS prepared as per applicable FRF

T E
Compare with statutory requirements

T U
T I
Financial Reporting Framework (FRF) N S
I
J C
General purpose FRF - Designed to

S
meet common financial information
needs of wide range of users

Fair presentation
Compliance framework
framework

Compliance with FRF to Disclosures other than May depart from

achieve fair presentation those required by FRF FRF requirement to
may be made to achieve fair presentation
achieve fair presentation

FRF that requires

compliance with
FRF requirement only.
No additional disclosures
and departures

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2 SA 700: FORMING AN OPINION AND REPORTING ON FS

AUDIT REPORT
Objective of auditor as per SA 700

Based on and express opinion

To form an opinion through a written
on FS conclusions from
report
AE

To form an opinion, the auditor shall conclude whether he has obtained reasonable
assurance about whether the FS as a whole are free from MMS, whether due to fraud
or error.

Auditor’s conclusion shall T E

intotake into account
Auditor's conclusion shall take account
T U
whether SAAE has
T I
been obtained S
whether uncorrected IN Evaluation of

MS are material
J C
S
whether FS Qualitative Specific
prepared as per aspects of requirements as
applicable FRF accounting per SA

Qualitative aspects of entity’s accounting practices

Management makes a number of judgments about the amounts and disclosures in the FS
SA 260 contains a discussion of the qualitative aspects of accounting practices
(E.g., accounting policies, accounting estimates, FS disclosures etc.) *See note below
SA 540 addresses possible management bias in making accounting estimates

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In considering the qualitative aspects of the accounting practices,the auditor may

become aware of possible bias in management’s judgments and conclude that lack
AUDIT REPORT

of neutrality together with uncorrected MS causes the FS to be materially misstated.

Indicators of a lack of neutrality include the following:
• Selective correction of MS brought to management’s attention (E.g., Correcting
MS that increase reported earnings and not correcting MS which might result

in decreased in earnings)
• Possible management bias in the making of accounting estimates

Requirement of Specific evaluations by auditor as per SA 700

T E
FS adequately discloses significant accounting policies applied
Accounting policies applied are consistent with applicable FRF
Accounting estimates made are reasonable
T U
T I
Information presented in FS is relevant, reliable and comparable

S
FS provide adequate disclosures of significant transactions and events
N
I
Terminology used in FS is appropriate

J C
S
When FS are prepared as per Fair presentation framework, auditor should evaluate the
contents and structure of FS and whether disclosures and related notes in the FS
give a fair presentation of transactions and events.

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Form of opinion

AUDIT REPORT
Auditor’s Report

Unmodified Report Modified Report but Modified Report and

Unmodified Opinion modified Opinion
FS prepared as per FRF; EOM or OM para
No MMS

FS are materially Auditor unable to

misstated obtain SAAE
Material not pervasive Material and pervasive Material not pervasive Material and pervasive

Qualified Opinion Adversed Opinion Qualified Opinion Disclaimer of Opinion

(QO) (AO) (QO) (DO)
FS show true and fair view
subject to reservations
FS are not free from
MMS
T E
T U
T I
Basic Elements in an Audit Report
S
IN
1. Auditor’s Report for Audits Conducted in Accordance with Standards on
Auditing
J C
S
The basic elements, specific headings and contents in the audit report are:

Title - "Independent Auditor’s Report"

 To indicate that it is a report of an Independent Auditor

Addressee - "To the members"

 Report to be addressed based on circumstances,engagement,law and regulation

 Generally addressed to Shareholders or TCWG

Auditor's Opinion - "Opinion"

 Name of entity
 Statement that FS audited
 Identification of title of FS components (Balance Sheet, P/L, Cash Flow Statement, Notes
to Accounts, Statement of equity)

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 Reference to Notes, Accounting policies

 Period covered by audit
AUDIT REPORT

 Phrases of opinion -discussed separately in Note 1 below

Basis for opinion - "Basis for Opinion"

 Statement that audit was conducted as per SAs
 Reference to Auditor's responsibilities section of audit report
 Statement that auditor is independent and fulfilled ethical responsibilities
 Whether SAAE has been obtained

Going Concern - "Going Concern"

 Auditor shall report as per SA 570

Key Audit Matters (KAM) - "Key Audit Matters" T E

T U


For complete set of FS of Listed entities
If required by any law or regulation
T I
 Auditor to report KAM as per SA 701
N S
I
Management Responsibilities - "Responsibilities for the Financial Statements"

J C
 State the responsibilities of management or TCWG (if management and TCWG is different)
 S
Preparing the financial statements as per FRF
 Design, implementation and maintenance of IC
 Assessing the entity’s ability to continue as a going concern

Auditor's responsibilities "Auditor’s Responsibilities for the Audit of the Financial Statements"
Overall Responsibilities
 State the objective of auditor as per SA 200 - Reasonable assurance that FS free from
MMS and issue audit report of his opinion
 State that reasonable assurance is a high level of assurance, not a guarantee
 State that MMS can arise from error or fraud
 Discuss Materiality level as applied in audit as per FRF
 State that audit was conducted as per SAs, Professional judgement was applied and
professional skepticism maintained
Specific Responsibilities
 To identify and assess the RMM of the FS

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 To design and perform audit procedures in response to those risks.

 To obtain SAAE

AUDIT REPORT
 To obtain an understanding of IC relevant to the audit
 To evaluate the appropriateness of accounting policies
 To conclude on the appropriateness of management’s use of the going concern basis
 State that the auditor communicates with TCWG
 For listed entities - state that auditor has provided a statement to TCWG that auditor
has complied with ethical requirements regarding independence
 Where KAM is included in the report, state that out of the matters communicated with
TCWG, matters that were of most significance as per the auditor has been included in
KAM

Location of description of auditor's responsibilities

T E
The above mentioned responsibilities may be included in -
T U
 Body of the auditor’s report
Within an appendix to the auditor’s report T I


N S
 By a specific reference within the auditor’s report to the location of such a description on
I
a website of an appropriate authority, if permitted by law or regulation

J C
Other Reporting Responsibilities "Report on Other Legal and Regulatory Requirements"


S
Any reporting requirement other than that specified in SAs
 Reporting as per Section 143(3) of Companies Act,2013 (in case of companies)
 Reporting under CARO, 2016 (if applicable)

Signature of auditor
 Individual auditor -Signature of engagement partner in his personal name
 Firm Auditor - Signature of engagement partner in his personal name and in the firm's
name
 Proprietor/Partner's Membership number assigned by ICAI to be mentioned
 In case of firm, firm registration number to be mentioned

Auditor's address - "Place"

 Name of city where audit report is signed

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Date of the Auditor’s Report - "Date"

 Date of signing audit report
AUDIT REPORT

 Should not be date earlier than date of obtaining SAAE on which opinion is based
 This date informs the users that the auditor has considered the effect of events and
transactions of which he became aware and that occurred up to that date
 Subsequent events dealt as per SA 560

1. Phrase of opinion
Auditor's opinion

Modified Opinion
T E
Unmodified opinion

T U
As per SA 705
T I
N S
If FS prepared as per If FS prepared as per

I
Fair Presentation Framework Compliance framework

J C
SIn our opinion, the FS present
fairly, in all material respects..../
give a true and fair view, in
In our opinion, the FS are
prepared in all material respects
in accordance with applicable
accordance with [the applicable FRF
FRF]

2. If individuals from management who signed the Engagement Letter left the
entity : The auditor would request those who are in charge of management to
give the representations to acknowledge their responsibilities within the letter
of representations.

3. Auditor would obtain a specific representation if a restatement is made to correct

a MMS in the prior period FS that affects the comparative information in the FS.

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2. Auditor’s Report prescribed by Law or regulation

If the auditor is required by law or regulation to use a specific layout, or wording of the

AUDIT REPORT
auditor’s report, the auditor’s report shall refer to SA 700 only if the auditor’s report

includes, at a minimum, each of the following elements-

T E
TU
T I
N S
3 I
SA 701 : COMMUNICATING KEY AUDIT MATTERS IN THE
AUDITOR’S REPORT
J C
Meaning of KeySAudit Matters

in auditor's were of most out of all matters

Matters which professional significance in audit communicated
judgement of FS of current period with TCWG

Goodwill valuation (if complex methods and judgements are involved), Investments

in related entities, Acquisitions etc.

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Applicability of SA 701
AUDIT REPORT

Audit of complete FS of Listed entities

Other circumstances where auditor decides to communicate KAM

Where Law or regulation requires communication of KAM

Purpose of communication

To enhance Assist intended users

communicative value of
the auditor's report Purpose of T E in understanding the
areas of significant
Communication
T U management judgment

T I in the audited FS

N S
I
S JC Provides additional
information to
intended users

Objectives of Auditor

to determine KAM
communicate those matters
by describing them
in the auditor’s report

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Determining Key Audit Matters

AUDIT REPORT
In determining KAM, the auditor shall consider -

Areas of higher
assessed RMM Significant auditor judgments
relating to areas in the FS
that involved significant
Effect of
management judgment
significant events
or transactions

Communicating Key Audit Matters

T E
The introductory language and drafting of KAM section shall include:

T U
Describe each KAM using an appropriate subheading, in a separate

T I
section of the auditor’s report under the heading “Key Audit Matters"

S
Along with reference of related disclosures in FS
N
I
Reason why the matter was considered as KAM

J C
How the matter was addressed in audit

S
State that KAM are those matters that, in the auditor’s
professional judgment, were of most significance in the audit of
the FS of current period

State that these matters were addressed in the audit of the FS

as a whole and the auditor does not provide a separate opinion
on these matters

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Communicating KAM is not:

AUDIT REPORT

Substitute for disclosures in the FS required as per applicable FRF or to achieve fair
presentation

Substitute for reporting as per SA 570 regarding material uncertainty of Going Concern
approach

Substitute for a modified opinion as per SA 705

Separate opinion on individual matters

Circumstances in which matter determined as KAM is not communicated in Audit report:

When Law or regulation precludes public

disclosure of such matter
T E
T U
If adverse consequences of the communication

T I
would outweigh the public interest benefit

N S
I
1. Any matter giving rise to a modified opinion or relating to doubt about Going

J C
concern approach are always KAM but not to be described as KAM as they are

S
separately dealt by SA 705 and SA 570 respectively. Reference of the same to
be included in the report as per SA 700.
2. If auditor determines that there are no KAM except as specified in Note 1, he
shall only include a statement to this effect in the KAM paragraph.

Communication with TCWG

Auditor shall communicate the following with TCWG:

Matters determined as KAM by the auditor

Auditor shall communicate
the following with TCWG: If no KAM determined, communicate auditor's
determination that there are no KAM

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Audit Documentation

AUDIT REPORT
Auditor shall document the following w.r.t. KAM

Matters that required

significant attention
for determination of
KAM

If KAM not
If no KAM determined,
communicated,
auditor's rationale for auditor's rationale for
the same not communicating
the same

T E
T U
4 SA 705: MODIFICATIONS TO THE OPINION IN THE
T I
INDEPENDENT AUDITOR’S REPORT
N S
I
Scope
J C
S
To issue an appropriate report with a modified opinion

Form and content of modified opinion

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Objective of SA 705
AUDIT REPORT

To express clearly an appropriately

modified opinion on the FS that is
necessary when

The auditor concludes, based on The auditor is unable to obtain

AE obtained that FS as whole SAAE to conclude that the FS as a
are not free from MMS whole are free from MMS

Circumstances when modification is required

T E
U
When auditor concludes that FS are not free from MMS, may be due to:
T
 Inappropriate accounting policies
T I
 Inappropriate or inadequate disclosures
N S
 Inappropriate application of Accounting policies

I
J C
When auditor unable to obtain SAAE to form a conclusion on the FS, may be due to:
 S
Limitations imposed by management
 Circumstances beyond control (e.g., records destroyed due to fire)
 Circumstances relating to NET of auditor's work

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Two factors determining the type of Modified opinion

AUDIT REPORT
Decision regarding type of modified opinion
depends on
Two Factors of the matter giving rise to modification

Materiality of matter Pervasiveness of matter

Relative significance of the matter Effects or possible effects of MS
for decision making of users

T E
Not confined to
specific FS elements
If confined,

T U Disclosures

T
proportion of FS I
represents substantial in FS fundamental
to understanding of users

N S
Types of Modified opinion
I
J C
S
Qualified Opinion Adverse Opinion Disclaimer of opinion
Circumstances for • When having obtained • When having • When the auditor
different opinions SAAE, auditor obtained SAAE, is unable to obtain
concludes that MS, auditor concludes SAAE on which to
individually or in that MS, individually base the opinion,
the aggregate, are or in the aggregate, and concludes
material, but not are both material that the possible
pervasive, to the FS and pervasive to the effects on the FS
• Unable to obtain FS. of undetected MS,
SAAE on which to if any, could be
base the opinion, but both material and
auditor concludes that pervasive.
the possible effects
of undetected MS,
if any, on FS could
be material but not
pervasive.

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Heading of Basis Basis for Qualified Basis for Adverse Basis for Disclaimer
for opinion Opinion Opinion of Opinion
AUDIT REPORT

Phrase of opinion In our opinion…. In our opinion…. In our opinion….

except for the effects because of the because of the
of matters specified significance of significance of
in Basis for opinion matters described matters described
section, FS present in Basis for opinion in Basis for opinion
fairly... as per FRF / section, FS do not section, the auditor
give a true and fair present fairly… as per has not been able
view. FRF / do not give a to obtain SAAE to
true and fair view. provide basis for audit
opinion.

Nature of Matter giving rise to Auditor’s Judgment about the Pervasiveness ofthe Effects or
the Modification

Material but Not Pervasive

T E
Possible Effects on the Financial Statements

Material and Pervasive

FS are materially misstated Qualified opinion
T U Adverse opinion
Inability to obtain SAAE Qualified opinion
T I Disclaimer of opinion

N S
Basis for Opinion I
J C
S
If auditor issues a modified opinion, a description of matter giving rise to such modification
should be included in Basis for Opinion section.
Causes of Modification and their description in Basis for Opinion section

MMS in FS relating to specific amounts

• Description and quantification of financial effects of MS, if practicable
• If impracticable to quantify, state this in the report

MMS of FS relating to Narrative disclosures

• Include explanation of how disclosures are misstated

MMS of FS relating to non-disclosure of information required to be disclosed

• Discuss non-disclosure with TCWG
• Describe nature of omitted information
• Include omitted disclosures, if permitted by law and regulation

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Inability to obtain SAAE

• Include the reason for such inability

AUDIT REPORT
Special points in case of Disclaimer of Opinion
Auditor’s Responsibility section of Audit report
Only following are to be included -
Statement regarding
responsibility to conduct
audit of FS as per SAs
and issue a report Statement about auditor’s
independence and ethical

T E
responsibilities

TU
Statement that because of
matters described in Basis for T I
Disclaimer of Opinion, auditor
N S
unable to obtain SAAE
I
J C
S

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Limitation imposed by management after engagement is accepted

AUDIT REPORT

Likely to result in
   to remove limitation
Auditor accepts Management Request Management
imposes limitation qualification/
engagement
disclaimer


Determine possibility
 
Communicate with If management
to perform alternative TCWG
APs refuses


Still unable to
obtain SAAE  Determine possible
effect on FS

Material but not pervasive

T E
Material and pervasive

T U



Issue qualified opinion T I

N S Is resignation possible?
No
Communicate with

I TCWG and issue

Disclaimer of opinion

J C Yes

S Resign

5 SA 706 : EMPHASIS OF MATTER PARAGRAPHS AND OTHER

MATTER PARAGRAPHS

Objective of Auditor
To draw users’ attention to significant matters by way of communication in:
i. Emphasis of Matter paragraph
ii. Other Matter paragraph

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Requirements of Emphasis of Matter and Other Matter

paragraphs

AUDIT REPORT
Emphasis of Matter (EOM) Other Matter (OM)
Meaning • Para included in auditor’s • Para included in auditor’s
report report
• Refers to matters • Refers to matters other
presented/disclosed than those presented/
appropriately in FS which disclosed in FS which
• In auditor’s judgment • is relevant to user’s
is fundamental to understanding of the audit,
understanding of users the auditor’s responsibilities
and audit report
Examples of situations • Uncertainty relating
T E
• Matters relevant to user’s
when the paragraphs to
be included
to future outcome or
exceptional litigation
T U understanding of audit

T I
• Significant subsequent • Matters relevant to user’s

N S
event between date of FS understanding of auditor’s

I
and date of auditor’s report
• Early application of a new
responsibilities
• Reporting on more than one

J
ASC set of FS

S
• A major catastrophe which
has effect on entity’s
• Restriction on distribution
or use of auditor’s report
financial position
Requirement of the • When FRF as prescribed by • When auditor’s procedures
paragraphs as per specific law is followed but would on subsequent events
SAs be unacceptable (SA 210) restricted to amendment in
FS only (SA 560)
• To alert users that FS • Prior period FS audited by
is as per Special purpose predecessor; auditor refers to
framework not general his report on corresponding
purpose (SA 800) figures (SA 710)
• When facts become known • If prior period FS
after date of auditor’s unaudited, state that
report and amended report corresponding figures are
is issued (SA 560) unaudited (SA 710)

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Requirements • To be included when: • To be included when:

• Opinion is not modified • Not prohibited by law
AUDIT REPORT

as per SA 705 due to the

matter in EOM
• Matter is not a KAM as • Matter is not a KAM as per
per SA 701 SA 701
Inclusion in audit report • Separate section named • If Other matter para is
Emphasis of matter with included to draw user’s
specific heading for each attention to Other
matter immediately after Reporting responsibilities,
Basis for opinion section. the paragraph to be
included in Report on
Other Legal and Regulatory
Requirements section

T E
• If KAM section is included, • If Other matter para is
either before or after KAM.

T U included to draw attention to

all auditor’s responsibilities,

T I include after Report on

N S audit of FS or Report on
Other Legal and Regulatory
I Requirements section

J C
• Clear reference of matter
prescribed and refer the
S relevant disclosures in FS
• Indication that auditor’s
opinion is not modified due
to this matter
Not a substitute for • A modified opinion as per
SA 705
• Disclosures in FS as per -
FRF
• Reporting as per SA 570
when material uncertainty
regarding going concern
exists

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6 SA 710 : COMPARATIVE INFORMATION–CORRESPONDING

FIGURES AND COMPARATIVE FS

AUDIT REPORT
Introduction

Comparative Information

Amounts and Disclosures included in the FS in respect of

one or more prior periods in accordance with the
applicable FRF

Corresponding Figures

T E
Comparative FS

Amounts and disclosures for the prior

T U
Amounts and disclosures for the prior
period, are included as an integral part
T I period, are included for comparison
of current period F.S only to be read
in relation to current figures
N S with the F.S. of the current period
Referred to in auditor's opinion, if
Not referred to in auditor's opinion I audited

J C
S
The nature of the comparative information that is presented in an entity’s FS
depends on the requirements of the applicable FRF.

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Audit Procedures
AUDIT REPORT

Determine
• Whether FS includes comparative
information as required by FRF
• Whether such information is
appropriately classified Evaluate
• Whether it agrees with amounts and
disclosures in prior period
• Whether accounting policies are
consistently applied; changes, if any
Other procedures properly disclosed and accounted for
• Whether possible MMS in comparative
information exists
T E
• If yes, perform additional procedures
T U
• Obtain WR for all periods covered in
audit opinion
T I
N S
Audit Reporting I
J C
Comparative FSS Corresponding Figures
 Audit opinion to refer to each period for  Audit opinion not to refer to corresponding
which FS are presented and on which figures, except in the following case:
opinion is expressed.
i. Auditor’s report in prior period FS was
 If opinion on prior period FS expressed modified and the subject matter is
in current period differs from opinion still unresolved: Modify current audit
expressed in the relevant prior period, report also.
give substantive reason for difference
ii. Auditor obtains AE w.r.t. existence
in Other Matter Para
of MMS in prior period FS on which
unmodified opinion was issued:
Express qualified/ adverse opinion on
current FS w.r.t. corresponding figures
if misstatement has not been dealt as
required by applicable FRF

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Prior Period FS Audited/ Unaudited

AUDIT REPORT
Comparative FS Corresponding Figures
When prior period FS audited If permitted, state in report If permitted, state in report
by predecessor auditor that: that:
 Prior period FS audited  Prior period FS audited by
by predecessor auditor predecessor auditor
 Type of opinion expressed  Type of opinion expressed
 Date of report  Date of report
If MMS exists in prior period
FS on which unmodified
opinion was issued
 Communicate to TCWG
T E


T
auditor is informed U
Request that predecessor

T I
When prior period FS are Include Other Matter para: Include Other Matter para:
unaudited
S
 That comparative
N  That corresponding figures
I
information is unaudited are unaudited

JC
 However, auditor not  However, auditor not
to be relieved from to be relieved from
S obtaining SAAE on
opening balances
obtaining SAAE on
opening balances

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QUESTIONS AND ANSWERS

AUDIT REPORT

1 INTRODUCTION
Q1 “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.
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

T E
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

T
material misstatement, whether due to fraud or error. U
That conclusion shall take into account:
T I
S
i. whether sufficient appropriate audit evidence has been obtained;
N
I
ii. whether uncorrected misstatements are material, individually or in aggregate;

J C
iii. Some specific evaluations

2
S
SA 700: FORMING AN OPINION AND REPORTING ON FS
Q2 The auditor shall evaluate whether the financial statements are prepared in accordance
with the requirements of the applicable financial reporting frame work. This evaluation
shall include consideration of the qualitative aspects of the entity’s accounting
practices,including indicators of possible bias in management’s judgements.
Advise about qualitative aspects of the entity’s accounting practices, including
indicators of possible bias in management’s judgments. RTP May 18 and RTP May 2020
Qualitative Aspects of the Entity’s Accounting Practices include the following:
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. For example, accounting policies, accounting estimates, financial statement

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disclosures etc.
iii. SA 540 addresses possible management bias in making accounting estimates.

AUDIT REPORT
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:
i. The selective correction of misstatements brought to management’s attention during
the audit. For example :
a. Correcting misstatements with the effect of increasing reported earnings,

earnings. T E
but not correcting misstatements that have the effect of decreasing reported

b.
T U
The combination of several deficiencies affecting the same significant account

T I
or disclosure could amount to a significant deficiency. This evaluation requires

S
judgment and involvement of audit executives.
N
ii. I
Possible management bias in the making of accounting estimates.

J C
Q3 S
An auditor is required to make specific evaluations while forming an opinion in an audit
report." State them. Nov 19
An auditor is required to make specific evaluations while forming an opinion in an audit
report.

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 applicable
financial reporting framework and are appropriate.
iii. The accounting estimates made by management are reasonable.
iv. The information presented in the financial statements is relevant, reliable, comparable,
and understandable.

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v. The financial statements provide adequate disclosures to enable the intended users
to understand the effect of material transactions and events on the information
AUDIT REPORT

conveyed in the financial statements

vi. The terminology used in the financial statements, including the title of each financial
statement, is appropriate.

Q4 Mention the elements of an Auditor’s report.

The basic elements of an Auditor’s Report are:
i. A title.
ii. An addressee, as required by the circumstances of the engagement.

T E
iii. An Opinion section containing an expression of opinion on the financial statements
and a reference to the applicable financial reporting framework used to prepare the
financial statements.
T U
iv.
T I
Where applicable, a section that addresses, and is not inconsistent with, there
S
porting requirements relating to going concern as per SA 570 (Revised).
N
I
v. A Basis for Opinion (Unmodified /Qualified /Adverse /Disclaimer of Opinion, as

C
applicable) section that addresses, and is not inconsistent with, the reporting
J
vi.
S
requirements relating to going concern as per SA 570 (Revised).

Where applicable, a section that includes the information required by SA 701 relating
to Key Audit Matters, or additional information about the audit that is prescribed by
law or regulation.
vii. A description of management’s responsibilities for the preparation of the financial
statements and an identification of those responsible for the oversight of the financial
reporting process that addresses, and is not inconsistent with, the requirements as
contained in this SA 700.
viii. A reference to Standards on Auditing and the law or regulation, and a description of
the auditor’s responsibilities for an audit of the financial statements that addresses,
and is not inconsistent with, the requirements as contained in this SA 700.

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ix. The auditor’s signature.

x. The place of signature.

AUDIT REPORT
xi. The date of the auditor’s report.

Q5 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.
RTP May 2020
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: T E
i.
T U
Identify the entity whose financial statements have been audited
ii.
T I
State that the financial statements have been audited
iii. S
Identify the title of each statement comprising the financial statements
N
iv. I
Refer to the notes, including the summary of significant accounting policies
v.
J C
Specify the date of, or period covered by, each financial statement comprising the

S
financial statements.

Q6 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. RTP Nov 19
The auditor’s report shall include a section, directly following the Opinion section,
with the heading “Basis for Opinion”, that:
i. States that the audit was conducted in accordance with Standards on Auditing.
ii. Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs.
iii. Includes a statement that the auditor is independent of the entity in accordance
with the relevant ethical requirements relating to the audit and has fulfilled the
auditor’s other ethical responsibilities in accordance with these requirements.

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iv. 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.
AUDIT REPORT

Q7 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, those charged with
governance, on which an audit in accordance with SAs is conducted. Explain.
RTP Nov 18
SA 200 explains the premise, relating to the responsibilities of management and, where
appropriate, those charged with governance, on which an audit in accordance with SAs is

conducted.

T E
The auditor’s report shall include a section with a heading “Responsibilities of Management
for the Financial Statements.”
T U

T I
This section of the auditor’s report shall describe management’s responsibility for:
i. S
Preparing the financial statements in accordance with the applicable financial
N
I
reporting framework, and for design, implementation and maintenance of such

J C
internal control to enable the preparation of financial statements that are free from

ii.
S
material misstatement, whether due to fraud or error.
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.

3 SA 701 : COMMUNICATING KEY AUDIT MATTERS IN THE

AUDITOR’S REPORT
Q8 What are Key Audit Matters? RTP Nov 18

Key audit matters are matter 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

Example: Goodwill valuation (if complex methods and judgements are involved), Investments
in related entities, Acquisitions etc.

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Q9 Explain clearly the purpose of communicating key audit matters. RTP Nov 18
As per SA 701, “Communicating Key Audit Matters in the Auditor’s Report”, the

AUDIT REPORT
purpose of communicating key audit matters is to:
i. Enhance the communicative value of the auditor’s report by providing greater
transparency about the audit that was performed.
ii. Provide 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.
iii. Assist intended users in understanding the entity and areas of significant management
judgment in the audited financial statements.

Q 10 Communicating T E
Key Audit Matter is not a substitute for disclosure in the Financial

T U
Statements rather Communicating key audit matters in the auditor’s report is in the

T I
context of the Auditor having formed an opinion on the financial statements as a
whole. Analyse.
N S RTP May 18 and RTP Nov 19
I
Communicating key audit matters in the auditor’s report is not:

i.
J C
A substitute for disclosures in the financial statements that are required by the

S
applicable Financial reporting framework or that are otherwise necessary to achieve
fair presentation.

ii. A substitute for the auditor expressing a modified opinion in accordance with SA 705.
iii. A substitute for reporting in accordance with SA 570 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.
iv. A separate opinion on individual matters.

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4 SA 705: MODIFICATIONS TO THE OPINION IN THE INDEPENDENT

AUDITOR’S REPORT
AUDIT REPORT

Q 11 Discuss the objective of the auditor as per Standard on Auditing (SA) 705 “Modifications
to The Opinion in The Independent Auditor’s Report”. RTP Nov 18

As per 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:
i. The auditor concludes, based on the audit evidence obtained, that the financial
statements as a whole are not free from material misstatement
ii. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that

E
the financial statements as a whole are free from material misstatement.

T
Q 12 Discuss
T U
the factors affecting the decision of the auditor regarding which type of
modified opinion is appropriate.
T I
S
The decision regarding which type of modified opinion is appropriate depends upon:
N
i. I
The nature of the matter giving rise to the modification, that is, whether the

J C
financial statements are materially misstated or, in the case of an inability to obtain

ii.
S
sufficient appropriate audit evidence, may be materially misstated, and
The auditor’s judgment about the pervasiveness of the effects or possible effects of
the matter on the financial statements.

5 SA 706: EMPHASIS OF MATTER PARAGRAPHS AND OTHER

MATTER PARAGRAPHS
Q 13 Define Emphasis of Matter paragraph. When the auditor shall include an Emphasis of
Matter paragraph in the auditor’s report? Also explain how the auditor would include
an Emphasis of Matter in the auditor’s report? May 18 and RTP May 19
Emphasis of Matter paragraph is a paragraph included in the auditor’s report that refers
to a matter appropriately presented or disclosed in the financial statements that, in the
auditor’s judgment, is of such importance that it is fundamental to users’ understanding
of the financial statements.

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The auditor shall include an Emphasis of Matter paragraph in the auditor’s report
provided:

AUDIT REPORT
i. The auditor would not be required to modify the opinion in accordance with SA 705
(Revised) as a result of the matter.

ii. When SA 701 applies, the matter has not been determined to be a key audit matter
to be communicated in the auditor’s report.
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report,
the auditor shall:
i. Include the paragraph within a separate section of the auditor’s report with an
appropriate heading that includes the term “Emphasis of Matter”
ii.
E
Include in the paragraph a clear reference to the matter being emphasized and

T
to where relevant disclosures that fully describe the matter can be found in the
financial statements.
T U
iii.
T I
Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

N S
6 I
SA 710 : COMPARATIVE INFORMATION–CORRESPONDING

C
FIGURES AND COMPARATIVE FS
J
Q 14 The nature of the comparative information that is presented in an entity’s financial
S
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. Explain clearly stating the essential audit reporting
differences between the approaches. Also define comparative information and audit
procedures regarding comparative information. RTP May 19
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.

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The essential audit reporting differences between the approaches are:

i. In case of corresponding figures, the auditor’s opinion on the financial statements
AUDIT REPORT

refers to the current period only

whereas
ii. In case of comparative financial statements, the auditor’s opinion refers to each
period for which financial statements are presented.

Definition of Comparative Information as per SA 710

Comparative information is the amounts and disclosures included in the financial statements
in respect of one or more prior periods in accordance with the applicable financial reporting
framework.
Audit Procedures regarding comparative information T E
T U
The auditor shall determine whether the financial statements include the comparative

T I
information required by the applicable financial reporting framework and whether such
information is appropriately classified.
N S
I
For this purpose, the auditor shall evaluate whether:
i.
J C
The comparative information agrees with the amounts and other disclosures presented

S
in the prior period
ii. The accounting policies reflected in the comparative information are consistent with
those applied in the current period or, if there have been changes in accounting
policies, whether those changes have been properly accounted for and adequately
presented and disclosed.

Q 15 When corresponding figures are presented, the auditor’s opinion shall not refer to the
corresponding figures. Discuss the exceptions of the above statement when the prior
period financial statements are audited. Nov 19
When corresponding figures are presented, the auditor’s opinion shall not refer to the
corresponding figures except in the following circumstances:
i. If the auditor’s report on the prior period included a modified opinion (qualified
opinion, a disclaimer of opinion, or an adverse opinion) and the matter which gave

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rise to the modification is unresolved, the auditor shall modify auditor’s report
opinion on the current period’s financial statements. In the basis for modification

AUDIT REPORT
paragraph in the auditor’s report the auditor shall:
a. When the effects or possible effects of the matter on the current period’s figure
are material: Refer to both the current period’s figures and the corresponding
figures in the description of the matter giving rise to the modification or
b. In other cases, explain that the audit opinion has been modified because of
the effects or possible effects of the unresolved matter on the comparability
of the current period’s figures and the corresponding figures.

ii. An unmodified opinion was issued on the prior period financial statements but the

T E
auditor obtains audit evidence that a material misstatement exists in the prior period
financial statements, the auditor shall verify whether the misstatement has been

T U
dealt with as required under the applicable financial reporting framework. If not,the

T I
auditor shall express a modified opinion (qualified opinion or an adverse opinion) in
S
the auditor’s report on the current period financial statements.
N
I
J C
CORRECT
S / INCORRECT STATEMENTS
State with reasons (in short) whether the following statements are correct or incorrect:
i. An Audit report is an opinion drawn on the entity’s financial statements to make sure
that the records are true and correct representation of the transactions they claim
to represent.
Incorrect.

Reason: The purpose of an audit is to enhance the degree of confidence of intended users
of the financial statements. The aforesaid purpose is achieved by the expression of an
independent reporting by the auditor as to whether the financial statements exhibit a true
and fair view of the affairs of the entity.
Thus, an Audit report is an opinion drawn on the entity’s financial statements to make sure
that the records are true and fair representation of the transactions they claim to represent.

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ii. The preparation of financial statements does not involve judgment by management in
applying the requirements of the entity’s applicable financial reporting framework to
AUDIT REPORT

the facts and circumstances of the entity.

Incorrect.
Reason: The preparation of financial statements involves judgment by management in
applying the requirements of the entity’s applicable financial reporting framework to the
facts and circumstances of the entity. In addition, many financial statement items involve
subjective decisions or assessments or a degree of uncertainty, and there may be a range
of acceptable interpretations or judgments that may be made.
iii. There is no need of addressee in the Auditor’s report.


Incorrect.

T E
Reason: The auditor’s report shall be addressed, as appropriate, based on the circumstances

T U
of the engagement. Law, regulation or the terms of the engagement may specify to whom

T I
the auditor’s report is to be addressed. The auditor’s report is normally addressed to those

S
for whom the report is prepared often either to the shareholders or to those charged with
N
I
governance of the entity whose financial statements are being audited.

iv. C
If a restatement is made to correct a material misstatement in the prior period
J
S
financial statements that affects the comparative information in the financial
statements, auditor may rely on written representations received on current period
financial statement.
Incorrect.
Reason: Auditor would obtain a specific representation if a restatement is made to

correct a material misstatement in the prior period financial statements that affects the
comparative information in the financial statements.

v. The statutory auditor of ABC Ltd. is of the opinion that communicating key audit matters
in the auditor's report constitutes a substitute for disclosure in the financial statements.
Incorrect.
Reason: Communicating key audit matters in the auditor’s report is not a substitute for
disclosures in the financial statements that the applicable Financial reporting framework
requires management to make, or that are otherwise necessary to achieve fair presentation.

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vi. The auditor shall modify the opinion in the auditor’s report only when the auditor
concludes that, based on the audit evidence obtained, the financial statements asa

AUDIT REPORT
whole are not free from material misstatement.
Incorrect.
Reason: The auditor shall modify the opinion in the auditor’s report when:
a. The auditor concludes that, based on the audit evidence obtained, 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.
vii. The auditor shall express a qualified opinion when the auditor concludes that the

applicable financial reporting framework. T E

financial statements are prepared, in all material respects, in accordance with the

Incorrect.
T U

T I
Reason: The auditor shall express an unmodified opinion when the auditor concludes that
S
the financial statements are prepared, in all material respects, in accordance with the
N
I
applicable financial reporting framework.

J C
viii. If financial statements are misstated, and in the auditor’s judgment such misstatement

S
is material and pervasive, he should issue a qualified opinion.
Incorrect.
Reason: As per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”,
the auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate,
are both material and pervasive to the financial statements. However, the auditor shall
express qualified opinion when he concludes that misstatement, individually or in aggregate
are material but not pervasive.
ix. An auditor should issue disclaimer of opinion when there is difference of opinion
between him and the management on a particular point.
Incorrect.
Reason: The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that the

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possible effects on the financial statements of undetected misstatements, if any, could be

both material and pervasive.
AUDIT REPORT

In case of difference of opinion, either the auditor will issue qualified report or adverse
report and not disclaimer of opinion.

MULTIPLE CHOICE QUESTIONS

i. An Audit report is:

a. an opinion drawn on the entity’s financial statements to make sure that the records

b. T E
are true and correct representation of the transactions they claim to represent.

an opinion drawn on the entity’s books of accounts to make sure that the records

T U
are true and fair representation of the transactions they claim to represent.

c.
T I
an opinion drawn on the entity’s financial statements to make sure that the records
S
are true and fair representation of the transactions they claim to represent.
N
d. I
an opinion drawn on the entity’s books of accounts to make sure that the records

J C
are true and correct representation of the transactions they claim to represent.
ii.
S
In order to form the opinion, the auditor shall conclude as to whether the auditor has
obtained ______ about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error
a. reasonable assurance
b. absolute assurance
c. limited assurance
d. None of the above
iii. Which of the following is not a Specific Evaluations by the Auditor?
a. The financial statements adequately disclose the significant accounting policies
selected and applied
b. The accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate
c. The accounting estimates made by management are reasonable

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d. The sufficient appropriate audit evidence has been obtained

iv. If the auditor is unable to obtain sufficient appropriate audit evidence regarding the

AUDIT REPORT
opening balances, the auditor shall express:
a. a disclaimer opinion
b. a qualified opinion
c. a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
d. unmodified opinion
v. A company did not disclose accounting policies required to be disclosed under Schedule
III or any other provisions of the Companies Act, 2013, the auditor should issue–
a. a qualified opinion
b.
c.
an adverse opinion
a disclaimer of opinion T E
d. emphasis of matter paragraph.
T U
vi.
T I
Which of the following is not a type of modified opinion?
a. qualified opinion
N S
b. adverse opinion I
c. disclaimer of opinion
J C
vii.
d. None of the above
S
SA-700 requires the use of specific headings, which are intended to assist in making
auditor’s reports that refer to audits that have been conducted in accordance with
SAs more recognizable. Which of the following is that specific heading?
a. Key audit matters
b. Basis of opinion
c. Date
d. All of the above
viii. K Ltd. has a substantial bank loan which is due to mature in 2021, and the company
plans to negotiate for a new loan in March 2019. The auditors concluded that the
company’s use of the going concern assumption in the financial statements for
the year ended 31st December 2019 is appropriate. However, they believe there is a
material uncertainty related to going concern, which has been appropriately disclosed

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in the financial statements. What action should the auditor take with regards to going
concern in the auditor’s report?
AUDIT REPORT

a. Express an unmodified opinion and describe the material uncertainty in the other
matter paragraph
b. Express an unmodified opinion and describe the material uncertainty in the material
uncertainty related to going concern paragraph
c. Express a modified opinion and describe the material uncertainty in the emphasis of
matter paragraph
d. Express a qualified opinion and describe the material uncertainty in the basis for
qualified opinion paragraph

T E
ix. Due to fire, Clear Crystals Co. had lost all of its accounting records for the entire year
and backups are not available. Which audit opinion is most likely to be issued?
a. Unmodified opinion
T U
b. Qualified opinion
T I
c. Adverse opinion
N S
d. Disclaimer of opinion I
x.
J C
The auditor has identified indicators of going concern problems. Which the client has

a.
S
adequately disclosed. Which of the following is appropriate?
Unmodified opinion and report
b. Unmodified opinion, modified report with emphasis of matter
c. Qualified opinion
d. Adverse opinion
Answers
i. c. an opinion drawn on the entity’s financial statements to make sure that the records
are true and fair representation of the transactions they claim to represent.
ii. a. reasonable assurance
iii. d. The sufficient appropriate audit evidence has been obtained
iv. c. a qualified opinion or a disclaimer of opinion, as appropriate, in accordance with SA 705.
v. a. a qualified opinion
vi. d. None of the above

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vii. d. All of the above

viii. b. Express an unmodified opinion and describe the material uncertainty in the material

AUDIT REPORT
uncertainty related to going concern paragraph
ix. d. Disclaimer of opinion
x. a. Unmodified opinion and report

T E
T U
T I
N S
I
J C
S

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AUDIT REPORT

T E
TU
T I
N S
I
J C
S

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Chapter
Audit of Banks

AUDIT OF BANKS
13
Chapter Roadmap

1
Introduction

T E
2
U
Auditing framework
T of Banks
T I
3
N S
Bank Audit Approach
I
4 J C
Conducting an Audit
S
5
Advances

6
Audit of Revenue Accounts

7
Auditor’s Report

| 13.1
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BRIEF OVERVIEW
AUDIT OF BANKS

1 INTRODUCTION

Types of Banks

Commercial Banks
(E.g., HDFC Bank,
ICICI Bank) Regional Rural Banks
Small Finance Bank
(E.g., Jana Small
T E (RRBs)
(E.g., Kerala
Finance Bank)

T U Gramin Bank)
Types of Banks
T I
Development Banks

N S Co-operative Banks
(E.g., West Bengal
(E.g., NABARD,
SIDBI) I
Payments Banks
State Co-operative
Bank Ltd.)

S JC (E.g., Airtel
Payments,
Paytm)

Non-computerised banks

Banks as per level Partially Computerised

of computerisation banks

Fully computerised banks

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Regulating body of Banks

AUDIT OF BANKS
Development
and supervision
of Indian
Financial system

Regulating
Monetary
activities of
policy
commercial
formulation
banks

Central Bank-
Reserve Bank of
India

T E
Acting as
banker's
TU Issuance of

bank
T I currency

N S
Regulation
I of currency

J C issue

S
Regulatory Framework

Banking Regulation Act, 1949.

State Bank of India Act, 1955

Companies Act, 2013.
State Bank of India (Subsidiary Banks) Act 1959
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
Regional Rural Banks Act, 1976
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
Information Technology Act, 2000
Prevention of Money Laundering Act, 2002

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Securitisation and Reconstruction of Financial Assets and Enforcement of Security

AUDIT OF BANKS

Interest Act, 2002

Credit Information Companies Regulation Act, 2005
Payment and Settlement Systems Act, 2007
Reserve Bank of India Act, 1934

Functions of banking operations

Functions

Accepting
T E Granting
deposits

T U advances

T I
S
Functions of
N
I banks

J C
Peculiarities S
Huge volumes and complexity of transactions

Wide geographical spread of banks’ network

Large range of products and services offered

Extensive use of technology

Strict vigilance by the banking regulators

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Form and Content of Financial Statements

AUDIT OF BANKS
 As per Section 29(1) of Balance Sheet
Banking Regulations Act, 1949
Form A
Financial Statements
 FS as per Third Schedule
of Banking
Companies  Compliance with Accounting Profit and Loss
Standards as per Section 133 Account
of Companies Act, 2013 Form B

2 AUDITING FRAMEWORK OF BANKS

Requirement of audit of accounts

T E
 Section 30(1) of Banking Regulations Act, 1949
TU
company auditor
T I
 Balance Sheet and Profit and Loss Account to be audited by person qualified to be

N S
Eligibility, Qualifications and Disqualifications
I
 As per Section 141 of Companies Act, 2013

J C
Appointment
S
 Banking Company - By shareholders at AGM (RBI Approval required)
 Nationalised Banks - By Board of Directors (RBI Approval required)
 State Bank of India (SBI)- By Comptroller and Auditor General of India in
consultation with Central Government (CG)
 Subsidiaries of SBI - By SBI
 Regional Rural banks - By Board of Directors after approval of CG

Remuneration
 Banking Company - As per Section 142 of Companies Act,2013
 Nationalised Banks and SBI - By RBI in consultation with CG

Powers of auditor
 Banking company, Nationalised bank, State Bank of India, subsidiaries of SBI or RRB
- Same powers as of Company Auditor (Refer Section 143 of Companies Act, 2013)

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3 BANK AUDIT APPROACH

AUDIT OF BANKS

Audit Plan

Audit plan to be drawn on basis of

Nature and thrust of

Nature of adverse features
operations

Audit risk based on lack or Level of compliance of

inadequacy of IC previous reports

T E
Controls to manage risks
T U

T I
Effective segregation of duties (Front end and Back end)
S
Accurate measurement and reporting of positions
N
I
Verification and approval of transactions

J C
Reconciliation of positions and results


Setting of limits S
Reporting and approval of exceptions
Physical security
Contingency planning

Common questions / steps to perform Control Activities

Performs the control?

Does the person have requisite knowledge and authority
Who
to perform the control?

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What
What evidence is generated to prove that the control is performed?

AUDIT OF BANKS
When and with what frequency is the control performed?
When
Is the frequency enough to prevent, detect and correct RMM?

Where is the evidence of performance of the control retained?

Where For how long is the evidence retained?
Is the evidence accessible for / available for audit?

Why is the control being performed?

Why
E
What types of errors are prevented or detected through the performance
of the control? T
T U
How T I
How is the control performed?

N S
What are the control activities?
Can these activities be bypassed?
I
Can the bypass, if any, be detected?

J C
How are exceptions / deviations resolved on identification?
S
What is the time frame for resolving the exceptions / deviations?

Engagement Team Discussions

Provides -

 To gain better  Opportunity for

understanding experienced members to
of the bank share insights
Team discussions
and its IC
 Opportunity for team
 To assess
potential MMS members to share experience
- Understanding effect of
RAP on NET of FAP

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Engagement team discussions are generally done at the planning stage of an audit.
AUDIT OF BANKS

Engagement team discussions shall include discussion on :

Huge
Errors volumes
more and
likely to complexity of transactions
occur

Wide
Errors geographical
identified in prior spread
years of banks’ network

Largefraud
Possible range of products
perpetration andbyservices
method offeredor others
bank personnel

Audit responses to engagement risk, pervasive risks, and

Extensive use of technology
specific risks

Strict
Need vigilance
to maintain by the banking
professional T
regulators
skepticism
E
T U
Need to remain
Huge alertand
volumes for information
T I
complexityorofconditions which
transactions
S
indicate that a MMS may have occurred

N
I
Wide geographical spread of banks’ network
4 C
CONDUCTING AN AUDIT
J
S
Large range
Initial consideration by the of products
statutory and services offered
auditor
No internal assignments in the bank by its Statutory auditors
Extensive use of technology
Assessment of engagement risk
Planning as per SA 300; Performing Quality control procedures as per SQC-1
Strict vigilance by the banking regulators
Communication with previous auditor
Understanding and documenting terms of engagement as per SA 210
Understanding the Bank and its Environment as per SA 315
Establish the engagement team
Perform audit procedures as per SA 510 on opening balances

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Declaration of Indebtedness

AUDIT OF BANKS
Identifying and Assessing

RMM at FS and assertion level of ABCD

Risk of Fraud including Money Laundering
Specific risks
Risk associated with outsourcing

Understanding the Bank and its Environment including Internal Control

Understand the Bank’s Accounting Process

T E
Understanding the Risk Management Process
T U
T I
Oversight and involvement in the control process by TCWG
S
Identification, measurement and monitoring of risks
N
Control activities I
Monitoring activities
J C
S
Reliable information systems
Stress testing framework

Engagement team discussions

Establish overall audit strategy and audit plan as per SA 300 and determine
audit materiality

Audit planning memorandum

Describe scope of audit

Highlight significant risks and issues
Evidence that audit was planned to address risks

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Consider doubts on entity's ability to continue as Going Concern

AUDIT OF BANKS

Responding to assessed risks as per SA 330

Decide NET of FAP as per risks assessed

Reliance on / review of other reports

Consider adverse or qualified remarks in-

Previous audit reports
Latest internal inspection reports of bank officials
Reserve Bank’s latest inspection report
Concurrent / Internal audit report
Report on verification of security. T E
T U
Any other internal reports specially related to particular accounts.

T I
Manager’s charge-handing-over report when incumbent is changed

N S
5 ADVANCES I
J C
Components S
Term loans

Cash credits, Overdrafts,

Demand loans

Bills discounted and

purhased
Advances
Adverse balance in
deposit accounts

Interest bearing
staff loans

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Disclosure requirements

AUDIT OF BANKS
Legal disclosure requirements in Balance Sheet

Nature wise Security wise Situation wise

 Bills purchased and  Secured by tangible I. Advances in India:
discounted assets  Priority sectors
 Cash credits,  Covered by Bank/  Public sector
Overdrafts and loans Government  Banks
repayable on demand guarantees  Others
 Term Loans  Unsecured

T E
II. Advances outside India:
 Due from Banks

T U  Due from Others:

T I  Bills Purchased
and discounted

N S  Syndicated loans
I  Others

J C
S

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Classification of Advances
AUDIT OF BANKS

Priority
Sector wise SMA 0
Non Priority (stress signals)

Secured
Security wise SMA 1
(Overdue b/w 31
Unsecured to 60 days)
Advances

SMA 2
(Overdue b/w 61
Standard Regular

Standard T E to 90 days)

T U
Special Mention
Accounts (SMA)

T I
Prudential norms
N S Sub-Standard
NPA for < = 12
I months

J C NPA for >

S NPAs Doubtful 12 months
(D1, D2, D3)

Loss identified by
Loss bank or auditor but
not written off

Secured Advances
Principal security
Primary against which bank
extends credit

Nature of security

Additional security.
Collateral Can be tangible or
intangible

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Personal Security of Guarantor, Goods/ Stocks/ Trade Receivables, Gold

AUDIT OF BANKS
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

Mode of creation of security

Registered- affected by Mortgage deed signed by

mortgagor
Mortgage
Equitable - effected by a mere delivery of title deeds or
other documents of title

Pledge
T E
Delivery of goods to the bank with legal ownership with
pledger
U
Creation of security

I T
Creation of an equitable charge. Neither possession nor
Hypothecation T
ownership transferred to lending bank. Bank may seize
S asset if terms and conditions not met

I N
Assignment
J C Transfer of actionable claims which gives assignee absolute
right over debt

Set-off
S Enables a bank to combine two accounts (a deposit
account and a loan account) of the same person

Creation of a legal charge with consent of the owner, which

Lien
gives lender a legal right to seize

Prudential norms on Income Recognition, Asset Classification and

Provisioning pertaining to Advances

Non-performing assets

An asset becomes NPA when-

 It ceases to generate income for the bank

 interest and/ or installment of principal remain overdue or out of order for a specified period
of time

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Category wise NPA

AUDIT OF BANKS

 Term Loan : interest and/ or installment of principal remain overdue for a period > 90 days
in respect of a term loan
 Overdraft / Cash credit : the account remains ‘out of order’ in respect of an OD/CC
 Bill discounted : bill remains overdue for a period > 90 days

Provisioning requirements

 Standard assets : 0.40% (Agricultural advances and SME advances: 0.25%, Real estate: 1%)
 Sub-standard assets : 15% [Additional 10% for unsecured portion (5% in case of infra)]
 Doubtful :
 Unsecured portion : 100%
 Secured portion : T E
→ Upto 1 year : 25%
T U
→ 1-3 years : 40%
T I
→ More than 3 years : 100%
N S
 Loss assets : 100% I
J C
S
Classification of advances should be based on record of recovery and not on availability
of security or net worth of borrower.

Special classifications of NPA

Accounts regularized near about the Balance Sheet Date

 Where the account indicates inherent weakness
 Few credits are recorded near balance sheet date to regularise the account

Government guaranteed advances

 CG guaranteed advances to be treated as NPA for provisioning only when guarantee is
invoked. For income recognition, they will be classified as NPA if conditions meet.

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Advances under consortium

 Advances by a group of banks, led by a Lead bank

AUDIT OF BANKS
 Classification should be based on record of recovery of the respective individual
member bank
 If lead bank receives all remittances, it should transfer share of other members for
proper classification

Accounts where there is erosion in the value of security / frauds committed by

borrowers
 If realisable value of security < 50% of value assessed by bank or accepted by RBI in
last inspection : Doubtful Asset
 If realisable value of security < 10% of outstanding in borrowal account: Loss Asset

E
Advances against Term deposits, NSCs, KVPs/ IVPs, Life policies
T
 If adequate margin available: not treated as NPA

T U
Agricultural advances T I
S
 For Short duration crops: crop season (period upto harvesting) longer than a year;
N
I
treated as NPA if overdue for 2 crop seasons

J C
 For Long duration crops: crop season (period upto harvesting) shorter than a year;
treated as NPA if overdue for 1 crop season
S
Agricultural advances affected by natural calamities
 Banks may decide on conversion of the short term production loan into a term loan or
re-schedulement of the repayment period and the sanctioning of fresh short term loan

Advances to staff
 Staff Advances: Classified under sub head Others under Other Assets schedule
 Classified as NPA when default in repayment of installment of principal or payment of
interest on the respective due dates

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Computation of Drawing Power

AUDIT OF BANKS

Meaning
Limit up to which a borrower can withdraw from the working capital limit sanctioned

Calculation
Generally calculated based on value of realisable current assets secured less a specified margin
set by the bank.

If a company availed loan from a bank on security of its stocks, BOD may direct

that drawing power may be calculated as-

T E
T U
Particulars of Current assets (`, in crores)

(A) Stocks
T I
Stocks at realizable value
N S 1000
Less: Unpaid Stocks I
S
Paid for stocks JC
- Sundry creditors (200)
800
Margin @25% (200)
Drawing Power (DP) 600

Points auditor must bear in mind

All accounts should be kept within both the drawing power and the sanctioned limit at all
times. Irregular accounts - brought to management's notice
Drawings in the working capital account are covered by the adequacy of the current assets.
Stock statements should not be older than 3 months.
Stock statements and audited annual reports should be submitted regularly by borrower to
the bank and scrutinised in detail by the bank
Drawing power to be calculated as per guidelines by BOD of the banks

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Banks must carry stock audit of accounts where funded exposure >5 crores and for other

AUDIT OF BANKS
accounts if situation warrants
Stock auditor's report shall be reviewed by the bank auditor
In case of consortium, lead bank calculates and allocates drawing power to member banks

Audit of Advances

Obtain SAAE about

Amounts of outstanding advances at the date of the balance sheet
Advances represent amount due to the bank
Advances supported by loan documents and other documents
No unrecorded advances T E
T U
Basis of valuation of advances is appropriate and properly applied, and that the recoverability
of advances is recognised in their valuation.
T I
S
The advances are disclosed, classified and described in accordance with recognised accounting
N
policies and practices I
J C
Appropriate provisions as per RBI norms

S
Accounting Standards and generally accepted accounting practices

Methods to obtain SAAE

examining validity of recorded amounts
examining loan documentation
reviewing operation of accounts
examining existence, enforceability and valuation of the security
checking compliance with RBI norms
carrying out appropriate analytical procedures
examine all large advances while other advances may be examined on a sampling basis

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Evaluation of IC over advances

AUDIT OF BANKS

Bank should make an advance after satisfaction of creditworthiness

Agreements, demands, letters and all other documents properly executed
Compliance with terms of sanction
Sufficient margin should be kept against securities. Availability of sufficient margin checked
at regular intervals
If security in form of shares etc. - ownership transferred to bank
In case of goods in possession with bank physical verification of packages and godown
inspection regularly done
DP register should be regularly updated
Accounts within sanctioned limit and drawing power

T E
Review of advances at least once a year and more frequently for large advances

T U
6 AUDIT OF REVENUE ACCOUNTS
T I
Incomes N S
I
Interest Earned J C Other Income
S
Interest / Discount on Advances / Commission, Exchange and Brokerage (on bills
for collection, on LCs, mobile banking, locker
Bills
rent etc.)
Interest Income on Investments
Profit on Sale of Investments
Interest on Balances with RBI and
Profit/Loss on Revaluation of Investments
Other Inter– bank Funds
Profit on sale of Land, Buildings and Other
Others: This includes any other
Assets
interest/discount income not
Profit/Loss on Revaluation of Fixed Assets
included in the above heads
Profit on exchange transactions (on forwards,
options and derivative contracts)

Income earned by way of dividends, etc., from

subsidiaries and joint ventures abroad/in India.

Miscellaneous income

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Audit Objective

AUDIT OF BANKS
Recorded income
No unrecorded income
pertain to the bank

Recorded income arose Income is recorded in

from transactions during proper amount and in
the relevant period proper period
To obtain
reasonable
assurance that

T E
T U
Auditor should obtain SAAE that the income recognition principles have been adhered

T I
to. Auditor should test check items of incomes (interest, fees, commissions etc.)

N S
Income Recognition I
Income from advances J C
Type of Income
S Point of Recognition

Any income which exceeds 1% of the total Recognition on accrual basis as per AS-9
income of the bank (if income on gross basis)
or 1% of the net profit before taxes (if income
net of costs)
If item does not fall under above Cash basis (auditor need not qualify his
report)
Income on NPAs Recorded on realisation as per RBI guidelines
Interest on advances against TDs, IVPs, KVPs, Recorded on due date provided adequate
life policies margin available
Discount on bills purchased at close of the year Income to be apportioned properly (unexpired
discount - Other liabilities)
Commission on bills for collection When bill is collected

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Fees and commissions earned by the banks on Accrual basis

renegotiations or rescheduling of outstanding debts
AUDIT OF BANKS

Income from investments

Type of Income Point of Recognition

Interest / Dividend Income on Investments from Accrual basis

Government securities, bonds and debentures of
corporates and other investments
Profit/Loss on Sale of Investments Taken to profit and loss account
Profit/Loss on Revaluation of Investments As per RBI guidelines, investments are to be
valued at periodical intervals and change in
valuation should be recognised and taken to

T E
profit and loss account
Interest (discount) component paid by Bank on rediscount of bills is not to be netted

T
off from the discount earned on bills discounted. U
T I
Reversal of Income from NPAs
N S
I
C
Advances (including government guaranteed advances), bills purchased and discounted,
J

S
becomes NPA as at the close of any year
Interest accrued and credited in the past periods but unrealised
 reversed (if recorded in current period) or
 create provision (if recorded in prior periods)
Fees, commission and similar income that have accrued should

 cease to accrue in the current period and

 should be reversed or provided for with respect to past periods, if uncollected.

Leased Assets
Accrued, credited but unrealised Finance charge income from leases assets, before asset
became NPA - reverse or create provision

Take out Finance

Should not recognize income unless realised from the borrower/taking-over institution.

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Partial recoveries of NPA

AUDIT OF BANKS
Follow an accounting policy to appropriate recovered amount to principal and interest in
a uniform manner
Credit towards interest income should not be out of fresh advances
Banks may record accrued interest income on NPAs in a Memorandum Account for
control purpose.

Expenses
Components and Audit approach

Interest Expended

T E
Interest on Reserve Bank
Interest on Deposits
U
of India / Inter– Bank
T
T I Borrowings

S
Others

N
I
Perform Substantive Procedures
J C


S
Verify calculation sheet on test basis
Verify whether there is any excess or short credit of material amount
 Interest rates in accordance with RBI directives, bank's regulations, fixed deposit receipt,
head office (in case of inter branch deposits)
 Ascertain whether there are any changes in interest rate
 Examine the completeness - interest on all liabilities recorded
 Re-compute interest on sample basis

Perform Analytical Procedures

 Assess reasonableness of amount of interest expense by analysing ratios of interest paid

to the average quantum of the respective liabilities during the year.
 Work out average interest rate, compare this with actual interest paid and investigate
discrepancies.
 Compare average interest rate with previous year figures
 Month to month cost analysis and analyse variances

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Operating Expenses
AUDIT OF BANKS

Repairs, Maintenance,
Marketing expenses

Salaries,Director's Fees,
Rent,Taxes, Lighting, Printing Auditor's fees, legal
and Stationery, postage charges,Insurance

Depreciation

 Study and evaluate the system of internal control - authorisation procedures

 Trend analysis - whether there is any divergent trend in any expense
 Month to month analytical review
T E
 Verify expenditures with documentary evidences

T U


Check calculation and reasonableness of expenses

T I
Ratio analysis - comparing expenditure ratios with previous year ratios

N S
Provisions and Contingencies I
J C Provsions in

S respect of NPAs

Provision for Taxation Provision of contingencies

Provision / for dimunition

in investment value

 Ascertain compliance with the various regulatory requirements for provisioning (e.g., RBI
norms)
 Verify basis of classification into standard, sub-standard, doubtful, loss and non-
performing assets on sample basis
 Re-computation of the provisions to ensure that they are recorded at proper amounts
 Verify income tax provision as per allowances and disallowances in Income Tax Act,1961
 Other Provisions: examine w.r.t. circumstances warranting creation of provision (E.g.,
Provision for gratuity)

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7 AUDITOR’S REPORT

AUDIT OF BANKS
Nationalised Bank

Reporting to CG on 5 points; Whether -

 Balance Sheet exhibit a true and fair view and all information and explanation

found satisfactory
 Transactions within powers of bank
 Returns received from branches are adequate
 Profit or Loss account shows true state of profit or loss during the period
 Any other matter deemed necessary to be reported to CG
Report of SBI in similar manner

T E
Statutory and Central Branch Auditors
T U

T I
In accordance with SA 700, SA 701, SA 705, SA 706, SA 710 and SA 720
S
Disclose information in relation to unaudited branches-
N
 Number of such branches I

J C
quantification of advances
 deposits

S
interest income and interest expense
Compliance with Section 143 of Companies Act,2013
CARO, 2016 is not applicable to a Banking Company
Long Form Audit Report (LFAR)
Reporting on matters specified by RBI
To be submitted before 30th June every year
Executive summary may be included to highlight key observations

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Fraud Reporting
AUDIT OF BANKS

As per RBI circular -

 Applicable to all scheduled commercial banks except Regional Rural Banks
 If auditor finds any susceptible fraud or act beyond powers of the bank
Consider requirements of SA 240
Report the matter to the RBI in addition to Chairman/Managing Director/Chief Executive
of the bank
As per Section 143(12)

QUESTIONS AND ANSWERS

T E
T U
1 INTRODUCTION
T I
Q1 S
What are the different types of banks in India? Also, state the peculiarities of a
N
banking system. I RTP May 18

J C
There are different types of banking institutions prevailing in India which are as
follows:
i. Commercial banks
S
ii. Regional rural banks
iii. Co-operative banks
iv. Payment banks
v. Development banks
vi. Small Finance banks
The peculiarities involved in a banking system are:
i. Huge volumes and complexity of transactions,
ii. Wide geographical spread of banks’ network,
iii. Large range of products and services offered,
iv. Extensive use of technology,
v. Strict vigilance by the banking regulator etc.

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2 AUDITING FRAMEWORK OF BANKS

AUDIT OF BANKS
Q2 Mention provisions related to eligibility, appointment and remuneration of auditor of
banking companies.
i. Eligibility, Qualification and disqualification : The eligibility, qualifications and
disqualifications of auditor of a banking company will be as per provisions of Section
141 of Companies Act, 2013.
ii. Appointment of Auditor : As per the provisions of the relevant enactments, the
auditor of a banking company is to be appointed at the annual general meeting of
the shareholders, whereas the auditor of a nationalised bank is to be appointed by

T E
the bank concerned acting through its Board of Directors. In either case, approval of
the Reserve Bank is required before the appointment is made. The auditors of the

T U
State Bank of India are to be appointed by the Comptroller and Auditor General of

T I
India in consultation with the Central Government. The auditors of the subsidiaries

S
of the State Bank of India are to be appointed by the State Bank of India. The
N
I
auditors of regional rural banks are to be appointed by the bank concerned with the

J C
approval of the Central Government.
iii. S
Remuneration of auditor : The remuneration of auditor of a banking company is
to be fixed in accordance with the provisions of section 142 of the Companies Act,
2013 (i.e., by the company in general meeting or in such manner as the company in
general meeting may determine). The remuneration of auditors of nationalised banks
and State Bank of India is to be fixed by the Reserve Bank of India in consultation
with the Central Government.

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3 BANK AUDIT APPROACH

Q3
AUDIT OF BANKS

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. Discuss the importance of
engagement team discussions.
The engagement team discussions enable the auditor and his team to gain better
understanding of the bank and its Internal controls and also to assess potential
material misstatements. It also provides :
i. An opportunity for more experienced engagement team members, including the audit

and its environment. T E

engagement partner, to share their insights based on their knowledge of the bank

ii.
T U
An opportunity for engagement team members to exchange information about the
bank’s business risks.
T I
iii. S
An understanding amongst the engagement team members about effect of the
N
I
results of the risk assessment procedures on other aspects of the audit, including

C
decisions about the nature, timing, and extent of further audit procedures.
J
Q4
S
You are appointed as an auditor of Banking Co., and hold discussions with engagement
team. List out matters which you would discuss at the planning stage of an audit to
gain better understanding of the bank and its environment. May 19 and Nov 19

The engagement team discussion ordinarily includes a discussion of the following matters:
i. Errors that may be more likely to occur
ii. Errors which have been identified in prior years
iii. Method by which fraud might be perpetrated by bank personnel or others within
particular account balances and/or disclosures
iv. Audit responses to Engagement Risk, Pervasive Risks, and Specific Risks
v. Need to maintain professional skepticism throughout the audit engagement
vi. Need to stay 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).

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4 CONDUCTING AN AUDIT

Q5

AUDIT OF BANKS
Mr. Piyush, the Bank Manager develops controls to aid in managing key business and
financial risks. Discuss the various requirements for an effective risk management
system in a bank. May 19
An effective risk management system in a bank generally requires the following:

i. Oversight and involvement in the control process by those charged with

governance : Those charged with governance (BOD/Chief Executive Officer) 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.
ii.
E
Identification, measurement and monitoring of risks : Risks that could significantly

T
impact the achievement of bank’s goals should be identified, measured and monitored
against pre-approved limits and criteria.
T U
iii.
T I
Control activities : A bank should have appropriate controls to manage its risks,
S
including effective segregation of duties (particularly, between front and back
N
I
offices), accurate measurement and reporting of positions, verification and approval

J C
of transactions, reconciliation of positions and results, setting of limits, reporting and

iv.
S
approval of exceptions, physical security and contingency planning.
Monitoring activities : Risk management models, methodologies and assumptions
used to measure and manage risk should be regularly assessed and updated. This
function may be conducted by the independent risk management unit.
v. Reliable information systems : Banks require reliable information systems that
provide adequate financial, operational and compliance information on a timely and
consistent basis.

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5 ADVANCES

Q6
AUDIT OF BANKS

Mr. A approaches a bank for financial assistance for his upcoming project. The Bank
Branch Manager, after verifying the proposal, is agreeable to financing Mr. A, but asks
for the security to be offered to the bank. Discuss the nature of securities required to
be offered to the bank. May 18
Nature of securities offered to the bank :
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.

T E
Examples of most common types of securities accepted by banks are the following :
 Personal Security of Guarantor
T U

T I
Goods / Stocks / Debtors / Trade Receivables
 Gold Ornaments and Bullion
N S
 Immovable Property I
J C
 Plantations (For Agricultural Advances)

S
 Third Party Guarantees
 Banker’s General Lien
 Life Insurance Policies
 Stock Exchange Securities and Other Instruments

Q7 Differentiate between mortgage and pledge. May 18

Mortgage are generally of two types: (a) 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. (b) 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.

On the other hand, pledge 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.

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The legal ownership of the goods remains with the pledger while the lending banker gets

AUDIT OF BANKS
certain defined interests in the goods.

Q8 “There is no difference in provisioning of NPA as regards to categories of NPA,

whether the debt is secured or unsecured." Critically evaluate the statement on the
basis of provisioning norms of NPA of nationalised bank. May 18
Classification as NPA should be based on the record of recovery. There are different
provisioning requirements as regards to categories of NPA such as Sub-standards assets,
Doubtful assets and loss assets which are given below:

i. Standard Assets : Provision of 0.40% of assets

ii.
E
Substandard Assets : Provision of 15% of assets [additional 10% for unsecured

T
portion (5% in case of infra)], which have remained NPA for a period less than or
equal to 12 months.
T U
T I
iii. Doubtful Assets : Assets which have remained in the substandard category for a
period of 12 months.
N S
a. I
Doubtful for more than 1 year (D1) – 25% on secured and 100% on unsecured
portion
J C
S
b. Doubtful for 1-3 years (D2) - 40% on secured and 100% on unsecured
portion
c. Doubtful for more than 3 years (D3) - 100% on secured and 100% on
unsecured portion
iv. Loss Assets : Provision of 100% of assets, where loss has been identified by the
bank or internal or external auditors or the RBI inspection but the amount has not
been written off wholly.

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Q9 "Ramjilal & Co. had been allotted the branch audit of a nationalized bank for the year
AUDIT OF BANKS

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. Nov 18

i. Agricultural advances:
The following NPA norms would apply to agricultural advances (including Crop Term
Loans):

a. T E
A loan granted for short duration crops will be treated as NPA, if the installment

T U
of principal or interest thereon remains overdue for two crop seasons and,

b.
T I
A loan granted for long duration crops will be treated as NPA, if the installment
S
of principal or interest thereon remains overdue for one crop season.
N
I
The crop season for each crop, which means the period up to harvesting of the crops
C
raised, would be as determined by the State Level Bankers’ Committee in each
J

State.
S
Master Circular issued by the RBI deals elaborately with the classification and
income recognition issues due to impairment caused by natural calamities. Banks
may decide on their own relief measures subject to the guidelines contained in RBI’s
Master Circular on Prudential Norms on Income Recognition, Asset Classification and
provisioning pertaining to Advances. In such cases, the NPA classification would be
governed by such rescheduled terms.

ii. In case of Accounts where there is erosion in the value of security / frauds
committed by borrowers it is not prudent to follow stages of asset classification.
It should be straight-away classified as doubtful or loss asset as appropriate.
The following points should be noted :

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a. Erosion in the value of security can be reckoned as significant when the

AUDIT OF BANKS
realisable value of the security is less than 50 per cent of the value assessed
by the bank or accepted by RBI at the time of last inspection. Such NPAs may
be straight-away classified under doubtful category and provisioning should be
made as applicable to doubtful assets.

b. If the realisable value of the security, as assessed by the bank/ approved

valuers/ RBI is less than 10 per cent of the outstanding in the borrowal
accounts, the existence of security should be ignored and the asset should
be straight-away classified as loss asset. It may be either written off or fully
provided for by the bank.

T E
U
Q 10 Your firm of Chartered Accountants has been appointed as the Auditor of two branches
T
T I
of OBC which are located in the Industrial area. Considering that the location of the
S
branches of bank in industrial area, these would be “advances oriented branches and
N
I
audit of advances would require the major attention of the auditors. Advise how would

J C
you proceed to obtain evidence in respect of audit of advances. RTP May 18

S OR
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 require the major attention from the auditors. In carrying out audit of
advances, the auditor is primarily concerned with obtaining evidence about, among
other points, the amounts included in balance sheet in respect of advances are
outstanding at the date of the balance sheet. Explain. RTP Nov 19
In carrying out audit of advances, the auditor is primarily concerned with obtaining
evidence about the following:

i. Amounts included in balance sheet in respect of advances are outstanding at the

date of the balance sheet.
ii. Advances represent amount due to the bank.

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iii. Amounts due to the bank are appropriately supported by Loan documents and other
AUDIT OF BANKS

documents as applicable to the nature of advances.

iv. There are no unrecorded advances.
v. The stated basis of valuation of advances is appropriate and properly applied, and
that the recoverability of advances is recognised in their valuation.
vi. The advances are disclosed, classified and described in accordance with recognised
accounting policies and practices and relevant statutory and regulatory requirements.
vii. 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

i. examining the validity of the recorded amounts T E

and evaluation of internal controls relating to advances, and by:

ii. examining loan documentation

T U
iii. reviewing the operation of the accounts
T I
iv. S
examining the existence, enforceability and valuation of the security
N
v. I
checking compliance with RBI norms including appropriate classification and
provisioning
J C
vi.
S
carrying out appropriate analytical procedures

Q 11 The Auditor should examine the efficacy of various internal controls over advances,
to determine the nature, timing and extent of his substantive procedures." Discuss
briefly. Nov 18, RTP Nov 18, RTP May 19 and RTP Nov 19
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 the following:

i. The bank should make an advance only after being satisfied about the credit
worthiness of the borrower and after obtaining sanction from the appropriate
authorities of the bank.
ii. All the necessary documents (e.g., agreements, demand promissory notes, letters of
hypothecation, etc.) should be executed by the parties before advances are made.

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iii. The compliance with the terms of sanction and end use of funds should be ensured.

AUDIT OF BANKS
iv. 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.

v. 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.

vi. 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.

vii. Drawing Power Register should be updated every month to record the value of

T E
securities hypothecated. These entries should be checked by an officer.
viii. The accounts should be kept within both the drawing power and the sanctioned
limit.
T U
T I
ix. All the accounts which exceed the sanctioned limit or drawing power or are otherwise
S
irregular should be brought to the notice of the controlling authority regularly.
N
x. I
The operation of each advance account should be reviewed at least once a year, and

J C
at more frequent intervals in the case of large advances.

6
S
AUDIT OF REVENUE ACCOUNTS

Q 12 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. RTP May 2020
i. If any advance, including bills purchased and discounted, becomes NPA as at the

close of any year, the entire interest accrued and credited to income account in the

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past periods, should be reversed or provided for if the same is not realised. This will
AUDIT OF BANKS

apply to Government guaranteed accounts also.

ii. In respect of NPAs, fees, commission and similar income that have accrued should
cease to accrue in the current period and should be reversed or provided for with
respect to past periods, if uncollected.
iii. 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).
iv. Furthermore, the auditor should enquire if there are any large debits in the Interest
Income account that have not been explained.

T E
U
Q 13 In carrying out an audit of interest expense, the auditor is primarily concerned with
T
T I
assessing the overall reasonableness of the amount of interest expense. Analyse and

S
explain stating the audit approach and procedure in regard to interest expense.
N
I RTP May 2020

J C
In carrying out an audit of interest expense, the auditor is primarily concerned with

S
assessing the overall reasonableness of the amount of interest expense by analysing ratios
of interest paid on different types of deposits and borrowings to the average quantum of
the respective liabilities during the year.
i. The auditor should obtain from the bank an analysis of various types of deposits
outstanding at the end of each quarter. From such information, the auditor may
work out a weighted average interest rate. The auditor may then compare this rate
with the actual average rate of interest paid on the relevant deposits as per the
annual accounts and enquire into the difference, if material.
ii. The auditor should also compare the average rate of interest paid on the relevant
deposits with the corresponding figures for the previous years and analyse any
material differences.
iii. The auditor should obtain general ledger break-up for the interest expense incurred
on deposits (savings and term deposits) and borrowing each month/quarter. The

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auditor should analyse month on month (or quarter on quarter) cost analysis and

AUDIT OF BANKS
document the reasons for the variances as per the benchmark stated.

iv. The auditor should, on a test check basis, verify the calculation of interest and
ensure that:
a. Interest has been provided on all deposits up to the date of the balance sheet
b. Interest rates are in accordance with the bank’s internal regulations, the RBI
directives and agreements with the respective deposit holder
c. Interest on savings accounts are in accordance with the rules framed by the
bank/RBI in this behalf
d. Interest on inter–branch balances has been provided at the rates prescribed

v.
by the head office/ RBI

T E
The auditor should ascertain whether there are any changes in interest rate on

T U
saving accounts and term deposits during the period. The auditor should obtain the

T I
interest rate card for various types of deposits and analyse the interest cost for the
period accordingly.
N S
I
vi. The auditor should examine the completeness that interest has been accrued on the

J C
entire borrowing portfolio and the same should agree with the general ledgers.

S
vii. The auditor should re-compute the interest accrual i.e., by referring to the parameters
like frequency of payment of interest amount, rate of interest, period elapsed till
the date of balance sheet, etc from the term sheet, deal ticket, agreements etc and
ensure that the recomputed amount is tallying with the amount as per books of
accounts without any significant difference.

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7 AUDITOR'S REPORT
AUDIT OF BANKS

Q 14 Explain the specific reporting requirements which apply to auditors of Nationalised

Banks.
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 :

i. whether, in his opinion, the balance sheet is a full and fair balance sheet containing
all the necessary particulars and is properly drawn up so as to exhibit 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

ii.
E
whether or not the transactions of the bank, which have come to his notice, have
been within the powers of that bank. T
T U
iii. whether or not the returns received from the offices and branches of the bank have

T I
been found adequate for the purpose of his audit.
S
iv. whether the profit and loss account show a true balance of profit or loss for the
N
I
period covered by such account

v.
J C
any other matter which he considers should be brought to the notice of the Central
Government.
S
Q 15 Write a short note on audit reports of banking companies.
In case of banking companies, following types of audit reports are generally issued:
i. Statutory audit report as per SA 700/ 705/ 706
ii. Long Form Audit Report (LFAR) as per RBI requirements
iii. Tax audit report as per Income Tax Act, 1961

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.
The auditor of a banking company is also required to state in his report in respect of
matters covered by Section 143 of the Companies Act, 2013.
The reporting requirements relating to the Companies (Auditor’s Report) Order, 2016 is not
applicable to a banking company

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Besides the audit report as per the statutory requirements, the auditors also need to

AUDIT OF BANKS
furnish a long form audit report (LFAR) on the matters which have been specified by the
Reserve Bank of India (to be submitted before 30th June every year.)

CORRECT / INCORRECT STATEMENTS

State with reasons (in short) whether the following statements are correct or incorrect:

i. RBI has been entrusted with the responsibility of regulating the activities of
commercial banks only

Incorrect.

T E
RBI has been entrusted with the responsibility of regulating the activities of commercial

T U
and other banks like Co-operative banks, payment banks, small finance banks etc.
ii.
T I
Banks recognize income on Non-Performing Assets on accrual basis.
Incorrect.
N S
I
Income from non-performing assets (NPA) is not recognised on accrual basis due to its

J C
uncertainty but is booked as income only when it is actually received.

S
iii. Auditor of a Nationalised bank is to be appointed at the annual general meeting of
the shareholders.
Incorrect.
Auditor of a nationalized bank is to be appointed by the bank concerned acting through its
Boards of Directors and approval of the Reserve bank is required before the appointment
is made.
iv. The auditor can assume that the system generated information is correct and relied
upon without evidence that demonstrates that the system driven information is based
on validation of the required parameters for the time being in force and applicable.
Incorrect.

The auditor should not go by the assumption that the system generated information is
correct and can be relied upon without evidence that demonstrates that the system driven
information is based on validation of the required parameters for the time being in force
and applicable.
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v. Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid
AUDIT OF BANKS

within 90 days of becoming due.

Incorrect.
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the
due date fixed by the bank.
vi. An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. 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 180 days as on the date
of Balance Sheet or credits are not enough to cover the interest debited during the

Incorrect. T E
same period, these accounts should be treated as ‘out of order’

T U
An account should be treated as ‘out of order’ if the outstanding balance remains continuously

T I
in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in
S
the principal operating account is less than the sanctioned limit/drawing power, but there
N
I
are no credits continuously for 90 days as on the date of Balance Sheet or credits are not

J C
enough to cover the interest debited during the same period, these accounts should be

S
treated as ‘out of order’.
vii. The matters which the banks require their auditors to deal with in the long form
audit report have been specified by the Central Government.
Incorrect.
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.

13.38 | Auditing and Assurance

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MULTIPLE CHOICE QUESTIONS

AUDIT OF BANKS
i. You are at the planning stage for one of your firm’s client XYZ Bank for the year
ended 31 March 2018. The bank is a commercial bank that provides a number of
products and services to the general public and other segments of the economy in
the area of South Mumbai. You are assigned the audit of one of the branches of XYZ
Bank. The audit engagement team was called to have a detailed discussion on the
following matters. Which one of the following should not be included in the discussion
for the audit of banks?
a.
b. T E
Discuss on the error of last year in the application of accounting policies of the bank.
Discuss on the method of fraud if any perpetrated by the bank employee within
particular balances and/or disclosures
T U
c.
T I
Discuss with the team the appointment and remuneration to be received on this
bank audit.
N S
d. I
Discuss the effect of the results of the risk assessment procedures on other aspects

J C
to decide the nature, timing and extent of further audit procedures
ii. S
Which of the following is correct in case of Banks?
a. The policy of income recognition should be subjective.
b. The policy of income recognition should be objective and based on record of recovery
rather than on any subjective considerations.
c. The policy of income recognition should be objective.
d. The policy of income recognition may be objective or subjective
iii. Which of the following statement is correct?
a. Sub-section (1) of section 30 of the Banking Regulations Act, 1949 requires that the
balance sheet and profit and loss account of a banking company should be audited
by a Firm of Chartered Accountants only.

b. Sub-section (1) of section 30 of the Banking Regulations Act, 1949 requires that the
balance sheet and profit and loss account of a banking company should be audited
by a person duly qualified under any law for the time being in force to be an auditor
of companies.
Auditing and Assurance | 13.39
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c. Sub-section (1) of section 30 of the Banking Regulations Act, 1949 requires that the
AUDIT OF BANKS

balance sheet and profit and loss account of a banking company should be audited
by a CAG Auditor only.

d. Sub-section (1) of section 30 of the Banking Regulations Act, 1949 requires that the
balance sheet and profit and loss account of a banking company should be audited
by a by a person duly qualified under Banking Law.

Answers
i. c. Discuss with the team the appointment and remuneration to be received on this bank
audit.
ii.
E
b. The policy of income recognition should be objective and based on record of recovery
rather than on any subjective considerations. T
iii.
T U
b. Sub-section (1) of section 30 of the Banking Regulations Act, 1949 requires that the

T I
balance sheet and profit and loss account of a banking company should be audited by
S
a person duly qualified under any law for the time being in force to be an auditor of
N
companies. I
J C
S

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AUDIT OF BANKS
T E
T U
T I
N S
I
J C
S

| 13.41
Auditing and Assurance
 Contact: 033-4059-3800 Website: sjc.co.in
AUDIT OF BANKS

T E
TU
T I
N S
I
J C
S

13.42 | Auditing and Assurance

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Chapter Audit of

AUDIT OF DIFFERENT
Different Entities
14

ENTITIES
Chapter Roadmap
1
Introduction

2 Non-governmental
organisations (NGOs)

3
Charitable Institution
T E
4
T U
I
Educational Institutions

T
S
5
Hospital

6
I
ClubN
J7C Cinema

S 8
Hotels

9
Sole Trader

10
Firm

11
LLPs

12 Hire purchase and

leasing companies

13
Co-opertaive Societies

14
Local Bodies

15
Government Audit

| 14.1
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BRIEF OVERVIEW
AUDIT OF DIFFERENT
ENTITIES

1 INTRODUCTION

Major points to be kept in mind while

conducting audit of different undertakings

Preliminary check Cash Inflow and Cash outflows and Assets and
points Incomes expenditures Liabilities

TE
Examining legal form Check various Verification of
and constitution receipts all assets and
liabilities
of the organisation
(E.g., Society, Trust, Check all
T UCheck various
Company etc.) sources of
incomes
T I expenditures

Examining the bye laws, S

rules and regulations by
studying charter documents IN
J
Examining powers of C
S
members and governing
bodies
Examining the IC system

Examining minute books

of meetings of governing
bodied and members

Examining the accounting

policies and accounting
records maintained

14.2 | Auditing and Assurance

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2 NON-GOVERNMENTAL ORGANISATIONS (NGOs)

AUDIT OF DIFFERENT
ENTITIES
Meaning
Non-profit organisations (NPOs)

which raises funds from members, donors or contributors

for achieving social objectives like eradicating hunger and poverty,

imparting education, protecting environment etc.

includes religious organisations, charitable institutions, hospitals,

old age homes, orphanages, research foundations etc.

Legal form and Appointment of auditor

T E
U
Registration as NGO not

T
Societies under Societies
Registration Act, 1860
T I mandatory
Auditor appointed by Managing

N S Committee

I Mandatory Registration if Trust

NGOs incorporated as
J C Trust, under Indian Trust
relates to Immovable Property worth
more than ` 100

S Act, 1882
Auditor appointed by Trust

Should maintain accounts as

prescribed under Section 128 on
Company, under Section 8 accrual basis
of Companies Act, 2013
Auditor appointed by members of
the company

1. The NGOs which are not registered under Companies Act,2013 are allowed to
maintain accounts either on accrual basis or cash basis.
2. Other important laws that apply to NGOs are Public Trusts Acts of different
States, Income Tax Act,1961, and the Foreign Contribution (Regulation) Act,1976
(FCRA, 1976).

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Audit Considerations
AUDIT OF DIFFERENT
ENTITIES

Preliminary Check Points to be considered

Obtain and update  Knowledge of the NGO’s work, its mission, and vision, areas of
operations

 Knowledge of various statues applicable to the NGO (e.g., Income Tax

Act, 1961, Foreign Contribution (Regulation) Act, 1976 etc.)

Review  Legal form and charter documents (e.g., Memorandum of Association,

Articles of Association etc.)

 NGO’s Organisation chart, Financial and Administrative Manuals,

Project and Programme Guidelines, Funding Agencies Requirements
and budgetary policies if any

 Previous year’s Audit Report

T E
Study or Examine
T U
 Board/Managing Committee/Trust Minute books
I
 Accounting System and Internal Controls
T
Set or Determine S
 Materiality Level for audit
N
I
 Requirement for involvement of experts
 Nature and timing of reports and other communication with
C
management
J
S
 Audit Programme and Audit checklists

Cash Inflows and Incomes

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AUDIT OF DIFFERENT
Contributions and Grants for projects and programmes
 Check agreement with donors to ensure accounting of grants

ENTITIES
 Check all foreign receipts and compliance with FCRA

Receipts from fund raising programmes

 Ensure collections are deposited in bank
 Verify IC system
 Ascertain persons responsible for collection and accounting

Membership Fees
 Check fees received with Membership Register
 Reconcile fees received with fees to be received during the year
E
 Ensure proper classification between entrance, annual fees and life membership fees made
T
Subscriptions
T U
T I
 Check with subscription register and receipts issued

periodicals
N S
 Reconcile subscription received with printing and dispatch of magazine / circulars /

I
 Check the receipts with subscription rate schedule

J C
Interest and Dividends
S
 Check the interest and dividends received and receivable with investments held during
the year

Cash Outflows and Expenditures

 Verify that provident fund, life insurance premium, employees

state insurance and their administrative charges are deducted,
Establishment contributed and deposited timely
Costs  Check other office and administrative expenses like postage,
stationery, salaries, travelling, etc.

 Verify agreement with donor/contributor(s) to ascertain

Programme and the conditions with respect to the programme
Project Expenses  If projects is on contractual basis, ensure deduction, deposit
and return filing of TDS

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AUDIT OF DIFFERENT

 Verify the donations or grants made to other organisations

Donations and and individuals
ENTITIES

Charity made  Check for deductions of the same allowed under Income Tax
Act, 1961
 Verify that depreciation has been charged at appropriate rates
Depreciation

Assets

Fixed Assets

 Vouch all acquisitions / sale or disposal of assets and the authorisations for the same
 Check depreciation allowance
 Check donor’s letters/ agreements for the grant T E
T U
 For immovable properties, check whether title deeds are in the name of the NGO

T I
Investments

N S
I
 Check Investment Register and the investments physically to ensure that investments are

in the name of the NGO

J C
S
 Verify further investments and dis- investments for approval by the appropriate authority
 Reconcile the principal and interest amount with the bank statement

Cash in hand and Bank balance

 Physically verify the cash in hand and imprest balances, at year end
 Check whether cash balance tallies with the books of account. Inquire in case of variances
 Check the bank reconciliation statements to ascertain details for old outstanding and
unadjusted amounts

Inventories

 Observe Physical Verification process of inventory in hand

 Obtain management certificate for the quantities and valuation of the same

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AUDIT OF DIFFERENT
Liabilities

ENTITIES
Corpus Fund

 Vouch with reference to letters from donors

 If contribution made to Revolving fund, check treatment of Interest income (whether
capitalised or treated as revenue)

Reserves

 Vouch transfer to reserves with Board resolutions

 Check adjustments made during the year

Earmarked Funds
T E
T
 Check requirements or purpose specified by the donors U
T I
 Check rules and regulations for utilisation of the funds

N S
Project Balances
I
J C
 For projects or programmes vouch disbursements and expenditure for each of the project
balances S
Loans

 Vouch loans taken with loan agreements and confirmation letters

 Check repayment schedule and interest rate payments

| 14.7
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3 CHARITABLE INSTITUTIONS
AUDIT OF DIFFERENT
ENTITIES

Audit Considerations
Preliminary Check Points to be considered

Study or Examine
 Constitution or legal form of the Charitable Institution
 Whether the Institution is being managed as per applicable law
 Accounting System and Internal Controls

T E
Review

T U
of Association etc.) T I
 Legal form and charter documents (e.g., Memorandum of Association, Articles

 Previous year’s Audit Report

N S
I
J C
Set or Determine S
 Materiality Level for audit
 Requirement for involvement of experts
 Nature and timing of reports and other communication with management
 Audit Programme and Audit checklists

Cash Inflows and Incomes

Subscriptions and Donations

 Check whether receipts issued for all donations and subscriptions

 Obtaining the printed list of subscriptions and donations and agreeing them with the total
collections shown in accounts
 Test checking the counterfoils with the cash book

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AUDIT OF DIFFERENT
 Any cancelled receipts should be examined carefully
 Confirming that adequate control is imposed over unused receipt books

ENTITIES
 Examining the system of Internal check regarding moneys received
 Verify the total subscriptions and donations received with any figures published in reports,
etc. issued by the charity.

Legacies

 Verify the amounts received with reference to minute books and correspondence letters

Grants

T
 Obtain certificate from official confirming receipt of grant.
E
 Vouch the amount received with the relevant correspondence, receipts and minute books

T U
Income from Investments - Interest, Dividend etc.
T I
S
 Vouch the amounts received with the dividend and interest counterfoils or demat statement
N
I
 Check the calculation of interest received with interest rate schedule

J C
 Check that appropriate dividend has been received where any investment has been sold

S
ex-dividend or purchased cum-dividend.
 Compare the amounts of dividend received with schedule of investments
 Special inquiries to be made into any investments held for which no dividend has been received.

Rent

 Examine rent agreements to ascertain the amount of rent and due dates of payment
 Vouch the rent received from counterfoils of receipt books and check it with reference to
cash book or bank statement

Income from Events - Concerts, Workshops, Cultural shows etc.

 Vouch gross receipts and outgoings in respect of special functions, e.g. concerts, dramatic
performance, etc., held with vouchers and cash statements as are necessary.
 Verify that the proceeds of all tickets issued have been accounted for

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Income Tax Refunds

AUDIT OF DIFFERENT

 Where income tax has been deducted (on investment income, rental income), vouch the
ENTITIES

refund with Income Tax department correspondence

Cash Outflows and Expenditures

Expenses relating  Check whether the expenditure is authorised
to Special Events  Check invoices with amounts paid referring cash book or bank
statement
Grants given  Vouch payment of grants
 Verify that grants have been paid only for a charitable purpose or
purposes within the purview of the objects of the Institution

T E
 Check that no trustee, director or member of the Managing Committee
has benefited there from either directly or indirectly
Depreciation U
 Verify that depreciation has been charged at appropriate rates
T
Assets
T I
S
Refer Audit of Assets of NGO – Topic 2 (Assets)
N
I
Liabilities
J C
S
Refer Audit of Corpus fund, earmarked funds, loans and reserves of NGO – Topic 2 (Liabilities)

4 EDUCATIONAL INSTITUTIONS

Audit Considerations
Preliminary Check Points to be considered

Study or Examine
 Trust Deed or Regulations, in the case of school or college and note all the
provisions affecting accounts.
 In the case of a university, refer to the Act of Legislature and Rules
 Accounting System and Internal Controls

14.10 | Auditing and Assurance

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AUDIT OF DIFFERENT
Review

ENTITIES
 Minutes of the meetings of the Managing Committee or Governing Body,
noting resolutions affecting accounts

Set or Determine
 Nature and timing of reports and other communication with management
 Audit Programme and Audit checklists

Cash Inflows and Incomes

Fees
T E
T U
Check names entered in Students Fee Register for each month or term with respective


T I
Class Registers and test amount of fees charged

N S
Verify that system of internal check operates which ensures that demands against the
students are properly raised I

J C
Check fees received by comparing receipt counterfoils with entries in the Cash Book and

S
tracing collections in Fee Register
 Check whether fees paid in advance have been carried forward and that irrecoverable
arrears have been written off
 Check admission fees with admission slips signed by the head and confirm that amount
has been credited to a Capital fund unless decided contrary.
 Verify that scholarships and concessions have been granted by authorised persons

Fines and Late Fees

 Check whether fines, late fees etc. has been properly charged, received and accounted for

Income from Canteen

 Check the income from canteen with reference to vouchers issued or cash book

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Income from Investments - Interest, Dividend etc.

AUDIT OF DIFFERENT

 Vouch the amounts received with the dividend and interest counterfoils or demat statement
ENTITIES

 Check the calculation of interest received with interest rate schedule

 Check that appropriate dividend has been received where any investment has been sold
ex-dividend or purchased cum-dividend.
 Compare the amounts of dividend received with schedule of investments
 Special inquiries to be made into any investments held for which no dividend has been
received.

Rent

T E
 Examine rent agreements to ascertain the amount of rent and due dates of payment
 Vouch the rent received from counterfoils of receipt books and check it with reference to
cash book or bank statement
T U
T I
Income from Boarding facilities

N S
I
 Confirm that hostel dues were recovered before student’s accounts closed and deposits of
caution money refunded
J C
Donations Received
S
 Vouch donations with the list published with the annual report

 If donation received for specific purpose, check that the money was utilised for the purpose.

Income Tax Refund

 Where income tax has been deducted (on investment income, rental income), vouch the
refund with Income Tax department correspondence

14.12 | Auditing and Assurance

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AUDIT OF DIFFERENT
Cash Outflows and Expenditures
Establishment  Verify that provident fund, life insurance premium, employees state

ENTITIES
Expenses insurance and their administrative charges are deducted, contributed
and deposited timely
 Check other office and administrative expenses like stationery,
salaries, purchase of consumables for canteen, sports equipments etc.
 Increase in salaries should be duly authorised

 Inquire into any unduly heavy expenditure under any head

 If there was any annual budget prepared, excess expenditure should

be brought under Managing Committee's notice.
Capital  Check whether expenditures qualifying as capital expenditure has
Expenditure been treated as such

T E
 Verify whether it is sanctioned by the Managing Committee

Depreciation U
 Verify that depreciation has been charged at appropriate rates
T
Assets T I
S
Refer Audit of Fixed Assets, Inventories, Cash and Bank balance, Investments of NGO
N
– Topic 2 (Assets) I
Fees or Rent Arrears
J C
S
 Report any old heavy arrears on account of fees, dormitory rents, etc. to the Managing
Committee.

Investments representing Endowment Funds

 Check that investments representing endowment funds for prizes are kept separate
 Any income in excess of the prizes has been accumulated and invested along with
corpus

Liabilities
Refer Audit of Corpus fund, earmarked funds, loans and reserves of NGO – Topic 2 (Liabilities)

Caution money
 Confirm that caution money and other deposits paid by students on admission, have
been shown as liability unless they are not refundable

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Funds
AUDIT OF DIFFERENT

 Verify the annual statements of account to check that separate statements of account
ENTITIES

have been prepared as regards Games Fund, Hostel Fund and Provident Fund of staff, etc.

5 HOSPITALS

Audit Considerations

Preliminary Check Points to be considered

Refer Preliminary Check points of Charitable Institutions – Topic 3
Cash Inflows and Incomes
T E
Collection from patients
T U
T I
 Vouch the Register of patients with copies of bills issued to them.
S
 Verify bills for a selected period with the patients’ attendance record to see that bills have
N
been correctly prepared. I
J C
 Check that bills have been issued to all patients from whom an amount was recoverable

S
according to hospital rules.

Income from Canteen, Pharmacy, Laboratories

 Check the income from canteen, pharmacy and laboratory (if any) with reference to vouchers
issued or cash book

Income from Investmemts - Interest, Dividend etc.

 Vouch the amounts received with the dividend and interest counterfoils or demat
statement
 Check the calculation of interest received with interest rate schedule
 Check that appropriate dividend has been received where any investment has been sold
ex-dividend or purchased cum-dividend.

14.14 | Auditing and Assurance

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AUDIT OF DIFFERENT
 Compare the amounts of dividend received with schedule of investments
 Special inquiries to be made into any investments held for which no dividend has been

ENTITIES
received.

Rent

 Examine rent agreements to ascertain the amount of rent and due dates of payment
 Vouch the rent received from counterfoils of receipt books and check it with reference to
cash book or bank statement

Legacies and Donations

the said purpose T E

 Ascertain that legacies and donations received for a specific purpose have been applied for

T U
Subscription
T I
S
 Verify all collections of subscription and donations from Cash Book to the respective
N
registers I
J C
 Reconcile subscription due with subscription actually received

Grants
S
 Verify that grants, if any, received from Government or local authority has been duly
accounted for

Income Tax Refund

 Where income tax has been deducted (on investment income, rental income), vouch the

refund with Income Tax department correspondence

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AUDIT OF DIFFERENT

Cash Outflows and Expenditures

 Check other office and administrative expenses like salaries,

ENTITIES

Establishment purchase of consumables for canteen, clothing, linen, apparatus,

Expenses medicines etc.
 Verify that provident fund, life insurance premium, employees
state insurance and their administrative charges are deducted,
contributed and deposited timely
 Inquire into any unduly heavy expenditure under any head.
 If there was any annual budget prepared, excess expenditure
should be brought under Managing Committee's notice.
 Check whether expenditures qualifying as capital expenditure has
Capital
Expenditure
been treated as such

T E
 Verify whether it is sanctioned by the Managing Committee

T U
T I
S
 Verify that depreciation has been charged at appropriate rates
N
Depreciation
I
J C
S
Assets
Refer Audit of Fixed Assets, Inventories, Cash and Bank balance, Investments of NGO – Topic
2 (Assets).

Liabilities
Refer Audit of Corpus fund, earmarked funds, loans and reserves of NGO – Topic 2 (Liabilities).

14.16 | Auditing and Assurance

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6 CLUB

AUDIT OF DIFFERENT
ENTITIES
Audit Considerations
Preliminary Check Points to be considered
Refer Preliminary Check points of Charitable Institutions – Topic 3

Cash Inflows and Incomes

Subscription

 Vouch amount receipt on account of entrance fees with members’ applications, counterfoils
issued and minutes of Managing Committee

T E
 Vouch members’ subscriptions with counterfoils issued, trace receipts for a selected period
to the Register of Members
T U
T I
 Reconcile the amount of total subscriptions due with the amount collected and outstanding.

S
 Verify that arrears of subscriptions and subscriptions received in advance for the previous
N
I
year and current year have been correctly adjusted

C
 Check Register of Members to ascertain Member’s dues and inquire whether necessary steps
J
S
have been taken for their recovery and amount considered irrecoverable should be mentioned
in the Audit Report

Income from Special Services

 Check the income from restaurants and other special services like sports facilities, recreation
etc.

Income from Investmemts - Interest, Dividend etc.

Rent

Income Tax Refund

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 Contact: 033-4059-3800 Website: sjc.co.in
AUDIT OF DIFFERENT

Cash Outflows and Expenditures

ENTITIES

 Vouch purchase of sports items, furniture, crockery, etc. and trace

Club Expenses their entries into respective inventory registers.
 Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale
price so as to confirm that the normal rates of gross profit have been
earned on their sales.
 Verify the internal check system for the price of foodstuffs and drinks
and fees for other services provided to members and their guests

Depreciation  Verify that depreciation has been charged at appropriate rates

Assets T E
T U
Refer Audit of Fixed Assets, Inventories, Cash and Bank balance, Investments of NGO – Topic 2

(Assets)
T I
N S
Liabilities I
J C
Refer Audit of Corpus fund, loans and reserves of NGO – Topic 2 (Liabilities)

7 CINEMA
S
Audit Considerations
Preliminary Check Points to be considered
Refer Preliminary Check points of Charitable Institutions – Topic 3

Cash Inflows and Incomes

Income from Tickets sold

 Examine IC system with respect to tickets sold-

 entrance to cinema-hall during show is through printed or e-tickets

 tickets are serially numbered and bound into books

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AUDIT OF DIFFERENT
 Number of tickets issued for each show and class, are different
 A separate series of tickets is issued for advance booking and online booking

ENTITIES
 The inventory of tickets is kept in the custody of a responsible official
 Confirm that at the end of show, a statement of tickets sold and cash collected is prepared
and reconciled.
 Verify that free passes are issued under proper authority and a record is maintained
 Vouch the entries in Cash Book in respect of cash collected on sale of tickets

Income from sale of food and beverages

 Check the income from sale of food and beverages is properly accounted for

accounting T E
 If restaurant is run by another vendor, check the Cinema's share of such income and its

T U
Income from Advertisements
T I
S
 Verify income from advertisement with reference to the agreement with advertisers and
N
I
Register of Slides and Shorts exhibited

J C
S
Income from Investmemts - Interest, Dividend etc.

Income Tax Refund

Cash Outflows and Expenditures

Distributorship or Film Hire charges

 Examine the agreements with distributors

 Vouch payments on account of film hire with bills of distributors
 In case of Advance Payment:
 Examine unadjusted balance out of advance paid to distributors against film hire contracts
 If any film in respect of which an advance was paid has already run, it should be
enquired as to why the advance has not been adjusted.

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AUDIT OF DIFFERENT

 The management should be asked to make a provision in respect of advances that are
considered irrecoverable
ENTITIES

Entertainment Tax

 Reconcile the amount of Entertainment Tax collected with the total number of tickets
issued for each class
 Ensure that entertainment tax returns filed each month

Establishment Expenses

 Vouch expenditure on advertisement, repairs and maintenance, purchase of foodstuff, staff

salaries etc.

T E
Depreciation
T U
T I
 Verify that depreciation has been charged at appropriate rates

N S
Assets I
J C
Refer Audit of Fixed Assets, Inventories, Cash and Bank balance, Investments of NGO – Topic
2 (Assets)
S
Liabilities
Refer Audit of Corpus fund, loans and reserves of NGO – Topic 2 (Liabilities)

8 HOTELS

Audit Considerations
Preliminary Check Points to be considered
Refer Preliminary Check points of Charitable Institutions – Topic 3

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AUDIT OF DIFFERENT
Cash Inflows and Incomes
Room Sales

ENTITIES
 Vouch amount of room rent with reference to the Guest Register and bills raised
 Verify that appropriate room rent is charged as per type of rooms occupied by the
guests
 Verify that actual rates charged is as per the standard room rent. If not, check for
authorisation and investigate the variances

Moneys recovered from Travel Agents

 Check that money is recovered from the travel agents or booking agencies as per the
terms of credit allowed.

Rent
T E
parties/conferences
TU
 Ensure that proper records are maintained for booking of halls and other premises for

T I
 Check that the amount is received as per the agreement. Refer counterfoils of money
receipts

N S
Income from Restaurant I
C
 Verify restaurant bills with reference to Kitchen Order Tickets.
J
S
 Check if restaurant charges have been included in the guests' bills and have been
entered in the cash book

Income from Investmemts - Interest, Dividend etc.

Income Tax Refund

Cash Outflows and Expenditures

Vouch the purchase of consumables for Kitchen with reference

Purchase of foodstuff to bills
Check for authorisation and accounting of all purchases

Check that costs of repairs and minor renovation and redecoration

Repairs and are treated as revenue expenditure,
Maintenance Costs of major alterations and additions to the hotel building
and facilities capitalised.

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Verify that depreciation has been charged at appropriate rates

AUDIT OF DIFFERENT

Depreciation

Salary paid should be verified with the employees on roll

ENTITIES

Wages paid to casual labour should be verified with reference to

Wages and Salaries
agreements and contracts.
Ensure no defalcation takes place through casual labour account

Check commission paid with reference to agreements

Commission to
Check whether invoice is issued by the agent and provisions
Travel agents
with respect to TDS complied with

Verify that all taxes collected from guests on food and

Taxes occupation (E.g., Luxury Tax etc.) have been paid over to the
proper authorities

T E
Pilferage is one of the greatest problems in any hotel. It is the responsibility of
U
management to introduce controls which will minimize this leakage as far as possible.
T
T I
The auditor should obtain regular trading accounts for the period under review,
examine them and obtain explanations for any apparent deviations.

N S
Assets I
J C
Refer Audit of Fixed Assets, Inventories, Cash and Bank balance, Investments of NGO – Topic
2 (Assets).
S Check that classification between inventories and Fixed assets
is properly made

Carry out tests to ensure that all documentation with respect to

movements and transfers of inventories is accurately processed

Ensure that keys of storehouses is released to trusted personnel

Verify that valuation of inventories at year end is reasonable

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AUDIT OF DIFFERENT
Liabilities
Refer Audit of Corpus fund, loans and reserves of NGO – Topic 2 (Liabilities)

ENTITIES
9 SOLE TRADER

General Points

Statutory Requirement

No legal obligation to get audit conducted

Audit conducted due to regulatory requirement from banks, etc. or due to advantages of audit
Appointment of Auditor

Appointed by sole proprietor T E

T U
In case of change, incoming auditor must communicate with outgoing auditor
Scope of Audit
T I
Determined by sole proprietor
N S
I
Should be defined in writing in audit engagement letter or contract of appointment

J C
10 FIRM
S
General Points

Statutory Requirement

No legal obligation to get audit conducted

Audit conducted due to regulatory requirement from banks, etc. or due to advantages of audit
Check applicability of AS prescribed by the Institute. If applicable, check compliance of the same
Appointment of Auditor

Appointed by partners, as per mutual agreement

In case of change,incoming auditor must communicate with outgoing auditor

Auditing and Assurance | 14.23

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Scope of Audit
AUDIT OF DIFFERENT

Determined by partners
ENTITIES

Should be defined in writing in audit engagement letter or contract of appointment

Advantages of Audit for Firm

Convenient and reliable

means of settling
Helps in detecting accounts between Reliable means for
frauds and errors and partners calculating amounts
auditor's suggestions can due to retired or
help in improvement
Advantages of T Edeceased partner

Audited accounts
T U
Acts as safeguard for
partners not actively involved
T I Considered reliable by

in the business operations

N S banks for advancing
financial facilities
and for settling disputes
I
Serve as a basis for
negotiation with a new

J C partner at the time of

S admission

Special Audit Considerations

Examine the partnership deed to note

Nature of business
Number of partners and duration of partnership, if any
Amount of capital invested by partners
Profit-loss sharing ratio
Rate of interest on capital
Partner's remuneration, if any
Limit on withdrawals, if any and Reinvestment of surplus funds of the firm

14.24 | Auditing and Assurance

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AUDIT OF DIFFERENT
Terms and conditions upon death, retirement or dissolution
Rights and Duties of partners, responsibilities of managing partner

ENTITIES
Provisions of maintenance of books of accounts
Calculation of Goodwill

Letter of engagement signed by a partner and specifies the scope of audit

Examining minute books to understand policy decisions or other important decisions

taken by partners

Verifying that business conducted is as authorised by the partnership deed and no

activity has been conducted in violation of the agreement

T E
Verifying that provision for tax is made before arriving at divisible profit Verifying
that profit is divided as per the profit sharing ratio
T U
T I
Adjustments in accounts required at the time of admission or retirement of partner
properly made
N S
I
C
Whether the accounts maintained are adequate and reasonable

J
S
Verifying that interest of none of the partners has been prejudicially affected

11 LIMITED LIABILITY PARTNERSHIP (LLP)

Statutory Provisions
As per the Limited Liability Partnership Act, 2008 [Section 34 and 35 Read with Rule 24]

Maintenance of Books of Accounts

Books of accounts to sufficiently disclose LLP's transactions with reasonable accuracy

 Particulars and purpose of all sums of money received and expended by the LLP
 A record of the assets and liabilities of the LLP

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AUDIT OF DIFFERENT

 Statements of costs of goods purchased, inventories, work-in progress, finished goods

and costs of goods sold,
ENTITIES

 Any other particulars which the partners may decide

Filing of Documents with the Registrar

Statement of Account and Solvency (SAS) in Form 8 shall be filed within a period of
thirty days from the end of six months of the financial year
Annual return (AR) in Form 11 with ROC within 60 days of closure of financial year

If filed within 300 days of prescribed time - additional fees will be charged but no action
for prosecution will be taken

for prosecution T E
If filed after 300 days of prescribed time - additional fees will be charged and also liable

T U
Applicability of Audit
T I
S
Accounts of Every LLP shall be audited except if turnover does not exceed ` 40 lakh or
N
I
contribution does not exceed ` 25 lakh in any financial year

J C
If partners still decide to get accounts audited, they shall be audited

Appointment of Auditor
S
May be appointed by the designated partners (DPs) of LLP –

 At any time for the first FY but before the end of first FY
 At least 30 days prior to the end of each FY (other than the first FY)
 To fill the causal vacancy in the office of auditor
 To fill the casual vacancy caused by removal of auditor.
The partners may appoint the auditors if the designated partners have failed to appoint
them.
Only Chartered Accountant in practice is eligible
Tenure: Till reappointment or till new auditor appointed
Remuneration may be fixed by DPs or by following procedure as per LLP agreement

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AUDIT OF DIFFERENT
Powers of Registrar

Power to obtain such information which he may consider necessary from any DP, partner

ENTITIES
or employee
Power to summon DP, partner or employee for any purpose if required information is not
submitted or Registrar is not satisfied

Documents available for public inspection

Incorporation document
Names of partners and changes, if any, made therein
Statement of Account and Solvency
Annual Return

T E
Fees for inspection of documents ` 50 and for obtaining certified copies or extracts from
Registrar ` 5 per page
T U
T I
1. The advantages of LLP’s accounts being audited are the same as that of
partnership firms.
N S
I
2. The auditor’s duties in case of an LLP audit are the same as that in the case
of a firm.
J C
S
3. Auditor should report
a. Whether records of the firm appear to be correct & reliable.
b. Whether he was able to obtain all information & explanation necessary for his work.
c. Whether any restriction was imposed upon him.

12 HIRE PURCHASE AND LEASING COMPANIES

Hire Purchase
Parties in a Hire Purchase Agreement are :

Person who lets on hire or delivers person who obtains possession of

Owner possession of goods to a hirer under Hirer goods from an owner under a hire-
a hire purchase agreement purchase agreement

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Meaning of Hire Purchase Agreement

AUDIT OF DIFFERENT
ENTITIES

 Agreement where
Hiring goods are let on hire

 hirer has an option to

Purchase purchase them as per
agreement terms

 possession of goods is delivered on

Possession of goods condition that hirer pays instalments

 Property of goods is passed

Property of goods to hirer on payment of last

T E instalment

U
Termination of
T
 Right to terminate
agreement before

T I agreement
property is passed

N S
I
Audit Considerations
J C
S
Auditor should consider the following while auditing owner’s books of accounts.

Agreement

 In writing and signed by all parties and Clearly specifies-

 Goods to be let out
 Hire Purchase Price of goods
 Cash Price (amount at which goods may be purchased in cash)
 Date of agreement
 Number, amount and date of payment of instalments
 Mode of payment

Payment

 Payments regularly received as per agreement

 If not, steps taken by owner for recovery

14.28 | Auditing and Assurance

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Leasing Companies

AUDIT OF DIFFERENT
ENTITIES
Parties in a Leasing Agreement
Lessor or Leasing Company Lessee

 Person who takes possession of property  Person who acquires right to use an asset
and provides it for use to another person  Risks and rewards of ownership are
on payment of rent transferred to lessee
 Legal ownership remains with Lessor

Types of Leases

Point of
Finance Lease T E Operating Lease
consideration

T U
Type of arrangement
Examples of goods
Financing arrangement

T I Renting arrangement
Plant and Machinery, Land, Office Projector, Computers, Laptops,
Building
N S Coffee, Dispensers
Lease Term I
Generally, more than or equal to Generally, extends to less than

asset.
J C
estimated economic life of the 75% of projected useful life of the
leased asset.
Ownership S
Ownership transfer option at end Ownership of the asset remains
of the lease period is with the with lessor for entire period of
lessee. Title may or may not be lease.
eventually transferred.
Accounting treatment  Treated like loan arrangement  Treated like a renting
 Asset ownership is considered arrangement
as that of lessee  Lease payments treated as
 Appears on lessee’s balance operating expenses
sheet  Asset does not appear on
lessee’s balance sheet.
Purchase Option Lessee has purchase option at Lessee does not have any option
less than the fair market value of to buy the asset during the lease
the asset period

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Operating/ running Lessee generally bears insurance, Lessee pays only the monthly
AUDIT OF DIFFERENT

expenses maintenance and taxes lease payments.

No running or administration costs
ENTITIES

are to be borne
Tax benefit Lessee can claim both interest Lease payment is considered as
and depreciation expense expense. No depreciation can be
claimed by the lessee.

Modus Operandi
Finance Lease
Lessee selects asset according
Lessee approaches Lessor places an
to their requirement with respect
lessor for financing order after negotiation
to functionalities etc.

T E
U
During the lease, lessee

IT
At the end of lease, asset is will pay rentals, repair and Lease
returned to lessor or lessee has agreement is
option of renewal or purchase
S T
maintenance expenses and
is entitled for after sales
signed between
parties
IN support from vendor

Operating Lease
J C
Lessor purchases/
S
possesses the asset

Lets it out to lessee

only for use

Lessee pays lease

rentals

At the end of lease, asset

is returned to lessor

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AUDIT OF DIFFERENT
Audit Considerations

ENTITIES
Auditor should consider the following while auditing leasing company’s books of accounts

Preliminary points to be considered

Study the Object clause as per the charter document

 to ensure whether company can undertake financing activities or not
 to see the goods in respect of which such activities can be undertaken
 Procedure to ascertain the credit analysis of lessee

Examine the Lease Agreement to note

T E
the description of the lessor, lessee, equipment and location where the equipment is to be
installed.
T U
T I
the amount of tenure of lease, dates of payment, late charges, deposits or advances etc.
should be noted.
N S
I
whether the equipment shall be returned to the lessor on termination of the agreement

J C
whether the agreement prohibits lessee from assigning the subletting the equipment and

S
authorises the lessor to do so.

Examine lease proposal form by lessee requesting lessor to provide the equipments

Ensure invoice is retained

Examine acceptance letter from lessee as a confirmation for receipt of equipment

Board resolution authorising a director to execute the lease

Copies of insurance policies retained

Compliance with AS 19 or Ind AS 17

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13 CO-OPERATIVE SOCIETIES
AUDIT OF DIFFERENT
ENTITIES

Introduction

Meaning  Association of persons who join voluntarily to achieve common economic,

social, and cultural needs

Applicable  Co-operative Societies Act, 1912 (Central Act)

Laws  State Cooperative Acts
 Multi State Co-operative Societies Act, 2002

Role of  Act as an auditor

Chartered  Guide in accounts maintenance and installation of an accounting system
Accountants in  Help in designing Internal Controls
Co-operative  Guide in taxation related matters
T E
Societies
T
 Provide Management Consultancy services U
 Act as Internal Auditor
T I
N S
Statutory Provisions I
J C
S
As per the Co-operative Societies Act, 1912

Registrar shall audit or cause to be audited accounts of every

cooperative at least once a year by some person authorised by him
Registrar or any person authorised by him shall have access to
Conduct of Audit as
all the books, accounts, papers and securities of a society at
per Section 17
all times
Every officer of the society shall furnish information as
required

Chartered Accountant
 Some State Co-operative Acts have permitted
Qualifications of  Persons holding a government diploma in co-operative
Auditors accounts or in cooperation and accountancy
 Person who has served as an auditor in the co-operative
department of a government

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Appointed by Registrar

AUDIT OF DIFFERENT
Appointment of Submits report to registrar

ENTITIES
Auditor Audit fees paid by society on the basis of statutory scale of fees
prescribed by Registrar

As per Section 43, State Government can frame rules regarding

books of accounts to be maintained
As per Maharashtra State Co-operative Act, following books of
accounts are required-
 All sums of money received and expended by the society and
the related matters.
 All sales and purchases of goods by the society.
 Assets and liabilities of the society
Books of accounts
Society should maintain such records which disclose a true and

T E
fair picture of financial transactions which may include -
 Daily cash sales summary register
U
 Register of collection from debtors if credit sales are
T
allowed

T I
 Loan disbursement register and register of recovery of
S
loans from members in case of credit society
N
I
 Any other subsidiary books

Restriction on J C
As per Section 5, in case liability of members is limited no
member other than a Registered Society shall hold maximum-
shareholding SD20% of the total number of shares or
 Value of shareholding to ` 1,000
Section 29 states that registered society shall not make a loan
to any person other than a member
Restriction on loans
With special sanction of Registrar, a registered society may
grant loan to another registered society

As per Section 30, a registered society shall accept loans and

Restriction on
deposits from non-members subject to bye-laws of society
borrowing

Auditing and Assurance | 14.33

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AUDIT OF DIFFERENT

As per Section 32, a society may invest its funds in-

 Central or State Co-operative Bank.
ENTITIES

 Any of the securities specified in section 20 of Indian Trusts

Act, 1882.
 Shares, securities, bonds or debentures of any other society
Investment of funds
with limited liability.
 Any co-operative bank, other than a Central or State co-
operative bank, as approved by the Registrar
 Any other moneys permitted by the Central or State
Government.

As per Section 33, at least 20% of the profits should be

transferred to Reserve Fund, before distribution as dividends or
bonus to members.
Reserve Fund May be used-
T E
 In business of the society or as working capital
U
 Invest as per provisions of the Act
T
I
 for some public purposes to promote objects of the Act
T
N S
As per Section 34, a registered society with Registrar's approval,
may contribute not exceeding 10% of the net profits after
Charitable purposes I
the compulsory transfer to the reserve fund for any charitable

J C
purpose

Education Fund
S Some State Acts may require societies to contribute to Education
Fund of State Federal Society
It is charge against profits and not appropriation

Transfers to Dividend Equalization Reserve and Share Capital Redemption Fund are
stated as charges against profits. According to generally accepted accounting principles
these items appropriation of profits and not charges against profits. The auditor
should point out such spots where statutory provisions of any law are in contradiction
with the generally accepted accounting principles.

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Special Audit Considerations

AUDIT OF DIFFERENT
ENTITIES
Examination of Overdue Debts

 Check effect on working capital position of a society

 Report overdue debts for a period from 6 months to 5 years and > 5 years
 Ascertain whether proper provisions for doubtful debts are made

Overdue Interest

 Interest on principal which is due

 Should be excluded from interest outstanding and accrued
 Check if Overdue interest reserve is created

T E
Certification of Bad Debts
T U
T I
 As per some State Acts, bad debts and irrecoverable losses can be written off only when
they are certified as such by the auditor
N S
I
 In other cases, managing committee must authorise such writing off

J C
Adherence of cooperative principles
S
 Ascertain whether the society is extending benefits to members who have formed the
society
 Ascertain whether society is achieving social benefits by lowering prices etc.
 Ascertain whether all expenses are economically incurred and wastage of funds is avoided

Verification of Members’ Register and examination of their pass books

 Examination of entries in members pass books regarding the loan given and its repayments
 Confirmation of loan balances in person on a test basis

Audit classification of society

 Auditor should award classification to society as per its performance and criteria set by

the Registrar

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AUDIT OF DIFFERENT

 If society is not satisfied with the classification it may appeal Registrar to review the
same
ENTITIES

Discussion of draft audit report with managing committee

 The audit report should be discussed with the managing committee.

 Minor irregularities may be settled and rectified.

Special Report to Registrar

 If serious irregularities are noticed in society's working, auditor may report the special
matters to Registrar. Examples of such matters include:
 Personal profiteering by managing committee members
 Detection of fraud T E
T
 Decisions of management against cooperative principles U
T I
 Disproportionate advances to vested interest groups, e.g., relatives of members
 Cases of reckless advancing of loans
N S
I
Audit Report J C
S
Respective authorities such as District Special Auditor, District
Submitted to Deputy auditor etc.

Auditor should report -

 Whether all necessary information and explanation necessary
for audit purpose obtained
 Whether the said accounts give all the information required
by the Act as per his opinion and explanations given to him
Main contents of  Whether the P/L Account of society gives a true and fair
Audit Report view of the Profit and Loss made
 Whether the Balance Sheet gives a true and fair view of the
state of affairs as on the given date.
 Whether proper books of accounts as required by the Act,
Rules and bye-laws of the society have been maintained.

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AUDIT OF DIFFERENT
 Whether the Balance Sheet and the P/L account examined by
him are in agreement with the books of account and returns

ENTITIES
of the society
If any of the above matters are answered in negative, qualifying
observations have to be given
In addition to the main contents, the auditor will have to attach
schedules to report -
 All transactions which appear to be contrary to the
provisions of the Act, rules and bye-laws of the society.
 All sums which have not been brought into account by the
society
Schedules  Any material, or property belonging to society which appears
to be bad or doubtful of recovery

T E
 Any material irregularity or impropriety in expenditure or in
the realisation of monies due to society

U
 Any other matters specified by the Registrar
T
on above points
T I
Auditor will have to give Nil Report if there is no observation

S
Auditor has to fill two sets of questionnaire - Audit memos
N
I
First set of audit memo or questionnaire is of general nature
Audit Memos
C
applicable to all types of societies
J
Second set of questionnaire is specific for a particular type of
Ssociety

To be addressed to Chairman of the society

Part I throws light on comparative financial position, capital
Narrative Audit structure, solvency position and the profitability or loss
Report Part II points out observations of routine nature, example
finished products, missing vouchers, loan bonds, inadequacies of
documents, mistakes of principles in accounting etc.

Auditing and Assurance | 14.37

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Multi-State Co-operative Societies

AUDIT OF DIFFERENT
ENTITIES

Introduction

Meaning Co-operative societies whose objects are not confined to one State.

Applicable Law Multi State Co-operative Societies Act, 2002

Statutory Provisions
As per the Multi-State Co-operative Societies (MSCOS) Act, 2002 and related Rules

the related matters. T E

All sums of money received and expended by the society and

Books of Accounts to
T U
All sales and purchases of goods by the society.

be maintained
T I
Assets and liabilities of the society
If society engaged in production, processing and manufacturing,
S
particulars relating to utilization of materials or labour or other
N
I
items of cost as may be specified in the bye laws

J C
As per Section 72, only Chartered Accountant can be
Qualifications and
Disqualifications of
S appointed as auditor
Ineligible persons
Auditors  A body corporate
 An officer or employee of the MSCOS
 A person who is member or who is in employment of an
officer or employee of the MSCOS
 A person who is indebted or who has given any
guarantee or provided any security in connection with the
indebtedness of any third person to the MSCOS for an
amount exceeding ` 1000
After appointment if any of the disqualifications apply, auditor
to vacate office

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As per Section 70, appointment of auditor shall be-

AUDIT OF DIFFERENT
 First Auditor - Appointed by Board within one month of

ENTITIES
the date of registration of such society;
Appointment of
 Tenure - Till first AGM
Auditors
 Subsequent Auditor - Appointed by members at each
AGM;
 Tenure - Till conclusion of next AGM

As per Section 73(1), auditor shall have

 Right to access books and vouchers at all times kept at
any place
 Right to obtain information and explanation from officers
Specific inquiries to be made as per Section 73(2) [Similar to
Powers and Duties of
auditor
Section 143(1)]
 T E
Loans and advances properly secured and terms not
prejudicial
T U

T I
Book entries not prejudicial


N S
Personal Expenses not charged to revenue account

I
If shares allotted for cash whether cash actually received.
If not, whether position is correctly reflected

J C
Auditor should report -
S Whether the P/L Account of society gives a true and fair
view of the Profit and Loss made
 Whether the Balance Sheet gives a true and fair view of
the state of affairs as on the given date.
 Whether all necessary information and explanation
necessary for audit purpose obtained
Contents of Main
Audit Report  Whether the said accounts give all the information
required by the Act as per his opinion and explanations
given to him
 Whether proper books of accounts as required by the Act,
Rules and bye-laws of the society have been maintained.
 Whether the Balance Sheet and the P/L account
examined by him are in agreement with the books of
account and returns of the society

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Whether the report on the accounts of any branch office

AUDIT OF DIFFERENT


audited by a person other than MSCOS auditor has been
forwarded to him and how he has dealt with the same in
ENTITIES

preparing the auditor’s report.

If any of the above matters are answered in negative, qualifying
observations have to be given

As per Section 77, CG may order Special Audit if MSCOS's-

affairs are not being managed in accordance with self-help and
co-operative principles
managed in a manner likely to cause serious injury or damage
to the interests of the trade industry
financial position of any MSCOS is such as to endanger its

Powers of Central
Government to direct
solvency

T E
Special Audit can be directed only if CG or SG or both hold 51%

Special Audit
T U
or more of the PUSC of the MSCOS

T I
Special auditor has same powers and duties as an auditor
Report shall be made to CG

N S
On receipt of the report, the special auditor may take such
I
action as necessary

J C
If no action is taken by CG within 4 months of submission of
report, it shall send copy of report to the MSCOS
S Expenses to be borne by the MSCOS

As per Section 78, Central Registrar may hold an inquiry on

request of-
a federal co-operative to which a MSCOS is affiliated or
Inquiry by Central a creditor or
Registrar not less than 1/3rd of the members of the board or
not less than 1/5th of the total number of members of a
MSCOS
15 days notice must be given to MSCOS

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Powers of Central Registrar-

AUDIT OF DIFFERENT
 have free access to the books, accounts, documents,

ENTITIES
securities, cash and other properties of MSCOS
 require the officers of society to call a GM of the society
by giving notice of not less than 7 days
 summon any person believed to have knowledge of
MSCOS affairs
Central Registrar shall communicate to the MSCOS, FIs or
to the persons who requested for inquiry within 3 months of
receipt of report

As per Section 79, Central Registrar may inspect into the

functioning, constitution and financial condition on request of-

 a creditor or T E
a federal co-operative to which a MSCOS is affiliated or


T U
not less than 1/3rd of the members of the board or

T I
not less than 1/5th of the total number of members of a
MSCOS

N S
15 days notice must be given to MSCOS
Inspection of MSCOS I
Powers of Central Registrar-

J CAccess to the books, accounts, documents, securities, cash

S
and other properties of MSCOS, take them into custody
Call a GM of the society
 Every officer or member of a Multi-State Co-operative
society shall furnish such information as required
Copy of report shall be submitted to MSCOS within 3 months
from completion of inspection

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14 LOCAL BODIES
AUDIT OF DIFFERENT
ENTITIES

Introduction

Meaning of Municipalities

revenue and
Unit of local self where a body
expenditure are
government in an administration of representing the
urban or semi- a locality done by mostly from/for
local inhabitants
urban area the locality

Types of Urban Local Authorities

Urban Local Authorities T E

T U
Municipal Municipal Notified area
T I Town area Cantonment
corporations councils
S
committees

N
committees committees
For large cities For small cities and
towns
I For fast developing
area considered
important by SG
For small towns For civilan population
in cantonment areas

J C
Sources and Application of funds S
Sources of Funds Areas of application of funds
 Taxes on property  General administration and revenue
 Taxes on trade collection

 Professional Tax  Public health

 Fees and licences  Public safety

 Taxes on advertisement  Sanitation

 Non-tax resources such as rent of land houses  Education

 Income from commercial undertakings  Public works

 Government grants  Interest payments

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AUDIT OF DIFFERENT
Financial Administration

ENTITIES
Government Grants

General Purpose Grants Specific Purpose Grants Statutory and compensatory grants
To bridge gap between Tied with certain as compensation on account of loss of
needs and resources tasks or projects any revenue on taking over a tax by SG
from local government

Auditor should understand the financial administration process of Local Bodies

For financial accountability and control of expenditure

Budgetary
Procedure
T E
To ensure funds raised and moneys spent as per rules
and within the sanction

T U
I
Expenditures should be authorised

T
N S
No demarcation between revenue and capital items;
Capital expenditures covered under Extraordinary items
I
J C
Due to integration of executive and legislative functions,
Expenditure
Control
S financial control becomes difficult
Independent financial officer for the local bodies cannot
be appointed
External Audit by SG can keep a check on controlling
expenditure

Complex and not easily comprehensible

Accounting
Sometimes provides inadequate information
System
Proper understanding of the system is required

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Audit Considerations
AUDIT OF DIFFERENT
ENTITIES

Objectives of Audit
Important Objectives of External Audit of Local Bodies
 reporting on the fairness of the content and presentation of FS
 reporting upon strengths and weaknesses of systems of financial control
 reporting on adherence to legal and/or administrative requirements
 reporting upon whether value is being fully received on money spent
 detection and prevention of error, fraud and misuse of resources

In addition to the external audit, there should be a system of internal audit in all
municipal institutions. Internal audit should be provided by the institutions’ own

T E
staff. External auditor should rely on the work of internal auditor and where there is
no internal audit is such auditor should conduct detailed checking
Audit Programme for Local Bodies
T U
The Auditor should-
T I
N S
Ensure their appointment by appropriate authority
I
J C
Bigger Municipal Corporations: Appoint their In other cases: Appointed by Local Audit
own auditors wing of SG

S
Achieve the objectives of audit and report on the same

Audit against Rules and orders: Ensure that expenditure incurred conforms to relevant
provisions of the law and is in accordance with the financial rules and regulations

Audit of sanctions: all types of sanctions, either special or general, accorded by the
competent authority.

Audit against Provision of funds: Ensure that there is a provision of funds approved by
competent authority and the expenditure is incurred from the provision

Propriety or Value for Money Audit: Check that different schemes, programmes and
projects, where large financial expenditure has been incurred, are running economically and
getting the expected results

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15 GOVERNMENT AUDIT

AUDIT OF DIFFERENT
ENTITIES
Introduction

Meaning of Government Audit

Objective, systematic, professional and financial, administrative and

independent examination of other operations of a public
entity
presenting a report containing
 explanatory comments on audit findings
 conclusions and recommendations for
future actions
 expressing appropriate opinion regarding
T E
for the purpose of evaluating
and verifying them
fairness of the presentation of FS
T U
T I
Features of Government Audit
N S
I
Aims to ensure accountability of the executive in respect of
C
public revenue and expenditure
J
S
Provides public accounting of operational, management,
programme and policy aspects of public administration

Highlight lapses of the lower hierarchy, thus assisting

supervisory level officers to take corrective measures

In India, function of Government Audit is discharged by the

independent statutory authority of the Comptroller and Auditor
General through Indian Audit and Accounts department

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Comptroller and Auditor General of India

AUDIT OF DIFFERENT
ENTITIES

Legal Framework

Appointment Appointed by the President of India

Can be removed only when each House of Parliament decides

by a majority of not less than 2/3rd of the members of the
Removal House present and voting.
Shall not be removed from office except on grounds of proven
misbehaviour or incapacity
Upto six years from date of appointment or 65 years of age,
Tenure whichever is earlier

Salary T E
Equivalent to that of a Supreme Court judge
Salary and other conditions of service cannot be varied to his

T U
disadvantage after his appointment

T I
S
Powers and Duties as per The C & AG’s (Duties, Powers and Conditions of Service) Act, 1971
N
I
Duties J C
Compile and submit Accounts of Union and States
Compile accounts from initial and subsidiary accounts
S
Classify receipts and disbursements
Submit accounts to President/Governor

Audit and report on -

All expenditure from the Consolidated Fund of India and of each State
and of each UT having a Legislative Assembly
All transactions of the Union and of the States relating to Contingency
Funds and Public Accounts
All trading, manufacturing, P/L accounts, balance-sheets and other
subsidiary accounts kept in any department

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AUDIT OF DIFFERENT
Inspect any office of accounts under the control of the Union or a
Power State Government.

ENTITIES
To require any accounts, books, papers and other documents (relevant
to audit) be sent to specified places.
To questions or make observations to the person in charge of the office
and to call for information as he may require

Different Types of Government Audits

T E Audit against rules and orders

Audit of receipts of Union or States

T U
T I Audit of sanctions

N S
Audit of expenditure of Union or
States
Audit against provision of funds

I Propriety audit

J C
Audit of receipts of substantially
financed entities
Performance Audit
Government Audit
S Audit of grants and loans

Audit of stores and inventories

Audit of Commercial Accounts

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Audit of Receipts of Union and States

AUDIT OF DIFFERENT

 Check all receipts into the Consolidated Fund of India.

ENTITIES

 Check whether rules and procedures are designed and observed to secure an effective check

on the assessment, collection and proper allocation of revenue

Audit of expenditure of Union and States

 Audit against Rules and Orders or Regularity Audit: Ensure that the expenditure conforms
to the relevant provisions of the Constitution, the laws and financial rules and regulations
including Rules and orders for:
 Regulating power to sanction and incur expenditure

moneys from Government Funds T E

 Dealing with the mode of presentation of claims against government, withdrawing

T U
 Regulating conditions of service, salary etc. of government servants

T I
 Audit of Sanctions: Ensure that each item of expenditure is covered by a sanction, either

S
general or special, of the competent authority.
N
I
 Audit against Provision of funds: Aims at ascertaining that amount of expenditure

J C
incurred has been as per the appropriation made and for the specified purpose.

S
 Propriety Audit: To ensure compliance with the general principles of financial propriety and
point out cases of avoidable and infructuous expenditure
 Performance Audit: To ensure that programmes and schemes are run economically and
yielding expected results
The principles of financial propriety are: Expenditure should not be more than what
occasion demands, No individual advantage from public money and not for benefit of
particular community.

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Audit of receipts of substantially financed entities

AUDIT OF DIFFERENT
 Substantially financed by loans or grants entities: Grant amount from Consolidated

ENTITIES
Fund of India or State or UT fund > = ` 25 lakhs and amount is not less than 75% of
expenditure of such body or authority
 Audit of all receipts and expenditures of that body shall be done

Audit of Grants and loans

 Check fulfilment of conditions subject to which grants or loans were given

Audit of accounts of Stores or Inventories

T E
 Check whether the Regulations governing purchase, receipt and issue, custody, sale and

T U
inventory taking of stores are well devised and properly carried out

T I
 Bring out deficiencies in quantities of inventories or defects in controls
S
 Purchase price is reasonable and as per contracts and agreements
N
 Excess or idle inventory to be reportedI
J C
 Periodical verification of stock

S
 Valuation of stock to be checked

Audit of Commercial Accounts

 Departmental Enterprises (E.g., Water, Electricity Department) - Audit similar to any

other government department

 Statutory Corporations (E.g., LIC, GIC etc.) - As per the relevant statute
 Government Companies - As per Section 139 and 143 of Companies Act, 2013

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AUDIT OF DIFFERENT

Reporting Procedures
ENTITIES

Report on the
accounts of the Union
Experience and
and States addressed
professional judgment
to the President or
Reporting standards ultimately determines
the Governor concerned
are issued by C&AG what is to be included
and the letter shall
cause the report to be in the audit reports
laid before the
legislatures

T E
T U
T I
N S
I
J C
S

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AUDIT OF DIFFERENT
QUESTIONS AND ANSWERS

ENTITIES
1 NON-GOVERNMENTAL ORGANISATIONS

Q1 You have been appointed as an auditor of an NGO, briefly state the points on which
you would concentrate while planning the audit of such an organisation? RTP Nov 18

While planning the audit of an NGO, the auditor may concentrate on the following:
i. Knowledge of the NGO’s work, its mission, and vision, areas of operations, and the
environment in which it operates.

T E
ii. Updating knowledge of relevant statutes especially about recent amendments, circu-

T
lars, judicial decisions related to the statutes. U
T I
iii. Reviewing the legal form of the Organisation and its Memorandum of Association,

S
Articles of Association, Rules, and Regulations.
N
I
iv. Reviewing the NGO’s Organisation chart, then Financial and Administrative Manuals,

J C
Project and Programme Guidelines, Funding Agencies Requirements and formats,bud-

S
getary policies if any.
v. Examination of minutes of the Board/Managing Committee/Governing Body/
Management and Committees thereof to ascertain the impact of any decisions on the
financial records.
vi. Study the accounting system, procedures, internal controls, and internal checks existing
for the NGO and verify their applicability.
vii. The setting of materiality levels for audit purposes.
viii. The nature and timing of reports or other communications.
ix. The involvement of experts and their reports.
x. Review the previous year’s Audit Report

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2 CHARITABLE INSTITUTIONS
AUDIT OF DIFFERENT

Q2 In the case of audit of a charitable institution, what attention should be paid by

ENTITIES

the auditor regarding audit of expenditure items? Nov 19

The special points to be kept in mind while auditing the expenditure of Charitable
Institutions are:
i. Vouching payment of grants also verifying that the grants have been paid only for
a charitable purpose or purposes falling within the purview of the objects for which
the charitable institution has been set up and that no trustee, director or member
of the management committee has benefited there from either directly or indirectly
ii. Verifying the schedules of securities held, as well as inventories of properties both

T E
movable and immovable by inspecting the securities and title deeds of the property
and by physical verification of the movable properties on a test basis.

T U
iii. Check payment along with supporting documents about salary and other expenses.

T I
Verify that all payments are made after proper sanction by the appropriate authority.

S
iv. Ascertaining that any funds contributed for a special purpose have been utilised for
N
the purpose. I
J C
v. Verifying the cash and bank balances/payments.

3
S
EDUCATIONAL INSTITUTIONS

Q3 What are the special steps involved in conducting the audit of an Educational
Institution? RTP May 18 and RTP Nov 19
The special steps involved in the audit of Educational Institutions are:
i. Examine the Trust Deed or Regulations in the case of school or college and note all

the provisions affecting accounts. In the case of a university, refer to the Act of
Legislature and the Regulations under which the university is established.
ii. Read the minutes of the meetings of the Managing Committee or Governing Body and
note the resolutions affecting accounts to see that these have duly complied with.
iii. Fees:
a. Check names entered in the Students’ Fee Register for each month or term,
with the respective class registers, showing names of students on rolls and test

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AUDIT OF DIFFERENT
amount of fees charged; and verify that there operates a system of internal
check which ensures that demands against the students are properly raised

ENTITIES
b. Check fees received by comparing counterfoils of receipts granted with entries in
the cashbook and tracing the collections in the Fee Register to confirm that the
revenue from this source has been duly accounted for.
c. Total up the various columns of the Fees Register for each month or term
to ascertain that fees paid in advance have been carried forward and the
irrecoverable arrears have been written off under the sanction of an appropriate
authority.
d. Check admission fees with admission slips signed by the head of the institution

Managing Committee has decided on the contrary. T E

and confirm that the amount had been credited to a Capital Fund unless the

T U
iv. See that free studentship and concessions have been granted by a person authorised

T I
to do so, having regard to the prescribed Rules.
S
v. Confirm that fines for late payment or absence, etc., have either been collected or
N
I
remitted under proper authority.

J C
vi. Confirm that hostel dues were recovered before students’ accounts were closed and

S
their deposits of caution money refunded.
vii. Verify rental income with the rent rolls and rent agreements.
viii. Vouch income from endowments and legacies, as well as interest and dividends from
investment; also inspect the securities in respect of investments held.
ix. Verify any Government or local authority grant with the relevant papers of grant. If
any expense has been disallowed for purposes of the grant, ascertain the reasons and
compliance thereof.
x. Report any old heavy arrears on account of fees, dormitory rents, etc, to the
Managing Committee.
xi. Confirm that caution money and other deposits paid by students on admission have
been shown as liability in the balance sheet and not transferred to revenue.
xii. See that the investments representing endowment funds for prizes are kept separate and
any income above the prizes has been accumulated and invested along with the corpus.

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AUDIT OF DIFFERENT

xiii. Verify that the Provident Fund money of the staff has been invested in appropriate
securities.
ENTITIES

xiv. Vouch donations, if any, with the list published with the annual report. If some
donations were meant for any specific purpose, see that the money was utilised for
the purpose
xv. Vouch all capital expenditure in the usual way and verify the same with the sanction
for the Committee as contained in the minute book.
xvi. Vouch in the usual manner all establishment expenses and enquire into any unduly
heavy expenditure under any head.
xvii. See that increase in the salaries of the staff has been sanctioned.

T E
xviii. Ascertain that the system of ordering,inspection on receipt, and issue of foodstuffs,
clothing, and other equipment is efficient and all bills are duly authorised and passed
before payment.
T U
T I
xix. Verify the inventories of furniture, stationery, clothing, provision, and all equipment,etc.

S
These should be checked by reference to Inventory Register and values applied to
N
I
various items should be test checked.

J C
xx. Confirm that the refund of taxes deducted from the income from investment

S
(interest on securities, etc.) has been claimed and recovered since the institutions
are generally exempted from the payment of income-tax.

4 HOSPITAL

Q4 The general transactions of a hospital include patient treatment, collection of

receipts, donations, capital expenditures. You are required to mention special points
of consideration while auditing such transactions of a hospital? RTP Nov 18

Special points of consideration while auditing certain transactions of a hospital are

stated below-
i. Register of Patients: Vouch the Register of patients with copies of bills issued to
them. Verify bills for a selected period with the patients’ attendance records to see
that the bills have been correctly prepared. Also, see that bills have been issued to

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AUDIT OF DIFFERENT
all patients from whom an amount was recoverable according to the rules of the

hospital.

ENTITIES
ii. Collection of Cash: Check cash collections as entered in the Cash Book with the
receipts, counterfoils, and other evidence, for example, copies of patients’ bills,

counterfoils of dividends, and other interest warrants, copies of rent bills, etc.
iii. Legacies and Donations: Ascertain that legacies and donations received for a specific
purpose have been applied in the manner agreed upon.
iv. Reconciliation of Subscriptions: Trace all collections of subscription and donations
from the Cash Book to the respective Registers. Reconcile the total subscriptions
due(as shown by the Subscription Register and the amount collected and that still
outstanding).

T E
v. Authorisation and Sanctions: Vouch all purchases and expenses and verify that the

T U
capital expenditure was incurred only with the prior sanction of the Trustees or the

T I
Managing Committee and that appointments and increments to staff have been duly
authorised
N S
I
5 CLUB
J C
Q5 S
The members of Aloha Club resolve to get the accounts of the club audited by an
Independent Auditor. Advise the auditor on the special audit considerations in relation
to clubs.
The special steps involved in such an audit are stated below-
i. Examine the constitution, powers of the governing body and relevant rules relating to
preparation and finalisation of accounts.
ii. Vouch the receipt on account of entrance fees with members’ applications, counterfoils
issued to them, and minutes of the Managing Committee.
iii. Vouch Members’ subscription with the counterfoils of receipts issued to them. Trace
receipts for a selected period to the Register of Members; reconcile the amount of
total subscription due with the amount collected and the outstanding. Check totals
of various columns of the Register of Members and tally them across. See the
Register of Members to ascertain the Member’s dues which are in arrear and enquire

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AUDIT OF DIFFERENT

whether necessary steps have been taken for their recovery. The amount considered
irrecoverable, if any should be written off.
ENTITIES

iv. Ensure that arrears of subscriptions for the previous year have been correctly brought
over and arrears for the year under audit and subscription received in advance have
been correctly adjusted.
v. Verify the internal check as regards members being charged with the price of
foodstuffs and drinks provided to them and their guests as well as with the fees
chargeable for the special service rendered such as billiards, tennis, etc. Trace debits
for a selected period from subsidiary registers maintained in respect of supplies and
services to members to confirm that the account of every member has been debited
with amounts recoverable from him.

T E
vi. Vouch purchase of sports items, furniture, crockery, etc., and trace their entries into

T U
the respective inventory registers. Vouch purchases of food-stuffs, cigars, wines, etc.

T I
and test their sale price to confirm that the normal rates of profit have been earned
on their sales.
N S
I
vii. The inventory of unsold provisions and stores, at the end of the year, should be

J C
verified physically and its valuation checked.

S
viii. Check the inventory of furniture, sports material and other assets physically with the
respective inventory registers or inventories prepared at the end of the year.
ix. Inspect the Demat statement in respect of investments, check their current values
for disclosure in final accounts, also ascertain that the arrangements for their safe
custody are satisfactory, check the accrual of income therefrom and provision of
income tax thereon.

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6 CINEMA

AUDIT OF DIFFERENT
Q6 FTR is running Daffodil Cinema. Your firm of Chartered Accountants has been appointed

ENTITIES
to get its accounts audited. The Assistant appointed on the job to conduct an audit
asks the audit in charge as to how to go about conducting an audit and seeks your
guidance on it. Keeping in view the above you are required to explain to the assistant
special steps (any five) involved in the Audit of Cinema.
The special steps involved in the audit of Cinema are stated below-
i. Verify the internal control mechanism-
a. that entrance to the cinema-hall during the show is only through printed tickets;
b. that they are serially numbered and bound into books;

T E
c. that the number of tickets issued for each show and class is different though the
numbers of the same class for the show on the same day, each week, run serially;

T U
d. that for advance booking a separate series of tickets is issued; and

T I
e. that the inventory of tickets is kept in the custody of a responsible official.
S
ii. Confirm that at the end of the show, a statement of tickets sold is prepared and cash
N
collected is agreed with it. I
J C
iii. Verify that a record is kept of the free passes and that these are issued under proper
authority.
S
iv. Reconcile the amount of Entertainment Tax collected with the total number of tickets
issued for each class and vouch and verify the entertainment tax returns filed each
month.
v. Vouch the entries in the Cash Book in respect of cash collected on the sale of tickets
for different shows on a reference to Daily Statements which have been test checked
with a record of tickets issued for the different shows held.
vi. Verify the charges collected for advertisement slides and shorts by reference to
the Register of Slides and Shorts Exhibited kept at the cinema as well with the
agreements, entered into with advertisers in this regard.
vii. Vouch the expenditure incurred on advertisement, repairs, and maintenance. No part of
such expenditure should be capitalized.

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AUDIT OF DIFFERENT

viii. Confirm that depreciation on machinery and furniture has been charged at an
appropriate rate.
ENTITIES

ix. Vouch payments on account of film hire with bills of distributors and in the process,
the agreements concerned should be referred to.
x. Examine unadjusted balance out of advance paid to the distributors against film hire
contracts to see that they are good and recoverable. If any film in respect of which
an advance was paid has already run, it should be inquired as to why the advance has
not been adjusted. The management should be asked to make a provision in respect of
advances that are considered irrecoverable.
xi. The arrangement for collection of the share in the restaurant income should be

T E
enquired into either a fixed sum or a fixed percentage of the taking may be receivable
annually. In case the restaurant is run by the Cinema, its accounts should be checked.

T U
The audit should cover the sale of various items of foodstuffs, purchase of foodstuffs,
cold drinks, etc.
T I
N S
7 HOTELS
I
Q7
J C
What special steps will you take into consideration in auditing the accounts of a
Hotel? S
The special points to consider in the audit of a Hotel are:
i. Ascertain the legal status of a hotel - whether it is a sole trading organisation,
partnership or a company.
ii. Examine the Articles and Memorandum of Association, or partnership deed and note
down important provisions which may have some bearing on the audit work.
iii. Examine the minutes of Board to note decisions which may affect accounts and audit.
iv. Evaluate the system of internal control particularly with regards to system billing the
guests, services availed by the guests from laundry, bar and restaurants etc.
v. Room Sales :
a. Verify room sales collections with the guest register.
b. Ensure standard rates have been charged in various guests’ bills and the standard
room rate should be investigated to ensure that they have been properly authorised.

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AUDIT OF DIFFERENT
c. Test check daily occupancy reports prepared by a housekeeper with guest register
and individual guest’s bill.

ENTITIES
vi. Examine the bills raised or letting out of banquet hall with reference to the agreement
signed with the customer, cashbook, bank passbook and relevant register.
vii. Examine copies of bills raised to agencies using space and other facilities of the hotel
e.g. shopkeeper, tour operator etc.
viii. Verify whether various taxes collected like service tax, luxury tax etc. have been timely
deposited with respective authorities.
ix. Verify restaurant bills by reference to Kitchen Order Tickets
x. Ensure that wages paid to casual labour are accounted for properly.

credit allowed. T E
xi. Ensure that money has been recovered from the travel agents as per the terms of

T U
xii. Vouch the commission paid to agents by reference to the agreement.

T I
xiii. Ensure that proper distinction is made between capital and revenue expenditure.
S
xiv. Check whether depreciation has been properly charged on Furniture, Vehicles,etc.
N
I
xv. Physically verify the fixed assets and find the discrepancies between the results of

J C
physical verification and the books of accounts.

S
xvi. Examine whether all the assets and liabilities have been properly disclosed.
xvii. If the hotel operates a counter to facilitate foreign exchange conversion,the auditor
should ensure compliance with the various provisions of FEMA, 1999.

8 SOLE TRADER
Q8 Discuss in brief about the scope of audit in case of a Sole Trader.
Auditors of sole- proprietary concern shall be appointed by the sole proprietor himself.
Hence, sole proprietor determines the scope of the audit as well as the conditions under
which it will be carried out. He can stipulate that only a partial audit shall be carried
out, that certain parts of the accounts shall not be checked or that the auditor also shall
prepare the final statements of account. He can also decide whether the audit shall be
carried out continuously or at the end of the year.

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9 FIRM
AUDIT OF DIFFERENT

Q9 Discuss the matters which should be specially considered in the audit of accounts of
ENTITIES

a partnership. RTP May 19 and Nov 19

Matters which should be specially considered in the audit of accounts of a partnership:

i. Confirming that the letter of appointment signed by a partner (duly authorised to
do so) clearly states the nature and scope of audit contemplated by the partners,
especially the limitation, if any, under which the auditor shall have to function.
ii. Studying the minute book, if any, maintained to record the policy decision taken by
partners especially the minutes relating to authorisation of extraordinary and capital
expenditure, raising of loans; purchase of assets, extraordinary contracts entered into
and other such matters as are not routine.

T E
iii. Verifying that the business in which the partnership is engaged is authorised by the
partnership agreement.
T U
T I
iv. Examining whether books of account appear to be reasonable and are considered
S
adequate about the nature of the business of the partnership.
N
I
v. Verifying generally that the interest of no partner has suffered prejudicially by an

J C
activity engaged in by the partnership which was not authorised under the partnership

S
deed or by any violation of a provision in the partnership agreements.
vi. Confirming that a provision for the firm’s tax payable by the partnership has been
made in the accounts before arriving at the amount of profit divisible among the
partners.
vii. Verifying that the profits and losses have been divided among the partners in their
agreed profit-sharing ratio.

10 LLPs

Q 10 What is the procedure of appointment of an auditor of a Limited Liability Partnership?

The auditor may be appointed by the designated partners of the LLP –
i. At any time for the first financial year but before the end of the first financial year,
ii. At least thirty days before the end of each financial year (other than the first
financial year),

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AUDIT OF DIFFERENT
iii. To fill the casual vacancy in the office of auditor
iv. To fill the casual vacancy caused by the removal of an auditor.

ENTITIES
The partners may appoint the auditors if the designated partners have failed to appoint
them.

11 HIRE PURCHASE AND LEASING COMPANIES

Q 11 Define the different types of lease agreements as per Accounting Standard/Ind-AS.

May 19

AS-19/ Ind-AS 17 defines that lease arrangements could be of 2 types i.e.

i. Finance Lease
ii. Operating Lease

T E
An arrangement with the following attributes qualifies as a Finance Lease:

T U
i. The lease arrangement transfers ownership of the asset to the lessee at the end of
the lease term
T I
S
ii. The lessee has the option to purchase the asset at a price that is expected to be
N
I
sufficiently lower than the fair value at the date the option becomes exercisable for

J C
it to be reasonably certain, at the inception of the lease, that the option will be
exercised S
iii. The lease term is for the major part of the economic life of the asset even if the
title is not transferred
iv. At the inception of the lease, the present value of the minimum lease payments
amounts to at least substantially all of the fair value of the leased asset
v. the leased assets are of such a specialized nature that only the lessee can use them
without major modifications Operating Lease.
An arrangement that does not transfer substantially all the risks and rewards incidental
to ownership qualifies as an Operating Lease. In other words, an operating lease is a lease
arrangement Other than a finance lease.

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Q 12 Anand
AUDIT OF DIFFERENT

Pvt. Ltd is engaged in the business of letting goods vehicles on hire. As

an auditor of Anand Pvt. Ltd. what are the special points you will consider while
ENTITIES

conducting the audit?

Important points that should be considered while checking the hire- purchase transactions
are
i. Hire purchase agreement is in writing and is signed by all parties.
ii. Hire purchase agreement specifies clearly-
a. The hire-purchase price of the goods to which the agreement relates;
b. The cash price of the goods, that is to say, the price at which the goods may
be purchased by the hirer for cash;

T E
c. The date on which the agreement shall be deemed to have commenced;
d. The number of instalments by which the hire- purchase price is to be paid, the

T U
amount of each of those instalments, and the date, or the mode of determining

T I
the date, upon which it is payable,and the person to whom and the place where
it is payable; and
N S
I
e. The goods to which the agreement relates, in a manner sufficient to identify
them.
J C
S
iii. Ensure that instalment payments are being received regularly as per the agreement.

13 CO-OPERATIVE SOCIETIES
Q 13 Briefly explain the provisions for qualification and appointment of Auditors under the
MultiState Co-operative Societies Act, 2002. May 19
Section 72 of the Multi-State Co-operative Societies Act, 2002states that a person who

is a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949
can only be appointed as auditor of Multi-State co-operative society.
However, the following persons are not eligible for appointment as auditors of a Multi-
State co-operative society-
i. A body corporate.
ii. An officer or employee of the Multi-State co-operative society.

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iii. A person who is a member or who is in the employment, of an officer or employee
of the Multi-State co-operative society.

ENTITIES
iv. A person who is indebted to the Multi-State co-operative society or who has given
any guarantee or provided any security in connection with the indebtedness of any
third person to the Multi-State co-operative society for an amount exceeding one
thousand rupees.
If an auditor becomes disqualified after his appointment, he shall be deemed to have
vacated his office as such.
Section 70 of the Multi-State Co-operative Societies Act, 2002provides that the first
auditor or auditors of a Multi-State co-operative society shall be appointed by the board

T E
within one month of the date of registration of such society and the auditor or auditors
so appointed shall hold office until the conclusion of the first annual general meeting. If

T U
the board fails to exercise its powers under this sub-section, the Multi-State co-operative

T I
society in the general meeting may appoint the first auditor or auditors.

S
The subsequent auditor or auditors are appointed by Multi-State co-operative society, at
N
I
each annual general meeting. The auditor or auditors so appointed shall hold office from

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the conclusion of that meeting until the conclusion of the next annual general meeting.

S
Q 14 As per Multi-state Co-operative Societies Act, 2002, the auditor shall make a report
to the members of the Multi-State co-operative society on the accounts examined
by him and on every balance sheet and profit and loss account and on every other
document required to be part of or annexed to the balance -sheet or profit and loss
account. Explain. RTP May 20
As per sub-section section, 73(3) and (4) of Multi-state Co-operative Societies Act,2002,
the auditor shall make a report to the members of the Multi-State co-operative society
on the accounts examined by him and on every balance sheet and profit and loss
account and on every other document required to be part of or annexed to the financial
statements, which are laid before the Multi-State cooperative society in the general
meeting during his tenure of office. The report shall state whether, in his opinion and
to the best of his information and according to the explanation given to him, the said

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account give the information required by this act in the manner so required, and give a
true and fair view:
ENTITIES

i. In the case of the balance sheet, the state of the Multi-State co-operative society’s
affairs as at the end of its financial year; and
ii. In the case of the profit and loss account, of the profit or loss for its financial year.
The auditor’s report shall also state:
a. Whether he has obtained all the information and explanation which to the best of
his knowledge and belief were necessary for his audit.
b. Whether, in his opinion, proper books of account have been kept by the Multi-State
co-operative society so far as appears from his examination of these books and

T E
proper returns adequate for his audit have been received from branches or offices of
the Multi-State co-operative society not visited by him.

T U
c. Whether the report on the accounts of any branch office audited by a person other

T I
than the Multi-State co-operative society’s auditor has been forwarded to him and
S
how he has dealt with the same in preparing the auditor’s report.
N
I
d. Whether the Multi-State co-operative society’s balance sheet and profit and loss

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account dealt with by the report agree with the books of account and return.

S
Where any of the matters referred to in sub-section (3) or (4) is answered in the
negative or with a qualification, the auditor’s report shall state the reason for the answer.

Q 15 Explain the powers and duties of auditors under the Multi-State Co-operative Societies
Act, 2002. RTP May 20

Section 73 of the Multi-State Co-operative Societies Act, 2002 discusses the powers and
duties of auditors. According to this, every auditor of a Multi-State co-operative society
shall have a right of access at all times to the books accounts and vouchers of the Multi-
State co-operative society, whether kept at the head office of the Multi-State co-operative
society or elsewhere, and shall be entitled to require from the officers or other employees
of the Multi-State co-operative society such information and explanation as the auditor
may think necessary for the performance of his duties as an auditor.

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As per section 73(2), the auditor shall make the following inquiries:
a. Whether loans and advances made by the Multi-State co-operative society based on

ENTITIES
security have been properly secured and whether the terms on which they have been
made are not prejudicial to the interests of the Multi-State co-operative society or its
members,

b. Whether transactions of the Multi-State co-operative society which are represented

merely by book entries are not prejudicial to the interests of the Multi-State co-
operative society,

c. Whether personal expenses have been charged to revenue account, and

d. Where it is Stated in the books and papers of the Multi-State co-operative society

T E
that any shares have been allotted for cash, whether cash has been received in
respect of such allotment, and if no cash has been so received, whether the position

T U
as stated in the account books and the balance sheet as correct regular and not
misleading.
T I
N S
Q 16 Central I
Govt. holds 55% of the paid-up share Capital in Kisan Credit Co-operative

C
Society, which is incurring huge losses. Advise when the Central Government can
J
S
direct Special Audit under Section 77 of the Multi-State Co-operative Society Act.

May 19
Central Government shall order for special audit only if that Government or the State

Government either by itself or both hold fifty-one percent or more of the paid-up share
capital in such Multi-State co-operative society. Under section 77 of the Multi-State
Cooperative Societies Act, 2002, where the Central Government believes:
i. that the affairs of any Multi-State co-operative society are not being managed as per
self-help and mutual deed and co-operative principles or prudent commercial practices
or with sound business principles; or

ii. that any Multi-State co-operative society is being managed in a manner likely to
cause serious injury or damage to the interests of the trade industry or business to
which it pertains; or

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iii. that the financial position of any Multi-State co-operative society is such as to
endanger its solvency.
ENTITIES

Thus, in the given case since Central Govt is holding 55% shares and financial position

of Kisan Credit co-operative society is in danger, the Central government can direct for
special audit.

14 LOCAL BODIES
Q 17 State the objectives of the audit of Local Bodies. May 18
The external control of municipal expenditure is exercised by the state governments through
the appointment of auditors to examine municipal accounts. The municipal corporations of

audit. The important objectives of the audit are: T E

Delhi, Mumbai, and a few others have powers to appoint their auditors for regular external

T U
i. reporting on the fairness of the content and presentation of financial statements

T I
ii. reporting upon the strengths and weaknesses of systems of financial control

S
iii. reporting on the adherence to legal and/or administrative requirements
N
I
iv. reporting upon whether the value is being fully received on money spent

C
v. detection and prevention of error, fraud, and misuse of resources.
J
Q 18 The
S
auditor should obtain an understanding of the financial administration of local
bodies before embarking upon the audit. Explain May 18

The auditor should understand the financial administration of local bodies before embarking
upon the audit. Some of the aspects are as under:

i. Budgetary Procedure: The main objective of the budgetary procedure is to ensure that
funds are raised and amounts of money are spent by the executive departments as per
the rules and regulations and within the limits of sanction and authorisation by the
legislature or council. Budget preparation is usually the occasion for determining the
levels of taxation and rates and the ceilings on expenditure.
ii. Expenditure Control: The system of financial control existing in the state and central
government level is conditioned by the fact that there is a clear demarcation between
the legislature and executive. The integration of legislation and executive powers in

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the municipal council makes it difficult for its executive to function as its questioning
body as well. This leaves the system of an external audit by the state government as

ENTITIES
the only instrument of controlling municipal expenditure.
iii. Accounting System: Municipal accounting and budget formats have been criticised as
neither simple nor comprehensible, sometimes providing in adequate information and
at other times a surfeit of information. Both these situations are not conducive to a
proper system of management information.

15 GOVERNMENT AUDIT
Q 19 Explain Government Audit in brief.

T E
Government audit serves as a mechanism or process for a public accounting of government
funds. It also provides a public accounting of the operational, management, programme

T U
and policy aspects of public administration as well as accountability of the officials

T I
administering them. It aims to ensure the accountability of the executive in respect of
public revenue and expenditure.
N S
I
C
Q 20 Explain in detail the duties of the Comptroller and Auditor General of India.
J

S RTP May 18, RTP May 19 and RTP Nov 19
The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971
lays down duties of the C&AG as under-
i. Compile and submit Accounts of Union and States - The C&AG shall be
responsible for compiling the accounts of the Union and each State from the
initial and subsidiary accounts provided to the audit and accounts offices by
treasuries, offices, or departments responsible for the keeping of such account.
ii. Duties relating to Audit - It shall be the duty of the C&AG –
a. to audit and report on all expenditure from the Consolidated Fund of India
and of each State and of each Union Territory having a Legislative Assembly
and to ascertain whether the amount of money disbursed as per accounts is
legally available for spending, has been authorised by a competent authority
and has been spent on the specified purpose

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b. to audit and report all transactions of the Union and the States relating to
Contingency Funds and Public Accounts
ENTITIES

c. to audit and report on trading, manufacturing profit and loss accounts,

balance sheets, and other subsidiary accounts kept in any department of the
Union or a State
iii. Audit of Receipts and Expenditure - Where any body or authority is substantially
financed by grants or loans from the Consolidated Fund of India or of any State
or of any Union Territory having a Legislative Assembly, the C&AG shall audit and
report on all receipts and expenditure of that body or authority.
iv. Audit of Grants or Loans - Where any grant or loan is given for any specific

T E
purpose from the Consolidated Fund of India or of any State or any Union Territory
having a Legislative Assembly to any authority or body, not being a foreign State

T U
or international organisation, the C&AG shall scrutinize the procedures by which

T I
the sanctioning authority satisfies itself about the fulfilment of conditions subject

S
to which such grants or loans were given.
N
v. I
Audit of Receipts of Union or States - It shall be the duty of the C&AG to audit

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all receipts into the Consolidated Fund of India and each State and each Union

S
Territory having a Legislative Assembly and to satisfy himself that the rules and
procedures designed to secure an effective check on the assessment, collection
and proper allocation of revenue and are being duly observed.
vi. Audit of Accounts of Stores and Inventory - The C&AG shall have the authority
to audit and report on the accounts of stores and inventory kept in any office or
department of the Union or a State.
vii. Audit of Government Companies and Corporations - The duties and powers of
the C&AG concerning the audit of the accounts of government companies shall be
performed and exercised by him as per the provisions of Section 139(5), 139(7)
and Section 143(6) and 143(7) of the Companies Act, 2013.

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Q 21

AUDIT OF DIFFERENT
Discuss the power of C & AG in Government audit. May 19
The C&AG Act gives the following powers to the C&AG in connection with the performance

ENTITIES
of his duties

i. To inspect any office of accounts under the control of the Union or a State
Government including office responsible for the creation of the initial or subsidiary
accounts.
ii. To require that any accounts, books, papers, and other documents that deal with or
are otherwise relevant to the transactions under audit, be sent to specified places.
iii. To put such questions or make such observations as he may consider necessary to
the person in charge of the office and to call for such information as he may require

T E
for the preparation of any account or report which is his duty to prepare.
iv. In carrying out the audit, the C&AG has the power to dispense with any part of a

T U
detailed audit of any accounts or class of transactions and to apply such limited

T I
checks concerning such accounts or transactions as he may determine.

N S
Q 22 An I
audit of Expenditure is one of the major components of the Government Audit.

C
In the context of ‘Government Expenditure Audit’, write in brief, what do you
J
understand by:
(i)
S
Audit against Rules and Orders
(ii) Audit of Sanctions
(iii) Audit against the provision of Funds
(iv) Propriety Audit
(v) Performance Audit. RTP May 18,
OR
Audit of government expenditure is one of the major components of government audit
conducted by the office of C&AG. The basic standards set for an audit of expenditure
are to ensure that there is the provision of funds authorised by competent authority
fixing the limits within which expenditure can be incurred. Explain those standards.
RTP Nov 19 and Nov 18

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Audit of government expenditure is one of the major components of government audit

conducted by the office of C&AG. The basic standards set for an audit of expenditure are
ENTITIES

to ensure that there is the provision of funds authorised by competent authority fixing
the limits within which expenditure can be incurred.
i. Audit against Rules & Orders: The auditor has to see that the expenditure
incurred conforms to the relevant provisions of the statutory enactment and is as
per the financial rules and regulations framed by the competent authority.

ii. Audit of Sanctions: The auditor has to ensure that each item of expenditure
is covered by a sanction, either general or special, accorded by the competent
authority, authorising such expenditure.

iii.
E
Audit against provision of Funds: It contemplates that there is a provision

T
of funds out of which expenditure can be incurred and the amount of such

T U
expenditure does not exceed the appropriations made.

iv.
T I
Propriety Audit: It is required to be seen that the expenditure is incurred with
S
due regard to broad and general principles of financial propriety. The auditor aims
N
I
to bring out cases of improper, avoidable, or infructuous expenditure even though

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the expenditure has been incurred in conformity with the existing rules and

S
regulations. The audit aims to secure a reasonably high standard of public financial
morality by looking into the wisdom, faithfulness, and economy of transactions.
v. Performance Audit: This involves that the various programmes, schemes, and
projects where large financial expenditure has been incurred are being run
economically and are yielding expected results. Efficiency-cum-performance
audit, wherever used, is an objective examination of the financial and operational
performance of an organisation, programme, authority, or function and is oriented
towards identifying opportunities for greater economy, and effectiveness.

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CORRECT / INCORRECT STATEMENTS

ENTITIES
State with reasons (in short) whether the following statements are correct or incorrect:

i. The accounts of every LLP shall be audited as per rule 24 of LLP Rules 2009.
Incorrect.
Reason: Rule 24 of LLP Rules 2009 provides that any LLP, whose turnover does not exceed,
in any financial year, forty lakh rupees, or whose contribution does not exceed twenty-five
lakh rupees, is not required to get its accounts audited. However, if the partners of such
limited liability partnership decide to get the accounts of such LLP audited, the accounts

ii.
shall be audited only as per such rules.

T E
Article 150 of the Constitution provides that the accounts of the Union and of the

T U
States shall be kept in such form as the Finance Minister may on the advice of the
C&AG prescribe.
T I
Incorrect.
N S
I
Reason: Article 150 of the Constitution provides that the accounts of the Union and of

J C
the States shall be kept in such form as the President may on the advice of the C&AG

iii.
prescribe.
S
LLP need not file a “Statement of Accounts and Solvency”
Incorrect.
Reason: LLP shall be under obligation to maintain annual accounts reflecting true and fair
view. A Statement of Accounts and Solvency shall be filed in Form 8 with the Registrar
within a period of thirty days from the end of six months of the financial year.
iv. According to ‘propriety audit’, the auditors try to bring out cases of improper,
avoidable, or infructuous expenditure.
Correct.
Reason: According to ‘propriety audit’, the auditors try to bring out cases of improper,
avoidable, or infructuous expenditure even though the expenditure has been incurred in
conformity with the existing rules and regulations.

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v. Expenditure incurred by the municipalities and corporations can be broadly classified

under the following heads: (a) general administration and revenue collection, (b)
ENTITIES

public health, (c) public safety, (d) education, (e) public works,and (f) others such
as interest payments.
Correct.
Reason: Expenditure incurred by the municipalities and corporations can be broadly
classified under the following heads: (a) general administration and revenue collection, (b)
public health, (c) public safety, (d) education, (e) public works, and (f) others such as
interest payments, etc.
vi. The external control of municipal expenditure is exercised by the Central Government

Incorrect. T E
through the appointment of auditors to examine municipal accounts.

T U
Reason: The external control of municipal expenditure is exercised by the state governments

T I
through the appointment of auditors to examine municipal accounts.

N S
MULTIPLE CHOICE QUESTIONS I
J C
i.
S
While auditing a cinema hall, the auditor needs to verify that-
a. entrance to the cinema-hall during the show is only through printed tickets
b. tickets are serially numbered and bound into books
c. that for advance booking a separate series of tickets are issued
d. All of the above
ii. Article 151 requires that the reports of the C&AG relating to the accounts of the
Union/ State shall be submitted to the ________ who shall cause them to be laid
before House of Parliament / State Legislature
a. President/Governor
b. Prime Minister/ Chief Minister
c. Union Finance Minister/State Finance Minister
d. All of the above

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iii. ________ aims at ascertaining that the expenditure incurred has been on the purpose

for which the grant and appropriation had been provided and that the amount of such

ENTITIES
expenditure does not exceed the appropriation made.
a. Audit against provision of funds
b. Propriety audit
c. Audit of sanctions
d. Audit against rules and orders
iv. Audit against Rules and Orders is also known as -
a. Performance Audit
b. Statutory Audit
c. Regularity Audit
d. Audit of financial propriety T E
Answers
T U
i. d. All of the above
T I
ii. a. President/Governor
N S
iii. a. Audit against provision of funds I
iv. c. Regularity Audit
J C
S

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ENTITIES

T E
TU
T I
N S
I
J C
S

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