CA FINAL PAPER 3 CHAPTER GUIDE

CA FINAL – PAPER 3
ADVANCED AUDITING AND PROFESSIONAL ETHICS

EDITION - 2022
AS PER OUR STARTING

NAME OF THE CHAPTER
ICAI MATERIAL PAGE NO.
NA 0. FUNDAMENTALS 3
5 1. COMPANY AUDIT 9
6 2. AUDIT REPORTING 48
1 3. STANDARDS AND GUIDANCE NOTES 134
18 4. PROFESSIONAL ETHICS 196
7 5. AUDIT COMMITTEE AND CORPORATE GOVERNANCE 314
14 6. LIABILITIES OF AN AUDITOR 327
17A, 17B 7. PEER REVIEW AND QUALITY REVIEW 356
12 8. AUDIT UNDER FISCAL LAWS [DIRECT TAXES] [ICAI SM] 402
15 9. INTERNAL, MANAGEMENT AND OPERATIONAL AUDITS 403
16A 10. DUE DILIGENCE 445
16B 11. FRAUD INVESTIGATION 458
16C 12. FORENSIC AUDIT 498
13 13. AUDIT OF PSU 515
9 14. AUDIT OF BANKS 543
11 15. AUDIT OF NBFC MODULE 2
10 16. AUDIT OF INSURANCE COMPANIES MODULE 2
2 17. AUDIT PLANNING, STRATEGY [SA 300 AND 320] 573
3 18. RISK ASSESSMENT [SA 315] 585
4 19. AUTOMATED ENVIRONMENT AUDIT [SA 315] 629
A. SA 500, 230 & 330 [CA INTER MATERIAL AND
1 20. 646
LECTURES]
1 B. SA 530 [CA INTER MATERIAL AND LECTURES] 668
1 C. SA 520 [CA INTER MATERIAL AND LECTURES] 678
5 21. SCHEDULE III [NOT COVERED AS PART OF AUDIT] NOT COVERED
8 22. CONSOLIDATED FINANCIAL STATEMENTS AUDIT MODULE 2
Disclaimer: Exercised reasonable skill, care, and diligence to ensure that the content given in this
material is free from material misstatements.
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Edition 2022 | Ram Harsha, FCA, DISA, B. Com |Phone: +91 9700273087 [Telegram]
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0. FUNDAMENTALS OF AUDITING
1. BOOKS OF ACCOUNTS:
As per companies act, 2013 “books of account” as defined in Section 2(13) includes records
maintained in respect of:
• all sums of money received and expended by a company and matters in relation to which the
receipts and expenditure take place.
• all sales and purchases of goods and services by the company.
• the assets and liabilities of the company; and
• The items of cost as may be prescribed under section 148.
2. FINANCIAL STATEMENTS:
a) Definition as per SA 200:
A structured representation of historical financial information, including related notes,
intended to communicate an entity’s economic resources or obligations at a point in time or
the changes therein for a period of time in accordance with applicable financial reporting
framework.
The related notes ordinarily comprise a summary of significant accounting policies and other
explanatory information.
b) Definition as per Companies Act: Financial statements includes the following:
• Profit and Loss account or Income and Expenditure account
• Balance Sheet
• Cash flow Statement
• Statement of change in equity, if applicable
• Any explanatory notes annexed to or forming part of financial statements.
c) USERS OF FINANCIAL STATEMENTS:

Users Purpose
Management For day-to-day decision-making and performance evaluation.
Proprietor / To analyse performance, profitability and financial position.
shareholders Note: Prospective investors are interested in the track record of the
company.
Lenders - banks & To determine the financial position and strength of the Company, Debt
fin. Institutions Service Coverage, etc.
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Suppliers To determine the credit worthiness of the company.

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Customers To know the general business viability before entering into long-term
contracts and arrangements.
Government • To ensure prompt collection of Direct and Indirect Tax revenues.
• To evaluate performance and contribution to social objectives.
Research scholars For study, research and analysis purpose.
Employees Job security, bonus.
3. APPLICABLE FINANCIAL REPORTING FRAMEWORK:

In view of the nature of the entity and the objective of the financial statements, the framework
adopted by management for preparation and presentation of the financial statements is known as
AFRFW.
In other words, a financial reporting framework is nothing but, set of rules and regulations that
are to be followed for preparation and presentation of financial statements.
E.g.: For a company the AFRFW is SCH-III and Accounting standards.
4. GENERAL PURPOSE FINANCIAL STATEMENTS (GPFS):
If the F/S are prepared in accordance with General Purpose Framework (GPFW) then they are
called as GPFS.
5. SPECIAL PURPOSE FINANCIAL STATEMENTS (SPFS):
Financial statements prepared in accordance with a special purpose framework.
In other words, if the financial statements are prepared as per the requirement of a specific user,
then they are known as SPFS.
6. GENERAL PURPOSE FRAMEWORK:

A financial reporting framework designed to meet the common financial information needs of a
wide range of users. (Framework may be understood as Rules and Regulations)
Characteristics of GPFW:
• Fundamental accounting assumptions are used in this type of framework.
• Compliance with GAAP.
• Accounting standards as per AFRFW.
• Annual Preparation, Periodically.
Further this financial reporting framework may be a Compliance Framework (or) a Fair
Presentation Framework.
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7. COMPLIANCE FRAMEWORK (CFW):

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• It refers to a framework where F/S are prepared and presented in accordance with the
requirements of such framework without any deviation.
• The words “True and Fair View” do not appear in the financial statements in this type of
framework.
• E.g.: Most of the special purpose financial statements are prepared as per compliance
framework.
8. FAIR PRESENTATION FRAMEWORK:

requirements of such framework (CFW) AND
A. Contains disclosures beyond the requirements of such framework (Explicitly / Implicitly)
or
B. May deviate from the requirement of the framework” so as to achieve fair presentation.
(Explicitly)
C. The words true and fair view appears only in this type of framework.
E.g.: Most of the general-purpose financial statements are prepared as per fair presentation
framework.
9. LEGAL FORM:
There are several types of legal forms in which people ordinarily conduct businesses. This is similar
to “Person” Definition under Income Tax.
The following are the various types of legal forms:
• Proprietorship firm
• Partnership firm
• Limited Liability Partnership
• Society and
• Company
• AOP or BOI
• Any other artificial Judicial Person.
10. MISSTATEMENT:
A difference between the Amount, Classification, Presentation, Or Disclosure of a reported
financial statement item AND the Amount, Classification, Presentation, Or Disclosure that is
required as per applicable financial reporting framework.
Misstatements can arise from error or fraud.
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11. FRAUD:
An intentional act by one or more individuals among management, those charged with governance,
employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.
a) FRAUDULENT FINANCIAL REPORTING:
It involves intentional misstatements, including omissions of amounts or disclosures in
financial statements, to deceive financial statement users. Either Overstatement or
understatement of performance / position.
b) MISAPPROPRIATION OF ASSETS:
Involves the theft of an entity’s assets and is often perpetrated by employees in relatively
small and immaterial amounts. Also, it involved misuse of resources.
12. ERROR:
The term “error” refers to unintentional mistakes in financial statements such as:
• Clerical errors, like errors of omission, errors of commission, errors of duplication and
compensating errors.
• Misapplication of accounting policies (Called errors of principle).
• From the point of view of audit these errors are two types namely – Self revealing errors
(Apparent on record and easily identifiable) and Non-self-revealing errors (Not apparent and
require additional efforts to detect them).
13. MEANING OF AUDIT:

An audit is an independent examination of financial information of any entity, whether or not
profit oriented and irrespective of its size or legal form, when such an examination is conducted
with a view to express an opinion thereon.
14. OBJECTIVE OF THE AUDIT/AUDITOR:

To express opinion (Audit Report) on financial statements:
• Whether the financial statements are free from material misstatements and
• Whether they are prepared as per Applicable Financial Reporting Framework.
15. AUDITOR:
“Auditor” is used to refer to the person or persons conducting the audit, usually the engagement
partner or other members of the engagement team, or the firm.
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When it comes to acceptance of Responsibility or being accountable to regulatory authorities then
engagement partner shall only be referred as auditor.
Practically the meaning of auditor includes the following persons (mentioned in Point No.
16. ENGAGEMENT TEAM:

a) Engagement Partner
b) Audit Manager
c) Paid assistant
d) Senior article assistant
e) Junior article assistant
f) Any other designation
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1. COMPANY AUDIT
Q.NO.1 WHAT ARE THE QUALIFICATIONS TO BECOME COMPANY AUDITOR?
ANSWER:
A. QUALIFICATIONS OF COMPANY AUDITOR [Sec 141(1)]:

1. An Individual is eligible for appointment as an auditor only if he is a chartered accountant.
2. A firm/LLP is also eligible for appointment as an auditor where majority of partners are
chartered accountants and are practicing in India.
B. WHO SHALL SIGN [Sec. 141(2)]:
If a firm/LLP is appointed as an auditor, then the partner who is in practice shall sign the audit
report on behalf of the firm.
Q.NO.2 WRITE ABOUT THE DISQUALIFICATIONS OF A COMPANY’S AUDITOR? OR CASES WHERE A

PERSON CANNOT BE APPOINTED AS AN AUDITOR OF A COMPANY?
ANSWER:
DISQUALIFICATIONS OF COMPANY AUDITOR: [Sec 141(3)]

The following persons are not eligible for appointment as an auditor of a company even though they
possess chartered accountancy qualification:
a. A Body corporate other than a limited liability partnership.
b. An Officer or Employee of the company.
According to Section 2(59) of the Companies Act, 2013, the term ‘Officer’ includes:
i. Director.
ii. Manager.
iii. Key Managerial personnel.
iv. Shadow Directors.
Examples:
1. G, a CA in practice is a director in RST Ltd. On combined reading of Section 141(3)(b) and Section
2(59), it may be concluded that CA G would be disqualified to be appointed as an auditor of RST Ltd.
2. G, a CA in practice is a director in Zed Ltd., holding company of RST Ltd. On combined reading of
Section 141(3)(b) and Section 2(59), it may be concluded that CA. G would be disqualified to be
appointed as an auditor of Zed Ltd. but would not be disqualified in case of RST Ltd.
c. A person who is a Partner, or who is in the Employment, of an officer or employee of the company.
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Note: In other words, The below mentioned persons are disqualified:

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1. Partner of an officer of the company.
2. Employee of an officer of the company.
3. Partner of an employee of the company.
4. Employee of an employee of the company.
d. A person who, or his relative or partner -
i) Is holding any security or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company (Group companies). (Ref: Note No. 1 to 5)
ii) Is indebted to the company or the group companies in excess of Rs 5,00,000. (Ref Note No.6
& 7) [DIRECT INDEBTNESS]
iii) Has given a guarantee or provided any security on behalf of any third person to the Company
or the group companies in excess of Rs 1,00,000. [INDIRECT INDEBTNESS]
NOTES:
1. The Limit of Rs. 1,00,000/- shall applies even for companies not having share capital.
2. The relative of the auditor may hold security or interest in the company for an amount Not
exceeding a face value of Rs 1,00,000.
3. Also, it is to be observed that if the auditor is holding securities in HIS name / partner’s name
this exception does not apply.
4. The value of shares of Rs. 1,00,000 that can be held by relative is the face value and not the
market value.
5. Limit of Rs. 1,00,000 and grace period of 60 days would be applicable where securities are held
in the company only. [Author Note – This is absolutely a wrong interpretation]
6. If an auditor purchases goods on credit from the company of a value exceeding Rs. 5,00,000,
he shall be indebted to the company. It is immaterial that the credit period allowed to the
auditor is same as allowed to other customers in the ordinary course of business.
7. If an auditor recovers fees from the company on a progressive basis, even though the audit
has not been completed, it is not treated as indebtedness.
EXAMPLE: “Mr. Avi”, a practicing Chartered Accountant, is holding securities of “XYZ Ltd.” having
face value of Rs. 990/-. Whether Mr. Avi is qualified for appointment as an Auditor of “XYZ Ltd.”?
ANSWER:
PROVISION AND ANALYSIS: As per section 141(3)(d)(i), a person is disqualified to be appointed as
an auditor if he, 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.
CONCLUSION: In the present case, Mr. Avi. is holding security of Rs. 900 in XYZ Ltd, therefore, he is
NOT eligible for appointment as an auditor of “XYZ Ltd”.
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EXAMPLE: “Mr. PK” is a practicing Chartered Accountant and “Mr. Qurashi”, the relative of “Mr.
PK”, is holding securities of “ABC Ltd.” having face value of Rs. 99,000/-. Whether “Mr. PK” is
Qualified for being appointed as an auditor of “ABC Ltd.”?
ANSWER:
subsidiary, or of its holding or associate company or a subsidiary of such holding company. Further,
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 Rs. 1,00,000.
CONCLUSION: In the present case, Mr. Qurashi (relative of Mr. PK), is having securities of Rs. 99,000
face Value in ABC Ltd., which is as per requirements of proviso to section 141(3)(d)(i). Therefore,
Mr. PK will not be disqualified to be appointed as an auditor of ABC Ltd.
EXAMPLE: “M/s Bhavin & Co.” is an Audit Firm having partners “Mr. Bala” and “Mr. Chandu”.
“Mr. A” the relative of “Mr. Chandu”, is holding securities of “AMD Ltd.” having face value of Rs.
1,00,100/-. Whether “M/s Bhavin & Co.” is qualified for being appointed as an auditor of “AMD
Ltd.”?
ANSWER:
subsidiary, or of its holding or associate company or a subsidiary of such holding company. Further
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 Rs. 1,00,000.
CONCLUSION: In the instant case, M/s Bhavin & Co, will be disqualified for appointment as an
auditor of AMD Ltd as the relative of Mr. Chandu (i.e., partner of M/s Bhavin & Co.), is holding the
securities in AMD Ltd which is exceeding the limit mentioned in proviso to section 141(3)(d)(i).
EXAMPLE: M/s Rajamohan & Co. is an audit firm having partners CA. Raja and CA. Mohan. The
firm has been offered the appointment as an auditor of Inn Ltd. for the Financial Year 2019-20.
Mr. Bee, the relative of CA. Raja, is holding 8,000 shares (face value of Rs. 10 each) in Inn Ltd.
having market value of Rs. 1,60,000. Whether M/s Rajamohan & Co. is disqualified to be
appointed as auditors of Inn Ltd.?
ANSWER:
PROVISION AND ANALYSIS: 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 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 Rs. 1,00,000.
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In the instant case, M/s Rajamohan & Co. is an audit firm having partners CA. Raja and CA. Mohan.
Mr. Bee is a relative of CA. Raja and he is holding shares of Inn Ltd. of face value of Rs. 80,000 only
(8,000 shares x Rs. 10 per share).
CONCLUSION: Therefore, M/s Rajamohan & Co. is not disqualified for appointment as an auditor
of Inn Ltd. as the relative of CA. Raja (i.e., partner of M/s Rajamohan & Co.) is holding the securities
in Inn Ltd. which is within the limit mentioned in proviso to section 141(3)(d)(i) of the Companies
Act, 2013.
e. A person or a firm (including LLP) who or which has business relationship with the Company, or
its Subsidiary, or its Holding or Associate Company or Subsidiary of such holding company or
associate company, whether directly or indirectly
Exceptions: The term “Business relationship” includes any transaction entered for commercial
purpose except the following Commercial transactions:
1. Professional services permitted to be rendered by an auditor or audit firm under the
Companies Act, 2013 and the Chartered Accountants Act, 1949.
2. 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 any other similar businesses.
f. A person whose relative is a Director or is in the employment of the Company as a director or key
Managerial Personnel. (KMP also known as officer)
g. A person who is in full time employment elsewhere. OR A person or partner of a firm holding
appointment of more than 20 company audits as on the date of proposed appointment. [Refer Q
No. 4]
h. A person who has been convicted by a Court of an offence involving fraud and a period of 10 years
has not elapsed from the date of such conviction.
Note: If such conviction is held by tribunal then prohibition is only for 5 years. (Sec.140 (5))
i. Any person who directly or indirectly renders any services as specified in section 144 to the
company, its holding company or its subsidiary company. [REFER Q NO. 3]
Note: For the purposes of this sub-section, the term “directly or indirectly” shall include rendering
of services by the auditor:
IN CASE OF INDIVIDUAL AUDITOR:
1. Either himself or
2. Through his relative or
3. Any other person connected or associated with such individual or
4. Through any other entity, whatsoever,
In which such individual has significant influence or control, or whose name or trademark or
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brand is used by such individual.

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IN CASE OF FIRM [ INCLUDING LLP]:
1. Either itself or
2. Through any of its partners or
3. Through its parent, subsidiary or associate entity or
4. Through any other entity, whatsoever,
In which the firm or any partner of the firm has significant influence or control, or whose name
or trademark or brand is used by the firm or any of its partners.
EXAMPLE: CA. P is providing the services of Design and implementation of financial information
system to C Ltd. Later on, he was also offered to be appointed as an auditor of the company for
the current financial year. Advise.
ANSWER:
PROVISION AND ANAYSIS: Section 141(3)(i) of the Companies Act, 2013 disqualifies a person for
appointment as an auditor of a company who is engaged as on the date of appointment in
consulting and specialized services as provided in section 144. Section 144 of the Companies Act,
2013 prescribes certain services not to be rendered by the auditor which includes Design and
implementation of financial information system.
CONCLUSION: Therefore, CA. P is advised not to accept the assignment of auditing as the service
he is rendering 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.
SUBSEQUENT DISQUALIFICATION AFTER APPOINTMENT: [SEC. 141(4)]

Where a person appointed as an auditor of a company incurs any of the disqualifications mentioned
above after his appointment, he shall vacate immediately his office as auditor and such vacation shall
be deemed to be a casual vacancy in the office of the auditor.
Note: However, If the relative of auditor is holding securities exceeding Face value Rs. 1,00,000 after
being appointed as an auditor then corrective action shall be taken within 60 days of such acquisition.
In this case immediate vacation does not apply as 60 days’ time limit is provided.
CASE STUDY: Mr. Ajay, a Chartered Accountant has been appointed as an auditor of Bharat Ltd.
in the Annual General Meeting of the company held in September 2019, which assignment he
accepted. Subsequently in February 2020, he joined Mr. Bajaj, another Chartered Accountant,
who is the Manager Finance of Bharat Ltd., as partner.
PROVISIONS AND EXPLANATION: 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. Further as per Section 141(4), an auditor who
becomes subject, after his appointment, to any of the disqualifications specified in sub-sections (3)
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of Section 141, he shall be deemed to have vacated his office as an auditor.

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CONCLUSION: In the present case, Mr. Ajay, an auditor of Bharat Ltd., joined as partner with Mr.
Bajaj, who is Manager Finance of Bharat 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 Bharat
Limited.
Note: Definition of “RELATIVE”: [sec 2(77)]: ‘Relative’ with reference to any person, means anyone
who is related to another, if
1. They are members of a Hindu Undivided Family.
2. They are husband and wife.
3. One person is related to the other in the manner as given below:
a) Father (including step- father)
b) Mother (including step-mother),
c) Brother (including step- brother),
d) Sister (including step- sister),
e) Son (including step- son),
f) Son’s wife,
g) Daughter,
h) Daughter’s husband.
Q.NO.3 STATE THE SERVICES WHICH AN AUDITOR OF A COMPANY IS PROHIBITED TO RENDER TO

THE CLIENT BEING AUDITED AS PER SEC 144 OF THE COMPANIES ACT 2013?
ANSWER:
As per Sec. 144, Prohibited services by auditors of the company to the company, holding company or
subsidiary company:
1. Accounting and bookkeeping services.
2. Internal audit.
3. Design and implementation of any financial information system.
4. Actuarial services.
5. Investment advisory services.
6. Investment banking services.
7. Outsourced financial services.
8. Management services.
9. Any other kind of services as may be prescribed.
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Therefore, any person engaged in providing any of the above services then he cannot be appointed
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as auditor of the same company or group companies.

If at all the proposed auditor withdraws from rendering the above services then he can be appointed
as an auditor after such withdrawal.
Q.NO.4 WRITE ABOUT CEILING ON NUMBER OF AUDITS THAT CAN BE ACCEPTED BY AN AUDITOR?
ANSWER:
1. A Chartered Accountant in practice cannot hold appointments as auditor for more than 20
companies at any time.
2. In case of a partnership firm the limit of 20 shall be counted per partner in practice.
3. If a person acting as partner in multiple firms, then the limit will be counted only for one
partnership and in the name of such partner only.
4. In other words, the limit of 20 shall be counted per person holding COP. Whether he is a sole
proprietor or partner, in one or multiple firms.
5. COMPANIES EXCLUDED FROM CEILING LIMIT: For the purpose of computation of ceiling limits
following companies are excluded:
a) One person companies,
b) Dormant companies,
c) Small companies and
d) Private limited companies having a paid-up capital less than Rs.100 crores. (Note 1)
Note 1: Private company which has not committed a default in filing its financial statements under
section 137 of the said Act or annual return under section 92 of the said Act with the Registrar.
CEILING ON TAX AUDIT ASSIGNMENTS: The specified number of tax audit assignments that an
auditor, as an individual or as a partner of a firm, can accept is 60 in number. ICAI has notified that a
Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if he
accepts in a financial year, more than the specified number of tax audit assignments u/s 44AB of the
Income Tax Act, 1961.
Notes:
1. The number of partners of a firm on the date of acceptance of audit assignment shall be taken
into account.
2. A Chartered Accountant in practice as well as firm of Chartered Accountants in practice shall
maintain a record of the audit assignments accepted by him or by the firm of Chartered
Accountants, or by any of the partner of the firm in his individual name or as a partner of any
other firm as far as possible, in the prescribed manner.
CASE STUDY: “PQRST & Co.” is an Audit Firm having partners “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and
“Mr. T”, Chartered Accountants. “Mr. P”, “Mr. Q”, “Mr. R”, “Mr. S” and “Mr. T” are holding
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appointment as an Auditor in 4, 5, 6, 10 and 15 Companies respectively.

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(i) Provide the maximum number of Audits remaining in the name of “PQRST & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e., “Mr. P”,
“Mr. Q”, Mr. R, Mr. S and Mr. T.
(iii) Can PQRST & Co. accept the appointment as an auditor in 80 private companies having paid-up
share capital less than Rs. 100 crore which has not committed default in filing its financial statements
under section 137 or annual return under section 92 of the Companies Act with the Registrar, 2 small
companies and 1 dormant company?
(iv) Would your answer be different, if out of those 80 private companies, 65 companies are having
paid-up share capital of Rs. 115 crore each?
ANSWER:
FACT OF THE CASE: In the instant case, Mr. P is holding appointment in 4 companies, Mr. Q is holding
appointment in 5 companies, Mr. R is holding appointment in 6 companies, whereas Mr. S is having
appointment in 10 Companies and Mr. T is having appointment in 15 Companies. In aggregate all five
partners are having 40 audits.
PROVISIONS AND EXPLANATIONS: As per section 141(3)(g) of the Companies Act, 2013, a person
shall not be eligible for appointment as an auditor if he is in full time employment elsewhere or a
person or a partner of a 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 20
companies other than one person companies, dormant companies, small companies and private
companies having paid-up share capital less than Rs. 100 crores (private company which has not
committed a default in filing its financial statements under section 137 of the said Act or annual return
under section 92 of the said Act with the Registrar). As per section 141(3)(g), this limit of 20 company
audits is per person.
In the case of an audit firm having 5 partners, the overall ceiling will be 5 × 20 = 100 company audits.
Sometimes, a Chartered Accountant is a partner in a number of auditing firms. In such a case, all the
firms in which he is partner or proprietor will be together entitled to 20 company audits on his
account.
CONCLUSION:
(i) Therefore, PQRST & Co. can hold appointment as an auditor of 60 more companies:
1. Total Number of Audits available to the Firm = 20*5 = 100
2. Number of Audits already taken by all the partners In their individual capacity =
4+5+6+10+15 = 40
3. Remaining number of Audits available to the Firm = 60
(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
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(1) Mr. P can hold: 20 - 4 = 16 more audits.

(2) Mr. Q can hold: 20 - 5 = 15 more audits.
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(3) Mr. R can hold: 20 - 6 = 14 more audits.
(4) Mr. S can hold 20-10 = 10 more audits and
(5) Mr. T can hold 20-15 = 5 more audits.
(iii) In view of above discussed provisions, PQRST & Co. can hold appointment as an auditor in all the
80 private companies having paid-up share capital less than Rs. 100 crore (private company which
has not committed a default in filing its financial statements under section 137 of the said Act or
annual return under section 92 of the said Act with the Registrar), 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.
(iv) As per fact of the case, PQRST & Co. is already having 40 company audits and they can accept only
60 more company audits. In addition, they can also conduct the audit of one person companies, small
companies, dormant companies, and private companies having paid up share capital less than Rs. 100
crores (private company which has not committed a default in filing its financial statements under
section 137 of the said Act or annual return under section 92 of the said Act with the Registrar).
In the given case, out of the 80 private companies PQRST & Co. is being offered, 65 companies have
paid-up share capital of Rs. 115 crore each.
Therefore, PQRST & Co. can accept the appointment as an auditor for 2 small companies, 1 dormant
company, 15 private companies having paid-up share capital less than Rs. 100 crore (private company
which has not committed a default in filing its financial statements under section 137 of the said Act
or annual return under section 92 of the said Act with the Registrar.”) and 60 private companies
having paid-up share capital of Rs. 115 crore each in addition to above 40 company audits already
held.
Q.NO.5 EXPLAIN THE PROVISIONS RELATING TO AUDIT COMMITTEE AND SELECTION PROCESS OF
THE COMPANY AUDITOR?
ANSWER:
A. APPLICABILITY OF AUDIT COMMITTEE:

The Following classes of companies shall constitute an Audit Committee -
1. Listed companies
2. All public companies
a) With a paid-up capital of Rs. 10 crore or more;
b) With turnover of Rs. 100 crore or more;
c) With aggregate outstanding loans or borrowings or debentures or deposits, Rs. 50 crore

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or more.
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Explanation: The above limits shall be taken as on preceding audited balance sheet date.
EXAMPLE: Radheshyam Ltd., a public company having paid up capital of Rs. 7 crores but having
turnover of Rs. 130 crores, will be required to constitute an Audit Committee under section 177
because the requirement for constitution of Audit Committee arises if the company falls into
any of the prescribed condition.
B. MANNER AND PROCEDURE OF SELECTION AND APPOINTMENT OF AUDITORS: 139(11)

Following is the manner and procedure of selection & appointment of auditors-
1. If the audit committee is constituted then they shall select the auditor (Including a case of
casual vacancy) on appropriate basis and recommend to the BOD. If No audit committee is
constituted, then BOD shall select the auditor on an appropriate basis.
2. The BOD may agree with the proposed auditor recommended by audit committee and shall
recommend the same to members at AGM.
3. If BOD disagrees with the recommendation made by audit committee then it shall refer back
to audit committee for the further revision.
4. If the audit committee after considering the revision appeal made by BOD, decided not to
change their recommendation then they can inform the same to the BOD.
5. Nevertheless, the BOD can finally recommend to the members the proposed auditor selected
by them and record the reasons for disagreement with the audit committee’s selection.
6. Finally, the members may take an appropriate action regarding the appointment of auditor.
C. COMPOSITION OF AUDIT COMMITTEE:
The audit Committee shall consist of minimum of three directors, Majority must be Independent
directors and shall be able to read and understand the financial statements.
NOTE:
1. The audit committee or Board of Directors, will take into account the size and requirements of the
company, will select the auditor having such experience and qualifications that commensurate
with the company size and complexities.
2. It 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.
Q.NO.6 EXPLAIN THE PROVISIONS RELATED TO APPOINTMENT OF AUDITOR OF A COMPANY?
ANSWER:
Section 139 of the Companies Act, 2013 contains provisions regarding Appointment of Auditors. The
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section divides the appointment into two parts:

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A. Appointment of First Auditors.
B. Appointment of Subsequent Auditors.
Further the appointment procedure is separately dealt for Government Company and Non-
Government Company.
APPOINTMENT OF FIRST AUDITOR
1. IN CASE OF NON-GOVERNMENT COMPANY: [SEC. 139(6)]
a. The first auditor of Non-government Company shall be appointed by the Board of Directors
within 30 days from the date of registration of the company.
b. If the Board fails to appoint, it shall inform the members of the company and the members
shall appoint the auditor within 90 days at an extraordinary general meeting.
c. Appointed auditor shall hold office till the conclusion of the first annual general meeting.
EXAMPLE: Managing Director of PQR Ltd. himself wants to appoint Shri Ganpati, a practicing
Chartered Accountant, as first auditor of the company. Comment on the proposed action of the
Managing Director.
PROVISIONS AND EXPLANATION: Section 139(6) of the Companies Act, 2013 lays down that “the first
auditor or auditors of a company sh all be appointed by the Board of directors within 30 days from
the date of registration of the company”.
In the instant case, the proposed appointment of Shri Ganpati, a practicing Chartered Accountant as
first auditors by the Managing Director of PQR Ltd by himself is in violation of Section 139(6) of the
Companies Act, 2013, which requires the Board of Directors to appoint the first auditor of the
company.
CONCLUSION: In view of the above, the Managing Director of PQR Ltd cannot appoint the first auditor
of the company.
2. IN CASE OF A GOVERNMENT COMPANY: [SEC. 139(7)]
a. The first auditor shall be appointed by the Comptroller and Auditor-General of India (CAG)
within 60 days from the date of registration of the company.
b. If CAG fails to appoint the auditor, then the Board of directors shall appoint within next 30 days.
c. If BOD also fails, then they shall inform the members who shall appoint such auditor within
60 days at an extraordinary general meeting.
d. The Auditors appointed as above shall hold office till the conclusion of the first annual general
meeting.
EXAMPLE: The first auditor of Healthy Wealthy Ltd., a Government company, was appointed by the
Board of Directors.
PROVISIONS AND EXPLANATION: Section 139(6) of the Companies Act, 2013 (the Act) lays down that
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“the first auditor or auditors of a company shall be appointed by the Board of directors within 30 days
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from the date of registration of the company”. Thus, the first auditor of a company can be appointed
by the Board of Directors within 30 days from the date of registration of the company. However, 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, 2013 which 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 Healthy Wealthy Ltd., being a government company, the first auditors shall be
appointed by the Comptroller and Auditor General of India.
CONCLUSION: Thus, the appointment of first auditors made by the Board of Directors of Healthy
Wealthy Ltd. is null and void.
APPOINTMENT OF SUBSEQUENT AUDITORS

1. IN CASE OF NON-GOVERNMENT COMPANIES: [SEC. 139(1)]
a. Every company shall at the Annual General Meeting appoint an individual or a firm as an
auditor and the appointed auditor shall hold office from the conclusion of that AGM till the
conclusion of its sixth AGM and thereafter till the conclusion of every 6th meeting.
b. The following certificates shall be obtained from the proposed auditor:
i) Before such appointment is made, the written consent of the auditor to such appointment
shall be obtained.
ii) A Certificate indicating that he is eligible and not disqualified shall be obtained.
iii) A Certificate that his total number of company audits after accepting the proposed
appointment will be within the ceiling limit specified under law.
iv) List of Pending Proceedings against the auditor or his partner or firm shall be indicated in
an appropriate manner.
c. The company shall file a notice of such appointment with the Registrar within 15 days of the
meeting in which the auditor is appointed. (Form ADT – 1)
2. IN CASE OF GOVERNMENT COMPANIES: [SEC. 139(5)]

a. The Comptroller and Auditor-General of India (CAG) shall appoint a chartered accountant in
practice within a period of 180 days from the commencement of the financial year.
b. The auditor appointed as above shall hold office till the conclusion of the next annual general
meeting.
Note: Where at any AGM, NO auditor is appointed or re-appointed, the existing auditor shall
continue to be the auditor of the company. [Sec. 139(10)].
Practically this case is not possible as appointment and reappointment are ordinary businesses in
an AGM which cannot be ignored.
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A. DEFINITION OF GOVERNMENT COMPANY:
“Government company” is a company:
a. In which not less than 51% of the paid-up* share capital is held by the Central or any State
Government or Governments or partly by the Central and partly by one or more State
Governments and
b. Includes a company which is a subsidiary company of such a Government company.
*Amendment 2020: In case of a Government company which has shares with DVR’s, the words
paid-up capital shall be substituted with the word Voting power.
B. POWERS OF CAG:
The Comptroller and Auditor-General of India shall within 60 days from the date of receipt of the
audit report have a right to:
SUPPLMENTARY AUDIT:
1. Conduct a supplementary audit under section 143(6)(a), of the financial statement of the
company by such person or persons as he may authorize in this behalf and
2. Comment upon or supplement such audit report under section 143(6)(b). It may be noted that
any comments given by the Comptroller and Auditor-General of India upon, or supplement to,
the audit report shall be sent by the company to every person entitled to copies of audited
financial statements under sub-section (1) of section 136 i.e., every member of the company,
to every trustee for the debenture-holder of any debentures issued by the company, and to
all persons other than such member or trustee, being the person so entitled and
3. Also be placed before the annual general meeting of the company at the same time and in the
same manner as the audit report.
TEST AUDIT U/S 143(7):
Further, without prejudice to the provisions relating to audit and auditor, the Comptroller and
Auditor- General of India may, in case of any company covered under sub-section (5) or sub-
section (7) of section 139, if he considers necessary, by an order, cause test audit to be conducted
of the accounts of such company and the provisions of section 19A of the Comptroller and Auditor-
General's (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such
test audit.
Q.NO.7 EXPLAIN THE PROVISIONS TO FILL THE CASUAL VACANCY ARISING IN THE OFFICE OF AN
AUDITOR?
ANSWER:
As per Section 139(8), any casual vacancy in the office of an auditor shall-
A. NON-GOVERNMENT COMPANY:
1. Other than Resignation: Shall be filled by the Board of Directors, on recommendation of audit
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committee, within 30 days.

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2. Resignation: The appointment shall also be approved by the company at a general meeting
convened within 3 months of the recommendation of the Board.
B. GOVERNMENT COMPANY:
1. It shall be filled by the CAG within 30 days.
2. In case if the CAG does not fill the vacancy within 30 days, then the Board of Directors shall fill
the vacancy within next 30 days.
C. PERIOD OF APPOINTMENT IN BOTH THE CASES:
The Auditor appointed under casual vacancy shall hold the office until conclusion of Next AGM
only.
MEANING OF CASUAL VACANCY: If vacancy arises in the auditor’s office on account of any reason
other than expiry of term. In other words, concept of casual vacancy arises only before expiry of term
of appointment of auditor.
SAMPLE QUESTIONS:
1) PQR & Co., Chartered Accountants, resigned from the audit of a CA INTER
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.
A.
2) At the AGM of HDB Private Ltd., Mr. R was appointed as the statutory CA INTER
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.
A.
3) Mr. A was appointed auditor of AAS Ltd. by Board to fill the casual vacancy CA INTER
that arose due to death of the auditor originally appointed in AGM.
Subsequently, Mr. A also resigned on health grounds during the tenure of
appointment. The Board filled this vacancy by appointing you through duly
passed Board resolution. Comment.
A.
4) A vacancy arose in the office of an auditor of XYZ Ltd due to death of the CA INTER
Auditor Mr. Z and the Managing Director of the company filled that
vacancy. Comment citing the provisions of the Companies Act, 2013.
A.
Q.NO.8 EXPLAIN THE DUTIES OF AN AUDITOR IN CASE OF RESIGNATION?
ANSWER:
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1. As per section 140(2), the auditor who has resigned from the company shall file a form with the
company and the Registrar in ADT-3 within a period of 30 days from the date of resignation.
2. Further in case of Government Company, He shall also inform the same to CAG.
3. The statement shall indicate the reasons and other facts as may be relevant with regard to his
resignation.
4. As per Sec. 140(3), in case of failure to comply with the above provisions, the auditor shall be liable
with a fine not less than Rs.50,000 or Remuneration, whichever is lower and Rs.500 per day for
continuing failure after the first during which the failure continues. Also, the fine levied shall be
subject to a maximum of Rs. 2,00,000/-.
SAMPLE QUESTION:
1. CA. Donald was appointed as the auditor of PS Ltd. at the remuneration of
Rs.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?
A. Provisions and Explanation: For non-compliance of sub-section (2) of section 140

of the Companies Act, 2013, the auditor shall be punishable with fine, which shall
not be less than Rs. 50,000/- or the remuneration of the auditor, whichever is less
but which may extend to Rs.2,00,000/-, under section 140(3) of the said Act. Also
in case of continuing failure an additional fine of Rs.500 per day shall be levied.
Conclusion: Thus, the fine under section 140(3) of the Companies Act, 2013 shall
not be less than Rs. 30,000/- but which may extend to Rs. 2,00,000/-.
Q.NO.9 EXPLAIN THE PROVISIONS RELATING TO ROTATION OF AN AUDITOR?
ANSWER:
A. APPLICABILITY OF ROTATION OF AUDITORS: [Sec. 139(2)]

1. All Listed Companies.
2. All Unlisted Public Limited Companies:
a) With paid up share capital of rupees 10 crore or more.
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b) With borrowings from PFI’s or Banks or Public Deposits of 50 crore or more.

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3. All Private Limited Companies:

a) With paid up share capital of rupees 50 crore or more.
b) With borrowings from PFI’s or Banks or Public Deposits of 50 crore or more.
Note: This provision shall not apply to One Person Company and Small Companies. Also, Rotation shall
not apply for Government companies.
EXAMPLE: Mishra Ltd. is a private limited Company, having paid up share capital of rupees 48 crore
but having public borrowing from nationalized banks and financial institutions of rupees 42 crore,
manner of rotation of auditor will not be applicable.
B. MANNER OF ROTATION:
1. Every company to which the concept of rotation is applicable, shall not appoint or re-appoint-
a) An Individual as auditor for more than ONE term of 5 consecutive years and
b) A Firm of auditors for more than TWO terms of 5 consecutive years.
2. COOLING PERIOD: An INDIVIDUAL auditor or an AUDIT FIRM who or which has completed
their respective term namely 5 years or 10 years (AKA retiring auditors) as the case may be,
shall not be eligible for re-appointment as auditor in the same company for a period of 5 years
from the completion of their respective term (AKA Break in service or Cooling period). [REFER
EXAMPLES 1 & 2]
3. AUTHOR NOTE: For the sake of convenience Retiring auditor is referred as outgoing auditor.
New auditor is referred as Incoming auditor.
4. The Audit Committee shall recommend to the Board, the name of an individual auditor or of
an audit firm who may replace the incumbent auditor on expiry of the term of such incumbent.
5. PRINCIPLES OF ROTATION:
a. COMMON PARTNERS: If there is a common partner(s) in incoming and outgoing
auditor’s firm, then such incoming auditor is not eligible for appointment under
rotation for a period of 5 years. [EXAMPLE 3]
b. SAME NETWORK: Also, if the incoming auditor and outgoing auditor belong to “Same
Network”, then also such incoming auditor shall not be eligible for appointment. The
term “same network” includes the firms operating or functioning under the same
brand name, trade name or common control.
c. If a partner who is in charge of an audit firm and also certifies the financial statements
of the company, retires from the said firm and joins another firm of chartered
accountants, such other firm shall also be ineligible to be appointed for a period of five
years.
NOTE: Subject to the provisions of this Act, members of the company may resolve that:
1. In the audit firm appointed by it, the auditing partner and his team shall be rotated at such
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intervals as may be resolved by members. (AKA Internal Rotation) or

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2. The audit shall be conducted by more than one auditor (Joint Audit).
NOTE: In case of audits of listed entities, SQC 1 requires rotation of engagement partner after a
pre-defined period normally not more than 7 years.
NOTE: For computing number of years for the purpose of rotation, the period of appointment
before commencement of this act shall also be considered i.e., auditor’s period under companies
acts, 1956 shall also be computed for calculating 1 term of 5 years or 2 terms of 5 years.
EXAMPLE 1: PRTK Ltd. is a listed company engaged in the business of textiles. The company has
appointed Rahul & Co. as its statutory auditor in its AGM dated 29th September, 2018. Rahul & Co.
will hold office of auditor from the conclusion of this meeting up to conclusion of sixth AGM i.e.,
AGM to be held in the year 2023. Now as per sub-section (2), Rahul & Co. shall not be re-appointed
as auditor in PRTK Ltd. for further term of five years i.e., he cannot be appointed as auditor upto
year 2028.
EXAMPLE 2: Meet Ltd., a listed company, appointed M/s Preet & Co., a Chartered Accountant firm,
as the statutory auditor in its AGM held at the end of September 2019 for 11 years. Here, the
appointment of M/s Preet & 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 cannot 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 cannot be re-appointed for further 5 years after
completion of two terms of five consecutive years.
EXAMPLE 3: M/s PQR & Co., is an audit firm having partner Mrs. P, Mr. Q and Mr. R, whose tenure
has expired in the company immediately preceding the financial year, M/s APJ & Co., is another
audit firm in which Mr. P is a common partner, will also be disqualified for the same company along
with M/S PQR & Co. for the period of 5 years.
Q.NO.10 BRIEFLY EXPLAIN THE PROVISIONS RELATING TO REMOVAL OF AUDITOR OF A COMPANY

BEFORE EXPIRY OF HIS TERM?
ANSWER:
PROCEDURE FOR REMOVAL OF AUDITOR BEFORE EXPIRY OF TERM [SEC. 140(1)]:

1. BOARD RESOLUTION: A BOD resolution shall be passed to remove the auditor before expiry of
term.
2. CG APPROVAL: An application to the Central Government for removal of auditor shall be made in
Form ADT-2 within 30 days of board resolution.
3. SPECIAL RESOLUTION: The company shall hold the general meeting within 60 days upon receipt
of approval from the Central Government for passing the special resolution. Convene the General
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Meeting and pass the special resolution removing the auditor.

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NOTE: An opportunity of being heard shall be given to the auditor before removing him.
Q.NO.11 EXPLAIN THE PROCEDURE FOR REMOVAL OF AUDITOR BY TRIBUNAL U/S 140(5)?
ANSWER:
A. APPLICATION BY WHOM:
1. The Tribunal on its own
2. The Central Government
3. Any person concerned
B. APPLICATION TO WHOM: The tribunal.
C. PROCEDURE FOR REMOVAL:

1. If the tribunal is satisfied that the auditor of a company has acted in a fraudulent manner or
colluded in any fraud with directors or officers of the company then it may direct the company
to change its auditors.
2. If the application is made by the Central Government and the Tribunal is satisfied that any
change of the auditor is required, it shall make an order that he shall not function as an auditor
within 15 days of receipt of such application and the Central Government may appoint another
auditor in his place.
D. PROHIBITION ON FURTHER APPOINTMENTS: An auditor, whether individual or firm, against
whom final order has been passed by the Tribunal under this section shall not be eligible for
appointment as an auditor of ANY company for a period of 5 years from the date of passing of the
order and such auditor shall also be liable for action u/s 447.
Note: It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every
partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or
in relation to, the company or its director or officers.
Note: If the conviction is by court, then the prohibition shall be 10 years.
Q.NO.12 EXPLAIN THE PROCEDURE FOR APPOINTMENT OF AUDITOR OTHER THAN RETIRING
AUDITOR?
ANSWER:
Section 140(4) lays down procedure to appoint an auditor other than retiring auditor -
1. Special notice shall be required for a resolution at an annual general meeting appointing a person
as auditor other than a retiring auditor or providing expressly that a retiring auditor shall not be
re-appointed.
2. On receipt of such notice, the company shall immediately send a copy thereof to the retiring
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auditor for getting the representation of retiring auditor.

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3. The retiring auditor can make a representation (not exceeding a reasonable length) in writing to
the company with respect to special notice and requests it to circulate the members.
4. The company shall send a copy of the representation to every member to whom notice of the
meeting is sent (Circulation).
5. If a copy of the representation is not sent as aforesaid because it was received too late or because
of the company’s default, the auditor may require that the representation shall be read out at the
meeting.
6. Further if a copy of representation is not sent as aforesaid, a copy thereof shall be field with the
Registrar.
PROHIBITION ON RIGHT TO REPRESENTATION:

If the Tribunal is satisfied that the right of representation being abused by the auditor then it may
direct not to send or read out the representation at AGM. The application can be made either by the
company or any other aggrieved person
Note: This provision need not be applied where the retiring auditor has completed a consecutive
tenure of five years or ten years and are liable for rotation u/s 139(2).
Q.NO.13 WHAT ARE THE POWERS OF AN AUDITOR AS PER SEC. 143(1)?
ANSWER:
The auditor has the following powers/rights while conducting an audit:
A. RIGHT OF ACCESS TO BOOKS:

1. The auditor of a company shall have a right of access to the books of account and vouchers of
the company at all times, whether kept at the registered office of the company or at any other
place including branches.
2. Further this right can be exercised during working days and business hours.
3. Right to access to books of accounts of subsidiary company and associate companies in so far
as they related to consolidated financial statements.
4. Right to access to other records namely minutes of board meeting, MIS reports and any other
books as may require by the auditor.
Note: Books of accounts definition includes cost records also. The phrase ‘books, accounts and
vouchers’ include all books which have any bearing, or are likely to have any bearing on the
accounts, whether these be the usual financial books or the statutory or statistical books;
memoranda books, e.g., inventory books, costing records and the like may also be inspected by
the auditor. Similarly, the term ‘voucher’ includes all or any of the correspondence which may in
any way serve to vouch for the accuracy of the accounts. Thus, the right of access is not restricted
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to books of account alone and it is for the auditor to determine what record or document is
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necessary for the purpose of the audit.

EXAMPLE: While conducting the audit of a limited company for the year ended 31st March,
2020, the auditor wanted to refer to the Minute Books. The Board of Directors refused to
show the Minute Books to the auditor.
ANSWER:
PROVISIONS AND EXPLANATION: Section 143 of the Companies Act, 2013 grants powers to the
auditor that every auditor has a right of access, at all times, to the books and account including
all statutory records such as minute books, fixed assets register, etc. of the company for
conducting the audit.
In order to verify actions of the company and to vouch and verify some of the transactions of
the company, it is necessary for the auditor to refer to the decisions of the shareholders and/or
the directors of the company. It is, therefore, essential for the auditor to refer to the Minute
Books. In the absence of the Minute Books, the auditor may not be able to vouch/verify certain
transactions of the company.
CONCLUSION: In case the directors have refused to produce the Minute Books, the auditor may
consider extending the audit procedure and also consider modifying/ qualifying his report in an
appropriate manner.
B. RIGHT TO OBTAIN INFORMATION AND EXPLANATION:

1. The auditor has right to obtain from the officers of the company such information and
explanations as he may think necessary for the performance of his duties as auditor.
2. The information and explanation can be obtained from either officers or employees of the
company.
In the absence of such power, the auditor would not be able to obtain details of amount collected
by the directors, etc. from any other company, firm or person as well as of any benefits in kind
derived by the directors from the company, which may not be known from an examination of the
books.
C. RIGHT TO RECEIVE NOTICES AND DUTY TO ATTEND GENERAL MEETING (Sec. 146):
1. The auditors of a company are entitled to attend any general meeting of the company (the
right is not restricted to those at which the accounts audited by them are to be discussed); to
receive all the notices to the general meetings, which members are entitled to receive.
2. Further it is the duty of the auditor to attend the general meeting as per sec. 146.
3. So, it can be concluded that it is both right and duty to attend the general meetings.
Note: However, he can with the prior approval of BOD can skip general meetings.
D. RIGHT TO LIEN: (General Principles of Law)

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1. As per General principles, any person having lawful possession of others property, on which
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he worked on, can retain such property, on account of non-payment of dues.
2. The auditor can exercise lien on books and documents belonging to client for Non-Payment of
fees.
3. Lien can be exercised only on records and documents in respect of which audit is conducted.
4. Lien can be exercised only on an authority from client. I.e., Lawful possession.
5. There must be a direct connection between the ‘Documents & Records on which work
performed’ and ‘Fees not being received’.
6. Further Due to the condition u/s 128, i.e., the books of accounts of the company shall only be
kept at registered office, it is impracticable for the auditor to exercise lien as it amounts to
violation of Sec. 128.
7. Taking an overall view of the matter, it seems that though legally, auditor may exercise right
of lien in cases of companies, it is mostly impracticable for legal and practicable constraints.
Note: The question of exercising lien by auditor on audit working papers does not arise. As working
papers are property of the auditor.
E. RIGHT TO REPORT TO THE MEMBERS OF THE COMPANY ON THE ACCOUNTS EXAMINED BY HIM:
The auditor shall make a report to the members of the company on the accounts examined by
him and on every financial statement which are required by or under this Act to be laid before the
company in general meeting.
Q.NO.14 WHAT ARE THE DUTIES OF THE AUDITOR?
A. DUTY TO REPORT: 143(2)

1. The author shall make a report to the members on
a) The Accounts examined by him; and
b) Financial Statements which are required to be laid before the company in general meeting.
2. The auditor shall state in his report as to whether the accounts examined by him and financial
statements give a true and fair view of:
a) The statement of the company’s affairs as at the end of its financial year;
b) The Profit/Loss for the year; and
c) Cash Flow Statement for the year.
3. The auditor shall prepare his report after taking into account the provisions of this Act and the
Accounting and Auditing Standards.
4. As per Sec. 143(4), If auditor has given any qualifications or remarks in the audit report, he shall
state reasons thereof in the said report.
B. DUTY TO SIGN THE AUDIT REPORT: 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
29
document of the company, in accordance with the provisions of section 141(2). The qualifications,
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observations or comments on financial transactions or matters, which have any adverse effect on
the functioning of the company mentioned in the auditors’ report shall be read before the
company in general meeting and shall be open to inspection by any member of the company.
C. DUTY TO COMPLY WITH AUDITING STANDARDS: As per section 143(9) of the Companies Act,
2013, every auditor shall comply with the auditing standards prescribed under Sec 143(10).
Further, as per sub-section 10 of section 143 of the Act, the Central Government may prescribe
the standards of auditing or any addendum thereto, as recommended by the Institute of
Chartered Accountants of India, constituted under section 3 of the Chartered Accountants Act,
1949, in consultation with and after examination of the recommendations made by the National
Financial Reporting Authority. Students may note that until any auditing standards are notified,
any standard, or standards of auditing specified by the Institute of Chartered Accountants of India
shall be deemed to be the auditing standards.
D. DUTY TO ATTEND GENERAL MEETINGS: Sec.146

1. All notices of general meeting must be sent to the Auditor of the company whether the
financial statements are discussed or not in that General Meeting.
2. The auditor shall attend the GM either by himself or through his authorized representative,
who shall also be qualified to be an auditor (unless otherwise exempted by the company).
3. The right is only in respect of General Meetings only and not in respect of any Board Meetings.
Q.NO.15 REPORTING ON FRAUD IDENTIFIED BY THE AUDITOR IN ACCORDANCE WITH SEC. 143(12)?
ANSWER:
According to section 143(12) and Rule 13 of the Companies (Audit and Auditors) Rules, 2014, the following
are the duties of auditor in relation to any fraud identified during the course of his audit:
A. IF THE AMOUNT OF FRAUD IS RS. 1 CRORE OR MORE
a. Reporting to the Central Government: If the auditor has reason to believe that an offence of
fraud involving an amount of Rs. 1 crore or above, is being or has been committed against the
company by its officers or employees, the auditor shall report the matter to the CG in the
following manner.
b. The manner of reporting the matter to the Central Government is as follows: [Rule 13]
1. First, the auditor shall report the matter to the Board or the Audit Committee, as the case
may be, not later than 2 days of his knowledge of the fraud, seeking their reply or
observations within 45 days.
2. On receipt of such reply or observations, the auditor shall forward his report and the reply
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or observations of the Board or the Audit Committee along with his comments on such
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reply or observations to the CG within 15 days from the date of receipt of such reply or
observations.
3. In case the auditor fails to get any reply or observations within the stipulated period of 45 days,
he shall forward his report to the CG 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.
4. The report shall be on the letterhead 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
5. The report shall be in the form of a statement as specified in Form ADT-4.
B. IF THE AMOUNT OF FRAUD IS LESS THAN RS. 1 CRORE:

a. Reporting to the Audit Committee or Board: If the auditor has reason to believe that an
offence of fraud involving an amount of less than Rs.1 Crore, is being or has been committed
against the company by its officers or employees, the auditor shall report the matter to the
audit committee constituted under section 177 or to the Board in other cases, not later than
2 days of knowledge of fraud, specifying the following:
1. Nature of Fraud with description.
2. Approximate amount involved and
3. Parties involved.
b. Disclosure in the Board's Report: The following details of each of the fraud reported to the
Audit committee or the Board shall be disclosed in board’s report:
1. Nature of Fraud with description.
2. Approximate Amount involved.
3. Parties involved, and
4. Remedial actions taken.
C. OTHER RELATED PROVISIONS:

Sec. 143 (12) - It states that no duty to which an auditor of a company may be subject to shall be
regarded as having been contravened by reason of his reporting the matter above if it is done in
good faith.
the provisions regarding fraud reporting shall also apply, mutatis mutandis, to a cost auditor and
a secretarial auditor during the performance of his duties under section 148 and section 204
respectively.
If any auditor, cost accountant or company secretary in practice does not comply with the
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provisions of sub-section (12) of section 143, he shall be liable to a penalty of five lakh rupees in
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case of a listed company and a penalty of one lakh rupees in case of any other company.
D. CARO 2020 AND STANDARDS ON AUDIT IN CONTEXT OF FRAUD:
1. The auditor is also required to report under clause (x) of paragraph 3 of Companies (Auditor’s
Report) Order, 2020 [CARO, 2020] on whether any fraud by the company or any fraud on the
Company has been noticed or reported during the year. If yes, the nature and the amount
involved is to be indicated.
2. The definition of fraud as per SA 240 and the explanation of fraud as per Section 447 of the
2013 Act are similar, except that under section 447, fraud includes ‘acts with an intent to injure
the interests of the company or its shareholders or its creditors or any other person, whether
or not there is any wrongful gain or wrongful loss.’ However, an auditor may not be able to
detect acts that have intent to injure the interests of the company or cause wrongful gain or
wrongful loss, unless the financial effects of such acts are reflected in the books of
account/financial statements of the company. For example,
a. An auditor may not be able to detect if an employee is receiving payoffs for favouring
a specific vendor, which is a fraudulent act, since such payoffs would not be recorded
in the books of account of the company.
b. If the password of a key managerial personnel is stolen and misused to access
confidential/restricted information, the effect of the same may not be determinable
by the management or by the auditor.
Therefore, the auditor shall consider the requirements of the SAs, insofar as it relates to the risk of
fraud, including the definition of fraud as stated in SA 240, in planning and performing his audit
procedures in an audit of financial statements to address the risk of material misstatement due to
fraud.
EXAMPLE:
The Senior Manager on the instruction of Chief Executive Officer of a company entered fake
invoices of credit purchases in the books of account aggregating to Rs. 95 lakh and cleared all the
payments to such bogus creditor. Here, the auditor of the company is required to report the
fraudulent activity to the Board or Audit Committee (as the case may be) within 2 days of his
knowledge of fraud. Further, the company is also required to disclose the same in Board’s Report.
It may be noted that the auditor need not to report to the Central Government as the amount of
fraud involved is less than Rs. 1 crore, however, reporting under CARO, 2020 is required.
Q.NO.16 WRITE ABOUT AUDIT OF BRANCH OFFICE ACCOUNTS [SEC. 143(8)]?
ANSWER:
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A. WHO CAN BE APPOINTED AS A BRANCH AUDITOR: Where a company has a branch office, the
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accounts of that office shall be audited either by:
a. The auditor appointed for the company (i.e., Principal auditor) or
b. Any chartered accountant holding certificate of practice, or
c. Where the branch office is situated in a country outside India, the accounts of the branch
office shall be audited either by:
1. The company's auditor or
2. By an accountant or
3. 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.
B. WHO CAN APPOINT BRANCH AUDITORS:
1. Usually, the branch auditors are also appointed by the members.
2. However, the shareholders can delegate such power to BOD to appoint branch auditor.
C. REPORTING REQUIREMENTS OF BRANCH AUDITORS:
1. The branch auditor shall prepare a report on the accounts of the branch examined by him.
2. The branch auditor shall submit his report to the company’s auditor.
3. The reporting requirements u/s 143(1), (3), (11) and (12) are equally applicable to branch auditors.
D. USING THE WORK OF ANOTHER AUDITOR (SA – 600): Where another auditor is appointed for a
component then the principal auditor is entitled to reply on the work of such other auditor. Further
the principal auditor has to perform certain audit procedures to obtain evidence that the work of
component auditor is adequate for the principal auditor work. The principal auditor would ordinarily
perform the following procedures:
1. The principal auditor would inform the other auditor of matters requiring special
consideration, procedures for the identification of inter -component transactions that may
require disclosure and the timetable for completion of audit.
2. Make sufficient arrangements for co-ordination of their efforts at the planning stage of the
audit.
3. Advise the other auditor of the significant accounting, auditing and reporting requirements
and obtain representation as to compliance with them.
4. 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 checklist.
5. The principal auditor may also wish to visit the other auditor.
RELEVANT QUESTIONS:
1. 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
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branch and the audit of the company as a whole; also, there is great necessity for
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a proper rapport between these two auditors for the purpose of an effective
audit. Explain.
A. Write Part – D.
Q.NO.17 DESCRIBE THE APPLICABILITY PROVISIONS RELATING TO APPOINTMENT OF INTERNAL

AUDITOR OF A COMPANY U/S 138.
ANSWER:
A. MEANING: Internal auditing is an independent, objective assurance and consulting activity

designed to add value and improve an organization’s operations.
B. APPLICABILITY OF INTERNAL AUDIT: As per section 138 of the Companies Act, 2013 the following
class of companies (prescribed in Rule 13 of Companies (Accounts) Rules, 2014). Shall be required
to appoint an internal auditor or a firm of internal auditors, namely:
a. Every listed company.
b. Every unlisted Public Company having
i) Paid up share capital of Rs. 50 crores or more as on preceding balance sheet date or
ii) Turnover of Rs. 200 crores or more or
iii) Outstanding loans or borrowings from banks or public financial institutions Rs. 100 crores or
more at any point of time during preceding financial year or
iv) Outstanding deposits of Rs. 25 crores or more at any point of time during preceding
financial year.
c. Every Private Company having:
i) Turnover of Rs. 200 crores or more as per preceding F/S or
ii) Outstanding loans or borrowings from banks or public financial institutions exceeding Rs.
100 crores or more at any point of time during preceding financial year
C. ELIGIBILITY TO ACT AS INTERNAL AUDITOR:

a. As per section 138, the following persons can be appointed as internal auditor which may be
either an individual or a partnership firm or a body corporate:
i) A Chartered Accountant whether engaged in practice or not.
ii) A Cost Accountant whether engaged in practice or not.
iii) Such other professional as may be decided by the Board
b. Internal auditor may or may not be an employee of the company.
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D. OBJECTIVE AND SCOPE OF INTERNAL AUDITOR: The functioning, periodicity and methodology for
conducting the internal audit i.e., objective and scope are determined by the Audit Committee or
the Board after consultation with the Internal Auditor.
E. INDEPENDENCE OF INTERNAL AUDITOR:

a. To be efficient and effective, the internal auditor must have adequate independence.
b. Internal auditor may or may not be an employee of the company. An outsider, like a firm of
chartered accountants, if acting as internal auditor, is likely to be more independent than an
employee of the organization.
c. It may be noted that by its very nature, the internal audit function cannot be expected to have
the same degree of independence as is essential when the external auditor expresses his
opinion on the financial information.
d. As mentioned above, the internal auditor may be part of the management, but he evaluates
the functioning of the management at different levels.
e. To ensure his independence he is made responsible directly to the Board of Directors through
audit committee.
f. If internal auditor is made subordinate to lower level, his independence will be effected which
will affect his functioning and effectiveness.
F. SA 610 - USING THE WORK OF INTERNAL AUDITOR: Refer Chapter-2 (Audit Reporting)
G. CONCEPT OF INTERNAL AUDIT AND STANDARDS ON INTERNAL AUDIT: Provisions related to

Internal audit are covered in detailed in IMO audit chapter.
Q.NO.18 EXPLAIN THE PROVISIONS RELATING TO AUDITOR’S REMUNERATION U/S 142 OF

COMPANIES ACT, 2013. (SELF STUDY)
ANSWER:
1. As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its
general meeting or in such manner as may be determined therein.
2. Board may fix remuneration of the first auditor appointed by it.
3. 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 and any facility extended to
him.
4. The remuneration does not include any remuneration paid to him for any other service rendered
by him at the request of the company.
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5. Therefore, it has been clarified that the remuneration to Auditor shall also include any facility
provided to him.
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Q.NO.19 EXPLAIN PROVISIONS RELATING TO MAINTENANCE OF COST RECORDS AND COST AUDIT
U/S 148 OF COMPANIES ACT 2013? (SELF STUDY)
ANSWER:
A. MAINTENANCE OF COST RECORDS:

1. APPLICABILITY: Rule 3 of the Companies (Cost Records and Audit) Rules, 2014 provides that
the following conditions for companies (including foreign companies) which are required to
maintain cost records,
a) Company must be engaged in the production of goods or providing services, and
b) It must be having an overall turnover from all its products and services of Rs.35 crore or
more during the immediately preceding financial year.
Exceptions: Companies classified as a Micro enterprise or a Small enterprise under Micro,
Small and Medium Enterprises Development Act, 2006 are not required are to maintain cost
records even it satisfies the above limits.
2. CLASSIFICATION OF COMPANIES FOR THE PURPOSE OF APPLICABILITY OF THE RULES: The
said rule has divided the list of companies into regulated sectors and non-regulated sectors.
Some of the companies/ industry/ sector/ product/ service prescribed under the said rule are
given below:
a) Regulated Sectors: (Not covered in Study Material)
i) Telecommunication services regulated by the telecom Regulatory Authority of India
(TRAI)
ii) Generation, transmission, distribution and supply of electricity regulated by the relevant
regulatory body or authority under the Electricity Act, 2003, other than for captive
generation.
iii) Petroleum products regulated by the Petroleum and Natural Gas Regulatory Board.
iv) Drugs and Pharmaceutical.
v) Sugar and industrial alcohol.
vi) Fertilizers.
b) Non - Regulated Sectors: (Not Covered in study material)

i) Turbo jets and turbo propellers.
ii) Tyres and Tubes.
iii) Steel; Cement.
3. PRESCRIBED FORM FOR MAINTENANCE OF COST RECORDS: As per Rule 5 of the companies
(Cost Records and Audit) Rules, cost records shall be maintained in Form CRA - 1.
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4. REQUIREMENT AS PER CARO, 2016: As per clause (vi) to Paragraph of the CARO, 2016, where
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maintenance of cost records has been specified by the Government under section 148(1) of
the Companies Act, 2013, the auditor has to report whether such accounts and records have
been made and maintained.
B. COST AUDIT u/s 148:
1. APPLICABILITY OF COST AUDIT: Rule 4 of the companies (Cost Records and Audit) Rules, 2014
states the provisions related to the applicability of the cost audit.
The applicability of Cost Audit to a company depends upon certain Turnover criteria as follows
a) For Companies specified under “Regulated Sectors”:
i) The overall annual turnover of the company from all its products and services during
the immediately preceding financial year is Rs.50 crore or more and
ii) The aggregate turnover of the individual product(s) or service(s) covered in the sector
is Rs.25 crore or more.
b) For Companies specified under “Non-Regulated Sectors”:
i) The overall annual turnover of the company from all its products and services during
the immediately preceding financial year is Rs.100 crore or more and
ii) The aggregate turnover of the individual product(s) or service(s) covered in the sector
is Rs.35 crore or more.
2. NON - APPLICABILITY OF COST AUDIT: Sub - rule (3) of Rule 4 provides that the requirement for
cost audit under these rules shall not be applicable to a company which is covered under Rule
3.
a) Whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue (or)
b) Which is operating from a special economic zone. (or)
c) A company which is engaged in generation of electricity for captive consumption.
3. APPOINTMENT OF COST AUDITOR: SEC 148

a) Qualification, disqualification, rights, duties and obligations of Cost Auditor: Similar to
the company auditor appointed under section 139.
b) Who can be appointed as a cost auditor: The Cost audit shall be conducted by a Cost
Accountant in practice Provided that person appointed under section 139 as an auditor of
the company shall not be appointed as its cost auditor.
c) Who can appoint Cost Auditor: Board of Directors.
However, if there is Audit committee in the company, then the appointment can be made
after considering the recommendation of audit committee.
d) Time limit for appointment: within 180 days of the commencement of every financial
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year.
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e) Communication with CG: Every referred company shall file a notice of such appointment
with the central Government within a period of 30 days of the Board meeting in which
such appointment is made or within a period of 180 days of the commencement of the
financial year, Whichever is earlier, through electronic mode, in Form CRA-2.
f) Tenure of Cost Auditor: The cost auditor appointed as such shall continue in such capacity
till the expiry of 180 days from the closure of the financial year, or till he submits the cost
audit report, for the financial year for which he has been appointed.
4. CASUAL VACANCY IN THE OFFICE OF COST AUDITOR: Any casual vacancy in the office of a
cost Auditor, whether due to resignation, death or removal, shall be filled by the Board of
Directors within 30 days of occurrence of such vacancy and the company shall inform the CG
in Form CRA-2 within 30days of such appointment of cost auditor.
5. REMOVAL OF COST AUDITOR: The cost Auditor may be removed from his office before the
expiry of his term, through a board resolution after giving a reasonable opportunity of being
heard to the cost auditor and recording the reasons for such removal in writing.
C. PROCEDURE FOR SUBMISSION OF COST AUDIT REPORT:
1. COST AUDITOR TO BOD: The cost auditor shall submit the cost audit report along with his his
reservations or qualifications, if any, in Form CRA-3 to the BOD within a period of 180 days
from the closure of the financial year.
2. BOD to CG:
a) The company shall within 30 days from the dated of receipt of a copy of the cost audit
report prepared furnish the Central Government with such report along with full
information and explanation on every reservation or qualification contained therein in
Form CRA-4.
b) If after considering the cost audit report and the information and explanation furnished by
the company as above, the central Government may call for any further information or
explanation as is necessary.
3. DUTY TO REPORT ON FRAUD: The provisions of section 143(12) of the Companies Act, 2013
and the relevant rules on duty to report on fraud shall apply mutatis mutandis to a cost auditor
during performance of his functions under section 148 of the Act and these rules.
Q.NO.20 UNDER WHAT CIRCUMSTANCES THE RETIRING AUDITOR CANNOT BE REAPPOINTED? (SELF
STUDY)
ANSWER:
1. IN THE FOLLOWING CIRCUMSTANCES, THE RETIRING AUDITOR CANNOT BE REAPPOINTED [Sec.

139(9)]:
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a. The auditor proposed to be reappointed does not possess the qualification prescribed under
section 141 of the Companies Act, 2013.
b. The proposed auditor suffers from the disqualifications under section 141(3), 141(4) and 144
of the Companies Act, 2013.
c. He has given to the company notice in writing of his unwillingness to be reappointed.
d. A written certificate has not been sent 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.
e. A resolution has been passed in AGM appointing somebody else or providing expressly that
the retiring auditor shall not be reappointed.
2. WHERE AT ANY AGM, NO AUDITOR IS APPOINTED OR RE-APPOINTED: [Sec. 139(10)] The existing
auditor shall continue to be the auditor of the company.
Q.NO.21 EXPLAIN THE PENALTY FOR NON-COMPLIANCE U/S 147 OF COMPANIES ACT, 2013. (SELF
STUDY)
ANSWER:
A. IN THA HANDS OF COMPANY AND OFFICER IN DEFAULT:

1. FOR COMPANY: If any of the provisions of sections 139 to 146 (both inclusive) is
contravened, the company shall be punishable with fine which shall not be less than
Rs.25,000/- but which may extend to Rs.5,00,000/- and
2. EVERY OFFICER of the company who is in default shall be punishable with imprisonment for
a term which may extend to 1 YEAR or with fine which shall not be less than Rs.10,000/- but
which may extend to Rs.1,00,000/- or with both.
B. IN THE HANDS OF AUDITOR: If an auditor of a company contravenes any of the provisions of

section 139 section 143, section 144 or section 145, the auditor shall be punishable with fine:
1) UN-INTENTIONAL CONTRAVENTION: Penalty of Not be less than:

a. Rs.25,000/- but which may extend to Rs.5,00,000/- or
b. 4 TIMES the remuneration of the auditor, WHICHEVER IS LESS.
2) INTENTIONAL CONTRAVENTION: If an auditor has contravened such provisions knowingly or

willfully with the intention to deceive the company or its shareholders or creditors or tax
authorities, he shall be punishable with:
a) Imprisonment for a term which may extend to 1 YEAR AND
b) With fine which:
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a. Shall not be less than Rs.50,000/- but which may extend to Rs.25,00,000/- or
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b. 8 TIMES the remuneration of the auditor, WHICHEVER IS LESS.
3) REFUND REMUNERATION AND PAY DAMAGES: Where an auditor has been convicted under
sub-section (2), he shall be liable to-
a. Refund the remuneration received by him to the company.
b. Pay for damages to the company statutory bodies or authorities or to members or
creditors of the company for loss arising out of incorrect or misleading statements of
particulars made in his audit report.
c) CIVIL AND CRIMINAL LIABILITY: Where, in case of audit of a company being conducted by an
audit firm, it is proved that the partner or partners of the audit firm has or have acted in a
fraudulent manner or abetted or colluded in an fraud by, or in relation to or by, the company or
its directors or officers, the liability, whether civil or criminal as provided in this Act or in any
other law for the time being in force, for such act shall be of the partner or partners concerned
of the audit firm and of the firm jointly and severally.
d) CRIMINAL LIABILITY – CONCERNED PARTNER ONLY: It may be noted that in case of criminal
liability of an audit firm, in respect of liability other than fine, the concerned partner(s), who
acted in a fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only
be liable.
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PRACTICE QUESTIONS
Q.NO.1 Ram and Hanuman Associates, Chartered Accountants in practice, have been appointed as
Statutory Auditor of Krishna Ltd. for the accounting year 2019-2020. Mr. Hanuman, a partner of
Ram and Hanuman Associates, holds 100 equity shares of Shiva Ltd., a subsidiary company of
Krishna Ltd. As an auditor, how would you deal in above situation:
ANSWER:
PROVISION AND EXPLANATION: As per sub-section (3)(d)(i) of Section 141 of the Companies Act, 2013
along with Rule 10 of the Companies (Audit and Auditors) Rule, 2014, 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
interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such
holding company. Provided that the relative may hold security or interest in the company of face value
not exceeding rupees one lakh.
Also, as per sub-section (4) of Section 141 of the Companies Act, 2013, where a person appointed as an
auditor of a company incurs any of the disqualifications mentioned in sub-section (3) after his
appointment, he shall vacate his office as such auditor and such vacation shall be deemed to be a
casual vacancy in the office of the auditor.
CONCLUSION: In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s Ram and
Hanuman Associates, holds 100 equity shares of Shiva Ltd. which is a subsidiary of Krishna Ltd.
Therefore, the firm, M/s Ram and Hanuman Associates would be disqualified to be appointed as
statutory auditor of Krishna Ltd., as per section 141(3)(d)(i), which is the holding company of Shiva Ltd.,
because Mr. Hanuman, one of the partners, is holding equity shares of its subsidiary.
Q.NO.2 Nick Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central
Government, 25% by Uttar Pradesh Government and 10% by Madhya Pradesh Government. Nick
Ltd. appointed Mr. Prem as its statutory auditor. As an auditor, how would you deal in above
situation.
ANSWER:
PROVISION AND EXPLANATION: According to Section 139(7) of the Companies Act, 2013, the auditors
of a government company shall be appointed or re-appointed by the Comptroller and Auditor General
of India(C&AG). As per section 2(45), a Government company is defined as any company in which not
less than 51% of the paid-up share capital is held by the Central Government or by any State
Government or Governments or partly by the Central Government and partly by one or more State
Governments and includes a company which is a subsidiary of a Government Company as thus defined.
CONCLUSION: In the given case, Ajanta Ltd is a government company as its 20% shares have been held
by Central Government, 25% by U.P. State Government and 10% by M.P. State Government. Total 55%
shares have been held by Central and State governments, therefore, it is a Government company.
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Nick Ltd. is a subsidiary company of Ajanta Ltd. Hence, Nick Ltd. is covered in the definition of a
government company. Therefore, auditor of Nick Ltd. can be appointed only by C&AG.
Consequently, appointment of Mr. Prem is invalid and he should not give acceptance to the Directors of
Nick Ltd.
Q.NO.3 Contravene Ltd. appointed CA Innocent as an auditor for the company for the current
financial year. Further the company offered him the services of actuarial, investment advisory
and investment banking which was also approved by the Board of Directors. As an auditor, how
would you deal in above situation.
ANSWER:
PROVISION AND EXPLANATION: Section 144 of the Companies Act, 2013 prescribes certain services
not to be rendered by the auditor. An auditor appointed under the Act shall provide to the company
only such other services as are approved by the Board of Directors or the audit committee, as the case
may be, but which shall not include any of the following services (whether such services are rendered
directly or indirectly to the company or its holding company or subsidiary company), namely:
(i) accounting and book keeping services;

(ii) internal audit;
(iii) design and implementation of any financial information system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.
Further section 141(3)(i) of the Companies Act, 2013 also disqualifies a person for appointment as an
auditor of a company who is engaged as on the date of appointment in consulting and specialized
services as provided in section 144.
CONCLUSION: In the given case, CA Innocent was appointed as an auditor of Contravene Ltd. He was
offered additional services of actuarial, investment advisory and investment banking which was also
approved by the Board of Directors. The auditor is advised not to accept the services as these services
are specifically notified in the services not to be rendered by him as an auditor as per section 144 of the
Act.
Q.NO.4 Mr. Amar, a Chartered Accountant, bought a car financed at Rs. 7,00,000 by Chaudhary
Finance Ltd., which is a holding company of Charan Ltd. and Das Ltd. Mr. Amar has been the
statutory auditor of Das Ltd. and continues to be even after taking the loan. As an auditor, how
would you deal in above situation.
ANSWER:
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PROVISION AND EXPLANATION: According to section 141(3)(d)(ii) of the Companies Act, 2013, a
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person is not eligible for appointment as auditor of any company, if he is indebted to the company, or
its subsidiary, or its holding or associate company or a subsidiary of such holding company, in excess of
Rs.5,00,000/-.
CONCLUSION: In the given case, Mr. Amar is disqualified to act as an auditor under section 141(3)(d)(ii)
as he is indebted to Chaudhary Finance Ltd. for more than Rs. 5,00,000. Also, according to section
141(3)(d)(ii), he cannot act as an auditor of any subsidiary of Chaudhary Finance Ltd. i.e., he is also
disqualified to work in Charan Ltd. & Das Ltd. Therefore, he has to vacate his office in Das Ltd. even
though it is a subsidiary of Chaudhary Finance Ltd.
Hence, audit work performed by Mr. Amar as an auditor is invalid, he should vacate his office
immediately and Das Ltd. should appoint another auditor for the company.
Q.NO.5 Pearl Ltd. is an exporter of precious and semi-precious stones. The turnover of the company
is Rs. 150 crore, out of which Rs. 105 crore is from export business and remaining Rs. 45 crore
from domestic sales. Amount received from export business is all in foreign currency. Directors of
Pearl Ltd. are of the opinion that cost audit is not applicable to their company as maximum
revenue has been generated from export business. Give your opinion.
ANSWER:
PROVISION AND EXPLANATION: The requirement for cost audit shall not be applicable to a company
whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue (as per Rule 3 of
the Companies (Cost Records and Audit) Rules, 2014).
CONCLUSION: In the instant case, Peral Ltd. is an exporter of precious and semi-precious stones and
the turnover of the company is rupees 150 crore out of which rupees 105 crore i.e., 70% is from export
business and remaining rupees 45 crore i.e., 30% from domestic sales.
Thus, opinion of director is not tenable as revenue from exports in foreign exchanges is below
prescribed limit. Therefore, cost audit is applicable on Pearl Ltd. as per Rule 3 of the Companies (Cost
Records and Audit) Rules, 2014. Pearl Ltd. has to appoint cost auditor to get the cost accounts of the
company audited.
Q.NO.6 While adopting the accounts for the year, the Board of Directors of Sunrise Ltd. decided to
consider the Interim Dividend declared @15% as final dividend and did not consider transfer of
Profit to reserves. Comment.
ANSWER:
Declaration of Interim Dividend: Section 123(3) of the Companies Act, 2013 provides that the Board of
Directors of a company may declare interim dividend during any financial year out of the surplus in the
Statement of Profit and Loss and out of profits of the financial year in which such interim dividend is
sought to be declared. The amount of dividend including interim dividend should be deposited in a
separate bank account within 5 days from the declaration of such dividend for the compliance of
Section 123(4) of the said Act.
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Based on Section 2(35) of the Act, it can be said that since interim dividend is also a dividend,
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companies should provide for depreciation as required by Section 123 before declaration of interim
dividend. However, the first proviso to Section 123(1) provides that a company may, before the
declaration of any dividend in any financial year, transfer such percentage of its profit for that financial
year as it may consider appropriate to the reserves of the company irrespective of the size of the
declared dividend i.e., the company is not mandatorily required to transfer the profit to the reserves, it
is an option available to the company to transfer such percentage.
In the instant case, the Board has decided to pay interim dividend @15% of the paid-up capital.
Assuming that the company has complied with the depreciation requirement, the interim dividend can
be declared without transferring such percentage of its profits to the reserves of the company.
Q.NO.7 ABC Limited is in the practice of maintaining consistent dividend payment over a minimum of
14%. The Financial year 2019-20 was so very bad for the Company that it was not possible for the
Company to maintain the payment of consistent dividend as above. The Management, being
hopeful of recovery of its performance in next year, felt that the depreciation of the year to the
extent of 75% alone be charged to the Statement of Profit and Loss and the remaining 25% be
kept in a separate account code in the Balance Sheet- 'Debit Balances Adjustable against Revenue
account'. The Management was of the view that it would be in fair practice of accounting if the
depreciation for asset is charged before the expiry of the life of assets and the amount parked in
asset code as above would unfailingly be adjusted to Revenue before the close of next financial
year anyway. Analyse the issues involved and state how the Auditor should decide on this matter.
ANSWER:
Provision of Depreciation: Section 123(1) of the Companies Act, 2013 provides that dividend cannot be
declared or paid by a company for any financial year except out of profits of the company for that year
arrived at after providing for depreciation in accordance with the provisions of Section 123(2), or out of
the profits or the company for any previous financial year or years arrived at after providing for
depreciation in the manner aforementioned and remaining undistributed, or out of both. Further, it is
the duty of auditor to check whether the depreciation was provided according to provision of AS 10 /
IND AS 16/Schedule II to the Act.
In the instant case, ABC Limited is in the practice of maintaining consistent dividend payment over a
minimum of 14%. Due to bad financial condition, company has not provided for dividend for the year
2019-20. In addition to this management has also taken decision to charge 75% of the depreciation in
the statement of Profit and Loss whereas 25% of the depreciation amount kept in a separate account
code in the Balance Sheet – ‘Debit Balances Adjustable against Revenue Account’.
Contention of management that it would be in fair practice of accounting where the depreciation on
asset is charged before the expiry of the life of assets and the amount parked in asset code would
unfailingly be adjusted to revenue before the close of next financial year is not tenable.
The practice of the company in not charging the depreciation and accumulating 25% of it in a debit
balance for being written off in the next year is not an acceptable accounting treatment. If dividend is
declared in such situation, it would mean payment out of capital.
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Therefore, the auditor of the company should ensure the compliance of provisions of section 123 and
Schedule II.
In case the management does not comply with the provisions and does not charge the 100%
depreciation, the auditor of the company should suggest the management for the same and if
management refuses, the auditor should qualify his report accordingly.
Q.NO.8 The financial statements of MP Ltd. as on March 31, 2020 are to be prepared under Division Il
of Schedule III to the Companies Act, 2013. Comment on the disclosure compliances for MP Ltd.
from the following information in the financial statements which are required to be drawn up in
compliance with Ind AS.
(i) Property, Plant and Equipment include Rs. 2.50 crore for a boiler-plant under construction.
(ii) Cash and cash equivalents include Rs. 1.25 crore deposited with a nationalized bank on 31st
March, 2020 for 18 months. It is shown under current assets.
(iii) Non-current assets include under caption "Biological assets other than bearer Plants" a sum of
Rs. 1.50 crore being cost of cultivation for bringing to yield level, the cashewnut trees whose yield
period, according to estimate shall not be less than 10 years
ANSWER:
(i) Disclosure of Boiler Plant under Construction: Boiler plant under construction should be shown
under the heading ‘Capital Work in Progress’ instead of Property Plan and Equipment. Thus, inclusion of
value of boiler plant under construction in Property Plan and Equipment is not in order.
(ii) Disclosure of Cash and Cash Equivalents deposited with Nationalised Bank: Bank deposits with
more than 12 months maturity shall be disclosed under 'Other financial assets'. Therefore, disclosure of
deposits rupees 1.25 crores in a nationalised bank for 18 months as Cash and Cash Equivalents is not in
order as per Division II of Schedule III.
(iii) Disclosure of Cost of Cultivation for bringing to yield level the Cashewnut trees: Cost of 1.5 crore
rupees for Cultivation for bringing to yield level, the cashewnut trees whose yield period is more than
one period will form part of ‘Bearer Plant’. Hence it will not be considered as ‘Biological Assets other
than bearer plant’. Therefore, it should be shown under the heading ‘Property Plant and Equipment’ as
Bearer Plant as per Division II of Schedule III.
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CONCEPTS NOT COVERED FROM STUDY MATERIAL [OCTOBER 2021 EDITION]
CONCEPT 14* – FINAL ACCOUNTS PREPARATION AND PRESENTATION PG: 5.45 TO 5.56
CONCEPT 16* – DIVISIBLE PROFITS, DIVIDENDS AND RESERVES PG: 5.56 TO 5.71
CONCEPT 17* – DEPRECIATION PG: 5.71 TO 5.73
CONCEPT 18* – SALIENT FEATURES OF LLP PG: 5.74 TO 5.76
CONCEPT 19 – AUDIT REPORT [COVERED IN DETAILED IN AUDIT COVERED IN AUDIT

REPORTING CHAPTER] REPORTING CHAPER
APPENDIX 1 - QUESTIONS ON CARO PG: 5.87 TO 5.94
APPENDIX 2 – GUIDANCE NOTE ON IFC OVER FINANICAL REPORTING COVERED IN AUDIT

[IFCOFR] REPORTING CHAPTER
*These Concepts are discussed directly from ICAI Material. Also Note that these concepts are
2nd priority concepts from exam point of view. However, they are Important from MCQ’s
viewpoint. So Listen to these concepts without ignoring them.
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2. AUDIT REPORTING
[(COVERING SA 700, 701, 705, 706, 710, 720, 299, 600, 610, 620, 570 & 260 AND REPORTING
REQUIREMENTS U/S 143 OF COMPANIES ACT 2013 INCLUDING CARO, 2020)]
PART – I (REPORTING STANDARDS)

SA – 700
FORMING OF AN OPINION AND REPORTING ON FINANCIAL
STATEMENTS
A. OBJECTIVES OF THE AUDITOR UNDER SA- 700:
The objectives of the auditor are:
a. To form an opinion on the financial statements based on the conclusions drawn from audit
evidence obtained; and
b. To express an opinion on the financial statements through a written report, known as
Auditor’s report.
Note: Applicable in the context of audit of complete set of GPFS.
B. FORMING AN OPINION ON THE FINANCIAL STATEMENTS:

1. The auditor shall form an opinion on whether the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework.
2. In order to form that opinion, the auditor shall obtain reasonable assurance about whether
the financial statements as a whole are free from material misstatement whether due to
fraud or error.
3. Further, when the financial statements are prepared in accordance with a fair presentation
framework, the auditor shall also evaluate as to whether the financial statements achieve
fair presentation by considering:
a. The overall presentation, structure and content of the financial statements and
b. Whether the financial statements, including the related notes, represent the
underlying transactions and events in a manner that achieves fair presentation.
In other words, the auditor shall express an unmodified opinion when the auditor concludes that
the financial statements are prepared, in all material respects, in accordance with the applicable
financial reporting framework.
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C. DEFINITIONS:
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Unmodified opinion:
When the auditor concludes that the financial statements are free from material misstatements
(i.e., give a true and fair view) and are also prepared in accordance with the applicable financial
reporting framework, then he shall express an unmodified opinion which is also known as
Unqualified Opinion or Clean Opinion.
Unmodified opinion indicates:
1. The auditor has obtained sufficient appropriate evidence.
2. The financial statements disclosed all relevant information as required by law or regulatory.
3. The accounting policies and changes therein are adequately disclosed in the financial
statements.
4. The financial statements are prepared as per applicable financial reporting framework.
D. EVALUATIONS TO BE MADE BY AUDITOR:
The auditor shall evaluate whether the financial statements are prepared in accordance with the
applicable financial reporting framework.
While evaluating the auditor shall also consider:
1. QUALITATIVE ASPECTS OF ENTITIES ACCOUNTING PRACTICES:

a) Management makes a number of judgments about the amounts and disclosures in the
financial statements.
b) Further while evaluating accounting systems, the auditor may find existence of
management bias and lack of neutrality over accounting practices.
c) These situations may cast significant doubt on reliability of financial statements which
may be materially misstated.
d) The indicators of management bias or lack of neutrality are as follows:
i) Selective correction of misstatements brought to the notice of management by
auditor.
E.g.: Correcting only those misstatements which increases reported earnings and
ignoring the other misstatements that decrease the earnings.
ii) Possible management bias over selecting appropriate accounting estimates.
iii) Frequent changes in accounting policies without a proper reason.
2. SPECIFIC EVALUATIONS WHILE FORMING OPINION:

The auditor shall take into account the following specific factors while forming an opinion:
a. Whether the financial statements adequately disclose the significant accounting policies
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selected and applied.

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b. Whether the accounting policies selected and are applied consistently and also check
they are in accordance with the applicable financial reporting framework and are
appropriate.
c. Whether the accounting estimates made by management are reasonable.
d. Whether the information presented in the financial statements is relevant, reliable,
comparable, and understandable and not misleading.
e. Whether the terminology used in the financial statements, including the title of each
assertion in financial statements, are appropriate.
E. WHEN IS A MODIFIED OPINION ISSUED?
a. If the auditor concludes that based on the Sufficient and appropriate audit evidence
obtained, the financial statements as a whole are NOT free from material misstatement; or
b. Is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.
F. CONTENTS OF THE AUDITOR’S REPORT:
1. Title
2. Addressee (GPFS - Members and in case of SPFS - BOD)
3. Opinion Para [Refer G 1]
4. Basis for Opinion [Refer G 2]
5. Material Uncertainty related to Going Concern (SA 570)
6. Key Audit Matters (SA 701)
7. Emphasis of Matter Paragraph (SA 706) Applicable as per the relevant
standard
8. Other Matter Paragraph (SA 706)
9. Other Information (SA 720)
10. Responsibilities of Management for the Financial Statements [Covered in SA 210]
11. Auditor’s Responsibilities for the Audit of the Financial Statements [QB] [Refer G 4]
12. *Report on Other Legal and regulatory requirements (E.g., CARO, 2020) [Refer G 5]
13. Signature of the Auditor [Refer G 6]
14. Place of Signature [Ordinarily the city where the audit report is signed]
15. Date of the Auditor’s Report [Refer G 7]
16. UDIN (Unique Document Identification Number w.e.f.1st July 2019) [The requirement to
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mention UDIN is applicable both for manually and digitally signed reports/certificates
including certificates uploaded online.]
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Note: Format of Auditors report prescribed by Law or Regulation is NOT Covered in our
material. Refer ICAI SM [Oct 2021 Edition – Pg. 6.15] [Not required from Exam Viewpoint]
G. DETAILED EXPLANATION TO FEW CONTENTS OF AUDIT REPORT:
1. OPINION PARAGRAPH / AUDITOR’S OPINION: The opinion section shall mention the
following:
a. Identify the entity whose financial statements have been audited
b. State that the financial statements have been audited (Not in case of Disclaimer of
Opinion)
c. Identify the title of each statement comprising the financial statements.
d. Refer to the notes, including the summary of significant accounting policies and
e. Specify the date of, or period covered by, each financial statement comprising the
WORDINGS OF UNMODIFIED OPINION: [Refer Illustrations in ICAI Pronouncements SA 700]
a. FAIR PRESENTATION FRAMEWORK: When expressing an unmodified opinion on
financial statements prepared in accordance with a fair presentation framework, the
auditor’s opinion shall, unless otherwise required by law or regulation, use one of the
following phrases, which are regarded as being equivalent:
i. In our opinion, the accompanying financial statements present fairly,
in all material respects, […] in accordance with [the applicable financial
reporting framework] or
ii. In our opinion, the accompanying financial statements give a true and
fair view of […] in accordance with [the applicable financial reporting
framework].
b. COMPLIANCE FRAMEWORK: When expressing an unmodified opinion on financial
statements prepared in accordance with a compliance framework, the auditor’s
opinion shall be that the accompanying financial statements present fairly are
prepared, in all material respects, in accordance with [the applicable financial
reporting framework].
c. If the reference to the applicable financial reporting framework in the auditor’s
opinion is not to Accounting Standards, the auditor’s opinion shall identify the origin
of such other framework. [E.g., In Company audit report – we refer Companies act,
2013]
2. BASIS FOR OPINION PARAGRAPH:
a. States that the audit was conducted as per standards on auditing.
b. Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs.
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c. Includes a statement that the auditor is independent of the entity in accordance with the
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relevant ethical requirements relating to the audit and has fulfilled the auditor’s other
ethical responsibilities in accordance with these requirements. The statement shall refer to
the Code of Ethics issued by ICAI.
d. Statement as to whether the auditor has obtained sufficient appropriate audit evidence
for the opinion expressed by him.
3. RESPONSIBILITIES FOR FINANCIAL STATEMENTS:

Refer to “Preconditions to audit” under SA 210 - Given in First chapter.
4. AUDITORS RESPONSIBILITIES FOR AUDIT OF FINANCIAL STATEMENTS:
LOCATION OF DESCRIPTION OF AUDITORS

RESPONSIBILITES
(b) Within an appendix to the auditor’s

(a) Within the body of report, in which case the auditor’s (c) By a specific reference within the auditor’s
the auditor’s report report shall include a reference to the report to the location of such a description on a
location of the appendix or website of an appropriate authority, where law,
regulation or the auditing standards expressly
permit the auditor to do so.
5. OTHER REPORTING RESPONSIBILITIES: [NOT REQUIRED FROM EXAM VIEWPOINT]

a. SEPARATE SECTION: If the auditor addresses other reporting responsibilities in the
auditor’s report on the financial statements that are in addition to the auditor’s
responsibilities under the SAs, these other reporting responsibilities shall be addressed in
a separate section in the auditor’s report with a heading titled “Report on Other Legal
and Regulatory Requirements” or otherwise as appropriate to the content of the section,
unless these other reporting responsibilities address the same topics as those presented
under the reporting responsibilities required by the SAs in which case the other reporting
responsibilities may be presented in the same section as the related report elements
required by the SAs.
b. DIFFERENTIATION: If other reporting responsibilities are presented in the same section
as the related report elements required by the SAs, the auditor’s report shall clearly
differentiate the other reporting responsibilities from the reporting that is required by
the SAs.
c. REPORT ON AUDIT OF F/S: If the auditor’s report contains a separate section that
addresses other reporting responsibilities, the requirements of this SA shall be included
under a section with a heading “Report on the Audit of the Financial Statements.” The
“Report on Other Legal and Regulatory Requirements” shall follow the “Report on the
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Audit of the Financial Statements.”

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6. SIGNATURE OF THE AUDITOR:
a. PERSONAL NAME: The auditor’s report shall be signed. The report is signed by the
auditor (i.e., the engagement partner) in his personal name.
b. FIRM NAME: Where the firm is appointed as the auditor, the report is signed in the
personal name of the auditor and in the name of the audit firm.
c. MRN: The partner/proprietor signing the audit report also needs to mention the
membership number assigned by the Institute of Chartered Accountants of India.
d. FRN: They also include the registration number of the firm, wherever applicable, as
allotted by ICAI, in the audit reports signed by them. The report is to be signed by the
maker of the report.
e. SEC. 145: Under Section 145 read with Section 141(2) of the Companies Act, 2013, only
the person appointed as an auditor of the company or, where a firm is so appointed, only
the partner in the firm who is a chartered accountant, may sign the auditor’s report or
sign or authenticate any other document of the company required by law to be signed or
authenticated by the auditor.
7. DATE OF THE AUDITOR’S REPORT:

The auditor’s report shall be dated NO EARLIER THAN the date on which the auditor has
obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the
financial statements, including evidence that:
a. All the statements that comprise the financial statements, including the related notes,
have been prepared and
b. APPROVAL OF F/S: Those with the recognized authority have asserted that they have
taken responsibility for those financial statements.
In other words, The auditors report date shall be only on or after obtaining sufficient and
appropriate evidence and on or after Approval of F/s by competent authority.
H. AUDITOR’S REPORT FOR AUDITS CONDUCTED IN ACCORDANCE WITH BOTH STANDARDS ON

AUDITING ISSUED BY ICAI AND INTERNATIONAL STANDARDS ON AUDITING OR AUDITING
STANDARDS OF ANY OTHER JURISDICTION:
COVERED AS PART OF QUESTION BANK [NOT IMP FROM EXAMS VIEWPOINT]
I. SUPPLEMENTARY INFORMATION ALONG WITH FINANCIAL STATEMENTS:

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1. If supplementary information that is not required by the applicable financial reporting

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framework is presented with the audited financial statements, the auditor shall evaluate
whether, in the auditor’s professional judgment whether such supplementary information is
an integral part of the financial statements due to its nature or how it is presented.
a. INTEGRAL PART: When it is an integral part of the financial statements, the
supplementary information shall be covered by the auditor’s opinion.
b. NOT AN INTEGRAL PART:

i. The auditor shall evaluate whether such supplementary information is
presented in a way that sufficiently and clearly differentiates it from the
audited financial statements.
ii. If this is not the case, then the auditor shall ask management to change how
the unaudited supplementary information is presented.
iii. If management refuses to do so, the auditor shall identify the unaudited
supplementary information and explain in the auditor's report that such
supplementary information has not been audited.
2. Examples of Supplementary information:

a. INTEGRAL PART: When the notes to the financial statements include an explanation
or the reconciliation of the extent to which the financial statements comply with
another financial reporting framework, the auditor may consider this to be
supplementary information that cannot be clearly differentiated from the financial
statements. the auditor’s opinion would also cover notes or supplementary schedules
that are cross referenced from the financial statements.
b. NOT AN INTEGRAL PART: When an additional profit and loss account that discloses
specific items of expenditure is disclosed as a separate schedule included as an
appendix to the financial statements, the auditor may consider this to be
supplementary information that can be clearly differentiated from the financial
statements.
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SA – 701
COMMUNICATING KEY AUDIT MATTERS IN THE
INDEPENDENT AUDITOR’S REPORT
A. DEFINITION OF KEY AUDIT MATTER:

The matters which in auditor’s Judgment are of most significant in the audit of the financial
statements of the current period and these are selected from the matters communicated with
those charged with governance.
B. PURPOSE OF KEY AUDIT MATTER (OBJECTIVE):

1. The purpose of communicating key audit matters is to enhance the communicative value of
auditor’s report by providing greater transparency about the audit that was performed.
2. KAM provides additional information to the intended users of the F/S to assist them in
understanding the entity and areas of significant matters in the professional judgment of
auditor.
3. Communicating key audit matters in the auditor’s report is:
a) NOT a substitute for disclosures in the financial statements that the applicable financial
reporting framework requires management to make;
b) NOT a substitute for the auditor expressing a modified opinion when required by the
circumstances of a specific audit engagement in accordance with SA 705;
c) NOT a separate opinion on individual matters.
d) NOT a substitute for reporting in accordance with SA – 570 – where a material

uncertainty there related to going concern of the entity.
C. APPLICABILITY AND PROHIBITION ON KEY AUDIT MATTERS (KAM):

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1. This SA applies to audits of complete sets of general-purpose financial statements of:

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a. Listed entities and
b. Circumstances when the auditor otherwise decides to communicate key audit
matters in the auditor’s report and
c. Required by law or regulation to communicate key audit matters in the auditor’s
report
2. SA 705 prohibits the auditor from communicating key audit matters when the auditor
disclaims an opinion on the financial statements
D. FACTORS FOR DETERMINING KEY AUDIT MATTERS:

The auditor shall determine, from the matters communicated with those charged with
governance, those matters that required significant auditor attention in performing the audit.
The auditor shall take into account the following factors while determining the Key Audit
Matters:
1. Areas of higher assessed risk of material misstatement or significant risks identified in
accordance with SA 315
2. Significant auditor judgments relating to areas in the financial statements that involved
significant management judgment, including accounting estimates that have been identified
as having high estimation uncertainty.
3. The effect of significant events or transactions that occurred during the period under audit.
Examples: (Inclusive list)

a. Assessment of Impairment.
b. Provision for losses and contingencies.
c. Valuation of financial instruments.
d. Matters relating to Revenue recognition
e. Taxation matters (multiple tax jurisdictions, uncertain tax position, deferred tax assets)
E. CERTAIN MATTERS NOT TO BE COMMUNICATED AS “KAM” [RESTRICTIONS ON KAM]:

In the following circumstances the auditor shall not communicate KAM:
a. Law or regulation prohibits such disclosure about the matter; or
b. The auditor determines that the matter should not be communicated in the auditor’s report
because of the possible adverse consequences.
c. If the auditor concluded that the matter is highly confidential or sensitive at the interest of
the company.
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WORDINGS IN AUDITORS REPORT
1. The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading
“Key Audit Matters”. What would the introductory language in this section of
the auditor’s report state.
Also, state the purpose of communicating key audit matters.
ANSWER:
Key audit matters are those matters that, in our professional judgment, were of most
significance in our audit of the financial statements of the current period. These
matters were addressed in the context of our audit of the financial statements as a
whole, and in forming our opinion thereon, and we do not provide a separate opinion
on these matters. (Not relevant from exam perspective)
Also write about purpose of KAM.
2. The following illustrates the presentation in the auditor’s report if the auditor
has determined there are no key audit matters to communicate:
ANSWER:
[Except for the matter described in the Basis for Qualified (Adverse) Opinion section
or Material Uncertainty Related to Going Concern section,] We have determined that
there are no [other] key audit matters to communicate in our report.]
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SA – 705
MODIFICATIONS TO THE OPINION IN THE INDEPENDENT
AUDITORS REPORT
A. OBJECTIVE OF THE AUDITOR / CIRCUMSTANCES WHEN A MODIFICATION TO THE AUDITOR’S
OPINION IS REQUIRED:
The objective of the auditor is to express clearly an appropriately modified opinion on the
financial statements that is necessary when:
a. The auditor concludes 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.
B. DIFFERENT TYPES OF MODIFIED OPINIONS: The decision regarding which type of opinion is
appropriate depends upon:
a. The Nature of the matter giving rise to the modification:
1. Whether the misstatements are material
2. Inability to obtain audit evidence for material items of financial statements.
b. Auditor’s judgment about pervasiveness of effects or possible effects of matters related
to financial statements.
1. QUALIFIED OPINION:
The auditor shall express a qualified opinion when:
a. The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but NOT pervasive, to the
financial statements or
b. The auditor is unable to obtain sufficient appropriate audit evidence on which to base
the opinion, but the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be material but NOT pervasive.
2. ADVERSE OPINION:
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
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3. DISCLAIMER OF OPINION:
The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be BOTH material AND pervasive.
NOTE: The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained
sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not
possible to form an opinion on the financial statements due to the potential interaction of
the uncertainties and their possible cumulative effect on the financial statements. [if auditor
concludes that the evidence obtained in unreliable]
C. MEANING OF PERVASIVE EFFECTS:

Pervasive effects on the financial statements are those that, in the auditor’s judgment:
a. Are not confined (limited) to specific elements, accounts or items of the financial
statements.
b. If so confined, represent or could represent a substantial proportion of the financial statements
or
c. In relation to disclosures, are fundamental to user’s understanding of the financial
statements.
BELOW TABLE SHOWS DIFFERENT TYPES OF OPINIONS BASED IN DIFFERENT SITUATIONS

SITUATION CASE MMS EXIST? PERVASIVE? OPINION
Sufficient and appropriate A No NA Unqualified Opinion

evidence OBTAINED
B Yes No Qualified Opinion
C Yes Yes Adverse Opinion
IS IT IS THE POSSIBLE
SITUATION CASE OPINION
MATERIAL? EFFECT PERVASIVE?
Sufficient and appropriate A No NA Unqualified Opinion

evidence NOT OBTAINED
B Yes No Qualified Opinion
C Yes Yes Disclaimer Opinion
Observations:
1. Adverse Opinion arises only in a situation where Sufficient and appropriate evidence is Available.
2. Disclaimer of Opinion arises only in a situation where sufficient and appropriate evidence is
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NOT Available.
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In other words, “Availability of sufficient and appropriate evidence and Disclaimer of Opinion are
mutually exclusive”
D. SPECIAL CONSIDERATIONS BEFORE EXPRESSING MODIFIED OPINION:

1. QUALIFIED OPINION: When the auditor expresses a qualified opinion due to a material
misstatement in the financial statements, the auditor shall state that, in the auditor’s
opinion, except for the effects of the matter(s) described in the Basis for Qualified Opinion
section:
a. When reporting in accordance with a fair presentation framework, the
accompanying financial statements present fairly, in all material respects (or give a
true and fair view of) […] in accordance with [the applicable financial reporting
framework]; or
b. When reporting in accordance with a compliance framework, the accompanying
financial statements have been prepared, in all material respects, in accordance with
[the applicable financial reporting framework]. When the modification arises from an
inability to obtain sufficient appropriate audit evidence, the auditor shall use the
corresponding phrase “except for the possible effects of the matter(s) ...” for the
modified opinion.
2. ADVERSE OPINION: When the auditor expresses an adverse opinion, the auditor shall state
that, in the auditor’s opinion, because of the significance of the matter(s) described in the
Basis for Adverse Opinion section:
a. When reporting in accordance with a fair presentation framework, the
accompanying financial statements do not present fairly (or give a true and fair view
of) […] in accordance with [the applicable financial reporting framework]; or
b. When reporting in accordance with a compliance framework, the accompanying
financial statements have not been prepared, in all material respects, in accordance
with [the applicable financial reporting framework].
3. DISCLAIMER OF OPINION: When the auditor disclaims an opinion due to an inability to

obtain sufficient appropriate audit evidence, the auditor shall:
a. State that the auditor does not express an opinion on the accompanying financial
statements.
b. State that, because of the significance of the matter(s) described in the Basis for
Disclaimer of Opinion section, the auditor has not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the financial
statements and
c. Amend the statement required in SA 700 (Revised), which indicates that the financial
statements have been audited, to state that the auditor was engaged to audit the
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NOTE: REQUIREMENTS FOR BASIS FOR MODIFIED OPINION IS DISCUSSED AS PART OF
QUESTION BANK.
E. REFERENCE IN AUDIT REPORT IN CASE OF MODIFIED OPINION:

The Opinion paragraph and Basis for opinion paragraph headings shall be appropriately modified
where the auditor expresses a modified opinion:
1. In case of Qualified Opinion:
a) Qualified Opinion
b) Basis for Qualified Opinion
2. In case of Adverse Opinion:
a) Adverse Opinion
b) Basis for Adverse Opinion
3. In case of Disclaimer Opinion:
a) Disclaimer Opinion
b) Basis for Disclaimer Opinion
F. CLARIFICATION ON EMPHASIS OF MATTER PARA IN CASE OF ADVERSE OPINION / DISCLAMER

OF OPINION:
When the auditor considers it necessary to express an adverse opinion or disclaim an opinion on
the financial statements as a whole, the auditor’s report shall not also include an unmodified
opinion with respect to the same financial reporting framework on a single financial statement
or one or more specific elements, accounts or items of a financial statement. To include such an
unmodified opinion in the same report in these circumstances would contradict the auditor’s
adverse opinion or disclaimer of opinion on the financial statements as a whole.
[WE MAY NOT USE EMPHASIS OF MATTER IN THE AUDITORS REPORT]
G. CONSEQUENCE OF AN INABILITY TO OBTAIN SUFFICIENT APPROPRIATE AUDIT EVIDENCE DUE

TO A MANAGEMENT-IMPOSED LIMITATION AFTER THE AUDITOR HAS ACCEPTED THE
ENGAGEMENT:
1. REQUEST FOR REMOVAL OF LIMITATION: If, after accepting the engagement, the auditor
becomes aware that management has imposed a limitation on the scope of the audit that
the auditor considers likely to result in the need to express a qualified opinion or to disclaim
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an opinion on the financial statements, the auditor shall request that management remove
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the limitation.
2. ALTERNATIVE PROCEDURES: If management refuses to remove the limitation, the auditor
shall communicate the matter to those charged with governance, unless all of those charged
with governance are involved in managing the entity and determine whether it is possible to
perform alternative procedures to obtain sufficient appropriate audit evidence.
3. REPORTING: If the auditor is unable to obtain sufficient appropriate audit evidence, the
auditor shall determine the implications as follows:
a. If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive, the auditor
shall qualify the opinion or
b. If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive so that a
qualification of the opinion would be inadequate to communicate the gravity of the
situation, the auditor shall:
i. Withdraw from the audit, where practicable and possible under applicable
law or regulation or
ii. If withdrawal from the audit before issuing the auditor’s report is not
practicable or possible, disclaim an opinion on the financial statements.
NOTE: When the auditor decides to withdraw before withdrawing, the auditor shall
communicate to those charged with governance any matters regarding misstatements
identified during the audit that would have given rise to a modification of the opinion.
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SA – 706
EMPHASIS OF MATTER PARAGRAPH AND OTHER MATTER
PARAGRAPH IN THE INDEPENDENT AUDITORS REPORT
A. DEFINITIONS:
1. EMPHASIS OF MATTER PARAGRAPH: 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.
2. OTHER MATTER PARAGRAPH: A paragraph included in the auditor’s report that refers to a
matter other than those presented or disclosed in the financial statements that in auditors’
judgment, is relevant for users understanding of the audit, auditors’ responsibilities or the
auditor’s report.
B. WHEN TO USE EMPHASIS OF MATTER PARAGRAPH:

1. CONDITIONS: If the auditor considers it necessary to draw users’ attention to a matter
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, the
auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided:
a. The auditor would not be required to modify the opinion in accordance with SA 705
(Revised) as a result of the matter and
b. When SA 701 applies, the matter has not been determined to be a key audit matter
to be communicated in the auditor’s report.
2. CIRCUMSTANCES: These circumstances may include:

a. When a financial reporting framework prescribed by law or regulation would be
unacceptable but for the fact that it is prescribed by law or regulation.
b. To alert users that the financial statements are prepared in accordance with a special
purpose framework.
c. When facts become known to the auditor after the date of the auditor’s report and
the auditor provides a new or amended auditor’s report (i.e., subsequent events).
d. An uncertainty relating to the future outcome of an exceptional litigation or
regulatory action.
e. A major catastrophe that has had, or continues to have, a significant effect on the
entity’s financial position.
3. RELATIONSHIP BETWEEN KAM AND EOMP ARE:

a. KAM are those which in auditors’ professional judgement, require significant
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auditors’ attention.
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b. EOMP necessarily may not require significant attention of the auditor but are
significant for USERS understanding of Financial statements in view of auditor’s
judgement.
4. MANNER OF PRESENTATION OF EMPHASIS OF MATTER:
a) Include the paragraph within a separate section of the auditor’s report with an
appropriate heading that includes the term “Emphasis of Matter”:
i) Shall express the matter being emphasized (highlighted) and give the reference to
such matter in the financial statements. Accordingly, this paragraph shall refer only to
information presented or disclosed in the financial statements; and
ii) Also state that the auditor’s opinion is not modified in respect of the matter
emphasized.
b) An Emphasis of Matter Para is not a substitute for
i) A modified Opinion in accordance with SA 705
ii) Disclosures in Financial statements as per AFRFW.
iii) Reporting in accordance with SA 570 when a material uncertainty exists relating to
entities ability to continue as a going concern.
C. WHEN TO ISSUE OTHER MATTER PARAGRAPH IN THE AUDITOR’S REPORT:

1. If the auditor considers it necessary to communicate a matter other than those that are
presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant
to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the
auditor shall include an Other Matter paragraph in the auditor’s report, provided:
a. This is not prohibited by law or regulation and
b. When SA 701 applies, the matter has not been determined to be a key audit matter
to be communicated in the auditor’s report.
2. MANNER OF PRESENTATION: When the auditor includes an Other Matter paragraph in the
auditor’s report, the auditor shall include the paragraph within a separate section with the
heading “Other Matter,” or other appropriate heading.
D. COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE:

If the auditor expects to include an Emphasis of Matter or an Other Matter paragraph in the
auditor’s report, the auditor shall communicate with those charged with governance regarding
their expectation and the wording of this Para.
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SA – 299
RESPONSIBILITIES OF JOINT AUDITORS
A. MEANING: The process of appointing two or more individuals or firms or combination of
individuals and firms is known as joint audit. (SA 299 – Joint Audit of Financial Statements)
B. VARIOUS ADVANTAGE OF JOINT AUDIT:

a. Sharing of expertise.
b. Mutual consultation.
c. Lower workload.
d. Better quality of performance.
e. Improved service to the client.
f. A sense of healthy competition towards a better performance.
C. THE GENERAL DISADVANTAGES MAY BE THE FOLLOWING:

a. The fees being shared.
b. Psychological problem where firms of different standing are associated in the joint audit.
c. General superiority complexes of some auditors.
d. Problems of co-ordination of the work.
e. Areas of work of common concern being neglected.
f. Uncertainty about the liability for the work done.
D. RESPONSIBILITY OF JOINT AUDITOR:

1. Individual / Separate Responsibilities: Where work is divided among the joint auditors on a
suitable basis then each joint auditor is responsible only for the work performed by them.
Generally, the work will be divided based on the following basis.
a) Items of Assets or liabilities
b) Income or Expenditure
c) Geographical areas
d) Identified units
e) Period of Financial statements
2. Joint / Combined Responsibility: In the following areas all the joint auditors will have
indivisible or combined responsibility.
a) In respect of audit work not divided among themselves
b) In respect of decisions taken by all the joint auditors
c) In respect of matters brought to the notice of all joint auditors
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d) For verifying disclosure requirements of financial statements; and

e) For ensuring that the audit report complies with relevant statute.
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E. AUDIT REPORTING IN CASE OF JOINT AUDIT:
a) Generally, all the joint auditors arrive common conclusions and express common opinion
through a single audit report.
b) However, NO joint auditor is not bound by majority’s opinion.
c) If there is a difference of opinion among joint auditors, then such disagreeing auditor can
express his own opinion by a separate report. In such a case each joint auditor shall refer about
other joint auditor’s report in their audit report.
Note: Each joint auditor is entitled to rely on the work performed by another joint auditor and need
not review the work performed by others.
F. SPECIAL CONSIDERATIONS AS PER SA – 299: (NOV 2019 – 4M)

1. The Engagement partner and Key engagement Team from each of the Joint auditors shall be
involved in planning the audit.
2. All joint auditors should establish jointly the overall audit strategy as required under SA – 300.
(Steps involved in developing overall strategy are discussed in “Audit Strategy, Planning and
Programme”)
3. All Joint auditors shall discuss and develop a Joint audit plan. The following points shall be kept
in mind:
a. Identify division of areas and common areas.
b. Ascertain reporting objectives of engagement team.
c. Communicate significant factors identified with each of the joint auditors.
d. Consider the results of preliminary engagement activities.
4. Each of the Joint auditors shall assess the risk of Material Misstatement and communicate to
other Joint auditors.
5. The Joint auditors should discuss and document the nature, timing and extent of audit
procedures for Common areas and Specific areas of audit to be performed.
6. Joint auditors shall obtain common engagement letter and common management
representation letter regarding fulfilment of responsibilities by management.
7. The Work allocation between joint auditors shall be documented and signed by all the joint
auditors which shall also be communicated to those charged with governance.
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SA 600
USING THE WORK OF ANOTHER AUDITOR
PREFACE: When the auditor delegates work to assistants or uses work performed by other auditors
and experts, he will continue to be responsible for forming and expressing his opinion on the
financial information.
However, he will be entitled to rely on work performed by others, provided he exercises adequate
skill and care and is not aware of any reason to believe that he should not have so relied.
In the case of any independent statutory appointment to perform the work on which the auditor
has to rely in forming his opinion, such as in the case of the work of branch auditors appointed
under the Companies Act, 2013 the auditor’s report should expressly state the fact of such reliance.
A. DIVISION OF RESPONSIBILITY:
1. The principal auditor would NOT BE RESPONSIBLE in respect of the work entrusted to the
other auditors, except in circumstances which should have aroused his suspicion about the
reliability of the work performed by the other auditors.
2. When the principal auditor has to base his opinion on the financial information of the entity
as a whole relying upon the statements and reports of the other auditors, his report should
STATE CLEARLY THE DIVISION OF RESPONSIBILITY for the financial information of the entity
by indicating the extent to which the financial information of components audited by the
other auditors have been included in the financial information of the entity, e.g., the number
of divisions/branches/subsidiaries or other components audited by other auditors.
B. DEFINITIONS:
a. PRINICIPAL AUDITOR: "Principal auditor" means the auditor with responsibility for
reporting on the financial information of an ENTITY when that financial information
includes the financial information of one or more components audited by another
auditor.
b. OTHER AUDITOR: "Other auditor" means an auditor, other than the principal auditor,
with responsibility for reporting on the financial information of a component which is
included in the financial information audited by the principal auditor. (AKA Component
auditor)
c. COMPONENT: "Component" means a division, branch, subsidiary, joint venture,
associated enterprises or other entity whose financial information is included in the
financial information audited by the principal auditor.
C. ACCEPTANCE OF PRINCIPAL AUDITOR:

The auditor should consider whether the auditor's own participation is sufficient to be able
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to act as the principal auditor. For this purpose, the auditor would consider:
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1. The materiality of the portion of the financial information which the principal auditor
audits.
2. The principal auditor's degree of knowledge regarding the business of the components.
3. The risk of material misstatements in the financial information of the components
audited by the other auditor; and
4. The performance of additional procedures as set out in this SA regarding the components
audited by other auditor resulting in the principal auditor having significant participation
in such audit.
Note: Where another auditor has been appointed for the component, the principal auditor
would normally be ENTITLED TO RELY upon the work 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 said component.
D. PRINCIPAL AUDITOR PROCEDURES:

1. The principal auditor should perform procedures to obtain sufficient appropriate audit
evidence, that the work of the other auditor is adequate for the principal auditor's purposes,
in the context of the specific assignment.
When using the work of another auditor, the principal auditor should ordinarily perform the
following procedures:
a) AT PLANNING STAGE: 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.
b) SPECIAL CONSIDERATIONS: The principal auditor would inform the other auditor of
matters such as areas requiring special consideration, procedures for the
identification of inter-component transactions that may require disclosure and the
timetable for completion of audit and
c) REPORTING REQUIREMENTS: Advise the other auditor of the significant accounting,
auditing and reporting requirements and obtain representation as to compliance with
them.
2. 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.
3. The principal auditor may also wish to visit the other auditor.
4. The nature, timing and extent of these procedures depends on:
a) The circumstances of the engagement and
b) The principal auditor's knowledge of the professional competence of the other
auditor.
E. COORDINATION BETWEEN PRINCIPAL AUDITOR AND OTHER AUDITOR:

1. There should be sufficient liaison between the principal auditor and the other auditor. For
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this purpose, the principal auditor may find it necessary to issue written communication(s) to
the other auditor.
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2. The other auditor, knowing the context in which his work is to be used by the principal
auditor, should co-ordinate with the principal auditor. For example:
a. By bringing to the principal auditor’s immediate attention any significant findings
requiring to be dealt with at entity level,
b. adhering to the timetable for audit of the component, etc.
c. He should ensure compliance with the relevant statutory requirements.
3. Similarly, the principal auditor should advise the other auditor of any matters that come to
his attention that he thinks may have an important bearing on the other auditor’s work.
4. When considered necessary by him, the principal auditor may require the other auditor to
answer a detailed questionnaire regarding matters on which the principal auditor requires
information for discharging his duties. The other auditor should respond to such
questionnaire on a timely basis.
F. SIGNIFICANT FINDINGS BY OTHER AUDITORS:

1. DISCUSSIONS: The principal auditor may consider it appropriate to discuss with the other
auditor and the management of the component, the audit findings or other matters affecting
the financial information of the components.
2. SUPPLEMENT TEST: He may also decide that supplemental tests of the records or the
financial statements of the component are necessary. Such tests may be performed by the
principal auditor or the other auditor.
3. DOCUMENTATION: The principal auditor should document:
a. The components whose financial information was audited by other auditors.
b. Their significance to the financial information of the entity as a whole.
c. The names of the other auditors and
d. Any conclusions reached that individual component are not material.
e. The principal auditor should also document the procedures performed and the
conclusions reached.
E.g., The auditor would document the results of discussions with the other auditor
and review of the written summary of the other auditor's procedures.
G. MODIFIED OPINION BY OTHER AUDITOR:

1. If the other auditor issues, or intends to issue, a modified auditor's report, the principal
auditor should consider whether the subject of the modification is of such nature and
significance, in relation to the financial information of the entity on which the principal
auditor is reporting that it requires a modification of the principal auditor's report.
2. Where the other auditor’s report is OTHER THAN UNMODIFIED, the principal auditor should
also DOCUMENT how he has dealt with the qualifications or adverse remarks contained in
the other auditor’s report in framing his own report. [Requirement u/s 143(3)(c) of
Companies Act, 2013]
3. If the work of the other auditor cannot be used and the principal auditor has not been able
to perform sufficient additional procedures regarding the financial information of the
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component audited by the other auditor, the principal auditor should express a qualified
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opinion or disclaimer of opinion because there is a limitation on the scope of audit.
[Exception: If such component(s) are immaterial either individually or aggregate of all such.]
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SA – 570
GOING CONCERN
A. OBJECTIVE:
a. To obtain sufficient appropriate audit evidence regarding the appropriateness of
management’s use of the going concern basis of accounting in the preparation of the financial
statements.
b. To conclude, based on the audit evidence obtained, whether a material uncertainty exists
and
c. To report in accordance with this SA.
B. PRELIMINARY ASSESSMENT REGARDING USE OF GOING CONCERN ASSUMPTION BY

MANAGEMENT:
1. The auditor shall determine whether management has already performed a preliminary
assessment of the entity’s ability to continue as a going concern and the auditor shall discuss
with management of:
a. The nature and condition of its business.
b. Effects of external events or conditions such as change in law or regulatory.
c. The information pertaining to operational forecast of foreseeable future.
d. Significant events or transactions that are occurred during the period under review.
E.g., fire accident or catastrophe etc.,
2. If such an assessment has not yet been performed, the auditor shall discuss with
management the basis for the intended use of the going concern basis of accounting and
inquire of management whether events or conditions exist that, individually or collectively,
may cast significant doubt on the entity’s ability to continue as a going concern.
C. PERIOD COVERED FOR ASSESSMENT OF ENTITY’S ABILITY TO CONTINUE AS A GOING

CONCERN:
1. The assessment period under audit for going concern testing shall be same period as
adopted by management.
2. If the management assessment of going concern is less than 12 MONTHS, then the auditor
shall request management to extend its assessment period to at least twelve months.
3. Further in some cases estimation more than 12 months is also justified and in such a case the
assessment shall be made for such extended period.
4. MODIFIED OPINION: If management is unwilling to make or extend its assessment when
requested to do so by the auditor, the auditor shall consider the implications for the
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auditor’s report.
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D. AUDIT PROCEDURE WHEN EVENTS OR CONDITIONS ARE IDENTIFIED:
The following audit procedures should perform by the auditor if the auditor identifies any
circumstances that cast significant doubt on entity’s going concern:
1. Whether there is a policy of assessment of risk related to going concern by management. If
not, request management to make an assessment.
2. Evaluating management’s plans for future actions in relation to its going concern assessment
and evaluate outcome of these plans is likely to improve the situation and whether
management’s plans are feasible.
3. Whether the entity has prepared a cash flow forecast based on a reliable data:
a. Evaluating the reliability of the underlying data generated to prepare the forecast.
b. Determining whether there is adequate support for the assumptions underlying the
forecast.
4. Considering whether any additional information available since the date on which
management made its assessment.
5. Requesting written representations from management regarding their plans for future
actions and the feasibility of these plans.
SIGNIFICANT DELAY IN APPROVAL OF F/S: If there is significant delay in the approval of the
financial statements by management or those charged with governance after the date of the
financial statements, the auditor shall inquire as to the reasons for the delay. If the auditor
believes that the delay could be related to events or conditions relating to the going concern
assessment, the auditor shall perform the above additional audit procedures necessary and
consider the effect on the auditor’s conclusion regarding the existence of a material uncertainty.
E. ADEQUACY OF DISCLOSURES IN FINANCIAL STATEMENTS WHEN EVENTS OR CONDITIONS

HAVE BEEN IDENTIFIED:
1. WHEN MATERIAL UNCERTAINTY EXIST: The auditor shall determine whether the financial
statements:
a. Adequately disclose the principal events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern and management’s plans to deal with
these events or conditions and
b. Disclose clearly that there is a material uncertainty related to events or conditions that
may cast significant doubt on the entity’s ability to continue as a going concern and,
therefore, that it may be unable to realize its assets and discharge its liabilities in the
normal course of business. [ILFS Audit report 2017 – 2018]
2. WHEN MATERIAL UNCERTAINTY DO NOT EXIST: If events or conditions have been identified
that may cast significant doubt on the entity’s ability to continue as a going concern but,
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based on the audit evidence obtained the auditor concludes that no material uncertainty
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exists, the auditor shall evaluate whether, in view of the requirements of the applicable
financial reporting framework, the financial statements provide adequate disclosures about
these events or conditions.
F. REPORTING IF “GOING CONCERN ASSUMPTION IS APPROPRIATE BUT MATERIAL UNCERTAINTY

EXIST”:
1. F/S “ADEQUATELY” DISCLOSES THE FACT:
a. If the auditor concludes that the financial statements adequately disclose the material
uncertainty that may cast significant doubt on the entity’s ability to continue as a going
concern and management’s plans to deal with these events; and
b. The audit report shall include a separate section under the heading “Material uncertainty
related to going concern” and draw the attention of the readers to the specific note
point presented or disclosed adequately by management regarding the material
uncertainty.
c. Also, the auditor will express an unqualified opinion in this regard as the entity has
adequately disclosed about the material uncertainty.
2. F/S “DO NOT ADEQUATELY” DISCLOSES THE FACT:

If the auditor concludes that the financial statements are not adequately reflecting the
material uncertainty regarding going concern, then the auditor shall:
a. Express a Qualified/Adverse opinion and
b. In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to
continue as a going concern and that the financial statements DO NOT adequately
disclose this matter.
G. REPORTING IF “GOING CONCERN ASSUMPTION IS INAPPROPRIATE”:

If the financial statements have been prepared using the going concern basis of accounting but,
in the auditor’s judgment, management’s use of the going concern basis of accounting for the
preparation of F/S is inappropriate the auditor shall express an adverse opinion.
H. INDICATORS THAT CAST DOUBT ON GOING CONCERN:

The following are examples of events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern. The indicators are classified into three types:
1. FINANCIAL INDICATORS:
a. Net liability or net current liability position.
b. Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment.
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c. Indications of withdrawal of financial support by creditors.

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d. Negative operating cash flows indicated by historical or prospective financial statements.
e. Adverse key financial ratios.
f. Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows.
g. Arrears or discontinuance of dividends.
h. Inability to pay creditors on due dates.
i. Inability to comply with the terms of loan agreements.
j. Change from credit to cash-on-delivery transactions with suppliers.
k. Inability to obtain financing for essential new product development or other essential
investments.
2. OPERATING INDICATORS:
a. Management intentions to liquidate the entity or to cease operations.
b. Loss of key management without replacement.
c. Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
d. Labour difficulties.
e. Shortages of important supplies.
f. Emergence of a highly successful competitor.
3. OTHER INDICATORS:
a. Non-compliance with capital or other statutory or regulatory requirements, such as
solvency or liquidity requirements for financial institutions.
b. Pending legal or regulatory proceedings against the entity that may, if successful, result
in claims that the entity is unlikely to be able to satisfy.
c. Changes in law or regulation or government policy expected to adversely affect the
entity.
d. Uninsured or underinsured catastrophes when they occur.
I. COMMUNICATION WITH TCWG:

The auditor shall communicate with those charged with governance events or conditions
identified that may cast significant doubt on the entity’s ability to continue as a going concern.
The following shall be communicated:
a. Whether the events or conditions constitute a material uncertainty.
b. Whether management’s use of the going concern basis of accounting is appropriate in the
preparation of the financial statements.
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c. The adequacy of related disclosures in the financial statements and

d. Where applicable, the implications for the auditor’s report.
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SA 720
AUDITORS RESPONSIBILITY IN RELATION TO OTHER
INFORMATION
A. OBJECTIVE OF SA – 720:
The objectives of the auditor, having read the other information, are:
1. To consider whether there is a material inconsistency between the other information and
the financial statements.
2. To consider whether there is a material inconsistency between the other information and
the auditor’s knowledge obtained in the audit.
3. To respond appropriately when the auditor identifies that such material inconsistencies
appear to exist, or when the auditor otherwise becomes aware that other information
appears to be materially misstated and
4. To report in accordance with this SA.
IMPORTANT NOTE:
1. The auditor’s responsibilities relating to other information (other than applicable reporting
responsibilities) apply regardless of whether the other information is obtained by the auditor
prior to, or after, the date of the auditor’s report. [Responsibility in relation to Other
information can be a Subsequent Event as per SA 560].
2. The auditor’s responsibilities under this SA DO NOT constitute an assurance engagement on
other information or DO NOT impose an obligation on the auditor to obtain assurance about
the other information.
3. This SA does not apply to:
a. Preliminary announcements of financial information or
b. Securities offering documents, including prospectuses.
B. DEFINITIONS:
OTHER INFORMATION: Financial or non-financial information (other than financial statements

and the auditor’s report thereon) included in an entity’s annual report.
NOTE: Other Matter Paragraph as per SA 706 is Completely different from the above.
ANNUAL REPORT: A document, or combination of documents, prepared typically on an annual

basis by management or those charged with governance in accordance with law, regulation or
custom, the purpose of which is to provide owners (or similar stakeholders) with information on
the entity’s operations and the entity’s financial results and financial position as set out in the
An annual report contains or accompanies the financial statements and the auditor’s report
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thereon and usually includes information about the entity’s developments, its future outlook
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and risks and uncertainties, a statement by the entity’s governing body, and reports covering
governance matters.
MISSTATEMENT OF THE OTHER INFORMATION: A misstatement of the other information exists

when the other information is incorrectly stated or otherwise misleading (including because it
omits or obscures information necessary for a proper understanding of a matter disclosed in the
other information).
C. AUDIT PROCEDURE FOR OTHER INFORMATION:

1. The auditor shall obtain other information:
a. Determine, through discussion with management, which document(s) comprises the
annual report, and the entity’s planned manner and timing of the issuance of such
document(s).
b. Make appropriate arrangements with management to obtain in a timely manner and,
if possible, PRIOR TO THE DATE OF THE AUDITOR’S REPORT, the final version of the
document(s) comprising the annual report; and
c. When some or all of the document(s) determined in (a) will not be available until
after the date of the auditor’s report, request management to provide a written
representation that the final version of the document(s) will be provided to the
auditor when available, and prior to its issuance by the entity, such that the auditor
can complete the procedures required by this SA.
2. The auditor shall read the other information and check:
a. Whether there is a material inconsistency between the other information and the
b. To consider whether there is a material inconsistency between the other information
and the auditor’s knowledge obtained in the audit.
c. Further he shall remain alert for indications that the other information not related to
the financial statements or the auditor’s knowledge obtained in the audit appears to
be materially misstated.
D. RESPONDING WHEN A MATERIAL INCONSISTENCY APPEARS TO EXIST OR OTHER

INFORMATION APPEARS TO BE MATERIALLY MISSTATED:
If the auditor identifies that a material inconsistency appears to exist (or becomes aware that
the other information appears to be materially misstated), the auditor shall discuss the matter
with management and, if necessary, perform other procedures to conclude whether:
a) A material misstatement of the other information exists.
b) A material misstatement of the financial statements exists or
c) The auditor’s understanding of the entity and its environment needs to be updated.
E. IF MATERIAL MISSTATEMENT EXISTS IN OTHER INFORMATION:

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1. REQUEST MANAGEMENT TO CORRECT IT: If the auditor concludes that a material
misstatement of the other information exists, the auditor shall request management to
correct the other information. If management:
a. Agrees to make the correction, the auditor shall determine that the correction has
been made; or
b. Refuses to make the correction, the auditor shall communicate the matter with those
charged with governance and request that the correction be made.
2. MMS IDENTIFIED BEFORE DATE OF AUDITOR’S REPORT: If the auditor concludes that a
material misstatement exists in other information obtained prior to the date of the auditor’s
report, and the other information is NOT CORRECTED after communicating with those
charged with governance, the auditor shall take appropriate action, including:
a. Considering the implications for the auditor’s report and communicating with those
charged with governance about how the auditor plans to address the material
misstatement in the auditor’s report. [Report in Other Info Para of the Report]
b. Withdrawing from the engagement, where withdrawal is possible under applicable
law or regulation.
3. MMS IDENTIFIED AFTER THE DATE OF THE AUDITOR’S REPORT: If the auditor concludes that
a material misstatement exists in other information obtained after the date of the auditor’s
report, the auditor shall:
a. If the other information is corrected, perform the procedures necessary in the
circumstances or
b. If the other information is NOT CORRECTED after communicating with those charged
with governance, take appropriate action considering the auditor’s legal rights and
obligations, to seek to have the uncorrected material misstatement appropriately
brought to the attention of users for whom the auditor’s report is prepared. [Follow
the procedure outlined in SA 560]
F. IF MATERIAL MISSTATEMENT EXISTS IN FINANCIAL STATEMENTS:
If the auditor concludes that a material misstatement in the financial statements exists or the
auditor’s understanding of the entity and its environment needs to be updated, the auditor shall
respond appropriately.
G. AUDITOR’S REPORTING REQUIREMENTS:
The auditor’s report shall include a separate section with a heading “Other Information”, or
other appropriate heading. this section shall include:
1. A statement that management is responsible for the other information;
2. An identification of:
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a. Other information, if any, obtained by the auditor prior to the date of the
auditor’s report; and
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b. For an audit of financial statements of a listed entity, other information, if any,
expected to be obtained after the date of the auditor’s report;
3. A statement that the auditor’s opinion does not cover the other information and,
accordingly, that the auditor does not express (or will not express) an audit opinion or
any form of assurance conclusion thereon;
4. A description of the auditor’s responsibilities relating to reading, considering and
reporting on other information as required by this SA; and
5. When other information has been obtained prior to the date of the auditor’s report,
either:
a. A statement that the auditor has nothing to report; or
b. MMS IN OTHER INFORMATION: If the auditor has concluded that there is an
uncorrected material misstatement of the other information, a statement that
describes the uncorrected material misstatement of the other information.
SUMMARY OF REPORTING:
MMS in Other Information MMS in FInancial Statements

• UMO and Report in Other • Modified Opinion and
Info para about such MMS Reasons in Basis for M.O
in Other Info. para of the report.
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SA 710
COMPARATIVE INFORMATION – CORRESPONDING
FIGURES AND COMPARATIVE FINANCIAL STATEMENTS
A. INTRODUCTION: SA 710 Comparative Information – Corresponding Figures and Comparative

Financial Statements deals with auditor’s responsibility regarding comparative information in an
audit of financial statement. There are two different broad approaches to the auditor’s
responsibilities in respect of comparative information:
1. Corresponding figures and
2. Comparative financial statement.
B. DEFINITIONS:
COMPARATIVE INFORMATION:
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.
CORRESPONDING FIGURES:
Comparative information where amounts and other disclosures for the prior period are included
as an integral part of the current period financial statements and are intended to be read only in
relation to amounts and other disclosures relating to the current period (current period figures).
Note: The level of detail presented in the corresponding amounts and disclosures is dictated
primarily by its relevance to the current period figures.
COMPARATIVE FINANCIAL STATEMENTS:

Comparative information where amounts and other disclosures for the prior period are included
for comparision with financial statements of the current period but, if audited, are referred in
the auditors opinion. The level of Information included in those comparative financial
statements is comparable with that of the financial statements of the current period.
C. OBJECTIVE OF THE AUDITOR:

1. To obtain sufficient appropriate audit evidence about whether the comparative information
included in the financial statements has been presented, in all material respects, in
accordance with the requirements of the applicable financial reporting framework and
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2. To report in accordance with the auditor’s reporting responsibilities.

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D. OPINION OF AUDITORS: The audit reporting differs between the approaches are:
1. For corresponding figures, the auditor’s opinion on the financial statements refers to the
current period only, whereas
2. For comparative financial statements, the auditor’s opinion refers to each period for
which financial statements are presented.
E. AUDIT PROCEDURES FOR COMPARATIVE INFORMATION:

1. PERFORM SPECIFIC AUDIT PROCEDURE: The following specific audit procedure shall be
performed for determining that the financial statement contains appropriately classified
comparative information:
a. Ensure that comparative information agrees with the amount and other disclosure
presented in the prior period. (E.g., Compare CY Balance Sheet with LY Balance Sheet)
b. The accounting policies applied are consistent with those applied in current period.
c. If there have been any changes in the application of accounting policies than they are
properly disclosed and presented.
2. EVALUATING THE IMPACT ON FINANCIAL STATEMENT: If the auditor identifies / aware of

any possible misstatement in the comparative information, then:
a. He should perform the necessary audit procedures to obtain sufficient audit evidence.
b. If the auditor had audited the prior period’s financial statement than he should follow
the relevant requirements of SA 560.
3. WRITTEN REPRESENTATION: As required by SA 580, the auditor should also request written
representation. He should also obtain a specific written representation regarding any prior
period item that is disclosed in current year’s financial statement.
F. AUDIT REPORTING:
1. W.R.T. CORRESPONDING FIGURES: When corresponding figures are presented, the auditor’s
opinion shall not refer to the corresponding figures EXCEPT in the following circumstances:
a. If the auditor’s report of the previous period contains other than an unqualified opinion.
b. If the auditor is of the opinion, and he has sufficient evidence in this regard, that a
material misstatement exists in the financial statement of prior period, which was not
addressed earlier.
c. If the prior period financial statement are not audited, then he should obtain sufficient
audit evidence that the opening balance does not contain any material misstatement.
(NOV 2019 – 4M)
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2. W.R.T. COMPARATIVE FINANCIAL STATEMENT: When comparative financial statement are
presented -
a. REFER EACH PERIOD: The auditor’s opinion shall refer to each period for which the
financial statements are presented.
b. CONFLICT OF OPINION – OTHER MATTER PARA: When reporting on current period’s
audit, if the auditor’s opinion on such prior period financial statement differs from the
opinion previously issued on such financial statement, the auditor shall disclose the
substantive reason for the different opinion in other matter paragraph in his report.
c. PREDECESSOR AUDITOR – MMS: If the auditor concludes that a material misstatement is
present in the previously audited figures of financial statement, he should report it to the
appropriate level of the management and request that the predecessor auditor be
informed.
If then the prior year’s statements are amended with new report by the predecessor
auditor, then the auditor shall report only on the current period.
3. COMMON REPORTING TREATMENT FOR BOTH THE APPROACHES: (TO BE MENTIONED IN

“OMP”)
a. PP F/S AUDITED: If the financial statement of the prior period were audited by a
predecessor auditor, the auditor shall state in his audit report:
i. That the financial statements of the prior period were audited by a predecessor
auditor.
ii. The type of the opinion expressed by the predecessor auditor.
iii. The date of that audit report.
b. PP F/S NOT AUDITED: If the prior period financial statement were not audited than he
shall report the same in other matter paragraph in his audit report that the
corresponding/comparative figures are unaudited.
However, the disclosure does not relieve him from his responsibility of obtaining
sufficient appropriate audit evidence that the opening balances do not contain
misstatements that materially affect the current period’s financial statements. 81
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SA 260
COMMUNICATION TO THOSE CHARGED WITH
GOVERNANCE
It is auditor’s responsibility to communicate with those charged with governance (TCWG) in an audit
of financial statements irrespective of an entity’s governance structure or size.
A. OBJECTIVE:
1. To communicate clearly with those charged with governance the responsibilities of the
auditor in relation to the financial statement audit, and an overview of the planned scope
and timing of the audit including:
a. The auditor is responsible for forming and expressing an opinion on the financial
statements that have been prepared by management with the oversight of those
charged with governance and
b. The audit of the financial statements does not relieve management or those charged
with governance of their responsibilities.
2. To obtain from those charged with governance information relevant to the audit.
3. To provide those charged with governance with timely observations arising from the audit
that are significant and relevant to their responsibility to oversee the financial reporting
process and
4. To promote effective two-way communication between the auditor and those charged with
governance.
Note: The auditor shall determine the appropriate person(s) within the entity’s governance
structure with whom to communicate. If the auditor communicates with a subgroup of those
charged with governance, for example, an audit committee, or an individual, the auditor shall
determine whether the auditor also needs to communicate with the governing body.
B. MATTERS TO BE COMMUNICATED:
1. RESPONSIBILITIES OF THE AUDITOR: The auditor shall communicate with those charged with
governance the responsibilities of the auditor in relation to the financial statement audit,
including that:
a. The auditor is responsible for forming and expressing an opinion on the financial
statements that have been prepared by management with the oversight of those
charged with governance; and
b. The audit of the financial statements does not relieve management or those charged
with governance of their responsibilities.
2. PLANNED SCOPE AND TIMING OF AUDIT: The auditor shall communicate with those charged
with governance an overview of the planned scope and timing of the audit, which includes
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communicating about the significant risks identified by the auditor.

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3. SIGNIFICANT FINDINGS FROM THE AUDIT: The auditor shall communicate with those
charged with governance:
a. The auditor’s views about significant qualitative aspects of the entity’s accounting
practices, including accounting policies, accounting estimates and financial statement
disclosures. When applicable, the auditor shall explain to those charged with
governance why the auditor considers a significant accounting practice, that is
acceptable under the applicable financial reporting framework, not to be most
appropriate to the particular circumstances of the entity.
b. Significant difficulties, if any, encountered during the audit
c. Circumstances that affect the form and content of the auditor’s report, if any and
d. Any other significant matters arising during the audit that, in the auditor’s
professional judgment, are relevant to the oversight of the financial reporting
process.
e. Written representations the auditor is requesting.
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SA – 610
USING THE WORK OF AN INTERNAL AUDITOR
A. OBJECTIVES:
The objectives of the external auditor are:
a) To determine whether the work of the internal audit function or direct assistance from
internal auditors can be used.
b) If using the work of the internal audit function, to determine whether that work is adequate
for purposes of the audit (Type 1); and
c) If using internal auditors to provide direct assistance, to appropriately direct, supervise and
review their work (Type 2).
B. DEFINITIONS:
1. Internal audit function: It is a function of an entity that performs assurance and consulting
activities designed to evaluate and improve the effectiveness of the entity’s governance, risk
management and internal control processes.
2. Direct assistance: Direct assistance means the use of internal auditors to perform audit
procedures under the direction, supervision and review of the external auditor.
C. USING THE WORK PERFORMED BY INTERNAL AUDITOR (Type 1):

1. Evaluation Process:
The external auditor shall determine whether the work of the internal audit function can be
used for purposes of the audit by evaluating the following:
a) Whether the internal audit functions organizational status and relevant policies and
procedures support the objectivity of the internal auditors;
b) The level of competence of the internal audit function; and
c) Whether the internal audit function applies a systematic and disciplined approach,
including quality control.
2. Prohibition on Type 1 Work:
The external auditor shall not use the work of the internal audit function if the external auditor
determines that:
a) The function’s organizational status and relevant policies and procedures do not
adequately support the objectivity of internal auditors;
b) The function lacks sufficient competence; or
c) The function does not apply a systematic and disciplined approach, including quality control.
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3. NATURE AND EXTENT OF WORK OF INTERNAL AUDIT FUNCTION THAT CAN BE USED:
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a) The external auditor shall consider the nature and scope of the work performed by
Internal audit function can use his work in the following:
1) Testing of the operating effectiveness of controls.
2) Substantive procedures involving limited judgment.
3) Observations of inventory counts.
4) Testing of compliance with regulatory requirements.
5) In some circumstances, audits or reviews of the financial information of
subsidiaries that are not significant components to the group (where this does
not conflict with the requirements of SA 600).
b) The external auditor shall make all significant judgments in the audit engagement and,
to prevent undue use of the work of the internal audit function, shall plan to use less of
the work of the function and perform more of the work directly.
c) The external auditor shall also evaluate whether using the work of the internal audit
function to the extent planned would still result in the external auditor being sufficiently
involved in the audit.
d) The external auditor shall, in communicating with those charged with governance, share
an overview of the planned scope and timing of the audit in accordance with SA 260,
communicate how the external auditor has planned to use the work of the internal audit
function.
4. USING THE WORK:
a) Discussion and Coordination with the Internal Audit Function: If the external auditor
plans to use the work of the internal audit function, the external auditor shall discuss the
planned use of its work with the function as a basis for coordinating their respective
activities.
b) The external auditor shall read the reports of the internal audit function relating to the
work of the function that the external auditor plans to use to obtain an understanding of
the nature and extent of audit procedures it performed and the related findings.
c) The external auditor shall perform sufficient audit procedures to determine adequacy of
internal audit function for purposes of the audit, including evaluating whether:
1) The work of the function had been properly planned, performed, supervised,
reviewed and documented.
2) Sufficient appropriate evidence had been obtained to enable the function to draw
reasonable conclusions; and
3) Conclusions reached are appropriate in the circumstances and the reports
prepared by the function are consistent with the results of the work performed.
d) The nature and extent of the external auditor’s audit procedures shall be responsive to
the external auditor’s evaluation of:
1) The amount of judgment involved.
2) The assessed risk of material misstatement.
3) The extent to which the internal audit function supports the objectivity of the
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internal auditors; and

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4) The level of competence of the function.

e) The external auditor shall also evaluate whether the external auditor’s conclusions
regarding the internal audit function and the determination of the nature and extent of
use of the work of the function for purposes of the audit remain appropriate.
D. USING INTERNAL AUDIT FUNCTION TO PROVIDE DIRECT ASSISTANCE (Type 2):

1. Evaluation Process:
The external auditor shall determine whether the work of the internal audit function can be
used for purposes of the audit by evaluating the following:
a) Whether the internal auditors possess objectivity and independence. It shall include
inquiry of the internal auditors regarding interests and relationships that may create a
threat to their objectivity:
1) Family and personal relationships with an individual working in, or responsible
for, the aspect of the entity to which the work relates.
2) Association with the division or department in the entity to which the work
relates
3) Significant financial interests in the entity other than remuneration on terms
consistent with those applicable to other employees at a similar level of seniority
b) Whether the internal auditors are having necessary skill and competence.
2. Prohibition on Type 2:
The external auditor shall not use an internal auditor to provide direct assistance if:
a) There are significant threats to the objectivity of the internal auditor; or
b) The internal auditor lacks sufficient competence to perform the proposed work.
E. AREAS WHERE IAF CANNOT BE USED FOR DIRECT ASSISTANCE:

The external auditor shall not use internal auditors to provide direct assistance to perform
procedures that:
a) Areas involve making of significant judgments in the audit.
b) Areas relate to higher assessed risks of material misstatement.
c) Areas relate to work with which the internal auditors have been already involved. 86
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F. OBTAIN WRITTEN AGREEMENT FROM IAF WHILE USING AS DIRECT ASSISTANCE:
Prior to using internal auditors to provide direct assistance for purposes of the audit, the external
auditor shall:
a) Obtain written agreement from Management: That the internal auditors will be allowed to
follow the external auditor’s instructions, and that the entity will not intervene in the work
the internal auditor performs for the external auditor; and
b) Obtain written agreement from the internal auditors: That they will keep confidential specific
matters as instructed by the external auditor and inform the external auditor of any threat to
their objectivity.
c) The external auditor shall
i) Direct, supervise and review the work performed by internal auditors on the engagement
in accordance with SA 220.
ii) Verify the audit evidence for the work performed by the internal auditors and ensure the
evident is sufficient and appropriate.
G. DOCUMENTATION:
If the external auditor uses internal auditors to provide direct assistance on the audit, the external
auditor shall include in the audit documentation:
1. The basis for the decision regarding the nature and extent of the work performed by the
internal auditors.
2. Who reviewed the work performed and the date and extent of that review in accordance with
SA 230.
3. The written agreements obtained from an authorized representative of the entity and the
internal auditors of this SA; and
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4. The working papers prepared by the internal auditors who provided direct assistance on the
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audit engagement.
SA – 620
USING THE WORK OF AN AUDITOR’s EXPERT
A. IMPORTANT DEFINITION’S:
AUDITOR’S EXPERT:
1. An individual or organisation possessing expertise in a field other than accounting or

auditing, whose work in that field is used by the auditor to assist the auditor in obtaining
sufficient appropriate audit evidence.
2. An auditor’s expert may be either an auditor’s internal expert (who is a partner or staff,
including temporary staff, of the auditor’s firm or a network firm), or an auditor’s external
expert.
MANAGEMENT’S EXPERT:
An individual or organisation possessing expertise in a field other than accounting or auditing,

whose work in that field is used by the entity to assist the entity in preparing the financial
statements.
B. APPLICABILITY:
1. SA 620 deals with the auditor’s responsibilities regarding the use of work in a field of
expertise other than accounting or auditing when that work is used to assist the auditor in
obtaining sufficient appropriate audit evidence.
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2. SA -620 does not deal with:

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a. Situations where the engagement team includes a member with expertise IN
specialised area of ACCOUNTING OR AUDITING.
b. Management Expert: The auditor’s use of the work of an individual or organisation
possessing expertise in a field other than accounting or auditing, whose work in that
field is used by the entity to assist the entity in preparing the financial statements (a
management’s expert), which is dealt with in SA 500.
C. SOLE RESPONSIBILITY – AUDITORS ONLY:
The AUDITOR HAS sole responsibility for the audit opinion expressed, and that responsibility is
not reduced by the auditor’s use of the work of an auditor’s expert.
Note: Nonetheless, if the auditor using the work of an auditor’s expert, having followed this SA,
concludes that the work of that expert is adequate for the auditor’s purposes, the auditor may
accept that expert’s findings or conclusions in the expert’s field as appropriate audit evidence.
D. OBJECTIVE OF THE AUDITOR:

1. To determine whether to use the work of an auditor’s expert and
2. If using the work of an auditor’s expert, to determine whether that work is adequate for
the auditor’s purposes.
E. FACTORS FOR DETERMINING THE NEED OF AN EXPERT:
1. An auditor’s expert may be needed to assist the auditor in one or more of the following:
a. While obtaining an understanding of the entity and its environment, including its
internal control.
b. While Identifying and assessing the risks of material misstatement.
c. Determining and implementing overall responses to assessed risks at the financial
statement level.
d. Designing and performing further audit procedures to respond to assessed risks at
the assertion level, comprising tests of controls or substantive procedures.
e. Evaluating the sufficiency and appropriateness of audit evidence obtained in forming
an opinion on the financial statements.
2. AUDITOR MAY OBTAIN UNDERSTANDING OF OTHER FIELD:

An auditor who is not an expert in a relevant field other than accounting or auditing may be
able to obtain a sufficient understanding of that field to perform the audit without an
auditor’s expert. This understanding may be obtained through:
a. Experience in auditing entities that require such expertise in the preparation of their
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b. Education or professional development in the particular field. This may include:

i. Formal courses, or
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ii. Discussion with individuals possessing expertise in the relevant field for the
purpose of enhancing the auditor’s own capacity to deal with matters in that
field.
c. Discussion with other auditors who have performed similar engagements.
F. CONSIDERATIONS WHEN DECIDING WHETHER TO USE AN AUDITOR’S EXPERT:
The auditor may determine that it is necessary, or may choose, to use an auditor’s expert to
assist in obtaining sufficient appropriate audit evidence. The following considerations will be
taken into account in deciding whether to use an auditor’s expert:
1. Whether management has used a management’s expert in preparing the financial
statements. In such a case the following additional factors shall also be considered:
a. The nature, scope and objectives of the management’s expert’s work.
b. Whether the management’s expert is:
i. employed by the entity, or
ii. is a 3rd party engaged by it to provide relevant services.
c. Management’s Control or influence over the work of the management’s expert.
d. The management’s expert’s competence and capabilities.
e. Whether the management’s expert is subject to technical performance standards or
other professional or industry requirements.
2. The nature and significance of the matter, including its complexity.
3. The risks of material misstatement in the matter.
4. The expected nature of procedures to respond to identified risks, including the auditor’s
knowledge of and experience with the work of experts in relation to such matters; and
5. The availability of alternative sources of audit evidence.
G. NTE OF AUDIT PROCEDURES INFLUENCED BY AUDITORS EXPERT’S WORK:
1. In determining the nature, timing and extent of those procedures, the auditor shall consider
matters including:
a. The nature of the matter to which that expert’s work relates.
b. The risks of material misstatement in the matter to which that expert’s work relates.
c. The significance of that expert’s work in the context of the audit.
d. The auditor’s knowledge of and experience with previous work performed by that expert
and
e. Whether that expert is subject to the auditor’s firm’s quality control policies and
procedures.
2. In the following cases generally more extensive audit procedures would require:
a. The work of the auditor’s expert relates to a significant matter that involves
subjective and complex judgments.
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b. The auditor has not previously used the work of the auditor’s expert, and has no prior
knowledge of that expert’s competence, capabilities and objectivity.
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c. The auditor’s expert is performing procedures that are integral to the audit, rather
than being consulted to provide advice on an individual matter.
d. The expert is an auditor’s external expert and is not subject to the firm’s quality
control policies and procedures.
H. EVALUATE - COMPETENCE, CAPABILITY AND OBJECTIVITY OF AUDITOR’s EXPERT:
1. The auditor shall evaluate whether the auditor’s expert has the necessary competence,
capabilities and objectivity for the auditor’s purposes.
2. EXTERNAL EXPERT OBJECTIVITY: In the case of an auditor’s external expert, the evaluation
of objectivity shall include inquiry regarding interests and relationships that may create a
threat to that expert’s objectivity. The following evaluations shall be made in this regard:
a. Inquire of the entity about any known interests or relationships that the entity has
with the auditor’s external expert that may affect that expert’s objectivity.
b. If relationship exist, discuss with that expert any applicable safeguards, including any
professional requirements that apply to that expert and
c. Evaluate whether the safeguards are adequate to reduce threats to an acceptable
level. Interests and relationships that may include:
i. Financial interests.
ii. Business and personal relationships.
iii. Provision of other services by the expert.
d. REPRESENTATION FROM EXPERT: The auditor may obtain a written representation
from the auditor’s external expert about any interests or relationships with the entity
of which that expert is aware.
3. Whether the expert’s work is subject to technical performance standards or other
professional or industry requirements, ethical standards and other membership
requirements of a professional body or industry association, accreditation standards of a
licensing body, or requirements imposed by law or regulation.
4. Relevance of the auditor’s expert’s competence to the matter for which that expert’s work
will be used, including any areas of specialty within that expert’s field. [E.g., A particular
actuary may specialise in property and casualty insurance, but has limited expertise
regarding pension calculations.]
5. The Evaluation of Experts competence is a continuous process keeping in mind unexpected
events and changes in conditions.
I. AGREEMENT WITH THE AUDITOR’S EXPERT:
The auditor shall agree, in writing when appropriate, on the following matters with the auditor’s
expert:
1. The nature, scope and objectives of that expert’s work.
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2. The respective roles and responsibilities of the auditor and that expert.
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3. The nature, timing and extent of communication between the auditor and that expert,
including the form of any report to be provided by that expert; and
4. The need for the auditor’s expert to observe confidentiality requirements.
J. EVALUATING THE ADEQUACY OF THE AUDITOR’S EXPERT WORK:
The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s
purposes, including:
1. The relevance and reasonableness of that expert’s findings or conclusions, and their
consistency with another audit evidence:
a. Inquiries of the auditor’s expert.
b. Reviewing the auditor’s expert’s working papers and reports.
c. Corroborative procedures, such as
i. Observing the auditor’s expert’s work.
ii. Confirming relevant matters with third parties.
iii. Performing detailed analytical procedures to see whether Principles of
materiality aspects considered and
iv. Re-performing calculations.
v. Discussion with another expert with relevant expertise when, for example,
the findings or conclusions of the auditor’s expert are not consistent with
other audit evidence.
vi. Discussing the auditor’s expert’s report with management.
2. If that expert’s work involves use of significant assumptions and methods, the relevance and
reasonableness of those assumptions and methods in the circumstances and
3. If that expert’s work involves the use of source data that is significant to that expert’s work,
the relevance, completeness, and accuracy of that source data.
K. WHEN THE WORK OF AUDITORS EXPERT IS NOT ADEQUATE:
1. If the auditor determines that the work of the auditor’s expert is not adequate for the
auditor’s purposes, the auditor shall:
a. Agree with that expert on the nature and extent of further work to be performed by
that expert; or
b. Perform further audit procedures appropriate to the circumstances.
2. NO EVIDENCE – MODIFIED OPINION: If the auditor cannot resolve the matter through the
additional audit procedures, which may involve further work being performed by both the
expert and the auditor, or include employing or engaging another expert, it may be
necessary to express a modified opinion in the auditor’s report in accordance with SA 705
because the auditor has not obtained sufficient appropriate audit evidence.
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L. REPORTING IN AUDITORS REPORT [ABOUT AUDITORS EXPERT]:

1. UMO – No Reference: The auditor shall not refer to the work of an auditor’s expert in an
auditor’s report containing an unmodified opinion unless required by law or regulation to do
so. If such reference is required by law or regulation, the auditor shall indicate in the
auditor’s report that the reference does not reduce the auditor’s responsibility for the audit
opinion.
2. MO – Refer: If the auditor may refer to the work of an auditor’s expert in the auditor’s
report because such reference is relevant to an understanding nature of a modification to
the auditor’s opinion. Further the auditor shall indicate in the auditor’s report that such
reference does not reduce the auditor’s responsibility for that opinion.
Refer Q No. 23, 24 in Additional Concepts and Practical Questions
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PART – II
LEGAL AND OTHER REGULATORY REQUIREMENTS
Q.NO.1 EXPLAIN VARIOUS REPORTING REQUIREMENTS OF THE AUDITOR U/S 143?
A. DUTY OF AUDITOR TO INQUIRE ON CERTAIN MATTERS u/s 143(1): It is the duty of auditor to
inquire into the following matters:
1. Whether loans and advances made by the company on the basis of security:
a) Have been properly secured and
b) Whether the terms on which they have been made are prejudicial to the interests of the
company or its members.
2. Whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company.
3. Whether any Shares or Securities held by the company are sold at a price less than purchase
price. However, this point shall not apply to banking and investment companies.
4. Whether loans and advances made by the company have been shown as deposits.
5. Whether personal expenses have been charged to revenue account.
6. Where it is stated in the books and documents of the company that any shares have been
allotted for cash:
a) Whether cash has actually been received in respect of such allotment and
b) If no cash has actually been received, the position as stated in the account books and the
balance sheet is correct, regular and not misleading.
Reporting Requirements: If the auditor got a positive response he can ignore above matters.
However, if there are any negative or adverse comments observed then he shall state them in
his report along with reasons.
In the audit report these matters should be included under the section “reporting on legal and
other regulatory requirements”.
B. DUTY TO REPORT ON CERTAIN MATTERS u/s 143(3): The auditor’s report shall also state
a. Whether he has sought and obtained all the information and explanations which to the best
of his knowledge and belief were necessary for the purpose of his audit.
b. Whether, in his opinion, proper books of account as required by law have been kept by the
company so far as appears from his examination of those books and proper returns
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adequate for the purposes of his audit have been received from branches not visited by him;
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c. Whether the report on the accounts of any branch office of the company audited by a
person other than the company’s auditors (Branch auditor) has been sent to him and How he
has dealt with it in preparing his report.
d. Whether the company’s balance sheet and profit and loss account (Financial Statements)
dealt with in the report are in agreement with the books of account and returns.
e. Whether, in his opinion, the financial statements comply with the accounting standards.
f. The observations or comments of the auditors on financial transactions or matters which
have any adverse effect on the functioning of the company.
g. Whether any director is disqualified from being appointed as a director under sub- section
(2) of the section 164.
h. Any qualification, reservation or adverse remark relating to the maintenance of accounts and
other matters connected therewith.
i. Whether the company has adequate internal financial controls w.r.t financial statements in
place and the operating effectiveness of such controls (Ref - Note 1)
j. Such other matters as may be prescribed. Rule 11 of the Companies (Audit and Auditors)
Rules, 2014 prescribes the other matters to be included in auditor’s report. The auditor’s
report shall also include their views and comments on the following matters, namely:
1. Whether the company has disclosed the impact of pending litigations on its financial
position in its financial statement.
2. Whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long term contracts including
derivative contracts.
3. Whether there has been any delay in transferring amounts, required to be transferred, to
the Investor Education and Protection Fund by the company.
4.
i) Whether the management has represented that, to the best of it’s knowledge and
belief, other than as disclosed in the notes to the accounts, no funds have been
advanced or loaned or invested (either from borrowed funds or share premium or
any other sources or kind of funds) by the company to or in any other person(s) or
entity(ies), including foreign entities (“Intermediaries”), with the understanding,
whether recorded in writing or otherwise, that the Intermediary shall, whether,
directly or indirectly lend or invest in other persons or entities identified in any
manner whatsoever by or on behalf of the company (“Ultimate Beneficiaries”) or
provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries.
ii) Whether the management has represented, that, to the best of its knowledge and
belief, other than as disclosed in the notes to the accounts, no funds have been
received by the company from any person(s) or entity(ies), including foreign
entities (“Funding Parties”), with the understanding, whether recorded in writing
or otherwise, that the company shall, whether, directly or indirectly, lend or invest
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in other persons or entities identified in any manner whatsoever by or on behalf of

the Funding Party (“Ultimate Beneficiaries”) or provide any guarantee, security or
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the like on behalf of the Ultimate Beneficiaries.
iii) Based on such audit procedures that the auditor has considered reasonable and
appropriate in the circumstances, nothing has come to their notice that has caused
them to believe that the representations under sub-clause (i) and (ii) contain any
material misstatement.
5. Whether the dividend declared or paid during the year by the company is in compliance
with section 123 of the Companies Act, 2013.
6. [Whether the company, in respect of financial years commencing on or after the 1st
April, 2022] has used such accounting software for maintaining its books of account
which has a feature of recording audit trail (edit log) facility and the same has been
operated throughout the year for all transactions recorded in the software and the audit
trail feature has not been tampered with and the audit trail has been preserved by the
company as per the statutory requirements for record retention.]
AUDIT TRAIL MEANS, a step-by-step sequential record which provides evidence of the
documented history of financial transactions to its source. An auditor can trace every step
of the financial data of a particular transaction right from the general ledger to its source
document with the help of the audit trail.
NOTE 1: The provisions of internal financial controls shall not apply for the following private limited
companies:
1. One Person company.
2. Small company.
3. A Private company satisfying the following conditions-
a. Turnover as per latest financial statements shall not exceed Rs. 50 Crore and
b. Loans and Borrowings from banks and financial institutions shall not exceed Rs. 25
Crore.
NOTE 2: The Companies (Amendment) Act, 2017 effective 12-09-2018 inserted Section 197(16) of the
Companies Act, 2013 that requires as under:
“The auditor of the company shall, in his report under section 143, make a statement as to whether the
remuneration paid by the company to its directors is in accordance with the provisions of this section,
whether remuneration paid to any director is in excess of the limit laid down under this section and give
such other details as may be prescribed”. [This provision is applicable only for PUBLIC COMPANIES]
Audit Reporting requirements:

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a) The auditor shall report on the above matters irrespective of positive or negative remarks
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observed by him.
b) Further he shall state these matters under the section “reporting on legal and other
regulatory requirements”.
C. DUTY TO REPORT AS PER CARO 2020: SECTION 143(11) – Q. NO. 2
Q.NO.2 EXPLAIN THE PROVISIONS RELATING TO REPORTING UNDER CARO 2020?
A. APPLICABILITY OF THE ORDER: The Companies Auditor Report Order, 2016 (CARO) is an
additional reporting requirement Order. The order applies to every company including a foreign
company. However, it shall not apply to following classes of companies:
1. A banking companies
2. An insurance company
3. A company licensed to operate under section 8 of the Companies Act;
4. A One Person Company.
5. A Small company and
6. A Private Limited Company:
a) Not being a subsidiary or holding company of a public company and
b) The Total Paid up capital and reserves & surplus shall not exceed Rs. 1 Crore as on the
balance sheet date and
c) The Total Borrowings from banks and financial institutions shall not exceed Rs. 1 Crore at
any point of time during the financial year and
d) Total Turnover calculated as per Schedule III (including revenue from discontinuing
operations) shall not Exceed Rs. 10 crore during the financial year as per the financial
statements.
POINTS TO BE KEPT IN MIND WHILE CALCULATING ABOVE PARAMETERS:
1. Paid up share capital:
a) Inclusions: It includes both equity share capital as well as the preference share capital.
b) Exclusions: It excludes share application money received pending allotment, calls in arrears
and calls in advance.
2. Reserves and surplus:
a) It includes all the reserves (whether capital or revenue reserves) as disclosed in the Schedule
III of the companies act, 2013.
b) Revaluation reserve, if any, should be taken into consideration while determining the
applicability of CARO.
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c) The debit balance of the profit and loss account, if any, should be reduced from the figures
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of Reserves & Surplus same as per Schedule III.

d) If there any excess debit balance of profit and loss account after adjustment to Reserves &
Surplus, then such excess can be netted off against Paid up Capital also.
e) Provisions are excluded whether they are made for depreciation or for Diminution in the
value of assets or for any known liability.
3. Borrowing:
a) Loans taken from banks and financial institutions are only to be considered.
b) It includes all the loans irrespective of nature of loans:
i) Whether term loans, demand loans, working capital loans, cash credits, and overdraft,
bills purchased and discounted.
ii) Whether loans whether secured or unsecured.
c) The limit shall be computed with reference to the aggregate borrowings from all banks and
financial institutions cumulatively but not as per each bank or financial institute basis.
d) The limit shall be considered at any point of time during the financial year i.e., on any day
during the year but need not on the date of balance sheet.
e) Where the company has taken any overdraft facility against Fixed Deposits, the gross
amount outstanding in overdraft facility (without adjusting Fixed Deposit) shall be
considered for the purpose of CARO.
f) Amounts outstanding in respect of credit Cards also would also be considered.
g) Non-fund-based credit facilities, to the extent such facilities have devolved and have been
converted into fund-based credit facilities, should also be considered as outstanding
borrowings.
h) INVOLED GUARANTEES: The figures of outstanding borrowing would also include the
amount of bank guarantees issued by the company where such guarantee(s) has (have) been
invoked and encashed or where, say, a letter of credit has been devolved on the company.
i) In case of Term Loans – Interest accrued BUT NOT DUE shall not be considered under
borrowings.
Note: The aggregate borrowings disclosed in the financial statements would need to be
considered based on applicable generally accepted accounting principles in India. [Ind AS / SCH
III / Accounting Standards]
4. Turnover:
a) Revenue means the aggregate amounts of sales affected by the company including the
revenue from discontinuing operations.
b) It includes sale of goods, services & any other operating revenues earned by the company.
c) GST shall be deducted from the Turnover.
d) It excludes sales returns and trade discounts, if any.

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5. Additional points:
a) In the case of holding and subsidiary companies:
i) The limits for applicability of CARO should be computed on the basis of standalone
financial statements of holding and subsidiary companies separately but not on the basis
of consolidated financial statements.
ii) CARO, 2020 reporting shall not apply to the Auditor’s Report on Consolidated Financial
Statements “EXCEPT Clause 21”.
b) In the case of companies having branches:
i) The limits for the purpose of Applicability of CARO shall be computed from the entire
company’s view including the amounts form all the branches but not w.r.t each branch
wise.
ii) Once it is applicable to the company as a whole, then each and every branch of the
company will be covered under CARO. Therefore, all the branch auditors of the company
are also required to report on these 16 matters in their branch audit report of the
concerned branches.
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21 CLAUSES TO BE REPORTED
[These clauses shall be reported as part of Auditors Report as referred under SA 700 under the
para / section “REPORTING ON OTHER LEGAL AND REGULATORY REQUIREMENTS]
1. FIXED ASSETS: (MODIFIED IN CARO 2020)
a) FIXED ASSET REGISTER: Whether the company is maintaining proper records showing full
particulars including
i) Quantitative details of PPE and Intangible Assets (Fixed Assets) and

ii) Situation of PPE.
b) PHYSICAL VERIFICATION:
i) Whether these fixed assets have been physically verified by the management at
reasonable intervals.
ii) Whether any material discrepancies were noticed on such verification and if so, whether
the same have been properly dealt with in the books of accounts.
c) IMMOVABLE PROPERTY: Whether the title of immovable properties is held in the name of
the company. If not, provide the details of the same:
i) Description of the Property

ii) Gross Carrying Value
iii) Held in Name of (I.e., Promoter or director or employees)
iv) Reason for Not being held in name of Company.
d) REVALUATION (NEWLY ADDED IN 2020):
Whether the company has revalued its Property, Plant and Equipment (including Right of
Use assets) or intangible assets or both during the year and, if so:
i) Whether the revaluation is based on the valuation by a Registered Valuer.
ii) Specify the amount of change, if change is 10% or more in the aggregate of the net
carrying value of each class of Property, Plant and Equipment or intangible assets.
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e) DISCLOSURE OF BENAMI TRANSACTIONS (NEWLY ADDED IN 2020):
Whether any proceedings have been initiated or are pending against the company for
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holding any benami property under the Benami Transactions (Prohibition) Act, 1988 (45 of
1988) and rules made there under, if so, whether the company has appropriately disclosed
the details in its financial statements.
2. INVENTORIES: (MODIFIED IN CARO 2020)
a) PHYSICAL VERIFICATION:
i) Whether physical verification of inventory has been conducted at reasonable intervals by

the management.
ii) Whether any discrepancies of 10% or more in the aggregate for each class of inventory
were noticed and if so, whether they have been properly dealt with in the books of
account.
b) WORKING CAPITAL LOANS (NEWLY ADDED IN 2020):
i) Whether during any point of time of the year, the company has been sanctioned working
capital limits in excess of five crore rupees, in aggregate, from banks or financial
institutions on the basis of security of current assets;
ii) Whether the quarterly returns or statements filed by the company with such banks or
financial institutions are in agreement with the books of account of the Company, if not,
give details
3. INVESTMENTS, GUARANTEE, SECURITY, LOANS OR ADVANCES (MODIFIED IN 2020):
a) APPLICABILITY: Whether during the year the company has provided loans or provided
advances in the nature of loans, or stood guarantee, or provided security to any other entity
[not applicable to companies whose principal business is to give loans], if so, indicate:
i) TO RELATED PARTIES: The aggregate amount during the year, and balance outstanding at
the balance sheet date with respect to such loans or advances and guarantees or security
to subsidiaries, joint ventures and associates.
ii) TO UNRELATED PARTIES: The aggregate amount during the year, and balance outstanding
at the balance sheet date with respect to such loans or advances and guarantees or
security to parties OTHER THAN subsidiaries, joint ventures and associates.
b) TERMS AND CONDITIONS:
Whether the investments made, guarantees provided, security given and the terms and
conditions of the grant of all loans and advances in the nature of loans and guarantees
provided are not prejudicial to the company’s interest.
c) REPAYMENT REGULARITY:
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In respect of loans and advances in the nature of loans, whether the schedule of repayment
of principal and payment of interest has been stipulated and whether the repayments or
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receipts are regular.
d) OVERDUE > 90 DAYS:
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 principal and
interest.
e) RESCHEDULING OR EXTENTION OF OVERDUE LOANS (NEWLY ADDED IN 2020):
Whether any loan or advance in the nature of loan granted which has fallen due during the
year, has been renewed or extended or fresh loans granted to settle the overdues of existing
loans given to the same parties, if so,
i) Specify the aggregate amount of such dues renewed or extended or settled by fresh loans
and
ii) The percentage of the aggregate to the total loans or advances in the nature of loans
granted during the year [not applicable to companies whose principal business is to give
loans].
f) DEMAND LOANS WITHOUT REPAYMENT PERIOD:
Whether the company has granted any loans or advances in the nature of loans either
repayable on demand or without specifying any terms or period of repayment, if so,
i) Specify the aggregate amount, percentage thereof to the total loans granted,
ii) Aggregate amount of loans granted to Promoters, related parties as defined in clause (76)
of section 2 of the Companies Act, 2013
4. OTHER LOANS, INVESTMENTS, GUARANTEES MADE BY COMPANY: (SAME AS CARO 2016)
In respect of loans, Investments, Guarantees, and securities provided by company, whether

provisions of section 185 & 186 have been complied with? If not, provide the details thereof.
5. DEPOSITS: (SAME AS CARO 2016)
In case the company has accepted deposits from the public,

a) Verify the compliance with the following:
i) the provisions of Sections 73 to 76 of the Co.’s Act, 2013 or

ii) whether the directives issued by the RBI and
iii) An order passed by CLB or any court or any other Tribunal, if any.
b) If there is any Non-compliance, the nature of contraventions should be stated.

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6. COST RECORDS: (SAME AS CARO 2016)
a) Whether maintenance of cost records has been prescribed by the Central Government under
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sub section (1) of section 148 of the Co.’s Act, 2013 is applicable.
b) If applicable, whether such accounts and records have made and maintained.
7. STATUTORY DUES: (SAME AS CARO 2016)
a) UNDISPUTED DUES:
i) Is the company regular in depositing undisputed statutory dues e.g. provident fund, ESI,
Income Tax, service tax and any other statutory dues with the appropriate authorities, and
ii) 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 by the auditor. (Only Information and not opinion)
b) DISPUTED DUES:
In case dues have not been deposited on account of any dispute, the auditor shall indicate
i) The amounts involved in dispute and
ii) The forum where dispute is pending.
Note: A mere representation to the concerned department shall not constitute a dispute.
8. DISCOVERY OF UNDISCLOSED INCOME (NEWLY ADDED IN 2020):
Whether any transactions not recorded in the books of account have been surrendered or
disclosed as income during the year in the tax assessments under the Income Tax Act, 1961 (43
of 1961), if so, whether the previously unrecorded income has been properly recorded in the
books of account during the year. (Author Note: May Be treated as prior period items in the
accounting records)
9. DEFAULT IN REPAYMENT OF DUES:
a) LENDER WISE DEFAULT:

i) Whether the company has defaulted in repayment of borrowings of loans to a financial
institution, Bank, Debenture holders or Governments.
ii) If so, the period and amount of default to be reported each lender wise in the following
Format:
• Nature of Borrowing
• Name of the lender
• Amount Not Paid on Due Date
• Whether Principal or Interest or both
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• Delay in Days
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• Remarks, if any.
b) WILFUL DEFAULTER (NEWLY ADDED IN 2020):
Whether the company is a declared willful defaulter by any bank or financial institution or
other lender.
c) PURPOSE OF TERM LOANS:

Whether term loans were applied for the purpose for which the loans were obtained; if not,
the amount of loan so diverted and the purpose for which it is used may be reported.
d) ST LOAN FOR LT PURPOSE (NEWLY ADDED IN 2020):

Whether funds raised on short term basis have been utilised for long term purposes, if yes,
the nature and amount to be indicated.
e) LOANS TAKEN TO MEET SUBSIDIARY COMPANY NEEDS (NEWLY ADDED IN 2020):

Whether the company has taken any funds from any entity or person on account of or to
meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with
nature of such transactions and the amount in each case.
f) LOAN AGAINST PLEDGE OF SECURITES OF SUBSIDIARIES:

i) Whether the company has raised any loans during the year “ON PLEDGE OF SECURITIES
HELD IN SUBSIDIARY/ASSOCIATE/JOINT VENTURE and if So, Give details thereof
ii) Also report whether the company has defaulted in repayment of such loans.
10. END USE OF FUNDS RAISED:
a) IPO / FPO:
i) Whether the money raised by way of initial or further public offer (including debt
instruments) were utilized for the purposes for which those are raised.
ii) If not, the details along with the defaults, delays & subsequent rectifications, if any, to be
reported.
b) PREFERENTIAL ALLOTMENT:
i) Whether the company has made any preferential allotment or private placement of
shares or fully or partly convertible debentures during the year under review &
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ii) If so, verify the following:

• Compliance with section 42 of the act. and
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• The amount raised have been used for the purpose for which they are raised.
iii) If not provide the details in respect of the amount involved & nature of non-compliance
11. REPORTING OF FRAUDS:
a) NOTICED OR REPORTED:
i) Whether any fraud by or on the company by its officers or employees has been noticed or
reported during the year.
ii) If yes, the nature and the amount involved is to be indicated.
b) SEC. 143(12) – FRAUD (NEWLY ADDED IN 2020):
Whether any report under sub-section (12) of section 143 of the Companies Act has been
filed by the auditors in Form ADT-4 as prescribed under rule 13 of Companies (Audit and
Auditors) Rules, 2014 with the Central Government.
c) WHISTLE BLOWER COMPLAINTS (NEWLY ADDED IN 2020):
Whether the auditor has considered whistle-blower complaints, if any, received during the
year by the company.
Note: The definition of fraud as per SA 240 and the explanation of fraud as per Section 447 of the
2013 Act are similar, except that under section 447, fraud includes ‘acts with an intent to injure the
interests of the company or its shareholders or its creditors or any other person, whether or not there
is any wrongful gain or wrongful loss.’ However, an auditor may not be able to detect acts that have
intent to injure the interests of the company or cause wrongful gain or wrongful loss, unless the
financial effects of such acts are reflected in the books of account/financial statements of the
company.
12. NIDHI COMPANY: (SAME AS CARO 2016)
a) Whether Nidhi Company has complied with the net owned funds (i.e., net worth) to deposits
in the ratio of 1:20 to meet out the liability.
i.e., for every one rupee of net owned funds, Nidhi company cannot accept more than 20
rupees of deposits.
b) Whether Nidhi Company is maintaining 10% Unencumbered term deposits as specified in
Nidhi Rules, 2014 to meet out the liability.
c) Whether there has been any default in payment of interest on deposits or repayment
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thereof for any period and if so, the details thereof.

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13. RELATED PARTY TRANSACTION: (SAME AS CARO 2016)
Whether all transaction with related parties is

a) In compliance with section 177 & 188 where applicable, &
b) Details have been disclosed in the financial statements etc., as required by applicable
accounting standards.
14. INTERNAL AUDIT SYSTEM (NEWLY ADDED IN CARO 2020):
a) Whether the company has an internal audit system commensurate with the size
and nature of its business.
b) Whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor.
15. NON-CASH TRANSACTION: (SAME AS CARO 2016)
Whether Company has entered into any Non-Cash Transactions with directors & if so provisions
of section 192 have been complied with.
16. NON-BANKING FINANCIAL INSTITUTION (MODIFIED IN 2020):
a) 45IA OF RBI ACT: Whether the company is required to be registered under section 45-IA of
Reserve Bank of India Act 1934, and If so, whether the registration has been obtained.
b) NBFC ACTIVITIES (NEW): Whether the company has conducted any Non-Banking Financial or
Housing Finance activities without a valid Certificate of Registration (CoR) from the Reserve
Bank of India as per the Reserve Bank of India Act, 1934.
c) CORE INVESTMENT COMPANY (NEW):
i) Whether the company is a Core Investment Company (CIC) as defined in the regulations
made by the Reserve Bank of India, if so,
ii) Whether it continues to fulfil the criteria of a CIC, and in case the company is an
exempted or unregistered CIC, whether it continues to fulfil such criteria.
iii) Whether the Group has more than one CIC as part of the Group, if yes, indicate the
number of CICs which are part of the Group.
17. CASH LOSSES (NEWLY ADDED IN 2020):
Whether the company has incurred cash losses in the financial year and in the immediately
preceding financial year, if so, state the amount of cash losses.
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18. RESIGNATION OF AUDITORS (NEWLY ADDED IN 2020):
a) Whether there has been any resignation of the statutory auditors during the year, if so,
b) Whether the auditor has taken into consideration the issues, objections or concerns
raised by the outgoing auditors.
19. MATERIAL UNCERTAINITY (NEWLY ADDED IN 2020):
On the basis of the financial ratios, ageing and expected dates of realisation of financial assets
and payment of financial liabilities, other information accompanying the financial statements,
the auditor’s knowledge of the Board of Directors and management plans, Whether the auditor
is of the opinion that no material uncertainty exists as on the date of the audit report that
company is capable of meeting its liabilities existing at the date of balance sheet as and when
they fall due within a period of one year from the balance sheet date.
20. CORPORATE SOCIAL RESPONSIBILITY FUND (NEWLY ADDED IN 2020):
a. Whether, in respect of other than ongoing projects, the company has transferred
unspent amount to a Fund specified in Schedule VII to the Companies Act within a period
of six months of the expiry of the financial year in compliance with second proviso to
sub-section (5) of section 135 of the said Act.
b. Whether any amount remaining unspent under sub-section (5) of section 135 of the
Companies Act, pursuant to any ongoing project, has been transferred to special account
in compliance with the provision of sub-section (6) of section 135.
21. MODIFIED OPINION (CARO) IN OTHER GROUP COMPANIES (NEWLY ADDED IN 2020):
a. Whether there have been any qualifications or adverse remarks by the respective
auditors in the Companies (Auditor’s Report) Order (CARO) reports of the companies
included in the consolidated financial statements,
b. if yes, indicate the details of the companies and the paragraph numbers of the CARO
report containing the qualifications or adverse remarks.
AUDIT REPORTING:
a) The reporting under the above matters is mandatory. Means whether it is positive or negative
the auditor must comment.
b) Where the response obtained for the above matters is negative, the auditor shall give reasons
thereof.
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Also, where the auditor is unable to express any opinion on any specified matter, his report shall
indicate such fact together with the reasons why it is not possible for him to give his opinion on the
same.
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ADDITIONAL CONCEPTS AND PRACTICE QUESTIONS
Q.NO.1 GUIDANCE NOTE ON INTERNAL FINANCIAL CONTROLS OVER FINANCIAL REPORTING?
ANSWER:
A. INTERNAL FINANCIAL CONTROL: As per Section 134 of the Companies Act 2013, the term
Internal Financial Controls means the policies and procedures adopted by the company for
ensuring:
1. Orderly and efficient conduct of its business, including adherence to Company’s policies,
2. Safeguarding of its assets,
3. Prevention and detection of frauds and errors,
4. Accuracy and completeness of the accounting records, and
5. Timely preparation of reliable financial information.
B. INTERNAL CONTROLS OVER FINANCIAL REPORTING (ICFR): As per Guidance Note issued by ICAI
on Guidance Note on Audit of Internal Financial Controls Over Financial Reporting (September
2015), “Internal Financial Controls Over Financial Reporting (ICFR) shall mean:
“A Process designed to provide reasonable assurance regarding the reliability of financial

reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles”. A Company’s internal financial control over financial
reporting includes those policies and procedures that:
1. Pertain to the maintenance of the records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company.
2. Provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statement in accordance with generally accepted accounting
principles, and those receipts and expenditures of the company are being made only in
accordance with authorizations of management and director of the company; and
3. Provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a material effect
of the financial statements.
C. COMPANIES ACT PROVISIONS RELATING TO IFCOFR:
Section 134:
1. In the case of a listed company, the Directors’ Responsibility states that directors, have laid
down IFC to be followed by the company and that such controls are adequate and operating
effectively.
2. In the case of a listed company, the Board of Directors are required to confirm about the
adequacy and operating effectiveness of Internal Financial Controls. However, as per Rule
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8(5) of Companies (Accounts) Rules, Board of Directors report to state the details in respect
of adequacy of IFC with reference to the financial statements.
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Section 143:
The auditor’s report should also state whether the company has adequate IFC system in place
and the operating effectiveness of such controls.
Section 177:
Audit committee may call for comments of auditors about internal control systems before their
submission to the Board and may also discuss any related issues with the internal and statutory
auditors and the management of the company.
Schedule IV:
The independent directors should satisfy themselves on the integrity of financial information
and ensure that financial controls and systems of risk management are robust and defensible.
D. APPLICABILITY OF IFC:
The guidance note clarifies that reporting on ICFR by auditors will be applicable to both listed
and unlisted companies, including small and one person companies. This is in line with the
requirements of section 143(3)(i) of the Companies Act, 2013.
Further ICFR are applicable both in respect stand alone and consolidated financial statements.
E. NON-APPLICABILITY OF IFC:
a) A One-person company.
b) A Small company.
c) A Private Limited Company subject to:
a. Which has turnover less than rupees 50 CRORES as per latest audited financial
statement and
b. Which has aggregate borrowings from banks or financial institutions or anybody
corporate at any point of time during the financial year less than rupees 25 CRORE.
F. PERIODICITY OF IFC REPORTING:
1. The guidance note clarifies that auditors will have to report whether a company has an
adequate ICFR system in place and whether the same was operating effectively as at the
balance sheet date. In practice, this will mean that when forming its audit opinion on ICFR,
the auditor will surely test transactions during the financial year and not just as at the
balance sheet date, though the extent of testing at or near the balance sheet date may be
higher.
2. Further it is applicable only with respect to auditor’s report on annual financial statements
and shall not apply on any Interim Financial statements.
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Q.NO.2 Whether any fraud by the company or any fraud on the company has been noticed or
reported during the year; If yes, the nature and the amount involved is to be indicated?
ANSWER:
1. Under this clause, the responsibilities of the auditor have been widened by removing the word
“officers or employees”. This clause requires the auditor to report whether any fraud by the
company or any fraud on the company has been noticed or reported during the year. If yes, the
auditor is required to state:
a. the amount involved and
b. the nature of fraud.
2. The clause does not require the auditor to discover such frauds.
3. The use of the words “noticed or reported” indicates that the management of the company
should have the knowledge about the frauds by the company or on the company that have
occurred during the period covered by the auditor’s report.
4. However, this clause does not relieve the auditor from his responsibility to consider fraud and
error in an audit of financial statements.
5. The auditor is required to report separately on the nature and amount involved for:
a. Fraud on the company [i.e., 3rd parties deceived the company] and
b. Fraud by the company [i.e., company deceived 3rd parties]
AUDIT PROCEDURES AND REPORTING:
1. INQUIRY OF MANAGEMENT: While planning, the auditor should also make inquiries of
management to determine whether management is aware of any known fraud or suspected
fraud that the company is investigating.
2. INTERNAL AUDIT REPORT: The auditor should examine the reports of the internal auditor with a
view to ascertain whether any fraud has been reported or noticed by the management.
3. AUDIT COMMITTEE: The auditor should examine the minutes of the audit committee meetings/
board meetings to ascertain whether any instance of fraud pertaining to the company has been
reported and actions taken thereon.
4. OTHER EMPLOYEES: The auditor should also discuss the matter with other employees including
officers of the company.
5. WRITTEN REPRESENTATION: The auditor should obtain written representations from
management that:
a. It acknowledges its responsibility for the implementation and operation of accounting
and internal control systems that are designed to prevent and detect fraud and error;
b. It believes the effects of those uncorrected misstatements in financial statements,
aggregated by the auditor during the audit are immaterial, both individually and in the
aggregate, to the financial statements taken as a whole.
c. It has disclosed to the auditor all significant facts relating to any frauds or suspected
frauds known to management that may have affected the entity; and
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d. It has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud.
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6. NEED FOR WRITTEN REPRESENTATION: Because management is responsible for adjusting the
financial statements to correct material misstatements, it is important that the auditor obtains
written representation from management that any uncorrected misstatements resulting from
fraud are, in management's opinion, immaterial, both individually and in the aggregate. Such
representations are not a substitute for obtaining sufficient appropriate audit evidence. In few
instances, management may disagree with the auditors regarding a mis-statements detected by
the auditor. For that reason, management may want to add to their written representation
words such as, "We do not agree that items constitute misstatements because [description of
reasons]."
7. FRAUDS IDENTIFIED BY THE AUDITOR: The auditor should consider if any fraud has been
reported by them during the year under section 143(12) of the Act and if so whether that same
would be reported under this Clause. It may be mentioned here that section 143(12) of the Act
requires the auditor has reasons to believe that a fraud is being committed or has been
committed by an employee or officer. In such a case the auditor needs to report to the Central
Government or the Audit Committee. However, this Clause will include only the reported frauds
and not suspected fraud.
Q.NO.3 What are the reporting requirements in the audit report under the Companies Act, 2013 /
CARO, 2020 for the following situations?
(i) A fraud has been committed against the company by a vendor of the company.
(ii) The company has committed a major fraud on its customer and the case is pending in the
court.
ANSWER:
REPORTING REQUIREMENTS IN THE AUDIT REPORT UNDER THE COMPANIES ACT, 2013 / CARO
2020: According to Clause (xi) (a) of Para 3 of CARO 2020, the auditor is required to report whether
any fraud by the company or any fraud on the company has been noticed or reported during the
year. If yes, the nature and the amount involved is to be indicated.
Further, as per Clause (xi) (b) of Para 3 of CARO 2020, whether any report under section 143(12) of
the Companies Act has been filed by the auditors in Form ADT-4 as prescribed under rule 13 of
Companies (Audit and Auditors) Rules, 2014 with the Central Government.
(i) Fraud committed against the company by a vendor of the Company: In case employees or
management are involved in fraud committed by vendor, reporting has to be done in accordance
with CARO 2020 and as per section 143 (12) of the Companies Act, 2013. Suspected fraud by
vendors, customers and other third parties should be dealt with in accordance with SA 240.
Therefore, reporting has to be done in accordance with SA 240, “The Auditor’s Responsibilities
relating to Fraud in an audit of Financial Statements”.
(ii) Company has committed major fraud on its customer of which case is pending in the court:
Major fraud committed by the company on its customer has to be reported in accordance with
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Clause (xi) of Para 3 of CARO 2020.

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Q.NO.4 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? [NOT IMP FROM EXAM VIEWPOINT]
ANSWER:
REFER PG. 5.89 IN ICAI SM [OCT 2021 EDITION] – SINGLE READING
Q.NO.5 WRITE ABOUT DISTINCTION BETWEEN NOTES ON ACCOUNTS AND QUALIFICATIONS?
ANSWER:
1. As a general practice, the management would normally prefer to explain their viewpoint and
assessment on all matters involving difference of opinion between them and the auditors by
way of notes in the financial statements, for better understanding of the facts of the matters by
users of financial statements.
2. Such notes represent management’s stand on the matter while the auditor records his
disagreement on the matters by way of qualifications in the auditor’s report.
3. Once auditor concludes that modification of his report in relation to the specific matter under
question, is warranted, he may choose to refer to the specific note given by the management
and thereafter, continue explaining more facts and his assessment on the matter including
quantification and impact on the various financial statement’s captions, to the extent possible.
4. MANNER OF QUALIFICATION BY AUDITOR:
a. The Auditor must express the nature of qualification, in a clear and unambiguous
manner. Where the Auditor answers any of the statutory affirmations in the negative or
with a qualification, his report shall state the reasons for such answer. All qualifications
should be contained in the Auditor’s Report.
b. Where the company has committed an irregularity resulting in a breach of law, the
Auditor should bring the same to the notice of the shareholders by properly qualifying
his report. A quantified opinion should be expressed as “except for” for the effects of the
matter to which qualification related. It would not be appropriate to use phrases such as
“with the foregoing explanation” or “subject to” in the opinion paragraph as these are
not sufficiently clear or forceful.
c. A reference to the notes to Accounts in the Auditors’ Report does not automatically
become a qualification.
Q.NO.6 WRITE ABOUT DIFFERENCE BETWEEN AUDIT REPORT AND AUDITOR’S CERTIFICATE?
ANSWER:
CERTIFICATE: A certificate is a written confirmation of the accuracy of the facts stated therein and
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does not involve any estimate or opinion. The term ‘certificate’ is, therefore, used where the auditor
verifies the accuracy of facts. An auditor may thus, certify the circulation figures of a newspaper or
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the value of imports or exports of a company. An auditor’s certificate represents that he has verified
certain figures and is in a position to vouch safe their accuracy as per his examination of documents
and books of account.
REPORT: A report, on the other hand, is a formal statement usually made after an enquiry,
examination or review of specified matters under report and includes the reporting auditor’s
opinion thereon. The ‘report’ involves expression of opinion which may differ from one professional
to another. There is no question of exactitude (I.e., Precise) in case of a report since the information
contained therein is based on estimates and involves judgement element.
Thus, when a reporting auditor issues a certificate, he is responsible for the factual accuracy of what
is stated therein. On the other hand, when a reporting auditor gives a report, he is responsible for
ensuring that the report is based on factual data, that his opinion is in due accordance with facts,
and that it is arrived at by the application of due care and skill.
Q.NO.7 WRITE COMPARISION BETWEEN REPORTING TO SHARE HOLDERS VS REPORTING TO

THOSE CHARGED WITH GOVERNANCE?
ANSWER:
REPORTING TO SHAREHOLDERS REPORTING TO TCWG

Section 143 of the Companies Act, 2013 deals Standard on Auditing 260 deals with the
with the provisions relating to reporting to provisions relating to reporting to those
Shareholders. Thus, it is a Statutory Audit Charged with Governance.
Report which is addressed to the members.
Statutory Audit Report is on true and fair view It is a reporting on matters those charged with
and as per prescribed Format. governance like scope of audit, audit
procedures, audit modifications, etc.
Statutory Audit Reports are in public domain. Reporting to those Charged with Governance is
an internal document i.e., private report.
Q.NO.8 COMPARISION BETWEEN AUDIT QUALIFICATION VS EMPHASIS OF MATTER PARA.
ANSWER:
AUDIT QUALIFICATION EMPHASIS OF MATTER

Standard on Auditing 705 “Modifications to the Standard on Auditing 706 “Emphasis of Matter
Opinion in the Independent Auditor’s Report”, Paragraphs and Other Matter Paragraphs in the
deals with the provisions relating to Audit Independent Auditor’s Report” deals with the
Qualification. provisions relating to Emphasis of Matter.
Audit Qualifications are also known as “subject Emphasis of Matter is a paragraph which is
to report” or “except that report”. included in auditor’s report to draw users’
attention to important matter(s) which are
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already disclosed in Financial Statements and

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are fundamental to users’ for understanding of
Financial Statements.
Audit Qualifications are given when auditor is Emphasis of Matter is a paragraph which is
having reservations on some of the items out of issued when there is an uncertainty relating to
the financial statements as a whole i.e., future outcome of exceptional litigation,
Auditor’s Judgment about the Pervasiveness of regulatory action, etc.; or there is early
the Effects or Possible Effects on the Financial application (where permitted) of a new
Statements relating to if the impact of material accounting standard that has a pervasive effect
misstatements is not pervasive on the financial on the financial statements in advance of its
statements but is present at some levels of the effective date.
financial statements, qualified report is issued.
Q.NO.9 ADKS & Co LLP are the newly appointed statutory auditors of PKK Ltd. During the course
of audit, the statutory auditors have come across certain significant observations which they
believe could lead to material misstatement of financial statements. Management has a
different view and does not concur with the view of the statutory auditors. Considering this
the statutory auditors are determining as to how to address these observations in terms of
their reporting requirement. Please advise.
ANSWER:
Write Definitions for Modified Opinion, Qualified, Adverse and Disclaimer of Opinions. Further write
the concept of Management Imposed Limitation on scope of the audit after accepting the audit
engagement.
Q.NO.10 KPI Ltd is a joint venture of KPI Inc, a company based in US, and OPQ Ltd, a company
based in Japan (hereinafter referred to as ‘JV partners’). KPI Ltd was registered in India and is
operating as a marketing support company for KPI Inc. All the costs of KPI Ltd are incurred in
India and entire revenue of KPI Inc is generated in USD. The entire funding requirements of KPI
Ltd are taken care of by the JV partners. Since KPI Ltd is based in India, hence it is also required
to get its financial statements audited.
The company appointed new auditors for the audit of the financial statements for the year
ended 31 March 2020 after doing all appointment formalities wherein auditors are required to
ensure compliance with Standards on Auditing and Internal Standards on Auditing.
As an expert you are required to advise the auditor about the requirements regarding
auditor’s report for audits conducted in accordance with both Standards on Auditing issued by
ICAI and International Standards on Auditing?
ANSWER:
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THIS CONCEPT IS DEALT UNDER QUESTION BANK

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Q.NO.11 TUV Ltd. is a company engaged in the business of manufacture of spare parts. Saroj &
Associates are the statutory auditors of the company for the FY 2020-21. During the course of
audit, CA Saroj noticed that the company had a major customer, namely, Korean Mart from
South Korea. Owing to an outbreak of war and subsequent destruction leading to government
ban on import and export in South Korea, the demand from Korean Mart for the products of
TUV Ltd. ended for an unforeseeable time period. When discussed with the management, CA
Saroj was told that the company is in the process of identifying new customers for their
products. CA Saroj understands that though the use of going concern assumption is
appropriate, but a material uncertainty exists with respect to the identification of new
customers. This fact is duly reflected in the financial statements of TUV Ltd. for the FY 2020-21.
How should CA Saroj deal with this matter in the auditor’s report for the FY 2020-21?
ANSWER:
As per SA 570, “Going Concern”, loss of a major market or a key customer is one of the operating
indicators that may cast significant doubt on the company’s ability to continue as a going concern.
In the present case, TUV Ltd. has a key customer in South Korea from which the demand for its
products has ended on account of outbreak of war, subsequent destruction and government ban on
import and export in South Korea. Further, the company has not yet identified new customers and is
in the process of doing the same. As such, the identification of new customer is a material
uncertainty that cast a significant doubt on the company’s ability to continue as a going concern.
However, this matter is duly disclosed by the management of TUV Ltd. in the financial statements
for the year ended 31.03.2021.
As such, considering that the going concern assumption is appropriate but a material uncertainty
exists with respect to identification of new customer, CA Saroj should:
1. Express an unmodified opinion and

2. Include in his audit report, a separate section under the heading “Material Uncertainty
Related to Going Concern” to:
a. Draw attention to the note in the financial statements that discloses the matters and
b. State that these events or conditions indicate that a material uncertainty exists that
may cast significant doubt on the entity’s ability to continue as a going concern and
that the auditor’s opinion is not modified in respect of the matter.
Thus, CA Saroj should deal with this matter in his auditor’s report in the above-mentioned manner.
Q.NO.12 Sun Moon Ltd. is a power generating company which uses coal as raw material for its
power generating plant. The company has been allotted coal blocks in the state of Jharkhand
and Odhisa. During the FY 2020-21, a scam regarding allotment of coal blocks was unveiled
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leading to a ban on the allotment of coal blocks to various companies including Sun Moon Ltd.
This happened in the month of December 2020 and as such entire power generation process
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of Sun Moon Ltd, came to a halt in that month. As a result of such ban, and the resultant
stoppage of the production process, many key managerial personnel of the company left the
company. There were delays in the of payment of wages and salaries and the banks from
whom the company had taken funds for project financing also decided not to extend further
finance or to fund further working capital requirements of the company.
Further, when discussed with the management, the statutory auditor understood that the
company had no action plan to mitigate such circumstances. Further, all such circumstances
were not reflected the the financial statements of Sun Moon Ltd. What course of action should
the statutory auditor of the company consider in such situation?
ANSWER:
SA 570- “Going Concern” deals with the auditor’s responsibilities in the audit of financial statements
relating to going concern and the implications for the auditor’s report.
When in the auditor’s judgement, the use of Going Concern Basis of Accounting Is Inappropriate and
the financial statements have been prepared using the going concern basis of accounting, the
auditor shall express an adverse opinion.
Also, when adequate Disclosure of a Material Uncertainty Is Not Made in the Financial Statements
the auditor shall:
1. Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705

(Revised); and
2. In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to continue
as a going concern and that the financial statements do not adequately disclose this matter.
In the present case, the following circumstances indicate the inability of Sun Moon Ltd. to continue
as a going concern:
1. Ban on the allotment of coal blocks

2. Halt in power generation
3. Key Managerial Personnel leaving the company.
4. Banks decided not to extend further finance and not to fund the working capital
requirements of the company.
5. Non availability of sound action plan to mitigate such circumstances.
Therefore, considering the above factors it is clear that the going concern basis is inappropriate for
the company. Further, such circumstances are not reflected in the financial statements of the
company. As such, the statutory auditor of Sun Moon Ltd. should:
1. Express an adverse opinion in accordance with SA 705 and

2. In the Basis of Opinion paragraph of the auditor’s report, the statutory auditor should state
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that a material uncertainty exists that may cast significant doubt on the entity’ ability to
continue as a going concern and that the financial statements do not adequately disclose this
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matter.
Q.NO.13 CA Omkar is the statutory auditor of Sabhyata Ltd. for the FY 2020-21. The company is
engaged in the business of manufacture of floor tiles. During the course of audit, CA Omkar
obtained certain audit evidence which were not consistent with the affirmation made in the
financial statements. Discuss as to how CA Omkar should deal with the situation in the
auditor’s report.
ANSWER:
As per SA 705, Modifications to the Opinion in the independent auditor’s report, The decision
regarding which type of modified opinion is appropriate depends upon:
1. The nature of the matter giving rise to the modification, that is, whether the financial
statements are materially misstated or, in the case of an inability to obtain sufficient
appropriate audit evidence, may be materially misstated; and
2. The auditor’s judgment about the pervasiveness of the effects or possible effects of the
matter on the financial statements.
Further, the auditor shall modify the opinion in the auditor’s report when the auditor concludes that
based on the audit evidence obtained, the financial statements as a whole are not free from
material misstatement.
In the present case, during the course of audit, CA Omkar obtained certain audit evidence which
were not consistent with the affirmation made in the financial statements. Therefore, CA Omkar
should modify his report in accordance with SA 705- “Modifications to The Opinion In The
Independent Auditor’s Report.
CA Omkar should issue either a qualified opinion or an adverse opinion depending upon the
circumstances of the case:
1. CA Omkar shall express a qualified opinion when, having obtained sufficient appropriate
audit evidence, he concludes that misstatements, individually or in the aggregate, are
material, but not pervasive, to the financial statements
2. CA Omkar 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.
Thus, since CA Omkar has obtained audit evidence which are inconsistent with the affirmations
made in the financial statement, CA Omkar should modify his opinion as per the circumstances of
the case.
Q.NO.14 Astha Pvt. Ltd. has fully paid capital of Rs. 140 lakhs. During the year, the company had
borrowed Rs. 15 lakhs each from a bank and a financial institution. It had the turnover (Net of
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GST Rs. 50 lakhs which is credited to a separate account) of Rs. 475 lakhs. Will Companies
(Auditor’s Report) Order, 2020 be applicable to Astha Pvt. Ltd.?
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ANSWER:
PROVISION AND EXPLANATION: The CARO, 2020 specifically exempts a private limited company:
1. Not being a subsidiary or holding company of a public company,

2. Having a paid-up capital and reserves and surplus not more than rupees One crore as on the
3. Which does not have total borrowings exceeding rupees ONE crore from any bank or
financial institution at any point of time during the financial year and
4. Which does not have a total revenue as disclosed in Scheduled III to the Companies Act,
2013 (including revenue from discontinuing operations) exceeding rupees TEN crore during
the financial year as per the financial statements.
CONCLUSION: In the case of Astha Pvt. Ltd., it has outstanding loan of Rs. 30 lakhs (Rs. 15 lakhs + Rs.
15 lakhs) collectively from bank and financial institution which is less than Rs. 1 crore rupees and
turnover is Rs. 475 lakhs i.e., also less than Rs. 10 crores and not exceeding the limit. However, it has
paid capital of Rs. 140 lakhs i.e., more than Rs. 1 crore.
Thus, considering its paid-up capital, which is exceeding the prescribed limit for exemption, CARO,
2020 will be applicable to Astha Pvt. Ltd.
Q.NO.15 T Pvt. Ltd.’s paid up capital & reserves are less than Rs. 50 lakhs and it has no
outstanding loan exceeding Rs. 25 lakhs from any bank or financial institution. Its sales are Rs.
6 crores before deducting trade discount Rs. 10 lakhs and sales returns Rs. 95 lakhs. The
services rendered by the company amounted to Rs. 10 lakhs. The company contends that
reporting under Companies Auditor’s Reports Order (CARO) is not applicable. Discuss.
ANSWER:
RELEVANT PROVISION: The CARO, 2020 specifically exempts a private limited company:
1. Not being a subsidiary or holding company of a public company,

2. Having a paid-up capital and reserves and surplus not more than rupees 1 crore as on the
3. Which does not have total borrowings exceeding rupees 1 crore from any bank or financial
institution at any point of time during the financial year and
4. 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.
ANALYSIS AND CONCLUSION:
In the given case, paid up capital and reserves of T Pvt. Ltd. are less than Rs. 1 crore and has no loan
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outstanding exceeding Rs. 1 crore from any bank or financial institution.

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Further, its total revenue as disclosed in Scheduled III to the Companies Act, 2013 (including
revenue from discontinuing operations) is not exceeding rupees 10 crore during the financial year as
per the financial statements.
Thus, CARO 2020 will NOT BE APPLICABLE to T Pvt. Ltd.
Q.NO.16 Physical verification of only 30% (in value) of items of inventory has been conducted by
the company. The balance 70% will be conducted in next year due to lack of time and
resources.
ANSWER:
PROVISION AND EXPLANATION: As per CARO 2020, the auditor report shall state whether physical
verification of inventory has been conducted at reasonable interval by the management and
whether, in the opinion of the auditor, the coverage and procedure of such verification by the
management is appropriate. Further what constitutes “reasonable intervals” depends on
circumstances of each case. The periodicity of the physical verification of inventories depends upon
the nature of inventories, their location and the feasibility of conducting a physical verification.
Normally, wherever practicable, all the items of inventories should be verified by the management
of the company at least once in a year. The auditor should satisfy himself about reasonableness of
physical verification and should examine the adequacy of evidence and records of verification.
CONCLUSION: In the given case, the management conducted the physical verification of inventory
only upon 30% (in value) of the total inventory for the reason of lack of time and resources. The
above requirement of CARO, 2020 has not been fulfilled as such and the auditor should point out
the specific areas where he believes the procedures of inventory verification are inadequate and
unreasonable. He may also consider the impact on financial statements and report accordingly.
Q.NO.17 WHAT DOCUMENTS CONSTITUTE TITLE DEED?
ANSWER:
Following documents mainly constitute title deeds of the immovable property:
1. FOR FREEHOLD PROPERTY: Registered sale deed / transfer deed / conveyance deed, etc. of land,
land & building together, etc. purchased, allotted, transferred by any person including any
government, government authority / body / agency/ corporation, etc. to the company.
2. FOR LEASEHOLD PROPERTY: In case of leasehold land and land & buildings together, covered
under the head property, plant and equipment (fixed assets), the lease agreement duly
registered with the appropriate authority.
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Q.NO.18 K Ltd. took a term loan from a nationalized bank in 2015 for Rs. 200 lakhs repayable in
five equal instalments of Rs. 40 lakhs from 31st March 2016 onwards. It repaid the loans due
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in 2016 & 2017, but defaulted in 2018, 2019 & 2020. As the auditor of K Ltd, what is your
responsibility assuming that company has sought reschedulement of loan?
ANSWER:
PROVISION AND EXPLANATION: As per clause (ix) of Para 3 of CARO, 2020, the auditor of a
company has to report whether the Company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to any lender, and if yes, the nature of borrowing,
name of lender, period and amount of default to be reported. The Auditor is also required to report
whether the company is a declared wilful defaulter by any bank or financial institution or other
lender.
ANALYSIS AND CONCLUSION: In this case, K Ltd. has defaulted in repayment of dues for three years.
Application for rescheduling will not change the default position. Hence, the auditor shall report in
his CARO report that the Company has defaulted in its repayment of dues to the bank to the extent
of Rs. 120 lakhs.
Q.NO.19 Should the auditor examine the cost record in detail while reporting under CARO?
ANSWER:
CARO does not require a detailed examination of Cost Records. The Auditor should, therefore,
conduct a general review of Cost Records to ensure that the records as prescribed are made and
maintained. The word "made" applies in respect of Cost Accounts, and the word "maintained"
applies in respect of Cost Records relating to Materials, Labour, Overheads, etc.
Q.NO.20 LM Ltd. had obtained a term loan of Rs. 300 lakhs from a bank for the construction of a
factory. Since there was a delay in the construction activities, the said funds were temporarily
invested in short term deposits.
ANSWER:
PROVISION AND EXPLANATION: As per clause (ix) of Para 3 of CARO, 2020, an auditor needs to
state in his report that whether the term loans were applied for the purpose for which the loans
were obtained. In the present case, the proceeds of the term loan obtained by LM Ltd. have not
been put to use for construction activities and have been temporarily invested in short term
deposit.
CONCLUSION: Here, the auditor should report the fact in his report that pending utilization of the
term loan for construction of a factory, the funds were temporarily used for the purpose other than
the purpose for which the loan was sanctioned, as per clause (ix) of Para 3 of CARO, 2020.
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Q.NO.21 A term loan was obtained from a bank for Rs. 80 lakhs for acquiring R&D equipment, out
of which Rs. 15 lakh was used to buy a car for use of the concerned director who was looking
at the R&D activities. As a statutory auditor, how would you report under CARO 2020.
ANSWER:
PROVISION AND EXPLANATION: According to clause (ix) of Para 3 of CARO, 2020, the auditor is
required to report “whether term loans were applied for the purposes for which those were
obtained. If not, the amount of loan so diverted and the purpose for which it is used may be
reported”.
The auditor should examine the terms and conditions of the term loan with the actual utilisation of
the loans. If the auditor finds that the fund has not been utilized for the purpose for which they
were obtained, the report should state the fact.
CONCLUSION: In the instant case, term loan taken for the purpose of R&D equipment has been
utilized for the purchase of car which has no relation with R&D equipment.
Therefore, car though used for R&D Director cannot be considered as R&D equipment. The auditor
should state the fact in his report as per Paragraph 3 clause (ix) of the CARO 2020, that out of the
term loan taken for R&D equipment, Rs. 15 lakhs was not utilised for the intended purpose of
acquiring R&D equipment.
Q.NO.22 Should the auditor examine the cost record in detail while reporting under CARO?
ANSWER:
CARO does not require a detailed examination of Cost Records. The Auditor should, therefore,
conduct a general review of Cost Records to ensure that the records as prescribed are made and
maintained. The word "made" applies in respect of Cost Accounts, and the word "maintained"
applies in respect of Cost Records relating to Materials, Labour, Overheads, etc.
Q.NO.23 KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint
auditors to conduct audit for the financial year 2018-19. For the valuation of gratuity scheme
of the company, Mr. X, Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to
difference of opinion, all the joint auditors consulted their respective Actuaries. Subsequently,
major difference was found in the actuarial reports. However, Mr. X agreed to Mr. Y’s actuary
report, though, Mr. Z did not. Mr. X contends that Mr. Y’s actuary report shall be considered in
audit report due to majority of votes. Now, Mr. Z is in dilemma. Explain the responsibility of
auditors, in case, report made by Mr. Y’s actuary, later on, was found faulty?
ANSWER:
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Using the work of an Auditor’s Expert: As per SA 620 “Using the Work of an Auditor’s Expert”, the
expertise of an expert may be required in the actuarial calculation of liabilities associated with
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insurance contracts or employee benefit plans etc., however, the auditor has sole responsibility for
the audit opinion expressed, and that responsibility is not reduced by the auditor’s use of the work
of an auditor’s expert.
The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes,
including the relevance and reasonableness of that expert’s findings or conclusions, and their
consistency with another audit evidence as per SA 500.
Further, in view of SA 620, if the expert’s work involves use of significant assumptions and methods,
then the relevance and reasonableness of those assumptions and methods must be ensured by the
auditor and if the expert’s work involves the use of source data that is significant to that expert’s
work, the relevance, completeness, and accuracy of that source data in the circumstances must be
verified by the auditor.
ANALYSIS AND CONCLUSION: In the instant case, Mr. X, Mr. Y and Mr. Z, jointly appointed as
auditors of KRP Ltd., referred their own known Actuaries for valuation of gratuity scheme. Actuaries
are an auditor’s expert as per SA 620. Mr. Y’s referred actuary has provided the gratuity valuation
report, which later on was found faulty. Further, Mr. Z is not in agreement with this report,
therefore, he submitted a separate audit report specifically for such gratuity valuation.
In such situation, it was duty of Mr. X, Mr. Y and Mr. Z, before using the gratuity valuation report of
Actuary, to ensure the relevance and reasonableness of assumptions and methods used. They were
also required to examine the relevance, completeness and accuracy of source data used for such
report before expressing their opinion.
Mr. X and Mr. Y will be held responsible for gross negligence and using such faulty report without
examining the adequacy of expert actuary’s work whereas Mr. Z will not be held liable for the same
due to separate opinion expressed by him.
Q.NO.24 X Ltd had a net worth of INR 1300 crores because of which Ind AS became applicable to
them. The company had various derivative contracts – options, forward contracts, interest
rate swaps etc. which were required to be fair valued for which company got the fair valuation
done through an external third party. The statutory auditors of the company involved an
auditor’s expert to audit valuation of derivatives. Auditor and auditor’s expert were new to
each other i.e., they were working for the first time together but developed a good bonding
during the course of the audit. The auditor did not enter into any formal agreement with the
auditor’s expert. Please advise.
ANSWER:
As per SA 620, Using the work of an Auditor’s Expert, the nature, scope and objectives of the
auditor’s expert’s work may vary considerably with the circumstances, as may the respective roles
and responsibilities of the auditor and the auditor’s expert, and the nature, timing and extent of
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communication between the auditor and the auditor’s expert. It is therefore required that these
matters are agreed between the auditor and the auditor’s expert.
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In certain situations, the need for a detailed agreement in writing is required like -
a. The auditor’s expert will have access to sensitive or confidential entity information.
b. The matter to which the auditor’s expert’s work relates is highly complex.
c. The auditor has not previously used work performed by that expert.
d. The greater the extent of the auditor’s expert’s work, and its significance in the context of
the audit.
CONCLUSION: In the given case, considering the complexity involved in the valuation and volume of
derivatives and also due to the fact that the auditor and auditor’s expert were new to each other,
auditor should have signed a formal agreement/ engagement letter with the auditor’s expert in
respect of the work assigned to him.
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ILLUSTRATIONS AS PER CA FINAL – STUDY MATERIAL
ILLUSTRATION 1: [SA 570]
CA Sameer is the statutory auditor of Tram Fram Ltd. for the FY 2020-21. While concluding the
audit CA Sameer decided to issue an unmodified opinion, though he also concluded that a
material uncertainity exists with respect to the company’s ability to continue as a going concern
on account of a pending litigation related to labour laws. He is of the view that the company has
made appropriate disclosures with respect to such pending litigation in the notes to accounts
annexed to the financial statements of Tram Fram Ltd. for the FY 2020-21. Explain how CA Sameer
will deal with the above situation in his auditor’s report (draft the relevant portion of the
auditor’s report.)
ANSWER:
Material Uncertainty Related to Going Concern:
We draw attention to Note 10 in the financial statements, which indicates that the outcome of a
litigation on account of labour laws is pending in case of the company during the year 31 March,
2021. As stated in Note 11, this event or condition, indicate that a material uncertainty exists that
may cast significant doubt on the Company’s ability to continue as a going concern. Our opinion is
not modified in respect of this matter.
The following illustrates the presentation in the auditor’s report if the auditor has determined
there are no key audit matters to communicate:
Key Audit Matters
[Except for the matter described in the Basis for Qualified (Adverse) Opinion section or Material
Uncertainty Related to Going Concern section,] We have determined that there are no [other] key
audit matters to communicate in our report.]
ILLUSTRATION 2: [SA 705 read with SA 570]
XYZ Ltd. is a company engaged in the manufacture of cranes. CA Sudhir is the statutory auditor of
the company for the FY 2020-21. The company has taken long term funding for fixed capital
requirements and short term funding for its working capital requirements. During the course of
audit, CA Sudhir found that the company’s financing arrangements are about to expire and the
company is unable to re- negotiate or obtain the replacement financing. As such the company
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may be unable to realize its assets and discharge its liabilities in the normal course of business.
Notes to accounts annexed to the financial statements discuss the magnitude of financing
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arrangements, the expiration and the total financing arrangements; however the financial
statements do not include discussion on the impact or the availability of refinancing. Thus, the
financial statements (and notes thereto) do not fully disclose this fact. What kind of opinion
should CA Sudhir issue in case of XYZ Ltd.?
ANSWER:
In the present case, XYZ Ltd. is unable to re- negotiate or obtain the replacement financing for its
long term and short-term funding requirements. This situation indicates the existence of a material
uncertainty that may cast significant doubt on the Company’s ability to continue as a going concern
and therefore, XYZ Ltd. may be unable to realize its assets and discharge its liabilities in the normal
course of business. Further, the financial statements of XYZ Ltd. do not disclose this fact adequately.
Thus, the financial statements of XYZ Ltd. are materially misstated due to the inadequate disclosure
of the material uncertainty. CA Sudhir will express a qualified opinion as the effects on the financial
statements of this inadequate disclosure are material but not pervasive to the financial statements.
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph
is as under:
Qualified Opinion:
In our opinion and to the best of our information and according to the explanations given to us,
except for the incomplete disclosure of the information referred to in the Basis for Qualified Opinion
section of our report, the aforesaid standalone financial statements give the information required
by the Act in the manner so required and give a true and fair view in conformity with the accounting
principles generally accepted in India, of the state of affairs of XYZ Ltd. as at March 31, 2021, and
profit/loss, for the year ended on that date.
Basis for Qualified Opinion:
As discussed in Note 6, the Company’s financing arrangements are about to expire and the
Company has been unable to conclude renegotiations or obtain replacement financing. This
situation indicates that a material uncertainty exists that may cast significant doubt on the
Company’s ability to continue as a going concern. The financial statements do not adequately
disclose this matter.
ILLUSTRATION 4: [SA 705 read with SA 570]
ABC Ltd. is a company engaged in the manufacture of iron and steel bars. PP & Associates are the
statutory auditors of ABC Ltd. for the FY 2020-21. During the course of audit, CA Prakash, the
engagement partner, found that the Company’s financing arrangements have expired and the
amount outstanding was payable on March 31, 2021. The Company has been unable to re-
negotiate or obtain replacement financing and is considering filing for bankruptcy. These events
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indicate a material uncertainty that may cast significant doubt on the Company’s ability to
continue as a going concern and therefore it may be unable to realize its assets and discharge its
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liabilities in the normal course of business. The financial statements (and notes thereto) do not
disclose this fact. What opinion should CA Prakash express in case of ABC Ltd.?
ANSWER:
In the present case based on the audit evidence obtained, CA Prakash has concluded that a material
uncertainty exists related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern, and the entity is considering bankruptcy. The financial
statements of ABC Ltd. omit the required disclosures relating to the material uncertainty. In such
circumstances, CA Prakash should express an adverse opinion because the effects on the financial
statements of such omission are material and pervasive.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is
as under:
Adverse Opinion:
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly, the
financial position of the entity as at March 31, 2021, and of its financial performance and its cash
flows for the year then ended in accordance with the Accounting Standards issued by the Institute
of Chartered Accountants of India.
Basis for Adverse Opinion:
The financing arrangements of ABC Ltd. has expired and the amount outstanding was payable on
March 31, 2021. The entity has been unable to conclude re-negotiations or obtain replacement
financing and is considering filing for bankruptcy. This situation indicates that a material uncertainty
exists that may cast significant doubt on the Company’s ability to continue as a going concern. The
financial statements do not adequately disclose this fact.
MNO Ltd. is a power generating company having its plants in the north eastern states of the
country. For the FY 2020-21, M/s PRT & Associates are the statutory auditors of the company.
During the course of audit, the audit team was unable to obtain sufficient appropriate audit
evidence about a single element of the consolidated financial statements. That is, the auditor was
also unable to obtain audit evidence about the financial information of a joint venture investment
(in XYZ Ltd.) that represents over 90% of the entity’s net assets. What kind of opinion should the
statutory auditor’s issue in such case?
ANSWER:
M/s PRT & Associates are unable to obtain sufficient appropriate audit evidence about the financial
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information of a joint venture investment that represents over 90% of the entity’s net assets. The
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possible effects of this inability to obtain sufficient appropriate audit evidence are both material and
pervasive to the consolidated financial statements. Therefore, the statutory auditor should issue a
disclaimer of opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
paragraph is as under:
Disclaimer of Opinion:
We do not express an opinion on the accompanying financial statements of MNO Ltd. Because of
the significance of the matters described in the Basis for Disclaimer of Opinion section of our report,
we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion on these financial statements.
Basis for Disclaimer of Opinion:
The Group’s investment in its joint venture XYZ Company is carried at Rs. 95 crores on the Group’s
consolidated balance sheet, which represents over 90% of the Group’s net assets as at March 31,
2021. We were not allowed access to the management and the auditors of XYZ Company, including
XYZ Company’s auditors’ audit documentation. As a result, we were unable to determine whether
any adjustments were necessary in respect of the Group’s proportional share of XYZ Company’s
assets that it controls jointly, its proportional share of XYZ Company’s liabilities for which it is jointly
responsible, its proportional share of XYZ’s income and expenses for the year, (and the elements
making up the consolidated statement of changes in equity) and the consolidated cash flow
statement.
CA Yash is the statutory auditor of Laksmi Vardhan Limited for the FY 2020-21. In respect of loans
and advances of Rs. 55,00,000/- given to Sarvagya Private Limited, the Company has not furnished
any agreement to CA Yash and in absence of the same, he is unable to verify the terms of
repayment, chargeability of interest and other terms. What kind of opinion should CA Yash give in
such situation?
ANSWER:
In the present case, with respect to loans and advances of Rs. 55,00,000/- given to Sarvagya Private
Limited, the Company has not furnished any agreement to CA Yash. In absence of such agreement,
CA Yash is unable to verify the terms of repayment, chargeability of interest and other terms. For an
auditor, while verifying any loans and advances, one of the most important audit evidences is the
loan agreement. Therefore, the absence of such document in the present case, tantamount to a
material misstatement in the financial statements of the company. However, the inability of CA Yash
to obtain such audit evidence is though material but not pervasive so as to require him to give a
disclaimer of opinion.
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Thus, in the present case, CA Yash should give a qualified opinion.

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ILLUSTRATION 7:
In the financial year 2020-21, MSD Ltd. faced an extraordinary event (earthquake), which
destroyed a lot of business activity of the company. These circumstances indicate material
uncertainty on the company’s ability to continue as going concern. Due to such event it may not
be possible for the company to realize its assets or pay off the liabilities during the regular course
of its business. The financial statement and notes to the financial statements of the company do
not disclose this fact. What kind of opinion should the statutory auditor of MSD Ltd. issue in such
circumstances?
ANSWER:
In the present case, there exists a material uncertainty that cast a significant doubt on the
company’s ability to continue as going concern and the same is not disclosed in the financial
statements of MSD Ltd. As such, the financial statements of MSD Ltd. for the FY 2020-21 are
materially misstated and the effect of the misstatement is so material and pervasive on the financial
statements that giving only a qualified opinion will be insufficient and therefore the statutory
auditor of MSD Ltd. should issue an adverse opinion.
ILLUSTRATION 8:
CA Abhimanyu is the statutory auditor of PQR Ltd. for the FY 2020-21. During the course of audit
CA Abhimanyu noticed the following:
a) With respect to the debtors amounting to Rs. 150 crores, no balance confirmation was
received by the audit team. Further, there have been defaults on the payment obligations by
debtors on the due dates during the year under audit. The Company has created a provision
for doubtful debts to the tune of Rs.25 Cr. during the year under audit. The Company has
stated that the provision is based on receivables which are older than 36 months, which
according to the audit team is inadequate and as such the audit team is unable to ascertain
the carrying value of trade receivables.
b) Further, in respect of Inventories (which constitutes 40% of the total assets of the company),
during the reporting period, the management has not undertaken physical verification of
inventories at periodic intervals. Also, the Company has not maintained adequate inventory
records at the factory. The audit team was unable to undertake the physical inventory count
as such the value of inventory could not be verified.
ANSWER:
In the present case, CA Abhimanyu is unable to obtain sufficient and appropriate audit evidence
with respect to the following:
1. The balance confirmation with respect to debtors amounting to Rs. 150 crores are not available.
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Further there has been default in payment by the debtors and the provision so made is not
adequate. The audit team is also unable ascertain the carrying value of trade receivables.
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2. With respect to 40% of the company’s inventory, neither the physical verification has been done
by the management nor are adequate inventory records maintained. The audit team is also unable
to undertake the physical inventory count as such the value of inventory could not be verified. In the
above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, and the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
Thus, CA Abhimanyu should give a Disclaimer of Opinion.
In respect of the audit of BDS Ltd., the statutory auditor of the company noticed some matters.
The statutory auditor wants to draw the user’s attention towards such matters, though his
opinion is not modified in respect of such matters. Draft the relevant paragraphs of the audit
report for the following matters:
a) The company has a plan to resume its construction activities with respect to one of its
thermal power project, the activity of such power plant was suspended in the FY 2018-19.
The thermal power project comprises of the plant and equipment amounting to Rs. 5.95
crore and capital work in progress of Rs. 147.50 crore.
b) The financial statements of 5 branches are included in the Standalone Financial Statements
of BDS Ltd. whose financial statements reflect total assets of Rs. 90 crores as at 31.03.2021
and total revenue from operations of Rs. 40 crores for the year ended on that date. The
financial statements of these branches have been audited by the branch auditors.
ANSWER:
Emphasis of Matter:
We draw attention to the following note of the standalone financial statements: Note 27 regarding
the plans of the Company to resume construction/developmental activities of a thermal power
project. The carrying amounts related to the project as at 31st March, 2021 comprise of plant and
equipment of Rs. 5.95 crore and capital work in progress of Rs. 147.50 crore.
Our opinion is not modified in respect of this matter.
Other Matter:
We did not audit the financial statements of 5 branches included in the Standalone Financial
Statements of the company whose financial statements reflect total assets of Rs. 90 crores as at
31.03.2021 and total revenue from operations of Rs. 40 crores for the year ended on that date. The
financial statements of these branches have been audited by the branch auditors whose reports
have been furnished to us, and our opinion in so far as it relates to the amounts and disclosures
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included in respect of these branches, is based solely on the report of the branch auditors.
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Our opinion is not modified in respect of this matter.
ILLUSTRATION 10: [SA 610] [Ref: PG. 2.27 in ICAI SM Nov 2020 Edition]
CA. Amboj, a practicing chartered accountant has been appointed as an internal auditor of Textile
Ltd. He conducted the physical verification of the inventory at the year-end and handed over the
report of such verification to CA. Kishore, the statutory auditor of the Company, for his view and
reporting. Can CA. Kishore rely on such report?
ANSWER:
USING THE WORK OF INTERNAL AUDITOR: As per SA 610 “Using the Work of Internal Auditors”,
while determining whether the work of the internal auditors can be used for the purpose of the
audit, the external auditor shall evaluate:
1) The extent to which the internal audit function’s organizational status and relevant policies
and procedures support the objectivity of the internal auditors;
2) The level of competence of the internal audit function; and
3) Whether the internal audit function applies a systematic and disciplined approach, including
quality control.
Further, the external auditor shall not use the work of the internal audit function if the external
auditor determines that:
1) The function’s organizational status and relevant policies and procedures do not adequately
support the objectivity of internal auditors.
2) The function lacks sufficient competence; or
3) The function does not apply a systematic and disciplined approach, including quality control.
ANALYSIS AND CONCLUSION: In the instant case, CA. Kishore should ascertain the internal auditor’s
scope of verification, area of coverage and method of verification. He should review the report on
physical verification taking into consideration these factors. If possible, he should also test check
few items and he can also observe the procedures performed by the internal auditors.
If the statutory auditor is satisfied about the appropriateness of the verification, he can rely on the
report but if he finds that the verification is not in order, he has to decide otherwise.
The final responsibility to express opinion on the financial statement remains with the statutory
auditor.
While doing audit, Ram, the Auditor requires reports from experts for the purpose of Audit
evidence. What types of reports/opinions he can obtain and to what extent he can rely upon the
same?
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ANSWER:
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CIRCUMSTANCES: While doing audit, Ram, the auditor can obtain the following types of reports, or
options or statements of an expert for the purpose of audit evidence:
1. The valuation of complex financial instruments, land and buildings, plant and machinery,
jewellery, works of art, antiques, intangible assets, assets acquired and liabilities assumed in
business combinations and assets that may have been impaired.
2. The actuarial calculation of liabilities associated with insurance contracts or employee
benefit plans.
3. The estimation of oil and gas reserves.
4. The valuation of environmental liabilities, and site clean-up costs.
5. The interpretation of contracts, laws and regulations.
6. The analysis of complex or unusual tax compliance issues.
EVALUATION OF WORK: When the auditor intends to use the work of an expert, he shall evaluate
the adequacy of the auditor’s expert’s work, including:
1. The relevance and reasonableness of that expert’s findings or conclusions, and their
consistency with other audit evidence.
2. If that expert’s work involves use of significant assumptions and methods, the relevance and
reasonableness of those assumptions and methods in the circumstances and
3. Ff that expert’s work involves the use of source data that is significant to his work, the
relevance, completeness, and accuracy of that source data.
4. INADEQUATE: If the auditor determines that the work of the auditor’s expert is not
adequate for the auditor’s purposes, he shall agree with that expert on the nature and
extent of further work to be performed by that expert; or perform further audit procedures
appropriate to the circumstances.
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133
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3. STANDARDS ON AUDITING AND GUIDANCE
NOTES
Overall Objectives of an Independent auditor and conduct of an audit in accordance with
1. SA 200
standards on auditing [GIVEN]
2. SA 210 Agreeing the terms of audit engagement [GIVEN]
3. SA 220 Quality Control for an audit of financial statements [GIVEN]
4. SA 230 Audit Documentation [GIVEN]
5. SA 240 Auditors’ responsibility relating to fraud in an audit of financial statements [GIVEN]
6. SA 250 Consideration of Laws and Regulations in an audit of financial statements [GIVEN]
7. SA 260 Communication with Those charged with governance [CHAPTER 2 - AUDIT REPORTING]
Communicating deficiencies in internal control with those charged with governance and
8. SA 265
management [CHAPTER 18 - RISK ASSESSMENT AND INTERNAL CONTROL]
9. SA 299 Responsibility of Joint auditor’s [CHAPTER 2 - AUDIT REPORTING]
10. SA 300 Planning an audit of financial statements [CHAPTER 17 - AUDIT STRATEGY]
Identifying and assessing risk of material misstatement through understanding the entity
11. SA 315
and its environment [CHAPTER 18 - RISK ASSESSMENT AND INTERNAL CONTROL]
12. SA 320 Materiality in planning and performing an audit [PRONOUNCEMENTS]
13. SA 330 The Auditor’s Responses to Assessed Risks [COVERED AS PART OF CHAPTER 20A]
Audit Considerations Relating to an Entity Using a Service Organisation
14. SA 402
[PRONOUNCEMENTS]
15. SA 450 Evaluation of Misstatements identified During the Audit [PRONOUNCEMENTS]
16. SA 500 Audit Evidence [CHAPTER 20A - AUDIT EVIDENCE]
17. SA 501 Audit Evidence - Specific Considerations for Selected Items [GIVEN]
18. SA 505 External Confirmations [GIVEN]
19. SA 510 Initial Audit Engagements - Opening Balances [GIVEN]
20. SA 520 Analytical Procedures [CHAPTER 20C - ANALYTICAL PROCEDURES]
21. SA 530 Audit Sampling [CHAPTER 20B - AUDIT SAMPLING]
Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related
22. SA 540
Disclosures
23. SA 550 Related Parties [GIVEN]
24. SA 560 Subsequent Events [GIVEN]
25. SA 570 Going Concern [CHAPTER 2 - AUDIT REPORTING]
26. SA 580 Written Representations [GIVEN]
27. SA 600 Using the Work of Another Auditor [CHAPTER 2 - AUDIT REPORTING]
28. SA 610 Using the Work of Internal Auditors [CHAPTER 2 - AUDIT REPORTING]
29. SA 620 Using the Work of an Auditor’s Expert [CHAPTER 2 - AUDIT REPORTING]
30. SA 700 Forming an Opinion and Reporting on Financial Statements [CH 2 - AUDIT REPORTING]
Communicating Key Audit Matters in the Independent Auditor’s Report [CHAPTER 2 -
31. SA 701
AUDIT REPORTING]
32. SA 705 Modifications to the Opinion in the Independent Auditor’s Report [2. AUDIT REPORTING]
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
33. SA 706
Auditor’s Report [CHAPTER 2 - AUDIT REPORTING]
Comparative Information - Corresponding Figures and Comparative Financial Statements
34. SA 710
[CHAPTER 2 - AUDIT REPORTING]
The Auditor’s Responsibility in Relation to Other Information in Documents Containing
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35. SA 720
Audited Financial Statements [CHAPTER 2 - AUDIT REPORTING]
Quality Control for Firms that Perform Audits and Review of Historical Financial
36. SQC
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Statements, Other Assurance And Related Services Engagements [GIVEN]
PART 1 – PREFACE TO STANDARDS
Q.NO.1 OVERVIEW ON AUDITING AND ASSURANCE STANDARDS BOARD [AASB]?
ANSWER:
The Following are the important points as regards scope and functions of Auditing and Assurance
Standards Board –
A. IAASB:
IFAC – IAPC - ISA: The International Federation of Accountants (IFAC) came into existence in 1977
and constituted International Auditing Practices Committee (IAPC) to formulate International
Auditing Guidelines. These guidelines were later on converted into International Standards on
Auditing (ISA).
International Auditing and Assurance Standards Board (IAASB): The IFAC Board has established the
IAASB to develop and issue, in the public interest and under its own authority, high quality auditing
standards for use around the world. The IAASB functions as an independent standard-setting body
under the auspices of IFAC.
B. AASB:
ICAI – APC: Considering the developments in the field of auditing at international level, the need for
issuing Standards and Guidance Notes in line with international standards but conforming to
national laws, customs, usages and business environments was felt.
APC – SAP: With this objective, our Institute constituted the Auditing Practices Committee (APC) on
September 17, 1982, to formulate the new framework of Statements on Standard Auditing Practices
(SAPs) and Guidance Notes (GNs) to replace the old omnibus Statement on Auditing Practices issued
in 1964.
Auditing and Assurance Standards Board (AASB):
1. ICAI is a member of the IFAC and is committed to work towards the implementation of the
guidelines issued by the IFAC.
2. ICAI constituted the AASB (erstwhile Auditing Practices Committee):
a. to review the existing auditing practices in India and
b. to develop Engagement and Quality Control Standards (erstwhile Statements on
Standard Auditing Practices)
3. So that these may be issued by the Council of the Institute.
4. In July, 2002, the Auditing Practices Committee has been converted into an Auditing and
Assurance Standards Board by the Council of the Institute, to be in line with the international
trend.
5. The nomenclature of SAPs had been changed to Auditing and Assurance Standards (AASs). As
per the Preface to Standards on Quality Control Auditing Review, other Assurance and Related
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Services w.e.f. April 1, 2008.

6. The nomenclature of AASs under the authority of the Council are collectively known as the
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Engagement Standards and Quality Control [EQC] Standards which include the following:
a) Standards on Auditing (SAs) are applied in the audit of historical financial information.
b) Standards on Review Engagements (SREs) are applied in the review of historical financial
information.
c) Standards on Assurance Engagements (SAEs) are applied in assurance engagements, dealing
with subject matters other than historical financial information.
d) Standards on Related Services (SRSs) are applied to engagements involving application of
agreed-upon procedures to information, compilation engagements, and other related
services engagements, as may be specified by the ICAI.
e) Standard on Quality Control [SQC] which contains Extensive requirements in relation to
Establishment and maintenance of a system of Quality control in the audit firms as well as
even for sole practitioners.
C. SCOPE AND FUNCTIONS OF AASB:
1. The main function of the AASB is to review the existing auditing practices in India and to
develop Statements on Standards on Auditing (SAs) so that these may be issued by the
Council of the Institute.
2. While formulating the SAs, the AASB takes into consideration the ISAs issued by the IAPC
[NOW IAASB], applicable laws, customs, usages and business environment in India.
3. The SAs are issued under the authority of the Council of the Institute. The AASB also issues
Guidance Notes on the issues arising from the SAs wherever necessary. The AASB has also
been entrusted with the responsibility to review the SAs at periodical intervals.
D. PROCEDURE FOR ISSUE OF STANDARDS ON AUDITING:
1. IDENTIFY THE AREA: The AASB determines the broad areas in which the SAs need to be
formulated and the priority in regard to the selection thereof.
2. PREPARE THE SA – STUDY GROUP: The preparation of SAs, the AASB is assisted by Study
Groups constituted to consider specific subjects. In the formation of Study Groups, provision
is made for participation of cross-section of members of the Institute.
3. EXPOSURE DRAFT: On the basis of work of the study groups, an exposure draft is prepared
by committee and issued for comments by members of the institute.
4. COMMENTS OF MEMBERS: After taking into consideration the comments received, the draft
of proposed SA is finalised by AASB and submitted to the council of the institute.
5. FINAL DRAFT AND ISSUE: The council of the institute considers the final draft of the
proposed SA, and if necessary, modifies the same in consultation with the AASB. The SA is
then issued under the authority of the council.
E. COMPLIANCE WITH SA’s - MANDATORY:

136
1. While discharging their attest function, it is the duty of the members of the Institute to
ensure that the SAs are followed in the audit of financial information covered by their audit
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reports.
2. If for any reason a member has not been able to perform an audit in accordance with the
SAs, his report should draw attention to the material departures therefrom. Further,
compliance of SAs is mandatory requirement as per the Companies Act, 2013 [143(9)].
3. Disciplinary Proceedings:
a. Clause 5 of Part I of the Second Schedule to the Chartered Accountants Act, 1949,
according to which a chartered accountant in practice shall be deemed to be guilty of
professional misconduct, if he fails to disclose a material fact known to him which is
not disclosed in a financial statement, but disclosure of which is necessary in making
such financial statement where he is concerned with that financial statement in a
professional capacity
b. Clause 7 of Part I of the Second Schedule to the Chartered Accountants Act, 1949
states that a chartered accountant in practice shall be deemed to be guilty of
professional misconduct, if he does not exercise due diligence, or is grossly negligent
in the conduct of his professional duties
c. Under Clause (9) of Part I of the Second Schedule to the Chartered Accountants Act,
1949 (as amended by the Chartered Accountants (Amendment) Act, 2006), which
specifies that a member of the Institute engaged into practice shall be guilty of
professional misconduct if he “fails to invite attention to any material departure
from the generally accepted procedure of audit applicable to the circumstances”.
Q.NO.2 WRITE ABOUT FRAMEWORK ON STANDARDS AND GUIDANCE NOTES RELATING TO

RELATED SERVICES?
ANSWER:
1. Framework of Standards on Auditing and Guidance Notes on Related Services issued recently
distinguishes audits from related services. Related services comprise reviews, agreed-upon
procedures and compilations.
a. Assurance: Audits and reviews are designed to enable the auditor to provide high and
moderate levels of assurance respectively.
b. Non-Assurance: Engagements to undertake agreed-upon procedures and compilations
are not intended to enable the auditor to express assurance.
Note: As per Guidance Note on Related Services, Review Engagement of Historical

Financial statements are also treated as part of related services. Generally, SRE and SRS
are different standards. But they both are covered commonly covered under one Guidance
Note.
2. Concept of Assurance [Audit and Review]:

a. Assurance in the above context refers to the auditor's satisfaction as to the reliability of
an assertion being made by one party for use by another party. To provide such
assurance, the auditor assesses the evidence collected as a result of procedures
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conducted and expresses a conclusion.

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b. The degree of satisfaction achieved and the level of assurance which may be provided is
determined by the procedures performed and their results.
3. Concept of Audit Engagement:

a. In an audit engagement, the auditor provides a high, but not absolute, level of assurance
(i.e., reasonable level of assurance) that the information subject to audit is free of
material misstatement expressed positively in the audit report.
b. Objective of an audit is to enable the auditor to express an opinion whether the financial
statements are prepared, in all material respects, in accordance with an identified
financial reporting framework "give a true and fair view".
c. Absolute assurance in auditing is not attainable as a result of such factors such as
i. the need for judgement,
ii. the use of test checks,
iii. the inherent limitations of any accounting and internal control systems and
iv. the fact that most of the evidence available to the auditor is persuasive, rather
than conclusive, in nature.
4. Concept of Review Engagement:

a. In a review engagement, the auditor provides a moderate level of assurance that the
information subject to review is free of material misstatement. This is expressed in the
form of negative assurance (also known as limited assurance).
b. The objective of a review of financial statements is to enable an auditor to state whether
anything has come to the auditor's attention that causes the auditor to believe that the
financial statements are not prepared, in all material respects, in accordance with an
identified financial reporting framework. [Negative form]
c. A review involves the application of audit skills and techniques and the gathering of
evidence, it does not ordinarily involve on assessment of accounting and internal
control systems, tests of records and of responses to inquiries by obtaining
corroborating evidence through inspection, observation, confirmation and
computation,
d. The auditor ATTEMPTS to become aware of all significant matters, thus the level of
assurance provided in a review report is correspondingly less than that given in an audit
report.
5. Concept of Agreed upon Procedures and Compilations:
Agreed Upon Procedures:

a. In an engagement to perform agreed-upon procedures and auditor is engaged to carry
out those procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings.
b. For agreed-upon procedures, auditor simply provides a report of the factual findings, no
138
assurance is expressed. Users of the report draw their own conclusions from the
auditor's work.
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c. Confidential: The report is restricted to those parties that have agreed to the procedures
to be performed since others, unaware of the reasons for the procedures, may
misinterpret the results.
Compilation Engagement:
d. In a compilation engagement, although the users of the compiled information derive
some benefit from the involvement of a member of the Institute, no assurance is
expressed in the report.
e. In a compilation engagement, a member of the Institute is engaged to use accounting
expertise as opposed to auditing expertise to collect, classify, and summaries financial
information.
f. The procedures employed are not designed and do not enable the member to express
any assurance on the financial information. However, users derive some benefit as a
result of the member's involvement because the service has been performed with due
professional skill and care.
Q.NO.3 WRITE ABOUT ENGAGEMENT AND QUALITY CONTROL STANDARDS AND STRUCTURE OF
STANDARDS ON AUDITING?
ANSWER:
Standards on Auditing are structured in a particular manner:
1. INTRODUCTION: It includes the purpose, scope, and subject matter as well as the
responsibilities of the auditor and others in that context.
2. OBJECTIVE: It includes the objective of the auditor in the audit area addressed by that particular
SA.
3. DEFINITIONS: For higher understanding of the SAs, pertinent terms are delineated in each SA.
4. REQUIREMENTS: Every objective is explained by clearly stated requirements. Requirements are
always expressed by the phrase “the auditor shall.” This itself includes Reporting requirements.
5. APPLICATION AND OTHER EXPLANATORY MATERIAL: The application and other explanatory
material explains more exactly what is meant by a requirement or is intended to cover, or
includes examples of procedures that can be appropriate under certain circumstances.
Q.NO.4 WRITE ABOUT “AUTHORITY ATTACHED” TO THE DOCUMENTS ISSUED BY THE ICAI?
ANSWER:
LISTING THE REQUIREMENTS BY ICAI:
1. The Institute has, from time to time, issued ‘Statements’ and ‘Guidance Notes’ on a number of
matters. With the formation of the Accounting Standards Board and the Auditing and Assurance
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Standards Board, Accounting Standards and Standards on Auditing have also been issued.
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2. The level of authority attached to these documents and the degree of compliance required in
respect thereof has been explained by the Institute through its various announcements issued
from time to time.
3. It is the duty of the professional accountants (Chartered Accountant) to ensure that the
Standards/Statements/General Clarifications are followed in the engagements undertaken by
them.
DEPARTURE FROM THE REQUIREMENT:
1. The need for the professional accountants to depart from a relevant requirement is expected to
arise only where the requirement is for a specific procedure to be performed and, in the specific
circumstances of the engagement, that procedure would be ineffective. If because of that
reason, a professional accountant has not been able to perform an engagement procedure in
accordance with any Standard/Statement/General Clarification:
a. He is required to document how alternative procedures performed achieve the purpose
of the procedure, and
b. the reasons for the departure.
c. Further, his report should draw attention to such departures.
2. However, a mere disclosure in his report does not relieve a professional accountant from
complying with the applicable Standards /Statements / General Clarifications.
CONCEPT OF STATEMENTS BY ICAI:
The ‘statements’ have been issued with a view to securing compliance by members on matters
which in the opinion of the council of the institute are critical for the proper discharge of their
functions. ‘Statements’ therefore are mandatory. Accordingly, while discharging their attest
function, it is the duty of the members of the institute:
1. Statement on Accounting Matters: to examine whether ‘Statements’ relating to accounting

matters are complied with in the presentation of financial statements covered by their audit. In
the event of any deviation from such ‘Statements’, it is their duty to make adequate disclosures
in their audit reports so that the users of financial statements may be aware of such deviations.
and
2. Statement on Auditing Matters: to ensure that the ‘Statements’ relating to auditing matters,
are followed in the audit of financial information covered by their audit reports. If, for any
reason, a member, has not been able to perform an audit in accordance with such ‘Statements
his report should draw attention to the material departures there from.
CONCEPT OF GUIDANCE NOTES:
1. ‘Guidance Notes’ are primarily designed to provide guidance to members on matters which may
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arise in the course of their professional work and on which they may require assistance in
resolving issues which may pose difficulty.
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2. Guidance notes are recommendatory in nature.
3. A member should ordinarily follow recommendations in a guidance note relating to an auditing
matter except where it may not be necessary to do so.
4. GN relating to accounting matters:
a. Similarly, while discharging his attest function, a member should examine whether the
recommendations in a guidance note relating to an accounting matter have been
followed or not.
b. If the same have not been followed, the member should consider whether keeping in
view the circumstances of the case, a disclosure in his report is necessary.
5. GN – MANDATORY: There are a few guidance notes in case of which the Council has specifically
stated that they should be considered as mandatory on members while discharging their attest
function. [E.g., GN on Tax Audit, GN on IFC in case of Listed entities]
CONCEPT OF STANDARDS ON ACCOUNTING AND AUDIT:
1. The ‘accounting standards’ and ‘Standards on Auditing’ establish standards which have to be
complied with to ensure that financial statements are prepared in accordance with generally
accepted accounting standards and that auditors carry out their audit in accordance with the
generally accepted auditing practices.
2. They become mandatory on the dates specified in the respective document or notified by the
council.
3. STATEMENT vs STANDARD: There can be situations in which certain matters are covered both
by a ‘Statement’ and by an ‘Accounting Standard’/ ‘Standards on Auditing. In such a situation,
the ‘Statement’ prevails till the time the relevant ‘Accounting Standard’/ Standards on Auditing
becomes mandatory. Once an ‘Accounting Standard’/ ‘Standards on Auditing’ becomes
mandatory, the concerned ‘Statement’ or the relevant part thereof automatically stands
withdrawn.
4. The duties of the members of the Institute in relation to operative SAs are similar to those in
respect of ‘Statements’ relating to auditing matters.
Q.NO.5 WRITE ABOUT ACCOUNTING STANDARDS AND ITS COMPLIANCE IN RELATION TO AUDIT?
ANSWER:
1. Accounting Standards are formulated by the Accounting Standards Board and issued by the
Council of the Institute. Accounting Standards forms part of Companies Act, 2013 as well which
are notified under Companies (Accounting standards) rules, 2006.
2. The Accounting Standards are issued for use in the presentation of ‘general purpose financial
statements’ which are issued to the public by such ‘commercial, industrial or business
enterprises’ as may be specified by the Institute from time to time and subject to the attest
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function of its members.

3. They become mandatory on the dates specified in the respective Accounting Standards or
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notified by the Council in this behalf.

4. Explanations:
a. The term ‘General Purpose Financial Statements’ includes balance sheet, statement of
profit and loss and other statements and explanatory notes which form part thereof,
issued for the use of shareholders/members, creditors, employees and public at large.
b. The reference to ‘commercial, industrial or business enterprises’ is in the context of the
nature of activities carried on by an enterprise rather than with reference to its objects.
The Accounting Standards apply in respect of commercial, industrial or business activities
of any enterprise, irrespective of whether it is profit oriented or is established for
charitable or religious purposes. Accounting Standards will not, however, apply to those
activities which are not of commercial, industrial or business nature (e.g., an activity of
collecting donations and giving them to flood affected people).
c. Non-Applicability: The exclusion of an entity from the applicability of the Accounting
Standards is permissible only if no part of the activity of entity is commercial, industrial
or business in nature. In other words, even if a very small proportion of the activities of
an entity is considered to be commercial, industrial or business in nature, then it cannot
claim exemption from the application of Accounting Standards. In such a case the
Accounting Standards will apply to all its activities including those which are not
commercial, industrial or business in nature.
5. TRUE AND FAIR VIEW: The Companies Act as well as many other statutes require that the
financial statements of an enterprise should give a true and fair view of its financial position and
working results. This requirement is implicit even in the absence of a specific statutory provision
to this effect. However, what constitutes ‘true and fair’ view has not been defined either in the
Companies Act or in any other statute.
6. DUTY OF MEMBERS: “While discharging their attest function, it will be the duty of the members
of the Institute to examine whether the Accounting Standard is complied with in the
presentation of financial statements covered by their audit. In the event of any deviation from
the Accounting Standard, it will be their duty to make adequate disclosures in their reports so
that the users of such statements may be aware of financial deviations.”
Q.NO.6 WHAT ARE THE POINTS TO BE KEPT IN MIND BY THE MEMBERS WITH RELATION TO
ACCOUNTING STANDARDS, WHILE DISCHARGING ATTESTATION FUNCTIONS?
ANSWER:
While discharging their attest function, the members of the Institute may keep the following in mind
with regard to mandatory Accounting Standards:
A. AS 1 - Disclosure of Accounting Policies: In the case of a company, members should qualify their
audit reports in case:
1. Non-Disclosure of A/c Policies: accounting policies required to be disclosed under Schedule
III or any other provisions of the Companies Act, 2013, have not been disclosed, or
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2. Non-Accrual basis: accounts have not been prepared on accrual basis, or

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3. Fundamental Assumptions Not followed: the fundamental accounting assumption of going
concern has not been followed and this fact has not been disclosed in the financial
statements, or
4. Non-Disclosure of changes in Policies: proper disclosures regarding changes in the
accounting policies have not been made.
Note: The above requirements can be equally applied to enterprises other than company also.
B. Exemption from A/c Standard – State in F/S: Where a company has been given a specific
exemption regarding any of Accounting Standard but the fact of such exemption has not been
adequately disclosed in the accounts, the member should mention the fact of exemption in his
audit report without necessarily making it a subject matter of audit qualification.
C. Financial Statements Prepared on OTHER THAN Accrual: With regard to the fundamental
accounting assumption of accrual, the Council of the Institute has made a specific
announcement that:
a. In cases where the statute governing the enterprise requires the preparation and
presentation of financial statements on accrual basis but the financial statements have
not been so prepared, the auditor should qualify his report.
b. On the other hand, where there is no statutory requirement for preparation and
presentation of financial statements on accrual basis, and the financial statements have
been prepared on a basis other than ‘accrual’, the auditor should describe in his audit
report, the basis of accounting followed, without necessarily making it a subject matter
of a qualification.
D. IND AS: Indian Accounting Standards (Ind-AS) are the International Financial Reporting
Standards (IFRS) converged standards issued by the Central Government of India under the
supervision and control of Accounting Standards Board (ASB) of ICAI and in consultation with
National Financial Reporting Authority (NFRA). The Ind AS are named and numbered in the
same way as the corresponding International Financial Reporting Standards (IFRS).
Q.NO.7 WRITE ABOUT MANNER OF MAKING QUALIFICATION OR DISCLOSURE IN AUDITORS

REPORT IN RESPECT OF NON COMPLAINCE OF STATEMENTS, STANDARDS AND GUIDANCE
NOTES?
ANSWER:
1. While making a qualification / disclosure in the audit report in respect of non-compliance with a
Statement, SA, Accounting Standard or Guidance Note, the auditor should consider the
materiality of the relevant item. Thus, the auditor need not make qualification/disclosure in
respect of items which, in his judgement, are not material.
2. While making a qualification, the auditor should follow the requirements of the ‘Statement on
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Qualifications in Auditor’s Report’ issued by the Institute. [Now, SA 705]

3. A disclosure, which is not a qualification, should be made in the auditor’s report in a manner
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that it is clear to the reader that the disclosure does not constitute an audit qualification. The
auditor’s opinion on true and fair view should not refer to the paragraph containing the
aforesaid disclosure.
4. Examples of Qualifications:
a. "The statement of profit and loss and balance sheet comply with the accounting
standards referred to Section 133 of the Companies Act, 2013, except Accounting
Standard (AS) 5, 'Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies', as the company has not disclosed in its accounts the fact of change,
from this year, in the method of providing depreciation on plant and machinery from
straight-line method to written-down value method, as also the effect of this change. As a
result of this change, the net profit for the year, the net block as well as the reserves and
surplus are lower by ` …. Each as compared to the position which would have prevailed
had this change not been made.
Subject to the above, we report that …….." [now this format is also changed as per
revised SA 700]
b. "The statement of profit and loss and balance sheet comply with the accounting
standards referred to in Section 133 of the Companies Act, 2013, except Accounting
Standard (AS) 9, 'Revenue Recognitions', as the company has followed the policy of
accounting for interest income on receipt basis rather than on time proportion basis. As a
result, the net profit for the year and the current assets are understated by `…… each as
compared to the position which would have prevailed if the company had accounted for
interest income on time proportion basis.
Subject to the above, we report that ….."
5. Example on Disclosures: [Non-Disclosure of A/c Policies at ONE Place] – Disclosure by Auditor
in the audit report rather qualification:
a. "The statement of profit and loss and balance sheet comply with the accounting
standards referred to in Section 133 of the Companies Act, 2013, except Accounting
Standard (AS) 1, 'Disclosure of Accounting Policies', as the company has disclosed those
accounting policies the disclosure of which is required by the Companies Act, 2013. Other
significant accounting policies, relating to treatment of research and development costs
have not been disclosed nor have all the policies been disclosed at one place.
We report that …..".
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PART 2 – QUALITY CONTROL AND AUDITING STANDARDS
Overall Objectives of an Independent auditor and conduct of an audit in accordance with
1. SA 200
standards on auditing [GIVEN]
2. SA 210 Agreeing the terms of audit engagement [GIVEN]
3. SA 220 Quality Control for an audit of financial statements [GIVEN]
4. SA 230 Audit Documentation [GIVEN]
5. SA 240 Auditors’ responsibility relating to fraud in an audit of financial statements [GIVEN]
6. SA 250 Consideration of Laws and Regulations in an audit of financial statements [GIVEN]
7. SA 260 Communication with Those charged with governance [CHAPTER 2 - AUDIT REPORTING]
Communicating deficiencies in internal control with those charged with governance and
8. SA 265
management [CHAPTER 18 - RISK ASSESSMENT AND INTERNAL CONTROL]
9. SA 299 Responsibility of Joint auditor’s [CHAPTER 2 - AUDIT REPORTING]
10. SA 300 Planning an audit of financial statements [CHAPTER 17 - AUDIT STRATEGY]
Identifying and assessing risk of material misstatement through understanding the entity
11. SA 315
and its environment [CHAPTER 18 - RISK ASSESSMENT AND INTERNAL CONTROL]
12. SA 320 Materiality in planning and performing an audit [PRONOUNCEMENTS]
13. SA 330 The Auditor’s Responses to Assessed Risks [COVERED AS PART OF CHAPTER 20A]
Audit Considerations Relating to an Entity Using a Service Organisation
14. SA 402
[PRONOUNCEMENTS]
15. SA 450 Evaluation of Misstatements identified During the Audit [PRONOUNCEMENTS]
16. SA 500 Audit Evidence [CHAPTER 20A - AUDIT EVIDENCE]
17. SA 501 Audit Evidence - Specific Considerations for Selected Items [GIVEN]
18. SA 505 External Confirmations [GIVEN]
19. SA 510 Initial Audit Engagements - Opening Balances [GIVEN]
20. SA 520 Analytical Procedures [CHAPTER 20C - ANALYTICAL PROCEDURES]
21. SA 530 Audit Sampling [CHAPTER 20B - AUDIT SAMPLING]
Auditing Accounting Estimates, Including Fair Value Accounting Estimates and Related
22. SA 540
Disclosures
23. SA 550 Related Parties [GIVEN]
24. SA 560 Subsequent Events [GIVEN]
25. SA 570 Going Concern [CHAPTER 2 - AUDIT REPORTING]
26. SA 580 Written Representations [GIVEN]
27. SA 600 Using the Work of Another Auditor [CHAPTER 2 - AUDIT REPORTING]
28. SA 610 Using the Work of Internal Auditors [CHAPTER 2 - AUDIT REPORTING]
29. SA 620 Using the Work of an Auditor’s Expert [CHAPTER 2 - AUDIT REPORTING]
30. SA 700 Forming an Opinion and Reporting on Financial Statements [CH 2 - AUDIT REPORTING]
Communicating Key Audit Matters in the Independent Auditor’s Report [CHAPTER 2 -
31. SA 701
AUDIT REPORTING]
32. SA 705 Modifications to the Opinion in the Independent Auditor’s Report [2. AUDIT REPORTING]
Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
33. SA 706
Auditor’s Report [CHAPTER 2 - AUDIT REPORTING]
Comparative Information - Corresponding Figures and Comparative Financial Statements
34. SA 710
[CHAPTER 2 - AUDIT REPORTING]
The Auditor’s Responsibility in Relation to Other Information in Documents Containing
35. SA 720
Audited Financial Statements [CHAPTER 2 - AUDIT REPORTING]
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Quality Control for Firms that Perform Audits and Review of Historical Financial
36. SQC
Statements, Other Assurance And Related Services Engagements [GIVEN]
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SQC 1 – STANDARD ON QUALITY CONTROL
QUALITY CONTROL FOR FIRMS THAT PERFORM AUDITS AND REVIEW OF HISTORICAL FINANCIAL
STATEMENTS, OTHER ASSURANCE AND RELATED SERVICES ENGAGEMENTS
SQC 1 contains extensive requirements in relation to establishment and maintenance of a system of

quality control (QC) in the audit firms as well as even for sole practitioners.
A. OBJECTIVE OF SQC:
The objective of the firm is to establish and maintain a system of quality control to provide
reasonable assurance that
1. The firm and its personnel comply with the respective standards and regulatory and legal
requirements and
2. Reports issued are appropriate in the circumstances.
B. DEFINITIONS:
a. Engagement team: All personnel performing an engagement, including any experts
contracted by the firm in connection with that engagement.
b. Engagement Partner: The partner or other person in the firm who is a member of the
Institute of Chartered Accountants of India and is in full time practice and is responsible
for the engagement and its performance, and for the report that is issued on behalf of
the firm, and who, where required, has the appropriate authority from a professional,
legal or regulatory body.
c. Engagement Quality Control Review: A process designed to provide an objective

evaluation, BEFORE the report is issued, of the significant judgments the engagement
team made and the conclusions they reached in formulating the report.
d. Engagement Documentation: The record of work performed, results obtained, and

conclusions the practitioner reached (terms such as “working papers” or “work-papers”
are sometimes used). [Similar to Audit Documentation Definition as per SA 230]
e. Engagement Quality Control REVIEWER: A partner, other person (should be a member

of the Institute of Chartered Accountants of India) in the firm, suitably qualified external
person, or a team made up of such individuals, with sufficient and appropriate
experience and authority to objectively evaluate, BEFORE the report is issued, the
significant judgments the engagement team made and the conclusions they reached in
formulating the report.
However, in case the review is done by a team of individuals, such team should be
headed by a member of the Institute.
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f. Firm: A sole practitioner, partnership or corporation or other entity of professional

accountants.
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g. Partner: Any individual with authority to bind the firm with respect to the performance
of a professional services engagement.
h. Professional Standards: Engagement standards, as defined in the AASB’s “Preface to the

Standards on Quality Control, Auditing, Review, Other Assurance and Related Services,”
and relevant ethical requirements as contained in the Code.
i. Reasonable assurance: A high, but not absolute, level of assurance.
j. Staff: Professionals, other than partners, including any experts the firm employs.
C. REQUIREMENTS OF SQC:
Comply with the Requirements: The Partners and Staff within the firm are responsible for
establishing and maintaining the system and applying its requirements properly.
D. ELEMENTS OF SYSTEM OF QUALITY CONTROL:
a) Leadership Responsibilities for Quality within the Framework: Establish Policies &
Procedures to:
1. Design an internal culture recognising Quality control which includes:
a. Compliances with professional standards.
b. Legal Compliances and
c. Law and regulations.
2. Firm’s chief executive officer or, managing board of partners to assume ultimate
responsibility for Quality Control.
3. Person assigned has sufficient and appropriate experience and ability to adhere the
responsibility.
b) Relevant Ethical Requirements: Establish Policies and procedures designed to provide that
the firm and its personnel comply with relevant ethical requirements of:
1. Integrity
2. Objectivity
3. Professional competence and due care
4. Confidentiality and
5. Professional behaviour
Note: The above are discussed in detailed in the chapter “Professional Ethics”
c) Requirement of Independence: Establish Policies and procedures designed to maintain
independence to:
1. Communicate its requirements to the Management.
2. Identify and evaluate circumstances and relationships that create threats to
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independence, and to take appropriate action against them.

3. Resolutions on Breach of Independence.
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4. Written confirmation of compliance with its policies and procedures on
independence from all firm personnel. [To be obtained from Engagement Team
members]
d) Acceptance and Continuation of Client Relationship and Specific Engagement:

Establish Policies and procedures for the acceptance/ continuance and withdrawal of client
relationships and specific engagements, designed to provide:
1. The Firm is Competent to perform the engagement.
2. Has the capabilities, including time and resources, ethical values.
3. Client integrity is available.
e) Human Resources and Engagement Performance: Establish Policies and Procedures

designed to provide and assign sufficient personnel with the:
1. Competence, capabilities, and commitment to perform engagements with
professional standards and
2. To issue reports that are appropriate in the circumstances.
f) Monitoring: Establish policies and procedures for Monitoring:

1. Firm’s Quality Control Policies and Procedures.
2. Evaluating, Communicating and Remedying Identified Deficiencies.
3. Complaints and Allegations.
g) Documentation of the System of Quality Control: Establish policies and procedures

requiring appropriate documentation for:
1. Evidence of the operation of each element of its system.
2. Retention for a period of time sufficient to permit those performing monitoring
procedures to evaluate the firm’s compliance with its system of quality control, or for
a longer period if required by law or regulation.
3. Complaints and allegations and the responses to them.
Depending upon the size of the firm and number of office and nature and complexity of
the firm.
NOTE:
1. Large firms may use electronic databases to document matters such as independence
confirmations, performance evaluations and the results of monitoring inspections.
2. Smaller firms may use more informal methods in the documentation such as manual notes,
checklists and forms.
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SA 220 – QUALITY CONTROL FOR AN AUDIT OF FINANCIAL STATEMENTS
A. OBJECTIVE:
The objective of the auditor is to implement quality control procedures at the engagement level
that provide the auditor with reasonable assurance that:
a) The audit complies with professional standards and regulatory and legal requirements; and
b) The auditor’s report issued is appropriate in the circumstances.
B. DEFINITIONS:
1. INSPECTION: In relation to completed engagements, procedures designed to provide

evidence of compliance by engagement teams with the firm’s quality control policies and
procedures.
2. LISTED ENTITY: An entity whose shares, stock or debt are quoted or listed on a recognized
stock exchange or are traded under the regulations of a recognized stock exchange or other
equivalent body.
3. MONITORING: A process comprising an ongoing consideration and evaluation of the firm’s
system of quality control, including a periodic inspection of a selection of completed
engagements, designed to enable the firm to obtain reasonable assurance that its system of
quality control is operating effectively.
4. NETWORK:
A larger structure
a. That is aimed at cooperation, and
b. That is clearly aimed at profit or cost-sharing or shares common ownership, control
or management, common quality control policies and procedures, common business
strategy, the use of a common brand name, or a significant part of professional
resources.
5. SUITABLY QUALIFIED EXTERNAL PERSON: An individual outside the firm with the
capabilities and competence to act as an engagement partner, for example a partner or an
employee (with appropriate experience) of another firm.
REQUIREMENTS OF SA 220
C. LEADERSHIP RESPONSIBILITIES FOR QUALITY ON AUDITS: The engagement partner shall take
responsibility for the overall quality on each audit engagement to which that partner is assigned.
D. RELEVANT ETHICAL REQUIREMENTS:

1. Throughout the audit engagement, the engagement partner shall remain alert, through
observation and making inquiries as necessary, for evidence of non-compliance with relevant
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ethical requirements by members of the engagement team.

2. If matters come to the engagement partner’s attention through the firm’s system of quality
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control or otherwise that indicate that members of the engagement team have not complied
with relevant ethical requirements, the engagement partner, in consultation with others in
the firm, shall determine the appropriate action.
E. INDEPENDENCE:
The engagement partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, the engagement partner shall:
1. Obtain relevant information from the firm and, where applicable, network firms, to identify
relationships that create threats to independence.
2. Evaluate information on identified breaches, if any, of the firm’s independence policies and
procedures and
3. Take appropriate action to eliminate such threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the audit engagement,
where withdrawal is permitted by law or regulation.
F. ACCEPTANCE AND CONTINUANCE OF CLIENT RELATIONSHIPS AND AUDIT ENGAGEMENTS:

The Engagement partner of the firm to consider the following information before accepting an
engagement:
1. The integrity of the key management and those charged with governance of the entity.
2. Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources.
3. Whether the engagement team can comply with relevant ethical requirements; and
4. Significant matters that have arisen during the previous audit engagement.
Note: If the engagement partner obtains information that would have caused the firm to decline
the audit engagement had that information been available earlier, the engagement partner
shall communicate that information promptly to the firm, so that the firm and the engagement
partner can take the necessary action.
G. ASSIGNMENT OF ENGAGEMENT TEAMS:
The engagement partner shall be satisfied that the engagement team, and any auditor’s experts
who are not part of the engagement team, collectively have the appropriate competence and
capabilities to:
1. Perform the audit engagement in accordance with professional standards and regulatory and
legal requirements; and
2. Enable an auditor’s report that is appropriate in the circumstances to be issued.
H. ENGAGEMENT PERFORMANCE:
a) Direction, Supervision and Performance:

The engagement partner shall take responsibility for:
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1. The direction, supervision and performance of the audit engagement in compliance with
professional standards and regulatory and legal requirements and
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2. The auditor’s report being appropriate in the circumstances.
b) Review:
1. The engagement partner shall take responsibility for reviews being performed in
accordance with the firm’s review policies and procedures.
2. On or before the date of the auditor’s report, the engagement partner shall, through a
review of the audit documentation and discussion with the engagement team, be
satisfied that sufficient appropriate audit evidence has been obtained to support the
conclusions reached and for the auditor’s report to be issued.
c) Consultation:
1. Take responsibility for the engagement team undertaking appropriate consultation on
difficult or contentious matters.
2. Be satisfied that members of the engagement team have undertaken appropriate
consultation during the course of the engagement, both within the engagement team
and between the engagement team and others at the appropriate level within or outside
the firm.
3. Be satisfied that the nature and scope of, and conclusions resulting from, such
consultations are agreed with the party consulted.
4. Determine that conclusions resulting from such consultations have been implemented.
d) Engagement Quality Control Review:
1. For audits of financial statements of listed entities, and those other audit engagements,
if any, for which the firm has determined that an engagement quality control review is
required, the engagement partner shall:
a. Determine that an engagement quality control reviewer has been appointed.
b. Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement
quality control reviewer.
c. Not date the auditor’s report until the completion of the engagement quality control
review.
2. The engagement quality control reviewer shall perform an objective evaluation of the
significant judgments made by the engagement team, and the conclusions reached in
formulating the auditor’s report. This evaluation involves:
a. Discussion of significant matters with the engagement partner
b. Review of the financial statements and the proposed auditor’s report;
c. Review of selected audit documentation relating to the significant judgments the
engagement team made and the conclusions it reached and
d. Evaluation of the conclusions reached in formulating the auditor’s report and
consideration of whether the proposed auditor’s report is appropriate.
e. In case of Listed Entities, the Engagement Quality Control Reviewer shall also
evaluate:
i. The engagement team’s evaluation of the firm’s independence.
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ii. Whether appropriate consultation has taken place on matters involving

differences of opinion and the conclusions arising from those
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consultations
iii. Whether audit documentation selected for review reflects the work
performed in relation to the significant judgments made and supports the
conclusions reached.
I. DIFFERENCES OF OPINION:
If differences of opinion arise within the engagement team, with those consulted or, where
applicable, between the engagement partner and the engagement quality control reviewer, the
engagement team shall follow the firm’s policies and procedures for dealing with and resolving
differences of opinion.
J. MONITORING:
1. An effective system of quality control includes a monitoring process designed to provide the
firm with reasonable assurance that its policies and procedures relating to the system of
quality control are relevant, adequate, and operating effectively.
2. The engagement partner shall consider the results of the firm’s monitoring process as
evidenced in the latest information circulated by the firm and, if applicable, other network
firms and whether deficiencies noted in that information may affect the audit engagement.
K. DOCUMENTATION:
AUDITORS DOCUMENTATION: The auditor shall document:
1. Issues identified with respect to compliance with relevant ethical requirements and how
they were resolved.
2. Conclusions on compliance with independence requirements that apply to the audit
engagement.
3. Conclusions reached regarding the acceptance and continuance of client relationships and
audit engagements.
4. The nature and scope of, and conclusions resulting from, consultations undertaken during
the course of the audit engagement.
DOCUMENTATION BY ENGAGEMENT AND QUALITY CONTROL REVIEWER: The Reviewer shall
document in respect of audit engagement reviewed:
1. The procedures required by the firm’s policies on engagement quality control review have
been performed.
2. The engagement quality control review has been completed on or before the date of the
auditor’s report.
3. The reviewer is not aware of any unresolved matters that would cause the reviewer to
believe that the significant judgments the engagement team made and the conclusions they
reached were not appropriate.
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During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his reviews
and also ensured compliance with independence requirements that apply to the audit
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engagement. The engagement files were also reviewed by the Engagement Quality Control
Reviewer (EQCR) except the independence assessment documentation. Engagement Partner
was of the view that matters related to independence assessment are the responsibility of the
Engagement Partner and not Engagement Quality Control Reviewer. Engagement Quality
Control Reviewer objected to this and refused to sign off the documentation. Please advise as
per SA 220.
ANSWER:
As per SA 220, Engagement Partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, Engagement Partner shall:
1. Obtain relevant information from the firm and, where applicable, network firms, to
identify and evaluate circumstances and relationships that create threats to
independence;
2. Evaluate information on identified breaches, if any, of the firm’s independence policies
and procedures to determine whether they create a threat to independence for the audit
engagement; and
3. Take appropriate action to eliminate such threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to withdraw from the audit
engagement, where withdrawal is permitted by law or regulation.
4. Engagement Partner shall take responsibility for reviews being performed in accordance
with the firm’s review policies and procedures.
As per SA 220, “Quality Control for Audit of Financial Statements”, for audits of financial
statements of listed entities, Engagement Quality Control Reviewer (EQCR), on performing an
engagement quality control review, shall also consider the engagement team’s evaluation of the
firm’s independence in relation to the audit engagement.
CONCLUSION: In the given case, Engagement Partner is NOT right. The independence assessment
documentation should also be given to Engagement Quality Control Reviewer for his review.
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SA 250 - THE AUDITOR’S RESPONSIBILITIES RELATING TO LAWS AND REGULATIONS IN AN
AUDIT OF FINANCIAL STATEMENTS
A. RESPONSIBILITY OF MANAGEMENT FOR COMPLIANCE WITH LAWS AND REGULATIONS:

It is the responsibility of management, with the oversight of those charged with governance, to
ensure that the entity’s operations are conducted in accordance with the provisions of laws and
regulations.
B. RESPONSIBILITY OF THE AUDITOR:

a) The auditor is not responsible for preventing non-compliance and cannot be expected to
detect all non-compliance with all laws and regulations.
b) Further This standard divides the responsibility of auditor in relation to Consideration of laws
and regulations into two types:
Type 1 - Those laws and regulations which have a direct effect on the determination of
material amounts and disclosures in the financial statements.
Type 2 - Other laws and regulations that do not have a direct effect on the determination of the
amounts and disclosures in the financial statements, but compliance with which may be
fundamental to continue its business, or to avoid material penalties and therefore non-compliance
with such laws and regulations may have a material impact on the financial statements.
C. OBJECTIVES OF THE AUDITOR:

a) To obtain sufficient appropriate audit evidence regarding compliance with Type 1 laws and
regulations;
b) To perform Limited audit procedures to help identify instances of non-compliance with Type 2;
and
c) To report appropriately to identified non-compliance with laws and regulations
D. DEFINITION OF NON-COMPLIANCE:
a) Acts of omission or commission by the entity, either intentional or unintentional, which are
contrary to the prevailing laws or regulations.
b) Such acts include transactions entered into by, or in the name of, the entity, or on its behalf,
by those charged with governance, management or employees.
c) Non-compliance does not include personal misconduct (unrelated to the business activities of
the entity) by those charged with governance, management or employees of the entity.
E. LIMITED AUDIT PROCEDURES FOR TYPE - 2 LAWS AND REGULATIONS:

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The auditor shall perform the following Limited audit procedures to help identify instances of non-
compliance with other laws and regulations that may have a material effect on the financial
statements:
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a) Inquiring of management and, where appropriate, those charged with governance, as to
whether the entity is in compliance with such laws and regulations; and
b) Inquiring and Inspecting correspondence, if any, with the relevant licensing or regulatory
authorities.
c) Inquiring Entity’s Legal counsel to know the details of pending litigations and resultantly
estimate the possible non compliances.
F. INDICATIONS OF NON-COMPLIANCE WITH LAWS AND REGULATIONS:

The following are few indicators of Non compliances with various laws and regulation. This list is
only illustrative and not exhaustive.
Further an indicator doesn’t mean that there is a severe Non-compliance. It only provides the
auditor the guidance to identify non compliances if any exists.
i) Investigations by regulatory organisations and government departments.
ii) Payment of fines or penalties.
iii) Payments for unspecified services or loans to consultants, related parties, employees or
government employees.
iv) Purchasing at prices significantly above or below market price.
v) Unusual payments in cash or payments in form of bearer cheques,
vi) Unusual payments towards legal and retainership fees.
vii) Unusual transactions with companies registered in tax havens.
viii) Unauthorised transactions or improperly recorded transactions.
ix) Adverse media comment.
G. REPORTING NON-COMPLIANCE TO THOSE CHARGED WITH GOVERNANCE:

If the auditor suspects that management or those charged with governance are involved in non-
compliance, the auditor shall communicate the matter to the next higher level of authority at the
entity, if it exists, such as an audit committee or supervisory board.
H. REPORTING NON-COMPLIANCE IN THE AUDITOR’S REPORT ON THE FINANCIAL STATEMENTS:

a) If the auditor concludes that the non-compliance has a material effect on the financial
statements, and has not been adequately reflected in the financial statements, the auditor
shall express a qualified or adverse opinion on the financial statements.
b) If the auditor is unable to obtain sufficient appropriate audit evidence to evaluate whether
non-compliance that may be material to the financial statements has, or is likely to have,
occurred, the auditor shall express a qualified opinion or disclaim an opinion on the financial
statements.
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SA 501 - AUDIT EVIDENCE - SPECIFIC CONSIDERATIONS FOR SELECTED ITEMS
A. OBJECTIVE OF THE AUDITOR:

The objective of the auditor is to obtain sufficient appropriate audit evidence regarding the:
a) Existence and condition of Inventory;
b) Completeness of litigation and claims involving the entity; and
c) Presentation and disclosure of segment information in accordance with the applicable
B. EXISTENCE AND CONDITION OF INVENTORY:

1. ATTEND MANAGEMENT INVENTORY COUNTING:
a) The auditor shall obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory as at year end i.e., Date of financial statements by:
i) Attendance at physical inventory counting performed by management to:
• Evaluate management’s process of physical inventory counting;
• Inspect the inventory; and
• Perform test counts; and
ii) Reconcile the physical inventory with the inventory records to identify any discrepancies.
b) If inventory counting is carried at other than balance sheet date then the auditor shall
identify the changes occurred between balance sheet date and count date and shall ensure
whether the changes are properly recorded.
2. PHYSICAL INSPECTION BY AUDITOR DIRECTLY:

a) If the auditor is unable to attend physical inventory counting by management due to
unforeseen circumstances, the auditor shall make or observe some physical counts on an
alternative date, and perform audit procedures on intervening transactions.
3. PHYSICAL INSPECTION IMPRACTICABILITY:

a) If attendance at physical inventory counting is impracticable, the auditor shall perform
alternative audit procedures to obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory.
b) The alternative procedure includes inspection of documentation of subsequent sale of
specific items of inventory purchased on or before balance sheet date. This will ensure the
auditor to confirm about existence and condition of inventory as on reporting date.
c) If alternative procedures are not possible to do so, the auditor shall modify the opinion in
the auditor’s report in accordance with SA 705.
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4. INVENTORY IN THE CUSTODY OF THIRD PARTY:

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a) When inventory under the custody and control of a third party the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condition of that
inventory by performing one or both of the following:
b) Request confirmation from the third party as to the quantities and condition of inventory
held on behalf of the entity. (SA 505)
c) If there exists doubts as to reliability of confirmation provided by third parties then the
auditor may perform the below procedures:
i) Attending or arranging another auditor for physical count procedures of third parties,
if practicable.
ii) Obtaining another auditor report on adequacy of third party count procedures.
iii) Inspecting documentation regarding inventory held by third party eg: warehouse receipts.
iv) Requesting confirmation from other parties where the inventory is pledged as collateral.
C. LITIGATION AND CLAIMS:

The auditor shall design and perform audit procedures in order to identify litigation and claims
involving the entity which may give rise to a risk of material misstatement, including:
a) Inquiry of management and, where applicable, others within the entity, including in-house
legal counsel.
b) Reviewing minutes of meetings of those charged with governance and correspondence
between the entity and its external legal counsel; and
c) Reviewing legal expense accounts.
d) If the auditor assesses a risk of material misstatement regarding litigation or claims that have
been identified, or when audit procedures performed indicate that other material litigation or
claims may exist, the auditor shall, in addition to the procedures required by other SAs, seek
direct communication with the entity’s external legal counsel.
e) The auditor shall do so through a letter of inquiry, prepared by management and sent by the
auditor, requesting the entity’s external legal counsel to communicate directly with the
auditor.
f) If management refuses to give the auditor permission to communicate or meet with the
entity’s external legal counsel, or the entity’s external legal counsel refuses to respond
appropriately to the letter of inquiry, or is prohibited from responding; and
g) If the auditor is unable to obtain sufficient appropriate audit evidence by performing
alternative audit procedures then the auditor shall modify the opinion in the auditor’s report
in accordance with SA 705.
h) WRITTEN REPRESENTATIONS:
The auditor shall request management and, where appropriate, those charged with
governance to provide written representations that all known actual or possible litigation and
claims whose effects should be considered when preparing the financial statements have been
disclosed to the auditor and appropriately accounted for and disclosed in accordance with the
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D. SEGMENT INFORMATION:
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The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and
disclosure of segment information in accordance with the applicable financial reporting framework
by:
a) Obtaining an understanding of the methods used by management in determining segment
information, and:
i) Evaluating whether such methods are likely to result in disclosure in accordance with the
applicable financial reporting framework; and
ii) Where appropriate, testing the application of such methods; and
b) Performing analytical procedures or other audit procedures appropriate in the circumstances.
RELEVANT QUESTIONS:
1. Paramount Exports Ltd is a manufacturer exporter having its own production CA INTER
capacity and also gets the job work done through various job workers. The
auditor of Paramount Exports Ltd. Considers that inventory held with job
workers is material to the financial statements. Suggest audit procedures in the
given case?
2. Pride India Ltd is a manufacturer of various FMCG (fast moving consumable CA INTER
goods) range of products. The company is having several cases of litigation
pending in courts. The auditor wanted to identify litigation and claims resulting
to risk of material misstatements. Suggest the auditor w.r.t SA 501.
3. ABC Ltd is engaged in manufacturing of different type of yarns. On-going through CA INTER
its financial statements for the past years, it is observed that inventory is material
to the financial statements. You as an auditor of the company wanted to obtain
sufficient appropriate audit evidence regarding the existence and condition of
the inventory as appearing in the financial statements. Discuss, how would you
proceed as an auditor.
4. Briefly mention the matters that are relevant in planning attendance at physical CA INTER
inventory counting?
A. The auditor shall consider the following:
1. Nature of Inventory
2. Stages of completion of WIP
3. Internal Controls related to Inventory
4. Whether adequate instructions are given for physical inventory counting
5. Timing of physical inventory counting
6. Whether the entity is maintaining perpetual inventory system
7. Whether assistance of auditor’s expert is needed
8. The location at which inventory is held and related risks.
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SA 505 - EXTERNAL CONFIRMATION
A. DEFINITIONS:
1. EXTERNAL CONFIRMATION:
Audit evidence obtained as a direct written response to the auditor from a third party (AKA
the confirming party), in paper form, or by electronic or other medium.
2. POSITIVE CONFIRMATION REQUEST:
A request that the confirming party respond directly to the auditor indicating whether the
confirming party agrees or disagrees with the information in the request, or providing the
requested information.
3. NEGATIVE CONFIRMATION REQUEST:
A request that the confirming party respond directly to the auditor only if the confirming party
disagrees with the information provided in the request.
4. EXCEPTION:
A response indicates a difference between information requested to be confirmed, or
contained in the entity’s records, and information provided by the confirming party.
B. EXTERNAL CONFIRMATION PROCEDURES:

When using external confirmation procedures, the auditor shall maintain control over external
confirmation requests, including:
1. Determining the information to be confirmed or requested;
2. Selecting the appropriate confirming party;
3. Designing the confirmation requests which may be positive pattern or negative pattern and
4. Sending the requests, including follow-up requests when applicable, to the confirming party.
5. Following are examples of situations or areas where external confirmations may be useful-
a) Bank balances and other information from bankers
b) Account receivables balances
c) Inventory held by third parties
d) Account payable balances.
6. External confirmation procedures frequently are performed to confirm or request information
regarding account balances and their elements.
7. They may also be used:
a) To confirm terms of agreements,
b) Contracts, or
c) Transactions between an entity and other parties, or
d) To confirm the absence of certain conditions, such as a “side agreement”.
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e) Property title deeds held by financers as security.

f) Amounts due to lenders.
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8. Therefore external confirmation can be obtained not only for account balances at yearend but
also for above details.
C. MANAGEMENT’S REFUSAL TO ALLOW THE AUDITOR TO SEND A CONFIRMATION REQUEST:

If management refuses to allow the auditor to send a confirmation request, the auditor shall:
a) Inquire as to management’s reasons for the refusal, and seek audit evidence as to their validity
and reasonableness;
b) Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant
risks of material misstatement, including the risk of fraud, and on the nature, timing and extent
of other audit procedures; and
c) Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
d) If the auditor concludes that management’s refusal to allow the auditor to send a confirmation
request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence
from alternative audit procedures, the auditor shall communicate with those charged with
governance in accordance with SA 260.
e) The auditor also shall determine the implications for the audit and the auditor’s opinion in
accordance with SA 705.
D. NEGATIVE CONFIRMATIONS:
In the following situations the auditor can use negative confirmation procedure:
a) The auditor has assessed the risk of material misstatement as low;
b) The population of items subject to negative confirmation procedures comprises a large
number of small, homogeneous, account balances, transactions or conditions;
c) A very low exception rate is expected; and
d) Very low chances of non-response from third party.
RELEVANT QUESTIONS:
1. While conducting the audit of Jay Kay Ltd, the auditor K of KLM and Associates, CA INTER
Chartered Accountants observes that there are large number of Trade payables
and receivables standing in the books of accounts as on 31 st March. The auditor
wanted to send confirmation request to few trade receivables but the
management refused the auditor to send confirmation request. How would you
as an auditor proceed in this situation?
2. What is meant by external confirmation? Mention any four situations where CA INTER
external confirmation may be useful for auditors.
3. External confirmation procedures frequently are relevant when addressing CA INTER
assertions associated with account balances and their elements, but need not be
restricted to these items. Discuss.
4. Write a short note on external confirmation as audit procedure? CA INTER
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SA 510 - INITIAL AUDIT ENGAGEMENTS - OPENING BALANCES

In conducting an initial audit engagement, the objective of the auditor with respect to opening
balances is to obtain sufficient appropriate audit evidence about whether:
a) Opening balances contain misstatements that materially affect the current period’s financial
statements; and
b) Appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period’s financial statements, or changes thereto are properly
accounted for and adequately presented and disclosed in accordance with the applicable
B. DEFINITIONS:
INITIAL AUDIT ENGAGEMENT:
An engagement in which either:
a) The financial statements for the prior period were not audited; or
b) The financial statements for the prior period were audited by a predecessor auditor.
OPENING BALANCES:
a) Those account balances that exist at the beginning of the period.
b) Opening balances are based upon the closing balances of the prior period and reflect the effects
of transactions and events of prior periods and accounting policies applied in the prior period.
c) Opening balances also include matters requiring disclosure that existed at the beginning of
the period, such as contingencies and commitments.
PREDECESSOR AUDITOR:
Predecessor auditor means the auditor from a different audit firm, who audited the financial
statements of an entity in the prior period and who has been replaced by the current auditor.
C. AUDIT PROCEDURES FOR AUDIT OF OPENING BALANCES:

The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances
contain misstatements that materially affect the current period’s financial statements by:
a) Determining whether the prior period’s closing balances have been correctly brought forward
to the current period or, when appropriate, any adjustments have been disclosed as prior
period items in the current year’s Statement of Profit and Loss;
b) Determining whether the opening balances reflect the application of appropriate accounting
policies; and
c) Performing one or more of the following:
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i) Whether audit procedures performed in the current period provide evidence relevant to
the opening balances; or
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ii) Performing specific audit procedures to obtain evidence regarding the opening balances.
(Opening Balance verification: Opening TB comparing with Previous year Approved
Balance sheet)
D. CONSISTENCY OF ACCOUNTING POLICIES:
The auditor shall obtain sufficient appropriate audit evidence about whether the accounting
policies reflected in the opening balances have been consistently applied in the current period’s
financial statements, and whether changes in the accounting policies have been properly
accounted for and adequately presented and disclosed in accordance with the applicable financial
reporting framework.
E. AUDIT CONCLUSIONS AND REPORTING - OPENING BALANCES:

a) If the auditor concludes that the opening balances contain a misstatement that materially
affects the current period’s financial statements, and the effect of the misstatement is not
properly accounted for or not adequately presented or disclosed, the auditor shall express a
qualified opinion or an adverse opinion, as appropriate, in accordance with SA 705.
b) If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening
balances, the auditor shall express a qualified opinion or a disclaimer of opinion, as
appropriate, in accordance with SA 705.
F. AUDIT CONCLUSIONS AND REPORTING - CONSISTENCY OF ACCOUNTING POLICIES:

If the auditor concludes that:
a) The current period’s accounting policies are not consistently applied in relation to opening
balances in accordance with the applicable financial reporting framework; or
b) Changes in accounting policies is not properly accounted for or not adequately presented or
disclosed in accordance with the applicable financial reporting framework.
Then the auditor shall express a qualified opinion or an adverse opinion as appropriate in
G. MODIFICATIONS IN THE PREDECESSOR AUDITOR’S REPORT:

If there exist a modification in the predecessor audit report and the modification is remain
relevant and material for the current period under audit then the current auditor shall also modify
the opinion in accordance with SA 705.
RELEVANT QUESTIONS:
1. Discuss with reference to SA 510, “Initial Audit Engagement - Opening CA INTER
Balances”, the procedures the auditor should undertake in respect of opening
balances for a new audit engagement.
2. Auditors of M/s Tender India (P) Ltd. were changed for the accounting year CA INTER
2016-17. The closing inventory of the company as on 31.03.2016 amounting to
Rs.100 lakhs continued as it is and became closing inventory as on 31.03.2017.
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The auditors of the company propose to exclude from their audit programme
the audit of closing inventory of Rs.100 lacs on the understanding that it pertains
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to the preceding year which was audited by another auditor.
A. Write Point - A and the following Points.
1. General principles governing verification of assets require that the auditor
should confirm that assets have been correctly valued as on the Balance Sheet
date.
2. The contention of the management that the inventory has not undergone any
change cannot be accepted, it forms part of normal duties of auditor to ensure
that the figures on which he is expressing opinion are correct and properly
valued.
3. Moreover, it is also quite likely that the inventory lying might have
deteriorated and the same need to be examined.
4. Therefore, the auditor is advised not to exclude the audit of closing inventory
from his audit programme.
3. Explain the audit procedure in respect of opening balances for a New Audit CA INTER
Engagements with reference to relevant SA.
4. M/s Pankaj & Associates, chartered accountants have been appointed as an CA INTER
auditor for ABC Limited. CA Pankaj did not apply any audit procedures regarding
opening balances. He argued that since financial statements were audited by
predecessor auditor therefore, he is not required to verify them. Is CA Pankaj
correct in his approach?
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SA 540 - AUDITING ACCOUNTING ESTIMATES, INCLUDING FAIR VALUE ACCOUNTING ESTIMATES
& RELATED DISCLOSURES
A. OBJECTIVE OF SA 540:
The objective of the auditor is to obtain sufficient appropriate audit evidence whether in the
context of the applicable financial reporting framework:
1. Accounting estimates, including fair value accounting estimates, in the financial statements,
whether recognised or disclosed, are reasonable and
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2. Related disclosures in the financial statements are adequate.

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B. DEFINITIONS:
ACCOUNTING ESTIMATE: An approximation of a monetary amount in the absence of a precise

means of measurement.
This term is used for an amount measured at fair value where there is estimation uncertainty, as
well as for other amounts that require estimation. Where ever this SA addresses accounting
estimates involving measurement at fair value, the term “fair value accounting estimates” is
used.
AUDITOR’S POINT ESTIMATE OR AUDITOR’S RANGE: The amount, or range of amounts,

respectively, derived from audit evidence for use in evaluating management’s point estimate.
MANAGEMENT’S POINT ESTIMATE: The amount selected by management for recognition or

disclosure in the financial statements as an accounting estimate.
MANAGEMENT BIAS: A lack of neutrality by management in the preparation and presentation of

information.
ESTIMATION UNCERTAINTY: The susceptibility of an accounting estimate and related

disclosures to an inherent lack of precision in its measurement.
OUTCOME OF AN ACCOUNTING ESTIMATE: The actual monetary amount which results from the
resolution of the underlying transaction(s), event(s) or condition(s) addressed by the accounting
estimate.
C. AUDITOR’S RESPONSIBILITY /AUDIT PROCEDURES:
1. RISK ASSESSMENT PROCEDURES AND RELATED ACTIVITIES FOR ACCOUNTING ESTIMATES:

The auditor shall obtain an understanding of the following in order to provide a basis for the
identification and assessment of the risks of material misstatement for accounting estimates:
a. The requirements of the applicable financial reporting framework relevant to
accounting estimates, including related disclosures.
b. How management identifies those transactions, events and conditions that may give
rise to the need for accounting estimates to be recognised or disclosed in the
c. In obtaining this understanding, the auditor shall make inquiries of management
about changes in circumstances that may give rise to new, or the need to revise
existing, accounting estimates.
2. OBTAINING AN UNDERSTANDING OF HOW MANAGEMENT IDENTIFIES THE NEED FOR

ACCOUNTING ESTIMATES:
a. Management has the responsibility to determine whether a transaction, event or

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condition requires to make an accounting estimate, and ensure that they are in
accordance with the applicable financial reporting framework.
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b. The auditors risk assessment procedures assist the auditor in identifying circumstances,
or changes in circumstances, that may indicate a requirement for an accounting
estimate.
c. Inquiries of management about changes in circumstances may include, for example,
inquiries about whether:
a) The entity has engaged in new types of transactions that may give rise to
accounting estimates.
b) Terms of transactions that gave rise to accounting estimates that have changed.
c) Accounting policies relating to accounting estimates have changed.
d) Regulatory or other changes outside the control of management have occurred
that may require management to revise, or make new, accounting estimates.
e) New conditions or events have occurred that may give rise to the need for new or
revised accounting estimates.
d. MANAGEMENT FAILED TO IDENTIFY AN ESTIMATE: During the audit, the auditor may
identify transactions, events and conditions that give rise to the need for accounting
estimates that management failed to identify. Determining whether there is a significant
deficiency in internal control with regard to the entity’s risk assessment processes.
3. HOW MANAGEMENT MAKES THE ACCOUNTING ESTIMATES: How management makes the
accounting estimates, and an understanding of the data on which they are based, including:
a) The method, including where applicable the model, used in making the accounting
estimate.
b) Relevant controls.
c) Whether management has used an expert.
d) The assumptions underlying the accounting estimates;
e) Whether there are any changes in the methods for making the accounting estimates, and
if so, why and
f) Whether and, if so, how management has assessed the effect of estimation uncertainty.
The auditor shall review the outcome of accounting estimates included in the prior period
financial statements, or, where applicable, their subsequent re-estimation for the purpose of
the current period.
4. ESTIMATION UNCERTAINTY: For accounting estimates that give rise to significant risks, in
addition to other substantive procedures performed to meet the requirements of SA 330,
the auditor shall evaluate the following:
a. How management has considered alternative assumptions or outcomes, and why it
has rejected them, or how management has otherwise addressed estimation
uncertainty in making the accounting estimate.
b. Whether the significant assumptions used by management are reasonable.
c. The appropriate application of the applicable financial reporting framework,
management’s intent to carry out specific courses of action and its ability to do so.
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ESTIMATION UNCERTAINTY - UNADDRESSED: If, in the auditor’s judgment, management

has not adequately addressed the effects of estimation uncertainty on the accounting
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estimates that give rise to significant risks, the auditor shall, if considered necessary, develop
a range with which to evaluate the reasonableness of the accounting estimate.
5. RECOGNITION AND MEASUREMENT CRITERIA – SIGNIFICANT RISK:
For accounting estimates that give rise to significant risks, the auditor shall obtain sufficient
appropriate audit evidence whether the following are in accordance with the requirements
of the applicable financial reporting framework:
a. Management’s decision to recognise, or to not recognise, the accounting estimates in the
financial statements; and
b. The selected measurement basis for the accounting estimates.
IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENTS:

1. The auditor shall evaluate the degree of estimation uncertainty associated with
accounting estimates.
2. The auditor shall determine whether any of those accounting estimate have high
estimation uncertainty give rise to significant risk.
RESPONSES TO THE ASSESSED RISKS OF MATERIAL MISSTATEMENT:
1. Based on Risk assessment the auditor shall determine:

a) Whether management has appropriately applied the applicable financial reporting
framework relevant to the accounting estimate and
b) Whether the methods for making the accounting estimates are appropriate and
have been applied consistently
c) If there are changes in accounting estimates or in the method used for making
those from prior period, are those appropriate in the present circumstances.
2. The auditor shall undertake one or more of the following, taking in account the nature
of the accounting estimates:
a. SUBSEQUENT EVIDENCE: Determine whether events occurring up to the
date of the auditor’s report provide sufficient audit evidence regarding the
accounting estimate.
b. Test checks the data used by the management for making accounting
estimate.
c. The auditor shall also evaluate whether the method used for measurement
is appropriate in the circumstances and assumptions made by the
management are reasonable. This can be achieved by:
i. Testing the extent to which data on which accounting estimate is
based is accurate, complete and relevant and whether the
accounting estimate has been properly determined using such data
and management assumptions.
ii. Considering the source, relevance and reliability of external data.
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iii. Recalculating the accounting estimate and reviewing information

about an accounting estimate for internal consistency.
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iv. Test checks the effectiveness of the controls over the estimates
used by the management together with appropriate substantive
procedure.
3. The auditor shall consider whether specialized skills or knowledge in relation to one or
more aspects of the accounting estimates are required in order to obtain sufficient
appropriate audit evidence. [Whether Expert assistance is needed]
6. EVALUATING THE REASONABLENESS OF THE ACCOUNTING ESTIMATES, AND DETERMINING

MISSTATEMENTS:
The auditor shall evaluate, based on the audit evidence, whether the accounting estimates in
the financial statements are either reasonable in the context of the applicable financial
reporting framework, or are misstated.
D. AUDIT REPORTING & DISCLOSURE:
DISCLOSURES RELATED TO ACCOUNTING ESTIMATES:
a. AFRFW: The auditor shall obtain sufficient appropriate audit evidence about whether the
disclosures in the financial statements related to accounting estimates are in accordance
with the requirements of the applicable financial reporting framework.
b. ESTIMATION UNCERTAINTY: For accounting estimates that give rise to significant risks, the
auditor shall also evaluate the adequacy of the disclosure of their estimation uncertainty in
the financial statements in the context of the applicable financial reporting framework
WRITTEN REPRESENTATIONS:
The auditor shall obtain written representations from management and, where appropriate,
those charged with governance whether they believe significant assumptions used in making
accounting estimates are reasonable.
E. DOCUMENTATION OF ACCOUNTING ESTIMATES:

The audit documentation shall include:
a) The basis for the auditor’s conclusions about the reasonableness of accounting estimates
and their disclosure that give rise to significant risks and
b) Indicators of possible management bias, if any.
ACCOUNTING RELATED CONTENT W.R.T ACCOUNTING ESTIMATES

NATURE OF ACCOUNTING ESTIMATES:
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1. Some financial statement items cannot be measured precisely, but can only be estimated. For
purposes of this SA, such financial statement items are referred to as accounting estimates.
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2.
3. Because of the uncertainties involve in business activities, some financial statement items can
only be estimated. Further, the specific characteristics of an asset, liability or component of
equity, or the basis of or method of measurement prescribed by the financial reporting
framework, may give rise to the need to estimate a financial statement item.
4. LOW ESTIMATION UNCERTAINTY: Some accounting estimates involve relatively low estimation
uncertainty and may give rise to lower risks of material misstatements:
a. Activities that are not complex.
b. Frequently used estimates related to routine transactions.
c. Accounting estimates derived from data that is readily available. Such data may be
referred to as “observable” in the context of a fair value accounting estimate.
d. Fair value accounting estimates where the method of measurement prescribed by
the applicable financial reporting framework is simple and can be applied easily.
e. Model used to measure the accounting estimate is well-known or generally
accepted.
5. HIGH ESTIMATION UNCERTAINTY: For some accounting estimates, however, there may be
relatively high estimation uncertainty, particularly where they are based on significant
assumptions, for example:
a. Accounting estimates relating to the outcome of litigation.
b. Fair value accounting estimates for derivative financial instruments not publicly
traded. [E.g., Un Quoted Shares]
c. Fair value accounting estimates for which a highly specialised entity-developed model
is used or for which, there are assumptions or inputs that cannot be observed in the
marketplace. [E.g., Accounting estimates in cases of Wage Revision Agreements
wherein negotiations with the Trade Unions are on the way or Government’s sanction
is awaited leading to uncertainty.]
6. DEGREE OF ESTIMATION UNCERTAINTY: The Degree of estimation uncertainty varies based

on:
a. The nature of the accounting estimate,
b. The extent to which there is a generally accepted method used to make the
accounting estimate and
c. The subjectivity of the assumptions used to make the accounting estimate.
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NOTES:
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a) Not all financial statement items requiring measurement at fair value, involve estimation
uncertainty. [E.g., Open Market Data is available for Unquoted shares which require to
be measured at Fair value].
b) Estimation uncertainty may exist even when the valuation method and data are well
defined. [For example, valuation of securities quoted on an active and open market at
the listed market price may require adjustment if the holding is significant in relation to
the market or is subject to restrictions in marketability.]
7. Examples of situations where accounting estimates, other than fair value accounting
estimates, may be required include:
a. Allowance for doubtful accounts.
b. Inventory obsolescence.
c. Warranty obligations.
d. Depreciation method or asset useful life.
e. Provision against the carrying amount of an investment where there is uncertainty
regarding its recoverability.
f. Outcome of long-term contracts.
g. Financial Obligations / Costs arising from litigation settlements and judgments.
8. Examples of situations where fair value accounting estimates may be required include:
a. Complex financial instruments, which are not traded in an active and open market.
b. Share-based payments.
c. Property or equipment held for disposal.
d. Certain assets or liabilities acquired in a business combination, including goodwill and
intangible assets.
e. Transactions involving the exchange of assets or liabilities between independent
parties without monetary consideration, for example, a non-monetary exchange of
plant facilities in different lines of business.
9. ESTIMATION INVOLVES JUDGMENTS:

a. Estimation involves judgments based on information available when the financial
statements are prepared.
b. For many accounting estimates, these include making assumptions about matters
that are uncertain at the time of estimation.
c. The auditor is not responsible for predicting future conditions, transactions or events.
10. MANAGEMENT BIAS:

a. Financial reporting frameworks often call for neutrality, that is, freedom from bias.
b. Accounting estimates are imprecise, however, and can be influenced by management
judgment. Such judgment may involve unintentional or intentional management bias
(for example, as a result of motivation to achieve a desired result).
c. The susceptibility of an accounting estimate to management bias increases with the
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subjectivity involved in making it.

d. Unintentional management bias and the potential for intentional management bias
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are inherent in subjective decisions.
e. For continuing audits, indicators of possible management bias identified during the
audit of the preceding periods influence the planning and risk identification and
assessment activities of the auditor in the current period.
f. Management bias can be difficult to detect at an account level:
i. It may only be identified when considered in the aggregate of groups of
accounting estimates or
ii. all accounting estimates, or
iii. when observed over a number of accounting periods.
g. If Management Bias is intention to mislead, then it is considered as Fraudulent.
While auditing Z Ltd., you observe certain material financial statement assertions have been
based on estimates made by the management. As the auditor how do you minimize the risk of
material misstatements?
ANSWER:
The auditor shall obtain an understanding of the following in order to provide a basis for the
identification and assessment of the risks of material misstatements for accounting estimates:
1. The requirements of the applicable financial reporting framework relevant to the accounting
estimates, including related disclosures.
2. How management makes the accounting estimates, and an understanding of the data on
which they are based, including:
a. The method, including where applicable the model, used in making the accounting
estimate.
b. Relevant controls.
c. Whether management has used an expert.
d. The assumptions underlying the accounting estimates;
e. Whether there are any changes in the methods for making the accounting estimates,
and if so, why and
f. Whether and, if so, how management has assessed the effect of estimation
uncertainty.
A Pvt Ltd is engaged in the business of real estate. The auditor of the company requested the
information from the management to review the outcome of accounting estimates (like
estimated costs considered for percentage completion etc) included in the prior period financial
statements and their subsequent re-estimation for the purpose of the current period.
The management has refused the information to the auditor saying that the review of prior
period information should not be done by the auditor. Please advise.
ANSWER:
As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures”, the auditor shall review the outcome of accounting estimates included in
the prior period financial statements, or, where applicable, their subsequent re-estimation for
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the purpose of the current period.

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The nature and extent of the auditor’s review takes account of the nature of the accounting
estimates, and whether the information obtained from the review would be relevant to
identifying and assessing risks of material misstatement of accounting estimates made in the
current period financial statements.
The outcome of an accounting estimate will often differ from the accounting estimate
recognised in the prior period financial statements. By performing risk assessment procedures to
identify and understand the reasons for such differences, the auditor may obtain:
• Information regarding the effectiveness of management’s prior period estimation
process, from which the auditor can judge the likely effectiveness of management’s
current process.
• Audit evidence that is pertinent to the re-estimation, in the current period, of prior
period accounting estimates.
• Audit evidence of matters, such as estimation uncertainty, that may be required to be
disclosed in the financial statements.
However, the review is not intended to call into question the judgments made in the prior
periods that were based on information available at that time.
In the given case, the management is not correct in refusing the relevant information to the
auditor.
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SA 550 - RELATED PARTIES
A. MEANING OF RELATED PARTY: A party that is either:

1. A related party as defined in the applicable financial reporting framework or
2. Where the applicable financial reporting framework establishes minimal or no related party
requirements:
a) A person or other entity that has control or significant influence, directly or indirectly
through one or more intermediaries, over the reporting entity;
b) Another entity over which the reporting entity has control or significant influence, directly
or indirectly through one or more intermediaries; or
c) Another entity that is under common control with the reporting entity through having:
i) Common controlling ownership;
ii) Owners who are close family members; or
iii) Common key management.
NOTE: 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.
B. NATURE OF RELATED PARTY RELATIONSHIPS AND TRANSACTIONS:

1. Many related party transactions are in the normal course of business. In such circumstances,
they may carry no higher risk of material misstatement of the financial statements than similar
transactions with unrelated parties.
2. However, in some circumstances there exist higher risks of material misstatement:
a) Related parties may operate through an extensive and complex range of relationships and
structures, with a corresponding increase in the complexity of related party transactions.
b) Information systems may be ineffective at identifying or summarising transactions and
outstanding balances between an entity and its related parties.
c) Related party transactions may not be conducted under normal market terms and conditions;
for example, some related party transactions may be conducted without consideration.
C. RESPONSIBILITIES OF THE AUDITOR

1. There are specific accounting and disclosure requirements for related party relationships,
transactions and balances to enable users of the financial statements to understand their
nature and effects on the financial statements.
2. The auditor has a responsibility to perform audit procedures to identify, assess and respond
to the risks of material misstatement arising from the entity’s failure to appropriately account
for related party relationships, transactions or balances.
3. The auditor needs to obtain an understanding of the entity’s related party relationships and
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transactions sufficient to be able to conclude whether the financial statements, insofar as they
are affected by those relationships and transactions:
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a) Achieve a true and fair presentation; or

b) Are not misleading (for compliance frameworks).
D. IDENTIFICATION OF FRAUD RISK FACTORS:

1. In addition, an understanding of the entity’s related party relationships and transactions is
relevant to the auditor’s evaluation of whether fraud risk factors are present as required by
SA 240. This is because fraud may be more easily committed through related parties.
2. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements of the financial statements may not be detected, even though the audit is
properly planned and performed in accordance with the SAs. In the context of related parties,
the potential effects of inherent limitations on the auditor’s ability to detect material
misstatements are greater for such reasons as the following:
a) Management may be unaware of the existence of all related party relationships.
b) Related party relationships may present a greater opportunity for collusion, concealment
or manipulation by management.
3. Planning and performing the audit with professional skepticism as required by SA 200 is therefore
particularly important in this context, given the potential for undisclosed related party
relationships and transactions. The requirements in this SA are designed to assist the auditor in
identifying and assessing the risks of material misstatement associated with related party
relationships and transactions, and in designing audit procedures to respond to the assessed risks.
RELEVANT QUESTIONS:
1. There are specific accounting and disclosure requirements for related party CA INTER
relationships, transactions and balances to enable users of the financial
statements to understand their nature and effects on the financial statements.
Analyse and explain stating the responsibility of auditor in this regard.
2. What the auditor shall do after identification of significant related party CA INTER
transactions outside the entity’s normal course of business.
A. As per SA 550 on “Related Parties”, for identified significant related party
transactions outside the entity’s normal course of business, the auditor shall-
1. Inspect the underlying contracts or agreements, if any, and evaluate
whether:
a) The business rationale (or lack thereof) of the transactions suggests that
they may have been entered into to engage in fraudulent financial
reporting or to conceal misappropriation of assets;
b) The terms of the transactions are consistent with management’s
explanations; and
c) The transactions have been appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework; and
2. Obtain audit evidence that the transactions have been appropriately
authorized and approved.
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SA 560 - SUBSEQUENT EVENTS
A. OBJECTIVES:
The objectives of the auditor are to:
a) Obtain sufficient appropriate audit evidence about whether events occurring between the
date of the financial statements and the date of the auditor’s report that require adjustment
in the financial statements are appropriately reflected in those financial statements; and
b) Respond appropriately to facts that become known to the auditor after the date of the
auditor’s report that may have caused the auditor to amend the auditor’s report
B. DEFINITIONS:
1. SUBSEQUENT EVENTS: the events occurring between the date of the financial statements and
the date of the auditor’s report, and facts that become known to the auditor after the date of
the auditor’s report.
2. DATE OF THE FINANCIAL STATEMENTS: The date of the end of the latest period covered by
3. DATE OF APPROVAL OF THE FINANCIAL STATEMENTS: The date on which all the statements
that comprise the financial statements, including the related notes, have been prepared and
those with the recognised authority have asserted that they have taken responsibility for
those financial statements.
4. DATE OF THE AUDITOR’S REPORT: The date the auditor dates the report on the financial
statements in accordance with SA 700.
5. DATE THE FINANCIAL STATEMENTS ARE ISSUED: The date that the auditor’s report and
audited financial statements are made available to third parties.
C. AUDIT PROCEDURE FOR IDENTIFICATION OF SUBSEQUENT EVENTS:

The auditor shall perform the procedures to identify subsequent events which shall include the
following:
1. Obtaining an understanding of any management procedures established to ensure that
subsequent events are identified.
2. Inquiring of management and those charged with governance as to whether any subsequent
events have occurred. Specifically, the auditor shall evaluate the following:
a) Whether new commitments, borrowings or guarantees have been entered into.
b) Whether sales or acquisitions of assets have occurred or are planned.
c) Whether any assets have been appropriated by government or destroyed, for example, by
fire or flood
d) Whether there have been any developments regarding contingencies.
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e) Whether any unusual accounting adjustments have been made or are Contemplated
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f) Whether any events have occurred or are likely to occur which will bring into question the
appropriateness of accounting policies used in the financial statements as would be the case,
for example, if such events call into question the validity of the going concern assumption.
3. Reading minutes of the meetings, of the entity’s owners, management and those charged with
governance, that have been held after the date of the financial statements.
4. Reading the entity’s latest subsequent interim financial statements, if any.
D. CASE- I
FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE DATE OF THE AUDITOR’S REPORT
BUT BEFORE THE DATE THE FINANCIAL STATEMENTS ARE ISSUED:
1. Generally, the auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report.
2. However, when, after the date of the auditor’s report but before the date the financial
statements are issued, a fact becomes known to the auditor that, had it been known to the
auditor at the date of the auditor’s report, may have caused the auditor to amend the
auditor’s report, the auditor shall:
a) Discuss the matter with management and those charged with governance.
b) Determine whether the financial statements need amendment and, if so,
c) Inquire how management intends to address the matter in the financial statements.
3. IF MANAGEMENT AMENDS THE FINANCIAL STATEMENTS: the auditor shall:
a) Carry out the audit procedures necessary in the circumstances on the amendment.
b) Obtain sufficient and appropriate evidence regarding the amendment such subsequent events.
4. IF MANAGEMENT DOES NOT AMEND THE FINANCIAL STATEMENTS:
a) Where the auditor concludes that the financial statements are not amended and If the
auditor’s report has not yet been provided to the entity, the auditor shall modify the
opinion as required by SA 705 and then provide the auditor’s report; or
b) If the auditor’s report has already been provided to the entity, the auditor shall notify
management and those charged with governance not to issue the financial statements to
third parties before the necessary amendments have been made.
c) If the financial statements are nevertheless subsequently issued without the necessary
amendments, the auditor shall take appropriate action, to seek to prevent reliance on the
auditor’s report.
E. CASE - II:
FACTS WHICH BECOME KNOWN TO THE AUDITOR AFTER THE FINANCIAL STATEMENTS HAVE
BEEN ISSUED:
1. After the financial statements have been issued, the auditor has no obligation to perform any
audit procedures regarding such financial statements.
2. However, when, after the financial statements have been issued, a fact becomes known to the
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auditor that, had it been known to the auditor at the date of the auditor’s report, may have
caused the auditor to amend the auditor’s report, the auditor shall:
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a) Discuss the matter with management and, where appropriate, those charged with
governance.
b) Determine whether the financial statements need amendment and, if so,
c) Inquire how management intends to address the matter in the financial statements.
3. IF THE MANAGEMENT AMENDS THE FINANCIAL STATEMENTS: T
The auditor shall:
a) Carry out the audit procedures necessary in the circumstances on the amendment.
b) Review the steps taken by management to ensure that anyone in receipt of the previously
issued financial statements together with the auditor’s report thereon is informed of the
situation.
c) Provide a new auditor’s report on the amended financial statements. The report shall
include an emphasis of matter or other matter paragraph describing the effect of
amendment of financial statements on the earlier issued F/S and earlier issued audit report.
4. IF MANAGEMENT DOES NOT TAKE NECESSARY STEPS:
The auditor shall take appropriate action to seek prevent reliance on the audit report and
financial statements that are already issued to third parties.
RELEVANT QUESTIONS:
1. The auditor shall perform audit procedures designed to obtain sufficient
appropriate audit evidence that all events occurring between the date of the
financial statements and the date of the auditor’s report that require
adjustment of, or disclosure in, the financial statements have been identified.
Explain.
2. Inquiry from Management is helpful for Auditor to evaluate subsequent
events. Discuss specific enquiries in reference of SA 560, which might have
effect on the financial statements.
3. In the context of SA 560 subsequent events, state the specific enquiries on
matters by an auditor which may have effect on financial statements.
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SA 580 - WRITTEN REPRESENTATIONS
A. DEFINITION OF WRITTEN REPRESENTATION:

A written statement by provided by management to the auditor to confirm certain matters or to
support other audit evidence. Written representations in this context do not include financial
statements, the assertions therein, or supporting books and records.
B. WRITTEN REPRESENTATIONS AS AUDIT EVIDENCE:

Written representations are necessary information that the auditor requires in connection with
the audit of the entity’s financial statements. Accordingly, similar to responses to inquiries,
written representations are audit evidence.
Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own
C. OBJECTIVES:
a) To obtain written representations from management that they believe that they have fulfilled
their responsibility for the preparation of the financial statements and for the completeness
of the information provided to the auditor;
b) To support other audit evidence relevant to the financial statements or specific assertions in
the financial statements by means of written representations, if determined necessary by the
auditor or required by other SAs; and
c) To respond appropriately to written representations provided by management.
D. DATE OF AND PERIOD COVERED BY WRITTEN REPRESENTATIONS:

The date shall be as near as practicable to, but not later than the date of the auditor’s report on
The written representations shall be for all financial statements and period referred to in the
auditor’s report.
E. DOUBT AS TO THE RELIABILITY OF WRITTEN REPRESENTATIONS:

1. If the auditor has concerns about the competence, integrity of management, the auditor shall
determine the effect that may have on the reliability of representations and audit evidence in
general.
2. In particular, if written representations are inconsistent with other audit evidence, the auditor
shall perform audit procedures to attempt to resolve the matter.
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3. If the auditor concludes that the written representations are not reliable, the auditor shall take
appropriate actions, including determining the possible effect on the opinion in the auditor’s
report in accordance with SA 705. (Usually expresses a disclaimer of opinion)
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F. WRITTEN REPRESENTATIONS NOT PROVIDED:
If management does not provide one or more of the requested written representations, the
auditor shall:
1. Discuss the matter with management;
2. Re-evaluate the integrity of management and evaluate the effect that may have on the
reliability of representations; and
3. Take appropriate actions in accordance with SA 705. (Expresses a disclaimer of opinion)
RELEVANT QUESTIONS:
1. What do you mean by "Written Representations"? As an auditor, how you will CA INTER
deal if management does not provide requested written representations?
2. The auditor P of PAR and Co., a firm of Chartered Accountants is conducting CA INTER
audit of AB Industries Ltd. The auditor requests management to provide
Banker’s certificate in support of Fixed deposits whereas management
provides only written representation on the matter. Analyse how would you
deal as an auditor.
3. The Partner of Vansh and Vaibhav, Chartered Accountants, asked the CA INTER
management to provide statements from the creditors as part of audit evidence
and also required written representation from the management but the
management did not provide the requested written representations. Discuss
how the auditor would proceed.
4. Write a short note on management representation. CA INTER
IMPORTANT SCREENSHOT FROM ICAI MATERIAL PG NO. 2.47 IN OCT 2021 EDITION
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SA 200 - OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND THE CONDUCT OF AN
AUDIT IN ACCORDANCE WITH STANDARDS ON AUDITING
A. OVERALL OBJECTIVES OF INDEPENDENT AUDITOR:
The overall objectives of the auditor are:

a) To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatements; and
b) To report on the financial statements as per relevant SA’s based on the auditor’s
findings.
B. DEFINITIONS:
a) MISSTATEMENT: A difference between the Amount, Classification, Presentation, Or
Disclosure of a reported financial statement item AND the Amount, Classification,
Presentation, Or Disclosure that is required as per applicable financial reporting framework.
Misstatements can arise from error or fraud.
b) FINANCIAL STATEMENTS: A structured representation of historical financial information,

including related notes, intended to communicate an entity’s economic resources or
obligations at a point in time or the changes therein for a period of time in accordance with
The related notes ordinarily comprise a summary of significant accounting policies and other
explanatory information.
c) APPLICABLE FRFW: In view of the nature of the entity and the objective of the financial
statements, the framework adopted by management for preparation and presentation of the
financial statements is known as AFRFW. Applicable FRFW may be a Fair Presentation Frame work
or Compliance Frame work:
1. COMPLIANCE FRAMEWORK (CFW):
requirements of such framework without any deviation.
• The words “True and Fair View” do not appear in the financial statements in this type
of framework.
• E.g.: Most of the special purpose financial statements are prepared as per compliance
framework.
2. FAIR PRESENTATION FRAMEWORK:
requirements of such framework (CFW) AND “Contains disclosures beyond the
requirements of such framework or may deviate from the requirement of the
framework” so as to achieve fair presentation.
• The words true and fair view appears only in this type of framework.
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d) PROFESSIONAL SKEPTICISM: Professional skepticism refers to an attitude of questioning

mind, being alert to unusual situations and a critical assessment of audit evidence.
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Professional skepticism includes being alert to the following situations:

1. Conflicts between multiple audit evidences.
2. Doubts as to reliability of audit evidence.
3. Situations of possible fraud.
4. Also maintaining professional skepticism throughout the audit is necessary to reduce the
risks of:
a) Overlooking unusual circumstances.
b) Over generalizing while taking decisions from audit observations.
c) Taking inappropriate decisions regarding nature, timing, and extent of the audit
procedures.
e) PROFESSIONAL JUDGMENT: It refers to taking decisions by the auditor during the course of
his audit by using his knowledge, training and experience. Judgment includes assumptions and
estimations made by auditor. Professional judgment is used throughout planning and
performing of an audit.
f) SUFFICIENT AND APPROPRIATE EVIDENCE: Refer SA 500

g) AUDIT RISK: The risk of expressing an inappropriate opinion when the financial statements
are materially misstated is termed as audit risk.
h) PREMISE TO AUDIT: The audit will be conducted on an assumption that the
management that they are accepting their responsibility for the following activities:
1. Preparation of the financial statements in accordance with the applicable financial
reporting framework.
2. Designing and implementing necessary internal control to enable the preparation of
financial statements that are free from material misstatement, whether due to fraud or
error; and
3. To provide the auditor with:
• Access to all information such as records, documentation and other matters;
• Additional information that the auditor may request from management for the
purpose of the audit; and
• Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
C. COMPLYING WITH SA’S RELEVANT TO AUDIT:
a) The auditor shall comply with all SAs relevant to the audit. An SA is relevant to the audit if the
circumstances addressed by the SA exist.
b) The auditor shall have an understanding of the entire text of an SA, including its application
and other explanatory material, to understand its objectives and to apply its requirements
properly.
c) The auditor shall not represent compliance with SAs in the auditor’s report unless the auditor
has complied with the requirements of this SA and all other SAs relevant to the audit.
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SA 210 - AGREEING THE TERMS OF AUDIT ENGAGEMENTS

The objective of the auditor is to accept or continue an audit engagement only when the terms of
audit have been agreed through:
a) Establishing whether the preconditions for an audit are present; and
b) Confirming that there is a common understanding between the auditor and management of
the terms of the audit engagement. (Mutual consent)
B. PRECONDITIONS FOR AN AUDIT: Refer Premise Definition in SA 200.
C. LIMITATION ON SCOPE PRIOR TO AUDIT ENGAGEMENT ACCEPTANCE: Prior to the acceptance of
the audit engagement, if there is a limitation imposed by management on the rights and duties of
the auditor (Scope), then the auditor shall not accept such audit engagement.
D. NON ACCEPTANE OF AUDIT ENGAGEMENT:
The auditor shall not accept the proposed audit engagement:
a) If the auditor has determined that the financial reporting framework to be applied in the
preparation of the financial statements is unacceptable or
b) If the agreement of management has not been obtained.
E. FORM AND CONTENTS OF THE AUDIT ENGAGEMENT:

Engagement letter is a document issued by the auditor to the client, to reduce the chances of
misunderstanding regarding scope, objective, rights and duties of the auditor and of management.
In case of Non statutory audit, the issue of engagement letter is highly recommendatory as there
is no governing law regarding rights and duties of an auditor.
CONTENTS OF AN AUDIT ENGAGEMENT LETTER:

1. Title;
2. Addressee;
3. The objective and scope of the audit;
4. The responsibilities of the auditor;
5. The responsibilities of management; (I.e., Preconditions to audit)
6. Reference to Applicable financial reporting framework;
7. Signature of auditor;
8. Signature of the client confirming the acceptance of terms;
9. Date and place;
F. ISSUANCE OF ENGAGEMENT LETTER DURING RECURRING AUDITS:

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INITIAL AUDIT ENGAGEMENT: The auditor must issue an engagement letter in case of newly
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accepted appointment for an audit.

RECURRING AUDIT:
1. If auditor of previous year(s) has also been appointed as auditor for current year, then the
current year engagement is known as “Recurring audit”.
2. In recurring audits, the auditor shall decide whether there is need to re-issue the engagement
letter based on circumstances and depending on professional judgment of auditor.
3. Circumstances where engagement letter is issued even in case of recurring audits:
a) Any indication that the entity misunderstands the objective and scope of the audit.
b) A change in legal or regulatory requirements.
c) A change in the Applicable financial reporting framework.
d) A change in audit reporting requirement.
e) A recent change of Top management.
f) A significant change in nature or size of the entity’s business.
g) Any changes in terms originally agreed.
G. CHANGES IN THE TERMS OF THE AUDIT ENGAGEMENT:
REASONS FOR REQUEST MADE BY CLIENTS:

A request from the client to change the terms of engagement may result from:
1. Change in circumstances.
2. Misunderstanding of terms originally agreed.
3. With a view to restrict the scope of engagement or to alter terms and conditions.
“ACCEPTANCE OF CHANGE” IN TERMS OF ENGAGEMENT BY AUDITOR:
1. If there is a reasonable justification, the auditor can accept the changes to terms of
engagement.
2. Further the auditor and management shall agree and record the new terms of the engagement
in a new engagement letter.
“NON-ACCEPTANCE” OF CHANGE IN TERMS OF ENGAGEMENT BY AUDITOR:
The auditor shall not agree for changes in the terms of the audit engagement where there is no
reasonable justification for doing so.
WITHDRAWAL FROM ENGAGEMENT:
If the auditor is unable to agree to a change of the terms of engagement and is not permitted
by management to continue the original audit engagement, the auditor shall withdraw from
the audit engagement.
AKJ Ltd is a small-sized 30 years old company having business of manufacturing of pipes.
Company has a plant based out of Dehradun and have their corporate office in Delhi. Recently
the company appointed new firm of Chartered Accountants as their statutory auditors.
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The statutory auditors want to enter into an engagement letter with the company in respect of
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their services but the management has contended that since the statutory audit is mandated by
law, engagement letter may not be required. Auditors did not agree to this and have shared a
format of engagement letter with the management for their reference before getting that
signed. In this respect management would like to understand that as per SA 210 (auditing
standard referred to by the auditors), if the agreed terms of the engagement shall be recorded
in an engagement letter or other suitable form of written agreement, what should be included
in terms of agreed audit engagement letter?
[Refer Point E]
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SA 230 - AUDIT DOCUMENTATION
A. NATURE AND PURPOSES OF AUDIT DOCUMENTATION:

AUDIT DOCUMENTATION:
1. It refers to the record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached.
2. These are also called as “working papers” or “work papers” or “audit files”.
PURPOSE / OBJECTIVE OF DOCUMENTATION:
Audit documentation provides:
1. Evidence of the auditor’s basis for a conclusion and achievement of overall objective and
2. Evidence that the audit was planned and performed in accordance with SAs.
ADVANTAGES OF AUDIT DOCUMENTATION:
The following are the purpose of Audit documentation:
1. Assisting the engagement team to plan and perform the audits of next years.
2. Assisting the engagement team to direct and supervise the audit work.
3. Enabling the engagement team to be accountable for its work.
4. Enabling quality control reviews and inspections within the auditors firm.
5. Enabling of external inspections in accordance legal, regulatory or other requirements.
Example: Peer reviews.
AUDIT DOCUMENTATION INCLUDES:
1. Audit Programmes
2. Analyses
3. Issues Memorandum (Query Sheet)
4. Evidences obtained
5. Summary of Significant matters
6. Confirmation and representation letters
7. Correspondence relating to significant matters.
B. TIMELY DOCUMENTATION OF AUDIT DOCUMENTATION:

Preparing sufficient and appropriate audit documentation on a timely basis helps to enhance the
quality of the audit and facilitates the effective review and evaluation of the audit evidence
obtained and conclusions reached before the auditor’s report is finalised. Documentation
prepared after the audit work has been performed is likely to be less accurate than documentation
prepared at the time such work is performed.
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C. FORM, CONTENT AND EXTENT OF AUDIT DOCUMENTATION:

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MANNER OF DOCUMENTATION: The documentation shall be such that an experienced auditor
having no previous connection with the audit shall understand the planning and performance of
audit based on the audit documentation.
FORM, CONTENT AND EXTENT OF AUDIT DOCUMENTATION:
It depends on the following factors:
1. The size and complexity of the entity.
2. The risks of material misstatement.
3. The nature and extent of exceptions identified.
4. The extent of audit carried out and methods used.
5. Level of Effectiveness of internal controls.
6. The Significance of evidence obtained.
MEANING OF AN EXPERIENCED AUDITOR:
A person who has a reasonable knowledge of:
a) Applicable financial reporting,
b) Accounting standards,
c) Auditing standards and
d) Knowledge of clients’ business.
D. ASSEMBLY / RETENTION / OWNERSHIP OF THE FINAL AUDIT FILE:
ASSEMBLY:
1. The auditor shall after completion of audit i.e., after issuance of audit report, within 60 days
shall assemble the audit file so as to keep it for future reference. This process is also known as
working paper arrangement. (SQC - 1)
2. The assembly of audit file after completion of audit is an administrative process and does not
involve carrying out new or additional audit procedures or conclusions. Changes may be made
if applicable and administrative in nature. E.g., Deleting superseded documents, referencing
WP’s.
3. Once Final audit file assembly is completed, the auditor shall not delete or discard audit
documentation of any nature before completion of retention period.
RETENTION PERIOD:
The auditor shall retain the working paper file for a minimum period of 7 years from the date of
audit report or group audit report, whichever is later. (SQC - 1)
OWNERSHIP OF AUDIT DOCUMENTATION:

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1. Audit documentation is the property of the auditor.

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2. The auditor may at his discretion, make portions of, or extracts from, audit documentation
available to clients or third parties.
3. Even Documentation of Brach auditors and Internal auditors are property of their own. They
are not bound to share documentation with External Statutory auditor.
E. MATTERS ARISING AFTER THE DATE OF THE AUDITOR’S REPORT:

If the auditor performs new or additional audit procedures or draws new conclusions after the
date of the auditor’s report,
The auditor shall document:
a) The circumstances encountered;
b) The new or additional audit procedures performed, audit evidence obtained, and conclusions
reached, and their effect on the auditor’s report; and
c) When and by whom the resulting changes to audit documentation were made and reviewed.
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SA 240 - THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN
AUDIT OF FINANCIAL STATEMENTS
A. DEFINITION OF FRAUD:
SA - 240* defines the term ‘fraud’ as “An intentional act by one or more individuals among
management, those charged with governance, employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage”.
B. CHARACTERISTICS OF FRAUD:
1. Fraud is Intentional.
2. Although fraud is a broad legal concept and the auditor is concerned only with the type of
fraud that causes a material misstatement in the financial statements.
C. TYPES OF FRAUDS:
1. Fraudulent financial reporting - Intentional Misstatements like Omissions, Misrepresentation.
2. Misappropriation of assets - Theft or Unauthorised usage of entity’s assets.
D. MANAGEMENT RESPONSIBILITY TO PREVENT AND DETECT FRAUD:

As per SA 240 the primary responsibility for the prevention and detection of fraud rests with both
those charged with governance of the entity and management.
E. AUDITOR’S RESPONSIBILITIES FOR DETECTION OF FRAUD AND ERROR:

a) As per the SA’s the auditor is responsible for obtaining reasonable assurance whether the
financial statements taken as a whole are free from material misstatement.
b) When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude
of professional scepticism throughout the audit,
c) The risk of not detecting a material misstatement resulting from fraud is higher than the risk
of not detecting one resulting from error.
d) The risk of the auditor not detecting a material misstatement resulting from management
fraud is greater than for employee fraud.
e) The auditor’s ability to detect a fraud depends on factors such as -
i) The skilfulness of the perpetrator.
ii) The degree of collusion involved.
iii) The relative size of individual amounts manipulated.
iv) Experience of Person committed fraud.
v) Frequency of fraud committed.
f) The liability of the auditor for failure to detect fraud exists only when such failure is clearly
due to not exercising reasonable care and skill. (If auditor acted negligently)
g) If the auditor can prove with the help of his working papers (documentation) that he has
conducted the audit in a proper manner, he cannot be held responsible for the same.
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F. FRAUD RISK FACTORS:

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1. DEFINITION: Fraud Risk Factors refers to events or conditions that indicate an incentive or
pressure to commit fraud or provide an opportunity to commit fraud.
2. FRAUD RISK FACTORS:
The examples of Risk factors relating to two types of frauds are discussed separately in
subsequent questions. The two types of frauds which we discussed in the earlier questions
are:
1. Fraudulent financial reporting and
2. Misappropriation of assets
For each of these types of fraud, the risk factors are further classified based on the three
criteria’s:
1. Incentives/pressures,
2. Opportunities, and
3. Attitudes/rationalizations.
3. EXAMPLES ON FRAUD RISK FACTORS W.R.T. FRAUDULANT FINANCIAL REPORTING:
INCENTIVES/PRESSURES:
Financial stability or profitability is threatened by economic, industry, or entity operating
conditions, such as:
a) High degree of competition accompanied by declining margins.
b) High vulnerability to rapid changes, such as changes in technology, or interest rates.
c) Significant declines in customer demand and increasing business failures
d) Operating losses making the threat of bankruptcy.
e) Recurring negative cash flows from operations
f) New accounting, statutory, or regulatory requirements.
OPPORTUNITIES:
The nature of the industry or the entity’s operations provides opportunities to engage in
fraudulent financial reporting that can arise from the following:
a) Significant related-party transactions not in the ordinary course of business
b) A strong financial presence or ability to dominate a certain industry sector may result in
inappropriate or non-arm’s-length transactions.
c) Assets, liabilities, revenues, or expenses based on significant estimates that involve
subjective judgments or uncertainties that are difficult to corroborate.
d) Highly complex transactions, especially those close to period end that pose difficult
“substance over form” questions.
e) Significant bank accounts or subsidiary or branch operations in tax-haven jurisdictions for
which there appears to be no clear business justification.
ATTITUDES/RATIONALIZATIONS:
Communication, implementation, support or enforcement of the entity’s values or ethical
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standards by management are not effective, or the communication of inappropriate values or

ethical standards.
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a) Known history of violations of securities laws or other laws and regulations.
b) Excessive interest by management in maintaining the entity’s inventory price or earnings
trend.
c) Management failing to remedy for known significant deficiencies in internal control on a
timely basis.
d) An interest by management in employing inappropriate means to minimize reported
earnings for tax-motivated reasons.
e) The owner-manager makes no distinction between personal and business transactions.
4. MISAPPROPRIATION OF ASSETS:
It involves the theft of an entity’s assets by employees in relatively small and immaterial
amounts (Pilferage). It can also involve management who are usually more able to conceal
misappropriations in ways that are difficult to detect.
Misappropriation of assets can be accomplished in a variety of ways including:
i) Embezzling receipts. E.g: misappropriating collections on accounts receivable.
ii) Stealing physical assets or intellectual property. E.g: Stealing inventory for personal use or,
colluding with a competitor by disclosing technological data.
iii) Causing an entity to pay for Goods and Services not received. E.g: payments to fictitious
vendors, payments to fictitious employees
iv) Using an entity’s assets for personal use (Unauthorised usage). E.g: using the entity’s assets
as collateral for a personal loan.
Misappropriation of assets is often accompanied by false or misleading records or documents in
order to conceal the fact that the assets are missing or have been pledged without proper
authorization.
EXAMPLE:
Vineet is a manager in Zed Ex Ltd. He is having authority to sign cheques up to Rs.10,000. While
performing the audit, Rajan, the auditor, noticed that there were many cheques of Rs.9,999
which had been signed by Vineet. Further Vineet had split large payments (amounting to more
than Rs.10,000 each, into two or more cheques less than Rs.10,000 each so that he may
authorize the payments). This raised suspicion in the auditor. The auditor found that the
cheques of Rs.9,999 were deposited in Vineet’s personal account i.e. Vineet had
misappropriated the amount. Splitting the cheques into lower amounts involves manipulation
of accounts. The fraud was committed by an employee.
5. EXAMPLES OF FRAUD RISK FACTORS W.R.T MIS APPROPRIATION OF ASSETS:

Risk factors that relate to misstatements arising from misappropriation of assets are also
classified into the three criteria’s:
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a) Incentives/pressures,
b) Opportunities, and
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c) Attitudes/rationalization.
The following are examples of risk factors related to misstatements arising from
misappropriation of assets-
INCENTIVES/PRESSURES:
I. Personal financial obligations may create pressure on management or employees with
access to cash or other assets susceptible to theft or misappropriation of assets.
II. Adverse relationships between the entity and employees:
a) Known or anticipated future employee layoffs.
b) Recent or anticipated changes to employee compensation or benefit plans.
c) Promotions, compensation, or other rewards inconsistent with expectations.
OPPORTUNITIES:
Opportunities to misappropriate assets increase when there are the following:
I. Large amounts of cash on hand.
II. Inventory items that are small in size, of high value, or in high demand.
III. Easily convertible assets, such as bearer bonds, diamonds, or computer chips or stamps.
IV. Fixed assets which are small in size, marketable, or lacking observable identification of
ownership.
ATTITUDES/RATIONALIZATIONS:
I. Lack of commitment for monitoring or reducing risks related to misappropriations of
assets.
II. Disregard for internal control over misappropriation of assets by overriding existing
controls
III. Behaviour indicating dissatisfaction with the entity or its treatment of the employee.
IV. Sudden Changes in behaviour or lifestyle that may indicate assets have been
misappropriated.
V. Tolerance of petty theft.
6. CIRCUMSTANCES THAT INDICATE THE POSSIBILITY OF FRAUD:

The following are the circumstances that may indicate the possibility of material misstatement
resulting from fraud-
DISCREPANCIES IN THE ACCOUNTING RECORDS, INCLUDING:
1. Transactions that are not recorded in complete or are improperly recorded as to amount,
or entity policy.
2. Unauthorized balances or transactions.
3. Last-minute adjustments that significantly affect financial results.
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4. Tips or complaints to the auditor about alleged fraud.

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CONFLICTING OR MISSING EVIDENCE:

1. Missing documents.
2. Documents that appear to have been altered.
3. Significant unexplained items on reconciliations.
4. Unusual discrepancies between the entity’s records and confirmation replies.
5. Large numbers of credit entries and other adjustments made to accounts receivable
records.
6. Missing inventory or physical assets of significant magnitude.
PROBLEMATIC OR UNUSUAL RELATIONSHIPS BETWEEN THE AUDITOR AND MANAGEMENT:
1. Denial of access to records, vendors, or others from whom, audit evidence might be
sought.
2. Undue time pressures imposed by management to resolve complex issues.
3. Unusual delays by the entity in providing requested information.
4. Unwillingness to facilitate auditor access to key electronic files for testing through the use
of computer-assisted audit techniques (CAAT).
5. Denial of access to key IT operations staff and facilities
6. Unwillingness to add or revise disclosures in the financial statements to make them more
complete
7. Unwillingness to address identified deficiencies in internal control on a timely basis.
NOTE: There is a marginal difference between fraud risk factors and circumstances indicating
fraud. The first one deal with factors that exist before commencement of audit procedures
and while the later arises during the conduct of audit through audit procedures.
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SA 300 - PLANNING AN AUDIT OF FINANCIAL STATEMENTS
CONCEPT OF PRELIMINARY ENGAGEMENT ACTIVITIES:

The auditor shall undertake the following activities at the beginning of the current audit
engagement:
1. Performing procedures required by SA 220, “Quality Control for an Audit of Financial Statements”
regarding the continuance of the client relationship and the specific audit engagement;
2. Evaluating compliance with ethical requirements, including independence, as required by SA
220;
3. Establishing an understanding of the terms of the engagement, as required by SA 210 and
4. Communicating with the predecessor auditor, if applicable.
NOTE: REMAINING CONCEPTS OF SA 300 ARE COVERED IN CHAPTER “AUDIT STRATEGY AND
AUDIT PLANNING”
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4. PROFESSIONAL ETHICS
INTRO: Chartered Accountants are engaged in building trust to vast variety of users, whether
shareholders, government, banks, investors, employees or others, which imposes a public interest
responsibility on their profession. Like other professionals, Chartered Accountants also have some
set of code of ethics. This Code of Ethics establishes ethical requirements for Professional
Accountants.
A Chartered Accountant, either in practice or in service, has to abide by these ethical behaviours.
They are expected to follow the fundamental principles of professional ethics while performing their
jobs. Service users of professionals should be able to feel secure that there exists a framework of
professional ethics which governs the provision of those services. Any deviation from the ethical
responsibilities brings the disciplinary mechanism into action against the Chartered Accountants.
‘Ya Esha Supteshu Jagrati’: (Need for Code of Ethics):
1. Ethics are as old as human civilization. It is nothing but the laws or rules of acceptable behaviour.
2. The whole foundation of any profession, particularly CA profession, is its credibility.
3. The sole purpose of Code of Ethics is to ensure and uphold this credibility.
4. The main ingredient of our profession is independence.
5. The code of ethics acts as a shield which enables us to command respect.
Our Institute’s Motto – ‘Ya Esha Supteshu Jagrati’ is adopted from Kathopanishad and it denotes
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‘eternal vigilance’ – awakening when the world is asleep.

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EXAMPLE 1: A doctor lies to a patient about the serious condition of his health, thinking that
disclosing the seriousness of health may cause more distress to the patient. This would be morally
wrong as the doctor is hiding imperative information from the patient. However, here,
improvement in health is given moral priority and hence it is justifiable to contravene other
morals.
EXAMPLE 2: A lawyer is responsible to his immediate client only. It doesn’t matter whether the
client has committed an offence or not, the lawyer has to defend him before the court of law,
whereas a Chartered Accountant, as an auditor, has the responsibility to highlight and bring to the
knowledge of stakeholders about where the client has flawed. This implies that there can be
different moral codes to different sections of society or professionals.
CODE OF ETHICS:
The code of ethics has been divided into three parts:
1. PART – 1: General Application of the code. (Both Practice, Business and Employment)
Complying with the Code, Fundamental Principles and Conceptual Framework, which includes
the fundamental principles and the conceptual framework and is applicable to all professional
accountants.
2. PART – 2: Professional Accountants in Public Practice. (For Practicing Auditors):

a) IN SERVICE: Applies to Professional Accountants in Service when performing professional
activities. Professional accountants in service include professional accountants employed,
engaged or contracted in an executive or non-executive capacity in, for example:
• Commerce, industry or service.
• The public sector.
• Education.
• The not-for-profit sector.
• Regulatory or professional bodies.
b) IN CA FIRM EMPLOYMENT: Part 2 is also applicable to individuals who are professional
accountants in public practice when performing professional activities pursuant to their
relationship with the firm as an employee.
3. PART – 3: Professional Accountants in Public Practice:

Professional Accountants in Public Practice, which sets out additional material that applies to
professional accountants in public practice when providing professional services.
4. PART – 4A and 4B: Independence Standards.

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5. GLOSSARY: contains defined terms (together with additional explanations where appropriate)
and described terms which have a specific meaning in certain parts of the Code.
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Q.NO.1 WRITE ABOUT FUNDAMENTAL PRINCIPLES THAT GOVERN A PROFESSIONAL
ACCOUNTANT, SAY, AN AUDITOR?
ANSWER:
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The fundamental principles as discussed in Code of Ethics of ICAI, to be complied, are given below:
A. INTEGRITY:
1. All professional accountants to be straightforward and honest in both Professional and

Business relationships.
2. Professional Accountant should not be associated with reports, returns, communications or
other information where they believe that the information:
a. Contains a materially false or misleading statement
b. Contains statements or information furnished recklessly.
c. Omits or obscures (unclear) information where such omission or obscurity would
be misleading.
3. If the professional accountant expresses a modified report in respect of above cases, then he
shall not consider to be in breach.
B. OBJECTIVITY:
1. All Professional Accountants must not to compromise their professional or business

judgment because of bias, conflict of interest or the undue influence of others.
2. Relationships that bias or unduly influence the professional judgment of the professional
accountant should be avoided. (In other words, wherever conflicts of interest arise such
relationship shall not be accepted by the professional accountants)
C. PROFESSIONAL COMPETENCE AND DUE CARE:
1. The objective is:

a. To maintain professional knowledge and skill at the level required to ensure that
clients or employers receive competent professional service, based on latest and
updated technical & professional standards and applicable legislations.
b. To act diligently in accordance with applicable technical and professional standards.
2. Professional competence is divided into two parts:
a. Attainment of competence and
b. Maintenance of competence.
3. Serving clients and employing organizations with professional competence requires the
exercise of sound judgment in applying professional knowledge and skill when undertaking
professional activities.
4. Maintenance of professional competence requires continuous awareness and understanding
of relevant technical, professional and business developments.
5. DELIGIENCE: Diligence requires an accountant to act carefully, thoroughly and on timely
basis. Professional accountant should take steps to ensure that those working under the
professional accountant have appropriate training and supervision.
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NOTE: Where appropriate, a professional accountant shall make clients, the employing
organization, or other users of the accountant’s professional services or activities, aware of the
limitations inherent in the services or activities. [E.g., Mentioning in Letter of Engagement about
inherent limitations of an audit]
D. CONFIDENTIALITY:
1. A professional accountant shall comply with the principle of confidentiality, which requires
an accountant to respect the confidentiality of information acquired as a result of
professional and employment relationships which may be present or prospective.
2. A Professional accountant should refrain from -
a. Disclosing confidential information with outsiders without proper and specific
authority, UNLESS there is a legal or professional duty or right to disclose or
b. Using confidential information to their personal advantage or 3rd party advantage.
3. The professional accountant shall maintain confidentiality even in a social environment. In
other words, he shall not share such information even to a close or immediate family
member.
4. MAINTAIN AFTER END OF RELATIONSHIP: Confidentiality shall be maintained even after end
of the relationship with client or employer as required under legal and professional
standards.
5. CIRCUMSTANCES EXCEPTION TO CONFIDENTIALITY: In the following cases the professional
accountants are permitted to disclose confidential information to outsiders if:
a. Required by Law.
b. It is permitted by law and authorized by client. [E.g., Production of documents in the
course of legal proceedings]
c. It is mandatory under the law. [If No Prohibition is there then it is assumed that the
law permits]
d. Professional Duty or right to disclose:
i. To comply with Peer Review or Quality Reviews.
ii. To respond to an inquiry in an investigation by regulatory.
iii. To comply with technical and professional standards.
6. FACTORS FOR DISCLOSING: In deciding whether to disclose confidential information or not,
the professional accountants should consider the following points:
a. Whether the interests of any party, including third parties whose interests may be
affected, could be harmed.
b. Whether all the relevant information is known and substantiated.
c. The type of communication that is expected and to whom it is addressed (I.e., right
recipient or not).
d. Whether the parties to whom the communication is addressed are appropriate
recipients.
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E. PROFESSIONAL BEHAVIOUR:
1. Professional accountant shall not knowingly engage in any employment, occupation or

activity that impairs or might impair the integrity, objectivity or good reputation of the
profession, and as a result would be incompatible with the fundamental principles.
2. In marketing and promoting themselves and their work, professional accountants should not
bring the profession into disrepute [Discredit]. Professional accountants should be honest
and truthful and should not:
a. Make exaggerated claims for the
i. Services they are able to offer,
ii. The qualifications they possess, or
iii. Experience they have gained.
b. Make disparaging references or unsubstantiated comparisons to the work of others.
(E.g., Degrading fellow members)
c. Any direct or indirect measures to advertise any professional/other facts which are in
violation of Advertisement Guidelines issued by the Council of the Institute from time
to time.
CONFLICT ARISES ON FUNDAMENTAL PRINCIPLES:
1. A professional accountant might face a situation in which complying with one fundamental
principle, conflict with complying with one or more other fundamental principles. In such a
situation, the accountant might consider consulting, with:
a. Others within the client or employing organisation.
b. Those charged with Governance.
c. The Institute.
d. Legal Counsel.
2. He shall exercise his professional judgment in resolving the conflict or dis-associate from the
matter creating conflict.
Q.NO.2 THE CODE OF ETHICS FOR PROFESSIONAL ACCOUNTANTS AS PER IFAC IDENTIFIES
DIFFERENT TYPES OF THREATS TO INDEPENDENCE OF AUDITORS? EXPLAIN IN DETAIL?
ANSWER:
The conceptual framework specifies an approach for a professional accountant to:
1. Identify threats to compliance with the fundamental principles
2. Evaluate the threats identified and
3. Address the threats by eliminating or reducing them to an acceptable level.
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PART 1: IDENTIFICATION THE THREATS:

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The Fundamental Principles are threatened by range of threats which are broadly classified into the
following types: (As per International Federation of Accountants)
A. SELF INTREREST THREATS: The threat that a financial or other interest will INAPPROPRIATELY
influence a professional accountant’s judgment or behaviour.
Examples:
1. Having a direct financial interest in a client
2. Undue dependence on total fees from a client.
3. Having a close business relationship with a client.
4. Concern about the possibility of losing a client.
5. Potential employment with a client.
6. Contingent fees relating to an assurance engagement.
B. SELF REVIEW THREATS: The threat that a professional accountant will not appropriately
evaluate the results of a previous judgment made; or an activity performed by the accountant,
or by another individual within the accountant’s firm or employing organization, on which the
accountant will rely when forming a judgment as part of performing a current activity.
Examples:
1. The discovery of a significant error during a re-evaluation of the work of the professional
accountant in public practice.
2. Reporting on the operation of financial systems after being involved in their design or
implementation.
3. Having prepared the original data used to generate records that are the subject matter of
the engagement.
4. A member of the assurance team being, or having recently been, a director or officer of that
client.
5. Performing a service for a client that directly affects the subject matter of the assurance
engagement.
C. ADVOCACY THREATS: The threat that a professional accountant will promote a client’s or
employing organization’s position to the point that the accountant’s objectivity is compromised.
Examples:
1. Promoting shares in a listed entity when that entity is a financial statement audit client.
2. Acting as an advocate on behalf of an assurance client in litigation or disputes with third
parties.
3. lobbying in favour of legislation on behalf of a client.
D. FAMILIARITY THREATS: The threat that due to a long or close relationship with a client, or
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employing organization, a professional accountant will be too sympathetic to their interests or

too accepting of their work;
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Examples:
1. A member of the engagement team having a close or immediate family relationship with a
director or officer of the client.
2. A former partner of the firm being a director or officer of the client or an employee in a
position to exert direct and significant influence over the subject matter of the engagement.
3. Accepting gifts or preferential treatment from a client, unless the value is clearly
insignificant.
4. Long association of senior personnel with the assurance client.
E. INTIMIDATION THREATS: The threat that a professional accountant will be deterred from acting
objectively because of actual or perceived pressures, including attempts to exercise undue
influence over the accountant.
Examples:
1. Being threatened with dismissal or replacement in relation to a client engagement.
2. Being threatened with litigation.
3. Being pressured to reduce inappropriately the extent of work performed in order to reduce
fees.
4. Being informed that a planned promotion will not occur unless the accountant agrees with
an inappropriate accounting treatment.
PART 2 – EVALUATION OF THREATS:
The conditions, policies and procedures described above might impact the evaluation of whether a
threat to compliance with the fundamental principles is at an acceptable level.
1. Acceptable level: An acceptable level is a level at which a professional accountant using the
reasonable and informed third party test would likely conclude that the accountant complies
with the fundamental principles.
2. Reasonable and Informed Third Party: The reasonable and informed third party test is a
consideration by the professional accountant about whether the same conclusions would likely
be reached by another party. Such consideration is made from the perspective of a reasonable
and informed third party, who weighs all the relevant facts and circumstances that the
accountant knows, or could reasonably be expected to know, at the time the conclusions are
made. The reasonable and informed third party does not need to be an accountant but would
possess the relevant knowledge and experience to understand and evaluate the appropriateness
of the accountant’s conclusions in an impartial manner.
PART 3 – ADDRESSING THREATS:

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1. ELIMINATE OR WITHDRAW: If the professional accountant determines that the identified

threats to compliance with the fundamental principles are not at an acceptable level, the
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accountant shall address the threats by eliminating them or reducing them to an acceptable
level. The accountant shall do so by:
a. Eliminating the circumstances, including interests or relationships, that are creating the
threats. [E.g., Will not acquire shares]
b. Applying safeguards, where available and capable of being applied, to reduce the threats
to an acceptable level. [E.g., Makes relatives not to acquire shares] or
c. Declining or ending the specific professional activity. [E.g., Do Not accept audit if he or his
relatives has shares in the company]
2. COMPULSORY WITHDRAWAL FROM ENGAGEMENT: Depending on the facts and circumstances,

a threat might be addressed by eliminating the circumstance creating the threat. However, there
are some situations in which threats can only be addressed by declining or ending the specific
professional activity. This is because the circumstances that created the threats cannot be
eliminated, and safeguards are not capable of being applied to reduce the threat to an
acceptable level.
Q.NO.3 IN ORDER TO ELIMINATE THREATS TO FUNDAMENTAL PRINCIPLES, SAFEGUARDS HAVE TO

BE CREATED. EXPLAIN VARIOUS SAFEGUARDS TO REDUCE OR ELIMINATE VARIOUS THREATS?
ANSWER:
Safeguards are actions individually or in combination that the accountant takes that effectively
reduce threats to an acceptable level. Safeguards vary depending on the facts and circumstances:
1. Safeguards created by profession, legislation or regulations and (E.g., Disqualifications)
2. Safeguards created by work environment
a. Firm-wide Safeguards.
b. Engagement specific safeguards.
A. FIRM-WIDE SAFEGUARDS:
1. Leadership qualities of the firm w.r.t fundamental principles.
2. Policies and procedures to implement and monitor quality controls.
3. Documented Internal control policies that protects fundamental principles.
4. Using different partners and engagement teams with separate reporting lines for the
provision of non-assurance services to an assurance client.
5. Timely communication of a firm’s policies and procedures to all partners and professional
staff, and appropriate training and education on such policies and procedures.
6. A disciplinary mechanism to promote compliance with policies and procedures.
B. ENGAGEMENT SPECIFIC SAFEGUARDS:

1. Assigning additional time and qualified personnel to required tasks when an engagement has
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been accepted might address a self-interest threat.

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2. Involving an additional professional accountant to review the work done or otherwise advise
as necessary. (E.g., Independent reviewer)
3. Consulting an independent third party, such as a committee of independent directors, a
professional regulatory body or another professional accountant.
4. Discussing ethical issues with those charged with governance of the client.
5. Disclosing to those charged with governance of the client the nature of services provided
and extent of fees charged.
6. Involving another firm to perform or re-perform part of the engagement.
7. Rotating senior assurance team personnel.
8. Separating teams when dealing with matters of a confidential nature might address a self-
interest threat.
Q.NO.4 WRITE ABOUT Non-Compliance with Laws and Regulations (NOCLAR)?
ANSWER:
1. APPLICABILITY OF NOCLAR IN INDIA:

a. The IESBA Code of Ethics makes NOCLAR applicable to all assignments (in case of
members in practice), and to all employers (in case of members in service).
b. However, in the ICAI Code, as of now, Institute has restricted applicability of NOCLAR to
Audits assignment of listed entities (in case of members in practice) and for the
members in service applicability has been restricted to employees of listed entities only.
2. NOCLAR MEANING:
a. In the course of providing a professional service to a client or carrying out professional
activities for an employer, a Professional accountant may come across an instance of
non-compliance with laws and regulations (NOCLAR) or suspected NOCLAR committed or
about to be committed.
b. Non-compliance with laws and regulations (“non-compliance”) comprises of acts of
omission or commission, intentional or unintentional, which are contrary to the
prevailing laws or regulations committed by:
i. A client/professional accountant’s employing organisation.
ii. Those charged with governance of a client or employing organisation.
iii. Management of a client/ employing organisation or
iv. Other individuals working for or under the direction of a client/ employing
organisation.
3. DO NOT INCLUDE PERSONAL MIS CONDUCT: However, NOCLAR under Revised Code of Ethics
does not address the personal misconduct unrelated to the business activities of the client/
employing organisation and non-compliance by parties other than listed out in the definition of
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NOCLAR.
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4. EXAMPLES: As per IESBA, following examples would be covered in NOCLAR:
a. Fraud, corruption and Bribery
b. Money laundering, terrorist financing and proceeds of crime
c. Securities markets and trading
d. Banking and other financial products and services
e. Data protection
f. Environmental protection
g. Public health and safety
h. Tax and pension liabilities and payments
5. OBJECTIVE: The objective of NOCLAR is that - turning a blind eye to potential NOCLAR is not an
appropriate response from professional accountants, while placing renewed emphasis on the
roles of management and those charged with governance in addressing the matter. Further, it
increases awareness and understanding among Professional accountant of their legal and
regulatory responsibilities when they face NOCLAR.
6. Some important facts about NOCLAR are given below:

a. During Course of Providing a Service: NOCLAR will be applicable if a professional accountant
encounters, or is made aware of, non-compliance or suspected non-compliance in the course
of providing a professional service to a client. He is not required to investigate, nor
responsible for ensuring compete compliance.
b. Expertise of Laws not Required: A professional accountant is expected to apply knowledge
and expertise, and exercise professional judgment. However, he is not expected to have a
level of knowledge of laws and regulations greater than that which is required to undertake
the engagement. Whether an act constitutes non-compliance is ultimately a matter to be
determined by a court or other appropriate adjudicative body.
c. Certain Matters Expressly out of Purview: Matters that are clearly inconsequential or
relating to personal misconduct pertaining to business activities of the client not covered.
d. Disclosure, which is Contrary to Law not Required: As per IESBA Code, disclosure of the
matter to an appropriate authority would be precluded if doing so would be contrary to law
or regulation.
7. NOCLAR vs. SA 250:

a. SA 250 is applicable only on Audit, and not on other Assurance engagements. However,
NOCLAR is applicable on professional accountants in service, and in practice. Among those in
practice, it applies to Auditors, as well as professional services other than Audit. However,
degree of responsibility of the professional accountant varies as per the role.
b. SA 250 talks of auditor’s responsibilities for laws having direct effect on the determination of
material amounts and disclosures in the financial statements (such as tax and labour laws);
and other laws and regulations that do not have a direct effect on the determination of the
amounts and disclosures in the financial statements, but compliance with which may be
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fundamental to the operating aspects of the business.

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c. NOCLAR, while being alike to SA 250 till this point, is further ahead of it in that it takes into
account non-compliance that causes substantial harm resulting in serious consequences in
financial or non-financial terms.
d. SA 250 does not define stakeholders. NOCLAR is related to affect of non-compliance on
investors, creditors, employees as also the general public.
e. As per NOCLAR, in exceptional circumstances, the professional accountant might become
aware of an imminent breach of a law or regulation that would cause substantial harm to
investors, creditors, employees or the general public. Having first considered whether it
would be appropriate to discuss the matter with management or those charged with
governance of the company, the accountant shall exercise professional judgment and
determine whether to disclose the matter immediately to an appropriate authority in order
to prevent or mitigate the consequences of such imminent breach. If disclosure is made, that
disclosure is permitted. This provision is not existent in SA 250.
8. STEPS FOR RESPONDING TO NOCLAR:

a. Obtaining an understanding of the matter
b. Addressing the matter
c. Seeking Advice
d. Determining whether further action is needed
e. Determining whether to disclose the matter to an Appropriate Authority
f. Imminent Breach
g. Documentation
NOTE: It may also be noted that in a situation where disclosure ought to be made by the
Auditor, the “Appropriate authority” for the purpose of disclosure will depend on the nature of
the matter.
For example, the appropriate authority would be SEBI in the case of fraudulent financial
reporting. Appropriate alignment has been made in the Code with regard to requirements of
Confidentiality, as required under Chartered Accountants Act, 1949.
9. PROVISIONS OF CONFIDENTIALITY UNDER CHARTERED ACCOUNTANTS ACT, 1949:

a. For Members in practice: Clause (1) of Part -I of First schedule to The Chartered
Accountants Act, 1949: A chartered accountant in practice shall be deemed to be guilty of
professional misconduct, if he discloses information acquired in the course of his
professional engagement to any person other than his client so engaging him, without the
consent of his client or otherwise than as required by any law for the time being in force.
b. For Members in service - Clause (2) of Part-II to the Second Schedule of the Chartered
Accountants Act, 1949: A member of the Institute, whether in practice or not, shall be
deemed to be guilty of professional misconduct, if he being an employee of any company,
firm or person, discloses confidential information acquired in the course of his employment
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except as and when required by any law for the time being in force or except as permitted by
the employer.
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10. DOCUMENTATION REQUIREMENTS IN NOCLAR: Revised Code over and above require the
professional accountant to follow the additional documents requirements as under:
a. How management / those charged with governance have responded to the matter.
b. The course of action the accountant considered, the judgments made and the decisions that
were taken, having regard to the reasonable and informed third party test.
c. How the accountant is satisfied that the responsibility of public interest has been fulfilled.
d. This documentation is in addition to complying with the documentation requirements under
applicable auditing standards. SAs, for example, require a professional accountant
performing an audit of financial statements to:
e. Prepare documentation sufficient to enable an understanding of significant matters arising
during the audit, the conclusions reached, and significant professional judgments made in
reaching those conclusions.
f. Document discussions of significant matters with management, those charged with
governance, and others, including the nature of the significant matters discussed and when
and with whom the discussions took place; and
g. Document identified or suspected non-compliance, and the results of discussion with
management and, where applicable, those charged with governance and other parties
outside the entity.
Q.NO.5 WRITE ABOUT MEMBERSHIP OF THE INSTITUTE?
ANSWER:
A. REGISTER OF MEMBERSHIP (SEC. 19): The council shall enter requisite details in the register of
members after receiving a valid application from the applicant:
The register of members shall include the following details:

1. Full Name, Date of Birth, Domicile, Residential and Professional Address.
2. Date of Entry of name in the register.
3. Whether the member hold COP or not.
4. Qualifications of the Member.
5. Any other prescribed details.
B. DISABILITIES / DISQUALIFICATIONS FOR THE PURPOSE OF MEMBERSHIP (SEC.8):
In the following circumstances a person is debarred from having his name entered in or borne
on the Register of Members of the Institute:
1. If he has not attained the age of 21 years at the time of his application for the entry of his
name in the Register.
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2. If he is of unsound mind and stands so adjudged by a competent court.

3. If he is an undischarged insolvent.
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4. If he, being a discharged insolvent, has not obtained from the court a certificate stating that
his insolvency was caused by misfortune without any misconduct on his part. (innocent
defaulter)
5. If he has been convicted by a competent Court whether within or without India:
a. Of an offence involving moral turpitude and punishable with transportation or
imprisonment or
b. Of an offence, not of a technical nature, committed by him in his professional
capacity.
6. If he has been removed from membership of the Institute on being found on inquiry to have
been guilty of professional or other misconduct.
Note: If a member knowingly fails to disclose the fact that he suffers from above disabilities, it
will amount to professional misconduct. Accordingly, his name may be removed from
permanently ROM by the council.
C. TYPES OF MEMBERSHIP OF INSTITUTE (SEC.5): The Members of the institute are divided into
the following designations:
ASSOSIATE CHARTERED ACCOUNTANT:

Any person, whose name has been entered in the Register, shall be deemed to have become an
Associate of the Institute and shall also be entitled to use the letters A.C.A. after his name to
indicate that he is an Associate Member of the Institute.
FELLOW CHARTERED ACCOUNTANT:

1. An associate member who has been in continuous practice in India for at least 5 years,
2. A member who has been an associate for a continuous period of not less than 5 years and
who possess such qualifications as may be prescribed by the Council with a view to ensuring
that he has experience equivalent to the experience normally acquired as a result of
continuous practice for a period of 5 years as a Chartered Accountant. (E.g., CA working
under a practicing member or audit firm at least 5 years even though not in practice in
individual capacity.)
The abovementioned members shall be entitled to use the letters F.C.A. after his name to
indicate that he is a Fellow Member of the Institute.
D. REMOVAL OF NAME FROM THE REGISTER (SEC.20):
The council, on the following occasions, may remove the name of any member from ROM:
1. A member who is dead
2. A member from whom a request has been received for removal.
3. A member who has not paid required fee. (E.g., Renewal fee for COP)
4. A member who has been affected with disabilities specified u/s. 8 of ICAI Act, 1949.
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NOTE: If the name of any member has been removed from the Register for non-payment of
required fee, then, on receipt of an application, his name may be entered again in the Register –
on payment of the arrears of annual fee and entrance fee along with such additional fee, as may
be determined by the Council.
E. RESTORATION OF MEMBERSHIP (REGL 19):
Regulation 19 of the Chartered Accountants Regulations, 1988, states that the name of the
member may be restored by the Council in the Register on an application, in the appropriate
Form, received in this behalf whose name has been removed from the Register for non-payment
of prescribed fee as required to be paid by him, if he is otherwise eligible to such membership,
on his paying the arrears of annual membership fee, entrance fee and additional fee determined
by the Council under the Act.
The effective date in case of restoration of cancelled membership, in different situations, shall
be in the following manner:
1. APPLICATION FOR RESTORATION AND REMOVAL ARE MADE IN THE SAME YEAR:
If removal happened on account of non-payment of required fee – Restoration shall be with
effect from the date on which it was removed from register, provided, the member pays
required fee including entrance fee and any additional fee as may be prescribed by council.
(In other words, there will not be any break in service.)
2. REMOVAL OF NAME IN A DISCIPLINARY ACTION*:

Restoration date shall be in accordance with the order.
*Board of Discipline, Disciplinary committee, Appellate authority or High court.
3. ANY OTHER CASE:

Restoration shall be with effect from the date on which the application and fee are received.
F. PENALTY FOR FALSELY CLAIMING TO BE A MEMBER (SEC.24):
Any person who

1. Not being a member of the Institute
a. Represents that he is a member of the Institute.
b. Uses the designation as Chartered Accountant.
2. Being a member of the Institute, but not having a certificate of practice, represents that
he is in practice or practices as a Chartered Accountant.
3. Shall be leviable with a fine
a. 1ST TIME: up to Rs. 1,000/- on first conviction and
b. SEBSEQUENT TIME: for subsequent convictions – fine up to Rs. 5,000/- or
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imprisonment up to 6 months or with both.

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Case Law: “Prem Batra” decided on 18.07.1989. The court of additional chief judicial
magistrate had by its judgement found the accused, guilty under section 24(i)(a) & (b) of the
chartered accountants act, 1949 and section 465 of the Indian penal code. The court imposed
a fine on the accused and in the event of his failure to pay the fine, sentenced to rigorous
imprisonment for three months.
Q.NO.6 WRITE ABOUT CHARTERED ACCOUNTANT IN PRACTICE?
ANSWER:
A practicing Chartered Accountant is a person who is a member of the Institute and is holding
Certificate of Practice; and includes such members of the Institute who are deemed to be in Practice
in accordance with the provisions of the Chartered Accountants Act, 1949.
A. SIGNIFICANCE OF COP:
1. COP: No member of the Institute shall be entitled to practice whether in India or elsewhere
unless he has obtained from the Council a certificate of practice:
2. ANNUAL FEES: Every such member shall pay such annual fee for his certificate as may be
determined, by notification, by the Council [..]
3. The certificate of practice obtained under sub-section (1) may be cancelled by the Council
under such circumstances as may be prescribed.
4. Once a person becomes a member of the institute, such person is bound by provisions of CA
Act, 1949 and other regulations.
5. A member of the Institute can have no other capacity in which he can take up such practice,
separable from his capacity to practice as a member of the Institute. (I.e., a Member can
practice only as a member of institute.)
6. If COP is cancelled or terminated, such person cannot undertake any other assignment which
he is entitled to undertake only as a member of the institute.
IN NUTSHELL, a Chartered Accountant whose name has been removed from the membership for
professional and/or other misconduct, during such period of removal, will not appear before the
various tax authorities or other bodies before whom he could have appeared in his capacity as a
member of this Institute.
Example: If and when he appears before the Income-tax Tribunal as an Income-tax

representative after having become a member of the Institute, he could so appear only in his
capacity as a Chartered Accountant and a member of the Institute (Only with COP).
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In other words, a member who is suspended from practice cannot undertake such assignments
which he ordinarily undertakes in the capacity of member of institute.
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Refer Q No. 1 in Illustrations
B. CANCELLATION AND RESTORATION OF COP (REGL.10 & REGL.11):
CANCELLATION (REGL.10):
COP shall be liable for cancellation in the following cases:
1. The name of the person is removed from ROM.
2. Certificate was issued on the basis of incorrect, misleading or false information, or by
mistake or inadvertence (accidental).
3. A member has ceased to practice.
4. A member has not paid annual fee for certificate of practice till 30th day of September of
the relevant year.
NOTE: Where COP is cancelled, the holder shall surrender certificate to the secretary of the
institute.
RESTORATION (REGL.11):
The Council may restore the COP with EFFECT FROM the date on which it was cancelled:
1. To a member whose certificate has been cancelled due to non-payment of the annual fee
for the COP and
2. An application together with the fee, is received by the Secretary before the expiry of the
relevant year.
C. DEEMED TO BE IN PRACTICE (SEC.2):
Every member of the Institute is entitled to designate himself as a Chartered Accountant. There
are two classes of members, those who are in practice and those who are otherwise occupied.
In Section 2(2) of the Act, the term deemed “to be in practice” has been defined as follows:
1. DEEMED TO BE IN PRACTICE: A member of the Institute shall be deemed “to be in practice”

when:
a) Individually or
b) In partnership with Chartered Accountants in practice, or
c) In partnership with members of such other recognized professions as may be prescribed
and
d) Consideration of remuneration received or to be received for being:
1) Engages himself in the practice of accountancy.
2) Offers to perform or performs service involving the:
i. Auditing or verification of financial transactions, books, accounts or records, or
ii. The preparation, verification or certification of financial accounting and related
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statements or
iii. Holds himself out to the public as an accountant.
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3) Renders professional services or assistance –
i. In or about matters of principle or
ii. Detail relating to accounting procedure or
iii. The recording, presentation or certification of financial facts or data.
4) Renders such other services as, in the opinion of the Council, are to be rendered by a
Chartered Accountant in practice.
e) A member shall be deemed to be in practice if he, in his professional capacity and neither
in his personal capacity nor in his capacity as an employee, acts as:
i. A liquidator, trustee, executor, administrator, arbitrator, receiver, adviser or
representative for costing, financial or taxation matters or
ii. Takes up an appointment made by the Central Government or a State
Government or a court of law or any other legal authority or acts as a Secretary
unless his employment is on a salary-cum-full-time basis.
2. FOR TRAINING ARTICLES: An associate or a fellow of the Institute who is a salaried employee
of
a) Chartered Accountant in practice (individual) or
b) A firm of such Chartered Accountants or
c) Firm consisting of one or more chartered accountants and members of any other
professional body having prescribed qualifications
Shall be deemed to be in practice for the limited purpose of the training of Articled
Assistants.
3. A Chartered accountant in practice is permitted to render entire range of Management

Consultancy and Other Services [MCOS].
4. MCOS EXCLUDES: MCOS shall not include the function of (these are treated as Deemed to be
in practice)
a) Statutory or periodical audit, tax (both direct taxes and indirect taxes) representation
or
b) Advice concerning tax matters or
c) Acting as liquidator, trustee, executor, administrator, arbitrator or receiver.
5. MCOS INCLUDES:
i. Financial management planning and financial policy determination*.
ii. Capital structure planning and advice regarding raising finance*.
iii. Working capital management*.
iv. Preparing project reports and feasibility studies*.
*[Consideration of “tax implications” while rendering the services at (i), (ii), (iii) and (iv) above
will be considered as part of “Management Consultancy and other services”]
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v. Preparing cash budget, cash flow statements, profitability statements, statements of sources
and application of funds etc.
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vi. Budgeting including capital budgets and revenue budgets.
vii. Inventory management, material handling and storage.
viii. Market research and demand studies.
ix. Price-fixation and other management decision making.
x. Management accounting systems, cost control and value analysis.
xi. Control methods and management information and reporting.
xii. Personnel recruitment and selection.
xiii. Setting up executive incentive plans, wage incentive plans etc.
xiv. Management and operational audits.
xv. Valuation of shares and business and advice regarding amalgamation, merger and
acquisition. Acting as Registered Valuer under the Companies Act, 2013 read with The
Companies (Registered Valuers and Valuation) Rules, 2017. (incorporated pursuant to
decision of Council at its 388th Meeting)
xvi. Business Policy, corporate planning, organisation development, growth and diversification.
xvii. Organisation structure and behaviour, development of human resources including design
and conduct of training programmes, work study, job-description, job evaluation and
evaluation of workloads.
xviii. Systems analysis and design, and computer related services including selection of hardware
and development of software in all areas of services which can otherwise be rendered by
a Chartered Accountant in practice and also to carry out any other professional services
relating to EDP.
xix. Acting as advisor or consultant to an issue, including such matters as:
a. Drafting of prospectus and memorandum containing salient futures of prospectus.
Drafting and filing of listing agreement and completing formalities with Stock Exchanges,
Registrar of Companies and SEBI.
b. Preparation of publicity budget, advice regarding arrangements for selection of (i) ad-
media, (ii) centres for holding conferences of brokers, investors, etc., (iii) bankers to
issue, (iv) collection centres, (v) brokers to issue, (vi) underwriters and the underwriting
arrangement, distribution of publicity and issue material including application form,
prospectus and brochure and deciding on the quantum of issue material (In doing so, the
relevant provisions of the Code of Ethics must be kept in mind). (c) Advice regarding
selection of various agencies connected with issue, namely Registrars to Issue, printers
and advertising agencies. (d) Advice on the post issue activities, e.g., follow up steps
which include listing of instruments and dispatch of certificates and refunds, with the
various agencies connected with the work.
Explanation - For removal of doubts, it is hereby clarified that the activities of broking,
underwriting and portfolio management are not permitted.
xx. Investment counselling in respect of securities [as defined in the Securities Contracts
(Regulation) Act, 1956 and other financial instruments.] (In doing so, the relevant
provisions of the Code of Ethics must be kept in mind).
xxi. Acting as registrar to an issue and for transfer of shares/other securities. (In doing so, the
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relevant provisions of the Code of Ethics must be kept in mind).

xxii. Quality Audit.
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xxiii. Environment Audit.
xxiv. Energy Audit.
xxv. Acting as Recovery Consultant in the Banking Sector.
xxvi. Insurance Financial Advisory Services under the Insurance Regulatory & Development
Authority Act, 1999, including Insurance Brokerage.
xxvii. Acting as Insolvency Professional in terms of Insolvency and Bankruptcy Code, 2016
(incorporated pursuant to decision of Council at its 362nd Meeting).
xxviii. Administrative Services. (incorporated pursuant to decision of Council at its 388th Meeting)
Administrative services involve assisting clients with their routine or mechanical tasks
within the normal course of operations. Such services require little to no professional
judgment and are clerical in nature.
Examples of administrative services include:
a) Word processing services.
b) Preparing administrative or statutory forms for client approval.
c) Submitting such forms as instructed by the client.
d) Monitoring statutory filing dates and advising an audit client of those dates.
For example, the functions of a GST practitioner as specified under Rule 83(8) of Central
Goods and Services Tax Rules, 2017:
1) Furnish the details of outward and inward supplies.
2) Furnish monthly, quarterly, annual or final return.
3) Make deposit for credit into the electronic cash ledger.
4) File a claim for refund.
5) File an application for amendment or cancellation of registration.
6) Furnish information for generation of e-way bill.
7) Furnish details of challan in form GST ITC-04.
8) File an application for amendment or cancellation of enrolment under rule 58 and
9) File an intimation to pay tax under the composition scheme or withdraw from the
said scheme.
6. INVITATION TO OFFER – DEEMED TO BE IN PRACTICE: The act of setting up of an
establishment offering to perform accounting services would be tantamount to being in
practice even though no client has been served.
7. COUNTED IN COP CALCULATION: A member of the Institute is deemed to be in practice
during the period he renders ‘service with armed forces’
Note:
1. MANAGEMENT SERVICES cannot be provided to a company if the member is appointed as a
statutory auditor for the said company. (Sec. 144 of Companies Act, 2013.)
2. A CA in full time employment is representing his employer in a tax assessment, it cannot be
treated as deemed to be in practice. However, if he represents colleagues in tax assessments
then It may be treated as Deemed to be in practice.
3. Implications of a CA deemed to be in practice:
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a. Shall obtain COP.

b. Pay annual fee.
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c. Obey council regulations, guidelines and professional standards.
Q.NO.7 COMPANIES CANNOT ENGAGE IN PRACTICE OF ACCOUNTANCY. COMMENT.
ANSWER:
1. As per Sec. 25 of Chartered Accountants Act, 1949, No Company shall practice as chartered
accountants. Further the term company includes LLP which has a partner – company.
2. If a company contravenes with the above provision, every director, officer or secretary shall be
punishable with a fine up to Rs.1,000/- for first time conviction and Rs.5,000/- for subsequent
convictions.
3. Also, it is to be noted that, under Companies act, 2013, only an Individual or a Firm (Including
LLP) where majority of the partners are chartered accountants can be appointed as auditor of a
company.
4. From reading the above two provisions it can be concluded that an LLP is eligible to act as an
auditor provided it should not have a partner which is a company.
[LLP’s which have Company as a partner is not eligible to practice and cannot act as an auditor]
Q.NO.8 MEMBER IN PRACTICE IS PROHIBITED USING ANY OTHER DESIGNATION OTHER THAN
CHARTERED ACCOUNTANT. COMMENT.
ANSWER:
The members of the Institute are now permitted to use the word 'CA' as prefix before their name
irrespective of the fact that they are in practice or not:
1. Under Section 7 of the Chartered Accountants Act, 1949 a member in practice:

a. Cannot use any designation other than that of a Chartered Accountant,
b. Cannot use any other description, whether in addition thereto or in substitution therefor.
2. Also, a member in practice may use any other letters or description indicating membership of
Accountancy Bodies which have been approved by the Council, so long as, such use does not
imply:
a. Adoption of a designation and/or
b. Does not amount to advertisement or publicity.
3. MEMBERSHIP OF FOREIGN INSTITUTES: The members are PERMITTED to mention membership
of a foreign Institute of Accountancy, which has been recognized by the Council through a
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Memorandum of Understanding (MoU) / Mutual Recognition Agreement (MRA) with the said
Institute.
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4. Merchant Banker / Advisor to an issue: The members may apply for and obtain registration as
category IV Merchant Banker under the SEBI’s rules and regulations and act as Advisor or
Consultant to an issue. In client Companies’ offer documents and advertisements regarding
capital issue, name and address of the Chartered Accountant or firm of Chartered Accountants
acting as Advisor or Consultant to the Issue could be indicated under the caption
“Advisor/Consultant to the Issue”.
However, the name and address of such Chartered Accountant/firm of Chartered Accountants
should NOT APPEAR PROMINENTLY.
5. Directors of Companies, MEMBERS OF POLITICAL PARTIES, position in clubs, etc.: The members
of the Institute who are also Directors in Companies, members of Political parties or Chartered
Accountants Cells in the political parties, holding different positions in clubs or other
organisations ARE NOT PERMITTED to mention these positions as these would be violative of
the provisions of Section 7 of the Act.
6. A Chartered Accountant in practice is NOT ENTITLED to use the designation “Corporate Lawyer”.
7. Members of the Institute in practice who are otherwise eligible may also practice as Company
Secretaries and/or Cost Accountants. Such members shall, however, not use designation/s of the
aforesaid Institute/s simultaneously with the designation “Chartered Accountant”.
E.g., Inavolu. Ram Harsha, Chartered Accountant, Company Secretary, Cost Accountant
Inavolu. Ram Harsha, CA, CS, CMA, DISA, B. Com – is permitted usage.
8. For example, though a member cannot designate himself as a Cost Accountant. However, he can
use the letters C.M.A after his name, when he is a member of that Institute.
E.g., Inavolu Ram Harsha, CA, DISA, CMA, CS, B.Com.
9. Further, the members are not permitted to use the initials ‘CPA’ (standing for Certified Public
Accountant) on their visiting cards.
10. NOT TO USE CERTAIN PHRASES: It is improper for a Chartered Accountant to state on his
professional documents that he is an Income-tax Consultant, Cost Accountant, Company
Secretary, Cost Consultant or a Management Consultant. [For Specified Qualifications,
Abbreviations can be used such as CS, CMA, DISA]
For E.g., Professional Documents such as letter heads, Visiting cards etc.,
11. NOT IN PRACTICE: A member who is not in practice AND does not use the designation of a
Chartered Accountant may use any other description.
Q.NO.9 WRITE PROVISIONS RELATED TO MAINTENANCE OF BRANCH OFFICES. (SEC. 27)
ANSWER:
A. SEPARATE INCHARGE FOR EVERY OFFICE:

1. If an Individual or a Firm of Chartered Accountants has more than one office in India, each
one of such offices should be in the SEPARATE CHARGE OF A MEMBER of the Institute.
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2. Failure in this regard would constitute professional misconduct.

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3. 182 DAYS: A member being in charge of an office of a Chartered Accountant in practice or a
firm of such Chartered Accountants shall be satisfied only if the member is actively
associated with such office. Such association shall be deemed to exist:
a. RESIDES: If the member resides in the place where the office is situated for a period
of not less than 182 days in a year or
b. ATTENDS OFFICE: if he attends the said office for a period of not less than 182 days in
a year or
c. In such other circumstances as, in the opinion of the Executive Committee, establish
such active association.
B. MEMBER IN-CHARGE FOR MORE THAN ONE OFFICE: A Member can open second office without
a separate charge of a member of institute in the following cases:
1. The second office is located in the same premises [i.e., One and Same Accomodation] , in
which the first office is located.
2. The second office is located in the same city, in which the first office is located.
3. The second office is located within a distance of 50 km from the municipal limits of a city, in
which the first office is located.
C. EXEMPTION IN HILL AREAS: A member or firm can open temporary office in hill area subject to
the following conditions:
1. A member or a firm be allowed to open temporary offices for a limited period not exceeding
3 months in a year.
2. The regular office need not be closed during this period and all correspondence can continue
to be made at the regular office.
3. The name board of the firm in the temporary office should not be displayed at times other
than the period such office is permitted to function as above.
4. The temporary office should not be mentioned in the letterheads, visiting cards or any other
documents as a place of business of the member/firm.
5. Before commencement of every winter, it shall be obligatory on the member/firm to inform
the Institute that he/it is opening the temporary office from a particular date and after the
office is closed at the expiry of the period of permission, an intimation to that effect should
also be sent to the office of the Institute by registered post.
IMPORTANT NOTES / CLARIFICATIONS:

1. NAME BOARD: A member is allowed to put name board at his place of residence provided it
is a nameplate or a name-board of an individual member and not of the firm.
2. MAIN OFFICE: When more than one office is located in the same city, the member shall
declare which office is main office.
3. MEMBER – PAID ASSISTANT – WTE: The member in charge of branch office of the firm shall
be associated with the firm either as a partner or paid assistant. If he is paid assistant, then
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he must be in whole time employment [WTE] of the firm.

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Refer Q No – 3 and 4 in Illustrations

Q.NO.10 WHAT DO YOU MEAN BY A CHARTERED ACCOUNTANT IN SERVICE?
ANSWER: As per Code of Ethics, a Professional Accountant in Service or Chartered Accountant in

Service means a professional accountant employed or engaged in an executive or non-executive
capacity in such areas as commerce, industry, service, the public sector, education, the not-for-
profit sector, regulatory bodies or professional bodies, or a professional accountant contracted by
such entities.
Q.NO.11 WRITE ABOUT DISCIPLINARY PROCEDURE? [SELF STUDY]
ANSWER:
Sections 21, 21A, 21B, 21C, 22-A and 22-G of the Chartered Accountants Act read with The
Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct of Cases)
Rules, 2007 have laid down the following procedure in regard to the investigation of misconduct of
members which has been summarized as under:
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220
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Q.NO.12 WRITE ABOUT TYPES OF MIS-CONDUCT [SEC. 22]?
ANSWER:
A member is liable to disciplinary action under Section 21 of the Chartered Accountants Act, if he is
found guilty of any Professional or Other Misconduct.
The expression “professional or other misconduct” shall be deemed to include any act or omission
provided in any of the Schedules.
A. PROFESSIONAL MIS-CONDUCT: (ARISES OUT OF PROFESSIONAL WORKS)
1. Defined in Part – I, II and III of First Schedule & Part – I and II of Second Schedule.
2. A member who is engaged in the profession of accountancy whether in practice or in service
should conduct/restrict his action in accordance with the provisions contained in the
respective parts of the schedules.
3. If the member is found guilty of any of the acts or omissions stated in any of the respective
parts of the Schedule, he/she shall be deemed to be guilty of professional misconduct.
B. OTHER MIS-CONDUCT: (DOES NOT ARISE FROM PROFESSIONAL WORKS)
1. Defined in Part – IV of First Schedule and Part – III of Second Schedule. These provisions
empower the Council to inquire into any misconduct of a member even it does not arise out
of his professional work.
2. This is considered necessary because a chartered accountant is expected to maintain the
highest standards of integrity even in his personal affairs.
For example, a member who is found to have for ged the will of a relative, would be
liable to disciplinary action even though the forgery may NOT have been done in the
course of his professional duty.
3. Other misconduct would also relate to conviction by a competent court for an offence
involving moral turpitude punishable with transportation or imprisonment.
4. Few Examples:
a) A chartered accountant retains the books of account and documents of the client and
fails to return these to the client on request without a reasonable cause.
b) A Chartered Accountant makes a material misrepresentation.
c) A Chartered Accountant uses the services of HIS ARTICLED OR AUDIT ASSISTANT for
purposes OTHER THAN professional practice.
d) Conviction by a competent court of law for any offence under Section 8 (v) of the
Chartered Accountants Act 1949.
e) Misappropriation by office-bearer of a Regional Council of the Institute, of a large
amount and utilization thereof for his personal use.
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f) Not replying within a reasonable time and without a good cause to the letter of the
public authorities.
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g) Where certain assessment records of income tax department belonging to the client of
Chartered Accountant were found in the almirah of the bed-room of the chartered
accountant. [Might be kept intentionally with a view to conceal them]
h) A chartered accountant had adopted coercive methods on a bank for having a loan
sanctioned to him.
Q.NO.13 WRITE ABOUT SCHEDULES TO CA ACT, 1949?
ANSWER:
SCHEDULE PART [7] DEALS WITH NO. OF CLAUSES [34]

[2]
Part - I Professional misconduct in relation to 12 Clauses

Chartered Accountants in PRACTICE
Part – II Professional misconduct in relation to 2 Clauses

FIRST SCHEDULE
Members of the Institute in SERVICE
Part – III Professional misconduct in relation to 3 Clauses

Members of the Institute GENERALLY
Part – IV Other misconduct in relation to Members 2 Clauses

of the Institute GENERALLY.
Part – I Professional misconduct in relation to 10 Clauses

Chartered Accountants in PRACTICE
SECOND SCHEDULE
Part – II Professional misconduct in relation to 4 Clauses

Members of the Institute GENERALLY
Part – III Other misconduct in relation to Members 1 Clause

of the Institute GENERALLY.
FIRST SCHEDULE – PART 1:
Q.NO.14 WRITE ABOUT ACTS OR OMISSIONS IN NATURE OF PROFESSIONAL MIS-CONDUCT AS

DEFINED IN PART – I OF FIRST SCHEDULE TO CA ACT, 1949?
ANSWER:
If the Director (Discipline) is of the opinion that member is guilty of any professional or other
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misconduct mentioned in the First Schedule, he shall place the matter before the Board of
Discipline.
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A Chartered Accountant in practice is deemed to be guilty as per Part – I to First Schedule in the
following cases:
CLAUSE – 1: ALLOWING NON – MEMBER AND OUTSIDERS TO PRACTICE IN THE NAME OF CAP:
1. A Chartered Accountant in practice (CAP) is deemed to be guilty if he allows another person to

practice in his name.
2. However, this clause will not apply If such other person is also a practicing CA and is associated
with the firm as a partner or employee under the control and supervision of CAP.
CLAUSE – 2: SHARE OF PROFITS TO NON – MEMBERS:
1. If CAP pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage in the fees or profits of his professional business, to any person, it shall be treated as
guilty of professional mis – conduct.
2. However, this clause shall not apply if the fees is shared with:
a. a member of the Institute or
b. a partner or
c. a retired partner or
d. the legal representative of a deceased partner, or
e. a member of any other professional body or
f. a person having recognized qualifications, as permitted by the council.
3. The Professional bodies prescribed by the council are: (Reg. 53A)
a. ICSI
b. ICWAI
c. Bar Council of India
d. Indian Institute of Architects.
e. Indian Institute of Actuaries.
4. The Professional qualifications prescribed by the council are: (Reg. 53A)
a. CS.
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b. CMA.
c. Actuary.
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d. B.E.
e. B. Tech.
f. Architect.
g. LLB.
h. MBA.
5. These professional services may be rendered in India or outside India.
6. While applying this clause, we have to look at the substance of the transaction and not the
nomenclature of the transaction. E.g., Whether the fee being shared for any purpose such as
office expenses, reference fees etc., from persons other than permitted, will also be treated as
the GUILTY.
7. If CAP is sharing fees in the form of deposit with State Government treasury, for the sake of
administrative expenses incurred in the process of assignment of audit of cooperative societies,
then it shall NOT BE TREATED AS GUILTY.
8. TREATMENT OF SHARE OF PROFIT / GOODWILL ON DEATH OF A PARTNER OR PROPRIETOR:

a. PARTNERSHIP FIRM – Can share to the legal representative of the deceased partner
provided such A CLAUSE EXIST IN the partnership DEED.
b. PROPRIETORSHIP FIRM –
A. SHARING OF FEES: Sharing of fees is strictly PROHIBITED between legal representative

of deceased CAP and BUYER of goodwill.
B. SALE OF GOODWILL: PERMITTED subject to the following conditions.
CASE 1: DEATH OF PROPRIETOR ON OR AFTER 30.08.1998:

i. PERMISSION: The Legal heir shall obtain permission of the council within ONE
YEAR from the date of demise of such proprietor.
ii. SALE COMPLETE - ONE YEAR TIME LIMIT: Also, Goodwill of sole proprietor can be
transferred to another eligible member of the institute, after the death of
proprietor. Provided the sale is completed in all aspects within ONE year from the
date of demise of such Proprietor.
iii. NON REMOVAL OF NAME – ONE YEAR: Further the name of the firm shall not be
removed for ONE year from death of proprietor or
iv. DISPUTE – LEGAL HEIR: In case of Dispute regarding legal heir of the deceased
proprietor and the institute received information of dispute within ONE YEAR of
death of proprietor, then the name of the concerned firm shall be kept in
ABEYANCE until ONE YEAR from Date of settlement of dispute
v. The purchaser can use firm name.
CASE 2: DEATH OF PROPRIETOR ON OR BEFORE 29.08.1998:

Sale/transfer is completed / effected AND the Institute's permission to practice in the
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deceased's proprietary firm name is sought for by 28th August, 1999 and the firm name
concerned is still available with the Institute.
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NOTE: In case of a partnership firm when all the partners die at the same time, the above
Council decision would also be applicable.
CLAUSE – 3: ACCEPTING SHARE OF PROFIT OR FEES FROM NON – MEMBER:
1. If CAP accepts or agrees to accept, any part of profits of professional work of any person who is
not a member of institute, then it shall be treated as guilty of professional mis – conduct.
2. However, this clause shall not apply if the fees is shared with a member of the Institute or a
partner or a retired partner or the legal representative of a deceased partner, or a member of
any other professional body or a person having recognized qualifications, as permitted by the
council.
3. In simple terms, a member of the institute SHALL NOT PAY OR ACCEPT FEES WITH NON –
MEMBERS.
4. REFERRAL FEES AMONGST MEMBERS - PERMITTED: It is not prohibited for a member in
practice to charge Referral Fees, being the fees obtained by a member in practice from another
member in practice in relation to referring a client to him.
CLAUSE – 4: PROHIBITING A CAP TO ENTER PARTNERSHIP WITH NON – MEMBERS:
1. If a CAP enters into partnership with any person other than CAP, shall be treated as guilty of
professional mis – conduct.
2. However, this clause shall not apply if such CAP enters partnership with the following persons:
a. Another CAP.
b. A member of professional body as prescribed by the council. (Reg. 53B) (i.e.,53A + B.E)
c. A person having recognized qualification as prescribed by the council.
d. A person whose qualification recognized being equivalent to member of ICAI.
3. Such other person may be within India or outside India.
4. MULTI DISCIPLINARY - NOT PERMIRTED: The members may however take note of the fact that
they cannot form Multi-Disciplinary partnerships till such time that Regulators of such other
professionals also permit partnership with chartered accountants, and guidelines in this regard
are issued by the Council.
5. COUNCIL DECISIONS / CASE LAWS:
a. HARISH KUMAR – Where a Chartered Accountant had engaged himself as a partner in
two business firms and Managing Director in two Companies and was also holding
Certificate of Practice without obtaining permission of the Institute. Held that he was
guilty of professional misconduct inter alia under Clauses (4) and (11).
b. ASSISTANT DIRECTOR OF INCOME TAX (INVESTMENT), CALICUT V. P SUBRAMANIAN:
The Respondent was a Taxation Advisor of a group of Companies. During search and
seizure under Section 132 of The Income Tax Act, 1961 of the group and also of the
Chartered Accountant, the Complainant found that the Respondent was colluding with
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this group in evasion of tax. The Respondent had signed two sets of financial statements
of the same AUDITEE, for the same financial year. The two financial statements showed
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different figures of contract receipts, net profits and balance sheet. He was grossly
negligent in the conduct of his professional duties. The Respondent admitted that he was
the managing partner/partner in two partnership firms where there were other partners
who were not Chartered Accountants. Held, the respondent is guilty under Clause (4) of
Part I of First Schedule and under Clauses (5), (6) & (7) of Part I of Second Schedule.
CLAUSE – 5: PROHIBITION ON SECURING PROFESSIONAL BUSINESS:
1. If a CAP Secures –
a. either through the services of a person who is not an employee of such Chartered
Accountant or
b. who is not his partner, or
c. by means which are not open to a CAP,
Any professional business then he shall be treated as guilty of professional mis – conduct.
2. However, this clause shall not apply if he secures professional business through the ways
permitted under previous clauses. (i.e., 2, 3 and 4).
3. A CAP must seek work not through any agency, but by the respect, that he is able to command
for his professional talent and skill and by the confidence he is able to inspire by his reputation.
All forms of canvassing on that account are treated as unethical and are prohibited.
4. COUNCIL DECISIONS / CASE LAWS:
a. JETHANAND SHARDA vs. DEEPAK MEHTA: TREATED AS GUILTY – A Chartered
Accountant wrote various letters to officers of different Army Canteens giving details
about him and his experience, his partner & office and the norms for charging audit fees.
(Council’s decision dated 1st to 4th July, 1998)
b. QUOTE: “A man must stand erect, and not to be kept erect by others”, is a dictum by
Marcus Aurelius.
CLAUSE – 6: PROHIBITION ON SOLICITATION OF CLIENTS OR PROFESSIONAL WORK:
1. If a CAP, solicits clients or professional work either directly or indirectly by circular,

advertisement, personal communication or interview or by any other means, then he shall be
treated as guilty of professional mis – conduct.
2. However, this clause shall not apply if CAP solicits work from:
a. Another CAP.
b. Securing work as a consequence of response to a tender of various users of professional
services or organizations. [i.e., applying for a TENDERs]
COUNCIL/COURT DECISIONS / GUIDELINES:

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3. Also, as per the council guidelines, if a tender is placed for a professional work which can be
exclusively reserved for CAP [E.g., audit / attestation], then the CAP shall not respond to such
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tenders.
Exception:
a) However, if the tender document contains MINIMUM FEES details, then CAP can respond
and secure such work. (E.g., Audit and Attestation services)
b) Also, if professional work is not exclusively reserved for CAP’s.
4. An advertisement of Coaching /teaching activities by a CAP may amount to indirect solicitation,

as well as solicitation by any other means – Treated as Guilty.
Exception: Members may put, outside their Coaching/teaching premises, sign board mentioning:
a. The name of Coaching/teaching Institute,
b. Contact details and
c. Subjects taught therein only.
d. As regards the size and type of sign board, the Council Guidelines as applicable to Firms
of Chartered Accountants would apply.
5. The members should not adopt any indirect methods to adventure their professional practice
with a view to gain publicity and thereby solicit clients or professional work. An advertisement is
not a key to success in the profession. The satisfaction of clients would be the best
advertisement, which would lead to other clients. Unabashed advertisement would affect the
public esteem in which the profession is held and would act to the disadvantage of its members.
It is the quality service, which attracts and retains the clients.
6. Not permitted – Circulating letters to a small field of possible clients –.
7. Not permitted – Personal canvassing or canvassing for clients of PREVIOUS EMPLOYER through
the help of the employees.
8. Permitted – Advertisement relating to change of partnership, dissolution, change in address and

contact details provided such advertisement is limited to bare statement of facts in newspapers
and consideration given to the appropriateness of the area of distribution of the newspaper or
magazine and number of insertions.
9. Permitted – Classified advertisement in the journal/ newsletter of the Institute intended to give
information:
a. For sharing professional work on assignment basis or
b. For seeking partnership or salaried employment of an accountancy nature,
Provided it only contains the accountant’s name, address or telephone number, fax number,
e-mail address.
10. Permitted – Application for empanelment for allotment of audit and other professional work
with:
a. Government departments, Government Companies/Corporations,
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b. Courts, Co-operative societies and banks and other similar institutions which prepares
panels of chartered accountants. [E.g., CAG, RBI Empanelment]
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c. However, it would not be proper for the Chartered Accountant to make roving enquiries
by applying to any such organization for having his name included in any such panel. It
is permissible to quote fees on enquiries being received from such bodies, which
maintain such panel.
11. EMD/Security Deposit: The Council is of the view that while interference with the practices
prevailing for requirement of EMD/Deposit is not required. However, on having received
complaint/ instance of exorbitant EMD/Deposit, the Ethical Standards Board may look into the
matter on case-to-case basis.
12. Permitted – Entries in telephone/trade directories subject to certain restrictions.
13. Not Permitted – It is not permissible for a member to mention in a book or an article published
by him, or a presentation made by him, any professional attainment(s), whether of the member
or the firm of chartered accountants, with which he is associated. However, he may indicate in a
book, article or presentation the designation “Chartered Accountant” as well as the name of the
firm.
14. Permitted – The designation “Chartered Accountant” as well as the name of the firm may be
used in greeting cards, invitations.
a. For marriages and religious ceremonies and
b. Any invitation for opening or inauguration of office of the members,
c. Change in office premises and change in telephone numbers,
provided that such greeting cards or invitations etc. are sent only to clients, relatives and
close friends of the members concerned.
15. ADVERTISEMENT FOR SILVER, GOLDEN, PLATINUM OR CENTENARY CELEBRATIONS: It is NOT

PERMITTED to advertise the events organised by a Firm of Chartered Accountants. However,
considering the need of interpersonal socialization/relationship of the members through such
get together occasions, the advertisement for Silver, Golden, Diamond, Platinum or Centenary
celebrations of the Chartered Accountants Firms may be published in newspaper or newsletter.
16. Sponsoring Activities:

a) A member in practice or a Firm of Chartered Accountants is not permitted to sponsor an
event. However, such member or Firm may sponsor an event conducted by a Programme
Organizing Unit (PoU) of the ICAI, provided such event has the prior approval of Continuing
Professional Education (CPE) Directorate of the ICAI.
b) Members sponsoring activities relating to Corporate Social Responsibility may mention their
individual name with the prefix “CA”. However, the mention of Firm name or CA Logo is not
permitted. [E.g., Food Distribution During Lockdown without mentioning Firm Name]
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17. Right of Representation u/s. 140(4) –

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a. The wording of his representation should be such that, it does not tantamount directly or
indirectly to canvassing or soliciting for his continuance as an auditor.
b. The letter should merely set out in a dignified manner how he has been acting
independently and conscientiously through the term of office.
c. Also, it may indicate his willingness to continue as auditor if re-appointed by the
shareholders.
18. Sharing Firm Profile with prospective Client: It is not permitted to share Firm profile with a
prospective Client unless it is in response to a proposed client’s specific query, and otherwise
not prohibited to be used by the client.
19. Television or Movie Credits: While sharing name of the member or Firm of Chartered
Accountants for inclusion in Television or Movie Credits, it must be taken care of that exhibition
of name is not made differently as compared to other entries in the credits. [E.g., In Movies we
would have come across special thanks to Andhra bank, special thanks to Ram & Co.,
Chartered Accountants – PERMITTED as these credits are uniform format for all.]
20. Permitted – Transfer of Original Work: A member should not accept the original professional
work emanating from a client introduced to him by another member. If any professional work of
such client comes to him directly, it should be his duty to ask the client that he should come
through the other member dealing generally with his original work. (I.e., Similar to Obtaining
consent of Previous auditor). [Auditor shall not grab the client introduced to him by another
auditor]
21. Permitted – Giving Public Interviews: Ensure the interviews or details about the members or
their firms are not given in a manner highlighting their professional attainments. It shall not be
in the nature of publicity. Any detail which is given must be given only as a response to a specific
question, and of factual nature only. (E.g., Speaking on MSME loans is different (vs) Will help in
obtaining MSME loans)
22. Not Permitted – Members are not permitted to use box numbers approach to advertise or
solicit clients. This practice is treated as guilty of professional mis – conduct. (Box – The box is
used to display those stories which are important or unusual in NEWSPAPERS).
23. EDUCATIONAL VIDEOS: While the videos of educational nature may be uploaded on the internet
by members, no reference should be made to the Chartered Accountants Firm wherein the
member is a partner/ proprietor. Further, it should not contain any contact details or website
address. [2021 NEWLY ADDED GUIDELINE]
24. Permitted – Website:

a. A CAP can use a website – No restriction related to usage of colours or format.
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b. Website shall run on pull model and not to use push model regarding:
i. Nature of services rendered.
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ii. Past experience.
iii. Expertise of partners / Employees.
iv. Details of Employees/articles.
v. Year of establishment.
c. Website address can be mentioned on letter heads, visiting cards and sign boards.
d. It may contain:
i. Name of the Firm/Member/Partners.
ii. Phone Numbers and Email ID’s of H.O and Branches as well.
iii. Passport photos of Partners, Partners Qualification, Year of Qualification.
iv. Employees Name and their Qualifications.
v. Career Opportunities.
vi. Can contain external links such as - Website links of ICAI, Other Professional
bodies, Government department sites, Regulatory authorities.
vii. News articles such as budget highlights and government policies.
viii. Common Logo prescribed by ICAI.
ix. Chat rooms for clients or other CAP’s – May provide line advices in return for
payment or free of cost.
x. Last date of updating the website.
e. Website shall not contain:
i. Names of clients and fees charged – Unless it is required as per regulations.
ii. No advertisement.
iii. No other photographs other than passport size photos.
iv. Rate card for services to be offered.
f. Listing of websites on search engines is allowed.
g. Intimation shall be given to ICAI about website while submitting annual membership
forms.
h. Can give information about websites in database of other professional bodies or
chamber of commerce or CA study circles. Provided this in no way directly or indirectly
amounts to solicitation.
i. The Website address should be as near as possible to the individual name/trade name,
firm name of the Chartered Accountant in practice or firm of Chartered Accountants in
practice.
j. A number of non-Chartered Accountants’ firms, corporate including banks, finance
Companies and newspapers have set up their own Websites providing advisory services
on taxation and other areas where Chartered Accountants are rendering professional
service.
i. Some of such Websites may request Chartered Accountants or Chartered
Accountants’ firms to provide consultation and advice through their Websites.
ii. This would be permitted subject to the condition that on the Website, contact
address of the Chartered Accountant concerned is not provided nor such Website
will contain any material which advertises professional achievements or status of
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such Chartered Accountant except making a statement that they are Chartered
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Accountants. The name of Chartered Accountants’ firm with suffix “Chartered
Accountants” would not be permitted. (E.g., Clear-tax, Taxman)
25. B.S.N Bushan (1965) – Sending a printed circular to a person unknown, offering his services in
profit planning and profit improvement programmes. The circular conveyed the idea that it was
meant for strangers only. Held, the chartered accountant was guilty of professional misconduct
under the clause as he used the circulars to solicit clients and professional work – Treated as
Guilty.
26. Chief Auditor of Co-operative Societies, West Bengal vs. B.B. Mukherjee (1967) – A chartered
accountant wrote several letters to Assistant Registrars/ Registrars of Co-operative Societies,
Government of West Bengal requesting for allotment of audit work and to enroll his name-on
panel of auditors. Held he was guilty of professional misconduct under the clause – Treated as
Guilty.
27. D.N. Das Gupta, Chief auditor of Co-operative Societies, West Bengal vs. B.B. Mukherjee
(1969) - A chartered accountant, inspite of the previous reprimand, sent letters to registrar Co-
operative societies, Calcutta, stating that no allotment of audit was made to him and requested
to take action immediately and oblige. Held he was guilty of professional misconduct under the
clause.
28. M. L. Agarwal (1973) –

a. A Chartered Accountant APPROACHED the principal of a secondary school through a
third person known to the principal for his appointment as auditor of that school.
b. Further, the chartered accountant misrepresented to the pervious Auditor that he had
been offered appointment as auditor of the school and enquired whether he had any
objection to his accepting the same though it was a fact that the appointment of
chartered accountant was not made, the chartered accountant was guilty of professional
misconduct under the clause – Treated as Guilty.
c. It was further held that writing letter by the Chartered Accountant to the previous
auditor offering his services to audit the accounts of school was not wrong as it was an
offer to professional colleague and not to a prospective client – Not Treated as Guilty.
29. K.K. Mehta vs. M.K. Kaul (1975)] – Issued circular letter regarding change of address of his firm
to persons who were not in professional relationship with him and for having written to the
shareholders thanking them for appointing him as auditor – Treated as Guilty and reprimanded.
30. Advertisements – Treated as Guilty –

a. G.P. Agrawal (1982) – An advertisement was published in a newspaper containing the
member’s photograph wherein he was congratulated on the occasion of the opening
ceremony of his office – Held as guilty by the council and later the high court.
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b. Anil K. Garg (1987) – A member who got an advertisement published in a newspaper
offering his “services in matters of Accounts, Income Tax, Labour laws, Law matters and
Management Services was found guilty in terms of this clause as also under Clause (7)
c. K.A. Gupta (1989) – A member wrote a letter to a Company in standard format
highlighting his expertise in sales tax matters and had requested for a draft of Rs. 200/- if
his knowledge of the Sales tax matters has been found worthwhile. The member was
found guilty in terms of this Clause. (Note: Even without consideration – Treated as
guilty)
d. J.S. Bhati Vs. M.L Aggarwal. (1991) – a Chartered Accountant had visited personally the
clients for securing the appointment as auditors of the Institutions. Held that he was
guilty.
e. Naresh C.Aggarwal (1992) – Where a Chartered Accountant issued a letter to a Bank
requesting for empanelment of his firm as auditor along with the particulars of his firm
showing the past experience and other details of the firm; and a Member of Parliament
had also sent a letter to the Bank recommending the name of the said Chartered
Accountant’s firm. Held that the member was guilty.
f. Vijay Kumar Goel (1994) – A Chartered Accountant had sent a letter on the letterhead of
his firm to a non-member introducing himself as a chartered accountant giving details of
services rendered by him and the schedule of his fees for rending various kinds of
services. Held that he was guilty.
g. M. V. Lonkar (1996) – A Chartered Accountant had written a letter to a Co-operative
Society wherein he had mentioned that he had been authorised by the Registrar of
Societies to conduct the statutory audit of the Societies and requested it to contact him.
Held that it tantamount to solicitation of the audit and he had violated the provisions of
the clause.
h. S.D. Chauhan, (2001): A Chartered Accountant sent New Year Greeting Cards bearing his
name, qualification, the name and address of his firm and also contain: “List of super hit
books written by Suresh D. Chauhan. Guide to win girls – Income-Tax raid. Contact for
any type of bank for institutional loans or deposits”. Held that the Chartered Accountant
contravened Clause (6) & (7) of Part-I of the First Schedule to the Chartered Accountants
Act, 1949 in having solicited assignment relating to any type of bank or institutional loans
or deposits.
Refer Q No. 6, 7, 8, 9 in Illustrations
CLAUSE – 7: PROHIBITION ON ADVERTISING PROFESSIONAL ATTAINMENTS AND USING OTHER

DESIGNATIONS:
1. A CAP is deemed to be guilty of professional mis – conduct if he advertises:

a. his professional attainments or
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b. services offered or
c. uses any designation other than Chartered Accountant on professional documents,
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visiting cards, letter heads and sign boards.

2. However, a CAP can mention about a degree of:
a. A university established under a law (E.g., B.com, M.com)
b. Title indicating membership of ICAI (E.g., ACA, FCA, DISA)
c. Any other institution that is recognized by CG or the council (E.g., CS, CMA)
d. A member empanelled as Insolvency Professional or Registered Valuer can mention
“Insolvency Professional” or “Registered Valuer” respectively on his visiting card and
letter head.
Council / Court Decisions or Guidelines:
3. DATE OF SETTING UP PRACTICE – Not Permitted – The date of setting up the practice by a
member or the date of establishment of the firm on the letterheads and other professional
documents, etc. should not be mentioned. However, in the Website, the year of establishment
can be given on the specific “pull” request. [A & Co., Since 1980 – Not Permitted]
4. CONSULTANT – Not Permitted – It is improper for a Chartered Accountant to state on his

professional documents that he is an Income-tax Consultant or a Cost Consultant or a
Management Consultant.
5. MP/MLA/MLC – Not Permitted – A member must not use the designation such as ‘Member of
Parliament’, Municipal Councilor any other functionary in addition to that of Chartered
Accountant.
6. ADVOCATE – Not Permitted – A CAP who is also a member of bar council cannot use
simultaneously ‘Chartered Accountant’ and ‘Advocate’ even though he is practicing under both
institutes. W.r.t advocate related matters and documents the member can use only ‘Advocate’
designation subject to permission of bar council.
7. DIRECTORIES – Permitted – The name, description and address of member (or firm) may appear
in any directory or list of members of a particular body in which the names are listed
alphabetically.
8. Permission to MENTION QUALIFICATIONS OF CERTAIN INSTITUTIONS: The members are

permitted to mention a title on their visiting cards to indicate membership of a foreign Institute
of Accountancy, which has been recognised by the Council e.g., South African Institute of
Chartered Accountants (SAICA), Institute of Certified Public Accountants (CPA Ireland) and
Institute of Chartered Accountants in England and Wales (ICAEW).
9. DIRECTORSHIP DETAILS – Permitted – A member may give information about directorship held
and reasonable personal details and may state his outside interests. He should not give the
names of any of his clients or details of the service offered by his firm.
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10. PHOTO ON MAGZINE – Permitted – There should be no objection to the publication of
photographs and brief particulars of members in magazines provided no payment is made for
such publication and there is no advertisement of professional attainments.
11. PHOTO ON VISITING CARD – Not Permitted – The Ethical Standard Board (ESB) of the Institute
has opined that mostly the business class prints the photograph on their visiting cards for
promoting their business and soliciting clients. As such, it is not permissible for the chartered
accountants in practice to print their photograph on their visiting cards.
12. QR CODE ON VISITING CARD – Permitted – Allowed to print QR Code on Visiting cards (Quick
Response) provided this code shall not contain information other than that is permitted to be
printed on visiting cards.
13. NEWSPAPER ADVERTISEMENT FOR RECRUITMENT – Permitted – News Paper (Press)

advertisement can be given with regard to the following guidelines:
a. Advertisement for recruiting staff for own office is allowed.
b. Advertisements on behalf of clients requiring staff or wishing to acquire or dispose of
business or property is allowed.
c. Advertisement for the sale of a business or property by a member acting in a professional
capacity as trustee, liquidator or receiver is allowed.
14. APPEARANCE OF CHARTERED ACCOUNTANTS ON ELECTRONIC MEDIA (INCLUDING INTERNET) -

Permitted: Members may appear on television, films and Internet and agree to broadcast in the
Radio or give lectures at forums and may give their names and describe themselves as Chartered
Accountants. Special qualifications or specialised knowledge directly relevant to the subject
matter of the programme may also be given. Firm name may also be mentioned, however, any
exaggerated claim or any kind of comparison is not permissible. What he may say or write must
not be promotional of him or his firm but must be an objective professional view of the topic
under consideration.
15. CONFERENCES – PERMITTED: Publicity is permitted for appointments to positions of local or

national importance or for the views of members on matters of similar importance. Mention of
the membership of the Institute is desirable in such cases. What should be aimed at is to achieve
suitable publicity for the Institute and its members generally. Members giving talks or lectures or
attending conference may describe themselves as Chartered Accountants only when they are
acting in their capacity as Chartered Accountants. However, reference to the professional firm of
the member should not be given.
16. WORDS SUCH AS WELL-KNOWN FIRM – Not Permitted – When advertising for staff, it is
members should avoid the expression such as “a well-known firm”. The advertisements should
not contain any promotional element nor should there be any suggestion that the services
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offered by the Chartered Accountant or his firm are superior to those offered by other
accountants.
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17. SUCCESS OF ARTICLES IN EXAMS – Not Permitted – Notice in the press relating to the success in
an examination of an articled/clerk/employee/member/firm, should not contain any element of
undesirable publicity.
18. A CAP should take adequate care to ensure that the extent and manner of publications of
certificates are limited to what is necessary to enable the report or certificate to serve its proper
purpose.
19. SEMINARS – Permitted – A CAP holding training courses, seminars etc. for his staff may also
invite the staff of other professional accountants and clients to attend the same. Undue
publicity, however, is not permitted in any broacher or booklet.
20. WRITING ARTICLES – Permitted – Members writing articles or letters to the press on subjects
connected with the profession may give their names and use the description Chartered
Accountants.
21. SIGN BOARDS – Permitted – With regard to the size of signboard for his office that member can
put up, it is matter in which the members should exercise their own discretion and good taste.
22. GLOW SIGNS – Not Permitted – Use of glow signs or lights on large-sized boards as is used by
traders or shop-keepers would not be proper.
23. MENTIONING IN PROSPECTUS ISSUED BY COMPANY – Permitted – Subject to Few guidelines:

a. It is necessary that the members should take necessary steps to ensure that such
prospectus or public announcements or public communications do not advertise his
professional attainments and do not directly or indirectly amount to solicitation of clients
for professional work by the member.
b. While it may be difficult to lay down a rigid rule in this respect, the members must use
their good judgement, depending upon the facts and circumstances of each case to
ensure that the above noted provisions are complied with both in letter and spirit.
24. DIRECTORSHIP IN A COMPANY: As soon as he is appointed as a director of a Company, he

should specifically invite the attention of the management of the company to the aforesaid
provisions and should request that before any such prospectus or public announcements or
public communication mentioning the name of the member concerned, is issued, the material
pertaining to the member concerned should, as far as practicable be got approved by him. The
use of the expression ‘Chartered Accountant’ is permissible.
a. However, the member must ensure that descriptions about his expertise, specialization
and knowledge in any particular field of other appellation or adjectives are not published
with his name.
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b. Particulars about directorships held by the member in other companies can be given.
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25. LOGO’s – Not Permitted – The Council has decided that the logos unconnected with the first
letter of the name of the firm or its partners or proprietors will not be permitted.
26. LOGO’S - Not Permitted – The use of logo/monogram of any kind/form/style/design/colour, etc.
by the members in practice and/or the firm of Chartered Accountants, be prohibited.
Use/printing of member/firm name in any other manner tantamounting to logo/monogram was
also prohibited. (Only CA Logo can be used and no branding or logo is permitted) (W.e.f.
Febraury, 1988 – Reg. 190)
27. COMMON CA LOGO: To promote the brand of CA profession and responding to the long felt
need to have a symbol of CA Profession in India, ICAI came up with a unique logo which could
be used by all members, whether in practice or not. Encapsulating the current beliefs, attitudes
and values of the profession, the CA Logo seeks to enhance the identity of the members. The
logo consists of the letters ‘CA’ with a tick mark (upside down) inside a rounded rectangle with
white background. The letters ‘CA’ have been put in BLUE, the corporate colour which not only
stands out on any background but also denotes creativity, innovativeness, knowledge,
integrity, trust, truth, stability and depth. The upside-down tick mark, typically used by the
chartered accountants, has been included to symbolize the wisdom and value of the
professional. The GREEN COLOUR IN THE TICK MARK signifies growth, prosperity, harmony and
freshness. Members are encouraged to use this logo. The Council has decided that use of CA
logo in the stamp is permissible, subject to CA logo guidelines.
28. RELATIONSHIPS WITH OTHERS – Not Permitted – The usage of expression/words “In association
with / Associates of / correspondents of…etc.” are not permitted and treated as guilty.
29. Sirdar P.S. Sodhbans (1969) – A chartered accountant wrote several letters to Government
Department, inter alia, pointing out seniority of his firm, sending his life sketch and stating that
he had a glorious record of service to the country as well as to the organisation of accountancy
profession with a view to get the audit work. These letters were clearly in the nature of
advertising professional attainments. Held, he was guilty of professional misconduct under the
clause.
30. N.O. Abraham Isaac Raj (1992) - Where a Chartered Accountant had issued two insertions in a
Journal published by a Chamber of Commerce expressing his willingness to offer the concession
in respect of all services offered by him. Held that he was guilty.
31. Yogash Gupta (1996) – Where a Chartered Accountant had addressed a letter to the Managing
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Director of a company offering his services as a practicing chartered accountant and giving
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impression that the letter had been addressed to more than one organization for the above
purpose, it was held that the member had contravened the provisions.
32. BULK SMS – Not Permitted: Where a Chartered Accountant allegedly propagating his services
subsequent to demonetization, an objective of Government of eradicating black money, through
mass SMS along with his mobile number offering his services towards conversion of cash with
minimum tax liability. Held guilty of Professional Misconduct falling within the meaning of Clause
(6) & (7) of Part I and “Other Misconduct” falling within the meaning of Clause (2) of Part IV of
First Schedule read with section 22 of the Chartered Accountants Act, 1949. (Kailash Shankarlal
Mantry)
Refer Q No. 10, 11, 12 in Illustrations
CLAUSE – 8: COMMUNICATION WITH PREVIOUS AUDITOR: (OBTAIN NOC)
1. If a CAP Accepts any position as an auditor previously held by another member of institute,
without first communicating him in writing then such CAP shall be treated as guilty of profession
mis – conduct. (Obtain NO OBJECTION CERTIFICATE)
2. This sort of communication is required for all types of audits – statutory audit, tax audit, internal
audit, concurrent audit or any other kind of audit. However, NOC is not required for special
audits as required under any law for the time being in force.
3. Further NOC is not required for accepting assignments that are conducted by other professionals
not being Chartered Accountants. [It is healthy practice to communicate.]
4. Why CAP shall communicate with previous auditor:

a. Professional Courtesy.
b. To know the reasons for the change in auditor.
c. To be able to safeguard his own interest and the legitimate interest of the public and
d. Protect the independence of the existing accountant.
e. When making the inquiry from the retiring auditor, the proposed auditor should
primarily find out whether there are any professional or other reasons why he should not
accept the appointment.
5. The change of auditor normally occurs:

a. Where there has been a change of venue of business and a local accountant is preferred
or
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b. Where the partner who has been dealing with the client’s affairs retires or dies; or
c. Where temperaments clash or
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d. The client has some good reasons to feel dissatisfied.

6. FEES NOT PAID:
a. The existence of a dispute as regards the fees not having been paid often may be the
root cause of an auditor being changed, but this would NOT CONSTITUTE VALID REASONS
for rejecting proposed appointment.
b. However, in the case of an undisputed audit fees for carrying out the statutory audit
under the Companies Act, 2013 or various other statutes having not been paid, the
incoming auditor should not accept the appointment unless such fees are paid.
c. Incoming auditor should in appropriate circumstances use his influence in favour of his
predecessor to have the disputes as regards the fees settled.
d. Where the Previous Auditor is not available for accepting payment of undisputed audit
fees, and it is not otherwise possible to transfer the payment to him electronically, the
Incoming Auditor may advise the client to purchase Demand Draft of the amount
equivalent to undisputed Audit Fees of retiring auditor, and may accept the Audit
assignment after verifying the same. It will be the duty of the Incoming auditor to ensure
the payment of undisputed Audit Fees of the retiring auditor at the earliest possibility.
7. General reasons for not accepting audits:

a. Non – compliances with provisions of applicable laws and regulations – Treated as Guilty
if accepts the audit.
b. Non-payment of undisputed audit fees by auditees other than in case of sick units –
Treated as Guilty if accepts the audit. (‘Undisputed audit fee’ refers to “amount of
provision for audit fees” recorded and signed by both the parties. ‘Sick Unit’ means
“negative networth”)
c. Issuance of Qualified report by outgoing auditor – May or May not treated as Guilty.
8. What should be the correct procedure to adopt when a prospective client tells you that he
wants to change his auditor and wants you to take up his work?
a. Inquire Full facts of the case such as reasons for replacement.
b. Inquire whether the client had informed the retiring auditor of the intended change:
i. If Yes – Send a communication to retiring auditor.
ii. If No – Inquire the client, why he did not make a first move. If the client has no
valid reason, it would be inappropriate to accept such proposed audit for the
incoming auditor.
NOTE: As stated earlier, the object of the incoming auditor, in communicating with the
retiring auditor is to ascertain from him whether there are any circumstances which
warrant him not to accept the appointment.
c. BANK / GOVERNMENT COMPANIES – TIME BOUND: In case the time schedule given for
the assignment is such that there is no time to wait for the reply from the outgoing
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auditor, the incoming auditor may give a conditional acceptance of the appointment and
commence the work which needs to be attended to immediately after he has sent the
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communication to the previous auditor in accordance with this clause. In his acceptance
letter, he should make clear to the client that his acceptance of appointment is subject to
professional objections, if any, from the previous auditors and that he will decide about
his final acceptance after taking into account the information received from the previous
auditor.
9. For example, whether the previous auditor has been changed on account of having qualified his
report or he had expressed a wish not to continue on account of something inherently wrong
with the administration of the business. The retiring auditor may even Give out information
regarding the condition of the accounts of the client or the reason that impelled him to qualify
his report. In all these cases it would be essential for the incoming auditor to carefully consider
the facts before deciding whether or not he should accept the audit, and should he do so, he
must also take into account the information while discharging his duties and responsibilities.
10. Does Reply must from retiring auditor to incoming auditor:

a. Reply Obtained –
i. No Objection raised – Incoming auditor can accept and continue the engagement.
ii. Objections raised – Evaluate the nature of objections and decide accordingly:
1. Objections justified – Reject the Proposed appointment.
2. Objections Not Justified – Accept the engagement.
b. Reply Not Obtained – The proposed auditor, after waiting for a reasonable time for a
reply, can accept and continue with the engagement.
11. Mode of Communication:

a. Communication must be in writing through a registered post. (After Corona – Emails also)
b. There should be positive evidence of the fact that the communication addressed to the
outgoing auditor has reached his hands.
c. Certificate of posting of a letter cannot, in the circumstances, be taken as a positive proof
of its delivery to the addressee. (Rajasthan High Court in J.S. Bhati v.s. The Council of
the ICAI)
d. Communication must be through a “Registered Post Acknowledgment due (RPAD)” or by
hand against a written acknowledgment would provide such positive evidence. (R.M.
Singhai vs. R.V. Agarwal (1988))
e. Acknowledgement of the communication from retiring auditor’s vide email address
registered with the Institute or his last known official email address, or
f. Unique Identification Number (UDIN) generated on UDIN portal (subject to separate
guidelines to be issued by the Council in this regard)
g. Premises found Locked: The communication received back by the Incoming Auditor with
“Office found Locked” written on the Acknowledgement Due shall be deemed as having
been delivered to the retiring auditor.
h. Firm not found at the given Registered address: If the Communication sent by the
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Incoming auditor is received back with remarks “No such office exists at this address”,
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and the address of communication is the same as registered with the Institute on the
date of dispatch, the letter will be deemed to be delivered.
NOTE: The requirement for communicating with the previous auditor being a Chartered
Accountant in practice would apply to all types of Audit viz., Statutory Audit, Tax Audit, GST
Audit, Internal Audit, Concurrent Audit or any other kind of audit.
12. Council/High court/BOD Decisions:

a. Rajeev Kumar vs. R.K. Agrawal (1988) – Communication is required for Audits of both
government and non-government entities.
b. S.N. Johri vs. N.K. Jain (1973) – A Chartered Accountant commenced the work of audit
on the very day he sent letter to the ‘previous auditor - Held, he was guilty of
professional misconduct under the clause. The appointment could be accepted only
when the outgoing auditor does not respond within a reasonable time.
c. Radhey Shyam vs. K.S. Dubey (1974) – A Chartered Accountant sent a registered letter
to the previous auditor after the commencement of the audit by him. Held he was guilty
of professional misconduct under the clause.
d. M.L. Agarwal vs. J.S. Bhati (1975) – A chartered accountant had sent a communication to
the previous auditor under certificate of posting without obtaining any acknowledgment
thereof. The Council held the member guilty in terms of this Clause.
e. V.A. Parikh vs. R.I. Galledar (1991) – Where a Chartered Accountant had conducted tax
audit of a firm without first communicating in writing with the Complainant, who was the
previous tax auditor of the said firm. Held that he was guilty under the clause.
f. CA. Manindra Chandra Poddar vs. CA. Manas Ghosh (2013) – The onus to communicate
with retiring auditor lies on Incoming auditor.
g. R.M. Singhai vs. R.V. Agarwal (1988): The requirements of Clause (8) of Part I of the First
Schedule can be considered to have been complied with only:
(i) if there is evidence that a communication to the previous auditor had been by R.P.A.D.
(ii) if there was positive evidence about delivery of the communication to the previous
auditor.
In the absence of both, the member should be found to have contravened this Clause.
h. Sunil Prakash Goyal vs. Balraj Kalia (2013): Where a Chartered Accountant had
couriered the letter to seek the NOC from the previous auditor but failed to produce the
POD of the said courier as documentary evidence before the Board. Held guilty of
“professional misconduct” falling under Clause (8) of Part I of First Schedule to the
Chartered Accountants Act, 1949.
13. Reduced audit fee for incoming auditor (undercutting) – Treated as guilty unless there is a
reasonable justification for such undercutting. It will not be treated as indirect way of promotion
or solicitation.
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Refer Q No. 13, 14 in Illustrations

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CLAUSE – 9: PROHIBITS TO ACCEPT THE AUDIT OF COMPANY WITHOUT COMPLYING WITH
PROVISIONS OF COMPANIES ACT, 2013:
1. A CAP is treated as guilty of professional mis conduct, if he accepts the audit of a company
without ascertaining the compliance with Sec. 139, 140, 141 and 142 of companies act, 2013.
2. The word “ascertain” means “to find out for certain”. This would mean that the incoming
auditor should find out, whether the company has complied with the provisions of Section 139,
140 and 142 read with Section 141 of the Companies Act, 2013.
3. The incoming auditor shall verify the following aspects in this regard:
a. Board Resolution for recommendation of incoming auditor.
b. Minutes of General Meeting where incoming auditor is appointed.
c. Whether the notice of general meeting has been sent as per the law.
d. Approval of CG in case outgoing auditor is removed before expiry of term.
e. Most importantly, Qualifications and Dis-Qualifications of the incoming auditor.
f. Obtain a certificate from the management that they have complied with above sections.
g. Communication with outgoing auditor as required under Clause - 8
4. If the incoming auditor is not allowed to verify above information and records, then such
appointment shall not be accepted.
GUIDELINES ISSUES BY THE COUNCIL: [NEWLY ADDED IN NOV 2020 EDITION MATERIAL]
A. The steps to be taken by an Auditor of a Company who is appointed in the following

circumstances are indicated in the paragraphs below:
1. When the auditor appointed is the First Auditor of the Company:
a. If the appointment of the auditor is being made for the first time after incorporation
of the Company, the auditor should verify as to whether the Board of Directors have
passed the resolution for his appointment within 30 days of the date of registration
of the Company.
b. If the Board of Directors have not appointed the first auditor but the appointment is
being made by a general meeting of the Company, the auditor should verify as to
whether a proper notice convening the general meeting has been issued by the
Company and whether the resolution has been validly passed at the general meeting
of the Company.
2. When the auditor is appointed in place of an existing auditor who has resigned or has been
removed or has ceased to hold office for any other reason:
a. CV other than Resignation: If the appointment is being made to fill a casual vacancy,
the incoming auditor should verify as to whether the Board of Directors have powers
to fill the casual vacancy and whether the Board of Directors have passed the
resolution filling the casual vacancy.
b. CV due to Resignation: If the vacancy has arisen due to resignation of the auditor,
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the incoming auditor should see as to whether a proper resolution filling the vacancy
has been passed at the General Meeting of the Company.
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c. Removal of auditor: If the vacancy has arisen as a result of removal of the auditor
before the expiry of his term of office, the incoming auditor should see that special
resolution has been passed at the General Meeting of the Company and that the
previous approval of the Central Government has been obtained by the Company.
3. When the auditor or auditors appointed by the Company were holding this office jointly with
others and one or more of such joint auditors are not reappointed.
4. When one or more of the auditors appointed by the Company was/were not holding this
office earlier.
B. If the incoming auditor is satisfied that the Company has complied with the provisions of
Sections 139 and 140 of the Companies Act, he should first communicate with the outgoing
auditor in writing as provided in Clause (8) of Part I of the First Schedule to the Chartered
Accountants Act, 1949 before accepting the audit assignment.
NOTE: If Time permits – Give a single reading of content given in ICAI SM [Oct 2021 Edition] – pg.
18.66 to 18.68 [Not Imp from Exam Viewpoint]
C. UNJUSTIFIED REMOVAL OF AUDITOR:

The following guidelines have been issued for the Ethical Standards Board for looking into the
cases of Removal of Auditors:
1. Resignation / No Consent for Re appointment: Where an auditor resigns his appointment as
an auditor of a Company or does not offer himself for reappointment as auditor of such
Company, he shall send a communication, in writing, to the Board of Directors of the
Company giving reasons therefor, if he considers that there are professional reasons
connected with his resignation or not offering himself for re-appointment which, in his
opinion, should be brought to the notice of the Board of Directors, and shall send a copy of
such communication to the Institute. It shall be obligatory on the incoming auditor, before
accepting appointment, to obtain a copy of such communication from the Board of Directors
and consider the same before accepting the appointment.
2. Sec. 140(4) – Appointment other than retiring auditor: Where an auditor, though willing for
re-appointment has not been reappointed, he shall file with the Institute a copy of the
statement which he may have sent to the management of the Company for circulation
among the shareholders. It shall be obligatory on the incoming auditor before accepting the
appointment, to obtain a copy of such a communication from the Company and consider it,
before accepting the appointment.
3. The Ethical Standards Board, on a review of the communications referred to in paras (1) and
(2), may call for such further information as it may require from the incoming auditor, the
outgoing auditor and the Company and make a report to the Council in cases where it
considers necessary.
4. The above procedure is also followed in the case of removal of auditors by the government
and other statutory authorities.
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CLAUSE – 10: PROHIBITED TO ACCEPT FEES AS A PERCENTAGE OF PROFITS OF COMPANY:
1. A CAP is treated as guilty of professional mis – conduct if he:

a. Charges or offers to charge,
b. accepts or offers to accept
c. in respect of any professional employment fees which are:
i. based on a percentage of profits or
ii. which are contingent upon the findings, or results of such employment.
2. However, if the same is permitted under any regulations made under this act then it shall not be
treated as guilty.
3. It is to be noted that, the fees cannot be considered as contingent if it is fixed by court or any
public authority. (E.g., Disputed fees)
4. Additional Exceptions: In the following cases acceptance of fees as a percentage of profits is
permitted:
a. In the case of a receiver or a liquidator, the fees may be based on a percentage of the
realization or disbursement of the assets.
b. In the case of an auditor of a co-operative society, the fees may be based on a
percentage of the paid-up capital or the working capital or the gross or net income or
profits.
c. In the case of a valuer for the purposes of direct taxes and duties, the fees may be based
on a percentage of the value of property valued.
d. In the case of certain management consultancy services as may be decided by the
resolution of the Council from time to time, the fees may be based on percentage basis
which may be contingent upon the findings, or results of such work.
e. In the case of certain fund-raising services, the fees may be based on a percentage of the
fund raised. (E.g., Underwriting)
f. In the case of debt recovery services, the fees may be based on a percentage of the debt
recovered.
g. In the case of services related to cost-optimization, the fees may be based on a
percentage of the benefit derived.
h. Any other service or audit as may be decided by the Council. [Following activities have
been decided by the Council under “h” above: (i) Acting as Insolvency Professional;(ii)
Non-Assurance Services to Non-Audit Clients]
5. S S S B Ray, Commissioner of Income Tax (Central), Nagpur vs. Durga Prasad Sarda: A Chartered
Accountant had arranged accounting bills raised by 16 parties amounting to Rs.14.09 Crores and
made entries which were not genuine. He had charged commission @ 0.25% to 1% of the
transactions for arranging accounting entries. He had been involved in arranging bogus bills,
accommodation entries and circular transactions for trading in coal through bank LC limits for
various other parties. Held guilty of Professional and Other Misconduct falling within the
meaning of Clause (10) of Part I and Clause (2) of Part IV of the First Schedule to the Chartered
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Accountants Act, 1949.

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CLAUSE – 11: PROHIBITED TO ENGAGE IN ANY OTHER OCCUPATION OR BUSINESS OTHER THAN A
CA:
1. A CAP is treated as guilty of professional mis – conduct if he engages in any business or

occupation in addition to CAP.
2. Exceptions:
a. If such business/occupation is permitted by council of ICAI, then it shall not be treated as
guilty. (Ref – Point 3)
b. If such CAP is a director of a company not being MD/WTD. (audit relation with the
company is prohibited).
c. A CAP may act as a liquidator, trustee, executor, administrator, arbitrator, receiver,
adviser or representative for costing, financial or taxation matter, or may take up an
appointment that may be made by the Central Government or a State Government or a
court of law or any other legal authority or may act as a Secretary in his professional
capacity, provided his employment is not on a salary-cum-full-time basis. (Reg. 191 read
with 190A).
3. Permitted additional occupations by council:
a. No permission required/General Permissions –
i. Employment under Chartered Accountants in practice or firms of such chartered
accountants.
ii. Private tutorship. (Teaching hours - Not exceeding 25 Hours a week)
iii. Authorship of books and articles. (Not Retail Reports)
iv. Holding of Life Insurance Agency License for the limited purpose of getting
renewal commission.
v. Attending classes and appearing for any examination.
vi. Holding of public elective offices such as M.P., M.L.A. and M.L.C.
vii. Honorary office leadership of charitable-educational or other non-commercial
organisations.
viii. Acting as Notary Public, Justice of the Peace, Special Executive Magistrate and the
like.
ix. Part-time tutorship under the coaching organisation of the Institute.
x. Valuation of papers, acting as paper-setter, head-examiner or a moderator, for
any examination.
xi. Editorship of professional journals.
xii. Acting as Surveyor and Loss Assessor under the Insurance Act, 1938 provided they
are otherwise eligible.
xiii. Acting as recovery consultant in the banking sector.
xiv. Owning agricultural land and carrying out agricultural activity.
b. Requirement for Special and Prior Permission:
i. Full-time or part-time employment in business concerns provided that the
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member and/or his relatives do not hold “substantial interest” in such concerns.
(E.g., MD/WTD) (Read with Point – iii)
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ii. Full-time or part-time employment in non-business concern.
iii. Office of managing director or a whole-time director of a body corporate within
the meaning of the Companies Act, 2013. (Read with Point – I)
iv. Interest in family business concerns (including such interest devolving on the
members as a result of inheritance / succession / partition of the family business)
or concerns in which interest has been acquired as a result of relationships and in
the management of which no active part is taken. (Including Karta of HUF)
v. Interest in an educational institution.
vi. Part-time or full-time lectureship for courses other than those relating to the
Institute’s examinations conducted under the auspices of the Institute or the
Regional councils or their branches. (E.g., GMCS trainer)
vii. Part-time or full-time tutorship under any educational institution other than the
coaching organization of the Institute. (Teaching hours - Not exceeding 25 Hours a
week)
viii. Editorship of journals other than professional journals.
ix. Any other business or occupation for which the Executive Committee considers
that permission may be granted.
4. However, it is open to the Council to refuse permission in individual cases though covered under
any of the above categories.
5. The term “relative”, in relation to a member, means the husband, wife, brother or sister or any
lineal ascendant or descendant of that member. (Same definition under Income tax)
6. Directorship / Promoter of a Company:
a. A member in practice is permitted generally to be a DIRECTOR SIMPLICITOR in any
company including a board-managed company and as such he is not required to obtain
any specific permission of the council in this behalf irrespective of whether he and / or
his relatives hold substantial interest in that company.
b. “Director Simplicitor” means an ordinary / simple Director. (Will not involve in executive
affairs of the company)
c. The auditor of a subsidiary company cannot accept appointment as a director in holding
company of such subsidiary company.
d. There is NO BAR FOR A MEMBER TO BE A PROMOTER / signatory to the Memorandum
and Articles of Association of any company. No specific permission is required.
e. A member can accept the office of a managing director or a whole- time director only
after obtaining, the specific and prior approval of the Council.
7. Member in practice in a HUF doing business: “A member of the Institute can acquire interest in
family business in any of the following manner:
(i) As a proprietary firm

(ii) As a partnership firm
(iii) In the name and style of Hindu Undivided Family as its Karta or a member.
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It would be necessary for the members to provide evidence that interest in the family business
concern devolved on him as a result of inheritance/succession/partition of the family business. It
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is also necessary for the member to show that he was not actively engaged in carrying on the
said business and that the family business concern in question was not created by himself.
8. Decisions of the council / BOD / High court:

a. K.S. Dugar (1980) – A chartered accountant in practice entered into partnership with
persons who were not the members of the Institute, for the purpose of carrying on
business. The share of the chartered accountant in the profit and losses was 25%. He was
to take part in the business and was entitled to represent the firm before Govt.
authorities etc. He was operating the Bank account of the firm was receiving moneys
from the customers and was also looking after the affairs of the partnership. Held he was
guilty of professional misconduct under the clause, as he was engaged in the business,
without the permission of the Council.
b. M.K. Abrol and S.S. Bawa vs. V.P. Vijh (1988) – A member in practice was authorised by
a resolution of the Board of Directors of a company held on 4.9.81 to look after the day
to do affairs of the company and other more than 51% the said company. Later on
8.5.82, he applied to the Council for permission to hold the office of the Executive
Chairman of the said company. It was held on the basis of facts and circumstances of the
case that during the period 4.9.81 to 8.5.82 the member had engaged himself in ‘other
occupation’ without the permission of the Council and was found guilty in terms of this
Clause.
c. Anil Kumar (1994) – Where a Chartered Accountant who had held a salaried
employment as an Assistant Manager (Finance & Accounts) in addition to the practice of
chartered accountancy without obtaining permission of the Institute as required was
held guilty under Clause (11) of Part I of First Schedule.
d. C.I.T. (Admn.) vs. H.M. Giriya (1996) – Where a Chartered Accountant while practicing as
a chartered accountant had engaged himself in other occupation as an LIC agent in
another name. Held that he was guilty Clause (11) of First Schedule.
e. Where a charted Accountant had offered to help the Complainant in disposing of odd lot
shareholding, sold them at much lower rate than he had sent of the Complainant notes
etc. and the said chartered accountant was personally involved in the share transfer and
broker's business besides his professional activities. Held that he was guilty under Clause
(11) of Part I.
f. CA. Shivaputra Mohan Jotwar (2013) – Where a charted Accountant was in full time
employment besides holding full time Certificate of Practice. Though, the Respondent
submitted that he did not carry out any attestation function during this period, yet the
same cannot absolve him for the non-compliance. Thus, the Board held the Respondent
guilty of professional misconduct falling within the meaning of Clause (11) of Part I of
First Schedule to the Chartered Accountants (Amendment) Act, 2006.
g. Rohit B. Jain vs. Kishore Kumar Poddar: Where a Chartered Accountant was one of the
Promoters and a Whole Time Director of Private Limited Company, drawing
remuneration besides practicing on a full time basis and besides holding full time COP.
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Held guilty of professional misconduct falling under Clause (11) of Part I of First Schedule
to the Chartered Accountants Act, 1949.
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h. Shivaputra Mohan Jotawar: Where it was established that a Chartered Accountant had
deceived a person by assuring that he can sanction a loan to him for business purpose.
He had taken a sum of Rs 15,000/- for doing the same and thereafter, started avoiding
that person. Apart from that he was in full time employment with a University in spite of
holding full time COP and never disclosed about his employment to the Institute. He
surrendered his COP only after issuance of information letter from the Institute. He
represented this as a mistake. Held guilty of professional misconduct falling under Clause
(11) of Part I of First Schedule to the Chartered Accountants Act, 1949.
i. Sharadchandra M. Kulkarni vs. Mahen J. Dholam: Where a Chartered Accountant
maintained the accounts and also acted as the Tax Auditor of a firm. Besides holding the
COP, he was also in active business association with a company being a Director of the
company without taking the permission of the Council. Held guilty of professional
misconduct falling within the meaning of Clause (11) of Part I of the First Schedule and
Clause (4) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
j. Bombay High Court – Clause – 4 does not have overriding effect on Clause – 11.
k. A CAP can register himself as registering authority for obtaining DSC’s for clients.
l. A CAP may be a research adviser but cannot publish retail reports.
m. A CAP cannot receive remuneration for Financial advisory role to a bank, financial
institutions, mutual funds or insurance companies.
n. A CAP cannot take agency of GIC/UTI/NSDL.
o. A CAP Cannot hold customs brokers license under Sec. 146 of Customs Act, 1962.
p. Trading in stocks / commodity derivatives is also an additional occupation and hence
special permission of the institute is required.
Refer Q No. 17, 18, 19 in Illustrations
CLAUSE – 12: PROHIBITING A NON-MEMBER / NON – PARTNER TO SIGN ON BEHALF OF THE FIRM:
1. A CAP is treated as guilty of professional mis – conduct if he allows, the following, to sign on his
behalf or on behalf of firm:
a. a non-member of the institute or
b. a member who is not in practice or
c. a person who is not a partner of his firm.
2. However, the above clause does not apply with respect to reports not containing expression of
opinion.
3. In the following cases a CAP can allow others to sign on his behalf with regard to routine
documents where professional opinion or authentication is not involved:
a. Issue of audit queries during the course of audit.
b. Asking for information or issue of questionnaire.
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c. Letter forwarding draft observations/financial statements.

d. Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.
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e. Acknowledging and carrying on routine correspondence with clients.

f. Issue of memorandum of cash verification and other physical verification or recording
the results thereof in the books of the clients.
g. Issuing acknowledgements for records produced. Raising of bills and issuing
acknowledgements for money receipts.
h. Attending to routine matters in tax practice, subject to provisions of Section 288 of
Income Tax Act.
i. Any other matter incidental to the office administration and routine work involved in
practice of accountancy.
4. Also, the Council has decided that:
a. Where a Chartered Accountant while signing a report or, a financial statement or any
other document is statutorily required to disclose his name, the member should disclose
his name while appending his signature on the report or document.
b. Where there is no such statutory requirement, the member may sign in the name of the
firm. (Member Seal vs Firm Seal).

DEFINED IN PART – II OF FIRST SCHEDULE TO CA ACT, 1949?
ANSWER:
A member of the Institute (other than a member in practice) (I.e., Member in Service - MIS) shall be
deemed to be guilty of professional misconduct, if he is being an employee of any company, firm or
person – (MIS may be full time or part time employee with or without COP)
CLAUSE – 1: PROHIBITS TO PAY, SHARE OF HIS EMOLUMENTS OF EMPLOYMENT:
1. A member of the Institute in service (MIS) is deemed to be guilty of professional misconduct, if

he is an employee of any company, firm or person and during that course whatever emoluments
he receives, if he:
a. either pays or
b. allows to pay or
c. agree to pay any part or share thereof whether directly or indirectly.
2. However, this clause dose not restricts such sharing or commitments among relatives,
dependents, friends etc., if there is no relationship in procuring or retaining the job and payment
is not a consideration for job procurement or retainership.
3. Example: Job shall be obtained through clear professional dignity and not through job agencies
or on recommendation etc.,
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CLAUSE – 2: PROHIBITS TO ACCEPT TIPS FROM EMPLOYER RELATED SERVICE PROVIDERS:

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A MIS is treated as guilty of professional mis – conduct if he accepts or agrees to accept any part of
fee, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm
or person or agent or customer of such company, firm or person by way of commission or
gratification.
(Simply he shall not get anything unauthorizedly from 3rd parties who are clients / customers to the
company where the member is providing service.)

DEFINED IN PART – III OF FIRST SCHEDULE TO CA ACT, 1949?
ANSWER:
A member of the Institute, whether in practice or not, shall be deemed to be guilty of professional
misconduct, if he –
CLAUSE – 1: NOT BEING A FELLOW OF THE INSTITUTE, BUT ACTS AS FELLOW OF THE INSTITUTE.
(LESS THAN 5 YEARS) [ACA acting as FCA]
CLAUSE – 2: FAILS TO SUPPLY INFORMATION CALLED FOR, OR DOES NOT COMPLY WITH
REQUIREMENTS OF:
1. ICAI,
2. Council,
3. Any of its committee,
4. Director (Discipline),
5. Board of Discipline,
6. Disciplinary committee,
7. Quality review board or
8. the appellate authority.
Council Decisions:
a. P.S. Rao (1992) – Clause (11) of Part I and Clauses (1) and (3) of Part III where a Chartered
Accountant had not disclosed to the Institute at any time about his engagement as a proprietor
of a non-chartered accountant’s firm while holding certificate of practice and had not furnished
particulars of his engagement as Director of a company despite various letters of the institute
which remained un replied. Held that he was guilty under Clause (11) of Part I and Clauses (1)
and (3) of Part III of the First Schedule.
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b. S.M. Vohra (1992) – Where a Chartered Accountant had continued to train an articled clerk
though his name was removed from the membership of the Institute and he had failed to send
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any reply to the Institute asking him to send his explanation as to how he was training as his
articled clerk when he was not a member of the Institute. Held that he was guilty under Clause
(2) of Part III of the First Schedule.
CLAUSE – 3: GIVING FALSE INFORMATION:
1. A member of the institute is treated as guilty of professional mis – conduct, if he provides

knowingly any false information:
a. While inviting work from another CA
b. While responding to tenders or enquiries.
c. While advertising through a writeup or anything as provided in clause – 6&7 of Part – I of
this Schedule.
2. This clause applies whether the misrepresentation is made through documents or acts.
Q.NO.17 WRITE ABOUT ACTS OR OMISSIONS IN NATURE OF “OTHER” MIS-CONDUCT AS DEFINED

IN PART – IV OF FIRST SCHEDULE TO CA ACT, 1949?
ANSWER:
As per Part – IV of Schedule – I to CA Act, 1949, A member of the Institute, whether in practice or
not, shall be deemed to be guilty of other misconduct, if he –
CLAUSE – 1: HELD GUILTY BY ANY CIVIL OR CRIMINAL COURT FOR AN OFFENCE WHICH IS
PUNISHABLE WITH IMPRISONMENT FOR A TERM NOT EXCEEDING SIX MONTHS.
CLAUSE – 2: IN THE OPINION OF THE COUNCIL, BRINGS DISREPUTE TO THE PROFESSION OR THE
INSTITUTE AS A RESULT OF HIS ACTION WHETHER OR NOT RELATED TO HIS PROFESSIONAL WORK.
JUDGMENTS:
1. Deputy General Manager, Canara Bank vs. Prasanta Kumar Roy Burman: Where a Chartered
Accountant had floated various Companies/Firms and availed huge limits from various Banks in
the name of the said Companies/Firms. The limits were availed fraudulently by him against
factory, land & building, machineries and other fixed assets in his name and others were already
mortgaged with a Bank. Furthermore, besides holding full time COP he was also the
Proprietor/Director of Firms/Private Limited Company for which he did not inform the Institute.
Held, guilty of ‘Other Misconduct’ falling under Clause (2) of Part IV of First Schedule to the
Chartered Accountants Act, 1949 with respect to the charge of being Proprietors of other Firms
he was guilty of ‘Professional Misconduct’ falling under Clause (11) of Part I of First Schedule to
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the Chartered Accountants Act, 1949.

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2. Naresh Mohan Mittal vs. Gulshan Kumar: Where a Chartered Accountant did not reveal the
important information that his name has been removed from the Register of Members w.e.f.
01.10.2005 due to non-payment of fees and he was not authorised to practice as a Chartered
Accountant but he continued to sign the audit report and conducted audit of the firm. Held,
guilty of professional and other misconduct falling within the meaning of Clause (2) of Part IV of
First Schedule, and Clause (1) of Part II of the Second Schedule to the Chartered Accountants
Act, 1949.
3. Kanchan Bhagchandani vs. Vaibhav Kumar Mehta: The accounts of the Complainant were
maintained and audited by a Chartered Accountant. Even after the full payment of fees he
refused to complete the work and to file the Income Tax Returns. The Respondent Firm was in
the possession of all the original accounts and refused to hand over the same. Further on
seeking for the payments against the work done for the interior of the new office of the Firm,
the Complainant was abused and threatened. The Password of Income Tax account was also
changed by him without knowledge of the Complainant. The Respondent refused to accept the
payment made by cheque. Held, guilty of ‘Other Misconduct’ falling within the meaning of
Clause (2) of Part IV of the First Schedule to the Chartered Accountants Acts, 1949 read with
section 22 of the said Act.
4. Gopal Bhatter: The Respondent had been appointed to carry out the audit, Income Tax and ROC
related work viz preparation and filing of various Forms like Form No. 32, Form 18, 23 AC and 23
ACA, DIN 3 and 20B. The Respondent did not verify any other document, contract, etc.to filing e-
forms with the ROC which had certain incorrectness on account of the same being filed on the
basis of tampered and forged documents which resulted in bringing disrepute to the Chartered
Accountancy Profession. The Respondent was held guilty of ‘Other Misconduct’ falling within the
meaning of Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949
read with Section 22 of the said act.
Q.NO.18 WRITE ABOUT ACTS OR OMISSIONS IN NATURE OF “PROFESSIONAL” MIS-CONDUCT AS

DEFINED IN PART – I OF SECOND SCHEDULE TO CA ACT, 1949?
ANSWER:
If the disciplinary director is satisfied that a CAP is guilty of professional or other mis – conduct in
the nature given under Second Schedule, then he shall refer the matter before disciplinary
committee: (PART – 1 OF SECOND SCHEDULE DEALS WITH PROFESSIONAL MIS-CONDUCT FOR
CAP’S)
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CLAUSE – 1: PROHIBITION ON DISCLOSURE OF INFORMATION PERTAINING TO CLIENT:

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1. A CAP Shall be deemed to be guilty of professional mis – conduct if he discloses information
relating to client, acquired in the course of professional work, to any third party.
2. However, the above clause does not apply:
a. If the information is disclosed with the consent of client, to third party.
b. Such disclosure of information is required under law for the time being in force.
3. The duty of not to disclose such information continues even after completion of engagement.
ACADEMIC INTEREST:
4. CONSENT FROM WHOM:

a. In the case of a sole proprietary concern, the consent may be given by the proprietor or
his constituted attorney who is legally empowered to give such consent.
b. In the case of partnership firm, since in turn, every partner has the authority to bind the
firm by his acts, the consent may be given by any partner.
c. In the case of a company, by virtue of section 179 of the Companies Act, 2013, the Board
of Directors is empowered to do all that the company in a general meeting may do.
Hence, the consent may be sought from the Managing Director if the powers of the
Board of Directors are delegated to him comprehensively enough to include the power to
give such consent, but if the powers of the Board of Directors are not so delegated, the
consent should be obtained by means of resolution of the Board of Directors of the
Company.
5. Working Papers:
a. It is not mandatory for the auditor to provide the client or other auditors of the same
enterprise or its related enterprise such as a parent or a subsidiary, access to his audit
working papers. (SQC – 1 says: Working Papers are property of auditor)
b. The Principal auditors do not have right of access to the working papers of the branch
auditors.
c. the auditor may, at his discretion, make portions of or extracts from his working papers
available to the client.
Note: There is a difference between sharing of working papers and sharing of information. So
far as the information is concerned, he can provide the same to the client or to a Regulatory
body after obtaining the consent of the client.
6. Members Liability in unlawful acts of client:

a. A CAP is NOT DUTY BOUND TO DISCLOSE income tax authorities about taxation frauds
committed by his clients which came to know during the conduct of professional work.
b. Sec. 126 of Indian Evidence act - a barrister, attorney, pleader or Vakil is barred from
disclosing except with the express consent of his client:
i. any communication made to him in the course of and for the purpose of his
employment or
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ii. to state the contents or conditions of any document with which he has become
acquainted in such course.
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c. The proceedings before income tax authorities are judicial proceedings and the CAP who
represents on behalf of client be treated as attorney. Accordingly, Sec. 126 protection
applies to a CAP acting on behalf of client.
d. However, if a CAP discovers any fraud or crime committed after commencement of his
professional work then sec. 126 protection will not apply. He would be liable to disclose
to legal authorities. (Past frauds – can be hidden. New Frauds – Must be disclosed)
7. Suppression of facts in Past IT Returns:
a. Intentional Suppression – Discovered: The CAP can continue to support his client.
b. Unintentional Suppression – CAP may disclose such information to tax authorities.
c. Fraud relates to past accounts certified by such CAP –
i. The member shall advise the client to make a complete disclosure.
ii. If client refuses to disclose:
1. then member can withdraw from engagement and
2. inform concerned authorities that the past records examined and
reported upon are unreliable.
8. Suppression related to current period: Suppose if the suppression of fraud relates to current
period accounts, then member shall advise the client to make a full disclosure. If client refuses
then:
a. member shall withdraw from engagement or
b. should give a modified report.
9. Suppose the employment of member is dispensed before accounts are complete or reported
upon, the member has no further obligation regarding the same.
CLAUSE – 2: PROHIBITS A CAP TO CERTIFY ACCOUNTS NOT VERIFIED BY HIM:
1. A CAP is deemed to be guilty of professional mis – conduct if he certifies or reports on financial

statements which are not examined by him or by his partner/employee or another CAP.
[EXCEPTION: JOINT AUDIT]
2. The certification may be in his name or his firm’s name.
P.N. Vittal Dass, Addl. Collector of Customs, Mumbai vs. P.U. Patil: Where a Chartered Accountant
issued false certificates to several parties for past exports for monetary consideration without
verifying any supporting records or documents. On the strength of these false certificates, certain
unscrupulous importers were able to obtain import license, effect imports and clear these free of
duty, perpetuating a fraud on Government revenue and depriving the Government of its legitimate
revenue to the tune of several Crores of Rupees. On his statements to the Department he confessed
the above fact and disclosed that he had issued these certificates for monetary consideration and
without verification of supporting documents on record. Held that the respondent was guilty of
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professional misconduct within the meaning of clauses (2), (7) & (8) of Part I of the second schedule
of the Chartered Accountants Act, 1949 in terms of section 21 & 22 of the said Act.
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CLAUSE – 3: PROHIBITS A CAP TO USE HIS NAME ON REPORTS RELATED TO EARNINGS ESTIMATE:
1. A CAP shall be deemed to be guilty of professional mis – conduct if he allows or permits his
name or firm name on a report that deals with earning estimate which depends on contingent
future transactions.
2. However, as per the opinion of the council, a CAP is permitted to use his name on earnings
estimate documents provided he:
a. Indicates clearly about the sources of information.
b. The basis of Forecast and underlying assumptions made.
c. The fact that he did not vouch for the accuracy of forecast.
3. The Council has further opined that the same opinion would also apply to projections made on
the basis of hypothetical assumptions about future events and management actions which are
not necessarily expected to take place so long as the auditor does not vouch for the accuracy of
the projection.
The DGM (Inspection), Tamilnad Mercantile Bank Ltd. vs. R. B. K. Samuel: A Chartered Accountant
issued 97 Projection Statements for certain Individuals without verifying the basic documents and
on the basis of which the Bank had extended the loan amount. Afterwards, the Bank revealed that
persons for whom the Respondent had issued Financial Statements did not have any
business/source for repayment of loan. Held, guilty of professional misconduct falling within the
meaning of Clauses (3), (7) and (8) of Part I of the Second Schedule to the Chartered Accountants
Act, 1949.
CLAUSE – 4: PROHIBITS EXPRESSION OF OPINION ON F/S OF ENTITY WHERE CAP HAS

SUBSTANTIAL INTEREST:
1. A CAP is deemed to be guilty of professional mis – conduct if he expresses opinion on financial

statements of business or entities in which either he or his firm or his partner has a substantial
interest .
2. Further as per the guidelines of the council, a CAP is prohibited to express opinion on financial
statements of an entity if one or more of his relatives has a substantial interest.
3. The above rules equally apply for all types of attest functions by a CAP. The objective of these
rules is to protect independence of mind.
4. The Council has also decided that a Chartered Accountant should not by himself or in his firm
name:
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a. Accept the Auditor ship of a college, if he is working as a part-time lecturer in the college.
b. Accept the Auditor ship of a Trust where his partner is either an employee or a trustee of
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the Trust.
5. It is not permissible for a member to undertake the assignment of certification, wherein the
client is relative of the member. The "relative" for this purpose would refer to the definition
mentioned in Accounting Standard (AS)-18.
6. Members not to write Books of Account for auditee clients: The Council has clarified that the
members are not permitted to write the books of account of their auditee clients.
7. Statutory auditor not to be the Internal Auditor simultaneously: An Auditor appointed by an
entity under the Companies Act or any other statute shall not be the Internal Auditor of the
same entity.
8. Internal auditor not to be the Tax auditor simultaneously: An Internal Auditor of an assessee,
whether working with the organization or an independently practicing Chartered Accountant
irrespective of being an individual Chartered Accountant or a firm of Chartered Accountants
cannot be appointed as its Tax Auditor.
9. Internal Auditor not to be the GST Auditor simultaneously: The Internal Auditor of an entity
cannot undertake GST Audit of the same entity.
10. COOLING OFF PERIOD AFTER COMPLETION OF TENURE AS DIRECTOR: A member shall not
accept the assignment of audit of a Company for a period of TWO years from the date of
completion of his tenure as Director, or resignation as Director of the said Company.
11. Members to satisfy whether appointment is as per the statute: A member should satisfy
himself before accepting an appointment as an auditor of an entity that his appointment is in
accordance with the statute governing the entity. In case the entity is constituted under a trust
deed/instrument, the member should satisfy whether his appointment is valid according to the
instrument constituting the entity and rules and regulations made thereunder.
CLAUSE – 5: FAILURE TO DISCLOSE A MATERIAL FACT KNOWN TO A CAP – GUILTY:
1. A CAP Shall be deemed to be guilty of professional mis – conduct if he fails to disclose a material
fact known to him which is not disclosed in financial statements in accordance with AFRFW.
2. However, If the failure is on the part of a member who is in employment and that information is
not meant for any outside authorities then it shall not be treated as guilty.
ACAEMIC INTEREST:
3. Decisions of Councils / Courts:

a. Davar & Sons Ltd. vs M.S. Krishnaswamy (1952) – Where a Chartered Accountant failed
to report to the shareholders of a company about the non-creation of a sinking fund in
accordance with the Debenture Trust Deed and did not make clear that the amounts
shown as towards sinking fund were borrowed from the managing agents of the
company-Held, that the chartered accountant was duty bound to see that the nature and
subject matter of the charge over a security and the nature and mode of valuation of the
sinking fund investment were disclosed in the Balance Sheet in accordance with Form F
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and he was found guilty of misconduct.

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b. A. Doraiswami/ Naidu-vs. P.M. Raghavendra Rao (1965) – Where a Chartered
Accountant failed to examine how debts became bad and were written off-Held he was
guilty under Clause (5).
c. Kishori Lal Dutta vs-P.K. Mukherjee (1968) – Where a Chartered Accountant had not
disclosed the fact that a large amount of loan have been given out of the funds of an
Employees Provident Fund to the Employer Company in contravention of the Rules of the
Provident Fund and had failed to report on the default in clearing the cheques received
in re-payment of the loan. Held by the High Court that he was not guilty of any
nondisclosure to the individual subscribers of the Provident Fund because he owed no
duty to disclose to them and he was well within his rights to have disclosed the
irregularities to the trustees themselves and to the company which had appointed him.
Held by the Supreme Court on appeal that it was no defence for the chartered
accountant to say that he had disclosed the irregularities to the company as it was his
duty to have made a disclosure thereof to the beneficiaries of the Provident Fund in the
statement of accounts signed by him as the legal position of the auditor in the present
case was similar to that of the auditor appointed under the Companies Act. He was
therefore guilty of professional misconduct.
CLAUSE – 6: FAILS TO REPORT A MMS - GUILTY:
1. A CAP shall be deemed to be guilty of professional mis – conduct if he fails to report a MMS in
the financial statements known to him.
2. Decisions of courts:
a. A Company did not provide for depreciation as required by Section 205 and Section 350
of the Companies Act, 1956 (now Section 123 read with Schedule III of the Companies
Act, 2013) and although the Chartered Accountant was aware that the Company had
underprovided depreciation, he did not bring out this fact in his report- Held the
Chartered Accountant was guilty of professional misconduct under the clause. He had
failed to disclose a material fact known to him but disclosure of which was necessary to
make the financial statement not misleading.
b. Attorney General of Kenya-vs-V.B. Joshi (1968) – Where a Chartered Accountant
prepared a balance sheet of a firm and subsequently prepared statement regarding the
state of affairs of the firm without taking into account the balance sheet already
prepared by him showing a lesser amount by way of opening stock and a lesser amount
to the credit of the proprietor and subsequently when he was called upon by his client to
prepare a fresh balance sheet and profit and loss account for the same year so that it
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should tally with the statement of affairs prepared by him he did so without reference to
the actual account books but on instruction of the client, and as such it was a false and
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incorrect balance sheet. Held, he was guilty under Clauses (5) & (6).
CLAUSE – 7: GUILTY IF DOES NOT EXERCISE DUE DILIGENCE:
1. A CAP shall be deemed to be guilty of professional mis – conduct if he does not exercise due
diligence or grossly negligent, in conducting his professional work.
2. Karnataka High court judgment (1977) –
a. It is the duty of an auditor to perform the work with skill, care and caution which a
reasonably competent, careful, and cautious auditor would use. An auditor is not bound
to be a detective (i.e., need not work with suspicion or with a foregone conclusion that
there is something wrong). He is a watchdog but not a bloodhound.
b. If there exist any matter that gives suspicion then he should probe it to the bottom; but
in the absence of anything of that kind he is only bound to be reasonably cautious and
careful.
c. Professional misconduct is a term of fairly wide import but generally speaking, it implies
fairly serious cases of misconduct of gross negligence.
d. Negligence generally would not amount to gross negligence in the case of minor errors
and lapses, which do not constitute professional misconduct and which, therefore, don’t
require a reference to the Disciplinary Committee, the Council would nevertheless bring
the matter to the attention of its members so that greater care may be taken in the
future in avoiding errors and lapses of a similar type.
3. Court / Council / DC Decisions:
a. M.C. Poddar vs-P.S. Sodhbans – Where a Chartered Accountant failed to indicate the
mode of valuation of investments in shares as required by the Companies Act and also to
draw attention to the inclusion of uniforms in the depreciation account- Held that he was
guilty under Clause (7)
b. V.K. Madhava Rao (1956) – Where a Chartered Accountant certified the circulation of a
newspaper based on the statistic record but stated in his certificate that he had given it
after examination of the books of account WITHOUT VERIFYING that the books of
account and the statistical records agreed and also without taking into account the
return of copies unsold. Held that he was guilty of gross negligence.
c. Controller of Insurance vs H. C. Das (1957) – Where a certificate issued by a Chartered
Accountant under Regulations 7(c) & 7(d) (i) of Part I (d) the First Schedule to the
Insurance Act, 1938 was not correct, as the company had granted loans on policies which
had already lapsed for non-payment of premium and also the claims in respect of two
policies which had matured were not included in estimated liability in respect of
outstanding claims shown in the Balance Sheet- Held he was guilty under Clauses (7) &
(8).
d. The Fairdeal Corporation Ltd. Bombay vs K. Gopalakrishna (1957) – Where a Chartered
Accountant, appointed as auditor of the Madras branch of a limited company in Bombay
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was charged with failure to report to the Bombay office that some entries in the bank
pass book had not been passed through the cash book of the branch. Held he was guilty
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of gross negligence. The High Court observed that a small fee paid to the respondent
should not come in the way of his doing duty without fear or favour, although it involved
unpleasant consequence namely, he might not be appointed again.
e. Sunder Lal Fatehpuria (1958) – A certificate issued by a Chartered Accountant to a
proprietor of a firm in respect of the turnover of betel nuts to enable the firm, which was
not dealing in betel nuts, to obtain import license without checking the books and
documents himself, but relying on his articled clerk for its correctness. Held he was guilty
of gross negligence.
f. Company Law Administration-vs-D.B. Kulkarni (1960) – Where a Chartered Accountant
failed in his duty to check the bank balances with the pass books of the banks and failed
to obtain certificates of balances from the bankers in respect of those balances. The
Council found him guilty of misconduct under Clauses (7) & (8) of Part I of the Second
Schedule. Held there being no proof of dishonesty or volume malafide on the part of the
Chartered Accountant and in view of the circumstances of the case, the High Court took
no more serious view of the matter than to express disapprobation of the conduct of the
Chartered Accountant in the form of admonition.
g. Superintendent of Police Madras vs M. Rajamany (1961) – In the course of some
investigation of the affairs of a bank on liquidation, it was found that the authorities of
the bank failed to disclose the total indebtedness of the directors in the balance sheet
and to report on the numerous alterations and fictitious entries in the books of accounts
of the bank. Held that no auditor could escape from personal liability by taking shelter
under the misconduct of his own employees. There was nothing to indicate the status,
qualifications or capacity of the assistants. Under the circumstances, the conduct of the
Chartered Accountant in abdicating his functions to his subordinates amounted to gross
negligence.
h. D. C. Sopariwala (1968) – Where a Chartered Accountant had placed implicit reliance on
his paid assistant who took absolutely no step whatsoever to check the cash balances
facilitating and resulting, in serious defalcations. Held he was guilty under Clauses (5), (7)
(8) and (9).
i. The Chief Controller of Exports vs-G.P. Acharya (1962) – Where a certificate issued by a
Chartered Accountant to the Joint Chief Controller of Imports & Exports, Calcutta stating
that a firm had exported a certain quantity of onions during a certain period contained
false and inaccurate particulars in respect of three items of invoice value the particulars
themselves related to exports not by this firm but by two other firms. Held he was guilty
of the charge of gross negligence.
j. Hitkarini Mahavidyalaya, Jabalpur vs P.C, Madan (1963) – Where a Chartered
Accountant signed the accounts of an institution subject to separate notes. Held he was
guilty of gross negligence. In the view of the High Court, the essential part was the
separate notes. Any one going through his report would at least assume that those notes
when prepared and were ready at the time when the report was signed by him. It could
not be supposed that those notes were not in existence at that time and were written at
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some later date on some facts, which were still to be verified or ascertained. His act,
though not suffering from bad or vicious intention, was still an act of gross negligence.
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k. Director of Accounts, Gujarat State, Ahmedabad vs K.D. Patel (1968) – Where a
chartered accountant gave clean reports on the balance sheets whereas the reports on
the special audit conducted subsequently revealed certain irregularities which amounted
to failure to examine the pass book and to verify the cash balance. Held he was guilty
under Clause (7).
l. Qaroon Trading & Finance Pvt. Ltd.- vs Luxmi Narain Saxena and Jitendera Mohan
Chadha (1969) - Where a Chartered Accountant had not completed his work relating to
the audit of the accounts of a company and had not submitted his audit report in due
time to enable the company to comply with the statutory requirement in this regard.
Held, he was guilty of professional misconduct under Clause (7).
m. B.L. Shoulder vs-M.K. Deb (1976) – In his audit report of a school, the auditor failed to
point out wrong and misleading entries and a sum of Rs. 7,000/- on account of reserve
fund did not find a place at all in the original statement sent to the school. The correction
slip alleged to be sent by the Chartered Accountant was never received by the school.
The Chartered Accountant had not proved that the correction slip was sent to the school.
Held the Chartered Accountant was guilty of gross negligence in the conduct of
professional duties and his conduct was quite unbecoming of a professional person
entrusted with responsibility of dealing with the accounts.
n. B. Shantharam Rao (1977) – A Chartered Accountant adopted arbitrary valuation of
closing stock and no verification at all was done by him. Further he accepted the
capitalization of a large sum of expenditure which was in the nature of revenue. He had
merely adopted an ad-hoc basis in deciding upon capitalization of expenditure and failed
to apply his mind and bring to bear on the subject the due diligence and care expected of
a member of the profession. Held, the Chartered Accountant was guilty of gross
negligence in the performance of his duties.
o. Registrar of Newspapers for India vs P.K. Mukherji (1971) – Where a Chartered
Accountant issued two different certificates of circulation of a daily for one and the same
period showing different figures in respect of the number of copies printed and
circulated. Held, he was guilty under Clauses (7) and (8).
p. Air Commodore Dilbagh Singh vs C.G. Apte (1976) – A Chartered Accountant had failed
to detect a fraud committed by the accountant of a canteen which could have been
detected if he had checked the castings of the cash books and also checked the ‘contra’
entries of the bank and cash columns of the cash books. Held, he was guilty of
professional misconduct under Clauses (7), (8) and (9).
q. Audit Bureau of Circulations Ltd., vs A.D. Shinde (1968) – Where a Chartered
Accountant failed to make a reference in the “Income Certificates” prescribed by the ABC
to the report which he had separately submitted to the newspaper concerned which did
represent the correct state of affairs in all respects but which was not sent by the
newspaper to the Bureau. Held, he was guilty under Clauses (7) and (9).
r. Shri J.K.Teotia vs. CA. Gaurav Arora (2014) - The Committee noted that the audited
accounts of the Company for the year ended 2004-05 and 2005-06 show an amount of
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Rs.53.44 lakhs as prior period adjustment from Shri Sushil Gupta. The said amount is
mentioned as an item of prior period adjustment amounts to Rs.53.44 lacs which
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constitutes 58.02% of the total unsecured funds and 55.03% of the total liabilities of the
Company for the said year which itself speaks of its materiality with respect to the
Financial Statement in question. The Respondent being the statutory auditor of the
Company for the said year was statutorily required to determine 503 and consider the
materiality of the said item for the purpose of audit and reporting. Where a Chartered
Accountant being the auditor has not only failed to exercise due diligence and also failed
to gather sufficient information to warrant an expression of opinion and also failed to
invite attention to any material departure from the generally accepted procedure of
audit applicable to the circumstances. Thus in conclusion, in the opinion of the
Committee, the Respondent is held guilty of professional misconduct falling within the
meaning of Clauses (7), (8) and (9) of Part I of the Second Schedule to the Chartered
CLAUSE – 8: CAP SHALL OBTAIN SUFFICIENT AND APPROPRIATE EVIDENCE:
1. A CAP shall be deemed to be guilty of professional mis – conduct fails to obtain sufficient and
appropriate evidence which is necessary for expression of opinion.
2. However, if he is unable to obtain sufficient and appropriate evidence, he shall deny expression
of opinion. (i.e., Disclaimer of opinion)
3. This clause covers both expression of opinion and certification of facts.
4. If a member fails with this clause it may be further treated as gross negligence.
5. Court/Council Decisions:
a. T.S. Vaidyanatha lyer (1977) - A Chartered Accountant without examination of stock
register and other relevant matters issued a wrong consumption certificate on the basis
of which licence of higher value, for which the unit was not entitled, was issued by
Controller of Imports & Exports. The examination done by the Chartered Accountant was
so restricted that he could not have obtained the information necessary to warrant the
expression of an opinion regarding consumption of raw material and components. Held
the chartered accountant was guilty of professional misconduct under Clause (8).
b. J.C. Chandhok (1964) – Where a Chartered Accountant relying on the work of the
internal auditor of a company qualified his report that the books of account and the
supporting vouchers had been examined by the internal auditor of the company, the
Council taking the view that the qualification amounted to an exception sufficiently
material to negate the expression of an opinion, found him guilty, of misconduct under
the latter part of Clause (8). As a general rule, a statutory auditor would be guilty under
this clause, if he performed his work so recklessly as to give his report without looking
into the books of account of a company, on the basis of the work of the internal auditor
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whose opinion turned out to be false.

c. Registrar of Newspapers for India vs K. Rajinder Singh (1971) – Where a Chartered
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Accountant issued a certificate of circulation of a periodical without going into the most
elementary details of how the circulation of a periodical was being maintained i.e. by not
looking into the financial records, bank statements or bank pass books, by not examining
evidence of actual payment of printers bills and by not caring to ascertain how many
copies were sold and paid for. Held he was guilty under Clause (8).
d. Shri Mukesh M. Kelawala vs. CA. Sukhdev Manilal Soni (2013) – The Committee noted
that since the transaction of land took place between the Shivdarshan Firm i.e., a
partnership firm and Siddheshwari Developers, the same should have been reflected in
the books of Shivdarshan Firm and not in the books of Shivdarshan Construction which
was a proprietary concern. The Respondent being the auditor of Shivdarshan
Construction failed to report the said discrepancy in his audit report. Since, the amount
of loan was material and the Respondent failed to submit any evidence based on which
he had chosen not to qualify the appearance of housing loan from Navsarjan Industrial
Co. Op. Bank Ltd in the financial statements, hence, the Committee is of the view that
the Respondent is guilty of professional misconduct falling within the meaning of Clauses
(6), (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
CLAUSE – 9: CAP SHALL FOLLOW AUDIT - GAAP:
1. A CAP shall be deemed to be guilty of professional mis – conduct if he fails to comply with
generally accepted audit procedures while performing professional works.
2. However, if he is unable to comply with GAAP and mentions the same in his report, then this
clause shall not apply.
3. The failure to perform a statutory duty in the manner required is not excused merely by giving a
qualification or reservation in auditor’s report. (i.e., expression of modified opinion is not a
substitute for avoiding a particular duty required under law.)
4. Audit of Listed Companies: Pursuant to SEBI Notification, Statutory Audit of Listed Companies
under the Companies Act, 2013 shall be done by only those auditors who have subjected
themselves to the Peer Review process of the Institute, and hold a valid certificate issued by the
Peer Review Board of the ICAI.
5. FRN and Membership No.: The members are required to mention the Membership number and
Firm registration number to all reports issued pursuant to any attestation engagements,
including certificates, issued by them as proprietor of/ partner in the said firm.
6. Unique Document Identification Number (UDIN): The members may note that UDIN is
mandatory from 1st July, 2019 on all Corporate/ Non- Corporate Audit, Attest and Assurance
Functions. Thus, a member of the Institute in practice shall generate Unique Document
Identification Number (UDIN) for all kinds of the certification, GST and Tax Audit Reports and
other Audit, Assurance and Attestation functions undertaken/signed by him.
7. Certifying figures of circulation of Newspapers etc. : Very often members are required to certify
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the figures of circulation of newspapers, magazines etc. by their clients on behalf of the Audit
Bureau of Circulations Ltd. Members are normally supplied by the ABC with the Rules and
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Regulations under which the certification of circulation is to be carried out. Members are also
asked to give their acceptance in writing that they will observe the rules of procedure envisaged
to report upon any lapse of such special requirements, even of an insignificant nature.
8. Verification on behalf of Banks: Similarly, in the case of verification on behalf of banks, the rules
or procedure for conducting such audit are different from the normal rules applicable to audits
under the Companies Act. Members are required to be very familiar with the special procedure
required in these matters and act accordingly.
9. Decisions of court/council:
a. M.R. Ramanathan vs A. Utnatlath Rao (1968) – Where a Chartered Accountant did not
conduct sample checking of the bank accounts in relation to the accounts of the
company and did not carry out vouching with respect to the transactions reflected in the
accounts of the company and depended upon his assistant who was a Chartered
Accountant and experienced clerk who were entrusted with the auditing work. Held he
was guilty under Clauses (7), (8) and (9).
b. Punjab State Govt. vs K.N. Chandla (1972) – Where a Chartered Accountant failed to
verify the actual disbursement of the amount by examining the various items of
purchases and insisting for the bills to be produced in respect of the various items before
issuing his certificate as mere payment would not constitute utilization of the amount for
the purpose for which it was meant. Held he was guilty under Clauses (7), (8) and (9).
c. Air Commodore Dilbagh Singh vs E.S. Venkataraman (1976) – A Chartered Accountant
had checked the cash book totals but not the bank column totals, had verified all the
transactions in the bank columns but not the contra-entries, had taken the casting only
of personal ledger and that too not of all accounts, had resorted to test check when
there was no system of internal check, had not seen the pay-in-slips, had not checked the
bank reconciliation statements for all the months. Held he was guilty of professional
misconduct under Clauses (7), (8) and (9).
d. Tamilnadu Mercantile Bank Ltd.vs.CA. V.U. Gangolli (2012) – Where a Chartered
Accountant as a concurrent auditor of the Bank carried out his duties recklessly, did not
exercise due diligence, failed to obtain sufficient information and failed to invite
attention to the material departure from the accounting policies. Accordingly, the
Committee is of the considered view that the Respondent is guilty of professional
misconduct falling within the 10 meaning of Clauses (7), (8) and (9) of [Part I of Second
Schedule to the Chartered Accountants Act.
CLAUSE – 10: CAP MUST KEEP CLIENTS MONEY IN A SEPARATE BANK ACCOUNT:
1. Any amount received from client must be kept in a separate bank account and shall be utilized
only for the purposes mentioned by the client.
2. However, this clause does not apply for the following receipts:
a. An advance received by a Chartered Accountant against services to be rendered does not
fall under Clause (10) of Part I of the Second Schedule.
b. Moneys received for expenses to be incurred, for example, payment of prescribed
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statutory fees, purchase of stamp paper etc., which are intended to be spent within a
reasonably short time NEED NOT be put in a separate bank account.
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c. Moneys received by a Chartered Accountant, in his capacity as trustee, executor
liquidator, etc. must be put in a separate bank account immediately.
3. For example: N.S. Chenoy v.s. K.V. Subba Rao: Commonly many CA’s are mentioning their bank
account details for getting IT Refund of the client. This is treated as guilty of professional mis –
conduct.
Q.NO.19 WRITE ABOUT ACTS OR OMISSIONS IN NATURE OF “PROFESSIONAL” MIS-CONDUCT AS

DEFINED IN PART – II OF SECOND SCHEDULE TO CA ACT, 1949?
ANSWER:
A member who may be in practice or otherwise, shall be deemed to be professional mis – conduct
in the following cases:
CLAUSE – 1: MEMBERS TO COMPLY WITH CA ACT, REGULATIONS AND GUIDELINES:
1. A member is deemed to be guilty of professional mis – conduct if he fails to comply with CA Act
or any regulations made thereunder.
2. Common violations of regulations, came to the notice of the council:
a. Regulation 43 – Engagement of Articled Assistant.
b. Regulation 46 – Registration of Articled Assistant.
c. Regulation 47 – Premium from Articled Assistant.
d. Regulation 48 – Stipend to Articled Assistant.
e. Regulation 56 – Termination or assignment of Articles.
f. Regulation 65 – Articled Assistant not to engage in any other occupation.
g. Regulation 67 – Complaint against the employer (from Articled Assistant).
h. Regulation 68 to 80 – Audit Assistant.
i. Regulation 190 – Register of offices and firms
j. Regulation 190A – Chartered Accountants not to engage in any other business or
occupation.
k. Regulation 191 – Part time employment's a Chartered Accountant may accept.
l. Regulation 192 – Restriction on fees
3. Council/Court decisions:
a. J.K. Ghosh in (1953) – A Chartered Accountant certified in Form K-2 that an audit clerk
was in service with him while he was also, employed elsewhere with another employer
between 11 A.M. and 5 P.M. and attended the office of the Chartered Accountant
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thereafter until 8 P.M. The Chartered Accountant suspended the audit clerk when the
Institute brought this fact to the notice of the Chartered Accountant. Held he was guilty
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of misconduct for making a misstatement to the institute in regard to the discharge of his
professional duties.
b. A.K. Basu v.s. P.K. Mukherjee (1956) – Where a Chartered Accountant agreed to take a
person as an articled clerk in a vacancy shortly to arise and received the premium for the
purpose and made him believe, when he executed the deed of articles that he was taking
him in that vacancy, while, in fact, that vacancy had been filled up by the Chartered
Accountant earlier by taking another audit clerk. The audit clerk came to know from the
Institute that the deed of articles was not registered as that was forwarded with a
request for entertaining an extra articled clerk. Held that the Chartered Accountant was
guilty of serious misconduct for having contravened Regulation 58.
c. Mohan Sehwani vs. Sunderlal Fatehpuria (1968) – Where a Chartered Accountant after
signing the Articles of Agreement, failed to forward the articles for registration as
required by Regulation 64 and the statement of particulars in the prescribed form as
required by Regulation 64 in spite of repeated enquiries from the articled clerk and even
failed to take notice of communications addressed to him in that behalf and having two
other articled clerks along with the present one who articles were not sent for
registration took up a fourth articled clerk without being entitled to do so. Held he was
guilty for breach of Regulation 46.
d. N.K. Ray Chowdhery in (1973) – A Chartered Accountant was found guilty of professional
misconduct in terms of Clause (1) of Part II of the Second Schedule to the Act for
contravention of Section 6 of the Act for having issued a certificate in respect of a
consumption statement of a concern as a Chartered Accountant in practice on a date
when he had NOT EVEN applied for a certificate of practice to the Institute.
e. B. M. Lala (1976) – A Chartered Accountant issued a confidential and private circular to
clients where, in addition to, describing himself as “Chartered Accountant” he also
described himself as “Investment Consultant Public Accountant”. By this circular he
introduced himself to the public and private limited companies, which were accepting,
fixed deposits and loans through him. Held he was guilty of professional misconduct
under Clause (1) of Part II of the Second Schedule.
f. M.K. Tripathi (1979) – A Chartered Accountant took loan from a firm in which the
articled clerk and his father were both Interested, against the provisions of the Chartered
Accountants Regulations, 1988 which prohibit ‘taking of loan or deposit etc. from the
articled clerk. Held the Chartered Accountant was guilty of professional misconduct
under the clause.
g. Radhey Mohan (1979) – A Chartered Accountant did not pay stipend to his articled clerk,
in accordance with Regulation 48 of the Chartered Accountants Regulations 1988, while
to another articled clerk, he was paying every month. The stipend was paid only after the
articled clerk left him after working for a months and complaint was lodged with the
Institute. The plea of the Chartered Accountant that he had an agreement with the
articled clerk to pay stipend on annual basis was found to be misconceived as the same
should be against the provisions of Regulation 48.
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h. R.C. Gupta (1980) – Three articled clerks of a Chartered Accountant informed Institute
that the Chartered Accountant had failed to make the payments of stipend to them every
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month in accordance with Regulation 48. Held the Chartered Accountant was guilty of
professional misconduct under the clause as he contravened Regulation 48 by not
making the payment every month. The court rejected two contentions put forward by
the Chartered Accountant, viz, (i) that the declaration filed by the articled clerks could
not be regarded as ‘information’ in order to justify the commencement of disciplinary
proceedings (2) that under Regulation 48 the payments had to be made at a monthly rate
and not that the payments had to be made every month. The third contention that the
payments could not be made every month or regularly because of financial stringency
was also rejected particularly in view of the fact that the Chartered Accountant during
the relevant period had purchased a plot of land and constructed a house at the cost of
more than 1 lakh of rupees and he had in his employment throughout the relevant
period a Chartered Accountant at a salary of Rs.500 Per Month.
i. Virender kumar v.s. K.B. Madhan (1980) – The chartered accountant received Rs.2000/-
by way of security from the compliant father as a consideration of taking him in to
articled clerk. Held that he was guilty under the provisions.
j. U.V. Benadikar vs. N.G. Kulkarni (2004) – A Chartered Accountant did not pay stipend to
the articled clerk in accordance with Regulation 32B of the Chartered Accountants
Regulations, 1964 for the period during which the Article Clerk worked with him. Also the
Article Clerk was asked to work in excess of the prescribed working hours in violation
of Regulation 45 of the Chartered Accountants Regulations, 1964. Held that he was guilty
of professional misconduct under Clause (1) of Part II of Second Schedule to the
CLAUSE – 2: PROHIBITION TO DISCLOSE INFORMATION RELATED TO EMPLOYER:
1. A member is deemed to be guilty of professional mis – conduct if he disclosed any confidential

information relating to his employer company, firm or any other person.
2. However, this clause does not apply if consent of employer is obtained for such disclosure.
CLAUSE – 3: PROVIDING MIS – LEADING INFORMATION TO THE INSTITUTE:
A member shall be deemed to be guilty of professional mis – conduct if he furnishes any returns,
reports, statements or forms which contain any false information knowingly to the institute, council
or any of its committees, BOD, Director Discipline, Disciplinary committee, Quality review board,
appellate authority.
CASELAWS:
1. J.R. Chatrath, (1952): If a Chartered Accountant includes in any information, statement, return
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or form to be submitted to the Institute Council etc. any particular knowing it to be false, he will
be held guilty of misconduct. Where a Chartered Accountant who was employed as a manager
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of a firm of Registered Accountants, applied for admission as Fellow of the Institute stating that
he was a partner, while he was not. Held that the Chartered Accountant was guilty of
misconduct as he had made the statement that he was a partner knowing it to be false.
2. K.S. Dugar, (1987): A Member had during the course of the hearing before Disciplinary
Committee given a wrong statement duly verified and also a statement on oath knowing it to be
false. He was found guilty in terms of this clause.
A. Umanath Rao, (1965): In spite of repeated reminders a Chartered Accountant failed to
reply to the letters of the Institute asking him to confirm the date of leaving the services
by the Paid Assistant. Held, the Chartered Accountant was guilty of professional
misconduct under the Clause.
3. N.K. Gupta, (1998): A Chartered Accountant had been in full-time employment in a Company
besides holding Certificate of Practice without obtaining Institute’s permission and in the bank
empanelment form, he had given declaration to the effect that he was not devoting any time to
any occupation / vocation / business etc. other than the profession of Chartered Accountants.
He was held guilty for violation of Clause (11) of Part I and Clause (1) of Part III of the First
Schedule. The Council ordered that his name be removed from the Register of Members for a
period of six months.
4. H.K. Gupta, (1999): A Chartered Accountant, in spite of his being in employment as Manager
(F&A) with a Company from 9 A.M. to 2 P.M. and devoting 30 hours per week in the said
employment, had shown his main occupation to be in full-time practice, in the Employment
Form for bank branch audits. He was held guilty for violation of Clause (1) of Part III of the First
Schedule for not giving the full particulars truthfully in his application.
CLAUSE – 4: DEFALCATION OF MONEY RECEIVED:
A member shall be deemed to be guilty of professional mis – conduct, if he defalcates or embezzles

any money received in professional capacity. This act amounts to fraud.
Q.NO.20 WRITE ABOUT ACTS OR OMISSIONS IN NATURE OF “OTHER” MIS-CONDUCT AS DEFINED

IN PART – III OF SECOND SCHEDULE TO CA ACT, 1949?
ANSWER:
A member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he is held guilty by any civil or criminal court for an offence which is punishable with
imprisonment for a term EXCEEDING 6 MONTHS.
Imprisonment awarded for a term exceeding six months in any civil/criminal matter treated as a
major offence under ‘other misconduct’ is included in this Schedule.
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Q.NO.21 WRITE ABOUT COUNCIL GUIDELINES, 2008?
ANSWER: The council guidelines contain various chapters. Few relevant chapters are being
discussed here under:
CHAPTER – I: These guidelines shall be applicable to ALL the Members of the Institute whether in
practice or not wherever the context so requires.
CHAPTER – II: A member of the Institute who is an employee shall exercise due diligence and shall
not be grossly negligent in the conduct of his duties.
CHAPTER – III: PROHIBITION ON ACCEPTANCE AS COST AUDITOR:
This Chapter is Omitted in November 2020 Edition. From May 2021 Exams Onwards it is not
applicable.
CHAPTER – IV: OPINION ON FINANCIAL STATEMENTS WHEN THERE IS SUBSTANTIAL INTEREST
This Chapter is Omitted in November 2020 Edition. From May 2021 Exams Onwards it is not
applicable.
CHAPTER – V: MAINTENANCE OF BOOKS OF ACCOUNTS BY CAP:
1. A member of the Institute in practice or the firm of Chartered Accountants, shall maintain and
keep in respect of his / its professional practice, proper books of account including the following-
a. A cashbook.
b. A ledger.
2. These books of accounts have to be maintained irrespective of the fact that the member
turnover is less than the limits specified u/s 44AA of income tax act, 1961.
CHAPTER – VI: LIMIT OF NUMBER OF TAX AUDIT ASSIGNMENTS:
1. A member of the Institute in practice shall not accept, in a financial year, more than the “60 tax
audits” under Section 44AB of the Income-tax Act, 1961.
2. In case of partnership firm / LLP, the above number is counted for “per partner in practice”.
3. Even if a member is a partner in multiple firms, the limit of 60, shall be counted per member
irrespective of his partnership in multiple firms.
4. Exclusion from the limit: Audit conducted u/s. 44AD, 44ADA and 44AE.
5. Further it is clarified that a firm having multiple partners, the audit signatures may be distributed
between all of them as per the choice of the firm. Also, a single partner may sign on behalf of all
other partners provided remaining partners are not signing. (Ref: Tax audit committee)
6. A Chartered Accountant being a part time practicing partner of a firm shall not be considered
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while calculating total limit for the firm.

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7. A Chartered Accountant in practice shall maintain a record of the tax audit assignments
accepted by him IN EACH ASSESSMENT YEAR in the format as may be prescribed by the Council.
8. The audit of one or more branches of the same concern by one Chartered Accountant in practice
shall be construed as ONLY ONE TAX AUDIT ASSIGNMENT.
9. The limit on number of tax audit assignments per partner in a CA Firm may be distributed
between the partners in any manner whatsoever.
Refer Q No. 35 in Illustrations.
CHAPTER – VII: NON-PAYMENT OF UNDISPUTED AUDIT FEES:
1. A CAP shall not accept the appointment as auditor of an entity in case the undisputed audit fee
of another Chartered Accountant for carrying out the statutory audit under the Companies Act,
2013 or various other statutes has not been paid.
2. However, this prohibition shall not apply in case appointment is w.r.t sick units.
Explanation 1: For this purpose, the provision for audit fee in accounts signed by both - the auditee
and the auditor along with other expenses, if any, incurred by the auditor in connection with the
audit, shall be considered as “undisputed audit fees”.
Explanation 2: For this purpose, “sick unit” shall mean a unit registered for not less than 5 years,
which has at the end of any financial year accumulated losses equal to or exceeding its entire net
worth.
CHAPTER – VIII: PROHIBITION ON AUDIT ASSIGNMENTS UNDER COMPANIES ACT 2013:
A member of the Institute in practice shall not hold at any time appointment of more than the
“specified Number of audit assignments” of Companies under Section 139 of the Companies Act,
2013. [Similar to Ceiling Limit Concept u/s 141(3)(g) of Companies Act, 2013]
EXPLANATIONS AND CLATIFICATIONS:

1. SPECIFIED NUMBER OF AUDIT ASSIGNMENTS: For the above purpose, the “specified number of
audit assignments” means –
a. PROPRIETOR: In the case of a Chartered Accountant in practice or a proprietary firm
of Chartered Accountant, 30 audit assignments whether in respect of private
Companies or other Companies, with the exception of one person Companies and
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dormant companies [W.E.F. FEB 2020].

b. PARTNERSHIP: In the case of Chartered Accountants in practice, 30 audit
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assignments per partner in the firm, whether in respect of private Companies or

other Companies, with the exception of One person Companies and dormant
companies [W.E.F. FEB 2020].
2. The number of partners of a firm on the date of acceptance of audit assignment shall be taken
into account.
3. All other rules prescribed under Chapter – VI shall equally apply here.
CHAPTER – IX: PROHIBITION IF OTHER FEES EXCEEDS STATUTORY AUDIT FEES:
1. In case of public sector undertakings, government companies, listed companies and other public
companies having turnover Rs. 50 crore or more – The audit of these companies shall not be
accepted by a CAP if the audit fees is less than the aggregate fees received for other services
rendered to the same company.
2. The above restrictions shall apply in respect of fees for other works or services or assignments
payable to the statutory auditors and their associate concerns put together. (i.e., the limits for
computation of aggregate fee for other services shall be computed by taking into account the
other fee payable to statutory auditor and his associate concerns together.)
3. The term “other works” or “services” or “assignments” shall include Management Consultancy
and all other professional services permitted by the Council pursuant to Section 2(2)(iv) of the
Chartered Accountants Act, 1949 but SHALL NOT INCLUDE:
a. Audit under any other statute. (E.g., Tax audit and GST audit)
b. Certification work required to be done by the statutory auditors.
c. Any representation before an authority.
CHAPTER – X: INDEBTED MORE THAN RS.1,00,000/-:
1. A CAP or a partner of a firm in practice or a firm or a relative of such member or partner shall
not accept appointment as auditor of a concern while indebted to the concern or given any
guarantee or provided any security in connection with the indebtedness of any third person to
the concern:
a. For limits fixed in the statute and (E.g., company under companies act)
b. In other cases, for amount exceeding Rs. 1,00,000/-
2. However, this restriction does not apply if the CAP received fees on progressive basis.

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CHAPTER XI: DIRECTIONS IN CASE OF UNJUSTIFIED REMOVAL OF AUDITORS:
A member of the Institute in practice shall follow the direction given, by the Council or an
appropriate Committee or on behalf of any of them, to him being the incoming auditor(s) not to
accept the appointment as auditor(s), in the case of unjustified removal of the earlier auditor(s).
CHAPTER XIII – GUIDELINES ON TENDERS:
1. A member of the Institute in practice shall not respond to any tender issued by an organization
or user of professional services in areas of services which are exclusively reserved for chartered
accountants, such as audit and attestation services.
2. However, such restriction shall not be applicable:
a. Where minimum fee of the assignment is prescribed in the tender document itself or
b. Where the areas are open to other professionals along with the Chartered Accountants.
CHAPTER XIV – UNIQUE DOCUMENT IDENTIFICATION NUMBER (UDIN) GUIDELINES
Whereas, to curb the malpractice of false certification/attestation by the unauthorized persons & to
eradicate the practice of bogus certificates and to save various regulators, banks, stakeholders etc.
from being misled, the Council of the Institute decided to implement an innovative concept to
generate Unique Document Identification Number (UDIN) mandatorily for all kinds of the
certificates/GST and Tax Audit Reports and other attest function in phased manner.
A member of the Institute in practice shall generate Unique Document Identification Number (UDIN)
for all kinds of the certification, GST and Tax Audit Reports and other Audit, Assurance and
Attestation functions undertaken/signed by him which made mandatory from the following dates
through announcements published on the website of the ICAI www.icai.org at the relevant time: -
1. For all Certificates w.e.f. 1st February, 2019.

2. For all GST and Tax Audit Reports w.e.f. 1st April, 2019.
3. For all other Audit, Assurance and Attestation functions w.e.f. 1st July, 2019.
CHAPTER XV – GUIDELINES FOR NETWORKING: [NEWLY ADDED]
A. CONCEPT:
To enhance their ability to provide professional services, firms frequently form larger structures with
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other firms and entities. Whether these larger structures create a network depends on the
particular facts and circumstances and does not depend on whether the firms and entities are
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legally separate and distinct.
B. EXAMPLES:
1. ONLY REFERRAL WORKS – NOT A NETWORK: A larger structure may be aimed only at
facilitating the referral of work, which in itself does not meet the criteria necessary to
constitute a network.
2. SHARE COMMON BRAND NAME / QC / RESOURCES – NETWORK: a larger structure might
be such that it is aimed at co-operation and the firms share a common brand name, a
common system of quality control, or significant professional resources and consequently is
deemed to be a network.
3. PROFESSIONAL JUDGMENT: The judgment as to whether the larger structure is a network
shall be made in light of whether a reasonable and informed third party would be likely to
conclude, weighing all the specific facts and circumstances, that the entities are associated in
such a way that a network exists. This judgment shall be applied consistently throughout the
network.
4. PROFIT OR COST SHARING – NETWORK: Where the larger structure is aimed at co-operation
and it is clearly aimed at profit or cost sharing among the entities within the structure, it is
deemed to be a network. However, the sharing of immaterial costs does not in itself create a
network.
5. COST SHARING ONLY FOR WORK METHODS – NOT A NETWORK: In addition, if the sharing
of costs is limited only to those costs related to the development of audit methodologies,
manuals, or training courses, this would not in itself create a network.
6. JOINT DEVELOPMENT OF PRODUCT – NOT A NETWORK: Further, an association between a
firm and an otherwise unrelated entity to jointly provide a service or develop a product does
not in itself create a network.
7. COMMON CONTROL AND MANAGEMENT – NETWORK: Where the larger structure is aimed
at cooperation and the entities within the structure share common ownership, control or
management, it is deemed to be a network. This could be achieved by contract or other
means.
8. COMMON QCP – NETWORK: Where the larger structure is aimed at co-operation and the
entities within the structure share common quality control policies and procedures, it is
deemed to be a network. For this purpose, common quality control policies and procedures
are those designed, implemented and monitored across the larger structure.
9. COMMON BUSINESS STRATEGY – NETWORK: Where the larger structure is aimed at co-
operation and the entities within the structure share a common business strategy, it is
deemed to be a network. Sharing a common business strategy involves an agreement by the
entities to achieve common strategic objectives.
10. JOINT WORKS – NOT A NETWORK: An entity is not deemed to be a network firm merely
because it co- operates with another entity solely to respond jointly to a request for a
proposal for the provision.
11. COMMON BRAND NAME - NETWORK: Where the larger structure is aimed at co-operation
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and the entities within the structure share the use of a common brand name, it is deemed to
be a network. A common brand name includes common initials or a common name. A firm is
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deemed to be using a common brand name if it includes, for example, the common brand
name as part of, or along with, its firm name, when a partner of the firm signs an audit
report.
PRECAUTION: Even though a firm does not belong to a network and does not use a common
brand name as part of its firm name, it may give the appearance that it belongs to a network
if it makes reference in its stationery or promotional materials to being a member of an
association of firms. Accordingly, if care is not taken in how a firm describes such
memberships, a perception may be created that the firm belongs to a network.
12. SHARING SIGNIFICANT PROFESSIONAL RESOURCES - NETWORK: Where the larger structure
is aimed at co-operation and the entities within the structure share a significant part of
professional resources, it is deemed to be a network. Professional resources include:
a. Common systems that enable firms to exchange information such as client data,
billing and time records;
b. Partners and staff;
c. Technical departments that consult on technical or industry specific issues,
transactions or events for assurance engagements;
d. Audit methodology or audit manuals; and
e. Training courses and facilities.
MEANING OF SIGNIFICANT SHARING OF RESOURCES:

➢ FACTS AND CIRCUMSTANCES: The determination of whether the professional resources
shared are significant, and therefore the firms are network firms, shall be made based on
the relevant facts and circumstances.
➢ COMMON AUDIT METHODOLOGY ONLY – NOT SIGNIFICANT: Where the shared
resources are limited to common audit methodology or audit manuals, with no exchange
of personnel or client or market information, it is unlikely that the shared resources
would be significant.
➢ COMMON TRAINING ONLY – NOT SIGNIFICANT: The same applies to a common training
endeavour.
➢ EXCHANGE OF PEOPLE – PERCEIVED AS SIGNIFICANT: Where, however, the shared
resources involve the exchange of people or information, such as where staff are drawn
from a shared pool, or a common technical department is created within the larger
structure to provide participating firms with technical advice that the firms are required
to follow, a reasonable and informed third party is more likely to conclude that the
shared resources are significant.
C. FORMS OF THE NETWORK:
1. MUTUAL ENTITY: A network can be constituted as a mutual entity which will act as a
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facilitator for the constituents of the Network. In such a case the Network itself will not carry
out any professional practice.
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2. PARTNERSHIP: A network can be constituted as a partnership firm subject to the condition
that the total number of partners does not exceed 20.
3. LLP: A network can be constituted as a Limited Liability Partnership subject to the provision
of the Chartered Accountant Act and Rules and such other laws as may be applicable.
4. COMPANY: A network can be constituted as company subject to the guidelines prescribed by
Institute for corporate form of practice and formation of management consultancy services
company.
5. PERMITTED CAP FIRMS TO BE MEMBERS: Network Firms shall consist of sole Practitioner /
proprietor, partnership or any such entity of professional accountants as may be permitted
by the Act.
6. A firm is allowed to join only one network.
7. Firms having common partners shall join only one Network.
D. APPROVAL OF NAME OF NETWORK AMONGST FIRMS REGISTERED WITH INSTITUTE:
1. AFFILIATES vs ASSOCIATES: The Network may have distinct name which should be approved
by the Institute. To distinguish a “Network” from a “firm” of Chartered Accountants, the
words “& Affiliates” shall be used after the name of the network and the words “& Co.” / “&
Associates” shall not be used.
2. The prescribed format of application for approval of Name for Network is at Form ‘A’
(enclosed). The names of the network may be as mentioned in Appendix II.
3. UNDESIRABLE NAMES – NOT PERMITTED: Provisions of Regulation 190 of the Chartered
Accountants Regulations, 1988 shall be applicable to the name of Network. However, even if
a name is approved and subsequently it is found that the same is undesirable then, the said
name may be withdrawn at any time by the Institute. The Institute shall reject any
undesirable name and the provisions in respect of names of companies as prescribed in the
Companies Act, 2013 shall be applicable in spirit.
4. 30 DAYS TIME LIMIT TO APPROVE: The Institute shall approve or reject the name of the
Network and intimate the same to the Network at its address mentioned in Form ‘A’ within a
period which shall not be later than 30 days from the date of receipt of the said Form.
5. DO NOT CARRY-ON PRACTICE: Mere approval of the name of the Network shall not entitle
the Network to carry on practice in its own name.
E. REGISTRATION OF NETWORK WITH ENTITIES IN INDIA:
1. RESERVE NAME – 3 MONTHS: After the name of a Network is approved as per provision
under Guideline 5, the Institute same shall reserve such name for a period of three (3)
months from the date of approval.
2. The Network shall get itself registered with the Institute by applying in Form B within the
period of 3 months, failing which the name assigned shall stand cancelled on the expiry of
the said period. Registration of Network with Institute is mandatory.
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3. If different Indian firms are networked with a common Multinational Accounting Firm, they
shall be considered as a part of network.
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F. LISTING OF NETWORK WITH ENTITIES OUTSIDE INDIA:
The duly authorized representative(s) of the Indian Member firm (s)/Member constituting the
Network with entities outside India shall file a declaration with the Institute in Form `D’ for
Listing of such Network within 30 days from the date of entering into the Network arrangement.
Proprietary/individual members, partnership firms as well as members in LLP or any such other
entity of members as may be permitted by the Act, shall be permitted to join such network with
entities outside India provided that the proprietary/individual members, partnership firms as
well as members in LLP or any such other entity of members are allowed to join only one
network and firms having common partners shall join only one such network.
G. CHANGE IN CONSTITUTION OF REGISTERED NETWORK:
In case of change in the constitution of registered Network on account of any entry into or exit
from the Network, the network shall communicate the same to the Institute by filing Form ‘C’
within a period of thirty (30) days from the date of change in the constitution.
H. ETHICAL COMPLIANCE AND RULES:
Once the relationship of network arises, it will be necessary for such a network to comply with
all applicable ethical requirements prescribed by the Institute from time to time in general and
the following requirements in particular:
1. PROHIBITED SERVICES: If one firm of the network is the statutory auditor of an entity then
the associate [including the networked firm(s)] or the said firm directly/indirectly shall not
accept the internal audit or book-keeping or such other professional assignments which are
prohibited for the statutory auditor firm.
2. CEILING ON NON-AUDIT FEES: The guidelines of ceiling on Non-audit fees is applicable in

relation to a Network as follows:
a. AUDITOR FIRM – OTHER SERVICES FEES NOT TO EXCEED STAT AUDIT FEES: For a
Network firm who is doing statutory audit (including its associate concern and/or
firm(s) having common partnership), it shall be the same as mentioned in the said
notification; and
b. OTHER NETWORK FIRMS – NOT TO EXCEED 3 TIMES: For other firms of the same
Network collectively, it shall be 3 times of the fee payable for carrying out the
statutory audit of the same undertaking/ company.
3. ROTATION OF AUDITORS: In those cases where rotation of firms is prescribed by any

regulatory authority, NO member firm of the network can accept appointment as an auditor
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in place of any member firm of the network which is retiring.

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4. The Network may advertise the Network to the extent permitted by the Advertisement
Guidelines issued by Institute.
5. The firms constituting the network are permitted to use the words “Network Firms” on their
professional stationery.
6. The constituent member firms of a Network and the Network shall comply with all the
Ethical Standards prescribed by the Council from time to time.
I. CONSENT OF CLIENT:
The effect of registration of network with Institute will be deemed to be a public notice of the
network and therefore consent of client will be deemed to be obtained.
J. FRAMEWORK OF INTERNAL BYELAWS OF NETWORK:
To streamline the networking, a network shall formulate operational bye-laws. Bye-laws may
contain the following clauses on which the affiliates of the network may enter into a written
agreement among themselves [These clauses are illustrative]:
1. Appointment of a Managing Committee, from among the managing partners of the member
firms of the network and the terms and conditions under which it should function.
2. The minimum and maximum number of members of the Managing Committee shall also be
agreed upon.
3. Administration of the network
4. Contribution of membership fees to meet the cost of the administration of the network.
5. Identifying a partner of any of the member firms of the network to be responsible for the
assignment (engagement partner).
6. Dispute settlement procedures through arbitration and conciliation
7. Development of training materials for members of the network
8. Issue of News-letters for staff and clients
9. Development of software for different types of assignments
10. Development and maintenance of data bases relevant for different types of assignments
11. Library.
12. Appointment of a technical director to whom references can be made
13. Determining the methodology for drawing resources from each member firm
14. Determining compensation to member firms for resources to be drawn from them
15. Peer review of the member firms
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CHAPTER XVI – LOGO GUIDELINES: [already discussed previously]
CHAPTER XVII – GUIDANCE FOR CORPORATE FORM OF PRACTICE:
1. The Council decided to allow members in practice to hold the office of Managing Director,
Whole-time Director or Manager of a body corporate within the meaning of the Companies Act
PROVIDED that the body corporate is engaged exclusively in rendering Management
Consultancy and Other Services permitted by the Council in pursuant to Section 2(2)(iv) of the
Chartered Accountants Act, 1949 and complies with the conditions(s) as specified by the Council
from time to time in this regard.
2. MD / WTD IN The members can retain full time Certificate of Practice besides being the
Managing Director, Whole-time Director or Manager of such Management Consultancy
Company.
3. There will be no restriction on the quantum of the equity holding of the members, either
individually and/ or along with the relatives, in such Company.
4. Such members shall be regarded as being in full- time practice and therefore can continue to do
attest function either in individual capacity or in Proprietorship/Partnership firm in which
capacity they practice.
5. The name of the Management Consultancy Company is required to be approved by the Institute
and such Company has to be registered with the Institute.
6. On abundant caution, it may be clarified that no audit practice can be done in Corporate Form.
The consultancy practice hitherto done in Individual or Firm Status alone is now intended to be
permitted in Corporate Form also.
ETHICAL COMPLIANCE:
Once the Management Consultancy Company is Registered with the Institute as per the Guidelines,
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it will be necessary for such a Company to comply with the following requirements: -
1. ASSOCIATE COMPANY – NOT TO ACCEPT PROHIBITED SERVICES: If the individual
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practitioner/sole-proprietorship firm/partnership firm is the statutory auditor of an entity then

the Management Consultancy Company should not accept the internal audit or book-keeping or
such other professional assignments, which are prohibited for the statutory auditor firm.
2. CEILING ON NON-AUDIT FEES: Ceiling on Non-audit fees is applicable in relation to a
Management Consultancy Company.
3. COMPANY SHALL NOT DO SOLICITATION: The Management Consultancy Company shall comply
with clauses (6) & (7) of Part-I of the First Schedule to the Chartered Accountants Act, 1949 and
such other directives as may be issued by the Institute from time to time.
4. DECLARATION: The Management Consultancy Company shall give an undertaking that it shall
comply with clauses (6) & (7) of Part-I of the First Schedule to the Chartered Accountants Act,
1949 and such other directives as may be issued by the Institute from time to time.
5. OBJECT OF MANAGEMENT CONSULTANCY COMPANY: The Management Consultancy Company
shall engage itself only in Management Consultancy & Other Services. The Management
Consultancy Company shall give an undertaking that it shall render only Management
Consultancy & Other Services prescribed by the Council pursuant to powers under section 2
(2)(iv) of the Chartered Accountants Act, 1949.
Q.NO.22 EXPLAIN COUNCIL GUIDELINES FOR ADVERTISEMENT, 2008?
ANSWER:
WRITE UP -
The Members may advertise through a write up setting out their particulars or of their firms and
services provided by them subject to the following Guidelines and must be presented in such a
manner as to maintain the profession’s good reputation, dignity and its ability to serve the public
interest.
The Member(s)/Firm(s) should ensure that the contents of the Write up are true to the best of their
knowledge and belief and are in conformity with these Guidelines and be aware that the Institute of
Chartered Accountants of India will neither approve a propose write-up, nor owns any responsibility
whatsoever for such contents or claims by the writer Member(s)/ Firm(s).
CONDITIONS:
1. It shall be honest and truthful.
2. There shall be no exaggerated claims for the services offered by the member or the Firm, or the
qualifications or experience of the member or any of the partners or any other person
associated with the Firm.
3. It must not make any disparaging [degrading others] references or unsubstantiated comparisons
to the work of others.
4. It should not be of a nature that may bring the profession into disrepute.
5. It should not contain testimonials or endorsements concerning Member(s) or names of clients
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(both the past and present) or the fees charged.

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6. It should not contain any information about achievements /awards (except the awards given by
the Central or State Governments or Regulatory bodies) or any other position held, or
accreditation(s) granted by any organisation.
7. Monogram of any kind or use of any kind of catch words is not permissible.
8. The Membership No./FRN (as may be applicable) is mandatory to be mentioned in the write-up.
9. It should not be of font size exceeding 14.
10. It must not be violative of any provisions of Chartered Accountants Act, 1949, Chartered
Accountants Regulations, 1988, Code of Ethics, 2020 or any Guideline of the Council
11. The Institute of Chartered Accountants of India may issue a reasoned directive for removal or
withdrawal of the whole write-up or of any part(s) thereof.
ADVERTISEMENT THROUGH WRITE-UP:

FOR DETAILED NOTES ON PERMISSABLE CONTENTS OF THE WRITE UP – PLEASE REFER PAGE.
18.129 IN STUDY MATERIAL – OCT 2021 EDITION. [NOT IMP FROM EXAM VIEWPOINT]
Q.NO.23 WRITE ABOUT ONLINE THIRD-PARTY PLATFORMS?
ANSWER:
1. A Number of non-Chartered Accountants’ firms, corporates including banks, finance Companies

and newspapers have set up their own Websites providing advisory services on taxation and
other areas where Chartered Accountants are rendering professional service. Some of such
Websites may request Chartered Accountants or Chartered Accountants’ firms to provide
consultation and advice through their Websites.
2. No other service, besides consultancy and advice can be rendered through such websites.
3. This would be permitted subject to the condition that on the Website, contact address of the
Chartered Accountant concerned is not provided nor such Website will contain any material
which advertises professional achievements or status of such Chartered Accountant except
making a statement that they are Chartered Accountants.
4. The name of Chartered Accountants’ firm with suffix “Chartered Accountants” would not be
permitted.
Q.NO.24 Write about Publication of Name or Firm Name by Chartered Accountants in the
Telephone or other Directories published by Telephone Authorities or Private Bodies AND
Aggregators AND Specialised Directories?
ANSWER:
A. TELEPHONE OR OTHER DIRECTORIES:

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The Chartered Accountants and Chartered Accountants Firms may have entries made in a
Telephone Directory (in printed and electronic form) either by making a special request or by
means of an additional payment. The Council has also considered the question of permitting
entries in respect of Chartered Accountants and their firms under specified groups in
telephone/trade directories subject to the following additional restrictions:
1. The entry should not appear in any other section/category except that of ‘Chartered
Accountants’.
2. The member/firm should belong to the town/city in respect of which the directory is being
published.
3. The order of the entries should not be in any manner other than alphabetical.
4. The entry should not be made in a differential or prominent manner giving the impression of
publicity/advertisement.
5. The entries should not be restricted and should be open to all the Chartered
Accountants/firms of Chartered Accountants in the particular city/town in respect whereof
the directory is published.
6. The members can also include their names in trade/ social directories.
B. APPLICATION BASED SERVICE PROVIDER AGGREGATORS:
It is not permissible for members to list themselves with online Application based service
provider Aggregators, wherein other categories like businessmen, technicians, maintenance
workers, event organizers etc. are also listed. [E.g., Clear Tax.]
C. SPECIALISED DIRECTORIES FOR LIMITED CIRCULATION:
The name, description and address of member (or firm) may appear in any directory or list of
members of a particular body in which the names are listed alphabetically. For a specialised
directory or a publication such as a “Who’s Who” (including those compiled on purely local
basis), a member should use his discretion in supplying information, bearing in mind the nature
and purpose of the publications. In addition to his name, description and address and those of
his firm, a member may give where appropriate, directorships held and reasonable personal
details and may state his outside interests. He should not, however, give the names of any of his
clients.
D. EXEMPTIONS FROM THE ABOVE:

1. A special exemption has been made as regards publication of the name and address of a
member or that of his firm, with the description Chartered Accountant(s), in an
advertisement appearing in the press in the following circumstances, provided that the
advertisement is not displayed more prominently than is usual for such advertisements or
the name of the member or that of his firm with the designation Chartered Accountant(s)
appears in type not bolder than the substance of the advertisement:
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(a) Advertisement for recruiting staff in the member’s own office.

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(b) Advertisement inserted on behalf of clients requiring staff or wishing to acquire or
dispose of business or property.
(c) Advertisement for the sale of a business or property by a member acting in a
professional capacity as trustee, liquidator or receiver.
2. When advertising for staff, it is desirable that members should avoid the expression such as
“a well-known firm”, since this would savour of advertisement. Similar considerations apply
to advertisements for articled assistants. The advertisements should not contain any
promotional element nor should there be any suggestion that the services offered by the
Chartered Accountant or his firm are superior to those offered by other accountants.
Q.NO.25 WRITE ABOUT SELF-REGULATORY MEASURES?
ANSWER: These measures are recommendatory in nature:
A. BRANCH AUDITS:
1. The branch audits of a company should not be conducted by its statutory auditors consisting
of ten or more members, but should be conducted by the local firms of auditors consisting
of less than ten members.
Note: This is not a restriction on the right of the statutory auditors to have access over
branch accounts conferred under the Companies Act, 2013.
2. The above restriction shall not apply in the following cases:
a. Accounting records of branches are maintained at head office.
b. Significant operations of the company are carried at branches.
B. JOINT AUDITS:
In the case of large companies, the practice of associating a practicing firm with less than five
members as Joint auditors should be encouraged. Where a client desires to appoint such a firm
as joint auditor, the senior firm should not object to the same.
C. RATIO BETWEEN QUALIFIED AND UNQUALIFIED STAFF:
1. Every CAP engaged in audit work shall have At Least One Qualified Member for every 5 Non-
Qualified members of the staff.
2. While counting Non-qualified member staff, the following shall be excluded:
a. Article and audit Assistants.
b. Typists.
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c. Peons.
d. Other persons not engaged in professional works. (E.g., Maid, Servants, Janitor).
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D. DISCLOSURE OF INTEREST BY AUDITORS IN OTHER FIRMS:
The Council has decided that as a good and healthy practice, auditors should make a disclosure
of the payments received by them for other services through the medium of a different firm or
firms in which the said auditor may be either a partner or proprietor.
E. RECOMMENDED MINIMUM SCALE OF FEES:
The Institute has issued revised Minimum scale of Fees for the professional assignments of the
members of ICAI. The recommended scale of Fees is to be charged as per the work performed
for various professional assignments. The Fees has been recommended separately for Class-A, B
and C cities.
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RECENT DECISIONS OF ETHICAL STANDARDS BOARD
[SINGLE READING – NOT IMP ROM EXAM VIEWPOINT]
1. A Chartered Accountant in practice may be an equity research adviser, but he CANNOT PUBLISH
retail report, as it would amount to other business or occupation.
2. A Chartered Accountant, who is a member of a Trust, cannot be the auditor of the said trust.
3. A Chartered Accountant in practice may engage himself as Registration Authority (RA) for
obtaining digital signatures for clients.
4. A Chartered accountant can hold the credit card of a bank when he is also the auditor of the
bank, provided the outstanding balance on the said card does not exceed rupees 10,000/-
Beyond The Prescribed Credit Period Limit on credit card given to him. [SIMPLY, NO OVER DUE]
5. A Chartered Accountant in practice can act as mediator in Court, since acting as a “mediator”
would be deemed to be covered within the meaning of “arbitrator’; which is inter-alia permitted
to members in practice as per Regulation 191 of the Chartered Accountants Regulations, 1988.
6. A Chartered Accountant in practice is not permitted to accept audit assignment of a bank in
case he has taken loan against a Fixed Deposit held by him in that bank.
7. Statutory auditor /tax auditor cannot be the valuer of unquoted equity shares of the same
entity. The Board has at its recent Meeting (January, 2017) has reviewed the above, and decided
that where law prohibits for instance in the Income Tax Act and the rules framed thereunder,
such prohibition on statutory auditor/tax auditor to be the valuer will continue, but where there
is no specific restriction under any law, the said eventuality will be permissible, subject to
compliance with the provisions, as contained in the Code of Ethics relating to independence.
8. The Ethical Standards Board had in 2011 decided that it is not permissible for a member who
has been Director of a Company, upon resignation from the Company to be appointed as an
auditor of the said Company, and the cooling period for the same may be 2 years. The Board has
at its recent Meeting (January, 2017) has reviewed the above, and noted that the Section 141 of
Companies Act, 2013 on disqualification of auditors does not mention such prohibition; though
threats pertaining to the said eventuality have been mentioned in Code of Ethics. Further, the
Board was of the view that a member may take decision in such situation based on the
provisions of Companies Act, 2013 and provisions of Code of Ethics.
9. A chartered accountant in practice cannot become Financial Advisors and receive
fees/commission from Financial Institutions such as Mutual Funds, Insurance Companies, NBFCs
etc.
10. A chartered accountant cannot exercise lien over the client documents/records for non-payment
of his fees.
11. It is not permissible for CA Firm to print its vision and values behind the visiting cards, as it
would result in solicitation and therefore would be violative of the provisions of Clause (6) of
Part-I of First Schedule to the Chartered Accountants Act, 1949.
12. It is not permissible for chartered accountants in practice to take agencies of UTI, GIC or NSDL.
13. It is permissible for a member in practice to be a settlor of a trust.
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14. A member in practice cannot hold Customs Brokers Licence under section 146 of the Customs
Act, 1962 read with Customs Brokers Licensing Regulations, 2013 in terms of the provisions of
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Code of Ethics.
15. A Chartered accountant in SERVICE may appear as tax representative before tax authorities on
behalf of his employer, but not on behalf of other employees of the employer.
16. A chartered accountant who is the statutory auditor of a bank cannot for the same financial year
accept stock audit of the same branch of the bank or any of the branches of the same bank or
sister concern of the bank, for the same financial year.
17. A CA Firm which has been appointed as the internal auditor of a PF Trust by a Government
Company cannot be appointed as its Statutory Auditor.
18. A concurrent auditor of a bank ‘X’ cannot be appointed as statutory auditor of bank ‘Y’, which is
sponsored by ‘X’.
19. A CA/CA Firm can act as the internal auditor of a company & statutory auditor of its employees
PF Fund under the new Companies Act (2013).
20. The Ethical Standards Board while noting that there is requirement for a Director u/s 149(3) of
the Companies Act, 2013 to reside in India for a minimum period of 182 days in the previous
calendar year, decided that such a Director would be within the scope of Director Simplicitor
(which is generally permitted as per ICAI norms), if he is non – executive director, required in the
Board Meetings only, and not paid any remuneration except for attending such Board Meetings.
21. Internal Auditor not to undertake GST Audit simultaneously.
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ILLUSTRATIONS FROM STUDY MATERIAL
[NOV 2020 EDITION]
Q.NO.1 A Chartered Accountant in practice has been suspended from practice for a period of 6
months and he had surrendered his Certificate of Practice for the said period. During the said
period of suspension, though the member did not undertake any audit assignments, he
undertook representation assignments for income tax whereby he would appear before the
tax authorities in his capacity as a Chartered Accountant.
ANSWER:
PROVISION: As per chartered accountant act, once a person becomes a member of the institute,
such person is bound by provisions of CA Act, 1949 and other regulations. A member of the Institute
can have no other capacity in which he can take up such practice, separable from his capacity to
practice as a member of the Institute. If COP is cancelled or terminated, such person cannot
undertake any other assignment which he is entitled to undertake only as a member of the institute.
If he appears before the income tax authorities, he is only doing so in his capacity as a chartered
accountant and a member of the Institute.
ANALYSIS AND CONCLUSION: In the given case, the certificate of practice of the member has been
suspended for six months. Also, it is mentioned that the member has undertaken representation
assignments for income tax, where he appeared earlier in the capacity of CA.
Therefore, it is clear violation of above provision and hence the member is treated as guilty of
professional mis – conduct.
Q.NO.2 Mr. A, a practicing Chartered Accountant agreed to select and recruit personnel, conduct
training programmes for and on behalf of a client. Is this a professional misconduct?
ANSWER:
Provision: As per chartered accountants act, 1949, As per Sec.2, Deemed to be in practice, an
individual Chartered Accountant or firm of chartered accountants are permitted to render entire
range of Management consultancy and other services. The definition of management consultancy
and other services includes “selecting and recruiting personnel and conducting training
programmes” on behalf of clients.
Analysis and Conclusion: In the given case, Mr. A, a practicing-chartered accountant agreed to select
and recruit, conduct training programmes on behalf of a client.
Since these services fall under the scope of Management consultancy services, which are permitted
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to be rendered by a chartered accountant in practice, Mr. A cannot be treated as guilty.

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Q.NO.3 Mr. X & Mr. Y, partners of a Chartered Accountant Firm, one in-charge of Head Office and
another in-charge of Branch at a distance of 80 km. from the municipal limits, puts up a name-
board of the firm in both premises and also in their respective residences.
ANSWER:
PROVISION: As per the guidelines of the council of institute with regard to manner of usage of name
boards, a Chartered Accountant in practice is permitted to use firm name board and individual name
board, at both head office and branch offices. However, the members shall not use firm name board
at the place of residence. It is clarified that the member can use only individual name board, with his
qualification as chartered accountant, at his place of residence.
ANALYSIS AND CONCLUSION: In the given case Mr. X and Mr. Y, partners of a CA firm puts-up firm
name board at both office and place of residence. Since the members used firm name board at place
of residence, which is contrary to the above guidelines of the council, they shall be deemed to be
guilty of professional mis – conduct.
Q.NO.4 Mr. K, Chartered Accountant practicing as a sole proprietor has an office in the suburbs of
Chennai. Due to increase in the income tax assessment work, he opens another office near the
income tax office, which is within the city and at a distance of 30 km. from his office in the
suburb. For running the new office, he has employed a retired Income Tax Commissioner who
is not a Chartered Accountant.
ANSWER:
PROVISION: As per chartered accountants act, 1949, If an Individual or a Firm of Chartered

Accountants has more than one office in India, each one of such offices should be in the separate
charge of a member of the Institute.
Further a member can open second office without a separate charge of a member of institute if the
second office is located within a distance of 50 km from the municipal limits of a city, in which the
first office is located.
ANALYSIS AND CONCLUSION: In the given case Mr. K, a chartered accountant in practice who has an
office in suburbs of Chennai. Further Mr. K opened a branch office which is within 30KM from the
municipal limits of Chennai. Also, he appointed a retired income tax commissioner to look after the
new office.
He shall NOT BE TREATED AS GUILTY as the new branch office is located within 30Km from the
municipal limits of the city where his first office is located. Further Mr. K shall declare which of the
above two office is the main office to the institute.
Q.NO.5 Mr. Qureshi, Chartered Accountant, in practice died in a road accident. His widow
proposes to sell the practice of her husband to Mr. Pardeshi, Chartered Accountant, for Rs. 5
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lakhs. The price also includes right to use the firm name - Qureshi and Associates. Can widow
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of Qureshi sell the practice and can Mr. Pardeshi continue to practice in that name as a
proprietor?
ANSWER:
PROVISION: As per Clause – 2 of Part-I of First Schedule to Chartered Accountants act, 1949, The
council of the institute clarified that the legal heir of a deceased chartered accountant can sell the
goodwill of the deceased sole proprietor for a consideration. Provided the legal heir shall obtain the
permission of the council within one year from the date of demise of such proprietor of the firm.
Further the member who purchased such practice as per the rules can continue to use the previous
name of the firm.
ANALYSIS AND CONCLUSION: In the given case, the widow of Mr. Qureshi, who has sold the practice
for Rs. 5 Lakhs to Mr. Pardeshi, is nothing but sale of goodwill.
Therefore, the act of Mrs. Qureshi is NOT IN VIOLATION of the guidelines of the council and Mr.
Pardeshi can continue to practice in that name as a proprietor.
Q.NO.6 Mr. S, a Chartered Accountant published a book and gave his personal details as the
author. These details also mentioned his professional experience and his present association
as partner with M/s RST, a firm.
ANSWER:
PROVISION: Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 refers
to professional misconduct of a member in practice if he solicits client or professional work either
directly or indirectly, by circular, advertisement, personal communication or interview or by any
other means. While elaborating forms of soliciting work, the Council has specified that a member is
not permitted to indicate in a book or an article, published by him, his association with any firm of
chartered accountants.
ANALYSIS AND CONCLUSION: In this case, Mr. S, a Chartered Accountant published the book and
mentioned his professional experience and his association as a partner with M/s RST, a firm of
chartered accountants. Mr. S being a chartered accountant in practice has committed the
professional misconduct by mentioning that at present he is a partner in M/s. RST, a chartered
accountant’s firm.
Q.NO.7 M/s XYZ, a firm of Chartered Accountants created a website “www.xyzindia.com”. The
website besides containing details of the firm and bio-data of the partners also contains the
passport size photographs of all the partners of the firm.
ANSWER:
PROVISION: As per detailed guidelines of the ICAI laid down in Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949, a chartered accountant of the firm can create its
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own website using any format subject to guidelines. However, the website should be so designed
that it does not solicit clients or professional work and should not amount to direct or indirect
advertisement. The guidelines of the ICAI to allow a firm to put up the details of the firm, bio-data of
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partners and display of a passport size photograph.

ANALYSIS AND CONCLUSION: In the case of M/s XYZ, all the guidelines seem to have been complied
and there appears to be NO VIOLATION of the Chartered Accountants Act, 1949 and its Regulations.
Q.NO.8 M/s LMN, a firm of Chartered Accountants responded to a tender from a State
Government for computerization of land revenue records. For this purpose, the firm also paid
Rs. 50,000 as earnest deposit as part of the terms of the tender.
ANSWER:
PROVISION: Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 lays
down guidelines for responding to tenders, etc. As per the guidelines if a matter relates to any
services other than audit, members can respond to any tender. Further, in respect of a non-exclusive
area, members are permitted to pay reasonable amount towards earnest money/security deposits.
ANALYSIS AND CONCLUSION: In the instance case, since computerization of land revenue records
does not fall within exclusive areas for chartered accountants, M/s LMN can respond to tender as
well as deposit Rs. 50,000 as earnest deposit and shall NOT HAVE COMMITTED any professional
misconduct.
Q.NO.9 Mr. Honest, a Chartered Accountant in practice, wrote two letters to M/s XY Chartered
Accountants a firm of CAs; requesting them to allot him some professional work. As he did not
have a significant practice or clients, he also wrote a letter to M/s ABC, a firm of Chartered
Accountants for securing professional work. Mr. Clever, another CA, informed ICAI regarding
Mr. Honest's approach to secure the professional work. Is Mr. Honest wrong in soliciting
professional work?
ANSWER:
PROVISION: Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 states
that a Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits
clients or professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means. However, a Chartered Accountant is not
prevented applying or requesting for or inviting or securing professional work from another
chartered accountant in practice. Such a restraint has been put so that the members maintain their
independence of judgment and may be able to command respect from their prospective clients.
ANALYSIS AND CONCLUSION: In the given case, Mr. Honest wrote letters only to other Chartered
Accountants, M/s XY and M/s ABC requesting them to allot some professional work to him, which is
not prohibited under Clause (6) as explained above. Thus, Mr. Honest has NOT COMMITTED ANY
PROFESSIONAL MISCONDUCT by soliciting professional work.
Q.NO.10 A practising Chartered Accountant uses a visiting card in which he designates himself,
besides as Chartered Accountant, as a Tax Consultant.
ANSWER:
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PROVISION: Section 7 of the Chartered Accountants Act, 1949 read with Clause (7) of Part I of the
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First Schedule to the said Act prohibits advertising of professional attainments or services of a
member. It also restrains a member from using any designation or expression other than that of a
chartered accountant in documents through which the professional attainments of the member
would come to the notice of the public. Under the clause, use of any designation or expression other
than chartered accountant for a chartered accountant in practice, on professional documents,
visiting cards, etc. amounts to a misconduct unless it be a degree of a university or a title indicating
membership of any other professional body recognised by the Central Government or the Council.
ANALYSIS AND CONCLUSION: Thus, it is IMPROPER to use designation "Tax Consultant" since
neither it is a degree of a University established by law in India or recognised by the Central
Government nor it is a recognised professional membership by the Central Government or the
Council.
Q.NO.11 B, a Chartered Accountant in practice is a partner in 3 firms. While printing his personal
letter heads, B gave the names of all the firms in which he is a partner.
ANSWER:
PROVISION: Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949
prohibits advertising of professional attainments or services of a member. It also restrains a member
from using any designation or expression other than that of a Chartered Accountant in documents
through which the professional attainments of the member would come to the notice of the public.
Even a member is not permitted to specify the date of setting up of practice or establishment of firm
on letterheads. However, there is no prohibition for printing names of all the three firms on the
personal letterheads in which a member holding Certificate of Practice is a partner.
ANALYSIS AND CONCLUSION: Thus, B is NOT GUILTY of any misconduct under the Chartered
Q.NO.12 The offer document of a listed company in which Mr. D, a practising Chartered
Accountant is a director mentions the name of Mr. D as a director along with his various
professional attainments and spheres of specialisation.
ANSWER:
PROVISION: The Council of the ICAI has in a communication to members stated that if a public
company, in which a chartered accountant in practice is a director, issues a prospectus or gives any
announcement that gives descriptions about the Chartered Accountant’s expertise, specialisation
and knowledge in any particular field, it shall constitute a misconduct under Clauses (6) and (7) of
Part I of the First Schedule to the Chartered Accountants Act, 1949. The Council has further stated
that in such cases the member concerned has to take necessary steps to ensure that such
prospectus or public announcements or public communications do not advertise his professional
attainments and also that such prospectus or public announcements or public communications do
not directly or indirectly amount to solicitation of clients for professional work by the members.
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ANALYSIS AND CONCLUSION: Thus, in the instant case, Mr. D would be held to be GUILTY of
professional mis-conduct and liable for disciplinary action.
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Q.NO.13 Mr. X, a Chartered Accountant accepted his appointment as tax auditor of a firm under
Section 44AB, of the Income-tax Act, and commenced the tax audit within two days of his
appointment since the client was in a hurry to file Return of Income before the due date. After
commencing the audit, Mr. X realised his mistake of accepting this tax audit without sending
any communication to the previous tax auditor. In order to rectify his mistake, before signing
the tax audit report, he sent a registered post to the previous auditor and obtained the postal
acknowledgement. Will Mr. X be held guilty under the Chartered Accountants Act?
ANSWER:
PROVISION: As per Clause (8) of Part I of First Schedule to the Chartered Accountants Act, 1949, Mr.
X will be held guilty since he has accepted the tax audit, without first communicating with the
previous auditor in writing. The object of the incoming auditor communicating in writing with the
retiring auditor is to ascertain whether there are any circumstances which warrant him not to accept
the appointment, for example, whether the previous auditor has been changed on account of having
qualified the report or he had expressed a wish not to continue on account of something inherently
wrong with the administration of the business. Under all circumstances, it would be essential for the
incoming auditor to carefully consider the facts before deciding whether or not he should accept the
audit. As a matter of professional courtesy and professional obligation it is necessary for the new
auditor appointed to communicate with such earlier auditor.
CONCLUSION: Therefore, Mr. X will be held GUILTY of professional misconduct.
Q.NO.14 W, a Chartered Accountant has sent letters under certificate of posting to the previous
auditor informing him his appointment as an auditor before the commencement of audit by
him.
ANSWER:
PROVISION: Clause (8) of Part I of the First Schedule to the Chartered Accountants Act, 1949
requires communication by the incoming auditor with the previous auditor before accepting a
position by him. The Council of the Institute has taken the view that a mere posting of a letter
“under certificate of posting” is not sufficient to establish communication with the retiring auditor
unless there is some evidence to show that the letter has in fact reached the person communicated
with. In the opinion of the Council, communication by a letter sent “Registered Acknowledgement
Due” or by hand against a written acknowledgement would in the normal course provide positive
evidence.
ANALYSIS AND CONCLUSION: Since the letters were sent by “W” to the previous auditor informing
him of his appointment as an auditor before the commencement of audit by him under Certificate of
Posting is not sufficient to prove communication with the retiring auditor. Hence, “W” was guilty of
professional misconduct under Clause (8) of Part I of First Schedule to the Chartered Accountants
Act, 1949
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Q.NO.15 CA Raja was appointed as the Auditor of Castle Ltd. for the year 2019-20. Since he
declined to accept the appointment, the Board of Directors appointed CA Rani as the auditor in
the place of CA Raja, which was also accepted by CA Rani.
ANSWER:
PROVISION: Board can appoint the auditor in the case of casual vacancy under section 139(8) of the
Companies Act, 2013. The non-acceptance of appointment by CA. Raja does not constitute a casual
vacancy to be filled by the Board.
In this case, it will be deemed that no auditor was appointed in the AGM. Further, as per Section
139(10) of the Companies Act, 2013 when at any annual general meeting, no auditor is appointed or
re-appointed, the existing auditor shall continue to be the auditor of the company.
ANALYSIS AND CONCLUSION: The appointment of the auditor by the Board is defective in law.
Further Clause (9) of Part I of First Schedule to the Chartered Accountants Act, 1949 states that a
chartered accountant is deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a company without first ascertaining from it whether the requirements of
Section 139, 140 and 142 read with Section 141 of the Companies Act, 2013), in respect of such
appointment have been fully complied with.
Hence, CA. Rani is guilty of professional misconduct since she accepted the appointment without
verification of statutory requirements.
Q.NO.16 Mrs. X is a Director of ABC Pvt. Ltd. During the year 2020-21, the company appointed CA
Mr. Y, Mrs. X's spouse, as its statutory auditor. Mr. Y used to deliver audit report without any
comments or disclosures, thereupon.
ANSWER:
PROVISION: As per Section 141(3)(f) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor of a company whose relative is a director or is in the employment of the
company as a director or key managerial personnel. The definition of ‘Relative’ includes husband and
wife.
Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949, provides that a
member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a company without first ascertaining from it whether the requirements of
Section 139, 140 and 142 read with Section 141 of the Companies Act, 2013), in respect of such
appointment have been duly complied with.
ANALYSIS AND CONCLUSION: In this case Mrs. X is a Director of ABC Pvt. Ltd. and the company has
appointed Mr. Y, Chartered Accountant, Mrs. X's spouse, as its statutory auditor. Mr. Y should not
accept the appointment as statutory auditor of the company, where his wife Mrs. X is a director. This
is contravention of section 141 of the Companies Act, 2013.
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Therefore, Mr. Y is liable for misconduct under the said clause since he accepted the appointment
without first verifying the compliance of statutory requirements.
Q.NO.17 A chartered accountant holding certificate of practice and having four articled clerks
registered under him accepts appointment as a full-time lecturer in a college. Also, he becomes
a partner with his brother in a business. Examine his conduct in the light of Chartered
Accountants Act, 1949 and the regulations thereunder.
ANSWER:
PROVISION AND EXPLANATION: Clause (11) of Part I of the First Schedule to the Chartered
Accountants Act, 1949 debars a chartered accountant in practice from engaging in any business or
occupation other than the profession of chartered accountancy unless permitted by the Council of
the Institute so to engage. This clause, in effect, has empowered the Council of the Institute to
permit chartered accountants in practice to engage in any other business or occupation considered
fit and proper. Accordingly, the Council had formulated Regulations 190A and 191 to the Chartered
Accountants Regulations, 1988 to provide a basis for considering applications of chartered
accountants seeking permission to engage in other business or occupation.
A member can accept full- time lecturer-ship in a college only after obtaining the specific and prior
approval of the Council as also becoming a partner in a business with his brother would require
specific permission.
CONCLUSION: Thus, the chartered accountant is liable for professional misconduct since he failed to
obtain specific and prior approval of the Council in each case.
Q.NO.18 Mr. A, a practicing Chartered Accountant, took over as the executive chairman of
Software Company on 1.4.2019. On 10.4.2019 he applied to the Council for permission.
ANSWER:
PROVISION: As per Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he
engages in any business or occupation other than the profession of Chartered Accountant unless
permitted by the Council so to engage.
ANALYSIS AND CONCLUSION: In the instant case, Mr. A took over as the executive chairman on
01.04.2019 and applied for permission on 10.04.2019. On the basis of these facts, he was engaged in
other occupation between the period 01.04.2019 and 10.04.2019, without the permission of the
Council.
Therefore, Mr. A is guilty of professional misconduct in terms of Clause (11) of Part I of First
Schedule to the Chartered Accountants Act, 1949.
Q.NO.19 C.A. Prabhu is a leading income tax practitioner and consultant for derivative products.
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He resides in Mumbai near to the ABC commodity stock exchange and does trading in
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commodity derivatives. Every day, he invests nearly 50% of his time to settle the commodity
transactions. Is C.A. Prabhu liable for professional misconduct?
ANSWER:
PROVISION: As per Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he engages in
any business or occupation other than the profession of Chartered Accountant unless permitted by
the Council so to engage. However, the Council has granted general permission to the members to
engage in certain specific occupation. In respect of all other occupations specific permission of the
Institute is necessary.
ANALYSIS AND CONCLUSION: In this case, CA. Prabhu is engaged in the occupation of trading in
commodity derivatives which is not covered under the general permission.
Hence, specific permission of the Institute has to be obtained otherwise he will be deemed to be
guilty of professional misconduct under Clause (11) of Part I of First Schedule of Chartered
Q.NO.20 S, a practicing chartered accountant gives power of attorney to an employee chartered

accountant to sign reports and financial statements on his behalf.
ANSWER:
PROVISION: Under Clause (12) of Part I of First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he allows a
person not being a member of the Institute in practice or a member not being his partner to SIGN
ON HIS BEHALF or on behalf of his firm, any balance sheet, profit and loss account, report or
financial statements. This clause read in conjunction with Section 26 of the Chartered Accountants
Act, 1949 stipulates that no person other than the member of the institute shall sign any document
on behalf of a Chartered Accountant in practice or a firm of Chartered Accountants in his or its
professional capacity.
Further, Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949 states
that a member of the Institute, whether in practice or not, shall be deemed to be guilty of
professional misconduct, if he contravenes any of the provisions of this Act or the regulations made
there under or any guidelines issued by the Council.
CONCLUSION: Accordingly, S is guilty of professional misconduct under Clause (12) of Part I of First
Schedule and also under Clause (1) of Part II of Second Schedule for contravening Section 26.
Q.NO.21 CA. Smart, a practicing Chartered Accountant was on Europe tour between 15-9-20 and
25-9-20. On 18-9-20 a message was received from one of his clients requesting for a stock
certificate to be produced to the bank on or before 20-9-20. Due to urgency, CA. Smart
directed his assistant, who is also a Chartered Accountant, to sign and issue the stock
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certificate after due verification, on his behalf.

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ANSWER:
PROVISION: As per Clause (12) of Part I of the First Schedule to the Chartered Accountants Act,
1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct “if he
allows a person not being a member of the Institute in practice or a member not being his partner to
sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or
financial statements”.
ANALYSIS AND CONCLUSION: In this case, CA. Smart allowed his assistant who is not a partner but a
member of the Institute of Chartered Accountants of India to sign stock certificate on his behalf and
thereby commits misconduct.
Thus, CA. Smart is guilty of professional misconduct under Clause (12) of Part I of First Schedule to
Q.NO.22 Mr. 'C', a Chartered Accountant holds a certificate of practice while in employment also,
recommends a particular lawyer to his employer in respect of a case. The lawyer, out of the
professional fee received from employer paid a particular sum as referral fee to Mr. 'C'.
ANSWER:
PROVISION: Referral Fee from Lawyer: According to Clause (2) of Part II of First Schedule of the
Chartered Accountant Act, 1949, a member of the Institute (other than a member in practice) shall
be guilty of professional misconduct, if he being an employee of any company, firm or person
accepts or agrees to accept any part of fee, profits or gains from a lawyer, a chartered accountant or
broker engaged by such company, firm or person or agent or customer of such company, firm or
person by way of commission or gratification.
ANALYSIS AND CONCLUSION: In the present case, Mr. C who beside holding a certificate of practice,
is also an employee and by referring a lawyer to the company in respect of a case, he receives a
particular sum as referral fee from the lawyer out of his professional fee.
Therefore, Mr. C is guilty of professional misconduct by virtue of Clause (2) of Part II of First
schedule.
Moreover, he is holding COP and simultaneously in Employment which is also a professional Mis
conduct as per Clause 11 of Part 1 of Schedule 1.
Q.NO.23 Mr. 'G', while applying for a certificate of practice, did not fill in the columns which solicit
information about his engagement in other occupation or business, while he was indeed
engaged in a business.
ANSWER:
PROVISION: As per Clause (2) of Part III of First Schedule to the Chartered Accountants Act, 1949 a
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member shall be held guilty if a Chartered Accountant, in practice or not, does not supply the
information called for, or does not comply with the requirements asked for, by the Institute, Council
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or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality
Review Board or the Appellate Authority.
ANALYSIS AND CONCLUSION: In the given case, Mr. “G”, a Chartered Accountant while applying for
a certificate of practice, did not fill in the columns which solicit information about his engagement in
other occupation or business, while he was indeed engaged in a business. Details of engagement in
business need to be disclosed while applying for the certificate of practice as it was the information
called for in the application, by the Institute.
Thus, Mr. G will be held guilty for professional misconduct under the Clause (2) of Part III of First
Schedule of the Chartered Accountants Act, 1949.
Q.NO.24 Mr. X, a Chartered Accountant, employed as a paid Assistant with a Chartered

Accountant firm, leaves the services of the firm on 31st December, 2019. Despite many
reminders from ICAI he fails to reply regarding the date of leaving the services of the firm.
ANSWER:
PROVISION: As per Clause (2) of Part III of the First Schedule to the Chartered Accountants Act,
1949, a member, whether in practice or not, will be deemed to be guilty of professional misconduct
if he does not supply the information called for, or does not comply with the requirements asked for,
by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline,
Disciplinary Committee, Quality Review Board or the Appellate authority.
ANALYSIS AND CONCLUSION: Thus, in the given case, Mr. X has failed to reply to the letters of the
Institute asking him to confirm the date of leaving the service as a paid assistant. Therefore, he is
held guilty of professional misconduct as per Clause (2) of Part III of the First Schedule to the
Q.NO.25 YKS & Co., a proprietary firm of Chartered Accountants was appointed as a concurrent
auditor of a bank. YKS, the proprietor, used his influence to get a loan and thereafter failed to
repay the loan.
ANSWER:
PROVISION: As per Clause (2) of Part IV of First Schedule to the Chartered Accountants Act, 1949, a
member of the Institute, whether in practice or not, shall be deemed to be guilty of OTHER
MISCONDUCT, if he, in the opinion of the Council, brings disrepute to the profession or the Institute
as a result of his action whether or not related to his professional work. Here the Chartered
Accountant is expected to maintain the highest standards of integrity even in his personal affairs and
any deviation from these standards calls for disciplinary action.
ANALYSIS AND CONCLUSION: In the present case, YKS & Co, being a concurrent auditor used his
position to obtain the funds and failed to repay the same to the bank. This brings disrepute to the
profession of a Chartered Accountant. This act of YKS & Co is not pardonable.
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Therefore, YKS & Co will be HELD GUILTY OF OTHER MISCONDUCT under Clause (2) of Part IV of First
Q.NO.26 Mr. Parekh, a Chartered Accountant was invited by the Chamber of Commerce to present
a paper in a symposium on the issues facing Indian Leather Industry. During the course of his
presentation, he shared some of the vital information of his client’s business under the
impression that it will help the Nation to compete with other countries at international level.
ANSWER:
PROVISION: Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949
deals with the professional misconduct relating to the disclosure of information by a chartered
accountant in practice relating to the business of his clients to any person other than his client
without the consent of his client or otherwise than as required by any law for the time being in force
would amount to breach of conduct. The Code of Ethics further clarifies that such a duty continues
even after completion of the assignment. The Chartered Accountant may however, disclose the
information in case it is required as a part of performance of his professional duties.
ANALYSIS AND CONCLUSION: In the given case, Mr. Parekh has disclosed vital information of his
client’s business without the consent of the client under the impression that it will help the nation to
compete with other countries at International level. Thus, it is a professional misconduct covered by
Clause (1) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
Q.NO.27 Mr. A, a Chartered Accountant was the auditor of 'A Limited'. During the financial year
2019-20, the investment appeared in the Balance Sheet of the company of Rs. 10 lakhs and
was the same amount as in the last year. Later on, it was found that the company's
investments were only Rs. 25,000, but the value of investments was inflated for the purpose of
obtaining higher amount of Bank loan.
ANSWER:
PROVISION: As per Part I of Second Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct, if he, certifies or
submits in his name or in the name of his firm, a report of an examination of financial statements
unless the examination of such statements and the related records has been made by him or by a
partner or an employee in his firm or by another chartered accountant in practice, Further under
Clause (2); If he does not exercise due diligence, or is grossly negligent in the conduct of his
professional duties, under Clause (7); or fails to obtain sufficient information which is necessary for
expression of an opinion or its exceptions are sufficiently material to negate the expression of an
opinion, under Clause (8). The primary duty of physical verification and valuation of investments is of
the management. However, the auditor’s duty is also to verify the physical existence and valuation
of investments placed, at least on the last day of the accounting year. The auditor should verify the
documentary evidence for the cost/value and physical existence of the investments at the end of the
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year. He should not blindly rely upon the Management’s representation.

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ANALYSIS AND CONCLUSION: In the instant case, such non-verification happened for two years. It
also appears that auditors failed to confirm the value of investments from any proper source. In case
auditor has simply relied on the management’s representation, the auditor has failed to perform his
duty. [SA 580 – Management Representation alone cannot be considered as sufficient and
appropriate evidence]
Accordingly, Mr. A, will be held liable for professional misconduct under Clauses (2), (7) and (8) of
Part I of the Second Schedule to the Chartered Accountants Act, 1949.
Q.NO.28 Mr. Joe, a Chartered Accountant during the course of audit of M/s XYZ Ltd. came to know
that the company has taken a loan of Rs. 10 lakhs from Employees Provident Fund. The said
loan was not reflected in the books of account. However, the auditor ignored this information
in his report.
ANSWER:
Failure to Disclose Material Facts: As per Clause (5) of Part I of Second Schedule to the Chartered
Accountants Act, 1949, a chartered Accountant in practice will be held liable for misconduct if he
fails to disclose a material fact known to him, which is not disclosed in the financial statements but
disclosure of which is necessary to make the financial statements not misleading.
In this case, Mr. Joe has come across information that a loan of Rs. 10 lakhs has been taken by the
company from Employees Provident Fund. This is contravention of Rules and the said loan has not
been reflected in the books of accounts. Further, this material fact has also to be disclosed in the
financial statements. The very fact that Mr. Joe has failed to disclose this fact in his report, he is
attracted by the provisions of professional misconduct under Clause (5) of Part I of Second Schedule
to the Chartered Accountants Act, 1949.
Q.NO.29 A practicing Chartered Accountant was appointed to represent a company before the tax
authorities. He submitted on behalf of his clients certain information and explanations to the
authorities, which were found to be false and misleading.
ANSWER:
PROVISION: As per Clause (5) of Part I of Second Schedule to the Chartered Accountant Act, 1949, if
a member in practice fails to disclose a material fact known to him which is not disclosed in a
financial statement, but disclosure of which is necessary to make the financial statement not
misleading, where he is concerned with that financial statement in a professional capacity, he will be
held guilty under Clause (5).
As per Clause (6) of Part I of Second Schedule if he fails to report a material misstatement known to
him to appear in a financial statement with which he is concerned in a professional capacity, he will
be held guilty under Clause (6).
ANALYSIS AND CONCLUSION: In given case, the Chartered Accountant had submitted the
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statements before the taxation authorities. These statements are based on the data provided by the
management of the company. Although the statements prepared were based on incorrect facts and
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misleading, the Chartered Accountant had only submitted them acting on the instructions of his
client as his authorized representative. Hence the Chartered Accountant would not be held liable for
professional misconduct.
Q.NO.30 CA Chiranjiv who conducted ABC audit of a Haryana daily ‘New Era’ certified the
circulation figures based on Management Information System Report (M.I.S Report) without
examining the books of Account.
ANSWER:
PROVISION: According to Clause (7) of Part I of Second Schedule of Chartered Accountants Act,
1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
“does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.
ANALYSIS AND CONCLUSION: In the instant case, CA Chiranjiv did not exercise due diligence and is
grossly negligent in the conduct of his professional duties since he certified the circulation figures
without examining the books of accounts. To ascertain the number of paid copies verification of
remittances from the agents, credit allowed to the agents for unsold copies returned, examination of
books of account is ESSENTIAL. Further certification of circulation figures based on statistical
information without cross verification with financial records amounts to gross negligence and failure
to exercise due diligence.
Hence, CA Chiranjiv is guilty of professional misconduct as per Clause (7) of Part I of Second Schedule
of Chartered Accountants Act, 1949.
Q.NO.31 Mr. D, a practicing Chartered Accountant, did not complete his work relating to the audit
of the accounts of a company and had not submitted his audit report in due time to enable the
company to comply with the statutory requirements.
ANSWER:
NOT EXERCISING DUE DILIGENCE: According to Clause (7) of Part I of Second Schedule of Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct if he does not exercise due diligence or is grossly negligent in the conduct of his
professional duties. It is a vital clause which unusually gets attracted whenever it is necessary to
judge whether the accountant has honestly and reasonably discharged his duties.
Where a Chartered Accountant had not completed his work relating to the audit of the accounts a
company and had not submitted his audit report in due time to enable the company to comply with
the statutory requirement in this regard. He was guilty of professional misconduct under Clause (7).
CONCLUSION: Since Mr. D has not completed his audit work in time and consequently could not
submit audit report in due time and consequently, company could not comply with the statutory
requirements, therefore, the auditor is guilty of professional misconduct under Clause (7) of Part I of
the Second Schedule to the Chartered Accountants Act, 1949.
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Q.NO.32 Z, a practicing Chartered Accountant issued a certificate of circulation of a periodical

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without going into the most elementary details of how the circulation of a periodical was being
maintained i.e. by not looking into the financial records, bank statements or bank pass books,
by not examining evidence of actual payment of printer’s bills and by not caring to ascertain
how many copies were sold and paid for.
ANSWER:
PROVISION: Clause (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949 states
that if a Chartered Accountant in practice fails to obtain sufficient information to warrant the
expression of an opinion or his exceptions are sufficient material to negate the expression of an
opinion, the chartered accountant shall be deemed to be guilty of a professional misconduct.
CONCLUSION: In the instant case Mr. Z, a practicing Chartered Accountant issued a certificate of
circulation of a periodical without going into the most elementary details of how the circulation of a
periodical was being maintained i.e., by not looking into the financial records, bank statements or
bank pass books, by not examining evidence of actual payment of printer’s bills and by not caring to
ascertain how many copies were sold and paid for. The chartered accountant should not express his
opinion before obtaining the required data and information. As an auditor, Mr. Z ought to have
verified the basic records to ensure the correctness of circulation figures.
Thus, in the present case Mr. Z will be held guilty of professional misconduct as per Clause (8) of Part
I of Second Schedule to the Chartered Accountants Act, 1949.
Q.NO.33 A charitable institution entrusted Rs. 10 lakhs with its auditors M/s Ram and Co., a
Chartered Accountant firm, to invest in a specified securities. The auditors pending investment
of the money, deposited it in their Savings bank account and no investment was made in the
next three months.
ANSWER:
PROVISION: If a Chartered Accountant in practice fails to keep moneys of his clients in a separate
bank account or fails to use such moneys for purposes for which they are intended then his action
would amount to professional misconduct under Clause (10) of Part I of Second Schedule to the
Chartered Accountants Act, 1949. It is his duty to deposit them in a separate banking account, and to
utilise such funds only in accordance with the instructions of the client or for the purposes intended
by the client.
CONCLUSION: In the given case by depositing the client’s money by M/s Ram and Co., a firm of
Chartered Accountants, in their own savings bank account, the auditors have committed a
professional misconduct. Hence in the given case, M/s Ram & Co. will be held guilty of professional
misconduct.
Q.NO.34 L, a chartered accountant did not maintain books of account for his professional earnings
on the ground that his income is less than the limits prescribed u/s 44AA of the Income Tax
Act, 1961.
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ANSWER:
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Maintenance of Books of Account: As per the Council General Guidelines 2008, under Chapter 5 on
maintenance of books of accounts, it is specified that if a chartered accountant in practice or the
firm of Chartered Accountants of which he is a partner fails to maintain and keep in respect of his/its
professional practice, proper books of account including the Cash Book and Ledger, he is deemed to
be guilty of professional misconduct. Accordingly, it does not matter whether section 44AA of the
Income Tax Act, 1961 applies or not.
CONCLUSION: Hence, Mr. L is guilty of professional misconduct.
Q.NO.35 A member of the institute shall not accept in a year more than the specified number of
tax audits under section 44AB of the Income Tax Act. Mr. Gaurav is a partner in M/s. XYZ &
Co., a firm of Chartered Accountants with 6 partners. During the assessment year 2020-21, Mr.
Gaurav alone had signed 290 tax audit reports consisting of both corporate and non-corporate
assesses.
ANSWER:
Ceiling limit for signing the Tax Audit Reports: As per Council General Guidelines 2008, a member of
the Institute in practice shall not accept, in a financial year, more than the “specified number of tax
audit assignments” under Section 44AB of the Income-tax Act, 1961. It is also provided further that
where any partner of a firm of Chartered Accountants in practice accepts one or more tax audit
assignments in his individual capacity, the total number of such assignments which may be accepted
by him shall not exceed the “specified number of tax audit assignments” in the aggregate. In the
case of firm of Chartered Accountants in practice “the specified number of tax audit assignments”
means, 60 tax audit assignments per partner in the firm, IN A FINANCIAL YEAR, whether in respect of
corporate or non-corporate assesses. Further, as per clarification issued by the Institute on Tax Audit
Assignments, tax audit reports may be signed by the partners in any manner whosoever in
accordance with specified audit limits.
ANALYSIS AND CONCLUSION: In the instant case, there are 6 partners in M/s XYZ & Co., a Chartered
Accountants firm, accordingly specified ceiling limit for the firm will be (60 tax audit assignments per
partner X 6 partners) = 360. Therefore, all the 6 partners of the firm can collectively sign 360 tax
audit reports. This maximum limit of 360 tax audit assignments may be distributed between the
partners in any manner whatsoever. For instance, 1 partner can individually sign 360 tax audit
reports in case remaining 5 partners are not signing any tax audit report. Assuming Mr. Gaurav has
signed 290 tax audit reports consisting of both corporate and non-corporate assesse on behalf of
firm and remaining partners are signing audit reports within the specified number of tax audit
assignments u/s 44AB i.e., up to 70.
Hence, MR. GAURAV SHALL NOT BE DEEMED TO GUILTY of professional misconduct provided total
number of tax audit reports on behalf of firm do not exceeds 360.
Q.NO.36 Mr. C accepted the statutory audit of M/s PSU Ltd., whose net worth is negative for the
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year 2019-20. The audit was to be conducted for the year 2020-21. The audited accounts for
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the year 2020-21 showed liability for payment of tax audit fees of Rs. 15,000 in favour of Mr. E,
the previous auditor.
ANSWER:
Accepting Appointment as an Auditor: As per Chapter 7 of Council General Guidelines 2008, a

member of the Institute of Chartered Accountants of India in practice shall be deemed to be guilty of
professional misconduct if he accepts appointment as auditor of an entity in case the undisputed
audit fee of another chartered accountant for carrying out the statutory audit under Companies Act
or various other statutes has not been paid. As per the proviso, such prohibition shall not apply in
case of a sick unit where a sick unit is defined to mean “where the net worth is negative”.
Conclusion: In the instant case, though the undisputed fees are unpaid, Mr. C would still not be
guilty of professional misconduct since the M/s PSU Ltd. is a sick unit having negative net worth for
the year 2019-20.
Q.NO.37 A is the auditor of Z Ltd., which has a turnover of Rs. 200 crore. The audit fee for the year
is fixed at Rs. 50 lakhs. During the year, the company offers A an assignment of management
consultancy within the meaning of Section 2(2)(iv) of the CA Act, 1949 for a remuneration of
Rs. 1 crore. A seeks your advice on accepting the assignment.
ANSWER:
Appointment as a Statutory Auditor of a PSUs’/Govt Company(ies)/Listed Company(ies) and Other

Public Company(ies): As per the Council General Guidelines 2008, under Chapter IX on appointment
as statutory auditor a member of the Institute in practice shall not accepts the appointment as a
statutory auditor of a PSUs’/Govt company(ies)/Listed company(ies) and other public company(ies)
having a turnover of Rs. 50 crores or more in a year and where he accepts any other work(s) or
assignment(s) or service(s) in regard to same undertaking(s) on a remuneration which in total
exceeds the fee payable for carrying out the statutory audit of the same undertaking.
For this purpose, the other work/services include Management Consultancy and all other
professional services permitted by Council excluding audit under any other statute, Certification
work required to be done by the statutory auditor and any representation before an authority.
Conclusion: In view of the above position, it would be a misconduct on A’s part if he accepts the
management consultancy assignment for a fee of Rs. 1 crore. Since the MCS fees of Rs. 1 Crore
exceeds the Statutory audit fee of Rs. 50 Lakhs.
Q.NO.38 D, who conducts the tax audit u/s 44AB of the Income Tax Act, 1961 of M/s ABC, a
partnership firm, has received the audit fees of Rs. 2,50,000 on progressive basis in respect of
the tax audit for the year ended 31.3.2020. The audit report was, however, signed on
25.5.2020.
ANSWER:
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Entire Audit Fees Received in Advance: As per Chapter X of Council General Guidelines, 2008 a
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member of the Institute in practice or a partner of a firm in practice or a firm shall not accept
appointment as auditor of a concern while indebted to the concern or given any guarantee or
provided any security in connection with the indebtedness of any third person to the concern, for
limits fixed in the statute and in other cases for amount exceeding Rs. 1,00,000/-.
However, the Research Committee of the ICAI has expressed the opinion that where in accordance
with the terms of engagement of auditor by a client, the auditor recovers his fees on a progressive
basis as and when a part of the work is done without waiting for the completion of the whole job, he
cannot be said to be indebted to the company at any stage.
Conclusion: In the instant case, Mr. D is appointed to conduct a tax audit u/s 44AB of the Income Tax
Act, 1961. He has received the audit fees of Rs. 2,50,000 in respect of the tax audit for the year
ended 31.3.2020 which is on progressive basis. Therefore, Mr. D will not be held guilty for
misconduct.
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TEST YOUR KNOWLEDGE QUESTIONS [ICAI SM]
NOV 2020 EDITION [SELF STUDY]
Q.NO.1 P, a Chartered Accountant in practice provides management consultancy and other services
to his clients. During 2020, looking to the growing needs of his clients to invest in the stock
markets, he also advised them on Portfolio Management Services whereby he managed
portfolios of some of his clients. Is P guilty of professional misconduct?
ANSWER:
Advising on Portfolio Management Services: The Council of the Institute of Chartered Accountants of
India (ICAI) pursuant to Section 2(2)(iv) of the Chartered Accountants Act, 1949 has passed a resolution
permitting “Management Consultancy and other Services” by a Chartered Accountant in practice. A
clause of the aforesaid resolution allows Chartered Accountants in practice to act as advisor or
consultant to an issue of securities including such matters as drafting of prospectus, filing of documents
with SEBI, preparation of publicity budgets, advice regarding selection of brokers, etc.
It is, however, specifically stated that Chartered Accountants in practice are not permitted to
undertake the activities of broking, underwriting and portfolio management services. Thus, a
chartered accountant in practice is not permitted to manage portfolios of his clients.
CONCLUSION: In view of this, P would be guilty of misconduct under the Chartered Accountants Act,
1949.
Q.NO.2 Mr. G, a Chartered Accountant in practice as a sole proprietor has an office in Mumbai near
Church Gate. Due to increase in professional work, he opens another office in a suburb of
Mumbai which is approximately 80 kilometers away from the municipal limits of the city. For
running the new office, he employs three retired Income-tax Officers. Is Mr. G guilty of
professional misconduct?
ANSWER:
PROVISION: In terms of section 27 of the Chartered Accountants Act, 1949, if a chartered accountant in
practice has more than one office in India, each one of these offices should be in the separate charge of
a member of the Institute.
There is however an exemption for the above if the second office is located in the same premises, in
which the first office is located; or the second office is located in the same city, in which the first office
is located; or the second office is located within a distance of 50 kms from the municipal limits of a city,
in which the first office is located.
CONCLUSION: Since the second office is situated beyond 50 kms of municipal limits of Mumbai city, he
would be liable for committing a professional misconduct.
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Q.NO.3 Mr. K, a practicing Chartered Accountant gave 50% of the audit fees received by him to a
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non-Chartered Accountant, Mr. L, under the nomenclature of office allowance and such an
arrangement continued for a number of years. Discuss this in the light of Professional Ethics
issued by ICAI.
ANSWER:
Sharing of Audit Fees with Non-Member: As per Clause (2) of Part I of First Schedule to the Chartered
Accountants Act, 1949 a member shall be held guilty if a Chartered Accountant in practice pays or
allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees
or profits of his professional business, to any person other than a member of the Institute or a partner
or a retired partner or the legal representative of a deceased partner, or a member of any other
professional body or with such other persons having such qualification as may be prescribed, for the
purpose of rendering such professional services from time to time in or outside India.
ANALYSIS AND CONCLUSION: In the instant case, Mr. K, a practising Chartered Accountant gave 50% of
the audit fees received by him to a non-Chartered Accountant, Mr. L, under the nomenclature of office
allowance and such an arrangement continued for a number of years. In this case, it is not the
nomenclature to a transaction that is material but it is the substance of the transaction, which has to
be looked into.
The Chartered Accountant had shared his profits and, therefore, Mr. K will be held guilty of
professional misconduct under the Clause (2) of Part I of First Schedule to the Chartered Accountants
Act, 1949.
Q.NO.4 Mr. X who passed his CA examination of ICAI on 18th July, 2020 and started his practice from
August 15, 2020. On 16th August 2020, one female candidate approached him for articleship. In
addition to monthly stipend, Mr. X also offered her 1 % profits of his CA firm. She agreed to take
both 1 % profits of the CA firm and stipend as per the rate prescribed by the ICAI. The Institute of
Chartered Accountants of India sent a letter to Mr. X objecting the payment of 1 % profits. Mr. X
replies to the ICAI stating that he is paying 1 % profits of his firm over and above the stipend to
help the articled clerk as the financial position of the articled clerk is very weak. Is Mr. X liable to
professional misconduct?
ANSWER:
PROVISION: As per Clause (2) of Part I of First Schedule to the Chartered Accountants Act 1949, a
Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he pays or
allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees
or profits of his professional business, to any person other than a member of the Institute or a partner
or a retired partner or the legal representative of a deceased partner, or a member of any other
professional body or with such other persons having such qualification as may be prescribed, for the
purpose of rendering such professional services from time to time in or outside India.
ANALYSIS AND CONCLUSION: In view of the above, the objections of the Institute of Chartered
Accountants of India, as given in the case, are correct and reply of Mr. X, stating that he is paying 1 %
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profits of his firm over and above the stipend to help the articled clerk as the position of the articled
clerk is weak is not tenable.
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Hence, Mr. X is guilty of professional misconduct in terms of Clause (2) of Part I of First Schedule to the
Chartered Accountants Act 1949.
Q.NO.5 M/s XYZ, a firm in practice, develops a website “xyz.com”. The colour chosen for the website
was a very bright green and the web-site was to run on a “push” technology where the names of
the partners of the firm and the major clients were to be displayed on the web-site without any
disclosure obligation from any regulator. Is this website in compliance with guidelines issued by
ICAI in this regard?
ANSWER:
PROVISION: The Council of the Institute had approved posting of particulars on website by Chartered
Accountants in practice under Clause (6) of Part I of First Schedule to the Chartered Accountants Act,
1949 subject to the prescribed guidelines. The relevant guidelines in the context of the website hosted
by M/s XYZ are:
1. No restriction on the colours used in the website;

2. The websites are run on a “pull” technology and not a “push” technology;
3. Names of clients and fees charged not to be given.
However, disclosure of names of clients and/or fees charged, on the website is permissible only where
it is required by a regulator, in India or outside India. Further below such disclosure itself, it should be
mentioned that “This disclosure is in terms of the requirement of [name of the regulator] having
jurisdiction in [name of the country/area where such regulator has jurisdiction] vide [Rule/ Directive
etc. under which the disclosure is required by the Regulator].
ANALYSIS AND CONCLUSION: In view of the above, M/s XYZ would have no restriction on the colours
used in the website but failed to satisfy the other two guidelines. Thus, the firm would be liable for
professional misconduct since it would amount to soliciting work by advertisement.
Q.NO.6 A partner of a firm of chartered accountants during a T.V. interview handed over a bio-data
of his firm to the chairperson. Such bio-data detailed the standing of the international firm with
which the firm was associated. It also detailed the achievements of the concerned partner and his
recognition as an expert in the field of taxation in the country. The chairperson read out the said
bio-data during the interview. Discuss whether this action by the Chartered Accountant would
amount to misconduct or not.
ANSWER:
PROVISION: Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 prohibits
solicitation of client or professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means since it shall constitute professional
misconduct.
ANALYSIS AND CONCLUSION: The bio-data was handed over to the chairperson during the T.V.
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interview by the Chartered Accountant which included details about the firm and the achievements of
the partner as an expert in the field of taxation. The chairperson simply read out the same in detail
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about association with the international firm as also the achievements of the partner and his
recognition as an expert in the field of taxation. Such an act would definitely lead to the promotion of
the firms’ name and publicity thereof as well as of the partner and as such the handing over of bio-data
cannot be approved. The partner would be held guilty of professional miscount under Clause (6) of
Part I of the First Schedule to the Chartered Accountants Act, 1949.
Q.NO.7
(a) An advertisement was published in a Newspaper containing the photograph of Mr. X, a member
of the institute wherein he was congratulated on the occasion of the opening ceremony of his office.
(b) Mr. X, a Chartered Accountant and the proprietor of X & Co., wrote several letters to the Assistant
Registrar of Co-operative Societies stating that though his firm was on the panel of auditors, no audit
work was allotted to the firm and further requested him to look into the matter.
ANSWER:
a) Publishing an Advertisement Containing Photograph:
As per Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients
or professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means.
ANALYSIS AND CONCLUSION: In the given case, Mr. X published an advertisement in a

Newspaper containing his photograph on the occasion of the opening ceremony of his office. On
this context, it may be noted that the advertisement which had been put in by the member is
quite prominent. If soliciting of work is allowed, the independence and forthrightness of a
Chartered Accountant in the discharge of duties cannot be maintained.
The above therefore amounts to soliciting professional work by advertisement directly or

indirectly. Mr. X would be therefore held guilty under Clause (6) of Part I of the First Schedule to
b) Soliciting Professional Work:
As per Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients
or professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means.
ANALYSIS AND CONCLUSION: In the given case, Mr. X, a Chartered Accountant and proprietor
of M/s X and Co., wrote several letters to the Assistant Registrar of Co-operative Societies,
requesting for allotment of audit work. In similar cases, it was held that the Chartered
Accountant would be guilty of professional misconduct under Clause (6) of Part I of the First
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Schedule to the Chartered Accountants Act, 1949. The writing of continuous letter to ascertain
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the reasons for not getting the work is quite alright but in case such either amount to request
for allowing the work then Mr. X will be liable for professional misconduct.
Consequently, Mr. X would therefore be held guilty under Clause (6) of Part I of the First
Q.NO.8 A practising Chartered Accountant uses a visiting card in which he designates himself, besides
as Chartered Accountant, Cost Accountant. Is this a misconduct?
ANSWER:
As per provisions of section 7 of the Act read with Clause (7) of Part I of the First Schedule to the
Chartered Accountants Act, 1949. A chartered accountant in practice cannot use any other designation
than that of a chartered accountant. However, a member in practice may use any other letters or
descriptions indicating membership of accountancy bodies which have been approved by the Council.
Thus, it is improper for a chartered accountant to state in his documents that he is a “Cost Accountant”.
However as per the Chartered Accountants Act, 1949, the Council has resolved that the members are
permitted to use letters indicating membership of the Institute of Cost and Works Accountants but not
the designation "Cost Accountant".
Q.NO.9 Mr. Nigal, a Chartered Accountant in practice, delivered a speech in the national conference
organized by the Ministry of Textiles. While delivering the speech, he told to the audience that he
is a management expert and his firm provides services of taxation and audit at reasonable rates.
He also requested the audience to approach his firm of chartered accountants for these services
and at the request of audience he also distributed his business cards and telephone number of his
firm to those in the audience. Comment.
ANSWER:
PROVISION: Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that
a Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or
professional work either directly or indirectly by a circular, advertisement, personal communication or
interview or by any other means.
Section 7 of the Chartered Accountants Act, 1949 read with Clause (7) of Part I of the First Schedule to
the said Act prohibits advertising of professional attainments or services of a member. It also restrains a
member from using any designation or expression other than that of a chartered accountant in
documents, visiting cards etc.
Member may appear on television and films and agree to broadcast in the Radio or give lectures at
forums and may give their names and describe themselves as Chartered Accountants. Special
qualifications or specialized knowledge directly relevant to the subject matter of the programme may
also be given but no reference should be made, in the case of practicing member to the name and
address or services of his firm.
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CONCLUSION: Thus, it is improper to use designation "Management Expert" since neither it is a degree
of a University established by law in India or recognised by the Central Government nor it is a
recognised professional membership by the Central Government or the Council.
Therefore, he is deemed to be guilty of professional misconduct under both Clause (6) and Clause (7) as
he has used the designation “Management Expert” in his speech and also, he has made reference to
the services provided by his firm of Chartered Accountants at reasonable rates.
Distribution of cards to audience is also a misconduct in terms of Clause (6).
Q.NO.10 Mr. A is a practicing Chartered Accountant working as proprietor of M/s A & Co. He went
abroad for 3 months. He delegated the authority to Mr. Y a Chartered Accountant his employee
for taking care of routine matters of his office. During his absence Mr. Y has conducted the under
mentioned jobs in the name of M/s A & Co.
(i) He issued the audit queries to client which were raised during the course of audit.
(ii) He issued production certificate to a client under the GST Act.
(iii) He attended the Income Tax proceedings for a client as authorized representative before Income
Tax Authorities.
Please comment on eligibility of Mr. Y for conducting such jobs in name of M/s A & Co. and liability of
Mr. A under the Chartered Accountants Act, 1949.
ANSWER:
Delegation of Authority to the Employee: As per Clause (12) of Part I of the First Schedule of the
Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of
professional misconduct “if he allows a person not being a member of the Institute in practice or a
member not being his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit
and loss account, report or financial statements”.
The Council has clarified that the power to sign routine documents on which a professional opinion or
authentication is not required to be expressed may be delegated and such delegation will not attract
provisions of this clause like issue of audit queries during the course of audit, asking for information or
issue of questionnaire, attending to routing matters in tax practice, subject to provisions of Section 288
of Income Tax Act etc.
ANALYSIS AND CONCLUSION: In this case CA A proprietor of M/s A & Co., went to abroad and
delegated the authority to another Chartered Accountant Mr. Y, his employee, for taking care of
routine matters of his office who is not a partner but a member of the Institute of Chartered
Accountants:
(i) In the given case, Mr. Y, a chartered accountant being employee of M/s A & Co. has issued audit
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queries which were raised during the course of audit. Here Y is right in issuing the query, since the same
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falls under routine work which can be delegated by the auditor. Therefore, there is no misconduct in
this case as per Clause (12) of Part I of First schedule to the Act.
(ii) Further, issuance of production certificate to a client under GST Act by Mr. Y being an employee of
M/s A & Co. (an audit firm), is not a routine work and it is outside his authorities. Thus, CA A is guilty of
professional misconduct under Clause (12) of Part I of First Schedule of the Chartered Accountants Act,
1949.
(iii) In this instance, Mr. Y, CA employee of the audit firm M/s A & Co. has attended the Income tax
proceedings for a client as authorized representative before Income Tax Authorities. Since the council
has allowed the delegation of such work, the chartered accountant employee can attend to routine
matter in tax practice as decided by the council, subject to provisions of Section 288 of the Income Tax
Act. Therefore, there is no misconduct in this case as per Clause (12) of Part I of First schedule to the
Act.
Q.NO.11 XYZ Co. Ltd. has applied to a bank for loan facilities. The bank on studying the financial
statements of the company notices that you are the auditor and requests you to call at the bank
for a discussion. In the course of discussions, the bank asks for your opinion regarding the
company and also asks for detailed information regarding a few items in the financial statements.
The information is available in your working paper file. What should be your response and why?
ANSWER:
PROVISION: As per Clause (1) of Part I of the Second Schedule read with SA 200 – Overall Objectives of
an independent audit and conduct of audit in accordance with standards on auditing, of the Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct if he discloses information acquired in the course of his professional engagement to any
person other than his client, without the consent of the client or otherwise than as required by law for
the time being in force.
ANALYSIS AND CONCLUSION: In the instant case, the bank has asked the auditor for detailed
information regarding few items in the financial statements available in his working papers. Having
regard to the position stated earlier, the auditor cannot disclose the information in his possession
without specific permission of the client. As far as working papers are concerned, working papers are
the property of the auditor. The auditor may at his discretion, make portions of or extracts from his
working papers available to his client".
Thus, there is no requirement compelling the auditor to disclose information obtained in the course of
audit and included in the working papers to any outside agency except as and when required by any
law.
Q.NO.12 Mr. A, a newly qualified Chartered Accountant, started his practice and sought clients
through telephone calls from his family and friends, almost all of them employed in one or the
other retail trade business. One of his friends Mr. X gave him an idea to start online services and
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give stock certifications to traders with Cash Credit Limits in Banks. Mr. A started a website with
colourful catchy designs and shared the website address on his all social media posts and stories
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and tagged 30 traders of his local community with the caption “Easy Online Stock Certification
Services”. Besides, Mr. A entered in an agreement with a Digital Marketer to give him 5%
commission on each service procured through him. Discuss if the actions of Mr. A are valid in the
light of the Professional Ethics and various pronouncements and guidelines issued by ICAI.
ANSWER:
PROVISION: As per Clause (6) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he solicits clients
or professional work either directly or indirectly by circular, advertisement, personal communication or
interview or by any other means.
Creating a website is not a non-compliance provided it is in line with the guidelines issued by the
Institute in this regard. One of the guidelines is that the website should not be in push mode. Further,
mentioning of clients’ names is also prohibited as per the guidelines.
ANALYSIS AND CONCLUSION: In the given situation, Mr. A shared the website address on his all-social
media posts and stories and tagged 30 traders of his local community with the caption “Easy Online
Stock Certification Services” mentioning his current clients as well. This is in complete contravention of
the guidelines on website issued by the ICAI.
Thus, CA, A would be held guilty of professional misconduct under clause 6 of Part 1 of First Schedule of
Q.NO.13 Mr. D, a practicing CA, is appointed as a Director Simplicitor in XYZ Pvt. Ltd. After one year
of appointment, Mr. D resigned as the Director and accepted the Statutory Auditor position of the
company. Is Mr. D right in accepting the auditor position?
ANSWER:
PROVISION: As per Clause (4) of Part I of the Second Schedule of the Chartered Accountants Act, 1949,
a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he expresses his
opinion on financial statements of any business or enterprise in which he, his firm, or a partner in his
firm has a substantial interest.
Section 141 of the Companies Act, 2013 specifically prohibits a member from auditing the accounts of a
company in which he is an officer or employee.
As per the clarifications issued by the Council, a member shall not accept the assignment of audit of a
Company for a period of two years from the date of completion of his tenure as Director, or resignation
as Director of the said Company.
CONCLUSION: In the instant case, Mr. D, a practicing CA, is appointed as a Director Simplicitor in XYZ
Pvt. Ltd. After one year of appointment, Mr. D resigned as the Director and accepted the Statutory
Auditor position of the company. In view of above provisions Mr. D cannot accept the AUDITOR
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POSITION of the company until the completion of two years after his resignation.
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Thus, CA, D would be held guilty of professional misconduct under clause 4 of Part 1 of Second
Schedule of the Chartered Accountants Act, 1949.
Q.NO.14 Mr. F, a Chartered Accountant, gave advisory services to PQR Pvt. Ltd. Further, he gave
them GST consultancy and helped in ERP set up. Later, the company turned out to be a part of a
group of companies involved in money laundering. Mr. F was asked to provide details of the
companies. Mr. F refused on the grounds that he gave only consultancy services to the company
and wasn’t supposed to keep any information about the company. Is Mr. F right as per the
guidelines issued by the ICAI?
ANSWER:
The financial services industry globally is required to obtain information of their clients and comply with
Know Your Client Norms (KYC norms).
In the given situation, CA. F, gave GST consultancy and helped in ERP set up along with advisory services
to PQR Pvt. Ltd. Mr. F was asked to provide details of the companies as the company, turned out to be
a part of a group of companies, involved in money laundering.
Contention of Mr. F that he gave only consultancy services to the company and wasn’t supposed to
keep any information about the company is not valid as Mr. F should have kept following information in
compliance with KYC Norms which are mandatory in nature and shall apply in all assignments
pertaining to attestation functions.
In the given case of PQR Pvt. Ltd., a Corporate Entity, Mr. F should have kept following information:
A. General Information Name and Address of the Entity Business Description:
1. Name of the Parent Company in case of Subsidiary

2. Copy of last Audited Financial Statement
B. Engagement Information
Type of Engagement
C. Regulatory Information
1. Company PAN No.

2. Company Identification No.
3. Directors’ Names & Addresses
4. Directors’ Identification No.
Q.NO.15 Mr. S, the auditor of ABC Pvt. Ltd. has delegated following works to his articles and staff:
i. Issue of audit queries during the course of audit.

ii. Issue of memorandum of cash verification and other physical verification.
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iii. Letter forwarding draft observations/financial statements.

iv. Issuing acknowledgements for records produced.
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v. Signing financial statements of the company.

Is this correct as per the Professional Ethics and ICAI’s guidelines and pronouncements?
ANSWER:
PROVISION: As per Clause (12) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
allows a person not being a member of the institute in practice or a member not being his partner to
sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or
The Council has clarified that the power to sign routine documents on which a professional opinion or
authentication is not required to be expressed may be delegated in the following
ANALYSIS AND CONCLUSION: In the instant case, Mr. S, the auditor of ABC Pvt. Ltd. has delegated
certain task to his articles and staff such as issue of audit queries during the course of audit, issue of
memorandum of cash verification and other physical verification, letter forwarding draft
observations/financial statements, issuing acknowledgements for records produced and signing
financial statements of the company.
In view of this, S would be guilty of professional misconduct for allowing the person signing the
financial statements on his behalf to his articles and staff under Clause 12 of Part 1 of First Schedule of
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TOPICS NOT COVERED FROM ICAI SM [OCT 2021 EDITION]
KYC Norms for CA in Practice [Concept 4.7] PG 18.32
Annexure 1 – Chartered Accountants Act, 1949 PG 18.137
Annexure 2 – Disciplinary Procedures PG 18.141
Annexure 4 – Bare Act related to SCHEDULES ONE and SCHEDULE TWO PG 18.146
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5. AUDIT COMMITTEE AND CORPORATE
GOVERNANCE
Q.NO.1 WRITE ABOUT THE CONCEPT AND DEFINITION OF CORPORATE GOVERNANCE?

ANSWER:
CONCEPT: Corporate Governance is the system by which companies are directed and governed by
the management. Through use of ethical business processes, the management is able to ensure
accountability, transparency and fairness in the company operations, thereby ensuring that the
interests of shareholders and all other stakeholders are protected. The Board of Directors are
responsible for governance of their companies.
DE-CODING: The word ‘Corporate’ relates to a large business entity or a large company Similarly,
the word ‘Governance’ means exercise of authority, direction or control. Thus, the concept of
‘Corporate Governance’ is the system by which the management of a business entity directs and
controls the activities in the best interest of the stakeholders.
Q.NO.2 WRITE ABOUT THE LEGAL FRAMEWORK RELATED TO CORPORATE GOVERNANCE IN

INDIA?
ANSWER:
1. The (SEBI) issued the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
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(“LODR Regulations”), with the objective of streamlining and consolidating the provisions of
various listing agreements in operation for different segments of the capital markets.
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2. The LODR Regulations are divided into two parts:

a. the substantive provisions are incorporated in the main body and
b. the procedural requirements are incorporated in the form of schedules.
3. The LODR Regulations also capture the corporate governance principles found in Clause 49 of
SEBI’s Model Listing Agreement.
Note: It may be noted that the LODR Regulations deal with only post-listing requirements and
exclude all pre-listing requirements.
4. Issues addressed in LODR Regulations are:

a. Responsibilities and key functions of the Board, it’s composition, compensation and
disclosures.
b. Code of Conduct and vigil mechanism.
c. Composition, meetings, powers, role and responsibilities of the Audit Committee which
is an important pillar of corporate governance.
d. Management of subsidiary companies.
e. Procedures related to risk management.
f. Disclosures on important issues regarding related party transactions, accounting
treatment, etc.
g. Content of management discussion and analysis.
h. Information to shareholders.
i. Compliance Certificate by the CEO and CFO.
j. Compliance Certificate from either the auditors or practising company secretaries
regarding compliance of conditions on corporate governance.
5. APPLICABILITY OF LODR REGULATIONS: These regulations shall apply to the listed entity who
has listed any of the following designated securities on recognised stock exchange:
a. Specified securities listed on main board or SME Exchange or institutional trading
platform.
b. Non-convertible debt securities, non-convertible redeemable Preference shares,
perpetual debt instrument, perpetual non-cumulative preference shares.
c. Indian depository receipts.
d. Securitised debt instruments.
e. Security receipts.
f. Units issued by mutual funds.
g. Any other securities as may be specified by the Board.
Q.NO.3 WRITE ABOUT REQUIREMENTS OF AUDIT COMMITTEE UNDER LODR REGULATIONS?

ANSWER:
A. APPLICABILITY AND COMPOSITION OF AUDIT COMMITTEE:
1. Every LISTED ENTITY shall constitute a qualified and independent audit committee in
accordance with the following provisions and rules:
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2. The Audit Committee shall have MINIMUM 3 DIRECTORS as members. Two-thirds of the
members of audit committee shall be independent directors, however, in case of a LISTED
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ENTITY HAVING OUTSTANDING SR (SUPERIOR RIGHTS) equity shares, the audit committee
shall only comprise of independent directors. [E.g., Shares held by Promoters, 2:1 up to 10:1
Voting Power]
3. All members of Audit Committee shall be financially literate and AT LEAST ONE member
shall have accounting or related financial management expertise.
4. The term “financially literate” means the ability to read and understand basic financial
statements i.e., balance sheet, profit and loss account, and statement of cash flows.
5. A member will be considered to have accounting or related financial management expertise
if he or she possesses experience in finance or accounting, or requisite professional
certification in accounting, or any other comparable experience or background which results
in the individual’s financial sophistication, including being or having been a chief executive
officer, chief financial officer or other senior officer with financial oversight responsibilities.
6. The Chairperson of the Audit Committee shall be an independent director and he shall be
present at Annual General Meeting to answer shareholder queries.
7. The Company Secretary shall act as the secretary to the committee.
8. The Audit Committee at its DISCRETION shall invite the finance director or the head of the
finance function, head of internal audit and a representative of the statutory auditor and any
other such executives to be present at the meetings of the committee.
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B. MEETING OF AUDIT COMMITTEE:
1. The Audit Committee shall meet AT LEAST FOUR TIMES in a year and the gap between two
meetings shall not exceed 120 DAYS.
2. The quorum shall be either two members or one third of the members of the Audit
Committee, whichever is GREATER, but there should be a minimum of two independent
directors present.
C. POWERS OF AUDIT COMMITTEE:
Powers of audit committee INCLUDES:

1. To investigate any activity within its terms of reference.
2. To seek information from any employee.
3. To obtain outside legal or other professional advice.
4. To secure attendance of outsiders with relevant expertise, if it considers necessary.
Note: It is mandatory for the above-mentioned four powers to be vested in the Audit
Committee. The Board may delegate/vest further powers to the committee. The auditor should
check whether the terms of reference of the Audit Committee have been suitably framed
mentioning the above powers.
D. ROLE OF AUDIT COMMITTEE:
The role of the Audit Committee shall include the following:

1. Financial Reporting Process: Oversight of the listed entity’s financial reporting process and
the disclosure of its financial information to ensure that the financial statement is correct,
sufficient and credible.
2. Appointment of Auditors: Recommendation for appointment, remuneration and terms of
appointment of auditors of the listed entity.
3. Other Services by Statutory auditors: Approval of payment to statutory auditors for any
other services rendered by the statutory auditors.
4. Discussion with statutory auditors before the audit commences, about the nature and scope
of audit as well as post-audit discussion to ascertain any area of concern.
5. Annual Financial Statements: Reviewing, with the management, the annual financial
statements and auditor's report thereon before submission to the Board for approval, with
particular reference to: [Draft audit report]
a. Matters required to be included in the Director’s Responsibility Statement to be
included in the Board’s report.
b. Changes, if any, in accounting policies and practices and reasons for the same.
c. Major accounting entries involving estimates based on the exercise of judgment by
management.
d. Significant adjustments made in the financial statements arising out of audit findings.
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e. Compliance with listing and other legal requirements relating to financial statements.
f. Disclosure of any related party transactions.
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g. Modified opinion(s) in the draft audit report.

6. Quarterly Financial Statements: Reviewing, with the management, the quarterly financial
statements before submission to the Board for approval.
7. Utilisation of Funds raised:
a. Reviewing, with the management, the statement of uses/application of funds raised
through an issue (public issue, rights issue, preferential issue, etc.), the statement of
funds utilized for purposes other than those stated in the offer document/
prospectus/ notice and the report submitted by the monitoring agency.
b. Monitoring the utilisation of proceeds of a public or rights issue, and making
appropriate recommendations to the Board to take up steps in this matter.
8. Auditors Independence: Reviewing and monitoring the auditor’s independence and
performance, and effectiveness of audit process;
9. Related Party Transactions: Approval or any subsequent modification of transactions of the
listed entity with related parties.
10. Loans and Investments: Scrutiny of inter-corporate loans and investments.
11. IFC: Evaluation of internal financial controls and risk management systems.
12. Performance of Auditors: Reviewing, with the management, performance of statutory and
internal auditors, adequacy of the internal control systems.
13. Internal Audit Function: Reviewing the adequacy of internal audit function, if any, including
the structure of the internal audit department, staffing and seniority of the official heading
the department, reporting structure coverage and frequency of internal audit.
14. Discussion with internal auditors of any significant findings and follow up there on;
15. Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a
material nature and reporting the matter to the Board.
16. To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of non-payment of declared dividends) and creditors.
17. WBP: To review the functioning of the Whistle Blower mechanism.
18. CFO: Approval of appointment of Chief Financial Officer after assessing the qualifications,
experience and background, etc. of the candidate.
19. Reviewing the utilization of loans and/ or advances from /investment by the holding
company in the subsidiary exceeding rupees 100 crore or 10% of the asset size of the
subsidiary, whichever is lower including existing loans / advances / investments.
20. Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee.
If the company has set up an Audit Committee as per section 177 of the Companies Act, 2013,
the company must ensure that the said Audit Committee has such additional functions /
features as are contained in the LODR Regulations.
In an unprecedented trend, in 2019, industry leading companies such as Sun Pharma, Yes Bank,
IndiGo Airlines, Zee Entertainment, and Indiabulls Housing Finance faced allegations of
corporate governance lapses. A little over half the companies in the Nifty 50 index received a
cumulative 4,552 whistle-blower complaints in financial year 2019 -20. [30 per cent higher
than the previous year.]
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Q.NO.4 WRITE ABOUT RESIGNATION OF STATUTORY AUDITOR FROM LISTED COMPANIES AND
THEIR MATERIAL SUBSIDIARIES IN CONTEXT OF LODR REGUATIONS?
ANSWER:
1. Audit Committee of a listed entity has to make recommendations for the appointment,
remuneration and terms of appointment of auditors of a listed entity. Audit Committee is also
responsible for reviewing and monitoring the independence and performance of auditors and
the effectiveness of the audit process.
2. Clause A in Part A of Schedule Ill under Regulation 30(2) of SEBI LODR Regulations requires
detailed reasons to be disclosed by the listed entities to the stock exchanges in case of
resignation of the auditor of a listed entity as soon as possible but not later than 24 HOURS of
receipt of reasons from the auditor. [I.e., Resignation Letter]
3. Further certain disclosures to be made part of the notice to the shareholders for an AGM, where
the statutory auditors are proposed to be appointed/re-appointed, including their terms of
appointment.
4. In light of the above, the conditions to be complied with upon resignation of the statutory
auditor of a listed entity/material subsidiary w.r.t. LIMITED REVIEW / AUDIT REPORT as per SEBI
LODR Regulations, are as under:
5. All listed entities/material subsidiaries while appointing/re re-appointing an auditor shall ensure
compliance with:
a. LIMITED REVIEW / AUDIT REPORT: If the auditor resigns within 45 days from the end of
a quarter of a financial year, then the auditor shall, before such resignation, issue the
limited review/ audit report for such quarter.
b. If the auditor resigns after 45 days from the end of a quarter of a financial year, then
the auditor shall, before such resignation, issue the limited review / audit report for:
i. such quarter as well as
ii. the next quarter.
c. if the auditor has signed the limited review/ audit report for the first three quarters of a
financial year, then the auditor shall, before such resignation:
i. issue the limited review/ audit report for the last quarter of such financial year
AS WELL AS
ii. THE AUDIT REPORT FOR SUCH FINANCIAL YEAR.
6. Other conditions relating to resignation shall include:

a. Reporting of concerns with respect to the listed entity/its material subsidiary to the Audit
Committee:
i. In case of any concern with the management of the listed entity/material
subsidiary such as non-availability of information / non-cooperation by the
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management which may hamper the audit process, the auditor shall approach
the Chairman of the Audit Committee of the listed entity and the Audit
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Committee shall receive such concern directly and immediately without
specifically waiting for the quarterly Audit Committee meetings.
ii. If auditor proposes to resign, all concerns with respect to the proposed
resignation, along with relevant documents shall be brought to the notice of the
Audit Committee.
iii. If proposed resignation is due to non-receipt of information/explanation from the
company, the auditor shall inform the Audit Committee of the details of
information / explanation sought and not provided by the management, as
applicable.
iv. On receipt of such information from the auditor relating to the proposal to
resign as mentioned above, the Audit Committee/board of directors (In case an
entity is not mandated to have an Audit Committee, then the board of directors
of the entity shall ensure compliance), shall deliberate on the matter and
communicate its views to the management and the auditor.
b. Disclaimer in case of non-receipt of information in accordance with the Standards of
Auditing as specified by ICAI/ NFRA. [DISCLAIMER OF OPINION]
7. CONDITIONS TO BE INCLUDED IN APPOINTMENT LETTER: The listed entity/ material subsidiary

shall ensure that the conditions mentioned above in (a) and (b) above are included in the terms
of appointment of the statutory auditor at the time of appointing/re-appointing the auditor.
8. In case the auditor has already been appointed, the terms of appointment shall be suitably
modified to give effect to (a) and (b) above.
9. The practicing company secretary shall certify compliance by a listed entity on the above in the
prescribed annual secretarial compliance report.
10. The listed entity where resignation of auditor arises shall also comply with the following:
a. Format of Information to be obtained from the auditor on resignation. [Reasons]
b. Disclosure of audit committee views to stock exchanges.
Q.NO.5 WRITE ABOUT APPLICABILITY AND FUNCTIONS OF AUDIT COMMITTEE UNDER

COMPANIES ACT, 2013? [SELF STUDY]
ANSWER:
A. APPLICABILITY:
1. As per section 177 read with Rule 6 of the Companies (Meetings of Board and its Powers)
Rules, 2014, every listed public company and the following classes of companies shall
constitute an Audit Committee –
1) all public companies with a paid-up capital of 10 CRORE RUPEES OR MORE or
2) all public companies having turnover of 100 CRORE RUPEES OR MORE or
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3) all public companies, having in aggregate, outstanding loans, debentures and

deposits, exceeding 50 CRORE RUPEES.
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2. However, following class of unlisted public companies shall not be covered:
1) A joint venture.
2) wholly owned subsidiary. and
3) a dormant company as covered u/s 455.
3. The paid-up share capital or turnover or outstanding loans, debentures and deposits, as the
case may be, as existing on the date of last audited Financial Statements shall be taken into
account for the purposes of this rule.
4. Section 139(11) provides that where a company is required to constitute an Audit
Committee under section 177, all appointments, including the filling of a casual vacancy of
an auditor under this section shall be made after taking into account the recommendations
of such committee.
5. COMPOSITION: The Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority. It may be noted that majority of members of
Audit Committee including its Chairperson shall be persons with ability to read and
understand, the financial statement.
B. FUNCTIONS OF AUDIT COMMITTEE: [177 (4) to (10)]
Every Audit Committee shall act in accordance with the terms of reference specified in writing
by the Board which shall include:
1. RECOMMENDATION FOR AUDITORS: The recommendation for appointment, remuneration
and terms of appointment of auditors of the company (However, in case of Government
Company, it is limited to the recommendation for remuneration).
2. REVIEW AND MONITOR AUDITORS: Review and monitor the auditor’s independence and
performance, and effectiveness of audit process.
3. EXAMINE F/S: Examination of the financial statement and the auditors’ report thereon.
4. RELATED PARTY TRANSACTIONS: Approval or any subsequent modification of transactions
with related parties.
5. SCRUTINY OF LOANS: Scrutiny of inter-corporate loans and investments.
6. VALUATIONS: Valuation of undertakings or assets of the company, wherever it is necessary.
7. IFC: Evaluation of internal financial controls and risk management systems.
8. END USE OF FUNDS: monitoring the end use of funds raised through public offers and
related matters.”
9. CALL COMMENTS OF AUDITORS: 177 (5): “The Audit Committee may call for the comments
of the auditors about internal control systems, the scope of audit, including the observations
of the auditors and review of financial statement before their submission to the Board and
may also discuss any related issues with the internal and statutory auditors and the
management of the company”.
10. POWER TO USE EXPERT 177(6): Shall have power to obtain professional advice from external
sources and have full access to information contained in the records of the company.
11. The auditors of a company and the key managerial personnel shall have a right to be heard
in the meetings of the Audit Committee when it considers the auditor’s report but shall not
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have the right to vote. [SEC. 177(7)]

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12. DISCLOSURES IN BOD REPORT [177(8)]: The Board’s report shall disclose the composition of
an Audit Committee and where the Board had not accepted any recommendation of the
Audit Committee, the same shall be disclosed in such report along with the reasons therefor.
13. VIGILENCE MECHANISM [SEC. 177(9) & (10)]:
a. Every listed company or such class or classes of companies, as may be prescribed,
shall establish a vigil mechanism for directors and employees to report genuine
concerns in such manner as may be prescribed.
b. The vigil mechanism shall provide for adequate safeguards against victimisation of
persons who use such mechanism and make provision for direct access to the
chairperson of the Audit Committee in appropriate or exceptional cases. Further the
details of such mechanism shall be disclosed by the company on its website, if any,
and in the Board’s report.
Q.NO.6 WRITE ABOUT REVIEW OF INFORMATION BY AUDIT COMMITTEE AS PER SCH II?
ANSWER:
The Audit Committee shall mandatorily review the following information:
1. Management Discussion and analysis of financial conditions and results of operations.

2. Statement of Significant Related Party transactions.
3. Letter of Weakness issue by statutory auditors.
4. Internal audit report related to internal control weaknesses.
5. Chief Internal Auditor’s Appointment, Removal and Remuneration shall be reviewed.
6. Statement of deviations:
a. Quarterly statement of deviations including report of monitoring agency if applicable and
b. Annual statement of funds utilized for purposes other than those stated in the offer
document/ prospectus/ notice.
AUDITORS DUTY:
1. The auditor should ascertain from the minutes book of the Audit Committee and other sources
like agenda papers, etc. whether the Audit Committee has reviewed the above-mentioned
information.
2. The auditor should ascertain whether as a part of Directors’ Report or as an addition thereto, a
Management Discussion and Analysis report forms part of the annual report to the
shareholders.
3. Where certain deficiencies or adverse findings are noted by the Audit Committee, the auditor
will be required to see that these have been suitably dealt with by the management in the
report on corporate governance.
Q.NO.7 WRITE ABOUT ROLE OF AUDITOR IN AUDIT COMMITTEE AND CERTIFICATION OF

COMPLIANCE OF CONDITIONS OF CORPORATE GOVERNANCE?
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ANSWER:
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1. The LODR Regulations as well as the Companies Act, 2013 in respect of the constitution of Audit
Committee underline the importance of audit process and its contribution to the corporate
governance process.
2. Regulation 18(1)(f) stipulates that a representative of the statutory auditor, when required, shall
be invited to the meetings of the Audit Committee.
3. Similarly, Section 177 of the Companies Act, 2013 provides the auditors of a company and the
key managerial personnel the right to be heard in the meetings of the Audit Committee when it
considers the auditor’s report but they shall not have the right to vote.
4. The auditor must ensure that he communicates frequently and openly with the Audit Committee
on key accounting or auditing issues that, in the auditor’s judgment, give rise to a greater risk of
material misstatement of the financial statements.
5. He can contribute significantly in assisting and advising the Audit Committee on improving
corporate governance, oversight of financial reporting process, implementation of accounting
policies and practices, compliance with accounting standards, strengthening of the internal
control systems in regard to financial reporting and reporting processes.
6. The auditor must devote substantial professional time in assisting the management and the
Audit Committee to enable them to discharge their functions effectively and in certification of
the requirements of corporate governance.
7. The auditor has to keep in mind that his role is not to drive corporate governance directly.
Rather, it is the management’s responsibility to do so and, in the process, he should play a
significant role in assisting management to ensure better standards of corporate governance.
8. AUDITOR’S RESPONSIBILITY:
a. CERTIFICATION ON CG: The auditor’s responsibility in certifying compliance with the
requirements of corporate governance relates to the verification and certification of
factual implementation of requirements of corporate governance as stipulated in the
LODR Regulations. Such verification and certification is neither an audit nor an
expression of opinion on the financial statements of the company.
b. The certificate from the auditor as regards compliance with the requirements of
corporate governance is neither an assurance as to the future viability of the company,
nor the efficiency or effectiveness with which the management has conducted the
affairs of the company.
9. GENERAL PRINCIPLES OF AUDIT:

a. The standards set out in the Standards on Auditing would be applicable in the
performance of certification with the requirements of corporate governance by the
auditor, to the extent relevant. The auditor should comply with the “Code of Ethics”
issued by the Institute of Chartered Accountants of India (ICAI).
b. The auditor should conduct verification of compliance with the requirements of
corporate governance as stipulated in the LODR Regulations, in accordance with the
Guidance Note on Certification of Corporate Governance issued by ICAI.
10. DOCUMENTATION: The auditor should document matters, which are important in providing
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evidence to support the certificate of factual findings, in accordance with SA 230 on “Audit
Documentation”.
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11. MANAGEMENT REPRESENTATIONS: The auditor should consider obtaining management
representations in accordance with SA 580, “Written Representations”.
12. VERIFICATION REGARDING COMPOSITION OF BOARD [REGULATION 17 AND 17A]: [SELF

STUDY]
Please Refer Page No. 7.15 in ICAI SM – NOV 2020 / OCT 2021 Edition for Detailed Discussion.
Note: These are Completely related to Company Law Provisions which requires an extensive
discussion and Hence not being discussed in our Auditing Sessions.
Please refer Company Law with regard to the same.
13. LIMITED REVIEW OF THE AUDIT OF ALL THE ENTITIES WHOSE ACCOUNTS ARE TO BE
CONSOLIDATED WITH THE LISTED ENTITY:
Limited Review by Statutory Auditor In case of:
a. All listed entities whose equity shares and convertible securities are listed on a recognised
stock exchange, the statutory auditors of such entities,
b. All entities whose accounts are to be consolidated with the listed entity and the statutory
auditors of entities whose accounts are to be consolidated with the listed entity shall comply
with the prescribed procedure.
Q.NO.8 WRITE ABOUT REMUNERATION OF DIRECTORS [PART C OF SCHEDULE V]?

ANSWER:
In this context, the auditor should:
1. Ascertain from the minutes of the Board of Directors’ meetings, shareholders’ meetings,
relevant agenda papers, notices, explanatory statements etc., whether the remuneration of non-
executive directors has been decided by the Board of Directors after receiving prior approval of
the shareholders in the general meeting;
2. Refer to the Articles of Association of the company, wherever applicable;
3. Examine the Report of the Board of Directors on corporate governance to be included in the
annual report of the company and ascertain whether the same contains the disclosures with
respect to remuneration of directors and compensation to non-executive directors. The auditor
should correlate this data with that contained in the financial statements.
NOTE: Where application of this clause requires the value of ESOP to be determined, the services of
expert may have to be utilized. In this regard, reference may be made to SA 620 dealing with “Using
the Work of an Auditor’s Expert”.
Q.NO.9 WRITE ABOUT OBLIGATIONS WITH RESPECT TO EMPLOYEES INCLUDING SENIOR

MANAGEMENT, KEY MANAGERIAL PERSONS, DIRECTORS AND PROMOTERS [REGULATIONS
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17(2) TO 17(4), 17A, 25(5), 25(6), 26(1),26 (2), 26(4) TO 26(6)]?

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ANSWER:
REFER COMPANY LAW IN THIS REGARD. THERE AFTER FURTHER REFER PAGE NO. 7.20 TO 7.24 IN
ICAI SM – NOV 2020 / OCT 2021 EDITION.
TOPICS NOT COVERED FROM ICAI SM [NOV 2020 EDITION]
TOPIC PAGE NO.
1. VERIFICATION REGARDING COMPOSITION OF BOARD [REGULATION 17 AND 7.15

17A]
2. OBLIGATIONS WITH RESPECT TO EMPLOYEES INCLUDING SENIOR 7.20 TO 7.24
MANAGEMENT, KEY MANAGERIAL PERSONS, DIRECTORS AND PROMOTERS
[REGULATIONS 17(2) TO 17(4), 17A, 25(5), 25(6), 26(1),26 (2), 26(4) TO 26(6)]
3. CODE OF CONDUCT [REGULATIONS 17(5), 26(3), 46(2) AND PART D OF 7.24
SCHEDULE V]
4. VIGIL MECHANISM [REGULATIONS 22, 46 AND PART C OF SCHEDULE V] 7.25
5. SUBSIDIARY OF LISTED ENTITY [REGULATIONS 16(C), 24 AND 46 AND PART C 7.25

OF SCHEDULE V]
6. NOMINATION AND REMUNERATION COMMITTEE [REGULATION 19 AND PART 7.26
D OF SCHEDULE II]
7. STAKEHOLDERS RELATIONSHIP COMMITTEE [REGULATION 20 AND PART D OF 7.27
SCHEDULE II]
8. RISK MANAGEMENT COMMITTEE 7.28
9. STATEMENT OF DEVIATION(S) OR VARIATION(S) [REGULATION 32 AND PART C 7.29

OF SCHEDULE II]
10. INFORMATION TO SHAREHOLDERS [REGULATION 36] 7.30
11. TRANSFER OR TRANSMISSION OR TRANSPOSITION 7.30

12. OF SECURITIES [REGULATION 40]
13. COMPLIANCE CERTIFICATE [PART B OF SCHEDULE II] 7.31
14. DISCLOSURES - MANAGEMENT DISCUSSION AND 7.32

15. ANALYSIS [SCHEDULE V]
16. OTHER DISCLOSURES 7.34 TO 7.36
17. REPORT ON CORPORATE GOVERNANCE [REGULATION 27 AND SCHEDULE II] 7.37
18. AUDITORS’ CERTIFICATE ON CORPORATE GOVERNANCE 7.37 TO 7.40
TEST YOUR KNOWLEDGE QUESTIONS – SOLVE FROM ICAI MATERIAL – PAGE – 7.41
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Page
326
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6. LIABILITIES OF AN AUDITOR
Q.NO.1 WRITE ABOUT NATURE OF AUDITOR’S LIABILITY?
ANSWER:
1. A member of the accounting profession, when he is in practice, offers to perform a larger variety
of professional services and also holds himself out to the public as an accountant qualified to
undertake these assignments.
2. When, therefore, he is appointed under a statute or under an agreement to carry out some
professional work especially audit or attestation function it is to be presumed that he shall carry
them out completely and with the care and diligence expected of a member of the profession.
The auditor, in all such cases, is expected to discharge his duties according to “generally
accepted auditing standards” or the applicable Standards of Auditing (SAs) at the time when the
professional work is carried out.
3. The implications of a professional engagement have been explained in the case Lanphire v.
Phipos (1838) & Case & P. 475 cited in “Professional Negligence” by J.P.Eddy, as follows:
“Every person who enters into a learned profession undertakes to bring to the exercise of it a
reasonable degree of care and skill. He does not undertake, if he is an attorney, that at all
events he shall gain his case, nor does a surgeon undertake that he will perform a cure; nor does
he undertake to use the highest degree of skill. There may be persons who have a higher
education and greater advantages than he has; but he undertakes to bring a fair, reasonable and
competent degree of skill.”
4. Either absence of the requisite skill or failure to exercise reasonable skill can give rise to an
action for damage for professional negligence.
Q.NO.2 WRITE ABOUT AUDITOR’S TAKING ASSISTANCE IN THE DISCHARGE OF HIS DUTIES?
ANSWER:
1. GENEREL WORKS CAN BE ASSIGNED: It is a well-accepted legal principle that duties under a
contract can be assigned only in cases where it does not make any difference to the person to
whom the obligation is owed, which of the two persons discharges it.
2. PROFESSIONAL CANNOT: Contracts involving personal skill, or other personal qualifications
normally cannot be assigned. It, therefore, follows that the work of an auditor being of a
personal character, it must be performed either by him or by persons under his direct
supervision since he himself remains finally responsible.
3. CODE OF ETHICS: To ensure his responsibility all cases, clause (12) of Part I of First Schedule to
the Chartered Accountants (Amendment) Act, 2006 makes it obligatory that reports on financial
statements would be signed either by the member or his partner.
4. USE OF STAFF:
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a. It is quite common for the auditors to engage persons some of whom are professionally
qualified, while others are not, to assist them in their work.
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b. The principals are expected to guide and supervise their work and are personally
responsible for any dereliction of duty or absence of care or skill in performance of an
audit or any other professional engagement. They cannot ordinarily shift any part of this
liability to their employees.
5. VARIOUS JUDGMENTS:
a. Henry Squire (Cash Chemists) Ltd. v. Ball Baker & Co.: “The principal must not excuse
himself for his clerk’s negligence by saying that he employed a clerk.”
b. Superintendent of Police v. M. Rajamany: “No auditor can escape from personal liability
by taking shelter under the misconduct of his own employees.”
c. The decision in the Rajamany’s case also places a limitation on the extent to which an
auditor may delegate his duties to his assistants:
“Callousness [insensitive] and irresponsible abdication [relinquishing] of his (auditor’s)
work will be regarded as misconduct. An auditor who does not personally look into the
accounts but merely delegated it to his assistants cannot be said to be acting with due
skill and care.”
6. DUTY OF QUALIFIED ASSISTANTS:

a. Despite the fact that the principal is responsible for the misdemeanor and misdeeds of
his employees, in order that the qualified staff discharge the duties assigned to them
with adequate skill and care, the council through various guidelines makes a member of
the Institute who is an employee shall exercise due diligence and shall not be grossly
negligent in the conduct of his duties.
b. In the absence of this clause, only the Chartered Accountant who had signed the report
would be liable and it would not be possible to reach the employee who is a chartered
accountant on grounds of misconduct. The above Council General Guidelines safeguards
the interest of members who engage Chartered Accountants and issue reports on the
basis of the work carried on by them.
7. BASIS OF LIABILITY: The liability for professional negligence may arise either under a statute or
an agreement; the liability may be civil or criminal.
Disciplinary action for professional misconduct under section 21 of the Chartered Accountants
Act can also be taken against a Chartered Accountant for failure to discharge his professional
duties competently or diligently.
Q.NO.3 WRITE ABOUT THE CONCEPT OF PROFESSIONAL NEGLIGENCE AND LIABILITY OF AUDITOR
TO THE CLIENT AND 3RD PARTIES?
ANSWER:
DEFINITION OF NEGLIGENCE: Negligence consists of below mentioned three elements:
1. Existence of duty or responsibility owed by one party to another to perform some act with
certain degree of care and competence and
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2. Occurrence of a breach of such duty and

3. Loss or detriment, being suffered by the party to whom the duty was owed as a result of
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negligence.
PROFESSIONAL NEGLIGENCE: In this context, professional negligence would constitute failure to
perform duties according to “accepted professional standards”, resulting in some loss or damage to
a party to whom the duty is owed.
A. TO WHOM IS THE DUTY OWED?
1. LOSS SUFFERED BY CLIENT: A professional man is deemed to have been negligent only when he
owed a duty to a person or persons and he had failed to perform or had performed it
negligently. If a loss had been suffered by a client through the action of the auditor, his liability
would be determined on the basis of the contract of engagement.
2. LOSS SUFFERED BY 3RD PARTY:
a. AUDITOR OWNED DUTY TO 3RD PARTIES: When a loss has been suffered by a third party
who is not privy to the arrangement between the clients and the auditor for determining
whether he is liable, it is necessary to find out whether the auditor owed any duty to him.
This will be apparent from the summary of legal decisions discussed hereinafter.
b. MANY USERS OF F/S – NOT PRIVY: The financial statements, on which the auditors’ report,
are designed to serve the needs of a variety of users, particularly owners and creditors.
There are users who have direct economic interest in the concerned business enterprise like
the owners, creditors and suppliers, potential owners, management, taxation authorities,
employees and customers. There are also others who have indirect interests like financial
analysts and advisers, stock exchanges, lawyers, regulatory authorities, financial press, trade
associations and labour unions. Usually, these parties are not in privity with the auditor.
c. TO WHOM / WHEN / HOW MUCH: Whether these parties are allowed to recover from the
auditor, losses that they incur as a result of the auditor’s dereliction of duty?
The solution seems difficult. To hold a negligent auditor liable “in an indeterminate amount
for an indeterminate time to an indeterminate class” will be stretching the limit too far.
d. SPECIFIC PARTIES SUFFERED LOSS – HOW MUCH ?: If responsibility is to be imposed where
specific users are identified, then to what extent will it be imposed and what criteria will be
used to determine the specific user to whom the auditor should be responsible? Liability
imposed should have some relation to the responsibility reasonably assumed and the fees
charged.
3. SITUATIONS IN VARIOUS JURISDICTIONS ABOUT LIABILITY OF AUDITORS:
a. ENGLAND:
1) The general rule in England is that only parties to a contract may enforce the
rights under the contract.
2) Direct case on an Accountant’s liability to third parties: The question of
Accountant’s liability to third parties directly came up for consideration in
England in the case of Candler v. Crane Christmas & Co.
Case of Candler v. Crane Christmas & Co.
Findings of the Case: A firm of accountants had been engaged by a company to prepare the
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company’s accounts. The accountants knew that the statements of account would be shown to
third parties. Relying on the statements of account reported upon by the accountants, the
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plaintiff had invested money in the company and it was lost. The statements in question had
been prepared negligently but there was no fraud.
Judgement/ Decision: Cohen and Asquith L. J. (Denning, LJ. dissenting), held that a false
statement made carelessly, as contrasted with one fraudulently made by one person to another,
though acted on by that other to his detriment was not action in the able absence of any
contractual or fiduciary relationship between the parties Lord Denning, however, dissented, and
said:
-------------the Accountant, who certifies the accounts of his client is always called upon to express
his personal opinion whether the accounts exhibit a true and correct view of his client’s affairs;
and he is required to do this not so much for the satisfaction of his own client but more for the
guidance of shareholders, investors, revenue authorities, and others who may have to rely on the
accounts in serious matters of business.
If we should decide this case in favour of the Accountants there will be no reason why
Accountants should ever verify the word of the man in a one-man company, because there will
be no one to complain about it. The one man who gives them wrong information will not
complain if they do not verify it. He wanted their backing for misleading information he gives
them and he can only get it if they accept his word without verification. It is just what he wants so
as to gain his own ends. And the persons who are misled cannot complain because the
accountants owe no duty to them.
If such be the law, I think it is to be regretted, for it means that the accountant’s certificate which
should be a safeguard, becomes a share for those who rely on it. I do not myself think it is the law.
In my opinion, Accountants owe a duty of care not only to their own clients; but also to those
who they know will rely on their accounts in the transactions for which these accounts are
prepared. [LIABLE TO 3RD PARTIES]
[Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. (1963)] [SIMILAR JUDGMENT]
Case of Jeb Fasteners, Marks, Bloom and Co.,
Findings of the Case: Jeb Fasteners - In 1975, Marks, Bloom and Co., the defending firm of
auditor reported on the annual financial statements of B.G. fasteners Ltd. for the year ended 31
October, 1974. Stock had been valued at net realisable value of £23,000. instead of at cost of
£11,000 resulting in overstated income and balance sheet figure. The auditors were aware of
the company’s liquidity problems, and had discussions with Jeb Fasteners, the plantiffs, at the
time of takeover negotiations. Jeb Fasteners subsequently purchased the company, but the
takeover was not a success. Consequently, Jeb sued the auditors on the grounds that they were
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made into purchasing the company by the mis-stated financial statement, and that the auditors
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had a duty of care to persons whom they could have reasonably foreseen would rely on their
audit report.
Judgement/ Decision: Justice Woolf ruled that such a duty of care did exist, but the auditors
escaped liability on the grounds that the alleged negligence was not the cause of the loss. The
judge ruled that the primary purpose of the takeover appeared to be the acquisition of the
services of the two B.G. directors, and that a purchase would probably have taken place on the
same basis even had the true financial position been known.
Justice Woolf applied a ‘reasonable foresight’ test, as opposed to the ‘special relationship test of
Hedley Byrne. This was based on a judgement by Lord Woolf force in the 1977 case of Annsv.
London Borough of Merton, in which it was held that:
‘First, one has to ask whether, as between the alleged wrongdoer and person who has suffered
damage there is a sufficient relationship of neighbourhood such that, in the reasonable
contemplation of the former, carelessness on his part may be likely to cause damage to the latter,
in which case a prima facie duty of care arises.
‘Second, if the first question is answered affirmatively, it is necessary to consider whether there
are any considerations which ought to negate, or reduce or limit the scope of the duty of the class
of person to whom it is owed or the danger to which any breach of it may give rise.’ In Jeb
Fasteners, Justice Woolf ruled that the auditors were aware of the liquidity problems of B.G. and
that financial assistance would become necessary and that a takeover was certainly one method
which, was within the contemplation of Mr. Marks (the auditor). Consequently, the judge decided
that the events leading to the takeover of B.G. were foreseeable, although it agreed by all parties
that at the time of the audit Marks, Bloom and Co. were not aware of reliance by the plaintiffs or
even of the fact that a takeover was contemplated. The Court of Appeal agreed that there was a
lack of causal connection between the auditor’s negligence and Jeb’s loss. It further stated that
it was not necessary for it to decide on the extent of liability to confirm in favour of the
defendant. Accordingly, Justice Woolf’s ruling has some authority but leaves the extent of third-
party liability still unconfirmed.
Financial loss to creditors or other third parties will normally only occur as a result of the auditor’s
default, if the auditors have made some very significant ‘goof.’ And auditor’s, insurers should be
well able to cover this risk, which could otherwise unfairly result in individuals bearing the loss.
On the other hand, it can be strongly argued that if the company law wants auditors to report to
creditors, and others, it should clearly say so. And tort should not be used as a backdoor approach
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for creating such a liability; although on grounds of equity one can question WHETHER the auditor
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should in fact be held responsible for the financial loss of every potential investor and every
creditor who seeks to rely on his report.
In the words of Cardozo in the famous American case of the Ultramares Corporation v.
Touche,”........ it would be wrong for accountants to be exposed ‘to liability in an indeterminate
amount for an indeterminate time to an indeterminate class’. The amounts involved could indeed
be almost infinite, and the fact of reliance very difficult to prove projectively (herein would lie the
auditors’ the greatest safeguard). Furthermore, it is the directors who should really take primary
responsibility for loss through misleading accounts. Yes, so often they are ‘men of straw’ so there is
no point in pursuing them; the auditors, with their insurance cover, will prove a much better bet.
But should we have to entirely bear this heavy burden, via our insurance premiums, whereas
directors can often escape with a suspended jail sentence and their ill-gotten spoils? Perhaps
directors should also carry a mandatory indemnity insurance, as a requirement of holding office.
Case of CAPARO Industries V. Touche Ross
Findings of the Case: CAPARO Industries V. Touche Ross -M/s. Touche Ross, a firm of
accountants had appealed to the House of Lords from a decision of the Court of Appeal which
held that auditors could be sued by an investing shareholder for inaccuracy in accounts or
misleading accounts by which a pre-tax profit should have been shown as a loss. On the facts, it
was alleged that CAPARO would not have bid for the takeover of Fidelity, a public company, if
the true accounts were known.
Judgement/ Decision: The House of Lords opined that in advising his clients, the professional
owed a duty to exercise the standard of skill and care appropriate to his professional status. He
would be liable to contract and tort for losses his client might suffer from breach of the duty. The
House of Lords observed that where a statement was put into general circulation and might
forcibly be relied on by strangers for anyone of a variety of different purposes which the makers
of the statement had no specific reason to anticipate, the duty to use care did not exist.
The auditors owed no duty of care to the members of the public who relied on the accounts in
deciding to buy shares. It was difficult to visualise a situation in which individual shareholders
could claim to have sustained loss in respect of existing shareholdings referable to auditors’
negligence which could not be recouped by the company. A purchaser of additional shares stood
in the public to whom the auditors owed no duty.
It was also held that the purpose of the auditor’s certificate was to provide those entitled to the
report within information to enable them to exercise their proprietary powers. It was not for
individual speculation with a view to profit. The purpose of annual accounts so far as members
are concerned, was to enable them to question past management, to exercise voting rights and to
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influence future policy management.

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Note: It is interesting to note that Touche Ross, the auditors in the case, made an out of court
settlement with Caparo of £1.35m in July, 1994 to avoid any further legal action. They denied any
negligence, a position they have maintained throughout the case.
The learned judges disclosed that for a duty to exist the following conditions must be satisfied:
(i) The defendant would need to be fully aware of the nature of the transaction the plaintiff
had in mind;
(ii) He must know that his advice or information would be directly or indirectly
communicated to the plaintiff and
(iii) He must know that the plaintiff was likely to rely on the advice or information in deciding
on the transaction that he had in mind.
Note: Defendant is Auditor and Plaintiff is the Client in the above cases we discussed.
Additional Case Laws:
Al Saudi Bank and others v Clark Pixley and another (1990), the Caparo principles were applied
and, because the auditor had not directly sent a copy of the audited statements to a bank about to
grant a loan to his client, and had not been aware that the statements had been distributed, the
relationship to the client was not deemed to be sufficiently close. The fact that a potential lender
could foreseeably come to possess statements was not enough to create the necessary relationship.
Subsequent to the Caparo case, three more cases have endorsed its doctrine:
James Mc Naughton Paper Group Ltd v Hicks Anderson and Co (1991), where a duty of care was
denied again because, it applied to shareholders as a class not as individuals;
Berg Sons and Co and others v, Adams and others (1992), which showed that the auditor’s work
had been performed only to satisfy the statutory audit requirement and no more, and could not
support a duty of care to a finance house that had discounted Berg’s bills; and
Goloo and others v Bright Grahame and Murray (1993) which would not extend the classes of
persons to whom the accountant might be liable and which reinforced the view that it must be
proved that an auditor’s negligence must be the “effective and dominant cause” of loss for a liability
to exist.
Clearly these recent cases have upheld the principles established in the Caparo judgement.
Only one case, Morgan Crucible Co PLC v Hill Samuel and Co Ltd (1991) has threatened to dilute the
effects of the Caparo decision. The facts of the case were that company taking over another, relying
on information provided by the auditor of the target company, as in Caparo. Since the directors of
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the target company circularised all their shareholders forecasting a sizeable increase in pre-tax
profits, supported by a letter from the auditors and the auditors’ opinion was issued after the
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takeover had commenced, and thus the plaintiff was not relying solely on the accounts but also on
these further representations. Thus, it was held the auditor had a duty of care in that, whereas in
the Caparo case the audited accounts had been drafted for one purpose but had been relied upon
for a different purpose, in this case, the opinion had been relied upon for the purpose for which it
was issued. The degree of proximity was such that the defendant could well be liable. The case
was settled out of court.
Similarly, in Columbia Coffee and Tea Party Ltd v. Churchill and others (1992), the Court held that a
third-party investor was owed a duty of care on the basis of an assumption of responsibility flowing
from statements in the defendant’s auditor manual which brought a potential purchaser of shares
within the ambit of persons to whom a duty of care was owed.
In Possfund v. Diamond (1996), it is being argued that a duty of care is assumed and owed to these
investors who (as intended) rely on the contents of the prospectus in making subsequent purchases.
b. AMERICAN CONTEXT:
From a legal stand-point, there are two classes of third parties:
1. A primary beneficiary is anyone identified to the auditor by name prior to the audit who is to
be the primary recipient of the auditor’s report. [i.e., Management]
a. If at the time the engagement letter is signed, the client informs the auditor that the
report is to be used to obtain a loan at the city national bank, the bank becomes a
primary beneficiary.
2. In contrast, other beneficiaries are unnamed third parties such as creditors, stockholders, and
potential investors.
3. The auditor is liable to all third parties for gross negligence and fraud under tort law. In contrast,
the auditor’s liability for ordinary negligence has traditionally been different between the two
classes of third parties.
4. Liability towards Primary Beneficiaries - The privity of contract doctrine extends to the primary
beneficiary of the auditor’s work.
The landmark case, Ultramares Corp. v. Touche (now deloitte and Touche), and its major
findings are as follows:
Ultramares Corp. v. Touche (now deloitte and Touche)
Findings of the Case: Ultramares upheld the privity of contract doctrine under which third parties
cannot sue auditors for ordinary negligence. However, judge Cardozo’s decision extended to
primary beneficiaries the rights of one in privity of contract. Hence, Ultramares as a primary
beneficiary could sue and recover for losses suffered because of the auditor’s ordinary
negligence. The defendant auditors, Touch, failed to discover fictitious transactions that
overstated assets and stockholders equity by $700,000 in the audit of Fred Stern & Co. On
receiving the audited financial statements, Ultramares loaned Stern large sums of money that
Stern was unable to repay because it was actually insolvent. Ultramares sued the CPA firm for
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negligence and fraud.

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Judgement/ Decision: The court found the auditors guilty of negligence but ruled that accountants
should not be liable to any third party for negligence except to a primary beneficiary. An analysis
of the decision reveals several significant environmental factors that are particularly interesting in
view of the current legal environment.
First, the judge recognized that extending liability for ordinary negligence to any third part
might discourage individuals from entering the accounting profession, thus depriving
society of a valuable service.
Second, he feared the impact that a broader encroachment on the privity doctrine might
have on other professionals such as lawyers and doctors.
Third, the decision reaffirmed the auditor’s liability to any third party for gross negligence
or fraud.
5. Liability towards Other Beneficiaries - The Ultramares decision remained virtually unchallenged
for 37 years, and it is followed today in many jurisdictions. However, since 1968, several court
decisions have served to extend the auditor’s liability for ordinary negligence beyond the privity
of contract doctrine.
6. The first shift away from Ultramares occurred in the form of judicial acceptance of the
specifically foreseen class concept. This concept is explained as follow:
a. If the client informs the CPA that the audit report is to be used to obtain a bank loan, all
banks are foreseen parties, but trade creditors and potential stockholders would not be
part of the foreseen class.
b. The liability is limited to losses suffered through reliance on the information in a
transaction known by the auditor or a similar transaction. In the above instance, this
means that the accountant would not be liable if the audit report was used by a bank to
invest capital in the client’s business in exchange for common stock instead of granting
a loan.
7. Foreseeable Parties: Individuals or entities whom the auditor either knew or should have known
would rely on the audit report in making business and investment decisions are foreseeable
parties. This concept extends the auditor’s duty of due care to any foreseeable party who suffers
a pecuniary loss from relying on the auditor’s representation.
8. Foreseeable parties include all creditors’, Stock holders and present and future investors.
Foreseeability is used extensively by the courts in cases involving physical injury. Foreseeability is
almost universally used in product liability cases when the manufacturer’s negligence causes the
physical injury. This concept was first applied in an audit negligence case in the early 1980s.
Rusch Factors Inc v. Levin (1968).
Rush Factors Inc. vs. Levin

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Findings of the Case: In Rush Factors Inc. vs. Levin (1968), the plaintiff had asked the defendant
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accountant to audit the financial statements of a corporation seeking a loan. The certified
statements indicated that the potential borrower was solvent when, in fact, it was insolvent.
Rush Factors sued the auditor for damages resulting from its reliance on negligent and
fraudulent misrepresentations in the financial statements. The defendant asked for dismissal
on the basis of lack of privity of contract.
Judgement/ Decision: The court ruled in favour of the plaintiff. While the decision could have
been decided on the basis of the primary benefit rule set forth in ultramares, the court instead
said:
The accountant should be liable in negligence for careless financial misrepresentation relied
upon by actually foreseen and limited classes of persons. In this case, the defendant knew that
his certification was to be used for potential financial of the corporation (emphasis added).
c. Indian Context
Commissioner of Income Tax v. G.M. Dandekar: This is the only decision on the auditor’s liability to
a third party by an Indian Court.
Commissioner of Income Tax v. G.M. Dandekar
Findings of the Case: Mr. Dandekar had been engaged by M/s A. Mohamad & Co., Madras and
had prepared the statements of account and Income-tax Return on the basis of account
produced to him. During the course of assessment, it was discovered that M/s Mohamad & Co.
had maintained two sets of account-regular day Books and ledgers for the open market
transactions and a separate book for the black-market transactions. While the former contained
detailed entries, relative to daily transactions, the latter contained only consolidated entries,
made at the end of the week of the transactions of that week. At the end of the financial year,
all the weekly entries in the separate sets of books of account were to called up and were
entered in the regular books of account. Mr. Dandekar had examined only the regular books of
account of the assessee and prepared the statements of account and the Income-tax Return on
the basis of these units. All the statements were signed by him and there was also endorsement
at the foot of the Balance Sheet that it had been verified and found to be correct. Mr. Dandekar
had forwarded the statements of account to the Income-Tax Officer and, while doing so had
stated particulars of books of account that he had examined.
Judgement/ Decision: On examination, the statements of account having been found to be

wrong, the Income-tax department took up the matter against Mr. Dandekar and filed a
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complaint with the Institute of Chartered Accountants of India.

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Madras high court: When the matter was subsequently considered by the Madras High Court it
was held that “he (Mr. Dandekar) was under an obligation to perform auditing with due skill and
diligence; if he did that; it would be difficult to see what further obligations he had in the matter
and in the favour of whom.
The Accountant is under a duty to prepare and resend correct statements of account of the
assessee and he should, of course, neither suggest nor assist in the preparations of false accounts.
But he is under no duty to investigate whether the accounts prepared by the assessees are
correct or not. The charge is that he owed a duty to the Department to himself investigate the
truth and correctness of the accounts of the assessee and not merely to act as their Post Office in
transmitting them. We do not agree that the respondent is under any such duty to the
Department and, therefore, no question of negligence arises.”
BREACH OF DUTY / NEGLIGENCE:
To charge a professional man with breach of duty or negligence, it is necessary to prove that there
has been a deviation from the standard of care which he was expected to exercise in the
performance of his duties. A professional man does not guarantee the success of his professional
effort. Nevertheless, he is expected to possess a certain amount of knowledge and experience and
he must exercise a reasonable degree of care and skill for the performance of duties. If there is any
default or failure in the conduct of an audit or in carrying out any other engagement judged by
professional standards the person responsible, therefore, would be guilty of negligence.
The auditor being an expert, skilled in the techniques of accounting and auditing, is expected that he
would be in possession of certain standards of knowledge and experience. He also must exercise the
same degree of prudence, skill and care, as any other professional person, in similar circumstances,
would be expected to do. In other words, he must carry out the audit according to ‘accepted
professional standards’ (the implications of these words are explained hereafter) and having regard
to all facts known to him about the financial solvency of the client.
The auditor, however, is not expected to be a detective nor is he required to approach his work
with a suspicious or pre-conceived notion that there is something wrong. He is a watch dog but not
a ‘blood hound’. However, if there is anything that is suspicious, he should delve deep into the
matter. But, in the absence thereof, he is only required to be reasonably cautious and careful.
It is expected that the auditor would carry out the checking of accounts and verification of
statements according to ‘Standards on Auditing’. The auditor who verifies the books of account of
client by the application of test checks, in a case where a complete audit should have been carried
out, would be held guilty of professional negligence if subsequently it is found that a mistake or
fraud had remained undetected which would have been unearthed if a detailed audit had been
carried out.
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Likewise, under the general principles of law, the auditors have been called upon to pay
compensation to their clients for the losses suffered by them through their negligence. Only in one
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case, i.e., Armitage v. Brewer and Knott, the auditors were held responsible for the defalcations
which arose subsequent to their failure to detect frauds in an earlier period.
Q.NO.4 WRITE ABOUT CASES CONCERNING THE CIVIL LIABILITY OF AUDITORS FOR NEGLIGENCE?
ANSWER:
In the series of cases considered below, action was brought against the auditors for damages
sustained through defalcation of employees or otherwise which, it has been alleged would have
been discovered by the auditors, if they had carried out their duties with the required degree of
care and skill.
The plaintiffs in some cases were individuals or partners and directors in the other companies but
action was not brought under misfeasance proceedings of the Companies Act. It may be observed
that in general the defence was that the frauds were such that reasonable diligence and careful
audit would have failed to reveal them or they were caused by lack of efficiency of the
management, or in its supervision over the accounts.
1. London Oil Storage Co. v. Seear Hasulk & Co. (1904): In this case, the auditors were charged with
negligence for failure to discover the misappropriation of the petty cash balance, which was shown
by the petty cash book at 799 but in fact was only 30. The auditor was found guilty of negligence in
not verifying the petty cash balance as part of the audit; but the damages awarded were limited to
£5.5sh. on the ground that the damages suffered were not due to the conduct of the auditor but
that of directors who were guilty of gross negligence in allowing the balance in the hands of the
Petty Cashier to increase to such a large amount.
2. Arthur E. Green & Co. v. The Central Advance and Discount Co. Ltd. (1901): The auditors in this
case had accepted the schedule of bad debts supplied to them by the Managing Director although it
was inaccurate and they were far from satisfied with it. Despite the fact, they had failed to qualify
their report. The claim filed by the liquidator of the company against the auditors for negligence
therefore, succeeded.
3. Pendleburys Ltd. v. Eills Green & Co. (1936): The charge in this case was that due to failure on
the part of the auditor to verify the amount recorded and received for cash sales, the fraud of the
cashier had not been discovered. But the charge did not succeed since the auditors have repeatedly
brought the lack of internal check on ‘cash receipts to the attention of the three directors who were
the only shareholders and debenture holders of the company. In the course of judgement, the
learned judge observed: “He (the auditor) is there to see that the shareholders get a true
representation of the finances of the company as disclosed by its books, this he must do with
reasonable care, but in considering whether or not he has displayed reasonable care one must
apply rules of common sense. There is all the world of difference between a company which has a
large body of shareholders numbering say, six or seven hundred and a company which has only
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three shareholders; all of whom happen to be the sole directors and the sole debenture
holders............ Where the interests of a small company are confined to a very few persons and
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there are no outside people because all the interests in the company are held by the directors
themselves, if the auditor has, in fact, reported to the directors, what more could he be expected to
do?”.
4. Leads Estate and Investment Society Ltd. v. Shepherd (1887): In this case action was brought by
the liquidators against the auditors not under misfeasance proceedings, but under a civil action for
the recovery for amounts paid as dividend out of capital. In examining the balance sheet, the
auditor had not considered the provision in the Articles and the balance sheet was not properly
drawn up. In the course of the judgement, the learned judge observed that it was the duty of the
auditor in auditing the accounts of the company not to confine himself to verifying the arithmetical
accuracy of the balance sheet, but to enquire into its substantial accuracy, and to ascertain that it
contained the particulars specified in the Articles of Association, and was properly drawn up so as
to contain a true and correct representation of the company’s affairs. The auditor was found
negligent by the Court.
5. Armitage v. Brewer & Knot (1942) ACTC (P 836): In this case, action was brought by Mr. Joseph
Armitage for alleged negligence in auditing the plaintiff’s books by reason of which defalcations
aggregating to £1440 were not detected. The defalcations consisted in fraudulent alterations of
time sheets and petty cash vouchers.
The plaintiff had arranged with the auditor that they would vouch all payments with the receipts
entered in the Petty Cash Account, check calculations and additions of wages sheets, check totals of
wages sheets into wages book and check weekly totals with other detailed provisions.
Such a detailed audit had been called for since the plaintiff wanted protection against his staff. A
special fee was demanded and paid for this work. But it transpired after the audit had been in
progress for some two and half years, that the cashier of the plaintiff, by altering systematically
figures on vouchers of petty cash and making fraudulent entries on time sheets, had
misappropriated a large sum of money. During the course of the hearing, it transpired [happened]
that the auditors had not examined the books of account with sufficient care as a result whereof
the fraud committed by the cashier had remained undetected.
Mr. Justice Talbot, during the course of his judgement, observed that “Accountants undertaking
duties of that kind could not be heard to excuse themselves on the ground that this or that was
small matter.” The auditors were held guilty of negligence and a damage of £1259 was awarded
against them.
6. Tri-Sure India Ltd. v. A.F. Ferguson & Co.: Tri-Sure India Limited issued a prospectus of February
75 inviting public to subscribe its share. The prospectus contained, inter alia, the report of the
auditors (the defendants) on the accounts of the company for the year 1973-74 which showed that
there was an abnormal rise in the rate of profits for the year 1973-74. The public issue was over-
subscribed and the company proceeded to allot the shares as per the term of the issue.
An investigation later revealed that sales figures for 1973-74 had been manipulated by a whole-time
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director of the company with the active co-operation of other top officials of the company. On
discovery of this, the company offered to refund all moneys which were subscribed by the allottees
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and also proceeded to sue the auditors for damages of Rs. 63.85 lakhs. The company alleged that
the auditors failed to examine and ascertain any satisfactory explanation for steep increase in the
rate of gross and net profits. The other charges levelled against the auditors were:
(i) whether the consumption of raw material was commensurate with the sharp
increase in sales/production;
(ii) the reasons for disproportionate ratio of the total debts due by trade debtors to
turnover as compared to the previous years
(iii) the reason for material variation in the ratio of the value of stock on hand to the cost
of turnover for the year 1972-73 and for the year 1973-74
(iv) whether there was any change in the prices of prime raw material
(v) whether there was any improvement/deterioration in the usage of material
(vi) whether the company had got new customers and/or there was any change in the
terms of credit to customers; and
(vii) whether the production for the year was adequate to support the volume of sales
and closing stock for the year.
The Court held that the plaintiffs were not able to prove that the auditors were negligent in the
performance of their duties. The suit was, therefore, dismissed.
Regarding the duties of the auditor, the Court held that “the auditor is required to employ
reasonable skill and care, but he is not required to begin with suspicion and to proceed in the
manner of trying to detect a fraud or a lie, unless some information has reached which excites
suspicion or ought to excite suspicion in a professional man of reasonable competence. An auditor’s
duty is to see what the state of the company’s affairs actually is, and whether it is reflected truly in
the accounts of the company, upon which the balance sheet and the profit and loss account are
based, but he is not required to perform the functions of a detective. What is reasonable care and
skill must depend upon the circumstances of each case. Where there is nothing to excite suspicion
and there is an atmosphere of complete confidence, based on the record of continued success in
financial matters, less care and less scrutiny may be considered reasonable.” Thus, the judgment has
re-emphasised that an auditor need not proceed with suspicion unless the circumstances are such
as to arouse suspicion or ought to arouse suspicion in a professional man of reasonable
competence. The practice of resorting to selective verification or sampling or test-check where
internal controls are found to be satisfactory by an auditor has also been upheld in his judgement.
Q.NO.5 WRITE ABOUT CIVIL LIABILITIES UNDER THE COMPANIES ACT?

ANSWER:
Lord Justice Topes once famously remarked that “The Auditor is a watchdog and not bloodhound.”
Civil action against the auditor may either take the form of claim for damages on account of
negligence or that of misfeasance proceeding for breach of trust or duty:
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DAMAGES FOR NEGLIGENCE: Civil liability for mis-statement in prospectus under section 35 of the
Companies Act, 2013, are:
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1. MISSTATEMENT IN PROSPECTUS: Where a person has subscribed for securities of a company
acting on any statement included, or the inclusion or omission of any matter, in the prospectus
which is misleading and has sustained any loss or damage as a consequence thereof, the
company and every person who:
a. is a director of the company at the time of the issue of the prospectus
b. has authorized himself to be named and is named in the prospectus as a director of the
company or has agreed to become such director either immediately or after an interval
of time
c. is a promoter of the company
d. has authorised the issue of the prospectus; and
e. is an expert referred to in sub-section (5) of section 26
shall be liable to pay compensation to every person who has sustained such loss or damage.
2. No person shall be liable under sub-section (1), if he proves—

a. that, having consented to become a director of the company, he withdrew his consent
before the issue of the prospectus, and that it was issued without his authority or
consent; or
b. that the prospectus was issued without his knowledge or consent, and that on becoming
aware of its issue, he forthwith gave a reasonable public notice that it was issued without
his knowledge or consent.
3. INTENTION OF FRAUD:
a. Notwithstanding anything contained in this section, where it is proved that a prospectus
has been issued with intent to defraud the applicants for the securities of a company or
any other person or for any fraudulent purpose, every person referred to in subsection
(1) shall be personally responsible, without any limitation of liability, for all or any of
the losses or damages that may have been incurred by any person who subscribed to the
securities on the basis of such prospectus.
b. The liability would arise if the written consent of the auditor to the issue of the
prospectus, including the report purporting to have been made by him as an “expert” has
been obtained.
LIABILITY FOR MISFEASANCE:
The term “misfeasance” implies a breach of trust or duty. The auditor of a company would be guilty
of misfeasance if he has been guilty of any breach of trust or negligence in the performance of his
duties which has resulted in some loss or damage to the company or its property.
A few cases in which action has been brought against the auditors under misfeasance provisions of
the Companies Act are summarised below:
1. In Re: The London and General Bank, (1895), held - The auditor who does not report, to the
shareholders the facts of the case, when the balance sheet is not properly drawn up, is guilty of
misfeasance.
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2. In Re: Kingston Cotton Mills Co. Ltd. (1896), held - That it is not the duty of the auditor to take
stock and that he is not guilty of negligence if the certificate of a responsible official is accepted
in the absence of suspicious circumstances.
In this case, the profits of the company had been inflated fictitiously by the deliberate
manipulation of the quantities and values of stock-in-trade. The auditors had certified the
balance sheet on the basis of the certificate of the manager as to the correctness of the stock-in-
trade without checking the stock in detail and this fact was shown on the face of the balance
sheet.
Lopes L.J. exonerating the auditors of the charge of negligence, in the course of judgement,
made remarks to the following effect:
It is the duty of an auditor to bring to bear on the work, he has to perform the skill, care and
caution which a reasonably competent, careful and cautious auditor ordinarily would use. What
is reasonable skill, care and caution is a matter which must be judged on consideration of the
special circumstances of each case. An auditor is not bound to act as a detective, or as had been
said to approach his work with suspicion or with a foregone conclusion that there is something
wrong. ‘He is a watch dog, but not a blood hound’. He is entitled to rely on the representation
made to him by the tried servants of the company in whom confidence has been placed by the
company, believing them to be honest and truthful. He must, however, take reasonable care to
find that the representations made by them are not palpably false. If any matter is observed
which is calculated to excite suspicion, he should probe it to the bottom, but in the absence of
anything of that kind he is only bound to be reasonable, cautious and careful.
3. The Irish Woolen Co. Limited v. Tyson and others (1900) Act L.R. 23, held -That an auditor is
liable for any damages sustained by a company by reasons of falsification of accounts which
might have been discovered by the exercise of reasonable care and skill in the performance of
the audit.
4. In Re: City Equitable Fire Insurance Co. Ltd., held -That an auditor is not justified in omitting to
make personal inspection of securities that are in the custody of a person or a company with
whom it is not proper that they should be left.
“I think he (the auditor) must take a certificate from a person who is in the habit of dealing with,
and holding securities, and who he, on reasonable grounds, rightly believes to the exercise of
the best judgement a trustworthy person to give such a certificate.”
5. In Re: Westminster Road Construction and Engineering Co. Ltd. (1932), That when there is time
lag between the incurring of a liability and receipt of bills and at the time of audit, sufficient time
had not elapsed for the invoices relating to such a liability to have been received it was the duty
of auditor to make specific enquiries as to the existence of such liabilities. He also must check
the valuation of the work in progress at which it is included in the Balance Sheet.
In this case, action had been brought against the auditor by the liquidator of the company in
respect of payment of dividend when there were in fact no profits of which it could be paid.
Negligence was alleged in respect of over valuation of work in progress, omission of liabilities,
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etc. The Court held that the auditor was liable to refund to the company the amount of dividend
wrongly declared, with interest and costs.
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6. In Re: S.P. Catterson and Sons Ltd. (1947), held - That the primary responsibility for the
accountability of a company is of those who are in control of the company i.e., the directors.
In the case, an application had been made by the liquidator that the auditor of the company had
been negligent in the performance of his duty and thus was liable to compensate the company
in respect of amounts misappropriated by an employee of the company, which had become
irrecoverable. Though the fact that the defalcation had occurred was accepted, the auditor
contended that he had drawn the attention of the directors to the weakness of the system of
recording cash and credit sales and had recommended its alteration; notwithstanding this, the
system had been continued. Also, that the directors had failed to check adequately the cash
records, at the time money was duly handed over, day to day, by the manager.
7. As per Sec. 143 of Companies Act, 2013 if auditor does not report any matter of fraud involving
such amounts as may be prescribed, he will be liable for punishment.
Q.NO.6 WRITE ABOUT AUDITOS’S CRIMINAL LIABILITY UNDER COMPANIES ACT, 2013?
ANSWER:
The circumstances in which an auditor can be prosecuted under the Companies Act, and the
penalties to which he may be subjected are briefly stated below:
1. CRIMINAL LIABILITY FOR MISSTATEMENT IN PROSPECTUS:

a. As per Section 34 of the Companies Act, 2013, where a prospectus issued, circulated or
distributed includes any statement which is untrue or misleading in form or context in
which it is included or where any inclusion or omission of any matter is likely to mislead,
every person who authorises the issue of such prospectus shall be liable under section
447.
b. This section shall not apply to a person if he proves that such statement or omission was
immaterial or that he had reasonable grounds to believe, and did up to the time of issue
of the prospectus believe, that the statement was true or the inclusion or omission was
necessary.
2. PUNISHMENT FOR FALSE STATEMENT: According to Section 448 of the Companies Act, 2013 if
in any return, report, certificate, financial statement, prospectus, statement or other document
required by, or for, the purposes of any of the provisions of this Act or the rules made
thereunder, any person makes a statement:
a. which is false in any material particulars, knowing it to be false; or
b. which omits any material fact, knowing it to be material,
he shall be liable under section 447.
3. SEC. 447 OF COMPANIES ACT – PUNISHMENT FOR FRAUD:

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1. NO PUBLIC INTEREST: Any person who is found to be guilty of fraud [involving an amount of
AT LEAST Rs.10,00,000/- or 1 % of the turnover of the company, whichever is lower] shall be
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punishable with:
a. IMPRISONMENT: imprisonment for a term which shall not be less than 6 MONTHS
but which may extend to 10 YEARS AND
b. FINE: Shall also be liable to fine which shall not be less than the “amount involved in
the fraud”, but which may extend to “3 times the amount involved” in the fraud.
2. PUBLIC INTEREST: Provided that where the fraud in question involves public interest, the
term of imprisonment shall not be less than 3 YEARS.
3. MEANING OF FRAUD: “FRAUD” in relation to affairs of a company or any body corporate,

includes any act, omission, concealment of any fact or abuse of position committed by any
person or any other person with the connivance (wrong doing) in any manner, with intent to
deceive, to gain undue advantage from, or to injure the interests of, the company or its
shareholders or its creditors or any other person, whether or not there is any wrongful gain
or wrongful loss.
a. “Wrongful gain” means the gain by unlawful means of property to which the person
gaining is not legally entitled.
b. “Wrongful loss” means the loss by unlawful means of property to which the person
losing is LEGALLY ENTITLED.
4. IF FRAUD IS LESS THAN 10 LAKHS AND NO PUBLIC INTEREST:

a. With imprisonment for a term which may extend to 5 YEARS or
b. With fine which may extend to 50 LAKHS or
c. With both.
4. DIRECTION BY TRIBUNAL IN CASE AUDITOR ACTED IN A FRAUDULENT MANNER [SEC. 140(5)]:

Refer Company Audit Material for discussion on this provision.
5. CASES AND JUDGMENTS OF CRIMINAL LIABILITY FOR AUDITORS:

a. Dambell Banking Co. Ltd. (1900) - The directors and auditors, in the case, were
prosecuted under section 221 of the Criminal Code of 1872 which is similar to Section
143 of the Companies Act, 2013, for having joined in the issue of false balance sheets,
knowing them to be false in material particulars, and with the intent to deceive and
defraud shareholders of the company. From the facts provided, it was clear that the
accounts were not only false but materially false; letters from the auditors to the
managers showed that they (the auditors) thought that overdrafts were bad although
taken in as good. They had told the managers that they held strong’ views about the
overdraft, but did not state those views in their certificates to the shareholders. The jury
found all the defendants (including the auditors) guilty, and they were sentenced to
various terms of imprisonment.
b. Farrow’s Bank Ltd. (1921) - In this case, there had been a considerable writing up of
assets, obviously to show profits available for dividends. In one case a piece of property
that cost £5,500 was written up to £7,80,000. The auditor was in the company’s regular
employment as its accountant and was convicted on various charges of conspiracy and
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fraud in connection with the published accounts of the bank, and sentenced to 12
months’ imprisonment.
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c. Rex v. Lord Kylsant and Another (1931) - (Known as the Royal Mail Steam Packet
Company’s Case): This was a criminal prosecution in which Lord Kylsant who was
Chairman of the Board of Directors of Royal Mail Steam Packet Company was charged on
two counts: (a) of publishing an annual report for 1926, which he knew to be false in a
material particular and that the said report concealed from the shareholders the true
position of the company, with intent to deceive the shareholders; and (b) of publishing
an annual report for the year 1927, which he knew to be false in a material particular,
with intent to deceive the shareholders. Mr. H.J. Morland the auditor, was charged with
aiding and abetting Lord Kylsant to commit these offences. Both the accused were
acquitted of respective charges, though Lord Kylsant was found guilty and convicted on a
separate charge of publishing false prospectus for the issue of fresh debenture stock.
The facts of the case briefly were that the Profit and Loss Account for the year 1926
showed, ‘Balance for the year, including dividends on shares in allied and other
companies, adjustment of taxation reserves, less depreciation of fleet £4,30,212.
Actually, this apparent surplus had been arrived at on including undisclosed credits of
£5,50,000 from excess Profit Duty, £2,75,000 from Income tax Reserve and £25,776 from
investment Profit. If this was not done there would have been a considerable deficit. In
1927, with practically identical wording, a surplus of £2,24,907 was raised to £4,37,293
by similar credits totalling £2,12,386. It must be added that almost the entire amounts of
these credits had no relation to the trading of the respective years 1926 and 1927. The
contention of the crown was that such item, in the accounts conveyed “a deliberate false
representation to the shareholders that the company was making a trading profit when,
in fact, it was making a trading loss.” The company, in fact, had been drawing upon its
secret or hidden reserves from 1921 to 1927. The adjustment of these special credits
enabled the company to pay its debenture interest, and dividends on both the
preference and ordinary stocks.
Note: The decision in the case has been principally responsible for the change in the
phraseology of the auditor’s report from ‘true and correct’ to ‘true and fair’ requiring a
full disclosure of any non-trading income or that not belonging to the year, adjusted in
the Profit and Loss Account.
d. Official Liquidator Karachi Bank v. The Directors, etc. of Karachi Bank Ltd. (1932) - The
directors of the Bank made a statement in the balance sheet that the profit earned by
the bank in 1927 amounted to Rs. 15,608. The amount of profit had been arrived at on
taking credit for a sum of Rs. 45,214, an amount held in suspense for bad or doubtful
items of interest. It was held that the official Liquidator should prosecute the managing
directors, manager and the auditors for an offence under section 232 of the Indian
Companies Act, 1913 (now section 448) of the Companies Act, 2013.
Wild J.C. said “What the Directors of the bank have done is to show a cash profit for the
year by adding in a sum which is due, no doubt, but was never paid and was never likely
to be paid. The balance sheet, therefore, contains a false statement and a very material
one and I am unable to see how it can be argued that it was not intended to be misled.”
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Q.NO.7 CASES CONCERNING THE MISCONDUCT OF AUDITORS UNDER THE CHARTERED
ACCOUNTANTS ACT?
ANSWER:
It is important for students to understand what constitutes ‘gross negligence’ in terms of Clauses 5
to 8 of Part I of the Second Schedule to the Chartered Accountants Act.
Two decisions by Indian Courts which have become legal classics, are considered below:
Case of Deputy Secretary of the Government of India, Ministry of Finance v. S. N. Dass Gupta:
Findings of the Case: In this case, action was brought against Shri S.N. Dass Gupta, a member of
the Institute, in respect of alleged negligence in the audit of accounts of Aryan Bank Limited, for
the years 1942 to 1944. It was alleged that the bank had resorted to manipulation of accounts on
an extensive scale. One of the charges was that in 1944 the bank has shown in its Fixed Deposit
Ledger certain large sums as having been received on fixed deposit from certain concerns in which
the Managing Director was interested but the Cash Book of the bank did not show any
corresponding entries on the relevant dates. Another charge was that though the auditor had
certain doubts as regard loans advanced against fixed deposits, he had not stated the position
clearly. It was also alleged that on a certain date in 1944 the Cash Book showed a cash balance of
Rs. 5,00,000 although the actual balance on the date was a little over Rs. 1,000. The auditor in
defence submitted that he had not verified the cash balance in hand and had mentioned this fact
in his Special Report.
Judgement/ Decision: The learned judge in this regard observed:
“If an auditor does not do what it is his duty to do, it is no defence for him to say in disciplinary
proceedings started under Chartered Accountants Act that he had told the shareholder that he had
not done it. The lapse is constituted by his failure to verify a duty without which an audit is
meaningless and it is not excused by giving information of the omission to the shareholders.
Authorities both legal and professional are unanimous that in a bank audit the cash balance
claimed by the management must be verified by the auditor because otherwise the management
might remove the greater part of the funds and show them falsely lying cash in hand and thereby
relieve themselves of the necessity of making up accounts showing the disposition of money. In the
matter of cash, the auditor is not entitled to rely on the certificate of the manager of accepted
integrity, according to the principles laid down in the case Re: City Equitable Fire Insurance Co.” In
the matter of the second charge against the auditor that though he had some doubts and misgivings
as regards certain losses which might be suffered by the bank due to certain overdrafts accounts
proving to be irrecoverable, he had failed to qualify the report in certain terms indicating the true
position of the debits and, instead, had made some cryptic remarks about them in his special report.
The learned judge observed, “Either he knew that some of the debts were bad and some of the so
called secured loans were not genuine, but he did not wish to inform the shareholders of that fact
but wanted at the same time to provide for his own safety and, therefore, he inserted certain
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cryptic remarks in his Special Report; or he was careless and neglected to give the shareholders the
information which it was his duty to give”. It was held that the respondent has committed a grave
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wrong and in consequence he was suspended from the membership of the institute for two years.
The learned judge in his judgement also made the following observation as regards the duties of
auditor and methods they should follow for discharging them satisfactorily:
(a) Ascertaining reporting, not only whether the balance sheet exhibits a true and fair state of affairs
of the company, as shown by the books of the company, but also whether the books of the
company themselves exhibit a true and fair state of the company’s affairs. If any matter has been
kept out of the books, with the result that the auditor did not have access to it, he is not responsible
for its non-disclosure to the shareholders.
In this regard the dictum, pronounced by Rigby L.J. in the case Re: London & General Bank, that the
words as shown by the books of the company, contained, in the report which the auditors make on
the statements of account relieve them the responsibility as regards disclosure of the affairs of the
company kept out of the books can be followed.
(b) Verifying not merely the arithmetical accuracy of the statements of account but also their
substantial accuracy by confirming that they include all the particulars requiring disclosure by the
Articles or the Companies Act and otherwise represents true and fair state of affairs of the company.
(c) Checking the accounts and verifying the financial statements with reasonable care and skill. For
the purpose, the auditor may properly rely on the statements of the director-in-charge or the
Managing Director but only if he is satisfied that the representations made by him appear to be an
honest and truthful.
All matters which are capable of direct verification should generally be verified directly. But
matters which require investigation rather than checking may be verified on the basis of
representation of officers of accepted competence and integrity provided there is nothing unusual
in the accounts.
(d) Examining the books of the company and obtaining such information or explanation which he
considers necessary but not with suspicious mind or by proceeding in a manner he would adopt for
detecting a fraud or a lie subject, however, to the fact that he is not in possession of any information
which excites suspicion or ought to excite suspicion of a professional man of reasonable
competence.
(e) Verifying the existence of assets and liabilities.
(f) Making a report to the shareholders as would give them information and not merely means of
information, in order that the shareholders may judge the position of the company for themselves.
If the auditor is not satisfied as to the accuracy of entries in the balance sheet or they are such that,
if disclosed, they would show the balance sheet in a different way, these facts must be conveyed to
the shareholders.
Case of Controller of Insurance vs H. C. Das:
Findings of the Case: In this case, action was brought against M/s H.C. Dass & Co. by the Central
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Government in the matter of audit of accounts of Bhagya Laxmi Insurance Limited. The auditors
had audited the accounts of the company from 1936 until 1951 and had issued the certificate
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required under Regulations 7(c) and 7(d) of Part I of the First Schedule to the Insurance Act, 1938.
On the appointment of the administrator subsequently under Section 52A of the Insurance Act, a
number of irregularities were discovered. The principal defence of the auditor in respect of the
charges was that he had relied on statements of the management in regard to matters included in
the statements certified by him. [SA 580 CAN BE RELATED HERE]
Judgement / Decision: During the course of the judgement, the learned judge made the following
observation:
“As has been said, an auditor is not only blood hound, but he is not also an insurer. He does not
certify the absolute accuracy of the accounts which he audits and approves of, but only says that he
has taken all possible care and exercised reasonable skill and having done so has arrived at the
conclusions which are recorded in his certificate. But if, as we find to our regret to have been the
position here, an auditor does nothing at all in the way of scrutinising the books of the company,
but only relies upon statements made to him by the management, as his own case find it
impossible to hold that he exercised any skill or care of any kind.
“An auditor who construes his duty to shareholders or policy holders too narrowly and who passes
and approves of whatever is stated to him by the management of the company whose accounts he
audits does not serve the shareholders with the loyalty or efficiency expected of him and
constitutes, instead of a source of security to the shareholders, a positive danger to them.”
The auditor was held guilty of gross negligence.
Q.NO.8 WRITE ABOUT AUDITOR’s LIABILITY UNDER INCOME TAX ACT 1961?
ANSWER:
In connection with proceedings under the Income Tax Act 1961, a Chartered Accountant often acts
as the authorised representative of his clients and attends before an Income Tax Authority or the
appellate tribunal. His liabilities under the Income Tax Act of 1961 are as below:
1. Liability U/s 288 (4):
NO PERSON –
a. Who has been dismissed or removed from Government service after the 1st day of April,
1938; or
b. Who has been convicted of an offence connected with any income tax proceeding or on
whom a penalty has been imposed under this Act, other than a penalty imposed on him
under [clause(ii) of sub section (1) of section 271 [or clause(d) of sub-section (1) of section
272A]; or
c. Who has become an insolvent or
d. Who has been convicted by a court for an offence involving fraud,
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shall be qualified to represent an assesse under sub-section (1):

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I. for all times in the case of a person referred to in clause(a),

II. for such time as the Principal Chief Commissioner or Chief Commission or Principal
Commissioner or Commissioner may, by order determine in the case of a person referred to
in clause (b),
III. for the period during which the insolvency continues in the case of a person referred to in clause
(c), and
IV. for a period of ten years from the date of conviction in the case of a person referred to in clause
(d).
2. LIABILITY U/S 288 (5):
If any person-
a. who is a legal practitioner or an accountant is found guilty of misconduct in his professional
capacity by any authority entitled to institute disciplinary proceedings against him, an order
passed by that authority shall have effect in relation to his right to attend before an income-
tax authority as it has in relation to his right to practice as a legal practitioner or account, as
the case may be,
b. Who is not a legal practitioner or an accountant, is found guilty of misconduct in connection
with any income-tax proceedings by the prescribed authority, the prescribed authority
(Chief Commissioner or Commissioner having requisite jurisdiction) may direct that he
shall thenceforth be disqualified to represent an assessee under sub section (1).
Note: A Chartered Accountant found guilty of professional misconduct in his professional
capacity by the Council of the Institute of Chartered Accountants of India, cannot act as an
authorised representative (for any matter within the definition of a member in practice) for such
time that the order of the Council disqualifies him from practising.
3. LIABILITY U/S 278:
If a person abets or induces in any manner another person to make and deliver an account or a
statement or declaration relating to any income [or any fringe benefits] chargeable to tax which
is false and which he either knows to be false or does not believe to be true or to commit an
offence under sub-section (1) of section 276C, he shall be punishable,- Section 278 of the
Income Tax Act, 1961:
a. in a case where the amount of tax, penalty or interest which would have been evaded, if the
declaration, account or statement had been accepted as true, or which is will fully attempted
to be evaded, exceeds Rs. 2,50,000/-, with rigorous imprisonment for a term which shall not
be less than 6 months but which may extend to 7 years and with fine;
b. in any other case, with rigorous imprisonment for a term which shall not be less than 3
months but which may extend to 2 years and with fine.
4. LIABILITY UNDER RULE 12A OF INCOME TAX RULES:

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A Chartered Accountant who as an authorised representative has prepared the return filed by
the assessee, has to furnish to the Assessing Officer, the particulars of accounts, statements and
other documents supplied to him by the assessee for the preparation of the return.
Where the Chartered Accountant has conducted an examination of such records, he has also to
submit a report on the scope and results of such examination. The report to be submitted will be
a statement within the meaning of Section 277 of the Income Tax Act.
Thus, if this report contains any information which is false and which the Chartered Accountant
either knows or believes to be false or untrue, he would be liable to rigorous imprisonment
which may extend to 7 years and to a fine.
5. LIABILITY UNDER SEC. 271J:
As per section 271J of the Income Tax Act, if an accountant or a merchant banker or a registered
valuer, furnishes incorrect information in a report or certificate under any provisions of the Act
or the rules made thereunder, the Assessing Officer or the Commissioner (Appeals) may direct
him to pay a sum of Rs. 10,000/- for each such report or certificate by way of penalty.
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PRACTICE QUESTIONS
TEST YOUR KNOWLEDGE QUESTIONS FROM ICAI STUDY MATERIAL
Q.NO.1 Certain weaknesses in the internal control procedure in the payment of wages in a large
construction company were noticed by the statutory auditor who in turn brought the same
to the knowledge of the Managing Director of the company. In the subsequent year huge
defalcation came to the notice of the management. The origin of the same was traced to the
earlier year. The management wants to sue the auditor for negligence and also plans to file
a complaint with the Institute.
ANSWER:
In the given case, certain weaknesses in the internal control procedure in the payment of wages
in a large construction company were noticed by the statutory auditor and brought the same to
the knowledge of the Managing Director of the company.
In the subsequent year, a huge defalcation took place, the impact of which stretched to the
earlier year. The management of the company desires to sue the statutory auditor for negligence.
The precise nature of auditor's liability in the case can be ascertained on the basis of the under
noted considerations:
Whether the defalcation emanated from the weaknesses noticed by the statutory auditor, the
information regarding which was passed on to the management; and
Whether the statutory auditor properly and adequately extended the audit programme of the
previous year having regard to the weaknesses noticed.
SA 265 on “Communicating Deficiencies in Internal Control to Those Charged with Governance

and Management” clearly mentions that, “The auditor shall determine whether, on the basis of
the audit work performed, the auditor has identified one or more deficiencies in internal control.
If the auditor has identified one or more deficiencies in internal control, the auditor shall
determine, on the basis of the audit work performed, whether, individually or in combination,
they constitute significant deficiencies. The auditor shall communicate in writing significant
deficiencies in internal control identified during the audit to those charged with governance on a
timely basis. The auditor shall also communicate to management at an appropriate level of
responsibility on a timely basis”.
The fact, however, remains that, weaknesses in the design of the internal control system and non-
compliance with identified control procedures increase the risk of fraud or error. If circumstances
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indicate the possible existence of fraud or error, the auditor should consider the potential effect
of the suspected fraud or error on the financial information. If the auditor believes the suspected
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fraud or error could have a material effect on the financial information, he should perform such
modified or additional procedures as he determines to be appropriate.
Thus, normally speaking, as long as the auditor took due care in performing the audit work, he
cannot be held liable.
The fact that the matter was brought to the notice of the managing director may be a good
defence for the auditor as well. According to the judgement of the classic case in re Kingston
Cotton Mills Ltd., (1896) it is the duty of the auditor to probe into the depth only when his
suspicion is aroused. The statutory auditor, by bringing the weakness to the notice of the
managing director had alerted the management which is judicially held to be primarily
responsible for protection of the assets of the company and can put forth this as defence against
any claim arising subsequent to passing of the information to the management. In a similar case
S.P. Catterson & Sons Ltd. (81 Acct. L. R.68), the auditor was acquitted of the charge.
Q.NO.2 Based upon the legal opinion of a leading advocate, X Ltd. made a provision of Rs. 3
crores towards Income Tax liability. The assessing authority has worked out the liability at
Rs. 5 crores. It is observed that the opinion of the advocate was inconsistent with legal
position with regard to certain revenue items.
ANSWER:
SA 500 on "Audit Evidence" discusses the auditor's responsibility in relation to and the procedures
the auditor should consider in, using the work of an expert as audit evidence. During the audit,
the auditor may seek to obtain, in conjunction with the client or independently, audit evidence in
the form of reports, opinions, valuations and statements of an expert, e.g., legal opinions
concerning interpretations of agreements, statutes, regulations, notifications, circulars, etc.
Before relying on advocate's opinion, the auditor should have seen that opinion given by the
expert is prima facie dependable. The question states very clearly that the opinion of the
advocate was inconsistent with legal position with regard to certain items. It is, perhaps, quite
possible that auditor did not seek reasonable assurance as to the appropriateness of the source
data, assumptions and methods used by the expert properly.
In fact, SA 500 makes it incumbent upon the part of the auditor to resolve the inconsistency by
discussion with the management and the expert. In case, the experts' work does not support the
related representation in the financial information the inconsistency in legal opinions could have
been detected by the auditor if he had gone through the same. This seems apparent having
regard to wide difference in the liability worked out by the assessing authority. Under the
circumstance, the auditor should have rejected the opinion and insisted upon making proper
provision.
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Q.NO.3 Write a short note on - Auditor’s liability in case of unlawful acts or defaults by clients.
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ANSWER:
The question of liability of an auditor for unlawful acts or defaults by clients should be considered
in the light of various parameters. if it appears that if an auditor was aware of any unlawful act
having been committed by client in respect of accounts audited by him and the unlawfulness was
not rectified by proper disclosure or any other appropriate means, the auditor owes a duty to
make a suitable report.
If he does not, he may be held liable, if the true and fair character of the accounts has been
vitiated.
It has been clearly established in various case laws that the auditor is expected to know the
contents of documents and records and ascertain whether the affairs of the client are being
conducted in an unlawful manner. It is in the course of the work, he comes across any unlawful
acts, it is his duty to bring it to the notice of the client as also to make a disclosure in his report in
appropriate cases.
Under the code, an auditor cannot disclose confidential information unless permitted by the
client or unless required by law. Each case has to be judged on its circumstances. However, in
every case he has to assess the implications of the unlawful act or default on the true and fair
character of the accounting statements.
In assessment procedure of M/s Cloud Ltd., Income Tax Officer observed some irregularities.
Therefore, he started investigation of Books of Accounts audited and signed by Mr. Old, a
practicing Chartered Accountant. While going through books he found that M/s Cloud Ltd. used
to maintain two sets of Books of Accounts, one is the official set and other is covering all the
transactions. Income Tax Department filed a complaint with the Institute of Chartered
Accountants of India saying Mr. Old had negligently performed his duties. Comment.
ANSWER:
Liability of Auditor: “It is the auditor’s responsibility to audit the statement of accounts and
prepare tax returns on the basis of books of accounts produced before him. Also, if he is satisfied
with the books and documents produced to him, he can give his opinion on the basis of those
documents only by exercising requisite skill and care and observing the laid down audit
procedure.
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In the instant case, Income tax Officer observed some irregularities during the assessment
proceeding of M/s Cloud Ltd. Therefore, he started investigation of books of accounts audited and
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signed by Mr. Old, a practicing Chartered Accountant. While going through the books, he found
that M/s Cloud Ltd. Used to maintain two sets of Books of Accounts, one is the official set and
other is covering all the transactions. Income Tax Department filed a complaint with the ICAI
saying Mr. Old had negligently performed his duties.
Mr. Old, the auditor was not under a duty to prepare books of accounts of assessee and he
should, of course, neither suggest nor assist in the preparations of false accounts. He is
responsible for the books produced before him for audit. He completed his audit work with
official set of books only.
In this situation, as Mr. Old, performed the auditing with due skill and diligence; and, therefore,
no question of negligence arises. It is the duty of the Department to himself investigate the truth
and correctness of the accounts of the assessee.
Q.NO.4 CA Prince, a Chartered Accountant has appeared before the Income Tax Authorities as
the authorized representative of his client and delivers to the Income Tax Authorities a false
declaration. What are the liabilities of CA. Prince under Income Tax Act, 1961?
ANSWER:
False Declaration as Authorized Representative: In connection with proceedings under the

Income Tax Act 1961, a Chartered Accountant often acts as the authorised representative of his
clients and attends before an Income Tax Authority or the appellate tribunal.
Any person who acts or induces, in any manner another person to make and deliver to the
Income Tax Authorities a false account, statement, or declaration, relating to any income
chargeable to tax which he knows to be false or does not believe to be true will be liable under
section 278 of the Income Tax Act 1961.
In the instant case, Mr. Prince, a chartered accountant has appeared before the Income Tax
Authorities as the authorized representative of his client and delivered a false declaration, thus,
he would be liable under section 278 of the Income Tax Act, 1961.
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7. PEER REVIEW AND QUALITY REVIEW
UNIT 1 – PEER REVIEW
Q.NO.1 EXPLAIN THE CONCEPT OF PEER REVIEW?
ANSWER:
1. The term ‘peer’ means a person of similar standing. The term ‘review’ means conduct of re-
examination or retrospective evaluation of the subject matter. In general, for a professional, the
term "peer review" would mean review of work done by a professional, by another
professional of similar standing.
2. ‘Peer Review’ is defined as, a regulatory mechanism for monitoring the performances of
professionals for maintaining quality of service expected of them for enhancing the reliance
placed by the users of financial statements for economic decision-making.
3. The concept of peer review is quite old. A competent professional always thinks that there is a
scope for improvement in his performance.
4. What is expected in a peer review is much beyond simple discussion or sharing of views. It is
sharing of complete information and documentation and subjecting to oneself to independent
scrutiny regarding professional work.
5. Practical examples of peer review are generally seen in the field of education and medicine
although they are referred to differently.
a. In the field of education, when a moderator rechecks the answer papers evaluated by
one paper checker, what the moderator is doing is nothing but a peer review.
b. Secondly, it is not uncommon for a senior teacher to sit in the last row and evaluate the
performance of the new teacher. These are commonly seen examples of peer review,
although not termed that way.
c. In the field of medicine also, such examples are seen. When a doctor refers a patient to
another doctor for second opinion, what the second doctor is doing is nothing but peer
review.
d. In the field of medicine and scientific research, peer review is very commonly done in
case of professional journals before publishing any article or research paper. Before the
article is published, it is subjected to review by a panel of reviewers.
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However, the situations described above are examples of on-the-job review. Moreover, the sample
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size in such cases is very small and the selection of the sample may also be influenced by the person
whose review is to be done. Therefore, the benefit derived by the person reviewed is limited and
the profession as such also does not benefit much. In order to reap the benefits of peer review, it
has to be done on a much larger scale and in a much-organised manner.
KEY TERMS OF PEER REVIEW:
As per the Statement of Peer Review, certain key terms are as under:
“Peer Review” means an examination and review of the systems and procedures to determine
whether the same have been put in place by the Practice Unit for ensuring the quality of assurance
services as envisaged by the Technical, Professional and Ethical Standards as applicable including
other regulatory requirements thereto and whether the same were consistently applied during the
period under review.”
"Reviewer" means a member duly approved and empanelled by the Board on fulfilling the
qualifications prescribed for a Reviewer.
"Practice Unit" means a firm of Chartered Accountants or a member in Practice, practicing whether
in an individual name or a trade name or such other entity as recognized by the Institute of
Chartered Accountants of India from time to time.
“Peer Review Board” means the Board constituted by the Council in terms of this Statement from
time to time. The expression “Peer Review Board” is hereinafter referred to as “Board”. The Peer
Review Board (the Board) was established in March, 2002 and the Statement on Peer Review has
been revised in April’2020.
STATEMENT ON PEER REVIEW: The Statement on Peer Review shall be deemed to be a guideline
of the Council under clause (1) of Part II of Second Schedule to the Act and it is obligatory for the
Practice Unit to comply with the provisions contained in this Statement. [PEER REVIEW
STATEMENT – COMPULSORY]
Q.NO.2 WRITE ABOUT THE CONCEPT OF PEER REVIEW OF AUDITORS?
ANSWER:
1. Peer review of attest function has a special significance. First of all, the nature of work is such
that it can be easily subjected to peer review. It is possible to review the work subsequent to its
completion; which means that one does not get disturbed while doing the work because of the
peer review.
2. Secondly, the business environment is changing so fast that it is necessary for an auditor to
keep improving his audit techniques and seek a stamp of approval about his competence And
3. thirdly, the question of whether an auditor has performed his function satisfactorily or not is
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arising more frequently now. There is a considerable gap between what the society as a whole
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expects the auditors to do and what the auditors are actually required perform; by law and as
per the terms of their engagement.
Therefore, if the work of any auditor is questioned, the auditor’s first line of defence would be that
the work has happened as per auditing practices which have been peer reviewed.
It is important to note that in spite of the advantages of peer review, not many professional bodies
have implemented the concept effectively. In this background, it is very creditable that ICAI has,
over a period, made peer review compulsory for all auditors.
Q.NO.3 WRITE ABOUT OBJECTIVES OF PEER REVIEW?
ANSWER:
The main objective of Peer Review is to ensure that in carrying out the assurance service
assignments, the members of the Institute shall:
1. Comply with Technical, Professional and Ethical Standards as applicable including other
regulatory requirements to there to and
2. Have in place proper systems including documentation thereof, to amply demonstrate the
quality of the assurance services.
Thus, the primary objective of peer review is not to find out deficiencies but to improve the quality
of services rendered by members of the profession.
CLARIFICATIONS:
1. The Statement of Peer Review also makes it clear that the peer review, "does not seek to
redefine the scope and authority of the Technical, Professional and Ethical Standards specified
by the Council but seeks to enforce them within the parameters prescribed by the Technical
Standards but only seeks to ensure that they are implemented, both in letter and spirit.".
2. The peer review is directed towards maintenance as well as enhancement of quality of

assurance services and to provide guidance to members to improve their performance and
adherence to various statutory and other regulatory requirements. Such an objective of the
peer review process makes it amply clear that the reviewer is not going to sit on the judgement
of the practice unit while rendering assurance services but to evaluate the procedure followed
by the practice unit in rendering such a service.
3. Accordingly, where a Practice Unit is not following the prescribed Standards, the Reviewers are
expected to recommend measures to improve the procedures followed by the Practice Units. To
elaborate further, the key objective of peer review exercise is not to identify isolated cases of
engagement failure, but to identify weaknesses that are pervasive and chronic in nature.
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Example: Absence of formal planning of an audit represents a serious deficiency that needs to
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be remedied by the practice unit. An instance of the auditor not carrying out physical verification
of furniture and fixture may not attract the same comment. However, certain items of assets are
best verified through the physical verification process and not adopting the same procedure may
rightly be viewed as a systemic failure.
4. The conclusion, therefore, is that the peer review seeks to identify and address patterns of non-
compliance with quality control standards.
Q.NO.4 WRITE ABOUT SCOPE OF PEER REVIEW?
ANWER:
The Statement on Peer Review lays down the scope of review to be conducted as under:
1. The Peer Review process shall apply to all the assurance services provided by a Practice Unit.
2. Once a Practice Unit is selected for Review, its assurance engagement records pertaining to the
Peer Review Period shall be subjected to Review.
3. The Review shall cover:
i. Compliance with Technical, Professional and Ethical Standards, Quality of reporting,
Systems and procedures for carrying out assurance services.
ii. Training programmes for staff (including articled and audit assistants) concerned with
assurance functions, including availability of appropriate infrastructure.
iii. Compliance with directions and / or guidelines issued by the Council to the Members,
including Fees to be charged, Number of audits undertaken, register for Assurance
Engagements conducted during the year and such other related records.
iv. Compliance with directions and / or guidelines issued by the Council in relating to
article assistants and / or audit assistants, including attendance register, work diaries,
stipend payments, and such other related records.
4. The Statement of Peer Review aims to confine the scope of review to preceding three years.
5. The Statement defines the scope of peer review which revolves around:
i. Compliance with technical, ethical and professional standards.
ii. Quality of reporting; office systems and procedures with regard to compliance of
assurance engagements; and,
iii. Training programmes for staff including articled and audit assistants involved in
assurance engagements.
6. The entire peer review process is directed at the assurance services.
Note: Assurance Services means assurance engagements services as specified in the “Framework
for Assurance Engagements” issued by the Institute of Chartered Accountants of India and as
may be amended from time to time. [Do not cover Related Services]. The phrase 'Assurance
Services' is used interchangeably with Audit Services, Attestation Functions, and Audit Functions.
TECHNICAL, PROFESSIONAL AND ETHICAL STANDARDS – MEANS:

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1. Accounting Standards issued by ICAI that are applicable for entities other than companies under
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the Companies Act, 2013;
2. Accounting Standards prescribed under section 133 of the Companies Act; 2013 by the Central
Government based on the recommendation of ICAI and in consultation with the National
Financial Reporting Authority (NFRA) and notified as Accounting Standards Rules 2006, as
amended from to time;
3. Indian Accounting Standards prescribed under section 133 of the Companies Act 2013 by the
Central Government based on the recommendation of ICAI and in consultation with NFRA and
notified as Companies (Indian Accounting Standards) Rules, 2015, as amended from time to
time;
4. Standards: Standards issued by the Institute of Chartered Accountants of India including-
(a) Engagement standards
(b) Statements
(c) Guidance notes
(d) Standards on Internal Audit.
(e) Guidelines/ Notifications / Directions / Announcements / Pronouncements /
Professional Standards issued from time to time by the Council or any of its
Committees.
5. Framework for the preparation and presentation of financial statements, Preface to the
Standards on Quality Control, Auditing, Review, Other Assurance and Related Services and
Framework for Assurance engagements;
6. Provisions of the relevant statutes and / or rules or regulations which are applicable in the
context of the specific engagements being reviewed including instructions, guidelines,
notifications, directions issued by regulatory bodies as covered in the scope of assurance
engagements.
Students may note that Engagement means an engagement in which a practitioner expresses a
conclusion designed to enhance the degree of confidence of the intended users other than the
responsible party about the outcome of the evaluation or measurement of a subject matter against
criteria but does not include:
1. Management Consultancy Engagements;

2. Representation before various Authorities;
3. Engagements to prepare tax returns or advising clients in taxation matters;
4. Engagements for the compilation of financial statements;
5. Engagements solely to assist the client in preparing, compiling or collating information other
than financial statements;
6. Testifying as an expert witness;
7. Providing expert opinion on points of principle, such as Accounting Standards or the applicability
of certain laws, on the basis of facts provided by the client; and
8. Engagement for Due diligence.
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Q.NO.5 WRITE ABOUT APPLICABILITY OF PEER REVIEW?
ANSWER:
A. APPLICABILITY:
1. COMPULSORY PEER REVIEW: Every Practice Unit including its branches, based on their
category [Level 1 or Level 2] as determined will be subject to Peer Review in accordance
with this Statement.
2. SPECIAL CASE REVIEW: The Board, based on specific information received from Secretary,
ICAI or any other Committee of the Institute including Disciplinary directorate or any other
Regulator, which in the opinion of the Board requires a special review of the Practice Unit,
may conduct a special review of the Practice Unit.
3. FIRM’s VOLUNTARY PEER REVIEW: Any Practice Unit not selected for Peer Review, may suo
moto apply to the Board for the conduct of its Peer Review. The Board shall act upon the
same within 30 days from the date of receipt of such request.
4. AT CLIENT’s REQUEST: An auditee (Client) may request the Board for the conduct of Peer
Review of its auditor (Practice Unit). The Board shall act upon the same within 30 days from
the date of receipt of such request.
5. The Board may, with the approval of the Council, modify any of the above criteria.
B. PERIODICITY:
1. Periodicity of Peer Review the Periodicity of Peer Review will be:
a. Level - I Practice Units – Once in 3 years.
b. Level - II Practice Units – Once in 4 years.
2. SHORTER INTERVAL: However, if the Board so decides or otherwise at the request of the
Practice Unit, the Peer Review for a Practice Unit can be conducted at shorter intervals.
LEVEL I – PRACTICING UNITS [Amended in 2021]
A Practice Unit which has undertaken any of the under-mentioned assurance services in the period
under review shall be treated a Level I entity:
1. Statutory Central Audit of Any Bank or Insurance Company.

Note: if Separate Branch Audits were not conducted then the word Statutory Central Audit shall
be replaced with Statutory Audit.
2. Statutory Audit of Central or State Public Sector Undertakings and Central Cooperative Societies
having turnover exceeding Rs.250 crores OR net worth exceeding Rs.5 crores.
3. AUDITORS OF AMC: Statutory Audit of asset management companies or mutual funds.
4. AUDITORS OF LISTED ENTITIES: Statutory Audit of enterprises whose equity or debt securities
are listed in India or abroad as defined under SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015.
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5. Statutory audit of anybody corporate including trusts which are covered under public interest
entities.
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6. Statutory Audit of Entities which have raised funds from public or banks or financial institutions
or by way of donations / contributions over 50 CRORES.
7. Statutory Audit of entities having net worth of more than Rs.100 crore or having turnover of
Rs.250 crore or above.
8. Statutory Audit of entities which have been funded by Central and / or State Government(s)
schemes of over Rupees 50 Cores.
9. Statutory Audit of Non – Banking Financial Companies (NBFCs) having deposits of Rs.100 crore,
or above.
10. Statutory Audit of Entities preparing the financial statements as per Ind AS.
LEVEL II – PRACTICING UNITS [Amended in 2021]
A Practice Unit which has undertaken any of the under-mentioned assurance services in the period
under review shall be treated as Level II entity:
1. Statutory / Internal / Concurrent / Systems / Tax audit and / or Departmental Review of

Branches / Offices of:
a. Public Sector undertaking
b. Any bank
c. Any Insurance Company
2. Statutory Audit of Non – Banking Financial Companies (NBFCs) not covered in L-1 above,
3. UDIN’s generated by the Practice Units more than the specified number determined by the
Board from time to time.
4. Any other Practice Unit providing assurance or other services not covered under (i) (ii), and (iii)
hereinabove.
Q.NO.6 WRITE ABOUT THE CONCEPT OF PEER REVIEW BOARD?
ANSWER:
COMPOSITION OF PRB:
1. MAX 12 MEMBERS – 50% FROM COUNCIL: The Board shall be constituted by the Council. The
Board shall consist of a maximum of 12 members to be appointed by the Council, of whom not
less than 50% shall be from amongst the members of the Council as defined in Section 9 of the
Chartered Accountants Act, 1949, as amended from time to time.
2. OUTSIDERS: The Council may nominate members to the Board from outside bodies and from
amongst prominent individuals of high integrity and reputation, including regulatory authorities,
bankers, academicians, economists, legal Professionals and business executives.
3. CM AND VCM: The Council shall appoint the Chairman and the Vice-Chairman from amongst its
elected Council members appointed on the Board.
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TERM OF MEMBERS OF PRB:

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1. The term of 2/3rd members shall be for 3 years or end of the term of the member in the Council
whichever is earlier, or such other period as may be prescribed by the Council from time to time.
2. The Chairman and the Vice-Chairman of the Board may be rotated every year by the Council of
the Institute.
3. Casual vacancies on the Board shall be filled by the Council.
4. A Member of the Disciplinary Committee or the Disciplinary Board of the Institute of Chartered
Accountants of India shall not be a member of the Board.
MEETING REQUIREMENT:
1. QUORUM: No business shall be transacted at any meeting of the Board unless there are present
at least 1/3rd members of the Board but not less than three members, including the Chairman
or, in his absence, the Vice-Chairman.
2. ADJOURNED: In the absence of quorum within half an hour of the time fixed for the meeting,
the meeting shall stand adjourned to a date, time and place fixed by the Chairman or, in this
absence, the Vice-Chairman.
3. ONE MEETING – 3 MONTHS: The Board shall meet as and when required for transaction of the
business before it. However, at least one meeting shall be held in every calendar quarter.
4. REPORTING: The Board shall submit a report to the Council prior to the date of every meeting of
the Council.
Q.NO.7 WRITE ABOUT ELIGIBILITY TO BE A PEER REVIEWER?
ANSWER:
A. QUALIFICATIONS:
A Peer Reviewer shall:
a. Shall be a member in practice with at least 7 years of audit experience.

b. In case a member has moved from industry to practice and is currently in practice he should
have:
i. At least 10 years of audit experience in industry and
ii. At least 3 years audit experience in practice.
c. Should have undergone the requisite training and cleared the requisite test for Peer Review
as prescribed by the Board.
B. DECLARATION:
A member on being appointed as a Reviewer shall be required to:
1. Furnish a declaration as prescribed by the Board, at the time of acceptance of Peer Review
appointment.
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2. Sign a Declaration of Confidentiality as per Annexure A to this Statement.

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C. DISQUALIFICATION:
A member shall not be eligible for being appointed as a Reviewer, if –
1. Any disciplinary action / proceeding is pending against him.

2. He has been found guilty of professional or other misconduct by the council or the board of
discipline or the disciplinary committee at any time.
3. He has been convicted by a competent court whether within or outside india, of an offence
involving moral turpitude and punishable with imprisonment.
4. He or his partners or personnel has any obligation or conflict of interest in the Practice Unit.
5. He has undergone training / article ship under any of the partner of Practice Unit. [Newly
added in 2021]
D. PROHIBITED ASSIGNMENTS:
A Reviewer shall not accept any professional assignment from the Practice Unit for a period
two years from the date of appointment. Further, he should not have accepted any professional
assignment from the Practice Unit for a period of two years before the date of appointment as
reviewer of that Practice Unit.
Q.NO.8 WRITE ABOUT USING THE WORK OF A QUALIFIED ASSISTANT BY PEER REVIEWER?
ANSWER:
USING THE WORK OF QUALIFIED ASSISTANT:
1. The reviewer may take the help of a qualified assistant while carrying out peer review. In this
context, the Board decided to clarify that a reviewer is permitted to take the assistance of only
ONE assistant who shall be a chartered accountant and a person who does not attract any of the
dis-qualifications prescribed under Section 8 or Section 21 of the Chartered Accountants Act,
1949.
2. The name of the qualified assistant which the reviewer would like to assist him shall be
identified and intimated to the Board as well as the practice unit before the commencement of
the peer review.
3. Such a qualified assistant shall also have to sign the declaration of confidentiality as annexed to
the Statement.
4. He shall have no direct interface either with the practice unit or the Board. Further the person
chosen for assisting the reviewer shall be from the firm of the reviewer as a partner or paid
assistant as per the records of ICAI.
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Q.NO.9 WRITE ABOUT CONFIDENTIALITY TO BE MAINTAINED BY PEER REVIEWER?
ANSWER:
Strict confidentiality shall be maintained by all those involved in the Peer Review process, namely,
Reviewers, members of the Board, any Qualified Assistants or Practice Unit. All persons governed
by the secrecy provisions:
1. Shall at all times preserve and aid in preserving secrecy with regard to any matter arising in the
performance or in assisting in the performance of any function, directly or indirectly related to
the process and conduct of Peer Reviews;
2. Reviewer shall not make use of or disclose the contents of Review report or any confidential
information about the process of Review unless as required by the Board or the Council.
Non-compliance with the secrecy provisions in the above clause shall amount to professional
misconduct as defined under Section 22 of the Chartered Accountants Act, 1949.
A Declaration of Confidentiality shall be signed by the persons who are responsible for the conduct
of Peer Review i.e., Reviewers and his Qualified Assistants and be filed with the Board. All members
of the Board shall also sign a declaration of Confidentiality in a manner as may be prescribed by the
Board.
Q.NO.10 WRITE ABOUT APPROACH OF THE REVIEWER?
ANSWER:
The stepwise approach which may be adopted by the reviewer is discussed in the following
paragraphs:
1. ENGAGEMENT LETTER: Engagement letter is an important document as it defines the nature

and scope of the assurance engagement, practice unit's responsibilities with regard to the
engagement. This understanding would help him in planning the review of documentation. The
reviewer should focus the review primarily on the key engagement matters. The reviewer should
also consider the materiality of the matter while planning the review.
2. NUMBER OF ASSURANCE ENGAGEMENTS: The number of assurance engagements to be

selected requires the exercise of judgement by the reviewer based on the evaluation of replies
given in the questionnaire and the size of the practice unit. The objective is to obtain a
reasonable cross-section of the practice unit's clients.
3. POLICIES AND PROCEDURES OF PRACTICING UNITS: The practice unit may have policies and
procedures for accepting a particular engagement. These policies and procedures may not exist
in the form of records in each practice unit. In such a case the reviewer should consider
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enquiring from the concerned persons about such policies and procedures. The reviewer should,
wherever possible, examine that the policies and procedures for acceptance of audit have been
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complied with and necessary documentation with regard to the same exists.
4. PROCEDURES BY REVIEWER: The reviewer may follow a combination of compliance procedures
and substantive procedures throughout the peer review process. The mix of compliance and
substantive procedures depends upon the professional judgement of the reviewer. The reviewer
may consider the following:
a. In carrying out the compliance tests, the reviewer may evaluate whether the policies and
procedures of the practice unit are sufficient to ensure compliance of technical standards
and whether these policies and procedures are adequately communicated to all staff
who are involved in carrying out the assurance work.
b. In performing substantive tests, the reviewer should evaluate whether the practice unit's
working papers relating to the client adequately document the findings and conclusions
and whether the report of practice unit is in consonance with the findings and
conclusions drawn.
5. Finally, the reviewer while evaluating records may consider the following:
a. Determine that any significant issues, matters, problems that arose during the course of
the engagement have been appropriately considered, resolved and documented;
b. Determine that adequate audit evidence or other relevant evidence in relation to the
engagement is obtained to support the reasonableness of the conclusions drawn; and
c. Determine that significant decisions relating to the engagement, use of professional
judgement, resolution of significant matters have been properly documented.
Q.NO.11 WHAT ARE THE OBLIGATIONS OF THE PRACTICING UNITS AND PEER REVIEWER WITH
RESPECT TO PEER REVIEW?
ANSWER:
OBLIGATIONS / DUTIES OF PRACTICING UNITS:
Any Practice Unit, in addition to the prescribed information to be furnished including the
questionnaire, statements and such other particulars as the Board may deem fit, shall comply with
the following:
1. ACCESS TO RECORDS: Produce to the Reviewer or allow access to, any record, document or
prescribed register maintained by the Practice Unit or any other record or document which is of
a class or description so specified, and which is in the possession or under the control of the
Practice Unit.
2. INFORMATION AND EXPLANATION: Provide to the Reviewer such explanation or further
particulars/ information in respect of anything produced in compliance with a requirement
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under sub clause (1) above, as the Reviewer shall specify.

3. ASSISTANCE: Provide to the Reviewer all assistance in connection with Peer Review;
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4. DUTY TO GIVE CLARIFICATIONS: Where any information or matter relevant to a Practice Unit is
recorded otherwise than in a legible form, the Practice Unit shall provide and present to the
Reviewer a reproduction of any such information or matter, or of the relevant part of it in a
legible form, with a translation in English or Hindi, if the matter is in any other language, and if
such translation is requested for by the Reviewer. The Practice Unit shall be responsible and
accountable for the accuracy and truthfulness of the translation so provided.
OBLIGATIONS / DUTIES OF THE PEER REVIEWER:
1. The Reviewer shall not take any extracts of the Practice Units clients’ file or records examined by
him while conducting Peer Review, as a part of his working papers.
2. The Reviewer shall complete the Review within the prescribed time frame and submit the report
to the Board.
3. The Reviewer shall document all his working papers and submit a copy of his working papers
to the Board, if called for by the Board within 18 months of submission of Review Report.
[Newly Added in 2021]
Q.NO.12 EXPLAIN THE PEER REVIEW PROCESS IN DETAILED?
ANSWER:
A. SELECTION OF PRACTICE UNIT & APPOINTMENT OF REVIEWER:
1. NOTIFICATION TO THE PRACTICE UNIT: A Practice Unit which has been selected for a Peer
Review shall be notified by the Board.
2. DECLARATION by PU: A detailed declaration cum questionnaire in the form approved by the
Board shall be submitted by the Practice Unit within 7 days from the date the Practice Unit
(PU) has been notified by the Board so that Reviewer to be allotted from the Panel of 3
reviewers can be identified by the Board as per declaration cum questionnaire submitted by
Practice Unit.
3. 3 NAMES TO BE RECOMMENDED: Name of 3 Reviewers shall be recommended by the Board

to the Practice Unit so selected.
4. SELECT ONE REVIEWER: The Practice Unit shall select one out of the 3 Reviewers & intimate
to the Board within 7 days of receipt of the names.
5. REVIEWER CONSENT: The Board shall intimate the Reviewer so selected and seek his
consent within 7 days.
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B. PLANNING:
INFORMATION TO BE FURNISHED BY PRACTICE UNIT: On intimation by the Board, of the

Reviewer’s consent, the Practice Unit shall within 2 days furnish the following in formation to
the Reviewer:
1. Copy of completely filled up questionnaire which is already submitted to board.
2. Details of any proceedings against the Practice Unit or any of its partners or qualified
assistants taken by any regulatory, monitoring or enforcement bodies relating to
investigation or allegation of deficiency in the conduct of attest function by them during
the period of 3 financial years preceding the period of review or at any time thereafter i.e.,
till the date of submission of the duly filled-in Questionnaire.
INFORMATION TO BE FURNISHED BY PEER REVIEW BOARD:
The Peer Review Board shall call for relevant information from the UDIN Directorate and share
the concerned details with Peer Reviewer which shall form part of Peer Review.
SELECTION OF SAMPLE BY THE REVIEWER:

1. The Reviewer shall within 7 days of receiving the information from the Practice Unit select
a sample of the assurance services that he would like to Review and intimate the same to
the Practice Unit and the Peer Review Board.
2. The Reviewer may also seek further / additional clarification from the Practice Unit on the
information furnished / not furnished.
3. The Reviewer shall plan for an on–site Review visit or initial meeting in consultation with
the Practice Unit. The Reviewer shall give the Practice Unit at least 5 days’ time to keep
ready the necessary records of the selected assurance services.
4. The Reviewer and Practice Unit shall mutually co-operate and ensure that the entire
Review process is completed within 60 days from the date of notifying the Practice Unit
about its selection for Review.
C. EXECUTION:
PEER REVIEW VISITS:

Peer Review visits will be conducted at the Practice Unit's head office or /and branch(es) or any
other locations. This on-site Review should not extend beyond 7 working days based on the size
of the Practice Unit.
COMPLIANCE REVIEW-GENERAL CONTROLS:

The Reviewer is required to carry out a compliance Review of the following General Controls for
evaluating the degree of reliance to be placed upon them for effective Review:
1. Independence
2. Maintenance of Professional Skills and Standards
3. Outside Consultation
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4. Staff recruitment, Supervision and Development

5. Office Administration
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SELECTION OF ASSURANCE SERVICE ENGAGEMENTS FOR REVIEW:
1. The number of assurance service engagements to be reviewed shall depend upon:
a. The Standard of quality controls generally prevailing;
b. The size and nature of assurance service engagements undertaken by the Practice
Unit.
c. The methodology generally adopted by the Practice Unit in providing assurance
services.
d. The number of partners / members involved in assurance service engagements in
the Practice Unit;
e. The number of locations / branch offices of the practice Unit;
f. The Fees charged / received / GST paid by the Practice unit.
2. From the initial sample selected at the planning stage, the Reviewer, in consultation with
the Peer Review Board, may reduce or enlarge the initial sample size of assurance service
engagements for Review.
REVIEW OF RECORDS:
The Reviewer is required to adopt a combination of compliance approach and substantive
approach in the Review process.
Compliance Approach – Assurance Service Engagements: The compliance approach is to assess

whether proper control procedures have been established / followed by the Practice Unit to
ensure that assurance services are being performed in accordance with Technical, Professional
and Ethical Standards. The following areas shall be considered:
1. Assurance services records for Administration

2. Review and Evaluation of System of Internal controls
3. Substantive Tests
4. Financial Statements Presentation and Disclosures
5. Assurance Services Conclusions Assurance Services Reporting
Substantive Approach - Assurance Engagements: This approach requires a Review of the

assurance working papers in order to establish the extent of compliance, whether the assurance
work has been carried out as per the Technical, Professional, and Ethical Standards.
D. REPORTING:
1. The Peer Review Report should state that the system of quality control for the assurance
services of the Practice Unit for the period under Review has been designed so as to carry
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out the assurance services in a manner that ensures compliance with Technical, Professional
and Ethical standards.
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2. The Peer Review Report shall address his report of compliance or otherwise on the following
areas of controls:
a. Independence.
b. Maintenance of Professional Skills and Standards.
c. Outside Consultation.
d. Staff Recruitment, Supervision and Development.
e. Office Administration.
DISCUSSION/COMMUNICATION OF FINDINGS:
1. After completing the on-site Review, the Reviewer, before making his Report to the Board, shall
communicate his findings in the Preliminary Report to the Practice Unit if in his opinion, the
systems and procedures are deficient or non-compliant with reference to any matter that has
been noticed by him or if there are other matters where he wants to seek clarification.
2. The Practice Unit shall within 5 days after the date of receipt of the findings, make any
submissions or representations, in writing to the Reviewer. (i.e., Response to the Preliminary
Report).
PEER REVIEW REPORT OF REVIEWER:
1. At the end of an on-site Review if the Reviewer is satisfied with the reply received from the
Practice Unit, he shall submit a Peer Review Report to the Board along with his initial findings,
response by the Practice Unit and the manner in which the responses have been dealt with. A
copy of the report shall also be forwarded to the Practice Unit.
2. In case the Reviewer is of the opinion that the response by the Practice Unit is not satisfactory,
the Reviewer shall accordingly submit a modified Report to the Board incorporating his reasons
for the same. The Reviewer shall also submit initial findings (i.e., Preliminary Report), response
by the Practice Unit (Response to Preliminary Report) and the manner in which the responses
have been dealt with. A copy of the report shall also be forwarded to the Practice Unit.
3. In case of a modified report, The Board shall order for a “Follow On” Review after a period of
ONE year from the date of issue of report as mentioned in (2) above. If the Board so decides, the
period of ONE year may be reduced but shall not be less than 6 months from the date of issue of
the report.
EXAMPLES OF QUALIFICATIONS BY PEER REVIEWER ON PRACTICING UNIT:
1. The PU does not have any documented policies for its system of quality control in accordance
with SQC 1, Standard on Quality Control. In view of this it was not possible for us to evaluate
compliance with the PU’s quality controls. We did, however make specific inquiries of the
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managing partner of the PU with regard to policies implemented with regard to the various
elements given in the Standard. On an overall basis, it was found that policies implemented were
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rudimentary and not commensurate with the size of the PU and the nature of its practice. There
were particular deficiencies in establishing and implementing quality control policies and
procedures in the areas of (i) Ethical requirements, and (ii) Acceptance and continuance of client
relationships and specific engagements.
2. The PU has no practice of documenting the samples selected for tests of details, what audit
procedures were applied to test the samples, or the outcome of such testing, if performed. The
only document that evidences performance of tests of details are query sheets. In several
instances, it was observed that queries were raised but there is nothing to evidence how they
were solved or disposed of.
3. During review of one of the audit files it was found that the entity’s current liabilities were in
excess of its current assets by several multiples, the entity had made cash losses during the last
three years and its accumulated losses were five times its share capital. In spite of this, there was
no evidence in the audit file of the engagement team’s evaluation of the management’s
assessment of going concern in accordance with SA 570, Going Concern, while the financial
statements were prepared on a going concern basis.
4. It was observed during examination of engagement files that the staff deployed lacked industry
expertise and was, in general, inexperienced. The PU does not have a system of supporting and
encouraging its resources to undergo relevant professional education necessary to execute audits
of entities in specialised industries. Moreover, there was no evidence in the working papers
prepared by articled assistants of any review performed by a senior resource.
5. No evaluation of the control environment of the entities audited was seen to have been done to
identify risks due to deficiencies or weaknesses in the audited entities internal control in
accordance with SA 315, Identifying and Assessing the Risk of Material Misstatement through
Understanding of the Entity and its Environment. Moreover, no attempt was made to test
internal control over financial reporting in order to determine if the controls are implemented
and operating effectively in accordance with SA 330, The Auditor’s Response to Assessed Risks.
Q.NO.13 WRITE ABOUT PEER REVIEW CERTIFICATE AND ITS VALIDITY PERIOD?
ANSWER:
PR CERTIFICATE:
On receipt of the Peer Review Report, the Board shall within 3 months:
1. Issue a Peer Review Certificate to the Practice Unit mentioning the validity period.
2. Inform the Practice Unit that a Peer Review certificate cannot be issued along with the reasons
therefor as well inform the Practice Unit about the due date for conducting a follow-on
review. [In Case of Modified Opinion]
VALIDITY OF PEER REVIEW CERTIFICATE:
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1. A Practice Unit cannot continue with the existing certificate, whose validity has expired.
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2. All documents signed by the Practice Unit during the intervening period (i.e., expiry of previous
certificate and issuance of new certificate) will be invalid.
3. Therefore, it is the responsibility of the Practice Unit to complete the Peer Review of the firm
and submit all necessary documents at least ONE month before the date of expiry of the
previous certificate.
Q.NO.14 WRITE ABOUT INHERENT LIMITATIONS OF PEER REVIEW?

ANSWER:
The reviewer conducts the review in accordance with the Statement on Peer Review. The review
would not necessarily disclose all weaknesses in compliance of technical standards and
maintenance of quality of assurance services since it would be based on selective tests. As there are
inherent limitations in the effectiveness of any system of quality control which happens to be
subject-matter of review, departure from the system may occur and may not be detected.
Q.NO.15 WRITE ABOUT DIFFERENCE BETWEEN PEER REVIEW AND QUALITY REVIEW?
ANSWER:
PEER REVIEW:
Peer review is a review of the systems and procedures of an audit firm. Although sample audit files
are inspected by the peer reviewer, it is done for the purpose of testing the effectiveness of the
systems and procedures. The intention is to not to find faults but to help the firm develop effective
systems. It is a kind of mentoring process. Peer review is a part of the activities of ICAI aimed at
improving the quality of service.
QUALITY REVIEW:
1. In contrast, a quality review is supposed to act as a deterrent. Quality Review Board (QRB) is
constituted by the Central Government and is independent of ICAI. As per Section 28A of the
Chartered Accountant’s Act, the Central Government has the authority to constitute a Quality
Review Board.
2. QRB carries out supervisory and disciplinary functions. A quality review normally pertains to one
particular audit conducted by an audit firm.
3. The main objective quality review is to find errors or inadequacies, if any, committed by the
auditor while conducting the audit. Serious errors detected in quality review lead to disciplinary
action against the member.
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UNIT 2 – QUALITY REVIEW
Q.NO.16 WRITE ABOUT BRIEF INTRODUCTION TO QUALITY CONTROL?
ANSWER:
‘Quality means doing it right when no one is looking.’ Henry Ford
Every audit firm is required to establish a system of quality control designed to provide it with
reasonable assurance that:
1. The firm and its personnel comply with professional standards applicable and regulatory
and legal requirements and
2. That reports issued by the firm or engagement partner(s) are appropriate in the
circumstances.
Standard on Quality Control (SQC) 1 requires that every firm’s system of quality control should
include policies and procedures addressing each of the following elements:
a. Leadership responsibilities for quality within the firm.

b. Ethical requirements.
c. Acceptance and continuance of client relationships and specific engagements.
d. Human resources.
e. Engagement performance.
The quality control policies and procedures should be documented and communicated to the firm’s
personnel. In addition, the firm recognizes the importance of obtaining feedback on its quality
control system from its personnel. Therefore, the firm encourages its personnel to communicate
their views or concerns on quality control matters.
Example of important areas as per Quality Review Report 2018-19 in accordance with Standard on
Quality Control -1 are:
1. Whether the audit firm establishes and implements policies and procedure on all the element of
system of quality control.
2. Whether the engagement quality control reviewer review at an appropriate time for the
planning of an audit, significant audit judgement, and expressions of an audit opinion.
3. Whether the audit firm assigns as the person responsible for the monitoring of the system of
quality control a person with appropriate experience for the role, vest the assigned person with
sufficient and appropriate authority.
4. Whether the audit firm obtain, at least annually, a confirmation letter concerning compliance
with policies and procedure for the maintenance of independence from all person required to
maintain independence.
5. Whether the audit firm perform the independence confirmation procedure set forth in its
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internal rules before acceptance and continuance of an audit engagement, and when issuing the
auditor’s report appropriately confirms that there was no change in the status of independence.
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6. Whether the audit firm develop and provides education/ training program that fully take into
account the knowledge, experience, competence and capabilities of the professional staff.
Q.NO.17 WRITE ABOUT SCOPE AND OBJECTIVE OF QUALITY REVIEW?
ANSWER:
Quality review is about evaluation of audit quality and adherence to various statutory and other
regulatory requirements. They are designed to identify and address weaknesses and deficiencies
related to how the audits were performed by the audit firms.
Quality reviews included reviews of certain aspects of selected statutory audits performed by the
firm and reviews of other matters related to the firm’s quality control system.
In the course of reviewing aspects of selected audits, a review may identify ways in which a
particular audit is deficient, including failures by the firm to identify, or to address appropriately,
aspects in which an entity’s financial statements do not present fairly the financial position or the
results of operations in conformity with the applicable Generally Accepted Accounting Principles
(GAAP) and other technical standards.
It is not the purpose of a review to identify every aspect in which a reviewed audit is deficient.
Accordingly, a review should not be understood to provide any assurance that the firm’s audits, or
its clients’ financial statements or reporting thereon, are free of any deficiencies.
THE SCOPE & OBJECTIVE OF THE QUALITY REVIEW INCLUDES:
1. Examining whether the Statutory Auditor has ensured compliance with the applicable technical
standards in India and other applicable professional and ethical standards and other relevant
guidance.
2. Examining whether the Statutory Auditor has ensured compliance with the relevant laws and
regulations as required under applicable auditing standard.
3. Examining whether the Audit firm under review (AFUR) has implemented a system of quality
control with reference to the applicable quality control standards.
4. Examining whether there is no material misstatement of assets and liabilities as at the reporting
date in respect to the selected entity.
The major focus of the reviews is on compliance with technical standards, other relevant guidance,
relevant laws & regulations as required under applicable auditing standard, quality of reporting and
firm’s quality control framework.
The review would encompass AFUR’s working papers of selected audit file/s to assess quality of
their audit and to ensure that financial statements are free of material misstatement/s; internal
quality controls placed within AFUR, including assessment of how internal controls impact audit
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quality; AFUR’s independence; compliance with technical standards, other relevant guidance and
relevant laws and regulations; on-site-inspections; and discussion of findings with senior
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management of AFUR.
As per the QRB, the term “Technical Standards” in the context of the Chartered Accountants
(Procedures of Meetings of Quality Review Board, and Terms and Conditions of Service and
Allowances of the Chairperson and Members of the Board) Rules, 2006 includes:
1. Preface to the Statements of Accounting Standards;

2. Preface to the Standards on Quality Control, Auditing, Review, Other Assurance and Related
Services;
3. The Accounting Standards notified under section 133 of the Companies Act, 2013;
4. The Accounting Standards issued by the Institute of Chartered Accountants of India;
5. The Framework for the Preparation and Presentation of Financial Statements issued by the
Institute of Chartered Accountants of India;
6. The applicable Quality Control and Standards on Auditing issued by the Institute of Chartered
Accountants of India and those notified under the relevant statute;
7. The Statements on Auditing issued by the Institute of Chartered Accountants of India;
8. The Notifications/Directions/Guidelines issued by the Institute of Chartered Accountants of India
including those of a self-regulatory nature; Other relevant legal and regulatory requirements.
9. “Other Relevant Guidance” include:
• The Guidance Notes on accounting and auditing matters issued by the Institute of
Chartered Accountants of India;
• The Code of Ethics issued by the Institute of Chartered Accountants of India.
IMP NOTE: Presently, the review undertaken by QRB covers statutory audit services only and does
not extend to internal audit services provided by the members of the Institute. These are proposed
to be covered by the Board at a later stage. Further, this review also does not extend to services
provided by the members of the Institute, in employment.
Q.NO.18 WRITE ABOUT QUALITY REVIEW BOARD, ITS FUNCTIONS, POWERS AND COVERAGE OF
SERVICES BY THEM?
ANSWER:
A. CONSTITUTION AND COMPOSITION OF QUALITY REVIEW BOARD:
1. The Quality Review Board (hereinafter “QRB”/ “the Board”) has been set up by the Central
Government under section 28A of the Chartered Accountants Act, 1949 (hereinafter “the
Act”). The first Quality Review Board was constituted by the Central Government, in exercise
of the powers conferred by section 28A of the Chartered Accountants Act, 1949, vide
Notification GSR. 448 (E) dated 28th June, 2007.
2. In terms of section 28A of the Chartered Accountants Act, 1949, the Board comprises of a
Chairperson and 10 other members:
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a. Central Government nominates the Chairperson and 5 members [TOTALLY 6]. 6 out
of 11 Members of the Board, including Chairperson, are nominated by the Central
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Government. Members are nominated from amongst the persons of eminence
having experience in the field of law, economics, business, finance or accountancy.
b. Remaining 5 members are nominated by the Council of the ICAI.
B. FUNCTIONS OF QRB:
A quality review carried by the QRB is directed towards inspection/evaluation of audit quality
and adherence to various statutory and other regulatory requirements. It involves inspection
and assessment of the work of the practitioner while carrying out their audit function so as to
enable QRB to assess:
1. The quality of compliance with the accounting standards and disclosure requirements
followed by the entity on which the audit report is issued;
2. The quality of audit and reporting by the practitioner; and
3. The quality control framework adopted by the practitioner/audit firms in conducting
audit.
Section 28B of the Chartered Accountants Act, 1949 provides that: “The Board shall perform the
following functions, namely:
a) to make recommendations to the Council with regard to the quality of services provided
by the members of Institute;
b) to review the quality of services provided by the members of the Institute including audit
services; and
c) to guide the members of the Institute to improve the quality of services and adherence
to the various statutory and other regulatory requirements.”
However, the Ministry of Corporate Affairs, vide letter F.No.7/1/2019-CL-1 dated 30th January,
2019, has clarified to the Quality Review Board that in view of Sec.132 (2) of the Companies
Act, 2013 r/w Rule 9(4) of NFRA Rules, 2018, the issue of QRB reviewing audits of the
companies/bodies corporate specified under Rule 3 of the NFRA Rules, 2018 will only arise in
case a reference is so made to QRB by NFRA, and not otherwise.
NFRA AND QRB:

Rule 3 (1) of National Financial Reporting Authority Rules, 2018, provides that the Authority
(read NFRA) shall have power to monitor and enforce compliance with accounting standards and
auditing standards, oversee the quality-of-service section 132 (2) or undertake investigation
under section 132 (4) of the auditors of the following class of companies and bodies corporate,
namely:
a) LISTED COMPANIES: companies whose securities are listed on any stock exchange in India or
outside India;
b) SELECTED UNLISTED COMPANIES: Unlisted public companies having:
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a. paid-up capital of not less than rupees 500 crores or

b. having annual turnover of not less than 1000 Crores or
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c. having, in aggregate, outstanding loans, debentures and deposits of not less than
rupees 500 crores as on the 31st March of IMMEDIATELY PRECEDING FINANCIAL
YEAR;
c) SPECIFIED BODY CORPORATES: Insurance companies, banking companies, companies
engaged in the generation or supply of electricity, companies governed by any special Act for
the time being in force or bodies corporate incorporated by an Act in accordance with
clauses (b), (c), (d), (e) and (f) of sub-section (4) of section 1 of the Act;
d) REFERENCE BY CENTRAL GOVERNMENT: any body corporate or company or person, or any
class of bodies corporate or companies or persons, on a reference made to the Authority by
the Central Government in public interest; and
e) SC or AC of above: a body corporate incorporated or registered outside India, which is a
subsidiary or associate company of any company or body corporate incorporated or
registered in India as referred to in clauses (a) to (d), if the income or net-worth of such
subsidiary or associate company exceeds 20% of the consolidated income or consolidated
net-worth of such company or the body corporate, as the case may be, referred to in clauses
(a) to (d).
Rule 9(4) of NFRA Rules, 2018 provides that the Authority (read NFRA) may refer cases with
regard to overseeing the quality of service of auditors of companies or bodies corporate
referred to in rule 3 to the Quality Review Board constituted under the Chartered Accountants
Act, 1949 (38 of 1949) or call for any report or information in respect of such auditors or
companies or bodies corporate from such Board as it may deem appropriate.
Accordingly, QRB would now be able to initiate reviews of quality of audit services provided by
members of the Institute only in respect of entities OTHER THAN those specified under Rule
3(1) of NFRA Rules, 2018, namely, private limited companies, unlisted public companies below
the thresholds specified under Rule 3(1) of NFRA Rules, 2018 and other entities not specified
under Rule 3(1) of NFRA Rules, 2018; and those referred to QRB by NFRA under Rule 9(4) of
NFRA Rules, 2018.
C. POWERS OF QRB:
The Central Government has made ‘Chartered Accountants (Procedures of Meetings of Quality
Review Board, and Terms and Conditions of Service and Allowances of the Chairperson and
Members of the Board) Rules, 2006’. To facilitate the discharge of its functions, Rule 6 of
aforesaid rules provides:
a) EVALUATE QC OF WORK OF MEMBERS: On its own or through any specialized arrangement
set up under the Institute, evaluate and review the quality of work and services provided by
the members of the Institute in such manner as it may decide;
b) SETUP EVALUATION CRITERIA: Lay down the procedure of evaluation criteria to evaluate
various services being provided by the members of the Institute and to select, in such
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manner and form as it may decide, the individuals and firms rendering such services for
review;
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c) CALL FOR INFORMATION:
a. Call for information from the Institute, the Council or its Committees, Members,
Clients of members or other persons or organizations, in such form and manner
as it may decide, and may also give a hearing to them;
b. Provided that where the Board does not receive the information called for by it
from any Member of the Institute, the Board may request the Institute to obtain
the information from the member and furnish the same to the Board.
c. Provided further that where the Board does not receive the information called for
by it from any company registered under the Companies Act, 1956 (now
Companies Act, 2013), the Board may request the Central Government in the
Ministry of Corporate Affairs for assistance in obtaining the information.
d) TAKE EXPERTS ADVICE: Invite experts to provide expert/technical advice or opinion or

analysis on any matter or issue which the Board may feel relevant for the purpose of
assessing the quality of work and services offered by the members of the Institute;
e) RECOMMENDATIONS TO THE COUNCIL: Make recommendations to the Council to guide the

members of the Institute to improve their professional competence and qualifications,
quality of work and services offered and adherence to various statutory and other regulatory
requirements and other matters related thereto.
D. COVERAGE OF SERVICES FOR QUALITY REVIEW:
1. The Board issued the ‘Procedure for Quality Review of Audit Services of Audit Firms’ (the
‘Procedure’) providing for various matters, adopting best practices, in laying down the
necessary system for conducting recurring quality reviews of audit firms in India.
2. It is felt that the broad contours and requirements of review and the manner in which such
review would be carried out, should not only be made known to users, stakeholders and
service providers, in advance, but should also be transparent.
3. Accordingly, the Quality Review would involve assessment of the work of statutory auditors
while carrying out statutory audit so that the Board is able to assess:
a. Quality of statutory audit and reporting by statutory auditors; and
b. Quality control framework adopted by the AFUR in conducting statutory audit.
4. EXCLUSIONS: This Procedure would not extend to:

a. Review of internal audit, tax audit, GST audit and other such special purpose audits
conducted by the members of the Institute which may be covered by the Board at a
later stage or unless otherwise specified and
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b. Review of services provided by the members of the Institute in employment.

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Q.NO.19 WRITE ABOUT SELECTION OF AUDIT FIRMS FOR QUALITY REVIEW?
ANSWER:
The quality review has been introduced in stages, with firms selected from different classes or types
of audit firms being subjected to review at each stage. The Board may decide the audit firms to be
included in the selection during each stage. Such selection of audit firms for review may be made
on the basis of one or more of the following criteria:
CRITERIA BASED ON ENTITIES AUDITED [BASED ON CLIENTS OF PU]:
1. The entities other than those specified under Rule 3(1) of NFRA Rules, 2018 may be selected on
the basis of one or more of the following:
a. Risk based selection including regulatory concerns pointing towards stakeholder risks.
b. On account of being part of a sector otherwise identified as being susceptible to risk on
the basis of market intelligence reports.
c. Reported fraud or likelihood of fraud.
d. Serious accounting irregularities in the financial statements highlighted by the media and
other reports.
2. Major non-compliances under relevant statutes highlighted in past reviews.
3. In case of joint audits, if required, all joint auditors may be reviewed, as may be decided by the
Board on case-to-case basis.
4. REGULATORY REFERRED: The Board may also review the quality of the statutory audit services
of AFUR with a view to assessing the quality of statutory audit and reporting by the statutory
auditors and their quality control framework on a reference made to it by any regulatory body
like Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and
Development Authority, Ministry of Corporate Affairs, National Financial Reporting Authority
(NFRA) under Rule 9(4) of NFRA Rules, 2018 etc.
5. The Board shall not consider cases of complaints received from individuals, firms, companies,
other entities and their partners, directors and other officers etc. which shall be continued to be
dealt with in accordance with the mechanism available under the Chartered Accountants Act,
1949. Cases of complaints from only regulatory bodies and other media reports involving
serious accounting irregularities shall be considered by the Board for the purpose of initiating
the review.
6. The selection for suo moto quality reviews may, however, be done using methods such as
random sampling, selection of particular class or classes of entities/audit firms, in the manner
as specified at (1) above.
7. The QRB secretariat should place the details of the entities and audit firms, which may be
selected for quality review before the Board for its consideration. The Board, at this stage, may
consider whether the case warrants a quality review by a TR [Technical Reviewer] and may refer
the cases selected for quality review to the relevant TRs. The Board will obtain the Annual
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Report of the entity concerned in terms of the ‘Chartered Accountants Procedures of Meetings
of Quality Review Board, and Terms and Conditions of Service and Allowances of the
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Chairperson and Members of the Board Rules, 2006’.

CRITERIA BASED ON AUDIT FIRMS:
Selection of audit firms should also be made for quality review of their statutory audit work on
random basis, the volume of work handled by them represented by the number and nature of
clients, sectors that may be identified as facing high risk, or on account of fraud or likelihood of
fraud.
QUALITY REVIEW CYCLE:
1. PERIODICITY OF QR: The following quality review cycle of Audit firms may be followed generally
or as may be decided by the Board:
a. Once in 3 years for Audit firms having 20 or more Partners
b. Once in 4 years for Audit firms having 10 or more but less than 20 Partners
c. Once in 5 years for Audit firms having less than 10 Partners.
2. No. OF ENGAGEMENTS FOR QR:

a. GENERALLY: Up to 3 audit engagements of an AFUR may be selected by the Board, as
may be considered appropriate, during a particular quality review cycle covering entities
of varied industries, size, geographical spread and regulatory concerns.
b. NO ADVERSE FINDINGS IN PAST: However, in the absence of any adverse finding in a
past review, not more than one audit engagement of the same engagement partner/
proprietor of an AFUR may be selected for quality review by the Board during a particular
quality review cycle
c. ADVERSE FINDINGS: However, in case of any adverse findings in past review/s or in any
other situation, QRB may conduct quality review of any particular audit firm or of a
particular engagement partner at more frequent interval and/or select more than 3
audit engagements.
Q.NO.20 WRITE ABOUT QUALITY REVIEW PROCESS?
ANSWER:
A. TECHNICAL REVIEWER:
1. A quality review is an engagement that needs to be carried out by a person who meets the
professional standards established by ICAI. With a view to carrying out the work of review
of quality of audit services of auditors/audit firms in India, the Quality Review Board has
decided to seek the services of members of the Institute to function as ‘Technical
Reviewers’ (TRs) for the Board. It is utmost importance that ensuring quality in a quality
review remains a priority for a technical reviewer.
2. In fact, maintaining the quality in a quality review as also the final report of the quality
review is and remains the responsibility of the technical reviewer.
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B. QUALITY REVIEW GROUPS:
1. The Board may constitute one or more Quality Review Groups (hereinafter referred to as
QRG) to examine final reports of Technical Reviewers, with a view to assessing the quality of
audit and reporting by the AFUR, in consultation with the Board. There could be two
categories of the QRGs:
a. Industry Specific; and
b. Generic.
2. Each of the QRG would be assisted by TRs. The job of the TRs would be to prepare a report
on the review of statutory audit function of AFUR, with a view to assessing their quality of
audit and reporting, and the review of quality control framework adopted by them in
conducting audit.
3. INDUSTRY EXPERT’s: The Board may also obtain services of relevant industry experts, if
needed, on such criteria as may be specified by the Board. These industry specific experts
may provide guidance/ advice to the TRs, as may be required. These TRs and industry
experts shall be entitled to payment of honorarium and reimbursement of travelling
expenses, including for their assistants, if any, at such rates as may be decided by the Board
from time to time.
C. EMPANELMENT OF TECHNICAL REVIEWERS:

1. The Board has specified the following basic minimum criteria for empanelment of Technical
Reviewers with the Board, applications in respect whereof are invited through an on-line
empanelment process at the website of QRB:
a. 15 PQE: Reviewer should have minimum 15 years of post-qualification experience as

a chartered accountant and be currently active in the practice of accounting and
auditing.
b. SIGNING PARTNER: Reviewer should have handled as a signing partner/proprietor

at least three statutory audit assignments as a Central Statutory Auditor of
Banks/Public Limited Companies/Government Companies/Private Limited Companies
having annual turnover of rupees 50 crores and above during the last ten financial
years; Provided that out of the aforesaid 3 statutory audit assignments, at least one
must be in respect of entities other than Private Limited Companies.
c. NO DISCIPLINARY: Reviewer should not have any disciplinary proceeding under the
Chartered Accountants Act, 1949 pending against him or any disciplinary action
under the Chartered Accountants Act, 1949 / penal action under any other law
taken/pending against you during last three financial years and/or thereafter.
d. NOT A MEMBR OF BOARD / COUNCIL: Reviewer should not currently be a Member

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of the QRB or ICAI’s Central Council/Regional Council/Branch level Management

Committee.
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2. The Board may specify any other criteria, from time to time, apart from the aforesaid basic
minimum criteria for empanelment of TRs with the Board.
3. The Board reserves the right to reject any application for empanelment as TR without
assigning any reason whatsoever.
4. TR VALIDITY FOR 3 YEARS: The empanelment of TRs, so made, shall be for the on-going
block period of 3 years subject to obtaining annual declarations from each of the
empanelled TR for continuing to meet the basic criteria of empanelment. However, it may be
noted that empanelment as a TR with the Quality Review Board does not, in any way,
guarantee allotment of quality review work to TR which shall be at the sole discretion of the
Quality Review Board.
5. MANDATORY TRAINING: TRs shall be required to undergo training on emerging areas such
as Ind-AS, Amendments in Companies Act, other technical standards, Valuation Standards,
other relevant laws and regulations etc. TRs shall regularly participate in training
workshops/programmes organized by various POUs [Programme Organising Units] on the
aforesaid areas and will update their knowledge.
6. ANNUAL DECLARATIONS: Further, they shall submit 6 annual declarations along with
relevant evidences, to the QRB regarding their participation in such training
workshops/programmes.
7. RENEWAL OF TR: After completion of the initial block period of empanelment, the Board
may decide to offer renewal of empanelment to TR, subject to his consent, for another block
period and so on based upon assessment of the quality of review work performed by the TR
during the period, if any, his meeting the basic minimum criteria for empanelment,
participation in training workshops and other such factors as may be considered appropriate
by the Board.
D. VARIOUS STAGES INVOLVED IN THE CONDUCT OF THE QUALITY REVIEW ASSIGNMENTS:
The following table describes the various stages generally involved in the conduct of the quality
review assignments:
1. IDENTIFY TR: QRB selects Audit Firm and the audit file for review and identifies TR to
conduct Quality Review.
2. OFFER LETTER: QRB sends Offer Letter of Engagement to TR.

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3. ACCEPTANCE BY TR: TR conveys his acceptance of Letter of Engagement to QRB by sending
necessary declarations for meeting eligibility conditions and furnishing statement of
confidentiality by himself and his assistant/s, if any.
4. INTIMATE AFUR: QRB intimates AFUR about the proposed Quality Review. QRB also sends a
copy of this intimation letter to TR and provides them contact details of each other for
further communication.
5. SEND QUESTIONNAIRE: TR sends the specified Quality Review Questionnaire to the AFUR for
filling-up. He also calls for additional information from the AFUR, if required.
6. CARRYOUT REVIEW: TR & his team carry out the Quality Review by starting their off-site
review by making proper planning for the review and then on-site visiting the office of the
AFUR by fixing the date as per mutual consent ensuring that review exercise gets completed
within specified time frame.
7. DRAFT REPORT: On completion of on-site review, TR to send the preliminary report to AFUR.
TR shall send a copy of preliminary report to QRB as well.
8. REPRESENTATION BY AFUR: AFUR to submit representation on the preliminary report to the

TR and TR to immediately send the reply of the AFUR to QRB.
9. FINAL REPORT: TR to submit final report along with a copy of Annual report of the entity for
the year under review, to the QRB in the specified format, on his (individual) letterhead,
duly signed and dated within specified time frame or as extended by the QRB. In addition, he
shall also send a copy of the final report to the AFUR, requesting them to send their final
reply thereon to the QRB within 7 days of receipt of the final report. AFUR shall also send a
copy of their final reply to TR.
10. FEEDBACK BY AFUR: AFUR to submit to QRB their reply on the final report and feedback, in
prescribed format, regarding their experience of the quality review.
11. SUMMARY OF FINDINGS BY TR: Upon receipt of the final reply from the AFUR, TR shall
submit to QRB within next 7 days a summary of his findings, in the specified format,
containing his findings, technical requirements, final reply of the AFUR and his final
comments thereon.
12. QRG to consider the report of the TR and responses of AFUR and make recommendations
to QRB. QRG may also call for additional details/information/explanations, if required, from
TR/AFUR or issue such directions to TR, as it may deem appropriate, enabling it to assess the
quality of audit and reporting by the AFUR.
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13. QRB to consider report and recommendations of QRG and decide further course of action.
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E. COMPOSITION OF THE REVIEW TEAM:
The composition of the review team would depend on the size of the AFUR/entity/(ies) under
review. The composition of the team, mandatorily headed by a TR empanelled with the Quality
Review Board, may also include up to 5 Assistants engaged by the TR, as may be fixed by the
Board in each case on need basis. However, NO firm of Chartered Accountants may be included
as a member of the review team.
F. INDEPENDENCE AND QUALIFICATIONS OF TECHNICAL REVIEWERS:
While assigning the quality review work to the respective Technical Reviewers, in order to
ensure independence and avoid conflict of interest, the following eligibility conditions were
specified for carrying out the specified quality review assignment to the Technical Reviewers
who were required to submit a declaration of eligibility before starting the assignment. For
being a technical reviewer (TR):
G. INDEPENDENCE OF ASSISTANT (QUALIFIED ASSISTANCE):
1. The QRB, from time to time, shall specify the requirements for engaging Assistants by the TR
for ensuring their independence and avoiding conflict of interest including:
a. He shall be chartered accountant;
b. He does not attract any of the disqualifications prescribed under the Chartered
c. He shall also have to sign the statement of confidentiality in a prescribed format.
d. He shall have no direct interface either with the audit firm under review (AFUR) or
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the Board;
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e. He should have been working with them for at least one year as a member/a partner
in the CA firm with them;
f. He should not have been associated with the AFUR and the concerned entity, whose
audit is being reviewed, during last three financial years and/or thereafter.
g. He should not have any disciplinary proceeding under the Chartered Accountants Act,
1949 pending against him or any disciplinary action under the Chartered Accountants
Act, 1949 / penal action under any other law taken/pending against him during last 3
financial years and/or thereafter;
h. He should not be a member of current QRB/ICAI’s Central Council/Regional.
Council/Branch level Management Committee; and
i. He should not himself be empanelled as a TR with the Quality Review Board.
2. The Board may also obtain services of relevant industry experts, if needed, on such criteria
as may be specified by the Board. These industry specific experts may provide guidance/
advice to the TRs, as may be required. These TRs and industry experts shall be entitled to
payment of honorarium and reimbursement of travelling expenses, including for their
assistants, if any, at such rates as may be decided by the Board from time to time.
H. CONFIDENTIALITY:
1. Technical Reviewers should ensure that all information, papers, materials, documents etc.
relating to the company/audit firm, as selected and assigned to them, that they will gain
during the course of assignment are kept in strict confidence.
2. They are required to send duly signed statement of confidentiality including by each one of
their assistants in a prescribed format. There should be no conflict of interest of all those
connected with the entire review process.
3. All persons involved with the entire review process including members of Board/Group,
Technical Reviewers, his/her assistants and QRB secretariat shall maintain confidentiality of
information obtained during reviews and also appropriately disclose to the Board, from time
to time, their interests or that of the partners of their firm or their relatives, if any, in relation
to statutory audit firm being reviewed by Board or entity concerned whose audit was
selected for review.
I. GUIDELINES FOR THE TECHNICAL REVIEWERS (TR):
TR should adhere to the principal requirements mentioned while preparing his report. It may be
noted that the requirements mentioned apply to the interim as well as the final reports of the
TR. TR should also adhere to the various guidelines given to him by the Board, from time to time,
including:
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1. TR shall himself make on-site visit, along with his Assistant/s, if any, to the AFUR for
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conducting the review of audit working papers as defined under the relevant standards;
2. TR shall follow Technical Guide on conducting Quality Review as brought out by the QRB
while conducting the review;
3. TR, including his Assistant/s, will have access to or take abstracts of the records and
documents maintained by the AFUR in relation to the review; However, in order to maintain
confidentiality, the TR, including his Assistant/s, shall not make any copies/extracts of the
AFUR’s Clients’ file or records examined by them while conducting review, as part of their
working papers;
4. TR shall provide detailed comments giving proper justification and explanation in respect of
the various matters required to be commented upon by TRs in the final report including its
Appendices;
5. TR shall also refer other guidance provided by the Quality Review Board from time to time
such as Audit Quality Review Reports of the QRB appearing at the website of the QRB, other
reports of international bodies or any other guidance as may be provided by the QRB from
time to time as well as industry specific Technical Guide/s, if any, brought out by the ICAI
while conducting the review;
6. TR shall be required to segregate his observations into those material and non-material;
7. TR should build in a review process to be able to review audit documentation maintained by
the AFUR in electronic form in line with the requirements of SA 230; and
8. TR shall specifically include a suitable paragraph in the review report on the adequacy of
fraud reporting by the Statutory Auditors in their Independent Auditor’s Report.
J. STAGE-WISE APPROACH OF QUALITY REVIEW PROCESS:
1. The Board may constitute one or more Quality Review Groups as discussed above.
2. Technical Reviewer(s) will be assisting each of the Review Group.
3. The TR, after completion of his on-site review, is required to submit a preliminary report to
the AFUR on the review of the quality of audit and reporting by the AFUR on the financial
statements and the AFUR’s quality control framework.
4. After obtaining comments of AFUR on his preliminary report, TR would submit his final
report to the Board in a specified format and within specified period of time. The Board may,
however, extend the time limit for submission of final report.
5. Report should be issued on the TRs (individual) letterhead and duly signed by the TR. The
report should be addressed to the Chairperson of the Board and should be dated as of the
date of the conclusion of the review.
6. The TR, based upon his satisfaction from the representation by the AFUR, may decide to
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issue either an interim report or a final report to the Board. TR shall also forward a copy of
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his final report to the AFUR requesting them to submit to the Board their final comments on
the observations made by him in the Final Report.
7. Involvement of Quality Review Group:

1) The report, so prepared by the TR, and the AFUR’s final comments on the
observations made by TR in the Final Report shall be considered by the QRG.
2) QRG may issue such directions to the TRs as may be considered necessary enabling
QRG to make recommendations to the Board on the review. The QRG may also
consult the Board on any issue, on which QRG feels that the guidance of the Board is
necessary.
3) QRG may also call for additional details/ information from the concerned TR and/or
Audit Firm, if needed.
4) QRG may also interact with the concerned TR, if needed, and request him to
explain/present his final report to the QRG in certain circumstances including:
1) Where interaction with the TR is necessarily warranted to seek
clarifications/further details on certain issues in the report enabling the QRG
to make necessary recommendations to the QRB.
2) Where there are complete differences between the observations of the TR
and the views of the AFUR to the extent that an interaction with the TR
and/or AFUR is considered necessary.
3) Where the QRG is dissatisfied with the quality of the review report of the TR
enabling the TR to have a better understanding of the expectations from him.
5) QRG may also interact with the AFUR, if needed, in certain special circumstances and
request the AFUR to explain/present their views enabling the QRG to make necessary
recommendations to the QRB.
8. In case of Joint Audits:

1) Generally, review reports in respect of all the joint auditors of an entity should be
considered together by the QRG, as far as practicable.
2) In view of SA 299 ‘Responsibility of Joint Auditors’, if TR finds that response of other
joint auditor is required on any particular observation(s) as the concerned area was
allocated to them, he may, through the office of QRB, communicate with the
concerned audit firm. TR shall submit his final report after giving reasonable
opportunity to the requisite audit firm for obtaining their response.
9. QRG shall consider the reports of TRs in respect of the quality reviews referred to it and
submit its recommendations on the same to the Board within a reasonable period of time.
The recommendations of the QRG may expressly state the following:
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10. QRG may consider the following broad parameters for determining the action to be
recommended to the Board upon consideration of the observations of the TRs:
1) MATERIAL NON COMPLIANCES – DISCIPLINARY ACTION: In situations where the

financial statements are not materially prepared in accordance with the
requirements of the applicable financial reporting framework considering qualitative
aspects of the entity’s accounting practices as would affect the truth and fairness of
the financial statements; auditor has not obtained reasonable assurance about
whether the financial statements as a whole are free from material misstatements,
whether due to fraud or error; auditor does not express a qualified opinion when,
having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually, or in aggregate, are material; and in other cases of material non-
compliances of technical standards, other relevant guidance, ethical standards and
other relevant laws and regulations as would affect the truth and fairness of the
financial statements; the matter may be recommended to the Council of the ICAI
u/s 28B(a) of the Chartered Accountants Act, 1949 for REFERRING TO THE
DISCIPLINARY DIRECTORATE of the Institute for consideration and appropriate
action.
2) IMMATERIAL - ADVICE: In other cases of non-compliances to various requirements of

technical standards, other relevant laws and regulations and other relevant guidance
which are not so material in nature as would affect the truth and fairness of the
financial statements, individually or in aggregate, an advisory/guidance to the AFUR
may be issued by the QRB in terms of the requirements of Sec. 28B(c) of the
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3) In respect of other observations of trivial nature, and where the AFUR has also
agreed to take effective corrective steps in future or has already taken corrective
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steps, the report may be taken on record and the matter may be closed.
K. OUT OF POCKET EXPENSES OF MEMBERS OF QRB / QRG / TR’s: [NOT IMPORTANT]
1. The members of the QRB/QRG may be entitled for sitting fees and reimbursement of
travelling expenditure incurred in connection with the meetings of the QRB/QRG in terms of
Chartered Accountants (Procedures of Meetings of Quality Review Board, and Terms and
Conditions of Service and Allowances of the Chairperson and Members of the Board) Rules,
2006.
2. TRs who incurred travelling expenditure in connection with the meetings of the QRB/QRG
would be eligible for reimbursement at such rates as may be fixed by the Board from time to
time in this regard. However, members of the QRB/QRG, nominated by the Council of the
ICAI, will not be entitled for any sitting fees for attending meetings.
Q.NO.21 WRITE ABOUT REPORTING AND OTHER PROCEDURES RELATED TO QUALITY REVIEW?
ANSWER:
1. The reviewer [TR], based on the conclusions drawn from the review, shall issue a preliminary
report and subsequently the final report. The final report shall be issued in the format as may be
specified by the Board from time to time.
2. A clean report indicates that the TR is of the opinion that the statutory audit is being conducted
in a manner that ensures the quality of audit services rendered. However, a reviewer may
qualify the report due to one or more of the following:
a. non-compliance with technical standards and other relevant guidance;
b. non-compliance with relevant laws and regulations as required under applicable auditing
standard;
c. quality control system design deficiency; or
d. non-compliance with quality control policies and procedures.
3. BASIC ELEMENTS OF THE REVIEWER'S REPORT: The report should contain:
A. Elements relating to audit quality of companies:

1) A reference to the description of the scope of the review and the period of review of
audit firm conducted along with existence of limitation(s), if any, on the review
conducted with reference to the scope as envisaged.
2) A statement indicating the instances of lack of compliance with technical standards
and other professional and ethical standards.
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3) A statement indicating the instances of lack of compliance with relevant laws and
regulations.
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B. Elements relating to quality control framework adopted by the audit firm in conducting
audit:
1) An indication of whether the AFUR has implemented a system of quality control with
reference to the quality control standards.
2) A statement indicating that the system of quality control is the responsibility of the
AFUR.
3) An opinion on whether the AFUR's system of quality control has been designed to
meet the requirements of the quality control standards for attestation services and
whether it was complied with during the period reviewed to provide the reviewer
with reasonable assurance of complying with technical standards, other professional
and ethical standards, other relevant guidance and relevant laws and regulations in
all material respects.
4) Where the reviewer concludes that a modification in the report is necessary, a
description of the reasons for modification. The report of the reviewer should also
contain the suggestions.
5) A reference to the preliminary report.
6) An attachment which describes the quality review conducted including an overview
and information on planning and performing the review.
4. The Quality Review Report should be issued on the reviewer's (individual) letterhead and
signed by the reviewer. The report should be addressed to the Board and should be dated as of
the date of the conclusion of the review.
5. TYPE OF REPORT TO BE ISSUED: In deciding on the type of report to be issued, a reviewer should
consider the evidence obtained and should document the overall conclusions with respect to the
year being reviewed in respect of following matters:
a. Whether the policies and procedures that constitute the reviewed firm's (afurs) system
of quality control for its attestation services have been designed to ensure quality control
to provide the firm with reasonable assurance of complying with technical standards,
other relevant guidance and other relevant laws and regulations.
b. Whether personnel of the reviewed firm (AFUR) complied with such policies and
procedures in order to provide the firm with reasonable assurance of complying with
technical standards, other relevant guidance and other relevant laws and regulations.
c. Whether independence of AFUR is maintained in conducting audit.
d. Whether the AFUR has instituted adequate mechanism for training of staff.
e. Whether the audit firm (AFUR) ensures the availability of expertise and/or experienced
individuals for consultation.
f. Whether the skill and competence of assistants are considered before assignment of
attestation engagement.
g. Whether the progress of attestation service is monitored and work performed by each
assistant is reviewed by the service in-charge and necessary guidance is provided to
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assistants.
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h. Whether the audit firm (AFUR) has established procedure to record the audit plan, the
nature, timing and extent of auditing procedures performed and the conclusions drawn
from the evidences obtained.
i. Whether the audit firm (AFUR) maintains audit documentation as per the relevant
standards.
j. Whether the audit firm verifies compliance with laws and regulations to the extent it has
material effect on financial statement.
k. Whether the internal controls within the audit firm (AFUR) contribute towards
maintenance of quality of reporting.
ILLUSTRATIVE QUALIFICATIONS – NON –COMPLIANCE WITH STANDARDS ON AUDITING
1. Independence declaration from audit members received on sign off date of auditors’ report.
Independence confirmation not received from all members.
2. No process of maintaining standard checklists, manuals, working papers to ensure
consistency in the quality of each engagement.
3. No audit evidences for evaluation of estimates made by the management.
4. No presentations were made to the Audit Committee about the audit plan, audit strategy
and the audit findings.
5. It was difficult to conclude whether fraud risk factors were considered during the audit of
the Company’s financial statements. Audit process in relation to fraud inquiry procedures
were not performed and hence not documented.
6. As envisaged by Para 13 of SA 250 that the firm shall obtain sufficient appropriate audit
evidence, however no copy of legal advice was available in auditor’s file with regard to the
legal advice obtained against crystallization of liability on account of demand raised by fiscal
authorities which had been disputed.
7. There was no documentation to substantiate communication by the auditor with
management in writing, about significant deficiencies in internal control that the auditor has
communicated or intends to communicate to those charged with governance, unless it
would be inappropriate to communicate directly to management in the circumstances.
8. No hard copies were kept for identification to obtain sufficient and appropriate audit
evidence for all subsequent events up to the date of the auditor’s report that requires
adjustments/ disclosures in the financial statements.
9. No confirmations of balances have been obtained pertaining to parties to Debtors, Creditors,
Advances and related party balances.
10. Management representation letter had been obtained for the general points covering the
financial statements not on other specific items of the financial statements.
11. Provisions of AS-10 and AS-16 had not been complied with, however, the auditor in their
audit report under the head Basis for Qualified opinion and in addition to this para 2(d) of
report on other legal and regulatory requirements had stated that qualification constitutes
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departure from accounting standards but in the report, there was no clear mention of which
AS were not complied with.
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ILLUSTRATIVE QUALIFICATIONS – NON –COMPLIANCE WITH ACCOUNTING STANDARDS
1. Significant Accounting Policies did not include disclosures of policies in respect of:
a. Recognition of Insurance claims.
b. Accounting of Leases.
c. Treatment of IPO Expenses.
2. Inventory of traded goods was not shown separately from that of finished goods.
3. Method of preparation of cash flow statement had not been disclosed in standalone
financial statements and consolidated financial statements. Company had not disclosed the
components of Cash and Cash Equivalent in the Cash Flow Statement in consonance of the
AS 3.
4. Accounting policy on revenue recognition did not capture the point of recognition where
significant risks and rewards were transferred.
5. Disclosures relating to previous year figures in regard to related parties were not given.
Q.NO.22 WRITE ABOUT CONSIDERATION OF THE REPORTS OF THE QUALITY REVIEW GROUPS?
ANSWER:
1. The Quality Review Group’s Report on the quality of audit by the auditor of a Public Sector
Undertaking (PSU) should be furnished to the Office of Comptroller and Auditor General of
India (C&AG), on case to case basis, and the C&AG’s views, if any, shall be put-up before the
Board along with the recommendations of the QRG.
2. In all other cases, the QRG’s recommendations along with the decision of the Board on the
quality of audit by the auditor of a PSU shall be furnished to the Office of the C&AG for
information.
3. The recommendations of the QRG on the quality of statutory audits by the auditors of entities
(other than those covered above) shall be placed before the Board for its consideration directly.
4. The Board may, after due consideration of the recommendations and comments of Office of the
C&AG, wherever applicable, decide whether the recommendation made by the QRG should be
accepted or otherwise. The Board may, Suo moto, take such further action, as it may deem
appropriate. If the Board decides against the recommendations made by the QRG in its report,
the Board shall record the reasons for doing so.
Q.NO.23 ACTIONS THAT MAY BE RECOMMENDED BY THE QUALITY REVIEW BOARD. EXPLAIN?
ANSWER:
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The actions that the Board may take, based upon consideration of recommendations of the QRG,
include one or more of the following:
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1. Make recommendations to the Council of ICAI u/s 28B(a) of Chartered Accountants Act, 1949
for referring the case to the Director (Discipline) of the Institute for consideration and necessary
action under the Chartered Accountants Act, 1949.
2. Issue advisory and guidance to the AFUR u/s 28B(c) of Chartered Accountants Act, 1949 for
improvement in the quality of services and adherence to various statutory and other regulatory
requirements. A copy of such advisory may also be sent to the ICAI for information.
3. Inform the details of the non-compliance to the regulatory bod(y)/ies relevant to the entity as
may be decided by the Board.
4. Intimate the AFUR as to the findings of the Report as well as action initiated as above.
5. In case of review arising out of a reference received from a regulatory body, inform the results
of review and the details of action taken to the concerned regulatory body.
6. Consider the matter complete and inform the AFUR accordingly.
Q.NO.24 WRITE ABOUT MECHANISM FOR FOLLOW-UP OF REVIEW FINDINGS?
ANSWER:
1. Quality Review Board shall require AFUR to submit a compliance report to the Board within
specified period for adopting necessary measures to avoid recurrence/corrective steps in
respect of advisories and guidance issued to AFUR by the QRB u/s 28B(c) of Chartered
Accountants Act, 1949 for improvement in the quality of services and adherence to various
statutory and other regulatory requirements.
2. Quality Review Board may follow-up and review effectiveness of corrective actions taken by
AFURs. The results of reviews shall be used for off-site monitoring as well as for next on-site
review.
3. In case of lack of effective corrective actions by AFURs, next on-site review might be organised
earlier.
4. Cases of continued non-compliance may be recommended to the Council of the ICAI for taking
necessary action.
5. Horizontal and in-depth analysis of results of individual off-site monitoring and on-site review
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will be conducted to identify industry-wide issues across audit firms.

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6. Quality Review Board may also share results of such analysis with relevant stakeholders, as may
be decided by the Board.
Q.NO.25 WRITE ABOUT CHANGES TO THE REPORTING FORMATS/ QUESTIONNAIRE BY QRB?
ANSWER:
1. The Board had specified the format for the Final Report, and the Quality Review Program
General Questionnaire containing questions concerning various aspects of an audit firm such as
Quality control, ethical requirements & audit independence; leadership and responsibilities;
assurance practices; client relationships & engagements; human resources, consultation;
differences of opinion; engagement quality control review; engagement documentation; audit
planning & risk assessment; materiality; audit sampling & other selective testing procedures;
audit documentation; audit evidence; written representations; and Auditor’s report.
2. However, whenever the Quality Review Board is of such a view, in the light of international
practices, changes in domestic laws & regulations and through experience gained, it may,
amend, or modify the Quality Review Questionnaire/ reporting formats, from time to time, as
it may deem appropriate.
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PRACTICAL QUESTIONS [TEST YOUR KNOWLEDGE]
Q.NO.1 Anand, a practicing Chartered Accountant is appointed to conduct the peer review of
another practicing unit. What areas Anand should review in the assessment of
independence of the practicing unit?
ANSWER:
The reviewer should carry out the compliance review of the five general controls, i.e.,
independence, maintenance of professional skills and standards, outside consultation, staff
supervision and development and office administration and evaluate the degree of reliance to be
placed upon them. The degree of reliance will, ultimately, affect the attestation service
engagements to be reviewed.
Independence is the main quality expected of an auditor. That is the very basis for the existence
of the profession of auditing. Independence is a condition of mind as well a personal character of
a person.
Guidance Note on Independence of Auditors clarifies that independence is of two types, viz.
independence of mind and independence of appearance. The Guidance Note further states that
there are certain threats to independence which are classified as self-interest threats, self-review
threats, advocacy threats, familiarity threats and intimidation threats.
The responsibility of the Peer Reviewer, therefore, is to ascertain the existence of independence
and the absence of threats to independence.
The reviewer should, therefore, check the following aspects in respect of assessment of
independence of the practicing unit:
a) Does the practice unit have a policy to ensure independence, objectivity and integrity, on the
part of partners and staff? Who is responsible for this policy?
b) Does the practice unit communicate these policies and the expected standards of professional
behaviour to all staff?
c) Does the practice unit monitor compliance with policies and procedures relating to
independence?
d) Does the practice unit periodically review the practice unit's association with clients to ensure
objectivity and independence?
e) How does the practice unit deal with the threats to independence?
Q.NO.2 What are the areas excluded from the scope of peer reviewer?
ANSWER:
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The Peer Review process shall apply to all the assurance services provided by a Practice Unit.
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Once a Practice Unit is selected for Review, its assurance engagement records pertaining to the
Peer Review Period shall be subjected to Review. The following areas are excluded from the
scope of peer review:
1. Management Consultancy Engagements;

2. Representation before various Authorities;
3. Engagements to prepare tax returns or advising clients in taxation matters;
4. Engagements for the compilation of financial statements;
5. Engagements solely to assist the client in preparing, compiling or collating information other
than financial statements;
6. Testifying as an expert witness;
7. Providing expert opinion on points of principle, such as Accounting Standards or the
applicability of certain laws, on the basis of facts provided by the client; and
8. Engagement for Due diligence.
Q.NO.3 Write short notes on the following:

(a) Scope of Peer Review.
(b) Technical, ethical and professional standards as per Statement on Peer Review.
ANSWER:
Refer Answer to Q No. 4 in Part 1 – Peer Review.
Q.NO.4 The elements of skill, experience and independence of reviewers are ensured before
initiating them in Peer Review process. In the above light, state few eligibility criteria fixed
for a person to be empanelled and also for being appointed as a Peer Reviewer.
ANSWER:

Q.NO.5 What are the inherent limitations of Peer Review?
ANSWER:
Q.NO.6 What are the objectives of the Quality review?

ANSWER:
Refer Answer to Q No. 17 in Part 2 – Quality Review.

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Q.NO.7 What are the reporting responsibilities of the technical reviewer while carrying out a
Quality review assignment?
ANSWER:
1. The Technical Reviewers expresses an opinion on whether the system of quality control for
the attestation services of the firm under review has been designed so as to carry out
professional attestation services assignments in a manner that ensures compliance with the
applicable Technical standards and maintenance of the quality of attestation service work,
they perform.
2. The Technical Reviewer’s review would not necessarily disclose all weaknesses in the quality
of attestation work or all instances of lack of compliance with applicable Technical Standards.
As there are inherent limitations in the effectiveness of any system of quality control,
departure from the system may occur and not be detected.
3. Also, projection of any evaluation of system of quality control to future periods is subject to
the risk that the system of quality controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and procedures may
deteriorate.
4. In the process, the Technical Reviewers also identified what they considered to be deficiencies
and any defects in, or criticisms of the firm’s quality control system.
Q.NO.8 What are the consequences if the Quality review board notices major non-compliances
with the requirements of the Standards on quality control or standards on auditing or
accounting standards?
ANSWER:
Refer Answer to Q No. 23 in Unit 2 – Quality Review.
Q.NO.9 Briefly discuss the various stages involved in the conduct of the quality review
assignments.
ANSWER:
Refer Answer to Q No. 20 [D], Unit 2 – Quality Review which is as below:
The following table describes the various stages generally involved in the conduct of the quality
review assignments:
1. IDENTIFY TR: QRB selects Audit Firm and the audit file for review and identifies TR to conduct
Quality Review.
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2. OFFER LETTER: QRB sends Offer Letter of Engagement to TR.

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3. ACCEPTANCE BY TR: TR conveys his acceptance of Letter of Engagement to QRB by sending
necessary declarations for meeting eligibility conditions and furnishing statement of
confidentiality by himself and his assistant/s, if any.
4. INTIMATE AFUR: QRB intimates AFUR about the proposed Quality Review. QRB also sends a
copy of this intimation letter to TR and provides them contact details of each other for further
communication.
5. SEND QUESTIONNAIRE: TR sends the specified Quality Review Questionnaire to the AFUR for
filling-up. He also calls for additional information from the AFUR, if required.
6. CARRYOUT REVIEW: TR & his team carry out the Quality Review by starting their off-site
review by making proper planning for the review and then on-site visiting the office of the
AFUR by fixing the date as per mutual consent ensuring that review exercise gets completed
within specified time frame.
7. DRAFT REPORT: On completion of on-site review, TR to send the preliminary report to AFUR.
TR shall send a copy of preliminary report to QRB as well.
8. REPRESENTATION BY AFUR: AFUR to submit representation on the preliminary report to the

TR and TR to immediately send the reply of the AFUR to QRB.
9. FINAL REPORT: TR to submit final report along with a copy of Annual report of the entity for
the year under review, to the QRB in the specified format, on his (individual) letterhead, duly
signed and dated within specified time frame or as extended by the QRB. In addition, he shall
also send a copy of the final report to the AFUR, requesting them to send their final reply
thereon to the QRB within 7 days of receipt of the final report. AFUR shall also send a copy of
their final reply to TR.
10. FEEDBACK BY AFUR: AFUR to submit to QRB their reply on the final report and feedback, in
prescribed format, regarding their experience of the quality review.
11. SUMMARY OF FINDINGS BY TR: Upon receipt of the final reply from the AFUR, TR shall submit
to QRB within next 7 days a summary of his findings, in the specified format, containing his
findings, technical requirements, final reply of the AFUR and his final comments thereon.
12. QRG to consider the report of the TR and responses of AFUR and make recommendations to
QRB. QRG may also call for additional details/information/explanations, if required, from
TR/AFUR or issue such directions to TR, as it may deem appropriate, enabling it to assess the
quality of audit and reporting by the AFUR.
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13. QRB to consider report and recommendations of QRG and decide further course of action.
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Q.NO.10 What are the important areas for evaluation while conducting quality reviews in terms
of SQC -1 Standard on Quality Control?
ANSWER:
The following are the important areas as per Quality Review Report 2018-19 in accordance with
Standard on Quality Control -1 are:
1. Whether the audit firm establishes and implements policies and procedure on all the element
of system of quality control.
2. Whether the engagement quality control reviewer review at an appropriate time for the
planning of an audit, significant audit judgement, and expressions of an audit opinion.
3. Whether the audit firm assigns as the person responsible for the monitoring of the system of
quality control a person with appropriate experience for the role, vest the assigned person
with sufficient and appropriate authority.
4. Whether the audit firm obtain, at least annually, a confirmation letter concerning
compliance with policies and procedure for the maintenance of independence from all
person required to maintain independence.
5. Whether the audit firm perform the independence confirmation procedure set forth in its
internal rules before acceptance and continuance of an audit engagement, and when issuing
the auditor’s report appropriately confirms that there was no change in the status of
independence.
6. Whether the audit firm develop and provides education/ training program that fully take into
account the knowledge, experience, competence and capabilities of the professional staff.
Q.NO.11 Evaluating the professional judgment exercised by the auditor is one of the important
aspects under Quality review, please explain the situation with reference to applicable SA.
ANSWER:
Evaluating the professional judgment exercised by the auditor: It is also important for the
Technical Reviewer (hereinafter referred as TR) to understand that “professional judgment”, as
defined in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing” is an integral concept in the context of an audit and
application of SAs in real life audit scenarios.
SA 200 defines professional judgment as “the application of relevant training, knowledge and
experience, within the context provided by auditing, accounting and ethical standards, in making
informed decisions about the course of action that is appropriate in the circumstances of the
audit engagement.”
The concept of “professional judgment” underscores the fact that Standards, particularly,
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Standards on Auditing are written to lay down the fundamental principles that would apply to an
audit situation. Hence, no Standard can have straight jacketed application/solutions for all audit
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scenarios. Above all, the Standards on Auditing issued by the Institute of Chartered Accountants
of India are principle based rather than rule based. Hence, almost all the SAs envisage exercise of
professional judgment by the auditor in their application in real life audit scenarios.
The TR would need to appreciate that the exercise of professional judgment in any particular case
is based on the facts and circumstances that are known to the auditor as at the time of exercising
that professional judgment. Normally, exercise of professional judgement by an auditor is
preceded by consultation on the relevant matters both within the engagement team and
between the engagement team and others at the appropriate level within or outside the firm.
In evaluating the professional judgment exercised by the auditor, the TR should consider the
following factors:
whether the judgment reached reflects a due consideration and application of the relevant
auditing and accounting principles; and
whether the judgment is appropriate in the light of, and consistent with, the facts and
circumstances that were known to the auditor up to the date of the auditor’s report. Hence, the
TR and the QR Team should not, under any circumstance, use “hindsight” (i.e., perception or
retrospection) in their evaluation of exercise of professional judgment by the auditor.
Since the auditor needs to exercise professional judgment throughout the audit, the latter also
needs to be appropriately documented. Hence, the TR can expect to find such audit
documentation as a part of the audit engagement file. It is important to note that professional
judgment cannot be used by an auditor as a justification for decisions that are not otherwise
supported by the facts and circumstances of the engagement or sufficient appropriate audit
evidence.
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401
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8. AUDIT UNDER FISCAL LAWS
This Chapter will be directly discussed From ICAI Study Material – As frequent amendments arise in
Tax Audit Reporting Requirements.
402
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9. INTERNAL, MANAGEMENT AND OPERATIONAL
AUDITS
PART 1 – INTERNAL AUDIT
Q.NO.1 EXPLAIN THE CONCEPT OF INTERNAL AUDIT AND ITS APPLICABILITY UNDER COMPANIES
ACT, 2013?
ANSWER:
A. DEFINITION OF INTERNAL AUDIT:

1. As defined in Framework Governing Internal Audits, “Internal Audit provides independent
assurance on the effectiveness of internal controls and risk management processes to
enhance governance and achieve organisational objectives.”
2. The Framework also indicates the nature of internal audit services may go beyond assurance
to include an advisory (consulting) role.
3. Further, the internal auditing need not to be confined financial transactions only.
4. The objectives and scope of Internal Audit Function as per SA 610, “Using the Work of an
Internal Auditor” may include:
• Monitoring of internal controls;
• Examination of financial and operating information
• Review of operating activities
• Review of compliance with laws and regulations
• Risk management
• Governance
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B. APPLICABILITY PROVISIONS UNDER COMPANIES ACT:
As per section 138 of the Companies Act, 2013, following class of companies (prescribed in rule
13 of Companies (Accounts) Rules,2014) shall be required to appoint an internal auditor which
may be either an individual or a partnership firm or a body corporate, namely:
1. Every LISTED COMPANY

2. Every unlisted public company having:
a. Paid up share capital of 50 crore rupees or more during the preceding financial year
or
b. Turnover of 200 crore rupees or more during the preceding financial year or
c. Outstanding loans or borrowings from banks or public financial institutions exceeding
100 crore rupees or more at any point of time during the preceding financial year or
d. Outstanding deposits of 25 crore rupees or more at any point of time during the
preceding financial year; and
3. Every private company having:
a. Turnover of 200 crore rupees or more during the preceding financial year; or
b. Outstanding loans or borrowings from banks or public financial institutions exceeding
100 crore rupees or more at any point of time during the preceding financial year.
Refer Q No. 1 in Practice Questions

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C. WHO CAN BE APPOINTED AS INTERNAL AUDITOR:

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1. As per section 138, the internal auditor shall either be a chartered accountant or a cost
accountant (whether engaged in the practice or not), or such other professional as may be
decided by the Board to conduct an internal audit of the functions and activities of the
company.
2. The internal auditor may or may not be an employee of the company.
3. To be effective, the internal auditor must be regarded as a part of the management and not
merely as an assistant thereto. Furthermore, he or she must have the authority to
investigate every organisational activity to meet the objectives and scope of the internal
audit.
D. RESPONSIBILITIES OF INTERNAL AUDITOR:

The main responsibilities of an Internal Auditor are:
1. To maintain an adequate system of internal control by a continuous examination of

accounting procedures, receipts and disbursements, and to provide adequate safeguards
against misappropriation of assets.
2. To operate independently of the accounting staff and must not in any way divest with any of
the responsibilities placed upon him.
3. To observe facts and situations and bring them to notice of authorities who would otherwise
never know them; also, critically appraise various policies of the management and draw its
attention to any deficiencies, wherever these require to be corrected.
4. To associate closely with management and keep knowledge up to date by being informed
about all important occurrences and events affecting the business, as well as the changes
that are made in business policies. At all times, the internal auditor must enjoy an
independent status.
5. At times, the internal auditor is exposed to a different type of risk to independence, whereby
management seeks active business support from the internal auditor.
6. Apart from providing basic assurance and advisory inputs, the internal auditor is sometimes
assigned certain operational responsibilities (such as risk management, compliance, system
automation, process re-engineering, etc.). Although some limited operational role may be
acceptable with due approvals, and for a short duration, the internal auditor shall do so only
after communicating his limitations along the following lines:
(a) Unable to assume ownership or accountability of the process; and
(b) Inability to take operational decisions that may be subject to an internal audit later
on. In addition, the audit committee of the company or the board shall, in
consultation with the internal auditor, formulate the scope, functioning, periodicity
and methodology for conducting the internal audit.
Q.NO.2 WRITE ABOUT MANAGEMENT FUNCTIONS AND SCOPE OF INTERNAL AUDITING?

ANSWER:
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Management is a process by which the affairs of an enterprise are conducted in such a manner that
its goals and objectives are attained through optimum utilisation of all available resources, within
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the legal, social, economic and environmental constraints. To achieve optimum utilisation of
resources management should determine the goals and objectives of the concern, quantify them to
the extent possible, develop major policies and plans, implement them and exercise control over
such implementation.
The Scope of Internal audit can be described in various parts as below:
A. REVIEW OF INTERNAL CONTROL SYSTEM AND PROCEDURES:

1. The review of internal control system and procedures involves assessing the design and
operational efficiency and effectiveness of the internal control system to strengthen the
overall internal control environment of the entity. The objective to review is to minimise the
overall internal audit risk, i.e., the inherent risk, control risk and detection risk.
Example: Review of three-way matching internal control involves matching of Purchase

Orders, Goods Receipt Notes and Invoice to ensure all the ordered quantity of the intended
goods have been received and invoiced accordingly. The failure of this internal control may
involve over-invoicing, over-payment, non-receipt, or under-receipt of goods.
2. As far as possible, controls should be in-built in the operating functions, if they are to be
cost-effective.
Example: The establishment of a separate credit control department would not be justified if
the objective of reducing credit risk and minimising debt recovery period could be met
through controls inbuilt in the accounting and sales systems, especially in smaller and
medium sized concerns.
3. Internal Control System should be reviewed considering the limitations of internal controls,
i.e., cost-benefit comparison, human errors, collusion, and abuse by process owners.
Example: Collusion of payment authorizer and payment maker to over pay a related party;
those charged with governance themselves overriding the internal controls with malafide
intention, etc.
4. It should also be seen whether the internal controls were in use throughout the period of
intended reliance.
B. REVIEW OF CUSTODIANSHIP AND SAFEGUARDING OF ASSEETS:
1. This involves verifying the existence of the assets.

2. The internal auditor should review the segregation of duties is in place.
3. The internal auditor should review the control systems to ensure that all assets are
accounted for fully. He should review the means used for safeguarding assets against losses
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e.g., fire, improper or negligent activity, theft and illegal acts, etc.
4. He should review the control systems for intangible assets e.g., the procedures relating to
credit control. Where an enterprise uses electronic data processing equipment, the physical
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and systems control on processing facilities as well as on data storage should be examined
and tested.
Example: The existence of intangible assets could be only an annual subscription in the name
of an entity, for example, an annual ERP subscription. [SAP License]
C. REVIEW OF COMPLIANCE WITH POLICIES, PLANS, PROCEDURES AND REGULATIONS:
1. It is essential that the various functional segments of an enterprise comply with the relevant
policies, plans, procedures, laws and regulations so that the operations are carried out in a
coordinated manner.
2. He should examine the system of periodical review of existing policies particularly when
there is a change in the method and nature of operations of the enterprise.
3. By combining the results of his review of the adequacy of the systems with the result of his
compliance tests, the internal auditor should be able to evaluate the effectiveness of the
former.
4. He should point out specific weaknesses and suggest remedial action.
D. REVIEW OF RELEVANCE AND RELIABILITY OF INFORMATION:
1. The internal auditor should review the information systems to evaluate the reliability and
integrity of financial and operating information given to management and to external
agencies such as governmental bodies, investors, trade organisations, labour unions, etc.
2. He should examine the accuracy and reliability of financial and operational records.
3. The usefulness of the reports as well as of the records should be evaluated with reference to
their costs.
4. The internal auditor should examine whether the reporting is by exception i.e., the reports
highlight the significant and distinctive features.
E. REVIEW OF THE ORGANISATION STRUCTURE:
The internal auditor should conduct an appraisal of the organisation structure to ascertain
whether it is in harmony with the objectives of the enterprise and whether the assignment of
responsibilities is in compliance therewith. For this purpose:
1. He should review the manner in which the activities of the enterprise are grouped for
managerial control. It is also important to review whether responsibility and authority are in
harmony with the grouping pattern.
2. The internal auditor should examine the organisation chart to find out whether the structure
is simple and economical and that no function enjoys an undue dominance over the others.
3. He should particularly see that the responsibilities of managerial staff at headquarters do not
overlap with those of chief executives at operating units.
4. The internal auditor should examine the reasonableness of the span of control of each
executive (the number of subordinates that an executive controls). He should examine
whether there is a unity of command i.e., whether each person reports only to one superior.
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5. Where dual responsibilities cannot be avoided, the primary one should be specified and the
specific responsibility to each senior fixed. This must be made known to all concerned.
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6. Finally, he should evaluate the process of managerial development in the enterprise.
F. REVIEW OF UTILISATION OF RESOURCES:
1. The internal auditor should check whether proper operating standards and norms have been
established for measuring the economical and efficient use of resources. They should be
detailed enough to be identifiable with specific operating responsibilities and should be
capable of being used by operating personnel for monitoring and evaluating their
performance.
2. The internal auditor should review the methods of establishing operating standards and
norms. He should carefully examine the assumptions made while setting the standards to
ensure that they are appropriate and necessary.
3. Where there is a wide divergence between actual performance and the corresponding
standards, reasons may be considered.
4. As a part of evaluating resources utilisation, identifying the facilities which are under-utilized
is an important function of the internal auditor.
G. REVIEW OF ACCOMPLISHMENT OF GOALS AND OBJECTIVES:
1. The internal auditor should review the overall objectives of the enterprise to evaluate
whether they are clearly stated and are attainable.
2. The internal auditor should examine whether, to the extent possible, objectives are
expressed in precise quantifiable terms (both monetary and non-monetary) to facilitate
detailed planning to be made for achieving them. Budgeting forms an important part of such
planning. This will ensure that plans anticipate the problem areas. There should also be
sufficient flexibility in the plans to permit such improvements in their implementation, as
would benefit the enterprises as a whole.
Q.NO.3 WRITE ABOUT FUNDAMENTAL PRINCIPLES OF AN INTERNAL AUDIT AND QUALITIES OF

INTERNAL AUDITOR?
ANSWER:
A. FUNDAMENTAL PRINCIPLES:
There is a set of core principles fundamental to the internal audit function and activities. These
basic principles of internal audit are critical to achieving the desired objectives as set out in the
Definition of Internal Audit. They are:
INDEPENDENCE:
1. The Internal Auditor shall be free from any undue influences which force him to deviate from
the truth. This independence shall be not only in mind but also in appearance.
2. Also, the internal auditor shall resist any undue pressure or interference in establishing the
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scope of the assignments or the manner in which these are conducted and reported, in case
these deviate from set objectives. The independence of the internal audit function as a
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whole, and the Internal Auditor within the organisation, plays a large part in establishing the
independence of the Internal Auditor.
3. The overall organisation structure of key personnel, the position and reporting of the Chief
Internal Auditor within this structure, along with the powers and authority which is derived
from superiors further establishes the independence of the Internal Auditor.
INTEGRITY:
The Internal Auditor shall be honest, truthful and be a person of high integrity. He shall operate
in a highly professional manner and seen to be fair in all his dealings. He shall avoid all conflicts
of interest and not seek to derive any undue personal benefit or advantage from his position.
OBJECTIVITY:
The Internal Auditor shall conduct his work in a highly objective manner, especially in gathering
and evaluation of facts and evidence. He shall not allow prejudice or bias to override his
objectivity, especially in arriving at conclusions or reporting his opinion.
For example, to avoid any conflict of interest, the internal auditor should not review an activity
for which he was previously responsible. It is also expected from the management to take steps
necessary for providing an environment conducive to enable the internal auditor to discharge
his responsibilities independently and also report his findings without any management
interference.
For example, in the case of a listed company, the internal auditor may be required to report
directly to those charged with governance, such as the Audit Committee instead of the Chief
Executive Officer or the Chief Financial Officer. The internal auditor should immediately bring
any actual or apparent conflict of interest to the attention of the appropriate level of
management so that necessary corrective action may be taken.
B. QUALITIES OF INTERNAL AUDITOR:
1. The internal auditor should have the special expertise necessary for evaluating management
control systems, especially financial and accounting controls.
2. Accounting and finance functions provide basic data for management control of an
enterprise. Therefore, the internal auditor must have accounting and financial expertise to
be able to discharge his duties.
3. The internal auditor is also expected to evaluate operational performance and non-
monetary, operational controls. This requires a basic knowledge of the technology and
commercial practices of the enterprise.
4. He should also have a basic knowledge of commerce, laws, taxation, cost accounting,
economics, quantitative methods and EDP systems.
5. An understanding of management principles and techniques is another essential
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qualification of an internal auditor as also the ability to deal with people.

6. By his conduct the internal auditor should provide an assurance to the management that the
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confidentiality of such information would be maintained.

Q.NO.4 WRITE ABOUT INTERNAL AUDIT REPORT AND SUBSEQUENT FOLLOW UP?
ANSWER:
The internal auditor should carefully review and assess the conclusions drawn from the audit
evidence obtained, as the basis for his findings contained in his report and suggest remedial action.
However, in case the internal auditor comes across any actual or suspected fraud or any other
misappropriation of assets, it would be more appropriate for him to bring the same immediately to
the attention of the management.
As per Standard on Internal Audit (SIA) 370 Reporting Results, reporting of internal audit results is
generally undertaken in two stages:
STAGE 1 – SPECIFIC REPORT ASSIGNMENT WISE:
1. At the end of a particular audit assignment, an Internal audit report covering a specific area is
prepared by internal auditor highlighting key observations arising from those assignments.
2. The report is generally issued by covering the following:
a. Manner in which the assignment is conducted.
b. Key findings from the procedures applied.
3. This report is shared with auditee with the local and executive management as agreed.
4. Sometimes, these may be part of overall audit reports being issued to top governing authority.
STAGE 2 – COMPREHENSIVE / OVERALL REPORT COVERING ALL AREAS ISSUED PERIODICALLY
1. On a Periodic bases, on closure of a planned period, a comprehensive report of all the internal
audit activities covering the entity and the plan period is prepared by the chief internal auditor
[Engagement partner if an outsider firm].
2. Such a reporting is normally prepared on quarterly basis and submitted to the top governing
authority such as audit committee.
NOTE: This Standard on Internal Audit (SIA) deals with the internal auditor’s responsibility to issue
only the first type of reports, the Internal Audit Report pertaining to specific audit assignments and
not to the periodic (e.g., Quarterly) reporting for the whole entity as per the Annual/Quarterly audit
plan.
ELEMENTS OF INTERNAL AUDIT REPORT:
On the basis of the internal audit work completed, the Internal Auditor shall issue a clear, well
documented Internal Audit Report which includes the following key elements:
1. An overview of the objectives, scope and approach of the audit assignments;

2. The fact that an internal audit has been conducted in accordance the Standards of Internal
Audit;
3. An executive summary of key observations covering all important aspects, and specific to the
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scope of the assignment;

4. A summary of the corrective actions required (or agreed by management) for each observation;
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and
5. Nature of assurance, if any, which can be derived from the observations.
Note: The content and form of the Internal Audit Report are to be established by the Internal
Auditor based on his best professional judgement, in consultation with the auditee and, if
necessary, with inputs from other key stakeholders.
DRAFT REPORT: No internal audit report shall be issued in final form unless a written draft of the
report has previously been shared with the auditee. The internal audit report shall be issued within
a reasonable time frame from the completion of the internal audit work.
PRINCIPLES TO BE APPLIED WHILE ISSUING THE INTERNAL AUDIT REPORT:
A. BASIS OF INTERNAL AUDIT REPORT: Each internal audit report is prepared on the basis of the
audit procedures conducted and the analysis of the audit evidence gathered. Conclusions
reached shall be based on all the findings rather than on a few deviations or issues noted.
Controls operating effectively have their own importance and should be acknowledged, while
the risk and significance of observations noted have a role to play in prioritising the matters to
be reported.
B. CONDUCTED IN ACCORDANCE WITH SIA’s: Where the internal audit is conducted in compliance
with the Standards of Internal Audit, (within the Framework governing Internal Audits), and the
internal auditor can substantiate the same with supporting evidence and documentation, the
internal audit report shall include a statement confirming that “the internal audit was
conducted in accordance with the Standards of Internal Audit issued by the Institute of
Chartered Accountants of India”.
C. CONTENT AND FORMAT OF INTERNAL AUDIT REPORT: The manner in which the internal audit
report is drafted and presented is a matter of professional judgment and choice and could be
influenced by the preferences of the recipients. The SIA does not mandate any particular
format or list of contents since the Internal Auditor is expected to exercise his best professional
judgement on matters regarding how and what to report. Where some level of assurance is
being provided, the form and content of the report shall be as per SIA 380, “Issuing Assurance
Reports”.
D. DOCUMENTATION: To confirm compliance of audit procedures with this SIA, the list of
documents required is as follows:
1. Copies of Draft and final audit reports to be maintained.
2. If appropriate, management action plans may be counter signed by respective management
personnel.
FOLLOWUP:
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As per SIA 390 Monitoring and Reporting of Prior Audit Issues, the Chief Internal Auditor is
responsible for continuously monitoring the closure of prior audit issues through timely
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implementation of action plans included in past audits. This shall be done with a formal monitoring
process, elements of which are pre-agreed with management and those charged with governance.
The responsibility to implement the action plans remains with the management.
In monitoring and reporting of prior audit issues, the responsibility of the Internal Auditor is usually
in the form of an “Action Taken Report (ATR) of previous audits”. The term “Monitoring and
Reporting” used in this Standard refers to the periodic tracking of issues raised during prior audits
and evaluation of the corrective actions undertaken by the auditee to resolve them and to report
any open and pending matters to the management and those charged with governance (e.g., the
Audit Committee).
The internal auditor should review whether follow-up action is taken by the management on the
basis of his report. If no action is taken within a reasonable time, he should draw the management’s
attention to it. Where the management has not acted upon his suggestions or not implemented his
recommendations, the internal auditor should ascertain the reasons thereof.
Where the management has accepted his recommendations and initiated the necessary action, the
internal auditor should periodically review the manner and the extent of implementation of the
recommendations and report to the management highlighting the recommendations which have
not been implemented fully or partly.
Q.NO.5 WHAT ARE THE DIFFERENCES BETWEEN INTERNAL AUDIT AND STATUTORY AUDIT?
ANSWER:
BASIS INTERNAL AUDIT EXTERNAL AUDIT
Meaning It refers to an ongoing audit It is an audit function performed by

function performed within an the independent body which is not a
organization by a separate internal part of the organization.
auditing department.
Examination The Internal auditor examines the The External auditor examines the
Operational efficiency of the Accuracy and Validity of Financial
organisation. Statements.
Appointment The Internal auditor is appointed The External auditor is appointed by

by the Management the Members.
Users of Report The user of internal audit report is The user of external audit report is
Management. Stakeholders.
Period Internal audit is a Continuous An External audit is done once in a

Process throughout the year year.
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Opinion The opinion is provided on the The opinion is provided on the
effectiveness of the operational truthfulness and fairness of the
activities of the organization. financial statement of the company
Status of Auditor The Internal auditor could be an The External auditor is mandatorily
employee of the company. not an employee of the company.
Students are advised to refer once again SA 610 – Using the work of internal auditor, which we
discussed as part of Audit Report Chapter.
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PART 2 – MANAGEMENT AUDIT
Q.NO.6 WRITE ABOUT THE CONCEPT OF MANAGEMENT AUDIT?
ANSWER:
A. CONCEPT OF MANAGEMENT AUDIT:

In recent years, Auditing has come to be viewed as an essential management tool, among
others, for the efficient running of the business and other economic activities. When we speak
of auditing as a management tool, we give extended coverage to the term auditing without,
however, altering its basic concept. This extended concept of auditing includes operational
auditing.
The emphasis of auditing has been changing over the years. According to T.G. Rose, “The
management audit would therefore concern itself with the whole field of activities of the
concern, from top to bottom, starting, as always where management control is concerned, from
the top, because we are primarily concerned with whether the general management is
functioning smoothly and satisfactorily. If it is not, it may be due to the functional management
being faulty and, therefore, we pass on to examine that in its turn, in order to find the missing or
faulty link which is causing the trouble”.
MANAGEMENT AUDIT VS OPERATIONAL AUDIT:
1. Management audit is “AUDIT OF MANAGEMENT”

2. Operational audit is “AUDIT FOR MANAGEMENT”
DIFFERENCE BETWEEN MANAGEMENT AUDIT & OPERATIONAL AUDIT:
1. Management audit is concerned with the “Quality of managing”, whereas operational audit
focuses on the “Quality of operations”.
2. Management audit is the “Audit of management” while the operational audit is the “Audit
for the management”. The focus of Management Audit is on “Quality of Decision Making”
rather than the effectiveness or efficiency of operations.
3. In a management audit, the auditor is to make his tests to the level of top management, its
formulation of objectives, plans and policies and its decision making. It is not that he just
verifies the operations of control and procedures and fulfillment of plans in conformity with
the prescribed policies.
B. SCOPE OF MANAGEMENT AUDIT:
1. Management audit is that it is wider in scope compared to operational audit.

2. The Two Audits are Complementary and Supplementary to One Another:
3. In a management audit, the auditor is to make his tests to the level of top management, its
formulation of objectives, plans and policies and decision making. It is not that he just
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verifies the operations of control and procedures and fulfillment of plans in conformity with
the prescribed policies.
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4. He is to reach the root i.e., the functions of top management which lay down objectives and
policies, provide means and procedures of implementation and control and which actually
engage in direction and control on a continuous basis.
5. In addition to what would normally be covered in an operational audit, management audit
would also encompass the relevance and effectiveness of the aims, duties and decisions of
management at various levels. Every aspect of the functions of the Board of Directors should
be in conformity with the objects set out in the constituting document.
6. Similarly, the managing director, if any, should act not only in accordance with the mandate
he has received but he should ensure that the decisions he takes are in conformity with the
objects of the company and the policies formulated by the Board.
7. The effectiveness of management under the control of the managing director and the
various members of the Board including those in charge of finance, production, sales, etc.,
should be subject to review of the management auditor. From the point of view of the
management auditor, knowledge about the following is essential:
a. Purpose for which the organisation has been created.
(a) For example, the purpose of a steel mill in the state sector may include:
1. production of steel to reduce imports of steel.
2. creation of reasonable employment opportunities.
3. development of backward areas.
4. providing staff welfare consistent with the needs of a proper living.
It should not be understood that such a steel mill will not work for a profit.
Profit being one of the main objects, should be properly balanced with other
objects so that the purposes for which the organisation was created can be
achieved.
b. Management structure including delegation of authority, planning and budgeting.
c. Reports required for proper management and the reports actually received.
d. Internal controls.
e. Nature of production of the business concerned in the broad way so that he can
understand
f. The flow of functions leading to production and their mutual relationships.
g. Production planning.
h. Factory layout, design and installed capacity.
i. Personnel policy and personnel management including requirements, training,
welfare, incentives and disincentives.
j. Materials management including sources of important raw materials, receipt of
materials of the quality and quantity needed, storage, supervision and safe custody,
insurance and the procedure for issue of materials.
k. Sales management and sales planning including advertisement policy.
l. Decision making process.
m. Books and records including cost accounting records, cost accounting system and
financial accounting policies.
n. Financial management of the organisation.
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NOTE: The expression “management and operational audit” may be acceptable as a

management audit which includes within its scope all the elements of operational auditing.
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C. DESIRABILITY OF MANAGEMENT AUDIT:
1. Management Audit is a tool to improve management performance by recognising facts and

information about management presented after appropriate examination, verification and
evaluation, by professionally qualified and competent people.
2. Management audit focuses attention on a comprehensive and constructive examination of
the organisational structure, its components such as divisions, departments, ventures, plans,
policies, its financial control system, its method of operation, its appropriate use of human,
physical and financial resources.
3. The principal reason for undertaking a management audit is the need for detecting and
overcoming current managerial deficiencies (and resulting operational problems) in ongoing
operations:
a. A management audit represents a more positive, forward-looking approach that
evaluates how well management accomplishes its stated organisational objectives;
b. how effective management is in planning, organising, directing, controlling and
coordinating the organisation’s activities; and
c. how appropriate management’s decisions are for reaching stated organisation
objectives. This evaluation of managerial performance is achieved with the aid of a
management audit questionnaire.
4. In a management audit, the managerial problems and related operational difficulties can be
spotted before the fact rather than after the fact as with a financial audit. Periodic
management audits can pinpoint problems as they are developing from a small scale.
5. LOSS MAKING COMPANIES: Management auditing would be clearly helpful in the case of
ailing [SICK] industries, to isolate the problems and account for their ailments. It is especially
important if such industries are either to be taken over by the government or to be heavily
financed by financial institutions with a view to bring back stability in them.
6. FOR GOVERNMENT AND BANKS: Before committing public funds, like government funds or
the institutional funds, it is important to properly diagnose the financial health and
possibilities of a business undertaking and know the specific reasons that have caused or
contributed to the decline of the business.
Often, Management Audits are conducted prior to making investment in an entity, its merger
or acquisition, or as a part of planning before entity level strategic decision.
D. ORGANISING THE MANAGEMENT AUDIT:
1. REQUIRES MANAGEMENT SUPPOR: The establishment of a general programme for

management audit requires management’s approval to the plan. Unless the management’s
full support is available for the proposal, there may be lot of difficulties at later stages.
Therefore, it is imperative to give consideration to a statement of policy which indicates
therein the objectives and which reflects a definite plan to achieve the objectives while
organising for management audit.
2. The plan should also include the statement on personnel requirements, establishment of
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staff training programmes to improve the effectiveness of work and the basis of control over
time and cost.
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3. The basic features of organising management audits are discussed below at length with
related matters:
Devising the statement of policy:
a. The management’s support must be reflected clearly and categorically in the company’s
highest policy statement. The policy statement should be quite specific.
b. It should spell out clearly the scope and status of the management auditing within the
enterprise, its authority to carry out audits, issue reports, make recommendations, and
evaluate corrective action.
c. The statement of policy should lay down in clear terms the scope of activities to be
performed by the management auditor. The scope of activities is the most basic
requirement for building up a successful management audit programme both for small as
well as a large organisation.
d. The statement must categorically say that the management auditor is capable of
reviewing administrative and management controls over any activity within the
company.
Location of audit function within the organisation:
a. Some organisations depending upon their size and nature have established a separate
department of audit specialists where the head of the department reports directly to the
top executive. In certain cases, the audit group may be a part of the activities of
management services department, administrative control department or some other
unit of organisation.
b. The more important question, however, is that the function should be as entirely
independent as possible of pressure from various groups in the enterprise. The greater
the independence, the greater is the freedom to work effectively.
Allocation of personnel:
a. It is important that all persons selected and assigned to audit, possess a good
understanding of auditing theory, a thorough knowledge of the fundamentals of
organisation and management, the principles and effective methods of control, and the
requirements for conducting a scientific appraisal.
b. As the management auditor is expected to evaluate operational performance and non-
monetary operational controls, he should possess basic knowledge of the technology and
commercial practices of the enterprise, an enquiring, analytical, pragmatic and
imaginative approach and a thorough understanding of the control system.
c. The management auditor should also have a basic knowledge of commerce, law,
taxation, cost accounting, economics, quantitative methods and EDP systems.
Staff training programme:

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A continuous training programme is necessary to achieve quality in performing audit

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assignments. An effective training programme enables staff to assume additional

responsibilities and advancements in the organisation. Thus, the programme acts as an
incentive for drawing capable people into the department and their retention.
Time and other aspects:
a. The time and cost will vary for each assignment, depending upon the nature of the
assignment, the number of auditors assigned to perform the work, and whether or not
more specialists in a particular field are required.
b. For example, the audit of a production planning and control department could require an
audit team including specialists in production planning and production control.
Frequency:
a. Frequency of the management audit vary according to the size, structure, nature,
objective and the technological environment of the organisation.
b. Is the company in a fast-changing industry where there is great accent on the latest
technology in the company’s products and/or services?
c. To get an idea of the optimum frequency of such an audit, it might be worthwhile to look
at financial audits. Customarily, financial audits are conducted annually. They are highly
programmed since an internal control questionnaire is utilised to attest to accounting
methods and procedures.
d. By contrast, a management audit should be considered for a longer time frame. In no
case should the interval be allowed to exceed 3 years.
E. CONDUCTING A MANAGEMENT AUDIT:
Once top management has decided on the scope, the staffing, and the frequency of the
management audit, the next phase is the undertaking of actual audit.
This involves investigating and analysing the present facts through interviews as well as
completing a management questionnaire so as to determine the problems confronting the
organisation.
Getting the facts through interviews:

a. To avoid waste of time and effort, adequate preparation is necessary in management
auditing just as in financial auditing. The management auditors should know what
information is desired, and they should be prepared to ask a number of direct questions to
get the desired information. Reference can be made to the management audit questionnaire
for specific questions.
b. In the interview itself, the auditors should begin by stating the purpose of the audit.
Emphasis should be placed on getting the facts that are essential to review and appraise the
functional area(s) under study. The exchange between auditors and managers should be
friendly and conducted in an open atmosphere so as to encourage a free exchange of ideas.
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Measuring performance through the Management Audit Questionnaire:

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a. During the interview, the management auditors make a careful inquiry into important facts.
The next step is to analyse this information, with the aim of measuring current performance.
The best way to perform such an analysis is to utilise the sections of the management audit
questionnaire that apply to the areas under study.
b. By way of review, a management audit questionnaire aims at a comprehensive and
constructive examination of an organisation’s management and its assigned tasks.
c. Overall, the questionnaire is concerned with the appraisal of management actions in
accomplishing organisation objectives. Its primary objective is to highlight the weaknesses
and deficiencies of the management for possible improvements.
d. Management audit questionnaire for this part of the audit not only serves as a management
tool to analyse the current situation; more importantly, it enables the management auditors
to synthesis those elements that are causing organisational difficulties and deficiencies.
(Management Audit Questionnaire is discussed in the later part of this chapter)
F. CONCLUDING A MANAGEMENT AUDIT:
1. The preparation of the management audit report that covers the details of the management
auditor’s findings and recommendations represents an important part of concluding an audit
assignment
2. To assist in the preparation of the final report, the management auditors normally meet with
management and other concerned personnel for the purpose of discussing freely any aspect
or finding of the audit.
3. This approach assists the independent third party in bringing together the important
elements of audit as well as determining appropriate recommendations. It is far better to
discuss alternative recommendations and feel out the possible consequences of the
recommended action. However, it should be noted that the type of report required varies
with the level of investigation.
4. Thus, a comprehensive investigation involves a report that is very broad in scope, while a
smaller-scale investigation of one or two functional areas will result in a less comprehensive
report.
5. Oral recommendations for improvement: From the management viewpoint, the main focus
of the audit is recommendations. Generally, there is an oral presentation of specific
recommendations to members of the top management team who approved the audit. In
some cases, the approval may have come from the board of directors, which then becomes
the recipient of the auditors’ oral recommendations. Upon completion of the presentation,
oral recommendations become an integral part of the final report- the subject matter for the
next section. The auditors should back these recommendations with a cost/benefit analysis
that indicates the expected return to the organisation from implementing them.
G. MANAGEMENT AUDIT REPORTS:
The written report is the medium by which the comments, criticisms and recommendations of a
management audit department are conveyed to the Board, to functional directors and to
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management in general. Management audit reports will inevitably cover a wide variety of
subjects, reflecting the many and ever-increasing ramifications of management audit
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departments. These reports may be divided into four main categories:

1. Reports prepared by the management audit staff after their visits to a unit.
2. Periodical reports prepared by senior members of the management audit department which
summarise the main audit findings and recommendations in respect of departmental
activities.
3. Reports on the results of special investigations and inquiries.
4. An annual audit reports.
TYPES OF REPORTS: The reporting of results covers a wide spectrum of types. We can describe
the more important ones as follows:
1. ORAL reports: In many situations, the reporting of results will be on an oral basis. To some
extent, this is inevitable since a part of the actual audit effort is carried on in conjunction
with company personnel.
Oral reporting serves a useful and legitimate purpose, especially the matters covered by
emergency oral reporting, should be followed up immediately by a written report giving
reference to oral reporting.
Example: A management auditor, if he has come across any embezzlement, should
immediately inform the concerned management orally, so that steps may be immediately
taken to prevent further embezzlement.
2. INTERIM written reports:

a. In situations where it is deemed advisable to inform management of significant
developments during the course of the audit, or at least preceding the release of
the regular report, there may be some kind of interim written report.
b. This report may pertain to especially significant problems where there is a need
for early consideration or the report may be of a progress nature.
c. All in all, interim reports represent a type of reporting which, when used with
judgement can be a good device to improve the total reporting process.
3. REGULAR written reports: In the typical situation, the particular audit assignment will
include the preparation of a formal written report. The form and content of such written
reports will vary widely for different audit assignments and companies in terms of their
length and depth, quantification and overall presentation.
4. SUMMARY written reports: These summary reports are also referred to as ‘FLASH’ reports.
In a number of companies, the practice has developed of issuing an annual (or sometimes
more frequent) report summarising the various individual reports issued and describing the
range of their content. These summary reports in some cases are primarily for audit
committees of Boards of Directors, but in other cases for higher level management. They
are especially useful to top level managers who do not actively review the individual reports.
They are also useful to the general auditor in seeing his total reporting effort with more
perspective and on an integrated basis.
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FORMAT OF THE WRITTEN REPORT:

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The following general guidelines may be observed for the preparation of Management Audit
Reports:
a. Title - The management audit report should have a short but descriptive title so that its
subject matter can be easily identified.
b. Objectives - The management auditor may describe the objectives of the audit assignment.
c. Scope - The management auditor may give a brief description of the activities audited by
him.
d. Findings, conclusions and opinions - These may be given either department wise or in the
order of importance. All the facts and data pertaining to the situation should be assembled,
classified and analysed. Each finding should be discussed comprehensively and correlated
with other findings. Conclusions and opinions should normally follow the findings. Tables or
graphs may be used for the presentation of statistical data in appendices.
e. Recommendations - A management audit report may include recommendations for
potential improvements. He may point out defects and make recommendations in a broad
manner on how to overcome them. He should avoid providing detailed procedures in the
capacity of an auditor. Normally specifying procedures etc. should rest with consultants.
f. Auditee’s views - The auditee’s views about audit conclusions or recommendations may also
be included in the audit report in appropriate circumstances. [i.e., Management response]
g. Summary - A summary of conclusions and recommendations may be given at the end. This is
particularly useful in long reports.
h. A summary of past observations and their implementation and closure status may also be
included as a part of the Management Audit Report. This should also highlight the
escalations made because of the non-implementation of the agreed audit recommendations
and the revised implementation timelines, if any.
Steps to Prepare the Management Audit Report
Planning the Audit Report - Before starting the report, the auditor should ask himself, “What do
I want to tell the reader about this audit?” The answer will enable him to communicate
effectively.
Supporting information - The management auditor should supplement his report with
appropriate audit evidence which sufficiently and convincingly supports the conclusions.
Preparing draft report - Before writing the final report, the auditor should prepare a draft
report. This would help him in finding out the most effective manner of presenting his report. It
would also indicate whether there is any superfluous information or a gap in reasoning.
Writing and issuing the final report - The final report should be written only when the auditor is
completely satisfied with the draft report. The head of the management auditing department
may review and approve the final report. Before issuing the final report, the auditor should
discuss conclusions and recommendations at appropriate levels of management. The report
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should be duly signed and dated.

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Follow-up of the audit report - The management auditor should review whether follow-up
action is taken by management on the basis of his report. If no action is taken within a
reasonable time, he should draw management’s attention to it.
Action / Response of Management on Audit Report: Where management has not acted upon
his suggestions or not implemented his recommendations, the auditor should ascertain the
reasons thereof. In cases where he finds that non-implementation is due to a gap in
communication, he should initiate further discussions to bridge such gaps.
The actions and responses to the Management Audit Report reflect management’s attitude to
the audit. In any case, the auditor to retain the usefulness of the audit function should ascertain
from the management, preferably in writing, the reasons for non- implementation.
Q.NO.7 WRITE ABOUT BEHAVIOURAL ASPECTS ENCOUNTERED IN A MANAGEMENT AUDIT?

ANSWER:
1. It has been experienced that one of the biggest difficulties involved during the course of
management audit is that people working in an organisation do not wish to accept any change.
While at the time of conducting interviews, it seems that people working in the organisation are
amenable to change but at the time of actual implementation they come up with stiff
resistance to proposals on account of various behavioural problems arising on this account.
2. Such situations can be reduced by building a positive top-down approach to management audits
and involving the various organisation personnel right from the initiation of the management
audit.
3. Another source of resistance from the executives working in the organisation is that the
management auditors’ recommendations may lead to their removal or reshuffling in the
process. This resistance may also be overcome by explaining to these executives that the
management auditor is there to help them in achieving the results rather than acting against
their interests.
4. Management auditors deal mainly with people. In the normal discharge of their duty, they
interact with:
a. Colleagues in their own department.
b. Staff of the department whose functioning they audit.
c. “Top management” who authorise them to perform audits.
5. Therefore, management auditors must develop and maintain good relations with the auditees
to gain information and to ensure corrective action on audit findings.
6. Various problems arising on account of behavioural attitudes and solutions to overcome them
422
during the process of management audit are discussed in the following paragraphs:
a. Relationship conflict between Management Auditor and other personnel: The staff
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relationship is inherently prone to conflict. Management auditors may be employees of

the company. And other personnel are likely to regard the management auditor the
same way as they regard other employees of the company with a lack of auditing
authority. On the other hand, Management auditors being specialists in their field may
think that their approach and solutions are the only way to resolve the management
audit issues.
b. Control - As the management auditor is expected to evaluate the effectiveness of

controls, the auditees might fear that the management audit report may create their
incompetent impression on the top management. Therefore, the management audit
may lead to the breeding of opposition on the part of the auditees.
c. Resistance to Change: The other significant cause is that auditor’s study of existing
systems and procedures may give room for recommendations for changes in such
systems. There is a certain built-in resistance to change. When a change is recommended
by the auditor the resistance to change is transferred to the auditor’s recommendations
and the auditor. The auditor is looked upon as a likely instrument for recommending
changes and auditees do not welcome the visits of auditors.
Reasons for opposition from various personnel against management auditors as below:
7. Solution to behavioural problems - The auditors, if they were to adopt the role of accuser or
secret agency of the management to try upon the happenings of the auditee division, they
would be unwelcome. Relations between the auditor and the auditee may improve if the
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auditor acts and is perceived as a professional advisor and consultant. In any event, there is a
need to demonstrate to the extent possible that:
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a. The audit is part of an overall programme mandated by the higher-level authority to meet
higher-level organisational needs for both protection and maximum constructive benefit.
b. The objective of the review is to provide maximum service in all feasible managerial
dimensions.
c. The review will be conducted with minimum interference with the regular operations of the
operating personnel.
d. The responsible officers will be kept fully informed and have the opportunity to review
findings and recommendations before any audit report is formally released.
8. ADDITIONAL PRECAUTIONS: It is essential to create an atmosphere of trust and friendliness so

that audit reports will be understood in their proper perspective.
a. Constructive criticism: It is essential that the auditor should concentrate only on
constructive criticism. He should also make obvious in his report the value of his comments
in tangible terms. Only then would suggestions carry weight with the auditees and they will
feel convinced that the auditor has been objective in his remarks in the report.
b. Reporting methods: To achieve this objective, the auditor has to make a planned effort to
convey effectively his role by adopting a friendly but firm tone in his report. It is always
possible to disagree without being disagreeable and to criticise without being critical. The
reports should concentrate on areas that need improvement rather than listing inefficiencies
and deficiencies in the performance of the auditee.
c. Participative approach: It is well established that auditor’s reports have better acceptability
if the improvements suggested are discussed with those who have to implement them and
made to feel that they have participated in the recommendations made for improvements.
On the other hand, it has been observed that either oral or written appreciation of the
auditee’s achievements not only encourages the auditees to develop a friendly attitude
towards the auditors but look forward to their guidance in a more receptive fashion.
9. Three cases are given hereunder to illustrate the practical aspects of behavioural problems.
Case-1: Auditor objective: Auditee offensive: Management’s apathy - In Professional
Organisation Ltd., the Management Auditor as part of his duty was expected to perform the
audit function of the Consultancy Division of the organisation. The auditor in the normal
functioning discovered a lack of control and a further study revealed suppression of information
regarding illegal procedures being followed by the department. His further in-depth examination
of the books revealed that the division has been overstating profits to justify its existence. These
facts which had been in existence with the knowledge of the manager of the Division had been
left undetected. The auditor was totally professional. His attitude was not one of “policing”. He
had discussed the contents of his proposed report with the auditee. The auditee had to be
defensive and hence decided to be offensive. Management had to face the predicament of
appreciating the good job done by the management audit department without openly decrying
the Divisional Manager. There was an open “cold war” of hatred and hostility declared by the
divisional Manager. The behavioural problems arose in spite of the auditor’s professional role.
The auditee’s reaction was instinctive as a corollary to being self-defensive. The management
had a tough time. The problem was sorted out and the atmosphere of ill-feeling and hatred
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generated by the auditee could be smoothened.

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Case-2 Auditee progressive: Disagreeable Auditor: Management indifferent - In a large
organisation, there was a long-standing problem of lack of coordination between marketing and
production. The pressures of day-to-day problem made the situation worse. The Production and
Marketing Managers were happy to have the services of the management auditor to streamline
the procedures and monitor the implementation. It would have been ideal for the auditor to
evolve a good system after a detailed study of the problems, have the key personnel of
production and marketing departments participate in the discussion and to have introduced the
proposed system with their co-operation.
Instead, the auditor took on his duty as a mission for fault finding and started submitting
secret reports on the malfunctioning of the Production and Marketing departments.
Management, already under the heavy load of coordination, would seek explanations from the
Production and the Marketing department. The auditor’s argumentative behaviour and
management’s indifferent attitude in spite of the auditee’s very co-operative approach gave
room for a series of behavioural problems. A participative approach, with the total curtailment
of “policing” reports, with the correct guidance from the management, would have avoided all
behavioural problems.
Case-3 Auditor progressive: Auditee appreciative: Management objective - In a large

organisation with operations spread all over the country the management faced sudden
problems of lack of financial control, in spite of high levels of production and remarkable market
demand. The organisation had an efficient and progressive management auditor with a good
team. The auditees were individuals with a professional attitude. Management was progressive
and dynamic. Management called for meetings, explained the special assignment being given to
the management auditor of aiding management to get a grip over the situation. The auditee
welcomed the auditor as an expert consultant. The auditor adopted a friendly yet assertive
attitude. There was a coordinated effort between the auditor and auditee. Management was
kept informed of the problems and solutions being jointly worked out by the auditors and the
auditees. Within a very reasonable time, what seemed an “out of control” situation was
streamlined and the management got back the grip over the entire organisation.
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PART 3 – OPERATIONAL AUDIT
Q.NO.8 WRITE ABOUT THE NEED OF OPERATIONAL AUDIT?

ANSWER:
1. FILL THE GAP OUR OF CONVENTIONAL SOURCES: The need for operational auditing has arisen
due to the inadequacy of traditional sources of information for effective management of the
company where the management is at a distance from actual operations due to layers of the
delegation of responsibility, separating it from actualities in the organisation. An operational
audit is considered as a specialised management information tool to fill the GAP that
conventional information sources fail to fill.
2. Conventional sources of management information are departmental managers, routine

performance reports, internal audit reports, and periodic special investigation and survey. These
conventional sources fail to provide information for the best direction of the departments all of
whose activities do not come under direct observation of managers. The shortcomings of these
sources can be stated as under:
a. NO TIME AVAILABILITY: Executives and managers are too preoccupied with the
implementation of plans and achieving of targets and may be out of touch with the
bigger picture including the inter-connectedness of their tasks with the overall objectives
of the organisation. Further, they may be left with very little time to collect information
and locate problems.
b. MERE TRANSMISSION OF INFORMATION RATHER ANALYSING IT: Managers or their
aides are generally relied upon for transmitting information rather than for booking for
information or for analysing the situations.
c. MAJOR EMPHASIS ONLY ON FINANCE: Conventional internal audit reports are often
routine and mechanical in character and have a definite leaning towards accounting and
financial information. They are also historical in nature.
d. LIMITAIONS: Other performance reports contained in the annual audited accounts and
the routine reports prepared by the operating departments have their own limitations.
The annual audited accounts are good as far as an overall true and fair evaluation of the
financial statements are concerned.
EXAMPLE: Sales may be shown at a higher monetary value compared to the previous year and
this may apparently suggest that the functioning of the sales department is satisfactory. But this
may have been caused by a number of factors in spite of really bad performance on the sales
front. This fact may not be readily known unless one carefully analyse the sales data by
reference to notes and explanations to the accounts and other related accounting data. Even a
study of this nature may not fully reveal the weakness. It is quite possible that the established
market for sales has been lost partly while some fortuitous sales have compensated the loss.
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EXAMPLE: The routine weekly production report may include production that is subsequently
rejected by the quality control staff or to avoid showing a bad production performance even the
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partly produced goods may also be included. Remember, all these things happen in spite of
specific management instructions about the basis on which the production report is to be made
out.
e. Surveys and special investigations, no doubt, are very useful but these are occasional in
character. Also, they are costly, time consuming and keep the departmental key
personnel busy during the period the operations are on. These are basically an attempt
to carry out a post-mortem rather than continuous improvement efforts or a system to
give signals for potential risks (dangers and disasters to come).
Q.NO.9 WRITE ABOUT THE CONCEPT OF OPERATIONAL AUDIT?

ANSWER:
1. IIA publication defines operational auditing as – “A systematic process of evaluating an

organisation’s effectiveness, efficiency and economy of operations under management’s control
and reporting to appropriate persons the results of the evaluation along with recommendations
for improvement.”
2. On the basis of above definition, operational auditing is a systematic process involving a logical,
structured and organized series of procedures. Operational auditing concentrates on
effectiveness, efficiency and economy of operations and therefore it is future oriented. It does
not end with the reporting of the findings but also recommends the steps for improvement in
future.
3. Operational Audits involve undertaking a deep analysis of operations to bring out the
improvement plan with respect to its overall standard of operation including improvement in
effectiveness, efficiency, benefits vis-à-vis cost of operation, and its impact on meeting the
objective of the operations and that of the organization.
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Q.NO.10 WRITE ABOUT RELATIONSHIP BETWEEN INTERNAL AUDIT AND OPERATIONAL AUDIT?
ANSWER:
1. Internal auditing is an independent appraisal activity within an organisation for the review of
operations as a service to organisation. When an auditor is concerned with the appraisal of
operations, he becomes an operational auditor.
2. According to the Institute of Internal Auditors, “the overall objective of internal auditing is to
assist all members of management in the objective discharge of their responsibilities, by
furnishing them with objective analysis, appraisals, recommendations and pertinent comments,
concerning the activities reviewed.”
3. Internal auditors may act as operational auditors when the objective is the deep-dive analysis of
operations only.
4. Difference between Internal & Operational Audit: There probably may not be much difference
in viewing operational audit as a review and appraisal of operations of an organisation carried
on by a competent independent person. Auditing whether carried on by internal staff or by an
external person should necessarily be an independent activity to maintain its objectivity and
usefulness.
5. The difference in the approach of both these audits is illustrated below:

1. Perception: Traditionally, internal auditors have been engaged in a sort of protective
function, deriving their authority from the management. They view and examine internal
controls in the financial and accounting areas to ensure that possibilities of loss, wastage and
fraud are not there; they check the accounting books and records to see, whether the
internal checks are properly working and the resulting accounting data are reliable. For
example - when the auditor looks into the vouchers to see whether they corroborate the
entries in the cash book or physically examines the cash in hand he is doing his traditional
protective function. The moment he concerns himself to see whether customers’ complaints
are duly attended to or whether cash balance is excessive to the need, he comes to the
operational field.
2. Issues: The basic difference that exists in conceptualisation of the technique of operational
auditing is in the auditor’s role in recommending corrections or in installing systems and
controls. According to the IIA, “the internal auditor should be free to review and appraise
policies, plans, procedures and records; but his review and appraisal does not in any way
relieve other persons in the organisation of the responsibilities assigned to them”
3. Attitude and approach: However, a further distinction should be observed between
traditional internal auditing and operational auditing - this lies in the attitude and approach
to the whole auditing proposition. Every aspect of the operational auditing programme
should be geared to management policies, management objectives and management goals.
4. Objectives:
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a. The main objective of operational auditing is to verify the fulfilment of plans and
sound business requirements as also to focus on objectives and their achievement
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objectives; the operational auditor should not only have a proper business sense, he
should also be equipped with a thorough knowledge of policies, procedures, systems
and controls, he should be intimately familiar with the business, its nature and
problems and prospects and its environment. Above all, his mind should be open and
active so as to be able to perceive problems and prospects and grasp technical
matters.
b. The norms and standards should be such as are generally acceptable or developed by
the company itself.
c. Performance yardsticks can be found in the management objectives, goals and plans,
budgets, records of past performance, policies and procedures. Industry standards
can be obtained from the statistics provided by the industry associations and
government sources. It should be appreciated that the standards may be relative
depending upon the situation and circumstances; the operational auditor may have
to apply them with suitable adjustments.
d. The standards relating to objectives for a government company are quite different
from those of a private sector company. Similarly, standards of performance of a
well-equipped company, which also adequately looks after the well-being of
employees, may be significantly different from a company that offers scanty welfare
facilities or is ill-equipped.
Today, however, the concept of modern internal auditing suggests that there is no difference
in internal and operational auditing. In fact, the scope of internal auditing is broad enough to
embrace the areas covered by operational auditing as well. The modern internal auditing
performs both protective as well as constructive functions.
Q.NO.11 WRITE ABOUT QUALITIES OF OPERATIONAL AUDITOR?

ANSWER:
The operational auditor should possess some very essential personal qualities to be effective in his
work:
1. He must have knowledge in areas beyond accounting and finance and this is a reason which
should make him even more inquisitive.
2. He should ask the who, why, how of everything. He should try to visualise whether simpler
alternative means are available to do a particular work.
3. He should try to see everything as to whether that properly fits in the business frame and
organisational policy. He should be persistent and should possess an attitude of skepticism.
4. He should imbibe a collaborative and constructive approach rather than a fault-finding
approach and should give a feeling that his efforts are to help to attain an improved operation
and not merely fault finding.
5. If the auditor succeeds in giving a feeling of help and assistance through constructive criticism,
he will be able to obtain the co-operation of the persons who are involved in the operations.
This will itself be a tremendous achievement of the operational auditor. He should try to develop
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a team comprised of people of different backgrounds. The involvement of technical people in

operational auditing is generally helpful.
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Q.NO.12 WRITE ABOUT TYPES OF OPERATIONAL AUDITS?
ANSWER:
There are three broad categories of operational auditors: functional, organizational, and special
assignments. In case, part of the audit is likely to concern evaluating internal controls for efficiency
and effectiveness.
FUNCTIONAL AUDITS:
1. Functions are a means of categorizing the activities of a business, such as the billing function
or production function. There are many ways to categorize and subdivide functions.
2. EXAMPLE: There is an accounting function, but there are also cash disbursements, cash
receipts, and payroll disbursement functions. There is a payroll function, but there are also
hiring, timekeeping, and payroll disbursement functions. As the name implies, a functional
audit deals with one or more functions in an organization. It could concern, for example, the
payroll function for a division or for the company as a whole.
3. A functional audit has the advantage of permitting specialization by auditors. Certain
auditors within an internal audit staff can develop considerable expertise in an area, such as
production engineering. They can more efficiently spend all their time auditing in that area.
A disadvantage of functional auditing is the failure to evaluate interrelated functions. The
production engineering function interacts with manufacturing and other functions in an
organization.
ORGANIZATIONAL AUDITS:
An operational audit of an organization deals with an entire organizational unit, such as a

department, branch, or subsidiary. An organizational audit emphasizes how efficiently and
effectively functions interact. The plan of organization and the methods to coordinate activities are
especially important in this type of audit.
SPECIAL ASSIGNMENTS:
In operational auditing, special assignments arise at the request of management. There are a wide
variety of such audits.
Examples include determining the cause of an ineffective IT system, investigating the possibility of
fraud in a division, and making recommendations for reducing the cost of a manufactured product.
Q.NO.13 WRITE ABOUT OBJECTIVES OF OPERATIONAL AUDIT?

ANSWER:
Like internal auditing, the scope and quality of operational auditing is predominantly dependent
upon management attitudes. An open-minded management with a broad vision can appreciate the
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need of operational auditing and to give it the necessary freedom and sanction to perform what it is
capable of performing. Therefore, there is a possibility of operational auditing having different
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objectives to fulfil in different organisations. Generally, operational audit objectives include:

APPRAISAL OF CONTROLS:
1. The most significant gain an organisation can derive from operational auditing is probably in
the area of appraisal of controls. Internal controls, because of their presence in every
process in the organisation, provide the essential hinges to ensure proper performance in
each functional or organisational area for accomplishing the desired organisational objective.
2. Similarly, if controls are weak or breaking down, however well - equipped or well-manned
the organisation may be, it will fail to operate effectively.
EVALUATION OF PERFORMANCE:
1. In the task of performance evaluation, an operational auditor is heavily dependent upon

availability of acceptable standards. Apart from this, the operational auditor cannot be
expected to possess a technical background in so many diverse technical fields obtaining
even in one enterprise. Even when examining or appraising performance or reports of
performance, the operational auditor’s mind is invariably fixed on control aspects.
EXAMPLE: When he walks through the factory floor, amongst others, he observes whether
machines are idle or workmen not present in the post assigned to them or the accumulation
of stores on the floors.
2. All these have a bearing on the operation of controls. He can then go into the reasons of the
failure of controls and bring these to the attention of the management for verification in the
interest of proper working in future. He reviews internal control reports to ascertain whether
they bring the performance, qualitatively and quantitatively to the notice of the
management; also, whether the organisation’s policies and plans are being carried out.
APPRAISAL OF OBJECTIVES AND PLANS:
1. In performance appraisal, the operational auditor is basically concerned not so much with how
well technically the operations are going on, but with accumulating information and evidence to
measure the effectiveness, efficiency, and economy with which the operations are being
carried on. He prepares his evaluation programme in such a manner that it will show how well or
how poorly the department has fared by reference to applicable standards, procedures, rules,
policies and plans. The principal basis of performance evaluation can be productivity,
personnel, workload, cost and quality.
EXAMPLE: In the area of production, the operational auditor can undertake such tests as input -
output ratios for materials and labour in quantitative terms.
2. Personnel is perhaps the most important factor in performance evaluation. Unless the
organisation has a sound personnel policy consistent with its requirements, the facilities,
materials and equipment that are available in the organisation may not be utilised properly to
obtain optimum performance.
3. Workload measurement can be another significant area where an operational auditor can be of
use because of the ready availability of quantitative data. There can be measures like volume or
quantity of work handled and/or performed volume of new work, the backlog of work, etc.
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4. Cost is perhaps the most cogent indicator of performance. Costs are classified and recorded for a
proper assimilation of their implications on performance.
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APPRAISAL OF ORGANISATIONAL STRUCTURE:

Organisational structure provides the line of relationships and delegation of authority and tasks.
This is an important element of the internal control design. Therefore, this is also another important
area for appraisal by the operational auditor. In evaluating organisational structure, the aspects that
may be considered by the operational auditor may be as follows:
1. Is the organisational structure in conformity with management objectives?

2. Whether the organisational structure is drawn up on the basis of matching of responsibility
and authority?
3. Whether the line of responsibility from the top to the bottom is clearly visible from the
structure?
4. Whether the delegation of responsibility and authority at each stage is clear and overlapping
are avoided?
Q.NO.14 WRITE ABOUT REVIEW OF SYSTEMS AND PROCEDURES? [SELF STUDY]

ANSWER:
1. The purpose of systems and procedures is to help management in the planning and
accomplishment of organisational goals, in communicating their requirements, and in assisting
the personnel in carrying out the requirements.
2. The review of systems and procedures is to improve the methods, to get away from the old ways
and traditional routines and to reduce the cost in completing and processing the paperwork -
eliminating waste, duplication and inefficiencies.
3. In reviewing any system or procedure, the management auditor must concern himself with its
purpose as well as its design and then he must decide on its merits as the best serving the
interests of the enterprise.
4. In the study of the systems and procedural functions, the auditor should ask himself:
i. Is the function properly located in the organisation?
ii. Do the staff personnel have the necessary training and experience to perform the
work?
iii. Has a definite programme been established and has been taken for its attentive
accomplishment?
iv. Is productivity satisfactory?
5. The evaluation of a system or a procedure actually includes three separate considerations:
a. First, is the system or procedure meeting all of the current requirements?
b. Second, is it operating effectively? And
c. Third, what is the degree of effectiveness?
6. To determine whether the system or procedure is meeting current requirements, the following
among other things should be considered:
a. Is the system or procedure designed to promote the achievement of the company’s
objectives, and is it accomplished effectively?
b. Does the system or procedure operate within the framework of the organisational
structure?
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c. Does the system or procedure adequately provide methods of control in order to obtain
maximum performance with the least expenditure of time and effort?
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d. Do the routines designated in the system or procedures indicate performance in a logical
sequence?
e. Does the system or procedure provide the means for effective coordination between one
department and another?
f. Have all required functions been established?
g. Has the necessary authority been designated to carry out responsibilities?
h. Can any changes be made to improve effectiveness?
Q.NO.15 WRITE ABOUT DIFFERENCE BETWEEN FINANCIAL AUDIT AND OPERATIONAL AUDIT?
ANSWER:
The major differences between financial and operational auditing can be described as follows:
PURPOSE - The financial auditing is concerned with the opinion that whether the historical
information recorded is correct or not, whereas the operational auditing emphasizes on
effectiveness and efficiency of operations for future performance.
AREA - Financial audits are restricted to the matters directly affecting the appropriateness of the
presented financial statements but the operational auditing covers all the activities that are related
to the efficiency and effectiveness of operations directed towards accomplishment of objectives of
organization.
REPORTING - The financial audit report is sent to all stockholders, bankers and other persons having
a stake in the Organisation. However, the operational audit report is primarily for the management.
END TASK - The financial audit has to report the findings to the persons getting the report as its end
objective; however, the operational auditing is not limited to reporting only but includes
suggestions for improvement also.
Q.NO.16 WRITE ABOUT MANAGEMENT AUDIT QUESTIONNAIRE?

ANSWER:
1. A management audit questionnaire is an important tool for conducting a management audit. It is

through these questionnaires that the auditors make an inquiry into important facts by
measuring current performance. Such questionnaires aim at a comprehensive and constructive
examination of an organisation’s management and its assigned tasks. Overall, it is concerned
with the appraisal of management actions in accomplishing the organisation’s objectives.
2. Its primary objective is to highlight weaknesses and deficiencies of the organisation. It includes a
review of how well or badly the management functions of planning, organising, directing and
controlling are being performed.
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3. The questionnaire provides a means for evaluating an organisation’s ongoing operations by

examining its major functional areas. There are three possible answers to the management
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audit questions:
YES – It indicates that the specific area, function or aspect under study is functioning in an
acceptable manner. No written application is needed in that case.
NO – It indicates unacceptable performance & should be explained in writing.
NOT APPLICABLE – It indicates that the question does not apply.
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PRACTICE QUESTIONS [TYK / ILLUSTRATIONS]
Q.NO.1 JKT Pvt. Ltd. having Rs. 40 lacs paid-up capital, Rs. 9.50 crores reserves and turnover of
last three consecutive financial years, immediately preceding the financial year under audit,
being Rs. 49 crores, Rs. 145 crores and Rs. 260 crores, but does not have any internal audit
system. In view of the management, the internal audit system is not mandatory. Comment.
ANSWER:
PROVISION:
As per section 138 of the Companies Act, 2013, following class of companies (prescribed in rule 13
of Companies (Accounts) Rules,2014) shall be required to appoint an internal auditor which may
be either an individual or a partnership firm or a body corporate, namely:
1. Every LISTED COMPANY

2. Every unlisted public company having:
a. Paid up share capital of 50 crore rupees or more during the preceding financial year or
b. Turnover of 200 crore rupees or more during the preceding financial year or
c. Outstanding loans or borrowings from banks or public financial institutions exceeding
100 crore rupees or more at any point of time during the preceding financial year or
d. Outstanding deposits of 25 crore rupees or more at any point of time during the
preceding financial year; and
3. Every private company having:
a. Turnover of 200 crore rupees or more during the preceding financial year; or
b. Outstanding loans or borrowings from banks or public financial institutions exceeding
100 crore rupees or more at any point of time during the preceding financial year.
ANALYSIS AND CONCLUSION:
In the instant case, JKT Pvt. Ltd. is having a turnover of Rs. 260 crores during the
preceding financial year which is more than two hundred crore rupees. Hence, the company has
the statutory requirement to appoint an Internal Auditor and mandatorily conduct an internal
audit.
Q.NO.2 AB Pvt. Ltd. company, having outstanding loans and borrowings from banks exceeding
one hundred crore rupees, wants to appoint Mr. X, a practicing cost accountant, as an
internal auditor. Is the appointment of Mr. X valid?
435
ANSWER:
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Provision & Conclusion: According to the provision given in section 138 of the companies Act,
2013, the internal auditor shall either be a chartered accountant or a cost accountant (whether
engaged in the practice or not), or such other professional as may be decided by the
Board to conduct an internal audit of the functions and activities of the companies.
Thus, Appointment of Mr. X as an internal auditor of AB Pvt. Ltd is valid.
Q.NO.3 The Managing Director of X Ltd is concerned about high employee attrition rate in his
company. As the internal auditor of the company he requests you to analyze the causes for
the same. What factors would you consider in such analysis?
ANSWER:
The factors responsible for high employee attrition rate are as under:
(i) Job Stress & work life imbalance;
(ii) Wrong policies of the Management;
(iii) Unbearable behaviour of Senior Staff;
(iv) Safety factors;
(v) Limited opportunities for promotion;
(vi) Low monetary benefits;
(vii) Lack of labour welfare schemes;
(viii) Whether the organization has properly qualified and experienced personnel for the various
levels of works?
(ix) Is the number of people employed at various work centres excessive or inadequate?
(x) Does the organization provide facilities for staff training so that employees and workers keep
themselves abreast of current techniques and practices?
Q.NO.4 XYZ, a manufacturing unit does not accept the recommendations for improvements
made by the Operational Auditor. Suggest an alternative way to tackle hostile management.
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ANSWER:
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Alternative Way to Tackle the Hostile Management: While conducting the operational audit the
auditor has to come across many irregularities and areas where improvement can be made and
therefore, he gives his suggestions and recommendations.
These suggestions and recommendations for improvements may not be accepted by the hostile
managers and in effect there may be cold war between the operational auditor and the
managers.
The Participative Approach comes to the help of the auditor. In this approach the auditor
discusses the ideas for improvements with those managers that have to implement them and
make them feel that they have participated in the recommendations made for improvements. By
soliciting the views of the operating personnel, the operational audit becomes a co-operative
enterprise. This participative approach encourages the auditee to develop a friendly attitude
towards the auditors and look forward to their guidance in a more receptive fashion.
CONCLUSION: Hence, the Operational Auditor of XYZ manufacturing unit should adopt the above-
mentioned participative approach to tackle the hostile management of XYZ.
Q.NO.5 State the important aspects to be considered by the External auditor in the evaluation
of the Internal Audit Function.
ANSWER: [SA 610 RELATED]
Evaluation of Internal Audit Functions by External Auditor: The external auditor’s general
evaluation of the internal audit function will assist him in determining the extent to which he can
place reliance upon the work of the internal auditor. The external auditor should document his
evaluation and conclusions in this respect. The important aspects to be considered in this context
are:
(a) Organisational Status - Whether internal audit is undertaken by an outside agency or by an

internal audit department within the entity itself, the internal auditor reports to the
management. In an ideal situation, his reports to the highest level of management and are free of
any other operating responsibility. Any constraints or restrictions placed upon his work by
management should be carefully evaluated. In particular, the internal auditor should be free to
437
communicate fully with the external auditor.

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(b) Scope of Function - The external auditor should ascertain the nature and depth of coverage of
the assignment which the internal auditor discharges for management. He should also ascertain
to what extent the management considers, and where appropriate, acts upon internal audit
recommendations.
(c) Technical Competence - The external auditor should ascertain that internal audit work is
performed by persons having adequate technical training and proficiency. This may be
accomplished by reviewing the experience and professional qualifications of the persons
undertaking the internal audit work.
(d) Due Professional Care - The external auditor should ascertain whether internal audit work
appears to be properly planned, supervised, reviewed and documented. An example of the
exercise of due professional care by the internal auditor is the existence of adequate audit
manuals, audit programmes and working papers.
Q.NO.6 AB Pvt. Ltd. company has outstanding loans or borrowings from banks exceeding one
hundred crore rupees wants to appoint an internal auditor. Please guide him for the
applicability of the same and who can be appointed as an internal auditor and what work
would be reviewed by him.
ANSWER:
APPLICABILITY PROVISIONS UNDER COMPANIES ACT:
As per section 138 of the Companies Act, 2013, following class of companies (prescribed in rule 13
of Companies (Accounts) Rules,2014) shall be required to appoint an internal auditor which may
be either an individual or a partnership firm or a body corporate, namely:
Every private company having:
1. Turnover of 200 crore rupees or more during the preceding financial year; or
2. Outstanding loans or borrowings from banks or public financial institutions exceeding 100
crore rupees or more at any point of time during the preceding financial year.
WHO CAN BE APPOINTED AS INTERNAL AUDITOR:
1. As per section 138, the internal auditor shall either be a chartered accountant or a cost
438
accountant (whether engaged in the practice or not), or such other professional as may be
decided by the Board to conduct an internal audit of the functions and activities of the
company.
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2. The internal auditor may or may not be an employee of the company.
INTERNAL AUDITOR'S WORK INCLUDE REVIEW OF:
1. Internal Control System & Procedures

2. Custodianship & Safeguarding of Assets
3. Compliance with Policies, Plans, Procedures & Regulations
4. Relevance & Reliability of Information
5. Organisational Structure
6. Utilisation of Resources
7. Accomplishment of Goals & Objectives
Q.NO.7 The main objective of operational auditing is to verify the fulfillment of plans, and
sound business requirements while in financial auditing, the concentration is more in the
financial and accounting areas to ensure that possibilities of loss, wastage and fraud are
minimized or removed. Analyze and Explain stating clearly major differences between
Financial and Operational Auditing.
ANSWER: Refer answer to Q No. 15 in the theory.
Q.NO.8 Moon Ltd. of which you are the Statutory Auditor, have an internal audit being
conducted by an outside agency. State the factors that weigh considerations in opting to
make use of direct assistance of the internal auditors for the purpose of statutory audit.
ANSWER: SA 610 answer in AUDIT REPORTING chapter.
Q.NO.9 The Operational Audit is carried out effectively when the Operational Auditor responds
with positive traits in a scenario that is blended with behavioural issues. Explain a few
positive traits that help to conclude an Operational Audit, a success
ANSWER: Refer answer to Q No. 11 in the theory.
Q.NO.10 Perfect Steel Ltd. has reported a higher turnover of Rs. 560 crores in the year 2019- as
compared to earlier years but its sales return has also increased to 10% from only 4% up to
the last year. The management is concerned about the high sales returns and feels a need to
get the operational audit done for sales and production department of the company. The
company is also having an internal audit department in the company. Elaborate the possible
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reason/s, why management is getting the operational audit done when an internal audit has
already been done for both the departments?
You are also required to discuss the difference in the approach of both these audits.
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ANSWER: Refer Q No. 10 and then Q No. 8 in theory.
Q.NO.11 Mr. A is appointed as a statutory auditor of XYZ Ltd. XYZ Ltd is required to appoint an
internal auditor as per statutory provisions given in the Companies Act, 2013 and appointed
Mr. B as its internal auditor. The external auditor Mr. A asked internal auditor to provide
direct assistance to him regarding evaluating significant accounting estimates by the
management and assessing the risk of material misstatements.
(a) Discuss whether Mr. A, statutory auditor, can ask direct assistance from Mr. B, internal
auditor as stated above in view of auditing standards.
(b) Will your answer be different if Mr. A asks direct assistance from Mr. B, internal auditor
with respect to external confirmation requests and evaluation of the results of external
confirmation procedures?
ANSWER:
(a) Direct Assistance from Internal Auditor: As per SA 610 “Using the Work of Internal Auditor”,
the external auditor shall not use internal auditors to provide direct assistance to perform
procedures that Involve making significant judgments in the audit.
Since the external auditor has sole responsibility for the audit opinion expressed, the external
auditor needs to make the significant judgments in the audit engagement.
Significant judgments include the following:
1. Assessing the risks of material misstatement;

2. Evaluating the sufficiency of tests performed;
3. Evaluating the appropriateness of management’s use of the going concern
assumption;
4. Evaluating significant accounting estimates; and
5. Evaluating the adequacy of disclosures in the financial statements, and other matters
affecting the auditor’s report.
In view of above, Mr. A cannot ask direct assistance from internal auditors regarding
evaluating significant accounting estimates and assessing the risk of material
misstatements.
(b) Direct Assistance from Internal Auditor in case of External Confirmation Procedures: SA 610
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“Using the Work of Internal Auditor”, provide relevant guidance in determining the nature and
extent of work that may be assigned to internal auditors. In determining the nature of work that
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may be assigned to internal auditors, the external auditor is careful to limit such work to those
areas that would be appropriate to be assigned.
Further, in accordance with SA 505, “External Confirmation” the external auditor is required to
maintain control over external confirmation requests and evaluate the results of external
confirmation procedures, it would not be appropriate to assign these responsibilities to internal
auditors.
However, internal auditors may assist in assembling information necessary for the external
auditor to resolve exceptions in confirmation responses.
Q.NO.12 M/s ABC & Co., Chartered Accountants have been approached by PQR Ltd., a company
engaged in iron and steel manufacturing industry. The company has been facing following
operational issues:
(a) Penal interest for delayed payments to the overseas vendors despite having enough cash
flows; and
(b) Despite having regular production and enough inventory, delays in shipping the final
goods to the customers leading to its deteriorating vendor rating.
As a partner of M/s ABC & Co., through detailed discussion with the Senior Manager of PQR
Ltd., you have concluded that all these delays are because of long decision-making cycles in the
company. As a consultant to the Company, would you recommend Management Audit or
Operational Audit?
ANSWER:
focuses on the “Quality of operations”. Management audit is the “Audit of management”
while the operational audit is the “Audit for the management”.
2. The focus of Management Audit is on “Quality of Decision Making” rather than the
effectiveness or efficiency of operations.
3. The basic difference between the two audits, then, is not in method, but in the level of
appraisal. In a management audit, the auditor is to make his tests to the level of top
management, its formulation of objectives, plans and policies and its decision making.
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CONCLUSION: Since, the delays in payments and consequent penal interest payments and the
delays in shipping and the consequent deteriorating vendor ratings are happening because of the
delays in decision-making process of the management.
Therefore, it appears that this is not just an internal control or operational issue but an issue of
management process. Therefore, management audit would be recommended in this case.
Q.NO.13 The PQR Ltd. has come across many instances where it could buy products at lesser
cost than the actual procurement price it paid. The management believes that the adequate
purchase policy is in place including the requirements of three quotations from registered
vendors, appropriate vendor vetting and rating mechanism, however, the on-ground
implementation of the purchase policy might be defective. Further, it has observed that
there might be some employees involved in choosing the higher cost vendors as well. The
company approaches you to advise the type of audit it should get done: Management or
Operational. Please advise through a comparison between both the audits.
ANSWER:
1. Operational auditing is a systematic process involving a logical, structured and organized

series of procedures. Operational auditing concentrates on effectiveness, efficiency and
economy of operations and therefore it is future oriented. It does not end with the reporting
of the findings but also recommends the steps for improvement in future.
2. Operational Audits involve undertaking a deep analysis of operations to bring out the
improvement plan with respect to its overall standard of operation including improvement in
effectiveness, efficiency, benefits vis-à-vis cost of operation, and its impact on meeting the
objective of the operations and that of the organization.
focuses on the “Quality of operations”. Management audit is the “Audit of management”
while the operational audit is the “Audit for the management”.
4. The focus of Management Audit is on “Quality of Decision Making” rather than the
effectiveness or efficiency of operations.
CONCLUSION: Since it is not the Management’s Decisions that are creating the operational
bottlenecks. The Purchase Policy and Procedure seem to be in place, the missing part is the
operational implementation by the process employees. Therefore, the Operational Audit is
recommended in this case.
Q.NO.14 The Marketing Department of XYZ Ltd. has been consistently showing a lower
performance whereas the cost of the department is increasing in spurts over the years. The
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management believes that since the marketing department is under a regular radar of the
CFO, an audit might result in the employee hostility. Also, an operational audit of Marketing
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Department was done two years back however, the recommendations of the previous audit
were not followed by the concerned employees. Please advise the management if another
audit is the solution and whether only one-time operational audit is enough? Further, advise
on the ways to deal with the employee hostility.
ANSWER:
The Operational Audit is not one-time activity. It should be viewed as a continuous improvement
cycle: PLAN>DO>CHECK>ACT>PLAN
1. All the significant operations must be subjected to the scrutiny of operational audit, at least,
once in three years.
2. Therefore, the operational audit should be done in the current scenario. However, to deal
with the employee hostility the participative approach of the audit should be adopted:
3. In this approach the auditor discusses the ideas for improvements with those managers that
have to implement them and make them feel that they have participated in the
recommendations made for improvements. By soliciting the views of the operating personnel,
the operational audit becomes a co-operative enterprise.
4. This participative approach encourages the auditee to develop a friendly attitude towards the
auditors and look forward to their guidance in a more receptive fashion. When the
participative method is adopted then the resistance to change becomes minimal, feelings of
hostility disappear and gives room for feelings of mutual trust. Team spirit is developed.
5. The auditors and the auditee together try to achieve the common goal. The proposed
recommendations are discussed with the auditee and modifications as may be agreed upon
are incorporated in the operational audit report.
6. With this attitude of the auditor, it becomes absolutely easy to implement the proposed
suggestions as the auditee themselves take initiative for implementing and the auditor does
not have to force any change on the auditee.
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10. DUE DILIGENCE
Q.NO.1 WRITE ABOUT THE CONCEPT OF DUE DILIGENCE?
ANSWER:
Due Diligence is used to investigate and evaluate a business opportunity. It implies a general duty to
exercise care in any transaction.
Most legal definition of due diligence describe it as a measure of prudence activity as is properly to
be expected from, and ordinarily exercised by, a reasonable and prudent person under the
particular circumstance, not measure by any absolute standard but depends on the relative facts
of the special case.
1. Due diligence is a process of investigation, performed by investors, into the details of a

potential investment such as an examination of operations and management and the
verification of material facts.
2. It entails conducting inquiries for the purpose of timely, sufficient and accurate disclosure of all
material statements/information or documents, which may influence the outcome of the
transaction.
3. Due diligence involves a careful study of the financial as well as non-financial possibilities for
successful implementation of restructuring plans.
4. Due diligence involves an analysis carried out before acquiring a controlling interest in a
company to determine that the conditions of the business conform with what has been
presented about the target business.
5. Also, due diligence can apply to recommendation for an investment or advancing a loan/credit.
6. Due Diligence may also require to be performed in cases of corporate restructuring, venture
capital financing, lending, leveraged buyouts, public offerings, disinvestment, corporatisation,
etc. Sometimes, in a restructuring exercise, while the unit may remain within a group, it may
pass from under the charge of one management team to that of another team. This situation
also gives rise to the need for a due diligence review.
Q.NO.2 WHAT IS THE DIFFERENCE BETWEEN DUE DILIGENCE AND AUDIT EXPLAIN?
ANSWER:
AUDIT: Audit is an independent examination and evaluation of the financial statements on an

organization with a view to express an opinion thereon.
DUE DILIGENCE: Whereas, due diligence refers to an examination of a potential investment to

confirms all material facts of the prospective business opportunity. It involves review of financial
and non-financial records as deemed relevant and material. Simply put, due diligence aims to take
the care that a reasonable person should take before entering into an agreement or a transaction
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with another party.

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Q.NO.3 WRITE ABOUT IMPORTANCE OF DUE DILIGENCE?
ANSWER:
When a business opportunity first arises, it continues throughout the talks, initial data collection and
evaluation commence. Thorough detailed due diligence is typically conducted after the parties
involved in a proposed transaction have agreed in principle that a deal should be pursued and
after a preliminary understanding has been reached, but prior to the signing of a binding contract.
The purpose of due diligence is to assist the purchaser or the investor in finding out all the care that
a reasonable person can, about the business he is acquiring or investing in prior to completion of
the transaction including its critical success factors as well as its strength and weaknesses.
In addition, it may expose problems or potential problems that can be addressed in the price
negotiations or by dealing suitable clauses in the contractual documentation, in particular, warranty
and or indemnity provisions.
There are many reasons for carrying out due diligence including:
1. To confirm that the business is what it appears to be;

2. To identify potential ‘deal killer’ defects in the target company and avoid a bad business
transaction;
3. To gain information that will be useful for valuing assets, defining representations and
warranties, and/or negotiating price concessions; and
4. To verify that the transaction complies with investment or acquisition criteria.
Q.NO.4 WRITE ABOUT CLASSIFICATION OF DUE DILIGENCE?

ANSWER:
Due Diligence can be sub-classified into discipline-wise exercises in following manner:
1. COMMERCIAL/OPERATIONAL DUE DILIGENCE: It is generally performed by the concerned

acquire enterprise involving an evaluation from commercial, strategic and operational
perspectives. For example, whether proposed merger would create operational synergies.
2. FINANCIAL DUE DILIGENCE: It involves analysis of the books of accounts and other information
pertaining to financial matters of the entity. It should be performed after completion of
commercial due diligence.
3. TAX DUE DILIGENCE: It is a separate due diligence exercise but since it is an integral component
of the financial status of a company, it is generally included in the financial due diligence. The
accountant has to look at the tax effect of the merger or acquisition.
4. INFORMATION SYSTEMS DUE DILIGENCE: It pertains to all computer systems and related matter
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of the entity.
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5. LEGAL DUE DILIGENCE: This may be required where legal aspects of functioning of the entity are
reviewed. EXAMPLE: The legal aspects of property owned by the entity or compliance with
various statutory requirements under various laws.
6. ENVIRONMENTAL DUE DILIGENCE: It is carried out in order to study the entity’s environment,
its flexibility and adaptiveness to the acquirer entity.
7. PERSONNEL DUE DILIGENCE: It is carried out to ascertain that the entity’s personnel policies are
in line or can be changed to suit the requirements of the restructuring.
Q.NO.5 WRITE ABOUT FINANCIAL DUE DILIGENCE?

ANSWER:
At times, the financial due diligence review is interpreted as complete due diligence review since it
is supposed to ascertain the financial implications of all the other due diligence reviews. This is,
however, not appropriate.
The term 'financial due diligence' should be used with caution. Unless the scope of financial due
diligence to be performed is wide enough to cover all the aspects, it should not be confused with
overall due diligence review.
It can be understood from the foregoing that the role of financial due diligence commences only
after a price has been agreed for the business or a restructuring plan is framed. The initial price and
other decisions are taken on the basis of net worth as well as trend of profitability of the target
company, with an assumption that all contingent liabilities that may impact the future of the
business have been recorded. The principal objective of financial due diligence, therefore, is usually
to look behind the veil of initial information provided by the company and to assess the benefits and
costs of the proposed acquisition/merger by inquiring into all relevant aspects of the past, present
and future of the business to be acquired/merged with.
In order to achieve its objective, the due diligence process can include any or all of the following
objectives for individual areas of the verification:
1. Brief description of the history of business

2. The background and standing of promoters.
3. Accounting policies and practices followed by the organization
4. Management information systems.
5. Details of management structure.
6. Trading results both past and the recent past
7. Assets and liabilities as per latest balance sheet
8. Current status of Income tax assessments including appeals pending against tax liabilities
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assessed by tax authority.

9. Cash flow patterns.
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10. Brief description of commercial and/or other activities carried out by the organization.
11. The projection of future profitability.
Q.NO.6 WRITE ABOUT FULL FLEDGED FINANCIAL DUE DILIGENCE?

ANSWER:
If a full-fledged financial due diligence is conducted, it would include the following matters, inter
alia, in its scope:
A. Brief history of the target company and background of its promoter;

B. Accounting policies;
C. Review of financial statements;
D. Taxation;
E. Cash flow;
F. Financial Projection;
G. Management and employees;
H. Statutory Compliance.
A. BRIEF HISTORY OF THE TARGET COMPANY AND BACKGROUND OF ITS PROMOTER:

The accountant should begin the financial due diligence review by looking into the history of the
company and the background of the promoters.
The details of how the company was set up and who were the original promoters has to be gone
into, before verification of financial data in detail. An eye into the history of the target company may
reveal its turning points, survival strategies adopted by the target company from time to time, the
market share enjoyed by the target company and changes therein, product life cycle and adequacy
of resources. It could also help the accountant in determining whether, in the past, any regulatory
requirements have had an impact on the business of the target company. Few other relevant
inquiries include:
1. Nature of business: Manufacturer/ trader, wholesaler, financial services, import/export.

2. Location of production facilities, warehouses, offices.
3. Employment: By location, supply, wage levels, union contracts, pension commitments,
government regulation.
4. Products or services and markets: Major customers and contracts, terms of payment,
profit margins, market share, competitors, exports, pricing policies, reputation of
products, warranties, order book, trends, marketing strategy and objectives,
manufacturing processes.
5. History of the business with important suppliers of goods and services: Long-term
contracts, stability of supply, terms of payment, imports, methods of delivery such as
"just-in-time".
6. Inventories: Locations, Quantities.
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7. Franchises, licenses, patents.

8. Important expense categories.
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9. R & D: Research and development.
10. Foreign currency assets, liabilities and transactions.
11. Legislation and regulation that significantly affect the entity.
12. Information systems.
B. ACCOUNTING POLICIES:
1. The accountant should study the accounting policies being followed by the target company
and ascertain whether any accounting policy is inappropriate.
2. The accountant should also see the effects of the recent changes in the accounting policies.
3. The overall scope has to be based on the accounting policies adopted by the management.
The accountant has to look at any material effect of accounting policies on the overall
profitability and their correctness.
4. It is reiterated that the accountant should have a detailed look at all material changes in
Accounting Policies in the period subjected to review very carefully.
5. REPORT: The accountant's report should include a summary of significant accounting policies
used by the target company, that changes that have been made to the accounting policies in
the recent past, the areas in which accounting policies followed by the target company are
different from those adopted by the acquiring enterprise, the effect of such differences.
C. REVIEW OF FINANCIAL STATEMENTS:

1. Before commencing the review of each of the aspect covered by the financial statements,
the accountant should examine whether the financial statements of the target company
have been prepared in accordance with the Statute governing the target company,
Framework for Preparation and Presentation of the Financial Statements and the relevant
Accounting Standards.
2. If not, the accountant should record the deviations from the above and consider whether it
warrant an inclusion in the final report on due diligence.
3. The accountant should review the operating results of the target company in great detail. It
is important to make an evaluation of the profit reported by the target company. The reason
being that the price of the target company would be largely based upon its operating results.
4. The accountant should consider the presence of an extraordinary item of income or expense
that might have affected the operating results of the target company.
5. It is advisable to compare the actual figures with the budgeted figures for the period under
review and those of the previous accounting period. This comparison could lead the
accountant to the reasons behind the variations.
6. It is important that the trading results for the past four to five years are compared and the
trend of normal operating profit arrived at. The normal operating profits should further be
benchmarked against other similar companies.
7. Besides the above, and based on the trend of operating results, the accountant has to advise
the acquiring enterprise, through due diligence report, on the indicative valuation of the
business.
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8. In the case of many enterprises, the valuation is mainly based on the value of net worth only.
9. For valuation of immovable properties and plant, if required, the assistance of expert valuers
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could also to be taken.

10. The exercise to evaluate the balance sheet of the target company has to take into
consideration the basis upon which assets have been valued and liabilities have been
recognised.
11. The net worth of the business has to be arrived at by taking into account the impact of
over/under valuation of assets and liabilities. The accountant should pay particular attention
to the valuation of intangible assets.
12. The objective of the Due Diligence exercise will be to look specifically for any hidden
liabilities or over-valued assets. [Examples: Please Refer Page No. 16.7 to 16.9 in ICAI SM]
D. TAXATION:
Tax due diligence is a separate due diligence exercise but since it is an integral component of the
financial status of a company, it is generally included in the financial due diligence. It is
important to check if the company is regular in paying various taxes to the Government. The
accountant has to also look at the tax effects of the merger or acquisition.
E. CASHFLOW:
A review of historical cash flows and their pattern would reflect the cash generating abilities of
the target company and should highlight the major trends. It is important to know if the
company is able to meet its cash requirements through internal accruals or does it have to seek
external help from time to time. It is necessary to check that:
(a) Is the company able to honor its commitments to its trade payables, to the banks, to
government and other stakeholders?
(b) How well is the company able to turn its trade receivables and inventories?
(c) How well does it deploy its funds?
(d) Are there any funds lying idle or is the company able to reap maximum benefits out of the
available funds?
(e) What is the investment pattern of the company and are they easily realisable?
F. FINANCIAL PROJECTIONS:
1. The accountant should obtain from the target company the projections for the next five
years with detailed assumptions and workings. He should ask the target company to give
projections on optimistic, pessimistic and most likely bases.
2. The accountant evaluates the appropriateness of assumption used in the preparation and
presentation of financial projections.
3. If, the accountant is of the opinion that as assumption used by the target company is
unrealistic, the accountant should consider its impact on the overall valuation of the
company. He should offer his comments on all the assumption, highlighting those which, in
his opinion are not inappropriate.
4. In case he feels the projections provided by the target company are not achievable or
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aggressive he has to mention this in his report. He should thoroughly check the arithmetical
accuracy of the calculations made for financial projections.
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G. MANAGEMENT AND EMPLOYEES:
1. In most of the companies which are available for take over the problem of excess work force
is often witnessed. It is important to work out how much of the labour force has to be
retained. It is also important to judge the job profile of the administrative and managerial
staff to gauge which of these matches the requirements of the new incumbents.
2. Due to complex set of labour laws applicable to them, companies often have to face
protracted litigation from its workforce and it is important to gauge the likely impact of such
litigation.
3. It is important to see if all employee benefits like Provident Fund (P.F.), Employees State
Insurance (E.S.I.), Gratuity, leave and Superannuation have been properly paid/ provided
for/funded. In case of un-funded Gratuity, an actuarial valuation of the liability has to be
obtained from a reputed actuary.
4. The assumptions regarding increase in salaries, interest rate, retirement etc. have to be gone
into to see if they are reasonable. It is also necessary to see if the basic salary /wage
considered for the valuation is correct and includes all elements subject to payment of
Gratuity. In the case of PF, ESI etc. the accountant has to see if all eligible employees have
been covered.
5. It is very important to consider the pay packages of the key employees as this can be a
crucial factor in future costs.
6. One has to carefully look at Employees Stock Option Plans; deferred compensation plans;
Economic Value Addition and other performance linked pay; sales incentives that have been
promised etc.
7. It is also important to identify the key employees who will not continue after the
acquisition either because they are not willing to continue or because they are to be
transferred to another company within the 'group' of the target company.
H. STATUTORY COMPLIANCE:
1. During a due diligence this is one aspect that has to be investigated in detail. It is important
therefore, to make a list of laws/ statues that are applicable to the entity as well as to make
a checklist of compliance required from the company under those laws.
2. If the company has not been regular in its legal compliance it could lead to punitive charges
under the law. These may have to be quantified and factored into the financial results of the
company.
Q.NO.7 WRITE ABOUT WORK APPROACH TO DUE DILIGENCE?

ANSWER:
The purchase of business in many instances is the largest and most expensive assets purchase in life
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time and therefore some caution should be exercised through the due diligence process. Therefore,
assessing the businesses fair value passes through.
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Discovering the correct strategy is always challenging, and even more so during challenging
economic circumstances. Each situation is unique. The variables are numerous, including factors
such as company age, markets, geography, price levels, competitive dynamics, to name but a few.
But when a company and its products are turned to match market needs and expectations -that is,
the decision makers and influencers involved in purchase decision-exceptional changes in
performance can occur. However, comprehensive model that describes this approach to the work is
illustrated in the figure below: [SIX-DIMENSIONAL PROCESS FRAMEWORK]
Q.NO.8 HOW TO CONDUCT DUE DILIGENCE?

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ANSWER:
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1. Start with an open mind. Do not assume that anything wrong will be found and look for it. What
needs to be done is to identify trouble spots and ask for explanations.
2. Get the best team of people. If you do not have a group of people inside your firm that can do
the task (e.g., lack of staff, lack of people who know the new business because you are acquiring
a business in an unrelated area, etc.), there are due diligence experts that you can hire. When
hiring such professionals, look for their experience record in the industry.
3. Get help in all areas like finance, tax accounting, legal, marketing, technology, and any others
relevant to the assignment so that you get a 360-degree view of the acquisition candidate.
4. Talk to customers, suppliers, business partners, and employees are great resources.
5. Take a risk management approach. So, while you want to do your research, you also want to
make sure that you do not go against the team of people of the target company by bogging
them down with loads of questions.
6. Prepare a comprehensive report detailing the compliances and substantive risks/issues.
Q.NO.9 WRITE ABOUT CONTENTS OF DUE DILIGENCE REPORT?

ANSWER:
The contents of a due diligence report will always vary with individual circumstances. Following
headings are illustrative:
Example of Headings of a Due Diligence Report
1. Executive Summary
2. Introduction
3. Background of Target company
4. Objective of due diligence
5. Terms of reference and scope of verification
6. Brief history of the company
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7. Share holding pattern

8. Observations on the review
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9. Assessment of management structure

10. Assessment of financial liabilities
11. Assessment of valuation of assets
12. Comments on properties, terms of leases, lien and encumbrances.
13. Assessment of operating results
14. Assessment of taxation and statutory liabilities
15. Assessment of possible liabilities on account of litigation and legal proceedings against the
company
16. Assessment of net worth.
17. Interlocking investments and financial obligations with group / associates companies, amounts
receivables subject to litigation, any other likely liability which is not provided for in the books of
account
18. SWOT Analysis
19. Comments on future projections
20. Status of charges, liens, mortgages, assets and properties of the company
21. Suggestion on ways and means including affidavits, indemnities, to be executed to cover
unforeseen and undetected contingent liabilities
22. Suggestions on various aspects to be taken care of before and after the proposed
merger/acquisition.
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PRACTICAL QUESTIONS [TEST YOUR KNOWLEDGE QUESTIONS]
Q.NO.1 Sri Rajan is above 80 years old and wishes to sell his proprietary business of
manufacture of specialty chemicals. Ceta Ltd. wants to buy the business and appoints you to
carry out a due diligence audit to decide whether it would be worthwhile to acquire the
business. What procedures you would adopt before you could render any advice to Ceta
Ltd.?
ANSWER:
Refer Answer to Q No. 5 [Financial Due Diligence]
Q.NO.2 An American Company engaged in the business of manufacturing and distribution of

industrial gases, is interested in acquiring a listed Indian Company having a market share of
more than 65% of the industrial gas business in India. It requests you to conduct a “Due
Diligence” of this Indian Company and submit your Report. List out the contents of your Due
Diligence Review Report that you will submit to your USA based Client.
ANSWER:
Refer Answer to Q No. 9 [ Contents of Due Diligence]
Q.NO.3 KDK Bank Ltd., received an application from a pharmaceutical company for takeover of
their outstanding term loans secured on its assets, availed from and outstanding with a
nationalised bank. KDK Bank Ltd., requires you to make a due diligence audit in the areas of
assets of pharmaceutical company especially with reference to valuation aspect of assets.
State what may be your areas of analysis in order to ensure that the assets are not stated at
overvalued amounts.
ANSWER:
1. In the case of many enterprises, the valuation is mainly based on the value of net worth only.
2. For valuation of immovable properties and plant, if required, the assistance of expert valuers
could also to be taken.
3. The exercise to evaluate the balance sheet of the target company has to take into
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consideration the basis upon which assets have been valued and liabilities have been
recognised.
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4. The net worth of the business has to be arrived at by taking into account the impact of
over/under valuation of assets and liabilities. The accountant should pay particular attention
to the valuation of intangible assets.
5. Over Valuation of assets may be occurred as below:
a. Uncollected/uncollectable receivables
b. Obsolete, slow non-moving inventories or inventories valued above NRV; huge
inventories of packing materials etc. with name of company.
c. Assets carried at much more than current market value due to capitalization of
expenditure/foreign exchange fluctuation, or capitalization of expenditure mainly
in the nature of revenue.
d. Investments carrying a very low rate of income / return
e. Litigated assets and property.
f. Investments carried at cost though realizable value is much lower.
Q.NO.4 PB Ltd. entered into a deal with SV Ltd. for buying its business of manufacturing
wooden products/ goods. PB Ltd. has appointed your firm for conducting due diligence
review and they want to know the cash generating abilities of SV Ltd. What points will you
check in order to ensure that the manufacturing unit of SV Ltd. will be able to meet the cash
requirements internally?
ANSWER:
In order to ensure that the manufacturing unit of SV Ltd. will be able to meet the cash
requirements internally, one is required to verify:
(a) Is the company able to honor its commitments to its trade payables, to the banks, to the
government and other stakeholders?
(b) How well is the company able to convert its trade receivables and inventories?
(c) How well the Company deploys its funds?
(d) Are there any funds lying idle or is the company able to reap maximum benefits out of the
available funds?
(e) What is the investment pattern of the company and are they easily realizable?
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11. FRAUD INVESTIGATION
Q.NO.1 WRITE THE DIFFERENCES BETWEEN AUDIT AND INVESTIGATION?
ANSWER:
Investigation differs substantially from an audit assignment. Audit aims at collection of sufficient
appropriate audit evidence to enable the auditor to form a judgement and express an opinion on
the financial statements or other data under examination. An investigation, on the other hand,
requires special in-depth examination of the particular records or transaction with the objective of
establishing a part or happening or assessing a particular situation. The scope of audit is broad
based and general in nature whereas investigation is narrow and specific.
The difference is tabulated below:
BASIS INVESTIGATION AUDIT
1. Objective An investigation aims at establishing The main objective of an audit is to

a fact or a happening or at assessing verify whether the financial
a particular situation. statements display a true and fair
view of the state of affairs and the
working results of an entity.
2. Scope The scope of investigation may be The scope of audit is wide and in
governed by statute or it may be
case of statutory audit the scope
non- statutory.
of work is determined by the
provisions of relevant law.
3. Periodicity The work is not limited by rigid time The audit is carried on either
frame. It may cover several years, as quarterly, half-yearly or yearly
the outcome of the same is not
certain.
4. Nature Requires a detailed study and Involves tests checking or sample

examination of facts and figures. technique to draw evidences for
Investigation is voluntary in nature. forming a judgement and expression
of opinion. It is mandatory for
companies.
5. Inherent No inherent limitation owing to its Audit suffers from inherent

Limitations nature of engagement. limitation.
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6. Evidence It seeks conclusive evidence. Audit is mainly concerned with
prima- facie evidence. [Persuasive is
most accurate term]
7. Observance of It is analytical in nature and requires Is governed by compliance with

Accounting a thorough mind, capable of generally accepted accounting
Principles observing, collecting and evaluating principles, audit procedures and
facts. disclosure requirements.
8. Appointing Even third party can appoint Auditor is appointed by owner/

Agency Investigator shareholders of company/ enterprise
9. Reporting The outcome is reported to the The outcome is reported to the

person(s) on whose behalf owners of the business entity.
investigation is carried out
An investigator does not accept a stated fact as correct until it is substantiated. Where as the
auditor, in the absence of suspicious circumstances, relies on stated facts or figures. An auditor does
not suspect unless circumstances are there to arouse suspicion, while an investigator approaches
the work with a frame of mind to suspect, verify and satisfy.
Q.NO.2 WHAT ARE THE STEPS INVOLVED IN INVESTIGATION?

ANSWER:
As investigation involves a variety of situations, it is not possible to lay down any standardised
procedure. However, usually, an investigation requires the following steps in order of sequence:
STEP 1: DETERMINATION OF OBJECTIVES AND ESTABLISHMENT OF SCOPE OF INVESTIGATION:
At the stage of acceptance of the assignment, the investigator should be absolutely clear about
what is sought to be achieved by the investigation. If instructions from the client leave matters
vague and non-specific, it would be proper for the investigator to have the matters discussed and
obtain clearly written instructions covering the object, the scope and purpose of investigations and
the issues incidental thereto.
The period to be covered under investigation should be clearly specified. Therefore, the purpose of
the investigation should be borne in mind while determining the period which an investigation
should cover.
STEP 2: FORMULATION OF THE INVESTIGATION PROGRAMME:

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It is not possible to draw up one programme to serve different types of investigations which a
professional accountant is called upon to carry out. The scope and content have to be determined
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on a consideration of circumstances peculiar to each business or situation. The investigation
programme should be drawn up having regard to:
a. The nature of the business

b. The structure of business organization
c. The instructions from the client embodying the objectives and scope of work
d. The consequent scope and depth of investigation
e. The necessity to extend the investigation into books and records belonging to others.
f. The investigator should concentrate on areas considered relevant rather than to undertake a
wide-ranging verification.
The programme should also be flexible so that knowledge gained with the progress of work can be
used.
Example: In case of an investigation on suspected payment of wages to ghost workers, the

investigator should scan the areas having a bearing on the determination of wages and payments
thereof. He should concentrate on time and job cards, appointment and termination of workers,
attendance records, internal controls, internal checks, and preparation of wage sheets, withdrawal
of money from bank for payment of wages and the actual disbursement of wages.
A conscious effort in investigation programming should be devoted to localise the enquiry into the
relevant areas and, for that purpose, the initial wider base of inquiry should be gradually narrowed
and fixed at a level that is meaningful. Matters not found to have a bearing on the subject matter of
investigation should be gradually and progressively eliminated.
STEP 3: COLLECTION OF EVIDENCE:
1. INQUIRY OF CLIENT: Through examination, the investigator would be gathering relevant

evidence connected with the matters to be investigated. In the course of examination of the
documents and records, the investigator may require to obtain oral explanations from various
personnel of the concerned business.
2. CLIENT AUTHORISATIONS – 3RD PARTIES: In case his client is a person external to the business, it
may be necessary for the investigator to get the matter formally agreed to by the business
through the client.
3. The investigator should look for the most convincing evidence; he should seek and examine all
the available evidence and by a process of elimination and corroboration, should endeavour to
reach at the truth of the matter. The investigating accountant can take help of external experts/
persons like, related parties outside the organization, valuation experts etc. to obtain specific
evidence.
4. Further, the work of investigating accountant should ensure that the process of obtaining
evidence does not interfere with the regular work of client.
EXAMPLE: In the matter of valuation of land, he should definitely have regard to the available
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evidence as per records of the business and records of any bid received for the land. In addition,
he should have regard to the prices at which land was sold or purchased in the neighbourhood
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around the same time. This may require him to obtain evidence even by going to the land
registration office. He may also call for the report of experts in land valuation.
STEP 4: ANALYSIS AND INTERPRETATION OF FINDINGS:
Careful analysis and correlation of facts and figures will be necessary before the investigator can
reach his conclusion. The conclusion should be well reasoned, backed by established facts and
evidenced by proper records/ data. He must analyse the data objectively on the basis of evidence
gathered by him and should not draw conclusions according to pre-conceived notions. While
interpreting the figures, the investigator must keep in mind various factors e.g., the political and
economic considerations, competition faced by the business, historical pattern of the data, nature
of the business, etc. The interpretation should be brief, clear and free from doubts.
STEP 5: REPORTING OF FINDINGS:
Like all other work of an accountant, an investigation results in a report. It is submitted and
addressed to the party at whose instance the investigation has been carried out. The nature of the
report is governed mainly by two factors –
a. The instructions given by the client as regards the special aspects of the business which are
required to be investigated; [AREAS OF INVESTIGATION]
b. The findings of the investigating accountant/ investigator. [FINDINGS]
The important issues to be kept in mind while preparing his report are as follows:
(i) The report should not contain anything which is not relevant.
(ii) Every word or expression used should be properly considered so that the possibility of
arriving at a different meaning or interpretation other than the one intended by the
investigator can be minimized.
(iii) Relevant facts and conclusions should be properly linked with evidence.
(iv) Bases and assumptions made should be explicitly stated. Reasonableness of the bases
and assumptions made should be well examined and care should be taken to see that
none of the bases and assumptions can be considered to be in conflict with the objective
of the investigation.
For example, in an investigation into over-stocking of raw material inventories and
spares etc. it should not be assumed that the ordering levels indicated on bin cards
provide fair guidance about acquisition of further materials. Also, since investigation is a
fact-finding assignment, assumptions should be made only when it is unavoidably
necessary.
(v) The report should clearly spell out the nature and objective of the assignment accepted
its scope and limitations, if any.
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(vi) The report should be made in paragraph form with headings for the paragraphs. Any
detailed data and figures supporting any finding may be given in Annexures.
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(vii) The report should also state restrictions or limitations, if any, imposed on the
instructions given by the client. Preferably the reasons for placing such restrictions and
their impact on the final result should also be stated.
(viii) The opinion of the investigator should appear in the final paragraph of the report.
NOTE:
HIGHER CHANCES OF DIS AGREEMENT: Due to non-availability of standardised procedure and lack
of professional guidance, investigation calls for extreme care, caution and circumspection on the
part of the investigator in exercising his judgement and discretion. Investigation often has a
characteristic of very intimate and direct involvement of parties whose interest may be affected.
Therefore, unlike auditing, chances of one or the other of the parties challenging the finding of the
investigation are far greater.
Q.NO.3 WRITE ABOUT SPECIAL ISSUES IN INVESTIGATION?

ANSWER:
Investigations broadly range between two extremes:
1. those in respect of which complete accounts, documents, records and other information are
available, and
2. on the other, those in respect of which little information, besides published accounts and
statistical data, is available.
Then again, investigation may cover the whole of accounting or may relate to only a part or parts
of accounting as may be specified. Some more issues often arise in investigation. They are stated
below:
A. WHETHER AN INVESTIGATOR IS REQUIRED TO UNDERTAKE A 100% VERIFICATION APPROACH

OR WHETHER HE CAN ADOPT SELECTIVE VERIFICATION:
1. The answer to this question depends on the exact circumstances of the case under
investigation.
a. If the investigator has to establish the amount of cash defalcated by the cashier, he
has probably no option but to carefully examine ALL the cash vouchers and related
records.
b. On the other hand, if he is to arrive at the profitability of a concern, he may verify
constituent transactions on a selective basis taking extreme care to see that no
material transaction that affects profit has remained concealed from his eyes.
2. In investigation, it is always safer to go by statistically recognised sampling methods than to
depend on the so-called “test checks” where circumstances permit selective verification.
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B. WHETHER THE INVESTIGATOR CAN PUT RELIANCE ON THE ALREADY AUDITED STATEMENT OF
ACCOUNT:
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1. Here also no dogmatic views are possible.
2. If the investigation has been launched because of some doubt in the audited statement of
account, no question of reliance on the audited statement of account arises.
3. However, if the investigator has been requested to establish value of a business or a share or
the amount of goodwill payable by an incoming partner, ordinarily the investigator would be
entitled to put reliance on audited materials made available to him unless, in the course of
his test verification, he finds the audit to have been carried on very casually or unless his
terms of appointment clearly require to test everything afresh.
4. It was held in the case of Short & Compton v. Brackert (1904) that an accountant, when
making an investigation for an incoming partner, was entitled to assume that the figures
appearing in the books were correct. In another case, Mead v. Ball Baker & Co. (1911), it
was held that an accountant, when acting as an adviser to a proposed investor in a limited
company, was not expected to check errors in stock sheets and the omission of liabilities.
These cases were decided long time ago. Therefore, much reliance cannot be placed on
them.
5. It is, therefore, desirable for the investigator to ascertain from the client, in advance, in
writing, whether the audited statements of account produced to him should be taken as
correct.
6. If the statements of account produced before the investigator were not audited by a
qualified accountant, then of course there arises a natural duty to get the figures in the
accounts properly checked and verified. However, when the accounts produced to the
investigator have been specially prepared by a professional accountant, who knows or ought
to have known that these were prepared for purposes of the investigation, he could accept
them as correct relying on the principle of liability to third parties settled in the famous
Hedley Byrne’s case.
7. Nevertheless, it would be prudent to see first that such accounts were prepared with
objectivity and that no bias has crept in to give advantage to the person on whose behalf
these were prepared.
C. WHETHER AN INVESTIGATOR NECESSARILY REQUIRES ASSISTANCE OF EXPERT:

Often an investigator may feel the necessity of obtaining views and opinions of experts in
various fields to properly conduct the investigation. It would be therefore, proper for the
investigator to get the written general consent of his client, to refer special matters for views of
different experts at the beginning of investigation and he should settle the question of costs for
obtaining the views and other related implications.
D. INVESTIGATION OUT OF DISPUTES AND CONFLICTING CLAIMS:

1. Cases for investigation sometimes arise out of disputes and conflicting claims. The
investigator should remain above disputes or conflicting claims and be alert to the
possibilities of the information or documents made available to him to be prejudiced.
2. Even the client, openly or indirectly, may try to influence his reports.
3. Example: A seller of a business or controlling shares may request him to see that he gets the
most favourable price. Similarly, if he is appointed by the buyer, he may be requested to
deliberately depress the value.
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4. The investigator should keep him without compromise and being professional and should
keep the interest of all the involved parties in view. This is a challenging task and probably
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no other professional work offers this much of challenge. This work is exciting too and
requires not only the best of skill but of a high degree of maturity and experience.
E. BASIS OF OPINION OF AN INVESTOR:

The investigator should refrain from issuing speculative opinion. He should confine his opinion
to the established facts and nothing more. If the facts, as conveyed through the books, records,
papers and other evidence, are not capable of being properly established, he should not express
an opinion or, if at all he expresses any opinion, he should qualify the opinion by clearly stating
the reasons therefor. This problem may particularly arise in cases where incomplete books and
records are produced for investigation. [Where Significant assumptions are used]
F. WHETHER AN INVESTIGATOR CAN MAKE FUTURISTIC STATEMENTS:

Even if the appointing authority is willing to obtain a futuristic statement, the investigator
should refuse to be futuristic. He may assume that the established trend in the business will
continue in the near future, in the absence of any contrary evidence, in arriving at the present
value of a business. He, however, should not project the trend into any future years to establish
a value.
G. WHETHER TO RETAIN WORKING PAPERS OR NOT:

Another important precaution is that the investigating accountant should retain in his files full
notes of the work carried out, copies of schedules and all working papers, annexures, facts,
figures, record of conversations and the like. Also, the working papers should link up the figures
as shown by the books of business with the final figures produced by the investigating
accountant. Wherever required the investigator should take representation letter from the
appointing authority. In the absence thereof, he would not be able to explain the figures when
he is called upon to give evidence in a court of law to support his figures; for quite often the
conclusions of the accountant are challenged by parties whose interest is adversely affected by
his findings, for example, when the value of shares of a company taken over by the Government
has been determined by him. This will also be of immense help to the investigator in correlating
facts and events and later in drafting the report.
Q.NO.4 WRITE ABOUT SPECIAL ASPECTS IN CONNECTION WITH BUSINESS INVESTIGATIONS?

ANSWER:
We discuss below the factors to be considered by a professional accountant while carrying out the
investigation for attaining satisfactory results:
A. STUDYING THE OVERALL PICTURE:
1. OVERALL PICTURE: In such a business investigation, it is of utmost importance first to have

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an overall picture of the position of the business which is being investigated. This is because
figures are only symbols; and it is impossible to interpret them intelligently without
knowledge of the background in which they have emerged.
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EXAMPLE: For investigating the accounts of a group of companies, it would not be possible
to know the manner in which the profits had emerged in the past unless a chart is prepared,
showing the relationship of different companies comprising the group; whether as
subsidiaries or not, the nature of transactions entered into by one unit in the group with
another or others and the terms on which this has been done.
2. PRODUCT LINES: Further, it is important to know whether the business is engaged in the
manufacture of one or two important lines of products, is principally processing materials or
is concerned only with the sale of a single product.
3. LOCAL OR IMPORTED: Also, whether it is a business which depends for its success on
imported raw materials or supply of parts and components from ancillary businesses or uses
indigenous materials and parts which are manufactured locally.
EXAMPLE: If the business is labour - intensive, its future profitability would be dependent on
availability of skilled labour and relations of the management with the trade unions. Labour
relations thus can affect the future profitability of the business.
4. DISTRIBUTION CHANNEL: The method of distribution of products, either through

wholesalers or retailers also must be examined.
5. POLITICAL AND ECONOMIC FACTORS: Apart from these preliminary enquiries, the
investigating accountant should study:
a. the character of management
b. the economic and political forces to which the business is subject; and
c. the position it enjoys in the market as against its competitors.
6. At times, political or economic factors also may affect the fortunes of a business;
FOR EXAMPLE, labour disturbances, changes in government policies in the matter of levy of
excise and custom duties, imports, etc.
7. It is, therefore necessary that the impact of all these factors should be studied and their
effect on the business judged on a consideration of the profits in the past.
8. For studying the economic and financial position of the business, the following should be
considered:
a. The adequacy or otherwise of fixed and working capital. Are these sufficient for the
growth of the business?
b. What will be the trend of the sales and profits in the future?
c. Whether the profit which the business could be expected to maintain in the future
would yield an adequate return on the capital employed?
d. Whether the business is operating at its 100 percent capacity or improvements can
be made to reach at full productivity?
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B. STATEMENT OF PROFIT AND LOSS:

1. MULTIPLE YEARS DATA: To study the Statement of Profit and Loss of a concern, it is
necessary to consider each item, included therein, in relation to the corresponding items in
the Statement of Profit and Loss of the previous years. It is therefore, necessary that a
summary, in a columnar form, should be prepared of the balances included in the Statement
of Profit and Loss of the business for a period, say of 5 to 7 years.
2. INVENTORY VALUATION: It should also be verified that the inventories have been valued on
a consistent basis throughout the period under review. If there has been a change, the
values of inventories should be adjusted. Further, in the summary, the gross profit ratios and
the ratios showing the relationship between various items of expenses and sales should be
entered. The trend of these ratios should be examined and, if there is a wide variation in
them, an explanation for the same should be sought.
3. In the preparation of the summary attention should also be paid to the following matters:
a. TURNOVER – PRODUCT WISE: The figures of sales should be broken down between
the various products sold to show variations in turnover of individual products from
year to year. In this way, it would be possible to find out the products the sales of
which have been increasing and those the sales of which have been falling.
[SEGMENT WISE]
b. EXPENSES – PRODUCT WISE: If the business consists of activities which are dissimilar
in operation, like manufacturing and agency, then apart from splitting the income
between the two sources, expenses should also be apportioned between them to
separately arrive at the figures of profit from each of the activities.
c. KEY CUSTOMER ANALYSIS: By reference to the list of customers, in the Order Books,
it should be ascertained whether the business has a very large turnover with a few
customers or a small turnover with several customers.
d. FICTICIOUS SALES: The Order Books should also be examined to find out if fictitious
sales have been entered in any year to boost up profits. If so, the figures of sales of
the year or years should be adjusted.
e. WAGE STRUCTURE: The method of computing wages and the rates of wages should
be examined. On occasions a business may have to pay higher wages than those
prevailing in other business in the same neighbourhood in pursuance of an industrial
award. Another factor which is important to consider in this connection is the
relationship of the business with its workers/ labour unions.
A business which has suffered several industrial disputes, strikes, etc. and has had its
working interrupted by them frequently cannot be expected to prosper.
f. DEPRECIATION AND MAINTENANCE: The charge on account of depreciation and

466
maintenance of machinery and other assets included in the accounts of different

years should be compared to verify that depreciation has been provided from year to
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year on a consistent basis and that it is adequate. Also, the necessary adjustment in
the depreciation charge should be made if it is the practice of the company to write
off the assets on a renewal basis.
g. REVALUATION: Further, if assets have been revalued, it should be confirmed that

depreciation on the increased valuation has been adjusted. Generally, with age, the
cost of maintenance of assets should increase. If it has not, the reason thereof should
be ascertained.
h. LEASES: In case of leasehold property, it should be ascertained whether an adequate

provision has been made for the dilapidation charge which may be payable at the end
of the lease. Further, compliance of relevant AS should also be verified.
i. MANAGERIAL REMUNERATION - It should be verified that the remuneration payable

to various members of managerial personnel is not excessive in relation to the
profits of the business after taking into account the time devoted by each of them.
Further, in case of company, requirement of relevant section of Companies Act,
2013 is to be seen. It has to be assured that calculation of profit for arriving at the
remuneration is correct.
j. EXCEPTIONAL AND NON-RECURRING ITEMS: It is customary to adjust exceptional

items in the summary of Statement of Profit and Loss in order that they may not
obscure the trend of the profits. In the matter of non-recurring items, it is necessary
to remember that adjustments are to be made in respect of exceptional items which
do not recur from year to year or can be considered exceptional having regard to
their materiality or periodicity.
k. INCOME TAX DISPUTES: In this connection, it is worthwhile to examine the income

tax assessment orders of the business to find out the items which have been treated
as revenue but have been considered inadmissible by the taxing authority. Where the
effect of these has been abnormal on the tax paid by the company from year to year,
suitable adjustments should be made in the figures of taxes paid, as well as in the
asset’s amounts.
l. REPAIRS AND MAINTENANCE: It is one of the recurring expenses of a business.

Occasionally it is noticed that this expenditure is unduly heavy in some of the years,
while quite low in some others. Generally, companies, as a matter of routine
undertake major repairs, overhauls and maintenance programme at an interval of 3
or 4 years while running repairs and maintenance continue in the usual manner
which gives rise to fluctuating charges in the accounts.
m. CAPITAL AND REVENUE: Besides, due to wrong allocation of expenses between

capital and revenue, repair charges may appear to be heavy or low. If fluctuating and
abnormal charges for repairs is noticed, it would be the duty of the investigating
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accountant to scrutinise this head thoroughly to establish correct and normal charge
for repairs.
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n. UNUSUAL YEAR: A company’s record of profitability may show a trend of increasing
or decreasing profit or loss or it may be highly erratic and fluctuating. Where a
definite trend is discernible, the job of the investigating accountant is somewhat
simplified. He can adopt recent years’ record of profitability as the basis for
estimating future maintainable profit having regard to the inflationary state in the
economy. But if the same is fluctuating, there would be more demand on judgement
of the accountant in selecting the period to be covered for estimation of profitability.
In such cases it may even be necessary to take into consideration results of past 9 to
10 years with a view to iron out the fluctuation.
C. BALANCE SHEET:
a. FIXED ASSETS: Fixed assets, usually, are shown in accounts at cost less depreciation but
the accounts do not show the ages of different assets. It is desirable, therefore, to obtain
age analysis of various items of fixed assets. Assets which are old or are obsolete would
naturally have to be replaced. It should be seen that their values are not in excess of the
value of service that they could be expected to render to the business during the balance
period of their active life and the amount they would fetch on sale as scrap. Title deeds
should be verified to ascertain the extent of enterprise’s ownership in such assets, like
land and building jointly owned by two or more companies or their subsidiaries.
Further, investigator has to assure whether assets whose recoverable amount is less than
carrying amount are impaired and requirement of AS 28, “Impairment of Asset”, has
been complied.
b. INVESTMENTS: Investments should be broadly classified into long term investments and
current investments. A current investment is by its nature readily realisable and is
intended to be held for not more than one year. All other investments are long term
investments. Current investments are valued on the basis of lower of cost and fair value
determined either on an individual investment basis or by category of investment but not
on an overall basis. Long-term investments are usually carried at cost. However, when
there is a permanent decline in the value of long-term investments, the carrying amount
should be reduced to recognise the decline. The carrying amount of long-term
investments is determined on an individual investment basis. Interest, dividends and
rentals receivable in connection with investment are generally regarded as income.
However, in some cases, such receipts represent recovery of cost and should therefore
be reduced from, the cost of investment (e.g., dividend out of pre-acquisition profits).
c. INVENTORIES: It should be seen that inventories have been valued consistently and that
the basis of valuation was such that the value placed on inventories did not include any
element of profit. Also, there should be due allowance for damaged, obsolete and slow-
moving inventories. In some cases, physical verification of inventories is necessary where
the inventories belonging to the entity are held by other parties. Examine the
appropriateness of valuation of work in progress as disclosed in the books.
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d. TRADE RECEIVABLES - In assessing their value, the following should be taken into
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account:
i. Whether provision for bad debts have been made in the years in which the
relevant sales took place instead of in the year in which they have been written
off, except when debts have had to be written off on account of a slump or a fall
in international prices, during a period subsequent to the period in which sales
had taken place.
ii. The length of the credit period allowed or any excessive discounts allowed
throughout the period under investigation, to determine whether it has been
necessary to increase continually the credit period in order to affect the sales. If it
has been so, it would indicate that the demand for the goods manufactured by
the concern in the market has been diminishing gradually.
iii. Debts should be classified according to their age. This would disclose the
character of the parties with whom the company trades and the amount of
working capital that will be necessarily blocked on this account in the course of
business. Determine Debtors to Sales Ratio.
e. OTHER LIQUID ASSETS: It should be ascertained that the assets so described are readily
realisable.
f. IDLE ASSETS: On a scrutiny, it may appear that certain assets are remaining idle and are
not being properly applied in the business. These may come from all sections of assets.
For example, certain plant and machinery may have been put to use after a
considerable period of time after acquisition. Some of the fixed assets may be awaiting
installation even at the valuation time. The company may hold large cash and bank
balances, not warranted by the need of the business. It would be the duty of the
investigating accountant to eliminate these idle assets, if any, after proper identification
from the net worth of the business. However, proper value of these assets may be
separately added to the value of the business.
g. LIABILITIES: The important matter to investigate in this regard is whether those are
stated fully or understated or overstated. In other words, whether the profits of the
business have been inflated by suppression of liabilities or there are any free reserves
included in the liabilities. In either case, an adjustment would be necessary. Secondly, it
should be ascertained that liabilities are not unduly large or are not outstanding for a
long time, in such cases, it would be necessary to pay off some of them which would
cause a drain on the liquid resources of the concern. The fact should be stated in the
report.
h. TAXATION: Orders in respect of assessments completed should be studied and it should

be verified that an adequate provision has been made in respect of liabilities for taxes
which have not been assessed. Also, it should be seen that in the past there has been no
reopening of assessments. If so, the company may be liable for an undisclosed sum of
taxes plus penalties. Any temporary tax benefit should also be disregarded.
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CCAPITAL: In this regard, it is necessary to ascertain:

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Whether the capital is well balanced. This would not be the case if the number of
debentures and preference share capital are disproportionately large as compared to the
equity capital. Low equity capital would handicap the company in raising further equity
capital, on favourable terms for financing the business or to pay off capital commitment.
Further, when the capital is highly geared, it would affect the value of the equity capital;
That the amount of capital is reasonable compared to the value of fixed assets and the
amount of working capital required. The terms associated with the issue of the capital
should also be studied; restriction on transferability of shares usually depresses the value
of share and of the business.
D. INTERPRETATION OF FIGURES:
a. FIXED ASSETS: The amount of capital expenditure which would be necessary in the
future for the continuation of the business, in its existing stage, should be assessed
having regard to the under-mentioned factors:
1. The amount required for the replacement of assets when these would become worn
out or obsolete;
2. The expenditure which will be necessary to replace obsolete machinery by more
sophisticated machinery for manufacturing different types of goods for which there is
demand.
b. TURNOVER: In assessing the turnover which the business would be able to maintain in
the future, the following factors should be taken into account:
1. Trend: Whether in the past sales have been increasing consistently or they have been
fluctuating.
2. Marketability: Is it possible to extend the sales into new markets or that these have
been fully exploited? Product wise estimation should be made.
3. Political and economic considerations: Are the policies pursued by the Government
likely to promote the extension of the market for goods to other countries? Whether
the sales in the home market are likely to increase or decrease as a result of various
emerging economic trends?
4. Competition: What is the likely effect on the business if other manufacturers enter
the same field or if products which would sell in competition are placed on the
market at cheaper price? Is the demand for competing products increasing? Is the
company’s share in the total trade constant or has it been fluctuating?
c. WORKING CAPITAL: In making assessment of the working capital requirements in the

future, the following matters should be taken into account:
1. Has the ratio of inventory to turnover been increasing and if so, is it a continuing or
only a temporary trend?
2. Are the trade payables being paid promptly or is there a backlog which will have to be
dealt with?
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3. What will be the effect on inventory, trade receivables and trade payables, if the
turnover is increased or if new products are introduced?
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d. ESTIMATING FUTURE MAINTAINABLE PROFITS: Fluctuations in profits during the years
under review should be examined after adjusting the profits for extraneous factors, if
any, that had given rise to fluctuations to determine whether the factors responsible for
the fluctuations were temporary or was likely to recur in future. A statement should be
prepared showing separately the profits after depreciation earned in each of the years
during the period under review, after making adjustments therein, if considered
necessary, as regards factors which have been responsible for any extraordinary increase
in profits. If the percentage of profits before taxation to capital has been stable or has
been increasing, it would indicate that the business would continue to earn the same
rate of profit as it has done in the past. If, on the other hand, the percentage has been
falling, and there is no evidence that the factors responsible therefore have ceased to
operate, investment of further capital in the business would not be commercially
advisable.
Q.NO.5 WHAT ARE THE DIFFERENT TYPES OF INVESTIGATION THAT A CHARTERED ACCOUNTANT
IS USUALLY CALLED UPON TO CARRY OUT?
ANSWER:
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Q.NO.6 WRITE ABOUT INVESTIGATION INTO AFFAIRS OF THE COMPANY UNDER COMPANIES ACT
2013?
ANSWER:
This may further be divided into three parts:
1. Investigation into the affairs of a company by inspector through an order of the Central
Government as envisaged under Section 210.
2. Investigation into the affairs of a company by Serious Fraud Investigation Office as
prescribed under Section 212.
3. Investigation into the affairs of a company in other cases as provided under Section 213.
A. INVESTIGATION INTO THE AFFAIRS OF A COMPANY AS ENVISAGED UNDER SECTION 210:
WHEN: Where the Central Government is of the opinion, that it is necessary to investigate into
the affairs of a company-
1. On the receipt of a report of the Registrar or inspector;
2. On intimation of a special resolution passed by a company that the affairs of the company
ought to be investigated; or
3. In public interest,
It may order an investigation into the affairs of the company.
NOTE: Further, where an order is passed by a court; or the Tribunal requiring investigation, the
Central Government shall order an investigation into the affairs of that company.
WHO: The Central Government would appoint one or more persons as inspectors to investigate
into the affairs of the company and to report thereon in such manner as the Central
Government may direct.
B. INVESTIGATION INTO THE AFFAIRS OF A COMPANY BY SERIOUS FRAUD INVESTIGATION

OFFICE [SFIO] UNDER SECTION 212:
WHO: The Central Government may, by an order, assign the investigation, into the affairs of the
company, to the Serious Fraud Investigation Office, when it considers necessary to investigate
into the affairs of the company:
1. on receipt of a report of the Registrar or inspector; or
2. on intimation of a special resolution passed by a company; or
3. in public interest; or
4. on request from the Department of the Central Government, or a State Government.
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NOTE: Where the Central Government assign any case to the Serious Fraud Investigation
Office for investigation under this Act, NO other investigating agency of Central
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Government or any State Government shall proceed with investigation in such case.
REPORT BY SFIO:
1. The SFIO shall follow the manner and procedure as provided and submit its report to the
Central Government. The Central Government may also direct to submit an interim report.
2. Where the report states that fraud has taken place in a company and due to such fraud any
director, key managerial personnel, other officer of the company or any other person or
entity, has taken undue advantage or benefit, whether in the form of any asset, property or
cash or in any other manner, the Central Government may file an application before the
Tribunal for appropriate orders with regard to disgorgement of such asset, property or cash
and also for holding such director, key managerial personnel, other officer or any other
person liable personally without any limitation of liability.
C. INVESTIGATION INTO THE AFFAIRS OF A COMPANY IN OTHER CASES AS PROVIDED UNDER

SECTION 213:
WHO: The Tribunal may order investigation into affairs of the company:
1. on an application received by specified number of members and supported by such

evidence or
2. on an application made to it by any other person or otherwise,
WHEN: If it is satisfied that there are circumstances like:
1. the business of the company is being conducted with intent to defraud its creditors, or
2. that the company was formed for any fraudulent or unlawful purpose, or
3. the members of the company have not been given all the information with respect to its
affairs, which they might reasonably expect, etc.
The investigation may be ordered, after giving a reasonable opportunity of being heard to the
parties concerned.
INVESTIGATION PROVED: It may be noted that if after investigation it is proved that The business
of the company is being conducted with intent to defraud its creditors, members or any other
persons or otherwise for a fraudulent or unlawful purpose, or that the company was formed for any
fraudulent or unlawful purpose; or Any person concerned in the formation of the company or the
management of its affairs have in connection therewith been guilty of fraud, misfeasance or other
misconduct, then, every officer of the company who is in default and the person or persons
concerned in the formation of the company or the management of its affairs SHALL BE PUNISHABLE
FOR FRAUD.
WHO CAN BE APPOINTED AS AN INSPECTOR: A firm, body corporate or other association cannot be
appointed as an inspector. Thus, a firm of professional accountant cannot be appointed as inspector
but an individual accountant can be so appointed. [ONLY INDIVIDUALS CAN BE ACTED AS
INVESTIGATORS]
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POWER OF INSPECTOR TO CONDUCT INVESTIGATION [SECTION 219]:

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An inspector appointed under section 210 or section 212 or section 213 to investigate into the
affairs of a company may also investigate, subject to approval of the Central Government, into the
affairs of—
1. Any other body corporate which is, or has at any relevant time been the company’s
subsidiary company or holding company, or a subsidiary company of its holding
company; [I.e., Related party companies]
2. Any other body corporate which is, or has at any relevant time been managed by any
person as managing director or as manager, who is, or was, at the relevant time, the
managing director or the manager of the company; [Entities with common
Management]
3. Any other body corporate whose Board of Directors comprises nominees of the company
or is accustomed to act in accordance with the directions or instructions of the company
or any of its directors; or
4. Any person who is or has at any relevant time been the company’s managing director or
manager or employee.
It may be noted that he shall, subject to the prior approval of the Central Government,
investigate into and REPORT ON the affairs of the other body corporate or of the managing
director or manager, in so far as he considers that the results of his investigation are relevant
to the investigation of the affairs of the company for which he is appointed.
OBJECTIVE OF INVESTIGATION:
1. The objective of these investigations, fundamentally, is to determine whether any

provision of the Act has been violated or there has been a breach of duty on the part of
a director or an officer of the company resulting in a loss to shareholders or a class of
them.
2. It has been held in the case Narayanlal Bansilal v. Maneck Phiroze Mistry and another
that an investigation into the affairs of a company under the Companies Act was not a
criminal proceeding. It was also held that the report of the inspector is just an expression
of his opinion in the manner in which affairs of the company was conducted.
3. The term “affairs of a company” was considered in R.V. Board of Trade Ex. parte St.
Martin Preserving Company Ltd. It was held that it can cover investigations into all
aspects of its business; its assets including goodwill, profits and losses, contracts and
transactions, investments and rather property interests and control of subsidiary
companies and transactions of a receiver and manager of a company.
PROCEDURE, POWERS ETC. OF INSPECTORS [Section 217]:
The procedures, powers of the Inspectors as follows:
1. Duty of officers and employees of the company towards inspector: It shall be the duty of all
officers and other employees and agents including the former officers, employees and agents of
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a company which is under investigation in accordance with the provisions, and where the affairs
of any other body corporate or a person are investigated under section 219, of all officers and
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other employees and agents including former officers, employees and agents of such body
corporate or a person:
a. to preserve and to produce to an inspector or any person authorised by him in this behalf all
books and papers of, or relating to, the company or, as the case may be, relating to the other
body corporate or the person, which are in their custody or power; and
b. otherwise, to give to the inspector all assistance in connection with the investigation which
they are reasonably able to give.
2. Inspector may ask information from any body corporate: The inspector may require any body
corporate, other than a body corporate referred to in point (1), to furnish such information to,
or produce such books and papers before him or any person authorised by him in this behalf as
he may consider necessary, If the furnishing of such information or the production of such books
and papers is relevant or necessary for the purpose of his investigation.
3. Not to keep Books and Papers in custody for more than 180 days: The inspector shall not keep
in his custody any books and papers produced under sub-section (1) or sub-section (2), for more
than 180 days and return the same to the company, body corporate, firm or individual by whom,
or on whose behalf the books and papers were produced. The inspector may call the books and
papers again, if needed, for a further period of 180 days by an order in writing.
4. Examine on oath: The inspector may examine on oath any of the persons referred in (1) above;
and with the prior approval of the Central Government, any other person in relation to the
affairs of the company, or other body corporate or person, as the case may be and for that
purpose, may require any of the persons to appear before him personally.
5. Inspector to possess all the Powers of Civil Court: The inspector, being an officer of the Central
Government, making an investigation shall have all the powers as are vested in a civil court
under the Code of Civil Procedure, while trying a suit in respect of specified matters.
6. Assistance by Officers of Government to Inspector: The officers of the Central Government,

State Government, police or statutory authority shall provide necessary assistance to the
inspector for the purpose of inspection, investigation etc.
7. Evidence from place outside India: If in the course of an investigation into the affairs of the
company, an application is made to the competent court in India by the inspector stating that
evidence may be available in a country or place outside India, such court may issue a letter of
request to a court or an authority in such country or place for seeking such evidence.
8. Punishment for non-compliance of order of Inspector: If any director or officer disobeys the
direction issued by the inspector, or any officer fails without any reasonable cause or refuses to
furnish any information or, appear before the inspector personally; the director or the officer
shall be punishable with imprisonment and with fine.
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INSPECTOR’S REPORT [Section 223]:

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1. An inspector shall, if so, directed by the Central Government, submit interim reports to that
Government, and on the conclusion of the investigation, shall submit a final report to the
Central Government.
2. Every report made shall be in writing or printed as directed by the Central Government.
3. A copy of the report may be obtained by members, creditors or any other person whose
interest is likely to be affected by making an application to the Central Government.
4. The report of any inspector shall be authenticated either by the seal of the company whose
affairs have been investigated, or by a certificate of a public officer having custody of the
report, and such report shall be admissible in any legal proceeding as evidence in relation
to any matter contained in the report.
NOTE: Section 224 of the Companies Act, 2013, deal with follow-up of the inspector’s report and
gives power to the central government to launch prosecution; apply for winding up of the
company etc.
GENERAL APPROACH FOR INVESTIGATION:
1. The general approach for investigation under Sections 210, 212 and 213 of the Companies Act,
2013 is conditioned by the legal requirements in these regards. From the foregoing
requirements of law, it is apparent that investigations under these requirements may
encompass a wide field.
2. The affairs of the company may include everything such as goodwill, profit and loss, contracts,
investments, assets, shareholding in subsidiaries, decision making, etc. Also, the specific
circumstances mentioned in these sections like fraud, mismanagement, oppression of minority
shareholder etc. come within the term “affairs of the company.”
3. Investigation under Sections 210 and 213 do not call for any special approach.
4. Approach/Steps for pursuing the investigation are:
a. Clarity of Terms of Reference:

The approach to any investigation is determined on a consideration of the nature of the
investigation and the terms of reference. However, the inspector should ensure that the
terms of reference are clear, unambiguous and in writing. If he has any doubt about any
item in the terms, he should obtain clarification in writing. It should also be, seen that the
terms of reference are not too general, because that may frustrate the whole objective of
the investigation; the scope of the investigation will become purposeless and ill defined. An
investigation order to investigate into the affairs of the company would be an instance at
point. Therefore, the inspector should ask for reframing of the order specifying the exact
matters to be investigated. He should also take into consideration the possible effect of
limitations, if any, put in the terms of reference and should keep the Central Government
informed in writing about their effect on the investigation.
b. Scope of Investigation: The next point for consideration of the inspector would be the
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determination of the scope of the investigation on the basis of the terms of reference. At this
stage, it may be useful for the inspector to go into the history of the company and its
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affiliates or associates. He should evaluate the terms of reference in sketching the scope of
investigation; this will enable him to locate the limitation, if any, in the terms of reference,
not clearly mentioned. For a purposeful investigation, he may need to stretch his inquiry
into the books and records of allied and associated persons and concerns and may require
to arm himself with the powers given under the Companies Act.
c. Period for investigation: He should also have regard to the period over which the
investigation can stretch. The evaluation of terms of reference and the consequential
determination of the scope of investigation are the twin props on which the entire
investigation would rest and, therefore, the inspector appointed under Sections 210 and 213
should devote careful attention to these.
d. Framing of Programme: The next step is the investigator/inspector should frame his
programme for investigation in a systematic manner. He should keep adequate working
notes and papers with references and cross references in a proper and methodical way to
aid him in the preparation of the report. The actual process of investigation would be
essentially an evidence gathering procedure and, at every step, he should have regard to
the procedures laid down in these sections regarding production of documents and
evidence, examination on oath and seizure of documents. He should also keep his mind open
to the revelations he comes across in the process of evidence collection and should assess
whether the programme of investigation needs amendment or modification.
e. Using the work of Experts: He should also consider whether assistance of other experts like
engineers, lawyers, etc., is necessary in the interest of a comprehensive and full proof
examination of the documents and information.
f. Legal requirements and investigation Report: Only after he has completed the steps in the
investigation programme and has obtained and concluded all the information that he
needed should he prepare his report. He, however, can also make interim report wherever
required, as provided under Section 223 of the Companies Act. The findings should be
completed and exhaustive.
Before he makes his final report, he should obtain and keep on record the evidences relied
upon by him. By the nature of things, such evidence should be as conclusive as possible
depending on circumstances of the case. He should make his report in accordance with the
provisions of the section 223 of the Companies Act, 2013. He should ensure that the report
prepared by him is fair and unbiased.
g. The general approach for investigations under Sections 210 and 213 should, therefore, be
formulated having regard to the terms of reference, scope, the period, the programme and
procedure of the investigation and the attending legal requirements specified above.
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Q.NO.7 WRITE ABOUT INVESTIGATION OF OWNERSHIP OF THE COMPANY [SEC. 216]?

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ANSWER:
WHEN:
According to Section 216 of the Companies Act, 2013, where it appears to the Central Government
that there is a reason so to do, it may appoint one or more inspectors to investigate and report on
matters relating to the company, and its membership for the purpose of determining the true
persons,
a. who are or have been financially interested in the success or failure, whether real or
apparent, of the company; or
b. who are or have been able to control or to materially influence the policy of the company; or
c. who have or had beneficial interest in shares of a company or who are or have been
beneficial owners or significant beneficial owner of a company.
In case, if the Tribunal, in the course of any proceeding before it, directs by an order that the affairs
of the company ought to be investigated as regards the membership of the company and other
matters relating to the company discussed above, the Central Government shall appoint one or
more inspectors.
SCOPE AND EXTENT OF INVESTIGATION:
1. While appointing an inspector, the Central Government may define the scope of the
investigation as respects the matters or the period to which it is to extend. It may limit the
investigation to matters connected with particular shares or debentures. Powers of inspectors
shall extend to the investigation of any circumstances suggesting the existence of any
arrangement or understanding.
2. When a chartered accountant is appointed to carry out an investigation under any of the
aforementioned provisions, the extent of enquiry, the objective of the investigation and the
various matters referred to for investigation are specified in the order of investigation issued by
the appointing authority.
3. On a consideration thereof, the investigating accountant should determine the areas of accounts
which require investigation and the extent to which the enquiry is to be made as well as his
general approach to the enquiry.
EXAMPLE: In case, if the allegation is that certain transactions have been entered into in
contravention of the provisions of the Companies Act, the nature of transactions, the persons
who were parties thereto, the amount or amounts involved and the circumstances under
which these were entered into must be examined. If the contravention was deliberate and
willful and was made with some ulterior motive, it would attract greater penalty as
compared to the one which was inadvertent. The enquiry therefore should show the motive,
if any, of the contravention. If the loss suffered by the company has given rise to a gain by
director and other managerial personnel or its associates, the manner in which the benefit
has accrued and the amount thereof shall have to be investigated.
4. In case of a company having subsidiaries or where one or more directors are interested in one or
more concerns, all the dealings with these concerns should be examined for these may have
478
been entered into with the intention of transferring profit. Generally, all sales and purchases of
goods and assets from directors and their associated concerns should be scrutinized since these
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also can be a vehicle of illicit transferring of profits.

5. Any breach of duty or abdication of responsibility for purposes of investigation would be
material only if it has resulted in a loss to the company. In such a case, the factors responsible
for the loss or losses, besides the amount thereof, shall have to be investigated.
6. Negligence would be blameable only if it was in relation to a duty cast by the Act, Articles of
Association or by a resolution of the shareholders or that of the Board of Directors.
7. Any negligence in the discharge of duty of a director or any other managerial personnel must be
construed very broadly, for apart from being the agents of the company, they are trustees of its
property. As such, it is their duty to safeguard the property of the company and protect the
interest of the shareholders. It must be remembered, however, that it is not the duty of a
director to attend to the business of a company continuously and, therefore, so long as the
decisions of the Board at which the director was present were taken on a proper consideration
of the evidence available and in the best interest of the company, he would not be responsible
for any losses suffered by the company.
8. It may be necessary for an investigator to interrogate directors, officers, agents, and others
concerned with matters under his enquiry. Before drawing up his brief in this regard as well as
for framing his conclusions, he should, if necessary, take legal assistance.
9. If the Investigating accountant is required to report on the efficiency of the management, he

should be very careful in expressing his opinion. Usually, it is sufficient if he merely indicates the
general limitations of the management. The inspector must ensure that the persons who figure
in the investigation get the fullest opportunity to explain their action and conduct. However, the
inspector cannot hold out any assurance to anybody except the assurance of fairness is
required in the job.
Q.NO.8 WRITE ABOUT INVESTIGATION ON BEHALF OF INCOMING PARTNER?

ANSWER:
The general approach of the investigating accountant in this type of investigation would be more or
less similar, irrespective of the nature of business of the firm-manufacturing, trading or rendering a
service.
Primarily, an incoming partner would be interested to know whether the terms offered to him are
reasonable having regard to the nature of the business, profit records, capital contribution, personal
capability of the existing partners, socio-economic setting, etc., and whether he would be capable of
deriving continuing benefit by the way of return on capital to be contributed and remuneration for
services to be rendered, which can be justified by the overall economic conditions prevailing and
479
other considerations considering his own personality and achievements.

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In addition, he would be interested to ascertain whether the capital to be contributed by him would
be safe and applied usefully.
Broadly, the steps involved are the following:
1. HISTORY: Ascertainment of the history of the inception and growth of the firm.
2. DEED: Study of the provisions of the deed of partnership, particularly for composition of
partners, their capital contribution, drawing rights, retirement benefits, job allocation, financial
management, goodwill, etc.
3. PROFITABILITY: Scrutiny of the record of profitability of the firm’s business over a suitable
number of years, with usual adjustments that are necessary in ascertaining the true record of
business profits. Particular attention should, however, be paid to the nature of partners’
remuneration, which may be excessive or inadequate in relation to the nature and profitability
of the business, qualification and expertise of the partners and such other factors as may be
relevant.
4. ASSETS AND LIABILITIES: Examination of the asset and liability position to determine the
tangible asset backing for the partner’s investment, appraisal of the value of intangibles like
goodwill, know how, patents, etc. impending liabilities including contingent liabilities and those
pending for tax assessment. In case of firms rendering services, the question of tangible asset
backing usually is not important, provided the firm’s profit record, business coverage and
standing of the partners are of the acceptable order.
5. CUSTOMERS AND CLIENTS: Position of orders at hand and the range and quality of clients
should be thoroughly examined, which the firm is presently operating.
6. LOANS AND ADVANCES: Position and terms of loan finance would call for careful scrutiny to
assess its usefulness and implication for the overall financial position; reason for its absence or
negative impact should be studied.
7. COMPOSITION OF EMPLOYEES: It would be interesting to study the composition and quality of

key personnel employed by the firm and any likelihood of their leaving the organisation in the
near future.
8. LEGAL OBLIGATIONS: Various important contractual and legal obligations should be ascertained
and their nature studied. It may be the case that the firm has standing agreement with the
employees as regards salary and wages, bonus, gratuity and other incidental benefits. Full
impact of such standing agreements would be gauged before a final decision is reached.
9. REASONS FOR NEW ADMISSION OF PARTNER: Reasons for the offer of admission to a new
partner should be ascertained and it should be determined whether the same synchronises with
the retirement of any senior partner whose association may have had considerable bearing on
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the firm’s success.

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10. RETURN ON CAPITAL: Appraisal of the record of capital employed and the rate of return. It is
necessary to have a comparison with alternative business avenues for investments and
evaluation of possible results on a changed capital and organisation structure, if any, envisaged
along with the admission of the partner.
11. FIRMS SPECIALISATION: It would be useful to have a first-hand knowledge about the
specialisation, if any, attained by the firm in any of its activities.
12. GOODWILL COMPUTATION: Manner of computation of goodwill on admission as also on

retirement, if any, should be ascertained.
It would always be worthwhile to remember that, in a partnership, personal considerations count

predominantly over other considerations and assessment of standing of the firm, standing and
reliability of other partners, their personal reputation and the goodwill enjoyed by the
products/services of the firm are important.
On the basis of the broad frame of considerations as given above, the investigating accountant
should devise his own considerations in each case which may be quite diverse.
Q.NO.9 WRITE ABOUT INVESTIGATION FOR VALUATION OF SHARES IN A PRIVATE COMPANY?

ANSWER:
The necessity for valuation of shares of a private company arises, for under the Companies Act, a
private company must restrict the transfer of its shares. In consequence, the shares of a private
company do not have a free market in which their prices could be determined by interaction of the
forces of supply and demand.
EQUITY SHARES: There are two main methods of valuation.
First Method, value is determined on the basis of net worth of the company. The amount of net
worth is divided by the number of shares comprising the equity capital to arrive at the value for one
share. When this method is followed, goodwill of the business, and non-trading assets (like
investments) based on the estimated future maintainable profit, is included among the assets to
arrive at the amount of net worth.
Second method, the average profit earned by the business during the preceding 5 to 7 years is
computed. Afterwards, on the assumption that the same would continue to be earned in the future,
the value of business is calculated by capitalising it at a reasonable rate of interest. If the rate
assumed is high, the value of the business would be smaller. Correspondingly, it would be high if the
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rate of interest applied is low.

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The rate of return that an investor expects to earn in a business of the type in which the company is
engaged, is ascertained from the prices of the shares of companies engaged in a similar business
quoted on the stock exchange.
PREFERENCE SHARES: The value of preference shares is estimated on the basis of the yield on
preference shares of companies engaged in a similar trade or industry after making allowance for
factors like restriction on transferability, average rate of earnings as compared to the rate of
dividend, etc.
SPECIAL FEATURES:
Net worth basis:
Each asset should be revalued on taking into account its utility to the business as a going concern.
The value of different assets, on a revaluation, may be either more or less in comparison to their
book values.
The assets should be revalued at their replacement cost i.e., the cost of similar assets at the
prevailing market price, reduced by the amount of depreciation which they would have suffered, if
they were in use during the period that the corresponding assets have been in use. But the cost
adopted, in cash, should be the cost of the assets as were originally purchased or that of their
substitutes considered more suitable in the circumstances of the case.
The value of goodwill of a business is primarily dependent on its capacity to earn super-profit and
the period over which these are expected to arise. The super profits that the business would earn in
the future are estimated on the basis of profits earned in the past. This is usually a difficult matter
since, for the purpose, it is necessary to analyse the trend of economic, social and political forces
which have an impact on the profitability of the business.
EXAMPLE: The installed capacity must be viewed against future national requirements on taking
into account the government’s licensing policy. Again, government policies like controls over selling
price or advantages of marketing through its own organisations will have to be considered since any
change therein might seriously affect the profit structure. Therefore, to determine the impact of
these factors, the accountant must have knowledge of the company’s working and experience of
the business in general.
Yield basis:
The value of shares on yield basis is arrived at on the basis of present value of the right to receive
dividends in the future. Since dividends can be paid only out of profits, in this case also, it is
necessary to determine the amounts of profits which the company would be earning in future as
well as the amounts thereof which would be distributed as dividend from year to year. In short, it is
an exercise of projecting the trend of profits and predicting the policy that the company might
follow in the matter of declaration of dividends.
482
The rate at which the amount of dividends should be capitalised is decided on taking into account
the risk that shareholders are taking in the matter of declaration of dividends being continued in
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future, assessed in the background of past history of the company, the amount of reserves the
company possesses, both secret and those disclosed in its books, future prospects of the line of
manufacture or trade in which the company is engaged and the impact of various social and political
factors that are likely to emerge on the company’s profitability.
NOTE: In any valuation of shares, with the transfer of shares control is also to pass, a separate
value should be ascertained for the control and added to the value.
Q.NO.10 WRITE ABOUT INVESTIGATION ON BEHALF OF A BANK/ FINANCIAL INSTITUTION

PROPOSING TO ADVANCE LOAN TO A COMPANY?
ANSWER:
A bank is primarily interested in knowing the purpose for which a loan is required, the sources from
which it would be repaid and the security that would be available to it, if the borrower fails to pay
back the loan.
On these considerations, the investigating accountant, in the course of his enquiry, should attempt
to collect information on the under-mentioned points:
PURPOSE OF LOAN: The purpose for which the loan is required and the manner in which the
borrower proposes to invest the amount of the loan.
PROJECTIONS: The schedule of repayment of loan submitted by the borrower, particularly the
assumptions made therein as regards amounts of profits that will be earned in cash and the amount
of cash that would be available for the repayment of loan to confirm that they are reasonable and
valid in the circumstances of the case. Institutional lenders now-a-days rely more, for repayment of
loans, on the annual profits and loss, and on the values of assets mortgaged to them.
CREDIBILITY: The financial standing and reputation for business integrity enjoyed by directors and
officers of the company.
AUTHORISATION UNDER BYELAWS: Whether the company is authorised by the Memorandum or

the Articles of Association to borrow money for the purpose for which the loan will be used.
HISTORY: The history of growth and development of the company and its performance during the
past 5 years.
ECONOMIC POSITION: How the economic position of the company would be affected by economic,
political and social changes that are likely to take place during the period of loan.
PREVIOUS LOAN APPLICATIONS: Whether any loan application to any other Bank or Financial
Institution was made, and if so, the reasons for rejection thereof.
Such other factors as the investigating accounts may determine necessary in the context of the
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proposed borrower.
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Q.NO.11 WRITE ABOUT INVESTIGATING FRAUD IN THE CONTEXT OF SA 240?
ANSWER:
In the Companies Act, 2013 meaning of fraud has been considered in two specific sections viz.
Section 143(10), where the SAs specified by the ICAI are deemed to be the auditing standards for
purposes of the Act, which, inter alia, define fraud, and in Section 447, where punishment for fraud
has been prescribed.
Fraud has been defined in paragraph 11(a) of SA 240, “The Auditor’s responsibilities Relating to
Fraud in an Audit of Financial Statements” as ‘an intentional act by one or more individuals among
management, those charged with governance, employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage.’
In the context of stating the provisions for punishment for fraud, Section 447 of the Act has
explained the term ‘fraud’ as “fraud in relation to affairs of a company or any body corporate,
includes any act, omission, concealment of fact or abuse of position committed by any person or
any other person with the connivance in any manner, with intent to deceive, to gain undue
advantage from, or to injure the interests of, the company or its shareholders or its creditors or any
other person, whether or not there is any wrongful gain or wrongful loss.”
TYPES OF FRAUD IN CONTEXT OF SA 240:
FRAUDULENT FINANCIAL REPORTING:
1. Alteration or falsification of records & documents

2. Misrepresentation in or intentional omission of events, transactions or information
3. Intentional misapplication of accounting principles
4. Fictitious Journal Entries
5. Adjusting assumptions and changing Judgments
6. Omitting, advancing or delaying the recognition of events or transactions.
7. Abnormal Year End Transactions.
MISAPPROPRIATION OF ASSETS:
1. Embezzlement of receipts in respect of written-off accounts

2. Stealing physical assets or intellectual properties
3. Introduction of fictitious vendors
4. Payment to fictitious employees
5. Using entities assets for personal use.
Frauds may be classified as defalcations involving misappropriation, either of money or that of
goods, and manipulation of accounts not involving a defalcation.
The detections of manipulations of accounts being one of the objects of an audit, for the detection
of frauds perpetrated for misappropriating either money or goods, knowledge of the various
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circumstances under which these may be committed and that of different forms they take is
essential. On this account, a brief description thereof at different level is given below:
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A. FRAUD FOR PERSONAL GAINS:
Bribery: Money, gift or other favours offered to procure (often illegal or dishonest) action or
decision in favour of the giver. These are also relatable to contract fraud or procurement fraud
and are, generally, out of books transactions. The auditor normally conducts a propriety audit
over the veracity of the transactions and review of any undue favours to vendors. [Kickbacks]
B. CORPORATE FRAUDS/ IRREGULARITIES:

Advance Billing: Advance billing is a situation where the company officials indulge in booking
fictitious sales in anticipation of actual sales. This results in misrepresentation of revenue in the
books thereby misleading financers and stakeholders. When the management treats borrowings
from money lenders as customer advances in the books against sale orders or for adjusting bills
receivables, the fraudulent act gets unnoticed for an extended period. This situation results in a
death knell for the corporation as the company is dragged into an irredeemable debt trap.
Use of Shell Company, false vendors, purchases of personal nature booked as official expenses
enable falsification of accounts and diversion of funds for purposes other than an intended
purpose. These could also be mechanism for employees or cartel of employees engaging in
personal gain at the cost of the company. In the former incident this could be termed as
management fraud.
Shell/ Dummy Company Schemes: Generally, represents a fictitious company or a ‘paper

company’ to transfer profits or funds from the main company. This could also involve fictitious
bills (mostly for services rendered or consultancy charges that cannot be corroborated) which
are used in the name of dummy companies diverting the funds taken from banks and financial
institutions.
The books could be falsified by wrong classification of expenses, inflating the expense claims,
fictitious expenses or multiple reimbursements. A review of controls, normally, leads to the
uncovering of expense booking that are prima facie not incurred.
Money-Laundering Activities: As per the Prevention of Money-Laundering Act, 2002,

“whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party
or is actually involved in any process or activity connected with the proceeds of crime and
projecting it as untainted property shall be guilty of offence of money-laundering.”
The person indulging in money laundering looks for avenues with weak banking controls for
converting illegal money into the banking system. Any excess credit in the bank accounts that
does not belong to the customer or is parked for a temporary period should raise suspicion of
such activities. This person indulging in money laundering activity looks for avenues to enter into
‘benami’ (could be called `proxy’ name lending) transactions. Companies with extensive cash
handling and inadequate control over source of money or involved in remittance of money for
import/ export of goods etc. are susceptible to money laundering activities.
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C. FRAUD AT OPERATIONAL LEVEL EMPLOYEES:

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Tampering of Cheques/Drafts/On-line payments/receipts: Tampering of cheques, payee name
being altered, or preparation of cheques without the same being issued to payee, etc., are
methods that may also lead to falsification of accounts.
On-line payments generally are considered a transparent mechanism to prevent the above
frauds. The ATM is a popular technological advancement that has inherent control gaps. For
example, credit cards once swiped the transaction is put through in the system without the need
for a signature of the payer. Similarly, unauthorised credits in bank accounts through ATMs are
an immense source of threat to recipients including bribery allegations, unless they lodge a
complaint with the bankers or the regulatory authorities in a prompt manner of such
unauthorised credits to their accounts/or company bank accounts.
D. OFF BOOK FRAUDS:

In off book frauds, the fraud perpetrator misappropriates the cash before these are recorded in
the books or before the sale is recorded in the books. These frauds are difficult to unearth as the
cash or collection is taken off before the accounting entries are made in the books. This situation
arises especially in unorganized markets and in rural economies where banking habits are
relatively under developed. These are difficult to establish due to absence of audit trails and are
more prevalent in businesses that have extensive cash dealings.
The above fraudulent schemes can be established based on circumstantial evidence or validation
through external sources such as, customer balance confirmations (where feasible) and
customer copy of the receipts or other documents that are retained by them. These are also
further supplemented by external evidence in the form of background checks and surveillance
mechanism. Verification of all the receipts and issues of stock recorded in stock register is
another way to identify this type of fraud.
E. CASH MISAPPROPRIATION:
Cash is misappropriated after the accounting entries are already passed in the books. These are
identified through surprise checks and through shortages in cash balances. These occur when
there are delays in accounting of cash collections and there are no laid down cash flow
controls. Unaccounted money in any form in an entity is a serious red flag in uncovering of
irregularities. Improper daily fund monitoring mechanism is another factor that results in
creating unauthorised float by employees in their personal account or in fictitious surrogate
(proxy) entities by fraudsters.
F. TEEMING AND LADING:

This is also achieved through cash deposits or cheques collected from customers being
overlapped with the collections from subsequent customers and the amount collected is
diverted to personal account. Reconciliation of customer accounts at a single point of time and
confirmation from customers for amounts outstanding in their accounts helps in identifying any
leakage in collections.
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G. FRAUDULENT DISBURSEMENTS:
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Fraudulent disbursements or reimbursements take place either by issuing or submission of false
bills, or personal expense bills being converted into official expenses bills. The other method
that is resorted to by the perpetrator of fraud is to inflate the refunds due to a customer and
skim the excess refunds.
H. EXPENSE REIMBURSEMENT SCHEMES: These fraudulent schemes involve employees resorting

to treating their personal expenses as incurred for business purpose and claiming
reimbursement. In some cases, employees may get reimbursed by third parties (such as
distributors) as well as by claiming these expenses from the company. Multiple expense claims
based on duplicate bills or photostat copies.
I. PAYROLL FRAUD: The payroll fraud could include payment to non-existent employees or in a
contractual arrangement inflating of the manpower resources than those actually deployed
while billing the client. It may also include showing higher pay than actual disbursement to
employees/ workers, etc. The process would require a detailed review of statutory
declarations/filings under various labour law statutes including disclosures in financial
statements of retirement benefits such as P.F, Gratuity and Superannuation benefits from an
evidence gathering perspective.
J. COMMISSION SCHEMES:
The salesman exaggerates the sales through fictitious billings to earn higher commission or alter
the sales prices of the products sold from those stipulated by the company or share the sales
volumes achieved with other employees to share higher commission. Commission schemes in
mega deals backed by legal documents are often tools used to camouflage kickbacks. These are
often difficult to uncover and would need to be supplemented by the monetary trails across
entities and geographies.
PROCEDURE FOR INVESTIGATION OF FRAUD:
1. Before proceeding to investigate frauds of the type afore-mentioned, the investigating

accountant should ascertain the exact duties of the person concerned who is suspected to have
committed a fraud; his relationship to the general routine of the office, and the circumstances in
which any known instances of defalcation have come to light.
2. Such an enquiry would give a clue to promising avenues of investigation. Greater the authority
of the individual suspected of a fraud, wider would be the field which would have to be
covered by the investigation.
3. At times, an accountant is called upon to investigate a suspected fraud, the details or the nature
whereof is not known. In such a case, for localising the source of the fraud, the investigating
accountant will have to study the financial and accounting structure of the organisation.
4. As a first step, he should examine the line of responsibility between the various members of the
staff. He should have a look at the system of internal control in operation for spotting out the
weaknesses, if any, that may exist in it.
5. Relying on the above study, he should direct his enquiry towards those aspects of the business
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where there has been excessive control in the hands of single persons/ employee, without any
supervision by any other person/ employee or, any other inherent weakness that may be in
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existence in the system.

EMBEZZLEMENT OF CASH:
Some of the situations in which money may be embezzled and the various forms that such frauds
usually take place along with their investigation procedure include the following:
Cash receipts: In cases like holding back cash sales, collections by travelling salesmen, V.P.P receipts,
or casual receipts, e.g., sales of scrap, recoveries out of debts written off earlier, etc., the amount or
amounts of receipts embezzled may be subsequently covered up by the perpetrator adopting one or
other of the under-mentioned devices:
1. Issuing a receipt to the payee for the full amount collected and entering only a part of the
amount on the counterfoil.
2. Showing a larger cash discount than actually allowed.
3. Adjusting a fictitious credit in the account of a customer for the value of goods returned by
him.
4. Adjusting a cash sale as a credit sale, and raising a debit in the account of the customer.
5. Writing off a good debt as bad and irrecoverable to cover up the amount collected which has
been misappropriated.
6. Short-debiting the customer’s account in the ledger with an intention to withdraw the
difference when the full amount payable by him is collected.
7. Verification of Cash Receipts:
a. On the assumption that some of these may have been diverted before being entered
in the books, evidence as regards income received from different sources should be
scrutinised, e.g., inventory, sales summaries, rental registers, correspondence with
customers, advices of travelling salesmen and counterfoils or receipts.
b. Carbon copies of receipts marked ‘duplicate’, should be scrutinised to confirm that
they are in fact copies of receipts issued earlier.
c. In addition, by recalling paying-in-slips from the bank the details of cash deposited on
each day should be compared with those shown in the Cash Book.
d. The record of sales of scrap of waste paper, that of collection of rents from labourers
temporarily accommodated in the company’s quarters, that of refunds of amounts
deposited with the electric supply co., or any other Government authorities should
be examined for finding out if any of these amounts have been misappropriated.
e. Cash sales should be vouched in detail. Recoveries from customers and sundry
parties should be checked with the copies of receipts issued to them; deductions
made on account of cash discounts should be reviewed.
f. All withdrawals from the bank should be checked by reference to corresponding
entries in the bank pass book.
Inflating cash payment: Cash payment frauds may be in the form of:
1. Making double payment of an invoice or paying a false invoice.

2. Paying personal expenses out of the business by falsifying details. e.g., showing betting
losses as advertisement charges.
3. Withdrawing unclaimed credit balances of customers or amounts falsely credited in the
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accounts of parties.
4. Falsely adjusting a refund in the account of a customer and withdrawing the credit balance.
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5. Wrong totalling of the wage sheets and misappropriating the excess amount withdrawn
from the bank for payment of wages.
6. Verification of Cash Payments:
a. All the evidence as regards cash payments made, including acknowledgement by
parties for payments shown to have been made to them, should be carefully
scrutinised.
b. In the case where a figure appears to have been erased or altered on the receipts
issued by the party, on reference to the party concerned, the actual amount paid to
him should be confirmed.
c. The same procedure should be adopted in respect of amounts acknowledged on
blank papers.
d. All payments by bearer cheques should be examined.
e. The system of recording of wages should be reviewed, specially as regards possible
over-totalling of wage sheets, and entries in them of dummy workmen.
f. The system of ordering and receiving goods should be reviewed so as to confirm that
no payment has been made in respect of supplies which have not been received.
g. Confirmations should be obtained from partners or Directors in respect of amounts
shown to have been paid to them.
h. The Petty Cash Book should be vouched and totalled.
i. Special attention should be paid to payments made on account of salaries and wages;
confirmation should be obtained from the management that all payments of such
salaries and wages were made to persons who were actually in the service of the
company.
j. All the withdrawals from the bank should be checked by reference to entries in the
bank’s pass book. All the bills receivable or payable should be checked by reference
to the Bills Books.
SELF STUDY: [REF PAGE NO. 16.53 TO 16.55] ICAI MATERIAL NOV 2020 EDITION
1. Frauds through suppliers’ ledger [Refer Practical Question - 5]

2. Customers’ ledger
3. Verification Procedure for Defalcation of inventory. [[Refer Practical Question - 4]
4. Indicators of Fraud
Q.NO.12 WRITE ABOUT RESPONSES TO FRAUD?

ANSWER:
RESPONSES TO FRAUD:
1. SA 330 states the auditor’s responses to assessed risks. It requires auditor to assign and
supervise personnel taking into account of the knowledge, skill and ability of the individuals.
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2. Evaluation of selection and application of accounting policies by the entity and incorporation of
an element of unpredictability in the selection of the nature, timing and extent of audit
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procedure.
3. Response to the risks related to management override of controls includes:
a. Testing the appropriateness of journal entries and other adjustments made in
preparation of the Financial Statements,
b. Review of accounting estimates for biases and
c. Review the significant transactions that are outside the normal course of business for the
entity or that otherwise appear to be unusual.
4. The responses to fraud will include communications to management and with those charged
with governance, communication to regulatory and enforcement authorities and appropriate
documentation on his assessment of the risks of material misstatement.
5. Auditor’s ability to detect fraud depends on factors such as:
a. The skilfulness of the perpetrator.
b. The frequency & extent of manipulation.
c. The degree of collusion involved.
d. The relative size of individual amounts manipulated and
e. The seniority of those individuals involved.
6. Detection of Fraud depends upon effectiveness of Audit Procedure.
7. Detection risk, however, can only be reduced, not eliminated.
Q.NO.13 WRITE ABOUT INVESTIGATION ON BEHALF OF AN INDIVIDUAL OR FIRM PROPOSING TO

BUY A BUSINESS? [SELF STUDY]
ANSWER:
SCOPE OF INVESTIGATION:
The objective of such an investigation is to collect such information as would enable the purchaser
to decide whether it is worthwhile to buy the business and if so, for what amount.
The investigation should proceed broadly on the same lines as for valuation of shares.
Additional matters which must receive the attention of the investigating accountant on which, if
appropriate, information to the client should be given.
IN CASE OF PROPRIETARY CONCERNS OR PARTNERSHIPS:
1. Reasons for the sale of the business and the effect on turnover and profits that there would be
on retirement of the present proprietor (or partners).
2. The length of lease under which the premises are held; the prospects of its renewal or
extension.
3. The unexpired period of any patents owned by the vendors.
4. The age of the present managerial staff and the prospects of continuing in service under the new
proprietorship.
5. the possible liability, not already provided for that would arise as regards payment of pensions
490
or gratuities in case of old and aged employees/ retrenched employees.

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6. If the bulk of sales are made to customers whose number is small, the profitability of the
business would be greatly shaken on withdrawing their support. This would be an element of
weakness which should be investigated as it might affect future profitability.
7. The valuation that could be placed on goodwill to determine whether that appearing in the book
is less or more; if none is included to determine the amount that should be included, if at all.
IF THE BUSINESS BELONGS TO A LIMITED COMPANY:
The vendors’ interest in this case will be purchased by the acquisition of shares. On that account,
the following additional matters would also require consideration:
1. The authorised and issued capital of the company.

2. Whether there is any uncalled liability on the shares.
3. If the capital is divided into different classes of shares - the rights that are attached to each class.
4. Particulars of dividends paid in the past and the amounts thereof which are in arrear (on
cumulative preference shares).
5. If there are any mortgages/ charge created on the assets appearing in the company’s books, a
search should be made in the Register of Charges in the office of the Registrar of Companies.
6. The price at which the shares are being offered. If the company is a public company, the price
will usually be in excess of market price quoted on the Stock Exchange, but in the case of
unquoted shares particularly where the company whose shares are being acquired is a private
company, a valuation will have to be placed on the shares for the purpose of purchase.
Q.NO.14 WRITE ABOUT INVESTIGATION IN CONNECTION WITH REVIEW OF PROFIT/FINANCIAL

FORECASTS? [SELF STUDY]
ANSWER:
There are many investigations which involve an examination of future profits like:
1. Profit reports can be required as part of a general investigation into the purchase of a business
or,
2. By banks and financial institutions with regard to project cash flow and profitability statements
for appraisal of loan applications submitted by the intending borrowers.
3. All forecasts depend, to a large extent, on the nature of the business with its numerous and
substantial uncertainties. Therefore, such forecasts are not capable of verification by the
reporting accountants in the same way as financial statements which present the results of a
completed accounting period.
4. Normally, such situations involve special review as these depart from the auditor’s traditional
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role of expressing an opinion in relation to past events.

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Q.NO.1 A nationalised bank received an application from an export company seeking sanction
of a term loan to expand the existing sea food processing plant. In this connection, the
General Manager, who is in charge of Advances, approaches you to conduct a thorough
investigation of this limited company and submit a confidential report based on which he
will decide whether to sanction this loan or not.
List out the points you will cover in your investigation before submitting your report to the
General Manager.
ANSWER:
Refer Answer to Q No. 10 [Investigation on behalf of Bank]
Q.NO.2 In a Company, it is suspected that there has been embezzlement in cash receipts. As an
investigator, what are the areas that you would verify?
ANSWER:
Verification of Cash Receipts:
1. On the assumption that some of these may have been diverted before being entered in
the books, evidence as regards income received from different sources should be
scrutinised, e.g., inventory, sales summaries, rental registers, correspondence with
customers, advices of travelling salesmen and counterfoils or receipts.
2. Carbon copies of receipts marked ‘duplicate’, should be scrutinised to confirm that they
are in fact copies of receipts issued earlier.
3. In addition, by recalling paying-in-slips from the bank the details of cash deposited on each
day should be compared with those shown in the Cash Book.
4. The record of sales of scrap of waste paper, that of collection of rents from labourers
temporarily accommodated in the company’s quarters, that of refunds of amounts
deposited with the electric supply co., or any other Government authorities should be
examined for finding out if any of these amounts have been misappropriated.
5. Cash sales should be vouched in detail. Recoveries from customers and sundry parties
should be checked with the copies of receipts issued to them; deductions made on
account of cash discounts should be reviewed.
6. All withdrawals from the bank should be checked by reference to corresponding entries in
the bank pass book.
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Q.NO.3 J Ltd. is interested in acquiring S Ltd. The valuation of S Ltd. is dependent on future
maintainable sales. As the person entrusted to value S Ltd., what factors would you consider
in assessing the future maintainable turnover?
ANSWER:
In assessing the turnover which the business would be able to maintain in the future, the
following factors should be taken into account:
1. Trend: Whether in the past sales have been increasing consistently or they have been
fluctuating.
2. Marketability: Is it possible to extend the sales into new markets or that these have been fully
exploited? Product wise estimation should be made.
3. Political and economic considerations: Are the policies pursued by the Government likely to
promote the extension of the market for goods to other countries? Whether the sales in the
home market are likely to increase or decrease as a result of various emerging economic
trends?
4. Competition: What is the likely effect on the business if other manufacturers enter the same
field or if products which would sell in competition are placed on the market at cheaper price?
Is the demand for competing products increasing? Is the company’s share in the total trade
constant or has it been fluctuating?
Q.NO.4 MF. Ltd., engaged in the manufacturing of various products in its factory, is concerned
with shortage in production and there arose suspicion of inventory fraud. You are appointed
by MF Ltd. To evaluate the options for verifying the process to reveal fraud and the
corrective action to be taken. As an investigating accountant what will be your areas of
verification and the procedure to be followed for verification of defalcation of inventory?
ANSWER:
Verification Procedure for Defalcation of inventory:
1. In case of defalcation of inventory, the entire system of receipts, storage and dispatch of all
goods, etc. should be reviewed to localise the weakness in the system.
2. The first step in such an investigation is to establish the different items of inventory defalcated
and their quantities by checking physically the quantities in inventory held and those shown
by the Inventory Book.
3. Investigating accountant should ascertain the exact duties of persons handling the stocks
received in and issued from store for production/ sale or any other purpose.
4. Identify the excessive control in the hands of a single person, without any supervision as it will
widen the scope of investigation.
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5. Afterwards, all the receipts and issues of inventory recorded in the Inventory Book should be
verified by reference to entries in the Goods Inward and Outward Registers and the
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documentary evidence as regards purchases and sales. This would reveal the particulars of
inventory not received but paid for as well as that issued but not charged to customers.
6. Further, entries in respect of returns, both inward and outward, recorded in the financial
books should be checked with corresponding entries in the Inventory Book.
7. Also, the totals of the Inventory Book should be checked.
8. Finally, the shortages observed on physical verification of inventory should be reconciled with
the discrepancies observed on checking the books in the manner mentioned above.
Q.NO.5 In a Public Limited Company, it is suspected by the Management that there has been
embezzlement in supplier's ledger. As an auditor of the Company, you have been asked to
investigate the matter. What are the major areas that you would verify in this regard?
ANSWER:
Frauds through suppliers’ ledger -
(i) Adjusting fictitious or duplicate invoices as purchases in the accounts of suppliers and
subsequently misappropriating the amounts when payments are made to the suppliers in respect
of these invoices.
(ii) Suppressing the Credit Notes issued by suppliers and withdrawing the corresponding amounts
not claimed by them.
(iii) Withdrawing amounts unclaimed by suppliers, for one reason or another by showing that the
same have been paid to them.
(iv) Accepting purchase invoices at prices considerably higher than their market prices and
collecting the excess amount, paid in cash, from the suppliers.
Verification of balances in suppliers’ ledger:
1. The Purchase Journal should be vouched by reference to entries in the Goods Inward Book
and the suppliers’ invoices to confirm that amounts credited to the accounts of suppliers were
in respect of goods, which were duly received and the suppliers’ accounts had been credited
correctly.
2. All the suppliers should be requested to furnish statements of their accounts to see whether
or not any balance is outstanding or due so as to confirm that allowances and rebates given by
them have been correctly adjusted and were duly authorized by the authorized person/
officer.
3. Examine the system of internal control in relation to purchase orders issued and identify
possibilities of collusion with suppliers.
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XYZ Ltd. has bought a land in Nagpur for setting up a manufacturing unit in the year 2018 at a
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price of Rs. 10 crores. In the year 2019, one of the directors of company raised suspicion on the
price and transactions related to purchase of land. Therefore, an investigation was ordered by
the management and PV Associates were appointed to investigate the matter and submit their
report accordingly. PV Associates were of the view that they need to take an expert’s opinion
on the price of land. Whether PV Associates is authorized to take assistance of expert? If yes,
what is the process they need to follow?
ANSWER:
If PV Associates feels the necessity of obtaining views and opinions of experts in various fields to
properly conduct the investigation, they are allowed to do so.
It would be therefore, proper for the investigator to get the written general consent of his client,
to refer special matters for views of different experts at the beginning of investigation and he
should settle the question of costs for obtaining the views and other related implications.
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12. FORENSIC AUDIT
FEW IMPORTANT DEFINITIONS:
Forensic Auditing has established itself as dynamic and strategic tool in combating corruption,
financial crimes and frauds through investigations and resolving allegations of fraud and
embezzlement. Thus, a new area of auditing, known as Forensic Audit, was needed to detect the
frauds in companies that suspected fraudulent transactions.
“Forensic” means “suitable for use in the court of law”. Bologna said that it is the application of
financial skills and investigative mentality to unresolved issues, conducted within the context of the
rules of evidence.
As an emerging discipline, it encompasses financial expertise, fraud knowledge and a sound

knowledge and understanding of business reality and the working of legal system.
However, the definition of Forensic Auditing keeps on changing in response to the growing needs
of corporations. Simply stated, Forensic Auditing includes the use of accounting, auditing and
investigative skills to assist in legal matters.
A. FORENSIC: The word forensic comes from the Latin word forensis, meaning "of or before the
forum." It is -
1. Relating to, used in, or appropriate for courts of law or for public discussion or
argumentation.
2. Relating to the use of science or technology in the investigation and establishment of facts or
evidence in a court of law.
B. FORENSIC ACCOUNTING: The integration of accounting, auditing and investigative skills yields
the specialty known as Forensic Accounting. It is the study and interpretation of accounting
evidence. It is the application of accounting methods to the tracking and collection of forensic
evidence, usually for investigation and prosecution of criminal acts such as embezzlement or
fraud. Forensic Accounting can sometimes be referred to as Forensic Auditing.
C. FORENSIC INVESTIGATION: Also known as forensic audit is the examination of documents and
the interviewing of people to extract evidence. Forensic Accounting examines individual or
company financial records as an investigative measure that attempts to derive evidence suitable
for use in litigation.
D. FRAUD AUDITING: In a fraud audit one searches for the point where the numbers and/or
financial statements to do mesh [Forming a network of Txn’s].
It is a meticulous review of financial documents conducted when fraud is suspected. Some
entities do them as a precaution to prevent fraud from happening and to catch it before the
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loss magnifies. A Fraud Audit however is not an Investigation. Fraud auditing is used to identify
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fraudulent transactions, not to figure out how they were created. Fraud auditors often go
outside the books of accounts to find fraudulent transactions.
E. RED FLAG: Red flags are indicators or warning of any impending danger or inappropriate
behaviour. Red flag does not necessarily indicate the existence of fraud however are indicators
that caution needs to be exercised while investigating the situations. Red flags are classified in
categories such as financial performance red flag, accounting system red flags, operational red
flags and behavioural red flags.
Q.NO.1 WRITE ABOUT DIFFERENCE BETWEEN AUDIT AND FORENSIC AUDIT / FORENSIC
ACCOUNTING?
ANSWER:
The general public believes that a financial auditor would detect a fraud if one were being
perpetrated during the financial auditor's audit. The truth, however, is that the procedures for
financial audits are designed to detect material misstatements, not immaterial frauds. While it is
true that many of the financial statements and frauds could have, perhaps should have, been
detected by financial auditors, the vast majority of frauds could not be detected with the use of
financial audits. Reasons include the dependence of financial auditors on a sample and the
auditors' reliance on examining the audit trail versus examining the events and activities behind the
documents. The financial audit suffers limitations in terms of costs and time.
There are some basic differences today between the procedures of forensic auditors and those of
financial auditors. In comparison, forensic accounting and audit differ in specific ways, as shown
below:
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A forensic accountant will often look for indications of fraud that are not subject to the scope of a
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financial statement audit. Forensic Accounting has Investigative mentality" however auditing is
done with "professional scepticism". A forensic accountant will often require more extensive
corroboration. A forensic accountant may focus more even on seemingly immaterial transactions.
The following table describes differences between Audit and Forensic Audit:
BASIS AUDIT FORENSIC AUDIT
Objectives Express an opinion as to ‘True & Fair’ Whether fraud has actually taken
presentation place in books
Techniques Substantive & Compliance. Sample Investigative, substantive or in-depth

based checking
Period Normally for a particulars accounting No such limitations

period.
Verification of Relies on the management Independent/verification of

stock, Estimation certificate/Management suspected/selected items where
realisable value Representation. misappropriation in suspected
of assets,
provisions,
liability etc.
Off balance sheet Used to vouch the arithmetic accuracy Regulatory & propriety of these
items (like & compliance with procedures. transactions/contracts are
contracts etc.) examined.
Adverse findings Negative opinion or qualified opinion Legal determination of fraud impact
if any expressed with/without quantification and identification of perpetrators
depending on scope.
Q.NO.2 EXPLAIN THE CONCEPT OF FORENSIC AUDITOR AND RELATED TOPICS?

ANSWER:
A. CONCEPT:
1. A Forensic Auditor is often retained to analyze, interpret, summarize and present complex
financial and business-related issues in a manner which is both understandable and
properly supported. Forensic Accountants are trained to look beyond the numbers and deal
with the business reality of the situation.
2. A Forensic Auditor must initially consider whether his/her firm has the necessary skills and
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experience to accept the work.

3. Forensic audits are highly specialized, and the work requires detailed knowledge of fraud
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investigation techniques and the legal framework.
4. Forensic auditor needs to have an understanding on various frauds that can be carried off
and how evidence need to be collected.
5. Forensic Auditors can be engaged in public practice or employed by insurance companies,
banks, police forces, government agencies and other organizations.\
B. AREAS INVOLVED INTO BY FORENSIC AUDITOR:
FRAUD DETECTION: Investigating and analyzing financial evidence, detecting financial frauds
and tracing misappropriated funds.
COMPUTER FORENSIC’s: Developing computerized applications to assist in the recovery,

analysis and presentation of financial evidence;
FRAUD PREVENTION: Either reviewing internal controls to verify their adequacy or providing
consultation in the development and implementation of an internal control framework aligned
to an organization's risk profile.
PROVIDING EXPERT TESTIMONY: Assisting in legal proceedings, including testifying in court as

an expert witness and preparing visual aids to support trial evidence.
NOTE: In order to properly perform these services a Forensic Auditor must be familiar with legal
concepts and procedures and have expertise in the use of IT tools and techniques that facilitate
data recovery and analysis. In addition, a Forensic Auditor must be able to identify substance
over form when dealing with an issue.
C. RETENTION OF FORENSIC AUDITORS BY VARIOUS ENTITIES:
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D. IMPORTANCE OF FORENSIC AUDITORS:
They can resolve the matters by combining accounting knowledge & experience with respect to:
1. Filing requirements.
2. Court systems.
3. Investigative methodologies.
4. Internal Controls Implementation and Review.
5. Compliance and Regulatory Functions.
6. Evidence Collection and Analysis.
7. Assignments with regulatory agencies like SEBI, RBI. EOW etc.,
8. Professional body to provide expertise and literature in this fast-growing field.
9. Communicating with audiences from attorneys & judges to victims & suspects.
E. SERVICES RENDERED BY FORENSIC AUDITORS:
1. Crafting questions to be posed.

2. Responding to questions posed.
3. Identifying documents to be requested and/or summoned.
4. Identifying individuals to be most knowledgeable of facts.
5. Conducting research relevant to facts of the case.
6. Identifying and preserving key evidence.
7. Evaluating produced documentation and information for completeness.
8. Analysing produced records and other information for facts.
9. Identifying alternative means to obtain key facts and information.
10. Providing questions for deposition and cross examination of fact and expert witnesses.
F. AREAS OF FORENSIC AUDIT SERVICES:
The services rendered by the forensic accountants are in great demand in the following areas:
CRIMINAL INVESTIGATION: Matters relating to financial implications the services of the forensic
accountants are availed of. The report of the accountants is considered in preparing and
presentation as evidence.
PROFESSIONAL NEGLIGENCE CASES: Professional negligence cases are taken up by the forensic
accountants. Non- conformation to Generally Accepted Accounting Standards (GAAS) or
noncompliance to auditing practices or ethical codes of any profession, Forensic Auditors are
needed to measure the loss due to such professional negligence or shortage in services.
ARBITRATION SERVICE: Forensic accountants render arbitration and mediation services for the
business community. Their expertise in data collection and evidence presentation makes
Them sought after in this specialized practice area.
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FRAUD INVESTIGATION AND RISK/CONTROL REVIEWS: Forensic accountants render such

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services both when called upon to investigate specific cases as well for a review of or for
implementation of Internal Controls. Another area of significance is Risk Assessment and Risk
Mitigation.
SETTLEMENT OF INSURANCE CLAIMS:

1. Insurance companies engage forensic accountants to have an accurate assessment of claims
to be settled.
2. In case of policy holders seek the help of a forensic accountant when they need to Challenge
the claim settlement as worked out by the insurance companies. A forensic accountant
handles the claims relating to consequential loss policy, property loss due to various risks,
fidelity insurance and other types of insurance claims.
DISPUTE SETTLEMENT: Business firms engage forensic accountants to handle contract disputes,
Construction claims, product liability claims, infringement of patent and trademarks
cases, liability arising from breach of contracts and soon.
G. CHARACTERISTICS AND SKILLS TO BE POSSESSED BY FORENSIC AUDITOR:
CHARACTERISTICS:
1. Out of the Box Thinking
2. Strong Visualization and Imagination
3. Curiosity
4. Persistence
5. Detail-oriented
6. Inquisitiveness
7. Creativity
8. Discretion
9. Scepticism
10. Confidence and
11. Sound professional judgement
12. Objectivity and credibility
SKILL SET:
1. Auditing standards, procedures and related methodologies.

2. Accounting & Business reporting systems.
3. Information Technology.
4. Data Analytics.
5. Criminology.
6. Legal Framework Litigation processes & procedures Investigative Techniques Evidence
gathering.
7. Network of professional contacts in related fields' viz. enforcement, regulatory bodies, law,
industry, peers etc.
A forensic accountant should possess not only the broad knowledge of accounting principles,
practice and standards but also the knowledge of insurance, banking civil and criminal law and
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human psychology.
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A Forensic Auditor must be open to consider all alternatives, scrutinize the details and act as an
expert witness. In addition, a Forensic Auditor must be able to listen effectively and
communicate clearly and concisely in a timely manner.
Q.NO.3 WRITE ABOUT PROCESS OF FORENSIC AUDIT?

ANSWER:
Each Forensic Accounting assignment is unique. Accordingly, the actual approach adopted and the
procedures performed will be specific to it. However, in general, many Forensic Accounting
assignments will include the steps detailed below:
STEP 1. INITIALIASTION:
It is vital to clarify and remove all doubts as to the real motive, purpose and utility of the
assignment. It is helpful to meet the client to obtain an understanding of the important facts,
players and issues at hand. A conflict check should be carried out as soon as the relevant parties are
established. It is often useful to carry out a preliminary investigation prior to the development of a
detailed plan of action. This will allow subsequent planning to be based upon a more complete
understanding of the issues.
STEP 2. DEVELOP PLAN:
This plan will take into account the knowledge gained by meeting with the client and carrying out
the initial investigation and will set out the objectives to be achieved and the methodology to be
utilized to accomplish them.
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STEP 3. OBTAIN RELEVANT EVIDENCE:

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1. Depending on the nature of the case, this may involve locating documents, economic
information, assets, a person or company, another expert or proof of the occurrence of an
event.
2. In order to gather detailed evidence, the investigator must understand the specific type of
fraud that has been carried out, and how the fraud has been committed.
3. The evidence should be sufficient to ultimately prove the identity of the fraudster(s), the
mechanics of the fraud scheme, and the amount of financial loss suffered.
4. It is important that the investigating team is skilled in collecting evidence that can be used
in a court case within the stipulated time period, and in keeping a clear chain of custody until
the evidence is presented in court.
5. If any evidence is inconclusive or there are gaps in the chain of custody, then the evidence
may be challenged in court, or even become inadmissible. Investigators must be alert to
documents being falsified, damaged or destroyed by the suspect(s).
STEP 4. PERFORM THE ANALYSIS:
The actual analysis performed will be dependent upon the nature of the assignment and may
involve:
1. Calculating economic damages;

2. Summarizing a large number of transactions;
3. Performing a tracing of assets;
4. Performing present value calculations utilizing appropriate discount rates;
5. Performing a regression or sensitivity analysis;
6. Utilizing a computerized application such as a spread sheet, data base or computer model;
and
7. Utilizing charts and graphics to explain the analysis.
STEP 5. REPORTING:
1. Issuing an audit report is the final step of a fraud audit. Auditors will include information
detailing the fraudulent activity, if any has been found. The client will expect a report
containing the findings of the investigation, including a summary of evidence, a conclusion as
to the amount of loss suffered as a result of the fraud and to identify those involved in fraud.
2. The report may include sections on the nature of the assignment, scope of the investigation,
approach utilized, limitations of scope and findings and/or opinions. The report will include
schedules and graphics necessary to properly support and explain the findings.
3. The report will also discuss how the fraudster set up the fraud scheme, and which controls, if
any, were circumvented. It is also likely that the investigative team will recommend
improvements to controls within the organization to prevent any similar frauds occurring in
the future.
4. The forensic auditor should have active listening skills which will enable him to summarize
the facts in the report. It should be kept in mind that the report should be based on the facts
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assimilated during the process and not on the opinion of the person writing the report.
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STEP 6. COURT PROCEEDINGS:
The investigation is likely to lead to legal proceedings against the suspect, and members of the
investigative team will probably be involved in any resultant court case. The evidence gathered
during the investigation will need to be presented at court, and team members may be called to
court to describe the evidence they have gathered and to explain how the suspect was identified.
Q.NO.4 WRITE ABOUT FORENSIC AUDIT TECHNIQUES?
ANSWER:
Detecting fraud is difficult, especially frauds involving material financial statement misstatements,
which occur only in about 2 percent of all financial statements. Fraud is generally concealed and
often occurs through collusion. Normally, the documents supporting omitted transactions are not
kept in company files. False documentation is often created or legitimate documents are altered to
support fictitious transactions. While fraud detection techniques will not identify all fraud, the use
of sound techniques can increase the likelihood that misstatements or defalcations will be
discovered on a timely basis.
Some of the techniques that a forensic auditor may use are listed below:
(I) General Audit Techniques:
Testing defences: A good initial forensic audit technique is to attempt to circumvent these
defences yourself. The weaknesses you find within the organizations control will most
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probably guide you down the sea path taken by suspected perpetrators. This technique
requires you to attempt to put yourself in the shoes and think like your suspect.
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(II) Statistical & Mathematical Techniques:
Trend Analysis: Businesses have cycles and seasons much akin to nature itself. Careful
review of your subject organization's historical norms is necessary in order for you to be able
to discern the outlier event should it arise within your investigation.
Ratio Analysis: Another useful fraud detection technique is the calculation of data analysis
ratios for key numeric fields. Like financial ratios that give indications of the financial health
of a company, data analysis ratios report on the fraud health by identifying possible
symptoms of fraud.
(III) Technology based /Digital Forensics Techniques: Every transaction leaves a digital footprint in
today's computer-driven society. Close scrutiny of relevant emails, accounting records, phone logs
and target company hard drives are a requisite facet of any modern forensic audit. Before taking
steps such as obtaining data from email etc. the forensic auditor should take appropriate legal
advice so that it doesn’t amount to invasion of privacy. Digital investigations can become quite
complex and require support from trained digital investigators. However, many open-source digital
forensics tools are now available to assist you in this phase of the investigation. Such as:
1. Cross Drive Analysis

2. Live Analysis
3. Deleted Files
4. Stochastic Forensics
5. Steganography
6. EnCase
7. MD5
8. Tracking Log Files
9. PC System Log
10. Free Log Tools
(IV) Computer Assisted Auditing Techniques (CAATs): Changing patterns of businesses, regulatory
framework, scarcity of resources at auditors’ disposal on one side and the ever-increasing
mountainous data on other hand is making audit a complex process. Use of CAATs is, thus,
indispensable to the Auditors and forensic auditors. Computer-assisted audit techniques (CAATs) or
computer-assisted audit tools and techniques (CAATs) are computer programs that the auditors use
as part of the audit procedures to process data of audit significance contained in a client’s
information systems, without depending on him.
(V) Generalised Audit Software (GAS): Generalized Audit Software (GAS) is a class of CAATs that
allows auditors to undertake data extraction, querying, manipulation, summarization and analytical
tasks. GAS focuses on the fully exploiting the data available in the entity’s application systems in the
pursuit of audit objectives. GAS support auditors by allowing them to examine the entity’s data
easily, flexibly, independently and interactively in data-based auditing.
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“What if” scenarios can be developed with the results and the auditors can examine the generated
report rapidly. Currently, the latest versions of GAS include the Audit Command Language (ACL),
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Interactive Data Extraction and Analysis (IDEA) and Panaudit.

(VI) Common Software Tool (CST): Due to shortcomings of GASs, CSTs have become popular over a
period. Spreadsheets (like MS Excel, Lotus, etc.), RDBMS (like MS Access, etc.) and Report writers
(like Crystal reports, etc.) are few examples of CSTs. Their widespread acceptability is due to its
instant availability and lower costs. While spreadsheets may be extremely easy to use due to its
simplicity and versatility, other CSTs may need some practice.
Whether one uses GAS or CST, it is imperative that the auditor is aware about the manner and
processes that have led to the data generation, the control environment revolving around the data
and the source from where the data samples are imported into the GAS/CST.
(VII) Data Mining Techniques: It is a set of assisted techniques designed to automatically mine large
volumes of data for new, hidden or unexpected information or patterns.
Data mining techniques are categorized in three ways: Discovery, Predictive modelling and
Deviation and Link analysis. It discovers the usual knowledge or patterns in data, without a
predefined idea or hypothesis about what the pattern may be, i.e., without any prior knowledge of
fraud. It explains various affinities, association, trends and variations in the form of conditional logic.
(VIII) Laboratory Analysis of Physical and Electronic Evidences:
a. Computer Forensics
i. hard disk imaging
ii. E-mail analysis
iii. search for erased files
iv. analyse use & possible misuse of data
v. computer software to analyse data
b. Protection/Validation of Evidence
i. Federal Rules of Evidence
ii. Chain of Custody
iii. Altered & Fictitious Documents
iv. physical examination
v. fingerprint analysis
vi. forgeries
vii. ink sampling
viii. document dating
Q.NO.5 WRITE ABOUT FORENSIC AUDIT REPORT?

ANSWER:
The Forensic Audit Report is nothing but statements of observation gathered & considered while
proving conclusive evidence. After the investigation is complete, the auditor is expected to give a
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report on the findings of the investigation, and also a summary of the evidence and conclusion
about the loss suffered due to such fraud.
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POINTS TO BE KEPT IN MIND WHILE REPORTING:
Clear thinking:
1. To whom the report is directed

2. Purpose and aim of investigation
3. Cool and calm thinking to have logical and coherent presentation ✓ Pattern of presentation
Keep the reader uppermost in mind:
1. Translate technical matters to layman's language

2. To visualize the reader's viewpoint
Unbiased approach: To mention the view point of the auditee
Impact of the report:
1. What be the probable reaction to reporting whether action or decision will follow in quickest
possible time or to be treated as of academic interest only?
2. To remember the universal saying - "don't jump to conclusions"
Facts and figures to be in proper sequences and suggestion to prevent fraud in future.
CONTENTS OF A FORENSIC AUDIT REPORT MAY INCLUDE THE FOLLOWING:
A. EXECUTIVE SUMMARY
1. Background
2. Origin of the Audit
3. Audit Objective
4. Proposed Audit Outputs
5. Audit Implementation Approach
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B. RISK ANALYSIS:
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Internal Environmental Risks:
1. Financial Management
2. Customers, Products and Competitors
3. Information technology
4. Business Process
5. Human Resource Management
External Environmental Forces:
1. Influence of Economics and relevant Market
2. Political and Legal Scenario
3. Technology in the Sector
C. AUDIT PROCESS:
1. Preliminary understanding of scope and incident coverage

a. Identification of all related data elements
b. Preparation of a List of "persons of interest" for interview
c. Obtain management approval for scope
2. Collect Evidence
3. Conduct Interviews
4. Analyse findings
5. Validate Inferences and conclusions
D. EVIDENCE OF RISK EVENTS:
1. Conflicts of interest
2. Bribery
3. Extortion
4. Theft
5. Fraudulent transactions
6. Inventory frauds
7. Misuse of assets
8. Financial Statement frauds
E. AUDIT RECOMMENDATIONS:
1. Logical Framework Approach

2. Preconditions and Risks
F. GOVERNANCE ON RECOMMENDATION IMPLEMENTATION:
1. Stakeholders
2. Budget Considerations
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LIST OF ANNEXURES:
Annex 1: Members of the Interviews
Annex 2: Organization Chart of Auditee organization
Annex 3: Financial Performance (YYYY to YYYY)
Annex 4: Audit Recommendation Logical Framework
Annex 5: Analysis of Key Risk Events
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ABC Ltd. is a listed company having turnover of Rs. 50 crores & plans expansion by installation
of new machines at new building-having total additional project cost of Rs. 20 crore.
Rupees (In crore) Purpose

10.0 - for Building
8.5 - for Machinery
1.5 - for Working Capital
20 Crore Total
Project gets implemented in 2019-20 and one of the accountant’s report to the Managing
Director that some suspicious transactions are noticed in the purchase of building material. But
the Management is confused as to whether they should get an audit or Forensic Audit done for
the same. Advise Management about the difference in forensic accounting and audit.
ANSWER:
Refer answer to Q No. 1.
BR Construction was into the business of building roads and other infrastructure facilities for
government contracts. Mr. Tiwari, one of the senior official, was looking after the procurement
of cement required at the construction sites. There was a substantial increase in the price of
cement bags bought as compared to those bought prior to the appointment of Mr. Tiwari. The
management of the company decides to get a forensic audit done for the transactions handled
by Mr. Tiwari. What points should be kept in mind by the management while appointing a
forensic auditor?
ANSWER:
While appointing a forensic auditor, the Management of BR Construction must initially consider
whether the firm has the necessary skills and experience to accept the work.
A Forensic Auditor should necessarily possess the following characteristics and skills:
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CHARACTERISTICS AND SKILLS TO BE POSSESSED BY FORENSIC AUDITOR:

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CHARACTERISTICS:
1. Out of the Box Thinking

2. Strong Visualization and Imagination
3. Curiosity
4. Persistence
5. Detail-oriented
6. Inquisitiveness
7. Creativity
8. Discretion
9. Scepticism
10. Confidence and
11. Sound professional judgement
12. Objectivity and credibility
SKILL SET:
1. Auditing standards, procedures and related methodologies.

2. Accounting & Business reporting systems.
3. Information Technology.
4. Data Analytics.
5. Criminology.
6. Legal Framework Litigation processes & procedures Investigative Techniques Evidence
gathering.
7. Network of professional contacts in related fields' viz. enforcement, regulatory bodies,
law, industry, peers etc.
A forensic accountant should possess not only the broad knowledge of accounting principles,
practice and standards but also the knowledge of insurance, banking civil and criminal law and
human psychology.
A Forensic Auditor must be open to consider all alternatives, scrutinize the details and act as an
expert witness. In addition, a Forensic Auditor must be able to listen effectively and
communicate clearly and concisely in a timely manner.
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13. AUDIT OF PSU
Q.NO.1 EXPLAIN THE BROAD FRAMEWORK FOR GOVERNMENT AUDIT?
ANSWER:
As defined under section 2(45) of the Companies Act, 2013, a “Government Company” is a company
in which not less than 51% of the paid-up share capital is held by the Central Government or by any
State Government or Governments or partly by the Central Government and partly by one or more
State Governments and includes a company which is a subsidiary company of such a Government
company.
In India, audit of the above government companies is performed by an independent constitutional

authority, i.e., Comptroller and Auditor General of India (C&AG), through the Indian Audit and
Accounts Department. The Constitution of India gives a special status to the C&AG and contains
provisions to safeguard his independence.
The Comptroller and Auditor General’s (Duties, Power and Conditions of Services) Act, 1971,
prescribes that the C&AG shall hold office for a term of 6 years or up to the age of 65 years,
whichever is earlier. He can resign at any time through a resignation letter addressed to the
President. The Act also assigns the duties regarding the audit to be followed by C&AG.
The number of organisations subject to the audit of the Comptroller and Auditor General of India is
very large. This includes:
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As a result of these numerous audits carried out every year, the Comptroller and Auditor General of
India has been issuing a large number of audit reports.
AUDIT OF GOVERNMENT COMPANIES (COMMERCIAL AUDIT):
There is a special arrangement for the audit of companies where the equity participation by
Government is 51 % or more. The auditors of these companies are firms of Chartered Accountants,
appointed by the Comptroller & Auditor General, who gives the auditor directions on the manner in
which the audit should be conducted by them. He is also empowered to comment upon the audit
reports of the auditors. In addition, he has a right to conduct a supplementary audit of such
companies and cause test audit if considered necessary, by an order.
[Note: Audit of Government companies is discussed separately under Para 4]
AUDIT BOARD SETUP IN COMMERCIAL AUDIT:
1. A unique feature of the audit conducted by the Indian Audit and Accounts Department is the
constitution of Audit Boards for conducting comprehensive audit appraisals of the working of
Public Sector Enterprises engaged in diverse sectors of the economy.
2. These Audit Boards associate with them experts in disciplines relevant to the appraisals. They
discuss their findings and conclusions with the managements of the enterprises and their
controlling ministries and departments of government to ascertain their view points before
finalisation.
3. The results of such comprehensive appraisals are incorporated by the Comptroller and Auditor
General in his reports.
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4. These Audit Boards have no separate legal entity and work under the supervision and control of
the Comptroller and Auditor General.
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ACTION ON AUDIT REPORTS:
1. The scrutiny of the Annual Accounts and the Audit Reports thereon by the Parliament as a
whole would be a difficult task, considering their diverse and specialised nature, besides
imposing excessive demands on the limited time available to the Parliament for discussion of
issues of national importance.
2. Therefore, the Parliament and the State Legislatures have, for this purpose, constituted
specialized Committees like the Public Accounts Committee (PAC), Estimates Committee
and the Committee on Public Undertakings (COPU), to which these audit Reports and Annual
Accounts automatically stand referred.
PUBLIC ACCOUNTS COMMITTEE (PAC):
It is the duty of the Public Accounts Committee to satisfy itself:
1. That the moneys were disbursed legally on the service or purpose to which they were applied;
2. That the expenditure incurred was authorised;
3. That re-appropriation has been made in accordance with the provisions made (i.e., distribution
of funds).
It is also the duty of the PAC to examine the statement of accounts of autonomous and semi -
autonomous bodies, the audit of which is conducted by the Comptroller & Auditor General either
under the directions of the President or by a Statute of Parliament.
ESTIMATES COMMITTEE: The Committee examines the estimates with a view to:
1. Report what economies, improvements in organization, efficiency or administrative reform,

consistent with the policy underlying the estimates may be effected;
2. Suggest alternative policies;
3. Examine whether the money is well laid out within the limit; and
4. Suggest the form in which the estimates shall be presented to parliament.
The Committee does not comment upon a policy approved by Parliament, but where there is
evidence that a particular policy is not leading to the desired results, or is leading to waste, it is the
duty of the Committee to bring it to the notice of the House.
COMMITTEE ON PUBLIC UNDERTAKINGS (COPU): The Committee on Public Undertakings exercises

the same financial control on the public sector undertakings as the PAC exercises over the
functioning of the Government departments. The functions of the Committee are –
1. To examine the reports and accounts of public undertakings.

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2. To examine the reports of the C & AG on public undertakings.

3. To examine the autonomy and efficiency of public undertakings and to see whether they are
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being managed in accordance with sound business principles and prudent commercial practices.
4. To exercise such other functions vested in the PAC and the estimates committee as are not
covered above and as may be allotted by the speaker from time to time.
The examination of public enterprises by the Committee takes the form of comprehensive appraisal
or evaluation of performance of the undertaking. It involves a thorough examination, including
evaluation of the policies, programmes and financial working of the undertaking.
The objective of the Financial Committees, in doing so, is to focus not only on the individual
irregularity, but also on the defects in the system which led to such irregularity, and the need for
correction of such systems and procedures.
C&AG'S ROLE: The Comptroller & Auditor General of India plays a key role in the functioning of the
financial committees of Parliament and the State Legislatures. He has come to be recognised as a
'friend, philosopher and guide' of the Committees.
1. His Reports generally form the basis of the Committees' working, although they are not
precluded from examining issues not brought out in his Reports;
2. He scrutinises the notes which the Ministries submit to the Committees and helps the
Committees to check the correctness of submissions to the Committees and facts and figures in
their draft reports;
3. The Financial Committees present their Report to the Parliament/ State Legislature with their
observations and recommendations. The various Ministries / Department of the Government
are required to inform the Committees of the action taken by them on the recommendations
of the Committees (which are generally accepted) and the Committees present Action Taken
Reports to Parliament / Legislature;
4. In respect of those Audit Reports, which could not be discussed in detail by the Committees,
written answers are obtained from the Department / Ministry concerned and are sometimes
incorporated in the Reports presented to the Parliament / State Legislature. This ensures that
the Audit Reports are not taken lightly by the Government, even if the entire report is not
deliberated upon by the Committee.
Q.NO.2 WRITE ABOUT OBJECTIVE AND SCOPE OF PUBLIC ENTERPRISES AUDIT?

ANSWER:
The C&AG’s (Duties, Power and Conditions of Services) Act, 1971 specifies the entities that come
under audit purview of C&AG at the Union and State level. However, the scope and extent of audit
is determined by the C&AG itself.
1. Audit of public enterprises in India is not restricted to financial and compliance audit; it extends
also to performance (efficiency, economy and effectiveness with which these operate and fulfill
518
their objectives and goals). C & AG Conducts broadly 3 types of audits:

a. Financial Audit.
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b. Compliance Audit.
c. Performance Audit.
2. PROPRIETY AUDIT: Another aspect of audit relates to questions of propriety. This audit is
directed towards an examination of management decisions in sales, purchases, contracts, etc. to
see whether these have been taken in the best interests of the undertaking and conform to
accepted principles of financial propriety.
3. COMPREHENSIVE AUDIT: Under comprehensive audit, the C&AG do not really cover again the
field which has already been covered. He conducts an appraisal or an efficiency-cum-
performance audit. He sees whether the undertakings have fulfilled the objectives for which
they have been established, whether value-for-money spent has been obtained, whether the
targets have been achieved, etc. He locates the areas of weakness including review of the
decisions taken by the management and a comprehensive appraisal of the performance of the
undertaking.
4. ORGANISATION’S DECISION TO BE TAKEN BY COMPETENT AUTHORITY: In examining the

decisions of a management, the auditor examines that these were taken by the competent
authority after examination of all aspects (economic, technological, public interest) on the basis
of all the relevant information available at that time and taking into consideration the different
alternatives available to management and that the decisions were consistent with the aims and
objectives of the enterprise.
5. HELPING GOVERNMENT: Audit is an instrument of accountability. But an equally important

purpose of audit of public enterprises in India is to help the Government and the enterprise
managements improve their efficiency and effectiveness. This is achieved by bringing out
financial and operational deficiencies, inadequacies or ineffectiveness of systems, shortfalls in
performance, etc. and by analysing the causes of shortfall from acceptable standards of
performance.
6. HIGHLIGHTING ISSUES OF EFFICIENT AND ECONOMIC OPERATIONS: Financial performance is
linked with physical performance and issues of efficient and economic operations and
management of resources are highlighted. There is an increasing emphasis on audit being an
instrument of improvement.
7. FISCAL AND MANAGERIAL ACCOUNTABILITY: In the broader context, Government audit
encompasses two main elements, viz.,
a. Fiscal Accountability: It includes audit of provisions of funds, sanctions, compliances and
propriety; and
b. Managerial Accountability: It includes audit of efficiency, economy and effectiveness
(This is often referred to as efficiency-cum-performance audit).
Q.NO.3 WRITE ABOUT ELEMENTS OF PSU AUDITS?

ANSWER:
Public sector auditing increases the confidence of the intended users by providing relevant
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information and independent and objective assessments concerning deviations from accepted
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standards or principles of good governance. Audit of all public-sector undertakings has the following
basic elements:
A. THE THREE PARTIES - AUDITOR, RESPONSIBLE PARTY AND INTENDED USERS:

1. AUDITOR: The role of auditor is fulfilled by Supreme Audit Institution (SAI), India and by its
personnel delegated with the duty of conducting audits. The Comptroller and Auditor
General of India (CAG) and the Indian Audit and Accounts Department (IAAD) functioning
under him, constitute the Supreme Audit Institution of India
2. RESPONSIBLE PARTY: The relevant responsibilities are determined by constitutional or
legislative arrangement. Generally, auditable entities and those charged with governance of
the auditable entities would be the responsible parties. The responsible parties may be
responsible for the subject matter information, for managing the subject matter or for
addressing recommendations.
3. INTENDED USERS: Intended users are the individuals, organizations or classes thereof for
whom the auditor prepares the audit report.
B. SUBJECT MATTER, CRITERIA AND SUBJECT MATTER INFORMATION:
C. TYPES OF ENGAGEMENT - ATTESTATION ENGAGEMENTS AND DIRECT REPORTING

ENGAGEMENT:
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Financial audits are always attestation engagements, as they are based on financial information
presented by the responsible party. Performance audits and compliance audits are generally direct
reporting engagements.
Q.NO.4 WHAT ARE THE PRINCIPLES OF PSU AUDITS?

ANSWER:
The principles of PSU Audits constitute the general standards that apply to SAI India’s personnel as
auditors and are fundamental to the conduct of all types of PSU Audits.
The principles are categorized into two distinct groups as below:
I. General Principles
II. Principles related to the Audit Process 521

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Q.NO.5 WRITE ABOUT AUDIT OF GOVERNMENT COMPANIES?
ANSWER:
The following steps are involved in the audit of government companies:
APPOINTMENT OF AUDITORS UNDER SECTION 139(5) AND 139(7) READ WITH SECTION 143(5) OF
THE COMPANIES ACT, 2013:
1. Statutory auditors of Government Companies are appointed or reappointed by the C&AG.

There is thus, a departure from the practice in vogue in the case of private sector companies
where appointment or re-appointment of the auditors and their remuneration are decided
by the members at the annual general meetings. In the case of government companies,
though the appointment of statutory auditors is done by the C&AG, the remuneration is left
to the individual companies to decide based on certain guidelines given by the C&AG in this
regard.
2. The C&AG may direct the appointed auditor on the manner in which the accounts of the
Government company are required to be audited and the auditor so appointed has to
submit a copy of the audit report to the Comptroller and Auditor-General of India. The
report, among other things, includes the directions, if any, issued by the C&AG, the action
taken thereon and its impact on the accounts and financial statement of the company.
3. The report under section 143(5) is in addition to the reports issued by the Statutory
Auditors under various other clauses of section 143.
SUPPLEMENTARY AUDIT UNDER SECTION 143(6)(A) OF THE COMPANIES ACT, 2013:
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The Comptroller and Auditor-General of India shall within 60 days from the date of receipt of the
audit report have a right to conduct a supplementary audit of the financial statements of the
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government company by such person or persons as he may authorize in this behalf and for the
purposes of such audit, require information or additional information to be furnished to any person
or persons, so authorised, on such matters, by such person or persons, and in such form, as the
C&AG may direct.
COMMENT UPON OR SUPPLEMENT SUCH AUDIT REPORT UNDER SECTION 143(6)(B) OF THE
COMPANIES ACT, 2013:
Any comments given by the C&AG upon, or in supplement to, the audit report issued by the
statutory auditors shall be sent by the company to every person entitled to copies of audited
financial statements under sub-section (1) of section 136 of the said Act i.e., every member of the
company, to every trustee for the debenture-holder of any debentures issued by the company, and
to all persons other than such member or trustee, being the person so entitled and also be placed
before the annual general meeting of the company at the same time and in the same manner as the
audit report.
TEST AUDIT UNDER SECTION 143(7) OF THE COMPANIES ACT, 2013:
Without prejudice to the provisions relating to audit and auditor, the C&AG may, in case of any
company covered under sub-section (5) or sub-section (7) of section 139 of the said Act, if he
considers necessary, by an order, cause test audit to be conducted of the accounts of such
company and the provisions of section 19A of the Comptroller and Auditor-General's (Duties,
Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.
Q.NO.6 EXPLAIN THE CONCEPT OF FINANICAL AUDIT?

ANSWER:
1. Financial audit is primarily conducted to:

a. express an audit opinion on the financial statements; and
b. enhance the degree of confidence of intended users in the financial statements.
2. The C&AG shall express an opinion as to whether the financial statements are in the case of
financial statements prepared in accordance with a fair presentation financial reporting
framework, whether the financial statements are presented fairly, in all material respects, or
give a true and fair view, in accordance with that framework.
Q.NO.7 EXPLAIN THE CONCEPT OF COMPLIANCE AUDIT?

ANSWER:
1. Compliance audit is the independent assessment of whether a given subject matter is in

compliance with the applicable criteria.
2. This audit is carried out by assessing whether activities, financial transactions and information
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comply in all material respects, with the regulatory and other rules which govern the audited
entity.
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3. Compliance audit is concerned with:
(i) Regularity: adherence of the subject matter to the formal criteria resulting from
relevant laws, regulations and agreements applicable to the entity.
(ii) Propriety: observance of the general principles governing sound financial
management and the ethical conduct of public officials.
4. While regularity is emphasized in compliance auditing, propriety is equally pertinent in the

public-sector context, in which there are certain expectations concerning financial management
and the conduct of officials.
5. Perspective of Compliance Audit: Compliance Audit is part of a combined audit that may also
include other aspects. Compliance auditing is generally conducted either-
(i) in relation with the audit of financial statements, or
(ii) separately as individual compliance audits, or
(iii) in combination with performance auditing.
6. When compliance auditing is part of a performance audit, compliance is seen as one of the
aspects of economy, efficiency and effectiveness. Noncompliance may be the cause of, an
explanation for, or a consequence of the state of the activities that are the subject matter of the
performance audit.
Q.NO.8 WRITE ABOUT PERFORMANCE AUDIT?

ANSWER:
DEFINITION:
A performance audit is an objective and systematic examination of evidence for the purpose of
providing an independent assessment of the performance of a government organization, program,
activity, or function in order to provide information to improve public accountability and facilitate
decision-making by parties with responsibility to oversee or initiate corrective action.
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C & AG AND SUB ORDINATES:

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Performance audit in PSUs is conducted by the C&AG (Supreme Audit Institutions) through various
subordinate offices of Indian Audit and Accounts Department (IAAD). In conducting performance
audit, the subordinate offices are guided by manual and auditing standards prescribed by C&AG.
ADVANTAGE OF PERFORMANCE AUDIT:
This audit promotes accountability by assisting those charged with governance and oversight
responsibilities to improve performance through an examination of whether:
1. Decisions by the legislature or the executive are efficiently and effectively prepared and
implemented; and
2. Tax payers or citizens have received value for money. According to the guidelines issued by
the C&AG, Performance Audits usually address the issues of ECONOMY, EFFICIENCY AND
EFFECTIVENESS.
ECONOMY: It is minimising the cost of resources used for an activity, having regard to appropriate
quantity, quality and at the best price. Judging economy implies forming an opinion on the
resources (e.g., human, financial and material) deployed. This requires assessing whether the given
resources have been used economically and acquired in due time, in appropriate quantity and
quality at the best price.
EFFICIENCY: It is the input-output ratio. In the case of public spending, efficiency is achieved when
the output is maximised at the minimum of inputs, or input is minimised for any given quantity and
quality of output. Auditing efficiency includes aspects such as whether:
1. Sound procurement practices are followed.

2. Resources are properly protected and maintained.
3. Human, financial and other resources are efficiently used.
4. Optimum number of resources (staff, equipment, and facilities) are used in producing or
delivering the appropriate quantity and quality of goods or services in a timely manner.
5. Public sector programmes, entities and activities are efficiently managed, regulated,
organised and executed.
6. Efficient operating procedures are used and
7. The objectives of public sector programmes are met cost-effectively.
EFFECTIVENESS: It is the extent to which objectives are achieved and the relationship between the
intended impact and the actual impact of an activity. In auditing effectiveness, performance audit
may, for instance:
1. Assess whether the objectives of and the means provided (legal, financial, etc.) For a new or
ongoing public sector programme are proper, consistent, suitable or relevant to the policy.
2. Determine the extent to which a program achieves a desired level of program results.
3. Assess and establish with evidence whether the observed direct or indirect social and economic
impacts of a policy are due to implementation of the policy or to other causes.
4. Identify factors inhibiting satisfactory performance or goal-fulfilment.
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5. Assess whether the programme complements, duplicates, overlaps or counteracts other related
programmes.
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6. Assess the effectiveness of the program and/or of individual program components.
7. Determine whether management has considered alternatives for carrying out the program that
might yield desired results more effectively or at a lower cost.
8. Assess the adequacy of the management control system for measuring, monitoring and
reporting a programme's effectiveness.
9. Assess compliance with laws and regulations applicable to the program; and
10. Identify ways of making programmes work more effectively.
Q.NO.9 WRITE ABOUT OBJECTIVE OF PERFORMANCE AUDIT?

ANSWER:
The objectives of performance auditing are evaluation of economy, efficiency, and effectiveness of
policy, programmes, organization and management.
It also promotes accountability by assisting those charged with governance and oversight
responsibilities to improve performance; and transparency by affording taxpayers, those targeted by
government policies and other stakeholders an insight into the management and outcomes of
different government activities.
Performance auditing focuses on areas in which it can add value which have the greatest potential
for development. It provides constructive incentives for the responsible parties to take appropriate
action.
Regulations on Audit and Accounts issued by C&AG lay down that the responsibility for the
development of measurable objectives and performance indicators as also the systems of
measurement rests with the Government departments or Heads of entities. They are also required
to define intermediate and final outputs and outcomes in measurable and monitorable terms,
standardise the unit cost of delivery and benchmark quality of outputs and outcomes.
EXAMPLE:
Performance Audit of enforcement mechanism for administering the provision of Minimum

Wages Act (a social welfare legislation)
The auditors, who undertake performance audit of a program or unit, must possess knowledge of
the industries or labor contracts where these provisions are applicable and also identify the
population thereof before carrying out audit program. He shall evaluate the standard of living
before implementation and after implementation of the Act. Further, the auditor shall have to
evaluate the evidence available as to nature of returns prescribed and obtained for taking
appropriate action. The Performance Auditor shall also have to evaluate the economy, efficiency
and effectiveness in the welfare systems to be audited. He can then study the shortcomings in the
coordination between different agencies like labor department, EPF and ESI organization and the
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control systems and point out a set of relevant problems.

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The auditor shall also have to point out gaps, if any in the existing legal frame work or enforcement
mechanism to strengthen the objective of legislation. Another possible area of critical audit may be
to study actual level of compensation required in each area keeping in mind the local living
conditions and where the minimum wages prescribed in the statute is demonstrably different from
this level, he may report the same to the Government for taking appropriate action.
In this manner, the performance audit can not only examine the reasons for such adversities but
also ensures that the legislation serves the intended purpose. By reporting the same to the
legislature, the corrective is made possible.
Q.NO.10 EXPLAIN IN DETAILED ABOUT PLANNING OF THE PERFORMANCE AUDIT?

ANSWER:
The following steps are suggested to the auditors for planning while conducting the performance
audit:
STEP 1: UNDERSTANDING THE ENTITY/PROGRAMME:
It is the starting point for planning individual performance audit.

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The auditor may use the following sources for understanding the entity:
1. DOCUMENTS OF THE ENTITY: Documents on administration and functions of the entity, policy
files, annual reports, budget documents, accounts, minutes of meetings, information on the
website, internal audit reports, electronic databases and MIS reports, RTI material etc.
2. LEGISLATIVE DOCUMENTS: Legislation, parliamentary questions and debates, reports of the
Public Accounts Committee, the Committee on Public Undertakings, the Estimates Committee
and letters from Members of Parliament.
3. POLICY DOCUMENTS: Documents of Planning Commission, Ministry of Finance etc.
4. ACADEMIC OR SPECIAL RESEARCH: Independent evaluations on the entity, academic research
and similar work done by other governments and other SAIs.
5. PAST AUDITS: Past financial and performance audits of the entity provide a major source of
information and understanding.
6. MEDIA COVERAGE: Print and electronic media - their systematic documentation on regular basis
in a transparent manner.
7. SPECIAL FOCUS GROUPS: Audit Advisory Committee concerns, annual and special reports of
World Bank, Reserve Bank of India, reports by special interest groups, NGOs, etc.
STEP 2: DEFINING THE OBJECTIVES AND THE SCOPE OF AUDIT:
The audit objectives should be defined in a succinct manner as they will impact the nature of the
audit, govern its conduct and affect audit conclusions. Setting audit objectives ensures good quality
performance audits. It facilitates clarity, demonstrates consistent quality of audit and serves as a
measure of quality assurance of the audit. Defining the scope constricts the audit to significant
issues that relate to the audit objectives. It mainly focuses the extent, timing and nature of the
audit.
STEP 3: DETERMINING AUDIT CRITERIA:
Audit criteria are the standards used to determine whether a program meets or exceeds
expectations. It provides a context for understanding the results of the audit. Audit criteria are
reasonable and attainable standards of performance against which economy, efficiency and
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effectiveness of programmes and activities can be assessed. The audit criteria may be sought to be
obtained from the following sources:
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1. Procedure manuals of the entity.
2. Policies, standards, directives and guidelines.
3. Criteria used by the same entity or other entities in similar activities or programmes.
4. Independent expert opinion and know how.
5. New or established scientific knowledge and other reliable information.
6. General management and subject matter literature and research papers.
STEP 4: DECIDING AUDIT APPROACH:
There is NO UNIFORM AUDIT APPROACH prescribed that can be applicable to all types of subjects of
performance audits. Selection of approach also determine methods and means used for conducting
the audit. Some of the methods which could be used in conducting performance audits include:
1. ANALYSIS OF PROCEDURES: It involves review of the systems in place for planning, conducting,
checking and monitoring the activity. This would consist of examination of documents such as
financial reports, budgets, programme guidelines, procedure manuals, etc.
2. CASE STUDIES: A case study is a descriptive analysis of an entity, scheme or a programme. It
involves analysis of a particular issue within the context of the whole area under review.
3. USE OF EXISTING DATA: The audit staff should investigate the data held by entity management
and by other relevant sources. Audit conclusions based on testing of available data for
correctness and completeness enhances the assurance level.
4. SURVEYS: Survey is a method of collecting information from members of a population to assess
the interrelation of events and conditions. Surveys on predetermined parameters can
supplement the audit findings and conclusions adding value to the performance audits.
5. ANALYSIS OF RESULTS: It requires the auditor to carry out actual output-input analysis to
determine the efficiency of the programme.
6. QUANTITATIVE ANALYSIS: It involves examination of available data relating to financials like
earnings, revenue, or data relating to programme implementation like details of beneficiaries
etc. However, it may not be possible for the auditor to work with complete data due to its high
volume. In such cases, sampling techniques are required to be used.
STEP 5: DEVELOPING AUDIT QUESTIONS:
Subsequent to designing of audit objectives and determination of audit criteria, the audit team is
required to prepare a list of questions to which they would seek answers. The questions should be
framed in comprehensive manner involving detailed hierarchy of questions.
STEP 6: ASSESSING AUDIT TEAM SKILLS AND WHETHER OUTSIDE EXPERTISE REQUIRED:
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1. It is essential that the performance auditors possess special aptitude and knowledge. The
Auditing Standards of C&AG of India provide that the audit institution should develop and train
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the auditors to enable them to perform their tasks effectively & efficiently and should prepare
manuals & other written guidance notes & instructions concerning conduct of audits.
2. Given the diverse range of subjects of performance auditing, the audit team needs to develop
sound understanding of the programme or entity proposed to be audited.
3. The audit team needs to decide at the planning stage on which aspect expertise is required.
Though, the Accountant General may use the work of an expert, he retains full responsibility for
the expression of opinion in the auditor’s report.
STEP 7: PREPARING AUDIT DESIGN MATRIX (ADM):
1. Having determined the audit objective, audit criteria, audit approach, data collection etc., audit
team should prepare an Audit Design Matrix. It is a structured and highly focused approach to
designing a performance audit study.
2. The ADM highlights the data collection and analysis method as well as the type and sources of
evidence required to support audit opinion/findings.
3. An ADM is prepared on the basis of information and knowledge obtained during the planning
stage. A well-designed ADM leads to effective audits thus providing highest assurances to the
auditing entities. It is desirable to prepare ADM for each of the audit objectives.
STEP 8: ESTABLISHING TIME TABLE AND RESOURCES:
1. It is significant to determine the timetable and desirable resources. Selection of appropriate

audit team is the most vital component in planning an audit. Considerations for selection of an
appropriate audit team should be recorded along with the proposed timelines for various
activities to be undertaken as a part of audit process. The progress should also be monitored
against these timelines.
2. The Accountant General would be liable for ensuring that the performance audit is completed
on time. The variations between the required and actual time spent should be compared and
approved from the competent authority.
3. The team should build time for translation, approval and possible delays in their own schedule in
order to meet the targets.
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STEP 9: INTIMATION OF AUDIT PROGRAMME TO AUDIT ENTITIES:

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1. Audited entities must be intimated about the intention of taking up planned performance audit
with the scope and extent of audit including the constitution of audit team and the tentative
time schedule, well before the commencement of Audit. Acknowledgement of this may be
requested and placed on record.
2. It may be required to refine an audit's objectives as the audit progresses for gathering the
requisite information to fulfil the audit. The reasons for such changes in the objectives should
also be recorded and approved from the competent authority.
3. The audit programme should be flexible and reviewed from time to time as it is not possible to
anticipate all the contingencies at the early stage.
4. The Accountant General should share all significant refinements in the approach and additional
tests and findings, concurrently with other audit teams when different persons conduct the
audit at different locations. The system of sharing of the significant field audit experience should
be documented and reviewed.
Refer Q No. 1 in Practical Questions [ Illustration 1 in ICAI Material]
SPECIMEN [ABRIDGED] PERFORMANCE AUDIT REPORT BY C & AG
Report No.5 of 2020 (Performance Audit)
Performance Audit on the Merchandise Exports from India Scheme (MEIS) and Service Exports
from India Scheme (SEIS) was conducted to seek an assurance on the success of facilitation
measures introduced for simplifying the process of issuance of scrips and to examine effective
linkage of rules and procedures of the Schemes in Director General of Foreign Trade (DGFT)
Electronic Data Interchange (EDI) system.
This audit covered analysis of pan-India data received from DGFT for the period April 2015 to
October 2018. It was noticed that 5,94,653 (5,84,650 MEIS and 10,003 SEIS) scrips amounting to
Rs.76,416 crore was issued by 38 Regional Authorities (RAs) and Nine Development
Commissioners (DCs) of SEZs. In view of prevalent manual processes, a sample of 25 RAs (66 per
cent of total RAs) and seven DC offices (77 per cent of total DC offices) was selected for this
audit. These 32 units covered 5,53,726 (5,43,803 MEIS and 9,923 SEIS) scrips (93.12 percent)
amounting to Rs.72,743 crore (95.19 percent).
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Further, in these selected units, 6,205 Scrips (5747 MEIS Scrips and 458 SEIS Scrips), representing
1.7 per cent of the total scrips in these units, were selected for detailed examination. Audit also
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selected Customs field offices from where exports relating to these sampled scrips were
affected. Results of data analysis carried out on Pan-India data were suitably included in the
report along with audit findings based on examination of the scrips selected for detailed
examination.
Structure of the Report: This report is divided into three chapters.
Chapter 1 presents an overview of both the schemes along with the Audit Objectives, Scope,
Sample, Audit Criteria and Audit Methodology used for conducting this Performance Audit.
Chapter 2 presents Audit Findings, Conclusions and Recommendations relating to gaps in

integrating the policy and procedures of the schemes with the automated module, observed
during analysis of pan-India data and key features of automation. The fact that many of the
intermediate procedures were still being handled manually, necessitated test checks in selected
units to examine the manual checks exercised by the RAs and DC offices.
Chapter 3 The Audit Findings, Conclusions and Recommendations relating to manual scrutiny in
the randomly selected samples in the selected units are presented in Chapter 3. As some of the
audit findings are based on test check, there is every likelihood that such errors of omission and
commission might exist in other cases also. Department may therefore, check all the remaining
transactions also on the lines of audit findings reported and take appropriate corrective action.
This report has 48 Audit paragraphs with a revenue implication of Rs.364.32 crores. Of these, 44
observations involving a money value of Rs.233.02 crore have been accepted by the department
and recovery of Rs.7.82 crore has been reported till date in respect of seven observations. Four
paras amounting to Rs.131.30 crore have not been accepted by the department. Similarly, eight
of the total 14 recommendations made in the report, have been accepted.
Responses received from Department of Commerce (September 2019/March 2020) and

Department of Revenue (October 2019/March 2020) have been included in the report.
Q.NO.11 WRITE ABOUT COMPREHENSIVE AUDIT IN DETAILED?

ANSWER:
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The Comptroller and Auditor General assists the legislature in reviewing the performance of public
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undertakings. He conducts an efficiency-cum-performance audit other than the field which has
already been covered either by the internal audit of the individual concerns or by the professional
auditors. He locates the area of weakness and irregularities for managements’ information.
The areas covered in comprehensive audit naturally vary from enterprise to enterprise depending
on the nature of the enterprise, its objectives and operations. However, in general, the covered
areas are those of investment decisions, project formulation, organisational effectiveness, capacity
utilisation, management of equipment, plant and machinery, production performance, use of
materials, productivity of labour, idle capacity, costs and prices, materials management, sales and
credit control, budgetary and internal control systems, etc.
Some of the issues examined in comprehensive audit are:
1. How does the overall capital cost of the project compare with the approved planned costs?
Were there any substantial increases and, if so, what are these and whether there is evidence of
extravagance or unnecessary expenditure?
2. Have the planned production or operational outputs been achieved? Has there been under-
utilisation of installed capacity or shortfall in performance and, if so, what has caused it?
3. Has the planned rate of return been achieved?
4. Are the systems of project formulation and execution sound? Are there inadequacies? What has
been the effect on the gestation period and capital cost?
5. Are cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.?
6. Are the purchase policies adequate? Or have they led to piling up of inventory resulting in
redundancy in stores and spares?
7. Does the enterprise have research and development programmes? What has been the
performance in adopting new processes, technologies, improving profits and in reducing costs
through technological progress?
8. If the enterprise has an adequate system of repairs and maintenance?
9. Are procedures effective and economical?
10. Is there any poor or insufficient or inefficient project planning?
The Bureau of Public Enterprises has issued guidelines to be followed by the public sector
enterprises in respect of general management, financial management, materials management,
production management, construction management, etc. and these guidelines provide another
basis for appraising enterprise performance and its systems. Another source of criteria is industrial
engineering and other technical studies by internal and external experts and the standards given in
these. Then there are standards of financial propriety.
Q.NO.12 WRITE ABOUT THE CONCEPT OF PROPRIETY AUDIT IN DETAILED?

ANSWER:
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A. DEFINITION AND PRINCIPLES:

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E.L. Kohler has defined the term propriety as “that which meets the tests of public interest,
commonly accepted customs, and standards of conduct, and particularly as applied to professional
performance, requirements of law, Government regulations and professional codes”.
1. On an analysis, the tests boil down to tests on economy, efficiency and faithfulness. Instead
of too much dependence on documents, vouchers and evidence, it shifts the emphasis to
the substance of transactions and looks into the appropriateness thereof on a
consideration of financial prudence, public interest and prevention of wasteful expenditure.
2. It is also seen whether every officer has exercised the same vigilance in respect of
expenditure incurred from public money, as a person of ordinary prudence would exercise in
respect of expenditure of his own money under similar circumstances.
3. In ‘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. A transaction may satisfy all the requirements of regularity
audit insofar as the various formalities regarding rules and regulations are concerned, but
may still be highly wasteful.
4. FOR EXAMPLE, a building may be constructed for installing a telephone exchange but may
not be used for the same purpose resulting in infructuous expenditure or a school building
may be constructed but used after five years of its completion is a case of avoidable
expenditure.
5. Audit should look into the wisdom, faithfulness and economy of transactions. These
considerations have led to the evolution of audit against propriety which is now being
combined by the audit authorities with their routine function of regularity audit.
6. It is hard to frame any precise rules for regulating the course of audit against propriety. Such
an objective of audit depends for its acceptance on its appeal to the common sense and
straight logic of the auditors and of those whose financial transactions are subjected to
propriety audit. However, some general principles have been laid down in the Audit Code,
which have for long been recognised as standards of financial propriety.
7. PRINCIPLES OF PROPRIETY: Propriety requires the transactions, and more particularly

expenditure, to conform to certain general principles. These principles are:
a. that the expenditure is not prima facie more than the occasion demands and that
every official exercise the same degree of vigilance in respect of expenditure as a
person of ordinary prudence would exercise in respect of his own money;
b. that the authority exercises its power of sanctioning expenditure to pass an order
which will not directly or indirectly accrue to its own advantage;
c. those funds are not utilised for the benefit of a particular person or group of persons
and
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d. that, apart from the agreed remuneration or reward, no other avenue is kept open to
indirectly benefit the management personnel, employees and others.
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8. It may be stated that it is the responsibility of the executive departments to enforce
economy in public expenditure. The function of audit is to bring to the notice of the proper
authorities of wastefulness in public administration and cases of improper, avoidable and
infructuous expenditure.
B. RELEVANT PROVISIONS IN THE COMPANIES ACT, 2013:

Some provisions in the Companies Act, having direct or indirect bearing on propriety. These
provisions are:
1. Section 143(1) requiring enquiry into certain specified matters.

2. Section 143(6) and 143(7) requiring a supplementary audit and test audit respectively in
respect of the Government companies on matters specified.
3. Section 148 relating to Cost Records and Audit.
4. Additional information in Part II of Schedule III.
All these are applicable to Government Companies. The requirement of the provisions of
section 143(1) is essentially propriety-oriented as much as some specific dubious practices are
required to be looked into by the auditor. Areas of propriety audit under the provisions of
Section 143(1) may be following:
143(1)(a): Whether the terms on which secured loans and secured advances have been made are
prejudicial to the interests of the company or its members.
It may be appreciated that the terms of loans include such matters as security, interest, repayment
period and other business considerations. The auditor has to inquire whether the terms are such
that they can be adjudged as prejudicial to the legitimate interest of the company or of its
shareholders. This is a process of judging a situation by reference to certain objective standards or
reasonableness whether the terms entered into are prejudicial or not, not only to the company but
also to the shareholders.
143(1)(b): Whether transactions of the company which are represented merely by book entries
are prejudicial to the interests of the company.
This proposition has got to be inquired into by reference to the effects of the book entries,
unsupported by transactions, on the legitimate interests of the company. The auditor has to
exercise his judgment based on certain objective standards. It is also possible that some transactions
may not adversely affect the interests of the company. The auditor has to judiciously consider what
does and does not constitute the interest of the company.
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143(1)(c): Whether investment of companies, other than a banking or an investment company, in

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the form of shares, debentures and other securities have been sold at a price lower than the cost.
Apparently, this is a matter of verification by the auditor. The intention, however, is not to know
whether loss has occurred due to the sale. The auditor is required to inquire into circumstances of
sale of investments that resulted in loss. Obviously, the duty cast on him is propriety based, i.e.,
reasonableness of the decision to sell at a loss. It involves exercise of judgment having regard to
the circumstances in which the company was placed at the time of making the sale.
143(1)(d): Whether loans and advances made by the company have been shown as deposits.
Again, considering the propriety element, rationalizing the proper disclosure of loans and advance
given by company is made.
143(1)(e): Whether personal expenses have been charged to revenue.
It is an accepted principle that expenses which are not business expenses should not be charged to
revenue. The effect of charging personal expenses to the business is to distort the profitability of the
company and to secure a personal gain at the cost of the company. Obviously, propriety is involved
in this; charging personal expenses to business account is highly improper and abusive hence this
provision.
143(1)(f): In case it is stated in the books and papers of the company that shares have been
allotted for cash, whether cash has actually been received in respect of such allotment, and if no
cash actually received, whether the position in books of account and balance sheet so stated is
correct, regular and not misleading.
A control has been set up to verify the receipt of cash in case of allotment of shares for cash.
Further, if cash is not received, whether the books of accounts and statement of affairs shows the
true picture.
SEC. 148 – COST RECORDS AND AUDIT:
Cost records and the provisions of cost audit are designed to inculcate cost consciousness in the
management and to know whether productivity is of acceptable order and whether undue wastage
or loss etc. has occurred. It would be useful to go into some of the specific requirement of cost audit
report in this context. Some of the matters in the additional information sought through the
Statement of Profit and Loss (i.e., Part II of Schedule III) provide a basis for making more searching
enquiries into such vital matters as consumption of raw materials under broad heads, goods
purchased under broad heads, work in progress under broad heads, any item of income or
expenditure which exceeds one percent of the revenue from operations or Rs. 1,00,000, whichever
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is higher, etc.
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C. PROPRIETY ELEMENTS UNDER CARO, 2020:
CLAUSE – III, IV, VIII, IX, X, XI, XIII, XV AND XVIII [REFER AUDIT REPORT CHAPTER]
The audit conducted by the C&AG is a rule, procedure and propriety-based one; and often it is said
that the desired flexibility is lacking in the system and this has contributed in a large measure to the
lack of rapport between the auditor and the audit-units. In turn, this has tended to foster a
tendency amongst Government officials to just conform to the rules and provide a show of
compliance with the standards of propriety. This is not intended to belittle the contribution of this
audit in ensuring appropriate use of fund of the Government.
In Government, because of the enormous amounts involved and the massive volume of transactions
and in view of public interest, it is but necessary that compliance with rules should be insisted upon
and non-compliance enquired into. But the benefit derived is at least partly offset by the element
of distrust and often the truth remains buried.
Q.NO.13 WHAT ARE THE PROBLEMS INVOLVED IN PROPRIETY AUDIT?

ANSWER:
1. Problems in propriety audit, however, arise mainly because of its distinct nature. The expression
“propriety” is a moral term and can be understood by reference to the concept of morality
accepted by the society at a given time.
2. In any auditing, the essential test lies in formulation of auditing propositions. In the audit of
financial accounts by reference to financial and legal requirements, propositions are built up
about happening of events, existence, accuracy, title, ownership, compliance with law and
internal regulations etc., which are all verifiable. In propriety audit the formulation of verifiable
auditing propositions poses the problem.
3. Propriety audit has an inherent element of subjectivity because it is very difficult to establish
standards of public interest, commonly accepted customs, standards for conduct which are not
firm basis for audit evaluation. To take care of this situation, the C&AG has developed the
norms of propriety for expenditure of public funds in our country. By laying down the standards
of propriety for Government expenditure the C&AG has really tried to tackle in a practical way
the complex problem of subjectivity inherent in a situation calling for propriety consideration.
The norms so developed provide the basis of verifying expenditure incurred by various
Government departments.
4. Propriety as a moral element should be a matter of evaluation based on objectives and

prevailing circumstances. For example, a travel by air as such should not be considered wasteful
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unless it is proved that a travel by rail would have been feasible in the circumstances and would
have brought the same results brought by the air travel.
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5. The element of subjectivity has sometimes resulted in proper discharge of duty very delicate and
which demands discretion, but wisdom of taking commercial decisions under dynamic
environment (the economic, social and political) must be evaluated with reference to the
circumstances in which these were taken (and not on hindsight) and therefore, the auditor in his
field must reconstruct such circumstances. The judgment of the auditor must be objective as
otherwise it would dampen the initiative of management and others in taking commercial
decisions and propriety audit would prove itself to be counter productive.
Q.NO.14 WRITE ABOUT AUDIT REPORT OF C & AG?

ANSWER:
To facilitate a proper consideration, the reports of the C&AG on the audit of PSUs are presented to
the Parliament in several parts consisting of the following:
1. Introduction containing a general review of the working results of Government companies,

deemed Government companies and corporations.
2. Results of comprehensive appraisals of selected undertakings conducted by the Audit Board.
3. Resume of the company auditors’ reports submitted by them under the directions issued by the
C&AG and that of comments on the accounts of the Government companies; and
4. Significant results of audit of the undertakings not taken up for appraisal by the Audit Board.
For certain specified states, the C&AG submits a separate audit report (commercial) to the
legislature, while for other States/Union Territories with legislature, there is a commercial chapter
in the main audit report. The State audit reports, contains both the results of audit appraisal of
performance of selected companies/corporations as well as important individual instances of
financial irregularities, wasteful expenditure, system deficiencies noticed by the statutory auditors,
and a general review of the working results of Government companies and corporations.
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PRACTICAL QUESTIONS
[ ILLUSTATIONS AND TEST YOUR KNOWLEDGE]
Q.NO.1 The objectives of audit in connection with a State Electricity Distribution Company were
to ascertain whether the:
(i) total cost of providing electricity is being recovered by timely submissions to the State
Electricity Regulatory Commission.
(ii) tariff orders, sales circulars and sales instructions were issued timely, without any
ambiguity. They were implemented in time.
(iii) metering, billing and collection was managed efficiently and effectively;
(iv) monitoring and internal controls were efficient. What kind of audit is this? Prepare
two sample observations which could be part of the audit report.
ANSWER:
This is a performance audit.
Sample observations could be:
1. NON-REPLACEMENT OF DEFECTIVE/ BURNT METERS: Large number of meters, much in

excess of the permitted limit of 1% of the total meters were defective and their replacement
was not completed within the stipulated time of 1 month. This resulted in billing on average
basis for a continuous period of several months. This could result in losses as well as
administrative hassles and disputes with consumers.
2. UNDER CHARGING OF METER RENT: As per Schedule of Charges, the Company is required to
charge meter rent of Rs.30 per month for a single-phase meter and Rs.40 per month for three
phase meter. It was observed that the Company had short charged meter rent of Rs.60 lakh
from 3 lakh consumers in 5 lakh bills during the period.
Q.NO.2 ABG & Co., a Chartered Accountant firm has been appointed by C & AG for performance
audit of a Sugar Industry. What factors should be considered by ABG & Co., while planning a
performance audit of Sugar Industry?
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ANSWER:
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Refer Answer to Q No. 10 [ Diagram].
Q.NO.3 Sunlight Limited is a public sector undertaking engaged in production of electricity from
solar power. It had commissioned a new project near Goa with a new technology for a cost
of Rs. 5,750 crore. The project had seen delay in commencement and cost overrun. State the
matters that a Comprehensive Audit by C&AG may cover in reporting on the performance
and efficiency of this project.
ANSWER:
Refer Answer to Q No. 11
Ceta Ltd. is a company in which 54% of the paid up share capital is held by Rajasthan
Government. The company is engaged in the business of providing consultancy services in
relation to construction projects. The audit of the financial statements of Ceta Ltd. for the
financial year ended 31 March 2020 got completed with lot of intervention of Comptroller &
Auditor General of India, wherein C&AG was giving directions to the auditors on the manner in
which audit should be conducted in respect of certain areas. Further, it also received comments
from C&AG on the audit report of the auditors. Ceta Ltd is seeking advice to go against C&AG so
that they can avoid unnecessary interference of C&AG. You are required to advise Ceta Ltd.
with respect to role of C&AG in the audit of a Government company.
ANSWER:
Q.NO.4 “A performance audit is an objective and systematic examination of evidence for the
purpose of providing an independent assessment of the performance of a government
organization, program, activity, or function in order to provide information to improve
public accountability and facilitate decision-making by parties with responsibility to oversee
or initiate corrective action.” Briefly discuss the issues addressed by Performance Audits
conducted in accordance with the guidelines issued by C&AG.
ANSWER:
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Q.NO.5 BT Ltd, a company wholly owned by central government was disinvested during the
previous year, resulting in 40% of the shares being held by public. The shares were also
listed on the BSE. Since the shares were listed, all the listing requirements were applicable,
including publication of quarterly results, submission of information to the BSE etc.
Sam, the FM of the company is of the opinion that now the company is subject to stringent
control by BSE and the markets, therefore the auditing requirements of a limited company in
private sector under the Companies Act 2013 would be applicable to the company and the
C&AG will not have any role to play. Comment.
ANSWER:
Section 2(45) of the Companies Act, 2013, defines a “Government Company” as a company in
which not less than 51% of the paid-up share capital is held by the Central Government or by any
State Government or Governments or partly by the Central Government and partly by one or
more State Governments, and includes a company which is a subsidiary company of such a
Government company. The auditors of these government companies are firms of Chartered
Accountants, appointed by the Comptroller & Auditor General, who gives the auditor directions
on the manner in which the audit should be conducted by them.
The listing of company’s shares on a stock exchange is irrelevant for this purpose and hence
Sam’s opinion is not correct.
Q.NO.6 You have been appointed as auditor of a AKY Ltd. After having determined the audit
objectives, now you have been requested to draft audit criteria. What are the sources that
you will use while doing the task?
ANSWER:
Audit criteria are the standards used to determine whether a program meets or exceeds
expectations. It provides a context for understanding the results of the audit. Audit criteria are
reasonable and attainable standards of performance against which economy, efficiency and
effectiveness of programmes and activities can be assessed. The audit criteria may be sought to
be obtained from the following sources:
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1. Procedure manuals of the entity.

2. Policies, standards, directives and guidelines.
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3. Criteria used by the same entity or other entities in similar activities or programmes.
4. Independent expert opinion and know how.
5. New or established scientific knowledge and other reliable information.
6. General management and subject matter literature and research papers.
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14. AUDIT OF BANKS
Q.NO.1 WHAT ARE THE CHARACTERISTICS OF BANKING INDUSTRY AND SPECIAL ISSUES THAT
ARISE IN AUDIT OF BANKS?
ANSWER:
Banks have certain characteristics distinguishing them from most other commercial enterprises:
1. Custody of large volumes of monetary items, including cash and negotiable instruments,
whose physical security has to be ensured. This applies to storage and the transfer of
monetary items, making banks vulnerable to misappropriation and fraud, necessitating
establishment of formal operating procedures, well-defined limits for individual discretion
and rigorous systems of internal control.
2. Engagement in a large volume and variety of transactions in terms of number and value
which necessarily require complex accounting and internal control systems and widespread
use of Information Technology (IT).
3. Operation through a wide network of geographically dispersed branches and departments
necessitating a greater decentralization of authority and dispersal of accounting and control
functions, with consequent difficulties in maintaining uniform operating practices and
accounting systems, particularly when the branch network transcends national boundaries.
4. Assumption of significant commitments without any transfer of funds. These items, called
'off-balance sheet' items, may at times not involve accounting entries and the failure to
record such items may be difficult to detect.
5. Engagement in transactions that are initiated at one location, recorded at a different
location and managed at yet another location.
6. Direct Initiation and completion of transactions by the customer without any intervention by
the bank’s employees. For example, over the Internet or mobile or through automatic teller
machines (ATMs).
7. Integration and linkages of national and international settlement systems could pose a
systemic risk to the countries in which they operate.
8. Regulatory requirements by governmental authorities often influence accounting and
auditing practices in the banking sector.
SPECIAL AUDIT CONSIDERATIONS arise in the audit of banks because of:
1. The particular nature of risks associated with the transactions undertaken.

2. The scale of banking operations and the resultant significant exposures which can arise
within short period of time.
3. The extensive dependence on IT to process transactions.
4. The effect of the statutory and regulatory requirements.
5. The continuing development of new products and services and banking practices which may
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not be matched by the concurrent development of accounting principles and auditing

practices.
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6. Evolution of technology and providing services through net banking and mobiles has exposed
banks to huge operational and financial risk. The auditor should consider the effect of the
above factors in designing his audit approach. It is imperative for branch auditors and SCAs
(statutory central auditors) to have detailed knowledge of the products offered and risks
associated with them, and appropriately address them in their audit plan to the extent they
give rise to the risk of material misstatements in the financial statements.
7. In today’s environment, the banks use different applications to carry out different
transactions which may include data flow from one application to other application; the
auditor while designing his plans should also understand interface controls between the
various applications.
Q.NO.2 WRITE ABOUT LEGAL FRAMEWORK FOR GOVERNING AND FUNCTIONING OF BANKS IN
INDIA?
ANSWER:
1. Banking Regulation Act, 1949

2. State Bank of India Act, 1955
3. Reserve Bank of India Act, 1934
4. Companies Act, 2013
5. Banking Companies (Acquisition and Transfer of undertakings) Act, 1970 and Act 1980.
6. Regional Rural Banks Act, 1976
7. Information Technology Act, 2000
8. Prevention of Money Laundering Act, 2002
9. SARFESI Act, 2002
10. Credit Information Companies (Regulation) Act, 2005
11. Payment and Settlement Systems Act, 2007
12. Co-operative Societies Act, 1912 for Co-operative Banks
Q.NO.3 WRITE ABOUT FORM AND CONTENT OF FINANCIAL STATEMENTS OF A BANK?
ANSWER:
1. Every banking company is required to prepare a Balance Sheet and a Profit and Loss Account in
the forms set out in the Third Schedule to the Act or as near thereto as the circumstances
admit. Form A of the Third Schedule to the Banking Regulation Act, 1949, contains the form of
Balance Sheet and Form B contains the form of Profit and Loss Account.
2. Every banking company needs to comply with the disclosure requirements under the various
Accounting Standards, as specified under section 133 of the Companies Act, 2013, read with
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Rule 7 of the Companies (Accounts) Rules 2014, in so far as they apply to banking companies, or
the Accounting Standards issued by the ICAI.
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3. It may be noted that implementation of Indian Accounting Standards (Ind AS) has been deferred
by RBI for all scheduled commercial banks presently.
Note:
1. It is pertinent to state that preparation of balance sheet of a bank usually involves preparation of
standalone financial statements and consolidated financial statements.
2. Preparation of Standalone financial statements involve consolidation of branch accounts and
incorporation of various verticals/departments of bank in case of a nationalized bank/public
sector bank. The detailed procedures in this regard may vary from bank to bank.
3. In case of private banks, the processes of accounting are centralized and there is no concept of
mandatory branch audit in accordance with RBI guidelines.
4. Public sector banks and private banks are listed on recognized stock exchange and are required
to comply with SEBI regulations including LODR.
Q.NO.4 WRITE ABOUT APPOINTMENT OF AUDITORS OF A BANKING COMPANIES?
ANSWER:
1. Banking Regulation Act 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.
2. JOINT AUDITS: Most banks, especially those in nationalised banks or public sector, appoint four
or more (depending upon their size and Board decision, as per RBI guidelines) firms of
chartered accountants to act jointly as statutory central auditors (SCAs).
3. STATUTORY CENTRAL AUDITOR’s: The appointment letter sent by banks in connection with the
appointment of SCAs typically contains the following:
a. Period of appointment.
b. Particulars of other central auditors.
c. Particulars of previous auditors.
d. Procedural requirements to be complied with in accepting the assignment.
EXAMPLE: Letter of acceptance (the letter usually contains, inter alia, affirmation as to
absence of disqualification for appointment, way in which the audit has to be conducted and
confirmation of present name, constitution and address of the auditor), declaration of
fidelity and secrecy, restriction on accepting other assignments from the bank, etc.
e. A statement of division of work and review and reporting responsibilities amongst joint
auditors in case of nationalised banks (Generally this is decided at a later stage)
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f. Scope of assignment which includes any special reports or certificates to be given by the
SCAs in addition to the main report. The statutory Central auditors provides the following
additional reports or certificates:
i. Report on adequacy and operating effectiveness of Internal Controls over

Financial Reporting in case of banks.
ii. Long form audit report.
iii. Report on compliance with SLR requirements.
iv. Report on whether the treasury operations of the bank have been conducted in
accordance with the instructions issued by the RBI from time to time.
v. Certificate on reconciliation of securities by the bank (both on its own investment
account as well as PMS Banks' account).
vi. Certificate on compliance by the bank in key areas of guidelines relating to such
transactions issued by the RBI.
vii. Report on whether the income recognition, asset classification and provisioning
have been made as per the guidelines issued by the RBI from time to time.
viii. Report on whether any serious irregularity was noticed in the working of the bank
which requires immediate attention (in accordance with sec 143(12) of the
Companies Act, 2013.)
ix. Certificate in respect of custody of unused Bank Receipt forms and their
utilisation.
x. Authentication of capital adequacy ratio, including disclosure requirements and
other ratios reported in the notes to accounts.
xi. Report on status of the compliance by the bank with regard to the
implementation of recommendations of the Ghosh Committee relating to frauds
and malpractices and of the recommendations of Jilani Committee on internal
control and inspection/credit system.
xii. Report on instances of adverse credit-deposit ratio in the rural areas.
xiii. Asset liability management.
xiv. Certificate on Corporate Governance in case of banks listed on Stock Exchange.
xv. Certification on claim of various interest subsidies and interest subvention.
g. In case of statutory branch auditors (SBAs), appointment letter is given on similar lines
except in regard to particulars of other auditors and statement of division of work.
However, it is to be noted that statutory branch audit is carried out by a single firm of
chartered accountants.
AUTHORITY APPOINTING THE AUDITORS: 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 the concerned bank acting through
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its Board of Directors. In either case, approval of the Reserve Bank is required before the
appointment is made. The auditors of the State Bank of India are to be appointed by the
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Comptroller and Auditor General of India in consultation with the Central Government. The auditors
of regional rural banks are to be appointed by the concerned bank with the approval of the Central
Government.
Note: Students may refer Chapter 12 of CA Intermediate Auditing and Assurance Study Material for
Eligibility, Qualifications, Disqualification, Appointment, Powers, Remuneration etc. of Auditor.
Q.NO.5 WRITE ABOUT PROCESS OF CONDUCTING THE BANK AUDIT?
ANSWER:
STEP 1 – INITIAL CONSIDERATIONS:
1. ACCEPTANCE & CONTINUANCE: The assessment of engagement risk is a critical part of the audit
process and should be done prior to the acceptance of an audit engagement since it affects the
decision of accepting the engagement and in planning decisions if the audit is accepted.
2. DECLARATION OF INDEBTEDNESS: The RBI has advised that the banks, before appointing their
statutory central/circle/branch auditors, should obtain a declaration of indebtedness i.e., a
written confirmation that credit facilities, if any, availed from any other bank or financial
institution by auditor/firm/partners/staff/family members have not become non-performing
assets. This is in addition the declaration regarding absence of disqualifications stipulated in
Section 141 of the Companies Act 2013 which includes borrowing above stipulated amount.
3. INTERNAL ASSIGNMENTS IN BANKS BY STATUTORY AUDITORS: The RBI decided that the audit
firms should not undertake statutory audit assignment while they are associated with internal
assignments in the bank during the same year.
4. TERMS OF AUDIT ENGAGEMENTS: SA 210, “Terms of Audit Engagements” requires that for each
period to be audited, the auditor should agree on the terms of the audit engagement with the
bank before beginning significant portions of fieldwork. It is imperative that the terms of the
engagement are documented, to prevent any confusion as to the terms that have been agreed
in relation to the audit and the respective responsibilities of the management and the auditor, at
the beginning of an audit relationship. This is usually done in the form of engagement letter
which is written by the auditor and acknowledged by the bank.
5. COMMUNICATION WITH PREVIOUS AUDITOR: As per Clause (8) of the Part I of the First
Schedule to the Chartered Accountants Act, 1949, a chartered accountant in practice cannot
accept position as auditor previously held by another chartered accountant without first
communicating with him/her in writing.
6. PLANNING: The audit plan needs to be properly documented with respect to timing, extent of
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checking, audit procedures to be followed at assertion level and should be flexible and updated
or changed, as and when necessary.
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7. ESTABLISH THE ENGAGEMENT TEAM: The assignment of qualified and experienced
professionals is an important component of managing engagement risk. The size and
composition of the engagement team would depend on the size, nature, and complexity of the
bank’s operations.
STEP 2 – UNDERSTANING:
1. UNDERSTANDING THE BANK AND ITS ENVIRONMENT INCLUDING INTERNAL CONTROL: An

understanding of the bank and its environment, including its internal control, enables the
auditor:
a. To identify and assess risk.
b. To develop an audit plan to determine the operating effectiveness of the controls, and to
address the specific risks.
2. UNDERSTAND THE BANK’S ACCOUNTING PROCESS: The accounting process produces financial
and operational information for management’s use and it also contributes to the bank’s internal
control. Thus, understanding of the accounting process is necessary to identify and assess the
risks of material misstatement whether due to fraud or not, and to design and perform further
audit procedures.
3. UNDERSTANDING THE RISK MANAGEMENT PROCESS: Management develops controls and uses
performance indicators to aid in managing key business and financial risks. An effective risk
management system in a bank generally requires the following:
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STEP 3 – RISK ASSESSMENT:
1. IDENTIFYING AND ASSESSING THE RISKS OF MATERIAL MISSTATEMENTS: SA 315 requires the
auditor to identify and assess the risks of material misstatement at the financial statement level
and the assertion level for classes of transactions, account balances, and disclosures to provide a
basis for designing and performing further audit procedures.
2. ASSESS THE RISK OF FRAUD INCLUDING MONEY LAUNDERING: As per SA 240 “The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements”, the auditor’s objective is
to identify and assess the risks of material misstatement in the financial statements due to
fraud, to obtain sufficient appropriate audit evidence on those identified misstatements and to
respond appropriately. The attitude of professional scepticism should be maintained by the
auditor to recognise the possibility of misstatements due to fraud.
3. The RBI has framed specific guidelines that deal with prevention of money laundering and
“Know Your Customer (KYC)” norms. The RBI has from time to time issued guidelines (“Know
Your Customer Guidelines – Anti Money Laundering Standards”), requiring banks to establish
policies, procedures and controls to deter and to recognise and report money laundering
activities.
4. ASSESS SPECIFIC RISKS: The auditors should identify and assess specific risks of material
misstatement at the financial statement level which refers to risks that relate to the banking
industry and the use of IT therein.
5. RISK ASSOCIATED WITH OUTSOURCING OF ACTIVITIES: The modern-day banks make extensive
use of outsourcing as a means of both reducing costs as well as making use of services of an
expert not available internally. There are, however, certain risks associated with outsourcing of
activities by banks and therefore, it is quintessential for the banks to effectively manage those
risks.
STAGE 4 – EXECUTION:
1. ENGAGEMENT TEAM DISCUSSIONS: The engagement team should hold discussions to gain
better understanding of bank and its environment, including internal control, and to assess the
potential for material misstatements of the financial statements.
2. RESPONSE TO THE ASSESSED RISKS: SA 330 “The Auditor’s Responses to Assessed Risks”
requires the auditor to design and implement overall responses to address the assessed risks of
material misstatement at the financial statement level. The auditor should design and perform
further audit procedures whose nature, timing and extent are based on and are responsive to
the assessed risks of material misstatement at the assertion level.
3. ESTABLISH THE OVERALL AUDIT STRATEGY: SA 300 “Planning an Audit of financial Statements’’
states that the objective of the auditor is to plan the audit so that it will be performed in an
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effective manner. For this purpose, the audit engagement partner should:
a. Establish the overall audit strategy, prior to the commencement of an audit; and
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b. Involve key engagement team members and other appropriate specialists while
establishing the overall audit strategy, which depends on the characteristics of the audit
engagement.
4. AUDIT PLANNING MEMORANDUM: The auditor should summarise the team’s audit plan by
preparing an audit planning memorandum in order to:
a. Describe the expected scope and extent of the audit procedures to be performed by the
auditor.
b. Highlight all significant issues and risks identified during their planning and risk
assessment activities, as well as the decisions concerning reliance on controls.
c. Provide evidence that they have planned the audit engagement appropriately and have
responded to engagement risk, pervasive risks, specific risks, and other matters affecting
the audit engagement.
5. DETERMINE AUDIT MATERIALITY: The auditor should consider the relationship between the
audit materiality and audit risk when conducting an audit. The determination of audit materiality
is a matter of professional judgment and depends upon the knowledge of the bank, assessment
of engagement risk, and the reporting requirements for the financial statements. Judgments
about materiality are made in light of surrounding circumstances and are affected by the size or
nature of a misstatement, or combination of both.
6. CONSIDER GOING CONCERN: In obtaining an understanding of the bank, the auditor should
consider whether there are events and conditions which may cast significant doubt on the
bank’s ability to continue as a going concern.
STAGE 5 – REPORTING:
Students should refer to the reporting requirements explained in heading. Auditor’s Report of this
Chapter.
Q.NO.6 WHAT ARE THE SPECIAL CONSIDERATIONS IN “IT ENVIRONMENT”?
ANSWER:
The advent of working in CBS environment in banks coupled with changes in technology, use of
different payment systems and integration of Aadhar for card less transactions have changed the
way banking used to be in earlier times. However, the technological developments have brought
new challenges for auditors as audit is required to be conducted through the system. Considering
the importance of IT systems in preparation and presentation of financial statements, it is
imperative that bank should share detailed information with auditors like: -
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1. Overall IT policy, structure and environment of Bank’s IT system

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2. Data processing and data interface under various systems

3. Data integrity and data security
4. Business Continuity plans and disaster control plans
5. Accounting manual and critical accounting entries, their processes and involvement of IT
systems
6. Controls over key aspects, use of various account heads, expense booking, overdue
identification etc.
7. Controls on recording of various e-banking and internet banking products and channels
8. MIS reports being generated and their periodicity
9. Major exception reports and process of generation including embedded logic
10. Process of generating various information related to various disclosures in financial statements
and involvement of IT systems
Overall review of IT environment and computerized accounting system has to be taken at head
office level. The branch auditors generally do not have access to IT policy and processes
implemented by the bank. Hence, based upon guidance and information received from Statutory
central auditors, branch auditors need to ensure that data review and analysis through CBS is
carried out and tests of controls and substantive checking of sample transactions is carried out at
branch level and results are shared with statutory central auditors.
It is responsibility of statutory central auditors to obtain understanding of IT environment and

various controls put in place by management and evaluate whether controls are operating
effectively. The methodology adopted by the bank in implementing and monitoring controls should
be discussed with head of IT department and based on this understanding, audit procedures can be
designed. The key security control aspects that an auditor needs to address when undertaking audit
in a computerised bank include:
1. Ensure that authorised, accurate and complete data is made available for processing.
2. Ensure that in case of interruption due to power, mechanical or processing failures, the system
restarts without distorting the completion of the entries and records.
3. Ensure that the system prevents unauthorised amendments to the programmes.
4. Verify whether “access controls” assigned to the staff-working match with the responsibilities as
per manual. It is important for the auditor to ensure that access and authorisation rights given
to employees are appropriate.
5. Verify that segregation of duties is ensured while granting system access to users and that the
user activities are monitored by performing activities log review.
6. Verify that changes made in the parameters or user levels are authenticated.
7. Verify that charges calculated manually for accounts when function is not regulated through
parameters are properly accounted for and authorised.
8. Verify that all modules in the software are implemented.
9. Verify that exceptional transaction reports are being authorised and verified on a daily basis by
the concerned officials. It is important for auditor to understand the nature of exception and its
impact on financials.
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10. Verify that the account master and balance cannot be modified/amended/altered except by the
authorised personnel.
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11. Verify that all the general ledger accounts codes authorised by Head Office are in existence in
the system.
12. Verify that balance in general ledger tallies with the balance in subsidiary book.
EXAMPLE:
One nationalized bank had a core system for most of the data. However, it prepared a separate
module to take care of certain reporting requirements for the HO. One such report was classification
of advances and provisioning under IRAC [Income Recognition and Asset Classification] norms.
When the auditors used that data, it would always be prudent to cross check certain totals with the
output of the core system. If the two do not match, then it will create problems for the
management as well as the auditors.
Q.NO.7 WRITE ABOUT INTERNAL AUDIT AND INSEPCTION OF BANKS?
ANSWER:
1. Central audit and inspection department in Banks is a combination of centralized function with
some level of decentralization which is usually headed by a Chief Audit Executive. It is
responsible for undertaking risk-Based Internal Audit (RBIA) as per the framework as stipulated
by RBI.
2. It is also responsible for identification of branches for revenue audit, appointment of concurrent
auditors, deciding their scope, meeting the concurrent auditors, discussing their issues,
conducting trainings if needed, and review of work of concurrent auditors. The primary function
is to ensure that the audit function is handled smoothly, effectively & efficiently.
3. Risk-based Internal audit is conducted based upon the risk assessment of business and control
risks of branches. The risk assessment process includes:
a. Identification of inherent business risks in various activities undertaken by branches
(Business risk)
b. Assessment of effectiveness of control systems for monitoring inherent risks of business
activities of branch (Control risk)
c. Making an assessment of level and direction of various risk areas and assess level and
direction of overall business risk and control risk
d. Drawing up of risk matrix taking into account factors viz. Risk of branch
Q.NO.8 WRITE ABOUT STRESS TESTING AND BASIL III FRAMEWORK OF BANKING COMPANIES?
ANSWER:
STRESS TESTING:
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RBI has required that all commercial banks (excluding RRBs and LABs) shall put in place a Board
approved ‘Stress Testing framework’ to suit their individual requirements which would integrate
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into their risk management systems. Stress tests are designed to understand whether a bank has
enough capital to survive plausible adverse economic conditions and to maintain enough buffer to
stay afloat under extreme scenarios.
BASEL III FRAMEWORK:
1. Basel III norms relate to the Capital Adequacy requirement compliance which the Bank has to
achieve as contained in the BASEL III accord. Basel capital adequacy norms are meant for the
protection of depositors and shareholders by prescriptive rules for measuring capital adequacy,
thereby evolving methods of determining regulatory capital and ensuring efficient use of capital.
2. Basel III accord strengthens the regulation, supervision and risk management of the banking
sector. It is global regulatory standard on capital adequacy of banks, stress testing as well as
market liquidity risk.
3. The Basel III accord, aims at:
a. Improving the banking sector's ability to absorb shocks arising from financial and
economic stress, irrespective of reasons thereof.
b. Improving risk management and governance practices; and
c. Strengthening banks' transparency and disclosure standards.
Q.NO.9 GIVE EXAMPLES ON CERTAIN IMPORTANT AREAS OF INTERNAL CONTROLS IN A BANKING

COMPANIES? [SELF STUDY]
ANSWER:
A. GENERAL CONTROLS:
1. The staff and officers of a bank should be shifted from one position to another frequently
and without prior notice.
2. The work of one person should always be checked by another person (usually by an officer)
in the normal course of business.
3. The arithmetical accuracy of the books should be proved independently every day.
4. All bank forms (e.g., Cheque books, demand draft/pay order books, travellers’ cheques,
foreign currency cards etc.) should be kept in the possession of an officer, and another
responsible officer should verify the issuance and stock of such stationery.
5. The mail should be opened by a responsible officer. Signatures on all the letters and advices
received from other branches of the bank or its correspondence should be checked by an
officer with the signature book.
6. The signature book and the telegraphic code book should be kept with responsible officers
and access should be allowed only to authorised officers.
7. The bank should take out insurance policies against loss due to all the risks such as fire,
natural calamities, theft and employees’ infidelity.
8. The financial powers of officers of different grades should be clearly defined.
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9. There should be surprise inspection of head office and branches at periodic interval by the
internal audit department. The irregularities pointed out in the inspection reports should be
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promptly rectified.
B. CASH:
1. Cash should be kept in the joint custody of 2 responsible officers.

2. In addition to normal checking by the chief cashier, cash should be test-checked daily and
counted in full occasionally by a responsible officer other than those handling the cash.
Actual cash in hand should agree with the balance shown by the Day Book every day.
3. The cashier should have no access to the customer’s ledger accounts and the Day Book. This
is an important safeguard as the Bank managements are often tempted to use cashiers
because of their shorter working hours as ledger clerks in the absence of regular staff etc.
This can result in substantial losses to the bank.
4. The counterfoil of cash receipt vouchers (e.g., counterfeits of pay-in-slips lodged by the
depositors) should be signed by an officer in Cash Department, in addition to the receiving
cashier.
5. Payments should be made only after the vouchers (e.g., cheques, demand drafts etc.) have
been passed for payment by the authorised officer and have been entered in the customer’s
account.
6. High value cash receipts and payments should be verified by a higher officer/ branch
manager and the excess cash balance should be remitted to currency chest according to
branch’s retention limit on daily basis.
7. Where the teller system is prevalent:
a. A limit should be placed on the powers of tellers to make payment.
b. All vouchers relating to the accounts of customers which the tellers handle should
first be sent to them and entered by them in the ledger.
c. Total payment made by a teller should be reconciled with the cash columns of the
Voucher Summary Sheet of the ledger concerned every day.
d. There should be frequent rotation of tellers.
C. CLEARINGS:
1. Under the Cheque Truncation System (CTS) implemented by RBI, an electronic image of the
cheque is transmitted to the paying branch through the clearing house, along with relevant
information like data on the MICR band, date of presentation, presenting bank, etc. This
effectively eliminates the associated cost of movement of the physical cheques, reduces the
time required for their collection.
2. As per RBI guidelines, the branch is required to either call the customer or email him for any
cheque received for the amount of Rs. 5 lakh and above in respect of inward clearings. The
Auditor may verify the compliance on test check basis.
3. The Auditor is to check whether signature of the drawer of the cheque is being verified by
the staff or not as else there will be liability of the paying bank under all circumstances.
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4. The unpaid cheques received in outward clearing should be either sent to the customers at
their recorded address or the customers be informed to collect the same from bank branch.
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D. BILLS FOR COLLECTION:
1. All the documents accompanying the bills should be received and entered in the Register by
a responsible officer. At the time of dispatch, the officer should also see that all the
documents are sent along with the bills.
2. The accounts of customers or principals should be credited only after the bills have been
collected or an advice to that effect received from the bank branch or agent to which they
were sent for collection.
3. It should be ensured that bills sent by one branch for collection to another branch of the
bank, are not taken in the bills for collection twice in the amalgamated balance sheet of the
bank. For this purpose, the receiving branch should reverse the entries regarding such bills at
the end of the year for closing purposes.
E. BILLS PURCHASED:
1. At the time of purchase of the bills, an officer should verify that all the documents of title are
properly assigned to the bank.
2. Sufficient margin should be kept while purchasing or discounting a bill to cover any decline in
the value of the security etc.
3. If the bank is unable to collect a bill on the due date, immediate steps should be taken to
recover the amount from the drawer against the security provided.
4. All irregular outstanding account/s should be reported to the Head Office.
5. In the case of bills purchased outstanding at the close of the year the discount received
thereon should be properly apportioned between the 2 years.
F. LOANS AND ADVANCES:
1. The bank should make advances only after satisfying itself as to the creditworthiness of the
borrowers and after obtaining sanction from the proper authorities of the bank.
2. All the necessary documents (e.g., agreements, demand promissory notes, letters of
hypothecation, etc.) should be executed by the parties before advances are made.
3. Sufficient margin should be kept against securities taken to cover any decline in the value
thereof and to comply with Reserve Bank directives. Such margins should be determined by
the proper authorities of the bank as a general policy or after detailed scrutiny for specific
accounts.
4. All the securities should be received and returned by responsible officer. They should be kept
in the Joint custody of 2 of such officers.
5. All securities requiring registration should be registered in the name of the bank or
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otherwise accompanied by the documents sufficient to give title of the bank.

6. In the case of goods in the possession of the bank, contents of the packages should be test
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checked at the time of receipts. The godowns/warehouses should be regularly and

frequently inspected by a responsible officer of the branch concerned, in addition to
inspectors of the bank.
7. Market value of goods should be checked by officers of the bank by personal enquiry in
addition to the invoice value given by the borrowers.
8. As soon as any increase or decrease takes place in the value of securities proper entries
should be made in the Drawing Power Book and Daily Balance Book. These entries should be
checked by an authorised officer.
9. All accounts should be kept within both the drawing power and the sanctioned limit as per
prescribed norms. Additional temporary limit may be sanctioned, for a maximum of 20% of
existing limit and 90 days maximum tenure.
10. All the accounts which exceed the sanctioned limit or drawing power or are against
unapproved securities or are otherwise irregular should be brought to the notice of the
Management/Head Office regularly.
11. The operation (in each advance account) should be reviewed at least once every year.
G. DEMAND DRAFTS:
1. The signatures on a demand draft should be checked by an officer with the Signature Book.
2. All the D.Ds. sold/ issued by a branch should be immediately confirmed by an advice to the
paying branch.
3. If the paying branch does not receive proper confirmation of any D.D. from the issuing
branch or does not receive credit in its account with that branch, it should take immediate
steps to ascertain the reasons.
H. INTER BRANCH ACCOUNTS:
1. The accounts should be adjusted only on the basis of advice (and not on the strength of
entries found in the statement of account) received from other branches,
2. Prompt action should be taken preferably by central authority, if any entries (particularly
debit entries) are not responded to by any branch within a reasonable time.
I. CREDIT CARD OPERATIONS:
1. There should be effective screening of applications with reasonably good credit assessments.
2. There should be strict control over storage and issue of cards.
3. There should be a system whereby a merchant confirms the status of unutilised limit of a
credit-card holder from the bank before accepting the settlement, in case the amount to be
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settled exceeds a specified percentage of the total limit of the card holder.
4. There should be a system of prompt reporting by the merchants of all settlements accepted
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by them through credit cards.
5. Reimbursement to merchants should be made only after verification of the validity of
merchant’s acceptance of cards.
6. All the reimbursement (gross of commission) should be immediately charged to the
customer’s account.
7. There should be a system to ensure that statements are sent regularly and promptly to the
customer.
8. There should be a system to monitor and follow-up customers’ payments.
9. Payments overdue beyond a reasonable period should be identified and attended to
carefully. For defaulting customers, credit should be stopped by informing the merchants
through periodic bulletins, as early as possible, to avoid increased losses.
10. There should be a system of periodic review of credit card holders’ accounts. On this basis,
the limits of customers may be revised, if necessary. The review should also include
determination of doubtful amounts and the provisioning in respect thereof.
EXAMPLE
While doing the audit of a branch of XYZ bank for the year ended 31st March 2019, it was seen that
the stock statements with the same figures are submitted by borrower’s month after month with a
change in the month at the top. These are just filed for formal compliance. Such things happen
because a responsible official does not check the stock statements and get them entered in the
register maintained for that, which is a lapse in internal control. Due to such a lapse, neither the
borrower nor bank staff take it sincerely, thus posing a risk of loss to bank.
Q.NO.10 WRITE ABOUT COMPLIANCE WITH CRR AND SLR RATIOS?
ANSWER:
CASH RESERVE RATIO (CRR):
CRR is a specified minimum fraction of the total deposits of customers, which commercial banks
have to hold as reserves either in cash or as deposits with the central bank. While the requirement
for maintenance of cash reserve by banking companies is contained in the Banking Regulation Act,
1949, corresponding requirement for scheduled banks is contained in the Reserve Bank of India Act,
1934. The RBI, from time to time, reviews the evolving liquidity situation and accordingly decides
the rate of CRR required to be maintained by scheduled commercial banks. Therefore, the auditor
needs to refer the master circular issued from time to time in this regard to ensure the compliance
of CRR requirements.
STATUTORY LIQUIDITY RATIO (SLR) REQUIREMENTS:
SLR is the requirement that every scheduled commercial bank in India is required to maintain in the
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form of certain liquid assets such as gold, cash and government approved securities before
providing credit to the customers. The Reserve Bank of India requires statutory central auditors of
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banks to verify the compliance with SLR requirements of 12 ODD DATES in different months of a
fiscal year not being Fridays. The objective of maintaining SLR is to have an amount in the form of
liquid assets which can be used to handle a sudden increase in demand for the amount from the
depositors.
The resultant report is to be sent to the top management of the bank and to the Reserve Bank.
1. Correctness of the compilation of DTL (Demand and Time Liabilities) position; and
2. Maintenance of liquid assets as prescribed u/s 24 of Banking Regulation Act.
AUDIT APPROACH TO VERIFY CRR AND SLR:
1. Obtain an understanding of the relevant circulars/ instructions of the RBI, particularly regarding
composition of items of DTL.
2. Request the branch auditors to send their weekly trial balance as on Friday and these are
consolidated at the head office. Based on this consolidation, the DTL position is determined for
every reporting Friday. The statutory central auditor should request the branch auditors to verify
the correctness of the trial balances relevant to the dates selected by him/her. The branch
auditors should also be specifically requested to examine the cash balance at the branch on the
selected dates.
3. Examine, on a test basis, the consolidations regarding DTL position prepared by the bank with
reference to the related returns received from branches. The auditor should examine whether
the valuation of securities done by the bank is in accordance with the guidelines prescribed by
the RBI.
4. While examining the computation of DTL, specifically examine that the following items have
been excluded from liabilities, some of these are:
a. Paid up capital, reserve, any credit balance in profit & loss account of bank, amount of
loan taken from RBI and amount of refinance taken from EXIM bank, NHB, SIDBI and
NABARD [NEWLY ADDED IN 2021 – APPLICABLE FROM MAY 2022 ONWARDS]
b. Part amounts of recoveries from the borrowers in respect of debts considered bad and
doubtful of recovery.
c. Amounts received in Indian currency against import bills and held in sundry deposits
pending receipts of final rates.
d. Un-adjusted deposits/balances lying in link branches for agency business like dividend
warrants, interest warrants, refund of application money, etc., in respect of
shares/debentures to the extent of payment made by other branches but not adjusted
by the link branches.
e. Margins held and kept in sundry deposits for funded facilities.
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5. Similarly, specifically examine that the following items have been included in liabilities, some of
these are:
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a. Net credit balance in branch adjustment accounts including these relating to foreign
branches.
b. Interest on deposit as at the end of the first half year reversed in the beginning of the
next half-year. [REMOVED FROM 2021 – NOT APPLICABLE FOR MAY 2022 EXAM
ONWARDS]
c. Borrowings from abroad by banks in India needs to be considered as ‘liabilities to other’
and thus, needs to be considered at gross level unlike ‘liabilities towards banking system
in India’, which are permitted to be netted off against ‘assets towards banking system in
India’. Thus, the adverse balances in Nostro Mirror Account needs to be considered as
‘Liabilities to other’.
d. The reconciliation of Nostro accounts (with Nostro Mirror Accounts) needs to be
scrutinized carefully to analyze and ascertain if any inwards remittances are received on
behalf of the customers / constituents of the bank and have remained unaccounted and
/ or any other debit (inward) entries have remained unaccounted and are pertaining to
any liabilities for the bank.
6. Examine whether the consolidations prepared by the bank include the relevant information in
respect of all the branches. It may be noted that, even though interest accrues daily, it is
recorded in the books only at periodic intervals. Thus, examine whether such interest accrued
but not accounted for in books is included in the computation of DTL.
7. The auditor at the central level should apply the audit procedures listed above to the overall
consolidation prepared for the bank as a whole. Where such procedure is followed, the central
auditor should adequately describe the same in the report.
8. While reporting on compliance with SLR requirements, the auditor should specify the number of
unaudited branches and state that he/she has relied on the returns received from the
unaudited branches in forming an opinion.
NOTE: Recently, there has been introduction of Automated Data Flow (ADF) for CRR & SLR reporting
and the auditors should develop necessary audit procedures around this.
Q.NO.11 WRITE ABOUT VERIFICATION OF ASSETS OF A BANKING COMPANY?
ANSWER:
REFER CONCEPT NO. 7 IN ICAI STUDY MATERIL FOR FULL LENGTH DISCUSSION OF AUDIT OF
ASSETS. [PAGE NO. 9.19 TO 9.37]. EDITION – OCT 2021 EDITION.
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Q.NO.12 WRITE ABOUT VERIFICATION OF CAPITAL AND LIABILITIES?

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ANSWER:
REFER CONCEPT NO. 8 IN ICAI STUDY MATERIL FOR FULL LENGTH DISCUSSION OF AUDIT OF
LIABILITIES. [PAGE NO. 9.37 TO 9.49]. EDITION – OCT 2021 EDITION.
Q.NO.13 WRITE ABOUT ISSUANCE OF AUDITORS REPORT BY CENTRAL STATUTORY AUDITORS AND
BRANCH AUDITORS OF BANKING COMPANIES?
ANSWER:
AUDITOR’s REPORT:
1. In the case of a nationalised bank, the auditor is required to make a report to the Central
Government in which the auditor should state the following:
a. Whether, in the auditor’s 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.
b. In case the auditor had called for any explanation or information, whether it has been
given and whether it is satisfactory.
c. Whether or not the transactions of the bank, which have come to the auditor’s notice,
have been within the powers of that bank.
d. Whether or not the returns received from the offices and branches of the bank have
been found adequate for the purpose of audit.
e. Whether the profit and loss account show a true balance of profit or loss for the period
covered by such account.
f. Any other matter which the auditor considers should be brought to the notice of the
Central Government.
2. The report of auditors of State Bank of India is also to be made to the Central Government and
is almost identical to the auditor’s report in the case of a nationalised bank.
FORMAT OF AUDITOR’s REPORT:
1. STANDARDS ON AUDITING: The auditors, central as well as branch, should also ensure that the
audit report issued by them complies with the requirements of SA 700, “Forming an Opinion and
Reporting on Financial Statements”, SA 705, “Modifications to the Opinion in the Independent
Auditor’s Report”, SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report”, SA 710, “Comparative Information-Corresponding Figures and
Comparative Financial Statements” and SA 720, The Auditor’s Responsibility Relating to Other
Information in Documents Containing Audited Financial Statements.
2. DISCLOSURES – UN AUDITED BRANCHES: The auditor should ensure that not only the
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information relating to number of unaudited branches is given but quantification of advances,

deposits, interest income and interest expense for such unaudited branches has also been
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disclosed in the audit report.

3. ADDITIONAL REPORTING REQUIREMENTS UNDER COMPANIES ACT:
a. The auditor of a banking company is also required to state in the report the matters
covered by Section 143 of the Companies Act, 2013. However, it is pertinent to mention
that the reporting requirements relating to the Companies (Auditor’s Report) Order,
2020 is NOT APPLICABLE to a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949.
b. As per reporting requirements cast through Rule 11 of the Companies (Audit and
Auditors) Rules, 2014 the auditor’s report shall also include their views and comments on
the following matters, namely: [143(3)]
i. Whether the bank has disclosed the impact, if any, of pending litigations on its
financial position in its financial statements.
ii. Whether the bank has made provision, as required under the law or accounting
standards, for material foreseeable losses, if any, on long term contracts including
derivative contracts.
iii. Whether there has been any delay in transferring amounts, required to be
transferred to the investor education and protection fund.
iv.
1. Whether the management has represented that, to the best of it’s
knowledge and belief, other than as disclosed in the notes to the
accounts, no funds have been advanced or loaned or invested (either from
borrowed funds or share premium or any other sources or kind of funds)
by the company to or in any other person(s) or entity(ies), including
foreign entities (“Intermediaries”), with the understanding, whether
recorded in writing or otherwise, that the Intermediary shall, whether,
directly or indirectly lend or invest in other persons or entities identified in
any manner whatsoever by or on behalf of the bank (“Ultimate
Beneficiaries”) or provide any guarantee, security or the like on behalf of
the Ultimate Beneficiaries.
2. Whether the management has represented, that, to the best of its
knowledge and belief, other than as disclosed in the notes to the
accounts, no funds have been received by the bank from any person(s) or
entity(ies), including foreign entities (“Funding Parties”), with the
understanding, whether recorded in writing or otherwise, that the bank
shall, whether, directly or indirectly, lend or invest in other persons or
entities identified in any manner whatsoever by or on behalf of the
Funding Party (“Ultimate Beneficiaries”) or provide any guarantee,
security or the like on behalf of the Ultimate Beneficiaries.
3. Based on such audit procedures that the auditor has considered
reasonable and appropriate in the circumstances, nothing has come to
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their notice that has caused them to believe that the representations
under sub-clause (1) and (2) contain any material misstatement.
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v. Whether the dividend declared or paid during the year by the company is in
compliance with section 123 of the Companies Act, 2013.
vi. [Whether the company, in respect of financial years commencing on or after the
1st April, 2022] has used such accounting software for maintaining its books of
account which has a feature of recording audit trail (edit log) facility and the same
has been operated throughout the year for all transactions recorded in the
software and the audit trail feature has not been tampered with and the audit
trail has been preserved by the company as per the statutory requirements for
record retention.]
AUDIT TRAIL MEANS, a step-by-step sequential record which provides evidence of

the documented history of financial transactions to its source. An auditor can
trace every step of the financial data of a particular transaction right from the
general ledger to its source document with the help of the audit trail.
LONG FORM AUDITOR’s REPORT:
1. Besides the audit report as per the statutory requirements discussed above, the terms of
appointment of auditors of public sector banks, private sector banks and foreign banks (as well
as their branches), require the auditors to also furnish a long form audit report (LFAR).
2. The long form audit report is to be given by statutory branch auditors as well as statutory central
auditors. The LFAR for branch auditors is in form of questionnaire where
observations/comments have to be provided on range of matters including cash, balance with
banks, investments, advances, deposits etc. These are submitted by the statutory branch
auditors to statutory central auditors.
3. The consolidation is done at head office level and LFAR for bank is submitted by statutory central
auditors to management.
4. The LFAR, on the bank, after due examination, should be placed before the ACB of the bank
indicating the action taken/proposed to be taken for rectification of the irregularities, if any,
mentioned therein; and
5. A copy of the LFAR and the relative agenda note, together with the Board's views or directions,
is submitted to RBI within 60 days of submission of LFAR by statutory auditors.
OTHER REPORTING REQUIREMENTS: [REPORTING ABOUT FRAUD]
1. The RBI issued a Circular relating to implementation of recommendations of Committee on

Legal Aspects of Bank Frauds applicable to all scheduled commercial banks (excluding Regional
Rural Banks). The said circular provides details regarding liability of accounting and auditing
562
profession including the professional conduct, non-disclosure of client information and need to
report fraud.
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2. Auditor should also consider the compliance with provisions of Standards on Auditing.
EXAMPLE: SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”,
explains that the duty of confidentiality is over -ridden by statute, law or by courts. Whereas an
auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable
assurance that the financial statements taken as a whole are free from material misstatement,
whether caused by fraud or error according to SA 240.
3. Further, as per sub-section 12 of section 143 of the Companies Act, 2013, if an auditor of a
company, in the course of the performance of duties as auditor, has reason to believe that an
offence of fraud involving such amount or amounts as may be prescribed, 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 may be prescribed. It must be
noted that auditor is not expected to consider each and every transaction but to evaluate the
system as a whole. Therefore, if the auditor while performing normal duties comes across any
instance, he/she should report the matter to the RBI in addition to Chairman/Managing
Director/Chief Executive of the concerned bank.
Q.NO.14 WRITE ABOUT CONCURRENT AUDIT OF BANKS?
ANSWER:
INTRODUCTION:
1. Concurrent audit, as the name suggests, is an audit or verification of transactions or activities of

an organisation concurrently as the transaction/activity takes place. It is not a pre-audit. The
concept in this audit is to verify the authenticity of the transaction/activity within the shortest
possible time after the same takes place. It is SIMILAR to internal audit which is a concept
recognised under the Companies Act.
2. In view of the complexities of economic activities it is now well recognised that there must be a
system of someone, other than the person involved in the operations, verifying the authenticity
of the transaction/activity on a regular basis, so that any deviation from the laid down
procedures can be noticed in the shortest possible time and remedial action can be taken.
3. The concept of concurrent audit in the public as well as the private sector banks has gained
acceptance in recent years. In some banks, this task has been entrusted to the internal
inspection staff who are not engaged in operational activities. In other banks, this work is
allotted to outside professional firms of chartered accountants. The Reserve Bank of India (RBI)
has issued certain guidelines for the conduct of this audit.
4. The Reserve Bank of India (RBI) has issued certain guidelines for the conduct of this audit.
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SCOPE OF CONCURRENT AUDIT:
1. The detailed scope of the concurrent audit should be clearly and uniformly determined for the
Bank as a whole by the Bank’s Inspector and Audit Department in consultation with the Bank’s
Audit Committee of the Board of Directors (ACB). In determining the scope, importance should
be given to checking high-risk transactions having large financial implications as opposed to
transactions involving lesser amounts. The detailed scope of the concurrent audit may be
determined and approved by the ACB.
2. Further, the guidelines issued by the RBI cover all the key areas of activities of the branch which
is under concurrent audit. Most banks have prepared an Audit Manual for this purpose. Broadly
stated, the following areas are covered by these guidelines:
CONCURRENT AUDIT SYSTEM IN COMMERCIAL BANKS:
It hardly needs to be stressed that the concurrent audit system is to be regarded as part of a bank’s
early-warning system to ensure timely detection of irregularities and lapses which helps in
preventing fraudulent transactions at branches. It is, therefore, necessary for the bank’s
management to give serious attention to the implementation of various aspects of the system such
as selection of branches/coverage of business operations, appointment of auditors, appropriate
reporting procedures, follow-up/rectification processes and utilisation of the feedback from the
system for appropriate and quick management decisions.
The bank should once in a year review the effectiveness of the system and take necessary measures
to correct the lacunae in the implementation of the programme.
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COVERAGE OF BUSINESS/BRANCHES:
1. The scope of work to be entrusted to concurrent auditors, coverage of business/branches, etc. is

left to the discretion of the head of internal audit of banks with the due prior approval of the
Audit Committee of the Board of Directors (ACB).
2. Banks may, however, ensure that risk sensitive areas identified by them as per their specific
business models are covered under concurrent audit. The detailed scope of the concurrent audit
may be determined and approved by the ACB.
3. The broad areas of coverage under concurrent audit shall be based on the identified risk of the
unit and must include random transaction testing of sufficiently large sample of such
transactions wherever required.
TYPES OF ACTIVITIES TO BE COVERED:
REFER CONCEPT - 10.4 IN ICAI STUDY MATERIAL [PAGE NO. 9.55 TO 9.57]
APPOINTMENT OF CONCURRENT AUDITOR’s AND ACCOUNTABILIY:
1. BANKS DISCRETION: The option to consider whether concurrent audit should be done by
bank’s own staff or external auditors is left to the discretion of individual banks.
2. OWN STAFF: In case the bank has engaged its own officials, they should be experienced, well
trained and sufficiently senior. The staff engaged on concurrent audit must be independent of
the branch where concurrent audit is to be conducted.
3. MAXIMUM TENURE OF EXTERNAL CONCURRENT AUDITOR’S: ACB of the bank shall decide the
maximum tenure of external concurrent auditors with the bank. Generally, tenure of external
concurrent auditors with a bank shall not be more than 5 years on continuous basis. However,
no concurrent auditor shall be allowed to continue with a branch/business unit for a period of
more than 3 years.
4. LAPSES IN WORKINGS: If external firms are appointed and any serious acts of omissions or
commissions are noticed in their working their appointments may be cancelled and the fact
may be reported to RBI & ICAI.
REMUNERATION OF CONCURRENT AUDITOR:
Terms of appointment of the external firms of Chartered Accountants for the concurrent audit and
their remuneration may be fixed by ACB of banks keeping in view various factors such as coverage
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of areas, skill sets required, number of staff required and time to be devoted to audit.
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REPORTING SYSTEMS:
1. There should be proper reporting of the findings of the concurrent auditors. For this purpose,
each bank should prepare a structured format. The major deficiencies/ aberrations noticed
during audit should be highlighted in a special note and given immediately to the bank’s
branch/controlling offices. A quarterly review containing key features brought out during the
concurrent audits should be placed before the ACB.
2. There should be zone-wise reporting of the findings of the concurrent audit to ACB and an
annual appraisal/report of the audit system should be placed before the ACB.
3. Before submission of the report the auditor should discuss the important issues on which he/she
wishes to report with the branch manager and concerned officers. This will enable the auditor to
take into consideration the opposite viewpoint and clarify any doubts.
4. Minor irregularities pointed out by the concurrent auditors are to be rectified in a timely
manner. Serious irregularities should be reported to the controlling offices/ Head Offices for
immediate action.
5. Whenever fraudulent transactions are detected, they should immediately be reported to

Inspection & Audit Department (Head Office) as also the Chief Vigilance Officer as well as Branch
Managers concerned (unless the branch manager is involved).
6. Follow-up action on the concurrent audit reports should be given high priority by the controlling
office/Inspection and Audit Department and rectification of the features done without any loss
of time.
Q.NO.15 WRITE ABOUT AUDIT COMMITTEE IN THE CONTEXT OF BANKS?
ANSWER:
Banks are required to constitute an Audit Committee of their Board in pursuance of RBI guidelines.
One of the functions of this committee is to provide direction and also oversee the operations of the
total audit function in the bank.
The committee also has to review the internal inspection/audit function in the bank, with special
emphasis on the system, its quality and effectiveness in terms of follow up. The committee has to
review the system of appointment and remuneration of concurrent auditors.
The Audit Committee is, therefore, connected with the functioning of the system of concurrent
audit. The method of appointment of auditors, their remuneration and the quality of their work is to
be reviewed by the Audit Committee. It is in this context that periodical meetings by the members
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of the audit committee with the concurrent auditors and statutory auditors help the audit
committee to oversee the operations of the total audit function in the bank.
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PRACTICAL QUESTIONS
[TEST YOUR KNOWLEDGE / ILLUSTRATIONS]
Q.NO.1 Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The
Bank follows financial year as accounting year. Your Audit Manager informed that the bank
has recognised on accrual basis income from dividends on securities and Units of Mutual
Funds held by it as at the end of financial year. The dividends on securities and Units of
Mutual Funds were declared after the end of financial year. Comment.
ANSWER:
Banks may book income from dividend on shares of corporate bodies on accrual basis, provided
dividend on the shares has been declared by the corporate body in its annual general meeting
and the owner's right to receive payment is established. This is also in accordance with AS 9. In
this case the dividends have been declared after the financial year end. Therefore, the recognition
of income by the bank on accrual basis is not in order.
In respect of income from government securities and bonds and debentures of corporate bodies,
where interest rates on these instruments are pre-determined, income could be booked on
accrual basis, provided interest is serviced regularly and as such is not in arrears. It was further,
however, clarified that bank may book income on accrual basis on securities of corporate
bodies/public sector undertakings in respect of which the payment of interest and repayment of
principal have been guaranteed by the central government or a State government.
Q.NO.2 In course of audit of Good Samaritan Bank as at 31st March, 19 you observed the
following:
(a) In a particular account there was no recovery in the past 18 months. The bank has not
applied the NPA norms as well as income recognition norms to this particular account. When
queried the bank management replied that this account was guaranteed by the central
government and hence these norms were not applicable. The bank has not invoked the
guarantee. Please respond. Would your answer be different if the advance is guaranteed by a
State Government?
(b) The bank’s advance portfolio comprised of significant loans against Life Insurance Policies.
Write suitable audit program to verify these advances.
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ANSWER:
(a) Government Guaranteed Advance: If a government guaranteed advance becomes NPA, then
for the purpose of income recognition, interest on such advance should not to be taken to
income unless interest is realized. However, for purpose of asset classification, credit facility
backed by Central Government Guarantee, though overdue, can be treated as NPA only when
the Central Government repudiates its guarantee, when invoked.
Since the bank has not invoked the guarantee, the question of repudiation does not arise. Hence
the bank is correct to the extent of not applying the NPA norms for provisioning purpose. But
this exemption is not available in respect of income recognition norms. Hence the income to the
extent not recovered should be reversed.
The situation would be different if the advance is guaranteed by State Government because this
exception is not applicable for State Government Guaranteed advances, where advance is to be
considered NPA if it remains overdue for more than 90 days.
In case the bank has not invoked the Central Government Guarantee though the amount is
overdue for long, the reasoning for the same should be taken and duly reported in LFAR.
(b) The Audit Programme to Verify Advances against Life Insurance Policies is as under-
(i) The auditor should inspect the policies and see whether they are assigned to the bank
and whether such assignment has been registered with the insurer.
(ii) The auditor should also examine whether premium has been paid on the policies and
whether they are in force.
(iii) Certificate regarding surrender value obtained from the insurer should be examined.
(iv) The auditor should particularly see that if such surrender value is subject to payment
of certain premium, the amount of such premium has been deducted from the surrender
value.
Q.NO.3 Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The
bank is a consortium member of Cash Credit Facilities of Rs. 50 crores to X Ltd. Bank's own
share is Rs. 10 crores only. During the last two quarters against a debit of Rs. 1.75 crores
towards interest the credits in X Ltd's account are to the tune of Rs. 1.25 crores only. Based
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on the certificate of lead bank, the bank has classified the account of X Ltd as performing.
The Bank follows financial year as accounting year. Advise your views on the issue which
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were brought to your notice by your Audit Manager.
ANSWER:
The bank is a consortium member of cash credit facilities of Rs. 50 crores to X Ltd. Bank's own
share is Rs. 10 crores only. During the last two quarters against a debit of Rs. 1.75 crores towards
interest, the credits in X Ltd.’s account are to the tune of Rs. 1.25 crores only. Sometimes, several
banks form a group (the 'consortium') under the leadership of a 'lead bank' to make advance to
a large customer on same conditions and security with proportionate rights. In such cases, each
bank may classify the advance given by it according to its own experience of recovery and other
factors.
Since in the last two quarters, the amount remains outstanding and, thus, interest amount should
be reversed. This is despite the certificate of lead bank to classify that the account as performing.
Accordingly, the amount should be shown as non-performing asset.
Q.NO.4 You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also
deals in providing credit card facilities to its account holder. The bank is aware of the fact
that there should be strict control over storage and issue of credit cards. How will you
evaluate the Internal Control System in the area of Credit Card operations of a Bank?
ANSWER:
Refer Q No. 9 [Point – I]
Q.NO.5 You have been appointed as Concurrent Auditor of a nationalized bank branch. The
main business at the branch is dealing in foreign exchange. Suggest the main areas of
coverage with regard to foreign exchange transactions of the said branch under concurrent
audit.
ANSWER:
Refer Q No. 14 on Concurrent Audit
Q.NO.6 While auditing FAIR Bank, you observed that a lump sum amount has been disclosed as
contingent liability collectively. You are, therefore, requested by the management to guide
them about the disclosure requirement of Contingent Liabilities for Banks. Kindly guide.
ANSWER:
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Refer ICAI SM – Audit of Liabilites

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Q.NO.7 ABC Chartered Accountants have been appointed as concurrent auditors for the
branches of Effective Bank Ltd. for the year 2019-20. You are part of the audit team for Agra
branch of the bank and have been instructed by your senior to verify the advances of the
audit period. You are required to guide your assistant about the areas to be taken care
while doing verification during the concurrent audit.
ANSWER:
Refer Q No. 14 on Concurrent Audit
Q.NO.8 In the course of audit of Skip Bank Ltd., you found that the Bank had sold certain of its
non-performing assets. Draft the points of audit check that are very relevant to this area of
checking.
ANSWER:
Refer Audit of Assets in ICAI SM
Q.NO.9 Banks, because of certain characteristics, are distinguished from other commercial
enterprises and hence it needs special audit consideration. As an auditor of a bank, specify
the various peculiarities which may necessitate special audit consideration to be taken care
by you?
ANSWER:
Refer Q No. 1 “Special Audit Considerations”
Q.NO.10 ABC Bank had sanctioned credit limits of Rs.100 lakh to M/s Volkart Ltd on 1st
September 2018. The renewal of limits was due on 1st September 2019. While doing the
statutory branch audit for the year ended 31st March 2020, you find that the renewal has
not been done even though 180 days are over. The bank says that the renewal process has
been initiated on time and most of the document are received. The account is operated
regularly and is in order; balance is maintained within drawing power. It also shows a letter
from Volkart stating that due to a sudden death of their auditor, a new auditor had to be
appointed. Procedure for appointment took some time and the new auditor was doing the
audit all over again. The limit was not renewed till 31/3/2020. However, the audited
financials are received on 10th April 2020 and the renewal letter was issued immediately.
Your assistant is insisting that the account must be classified as NPA since the limit was not
renewed as on 31/3/2020. What is your opinion?
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ANSWER:
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As per Guidelines of Reserve Bank of India the account should be classified as NPA if renewal is
not done in 180 days. However, in the present case, operations in the account are excellent. The
bank has shown a letter from that company that due to certain reasons the audited financial
statements are delayed. Further, the limit has been renewed before signing the audit report.
Thus, even if the sanction was issued after the balance sheet date, it relates to the position as on
the balance sheet date. Therefore, it is an adjusting event under AS 4, Contingencies and Events
Occurring After the Balance Sheet Date. It is also a matter of substance over form.
The auditor would consider classifying the account as a standard asset.
Q.NO.11 You are auditing a small bank branch with staff strength of the manager, cashier and
three other staff S1, S2 and S3. Among allocation of work for other areas, S1 who is a peon
also opens all the mail and forwards it to the concerned person. He does not have a
signature book so as to check the signatures on important communications. S2 has
possession of all bank forms (e.g. Cheque books, demand draft/pay order books, travelers’
cheques, foreign currency cards etc.). He maintains a record meticulously which you have
test checked also. However, no one among staff regularly checks that. You are informed
that being a small branch with shortage of manpower, it is not possible to always check the
work and records. Give your comments.
ANSWER:
Banks are required to implement and maintain a system of internal controls for mitigating risks,
maintain good governance and to meet the regulatory requirements. Given below are examples
of internal controls that are violated in the given situation:
In the instant case, S1 who is a peon opens all the mail and forwards it to the concerned person.
Further, he does not have a signature book so as to check the signatures on important
communications is not in accordance with implementation and maintenance of general internal
control. As the mail should be opened by a responsible officer. Signatures on all the letters and
advices received from other branches of the bank or its correspondence should be checked by an
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officer with the signature book.

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All bank forms (e.g., Cheque books, demand draft/pay order books, travelers’ cheques, foreign
currency cards etc.) should be kept in the possession of an officer, and another responsible officer
should verify the issuance and stock of such stationery. In the given case, S2 has possession of all
bank forms (e.g., cheque books, demand draft/pay order books, travelers’ cheques, foreign
currency cards etc.). He maintains a record meticulously which were also verified on test check
basis.
Further, contention of bank that being a small branch with shortage of manpower they are not
able to check the work and records on regular basis, is NOT TENABLE as such lapses in internal
control pose risk of fraud.
The auditor should report the same in his report accordingly.
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17. AUDIT STRATEGY AND PLANNING
Q.NO.1 “AN ADEQUATE AUDIT PLANNING BENEFITS THE AUDIT OF FINANCIAL STATEMENTS”
DISCUSS.
ANSWER:
Planning an audit involves establishing the overall audit strategy for the engagement and developing
an audit plan. Adequate planning benefits the audit of financial statements in several ways, including
the following:
1. Helping the auditor to Focus and attentive on important audit areas.
2. Helping the auditor identify and resolve potential problems on a timely basis.
3. Helping the auditor properly organize and manage the audit engagement so that it is performed
in an effective and efficient manner.
4. Assisting in the selection of engagement team members with appropriate levels of capabilities
and competence.
5. Facilitating the direction and supervision of engagement team members and the review of their work.
6. Assisting in coordination of work done by auditors of components and experts.
Q.NO.2 WRITE ABOUT NATURE AND EXTENT OF PLANNING?
ANSWER:
The Nature and Extent of Planning will vary according to:
1. SIZE AND COMPLEXITY OF THE AUDITEE: If the size and complexity of organization of which
audit is to be conducted is large, then much more planning activities would be required as
compared to an entity whose size and complexity is small.
2. PAST EXPERIENCE & EXPERTISE: The key engagement team members’ previous experience &
expertise also contributes towards variation in planning activities.
3. CHANGE IN CIRCUMSTANCES: Another factor contributing towards variation in planning

activities is change in circumstances.
Q.NO.3 AUDIT PLANNING IS A CONTINUOUS PROCESS. EXPLAIN?
ANSWER:
1. Planning is not a discrete (specific) phase of an audit, but rather a continual and iterative
(repetitive) process. Planning begins after the completion of the previous audit and continues until
the completion of the current audit engagement.
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2. Planning includes consideration of the timing of certain activities and audit procedures. It also
involves Audit Programming.
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3. Further the audit plan shall be reviewed periodically to ensure that it covers new audit areas
identified if any during the course of audit, making it up to date.
PLANNING INCLUDES CONSIDERATION OF FOLLOWING MATTERS:
1. Obtaining an understanding of the legal and regulatory framework applicable to the entity and
how the entity is complying with that framework.
2. The analytical procedures to be applied as risk assessment procedures.
3. The determination of materiality as per SA 320.
4. The need of expert’s assistance.
5. The performance of other risk assessment procedures.
Q.NO.4 PREPARATION OF AUDIT STRATEGY AND PLAN ARE THE RESPONSIBILITIES OF THE AUDITOR.
COMMENT
ANSWER:
Auditor is ultimately responsible for audit strategy and planning. While developing the audit plan the
auditor involves various persons:
A. INVOLVING OF ENTITIES PERSONNEL:
1. The auditor may discuss the audit plan with the entity’s management to facilitate proper
conduct of audit.
2. The auditor may take the help of client’s staff in certain audit areas. So while developing the
plan it is advisable to discuss the plan with the client’s staff.
3. Recognize the fact that the discussion of detailed audit plan and procedures with the client may
make the audit ineffective as what auditor is going to conduct becomes highly predictable.
4. The matters related to surprise checks shall not be included in the discussion with client.
B. INVOLVING OF ENGAGEMENT TEAM MEMBERS:
1. Also, the auditor shall involve the key engagement team members while developing the
overall audit strategy and plan.
2. This ensures allocation of audit areas based on capabilities and experience of engagement
team members thereby increasing the audit effectiveness.
CONCLUSION: Although the auditors involve various persons as stated above, it is the ultimate
responsibility of auditor w.r.t. overall audit strategy and audit plan.
Q.NO.5 WRITE ABOUT ACCEPTANCE AND CONTINUATION OF CLIENT RELATIONSHIPS AND AUDIT
ENGAGEMENTS? [PRELIMINARY ENGAGEMENT ACTIVITIES]
ANSWER:
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PRELIMINARY ENGAGEMENT ACTIVITIES: The auditor shall undertake the following activities at the
beginning of the current audit engagement-
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1. Performing procedures required by SA 220, “Quality Control for an Audit of Financial
Statements” regarding the continuance of the client relationship and the specific audit
engagement. As per the combined reading of SA 220 and SQC 1, information and procedures
such as the following, assists the auditor in determining whether the conclusions reached
regarding the acceptance and continuance of client relationships and audit engagements are
appropriate:
a. The integrity of the principal owners, key management and those charged with
governance of the entity
b. Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, expertise, including time and resources
c. Whether the firm and the engagement team can comply with relevant ethical
requirements; and
d. Significant matters that have arisen during the current or previous audit engagement,
and their implications for continuing the relationship.
2. Evaluating compliance with ethical requirements, including independence, as required by SA

220; and
3. Establishing an understanding of the terms of the engagement, as required by SA 210.
Q.NO.6 WHAT ARE THE CONTENTS OF AN AUDIT PLAN?
ANSWER:
1. The auditor should develop an audit plan that shall include a description of:
a. The nature, timing and extent of planned risk assessment procedures, as determined
under SA 315 “Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment”.
b. The nature, timing and extent of planned further audit procedures at the assertion level,
as determined under SA 330 “The Auditor’s Responses to Assessed Risks”.
c. Other planned audit procedures that are required to be carried out so that the
engagement complies with SAs.
2. The audit plan is more detailed than the overall audit strategy that includes the nature, timing
and extent of audit procedures to be performed by engagement team members.
3. Planning for these audit procedures takes place over the course of the audit as the audit plan for
the engagement develops.
4. In addition, the auditor may begin the execution of further audit procedures for some classes of
transactions, account balances and disclosures before planning all remaining further audit
procedures.
Q.NO.7 A WELL-DESIGNED AUDIT PLAN NEED NOT BE CHANGED DURING THE COURSE OF AUDIT.
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COMMENT.
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ANSWER:
1. The auditor shall update and change the overall audit strategy and the audit plan as and when
necessary.
2. Reasons for change:
a) Unexpected events.
b) Changes in conditions.
c) Information comes to the auditor’s knowledge during the audit which is different from the
information available at the time of planning.
3. Therefore, the auditor may need to change the overall audit strategy and audit plan based on
revised circumstances so as to make the audit effective.
4. In other words, the audit plan should be dynamic and offer flexibility that enables modifications
Q.NO.8 DISCUSS THE FACTORS THE AUDITOR WILL CONSIDER WHILE ESTABLISHING THE OVERALL
STRATEGY?
ANSWER:
1. CHARACTERISTICS OF ENGAGEMENT: Identify the characteristics of the engagement that define

its scope. Ex: Nature of business, number of locations to be audited and use of previous audit
workings.
2. REPORTING OBJECTIVES: Ascertain the reporting objectives of the engagement to plan the timing
of the audit and the nature of the communications required. Ex: Planning of audit meetings and
meetings with management on a timely basis.
3. TEAM’s EFFORTS: Consider the factors that, in the auditor’s professional judgment, are significant
in directing the engagement team’s efforts.
4. PRELIMINARY WORK: Consider the results of preliminary engagement activities. Whether
knowledge gained on other engagements performed by the engagement partner for the entity is
relevant; and
5. NTE OF RESOURCES: Ascertain the nature, timing and extent of resources necessary to perform
the engagement.
Q.NO.9 WHILE ESTABLISHING OVERALL AUDIT STRATEGY, THE AUDITOR SHALL “IDENTIFY
CHARACTERISTICS OF ENGAGEMENT THAT DEFINE ITS SCOPE”. GIVE SOME EXAMPLES FOR
CHARACTERISTICS OF ENGAGEMENT? [SELF STUDY]
ANSWER:
The characteristics of audit engagements will include:
1. The Financial Reporting Framework.

2. Industry-specific reporting requirements such as reports mandated by industry regulators.
3. The expected audit coverage, including the number and locations of components to be
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included.
4. The nature of the business segments to be audited, including the need for specialized
knowledge.
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5. The nature of the control relationships between a parent and its components that determine
how the group is to be consolidated.
6. The extent to which components are audited by other auditors.
7. The expected use of audit evidence obtained in previous audits, for example, audit evidence
related to risk assessment procedures and tests of controls.
8. The entity’s use of service organizations and how the auditor may obtain evidence concerning
the design or operation of controls performed by them.
9. The effect of information technology on the audit procedures.
10. The availability of client personnel and data.
Q.NO.10 WHILE ESTABLISHING OVERALL AUDIT STRATEGY, THE AUDITOR SHALL “ASCERTAIN THE
REPORTING OBJECTIVES OF THE ENGAGEMENT TO PLAN THE TIMING OF AUDIT AND NATURE
OF COMMUNICATION REQUIRED” EXPLAIN? [SELF STUDY]
ANSWER:
The reporting objectives of engagement team in light of SA – 300, Includes:

1. The entity’s timetable for reporting, such as at interim and final stages.
2. The organization of meetings with management and those charged with governance to discuss
the nature, timing and extent of the audit work.
3. The discussion with management and those charged with governance regarding the expected
type and timing of reports to be.
4. Communication with auditors of components regarding types and timing of reports to be
issued.
5. The nature and timing of communications among engagement team members.
6. Whether there are any other expected communications with third parties, including any
statutory or contractual reporting responsibilities arising from the audit.
Q.NO.11 WRITE ABOUT SIGNIFICANT FACTORS, PRELIMINARY ENGAGEMENT ACTIVITIES, AND

KNOWLEDGE GAINED ON OTHER ENGAGEMENTS BEING A FACTOR FOR DEVELOPMENT OF
OVERALL AUDIT STRATEGY?
ANSWER:
1. The determination of materiality in accordance with SA 320.

2. Preliminary identification of areas where there may be a higher risk of material misstatement.
3. The impact of the assessed risk of material misstatement at the overall financial statement level
on direction, supervision and review.
4. The manner in which engagement team members needs to maintain an inquisitive/ questioning
mind and exercise professional skepticism and unpredictability.
5. Results of previous audits including the identified deficiencies and action taken to address them.
6. Evidence of management’s commitment to the design, implementation and maintenance of
sound internal controls.
7. Volume of transactions which may determine reliance on internal control.
8. Significant changes in the financial reporting framework, such as changes in accounting
standards.
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9. Other significant relevant developments, such as changes in the legal and regulatory
environment affecting the entity.
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Q.NO.12 HOW OVERALL AUDIT STRATEGY ASSISTS THE AUDITOR WHILE DEVELOPING A
DETAILED AUDIT PLAN? OR BENEFITS OF OVERALL AUDIT STRATEGY?
ANSWER:
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the
audit that helps in development of the audit plan. The process of establishing the overall audit
strategy starts after completion of risk assessment procedure.
ASSISTANCE TO AUDITOR BY OVERALL AUDIT STRATEGY:
1. How Allocation of man power to specified audit areas based on evaluation of complexities
involved in such areas. Ex: In complex audit areas generally experienced team members will be
assigned or sometimes experts help may be taken
2. The number of persons and time allotted for such specific audit areas. Ex: The number of persons
from audit team to observe the inventory count at various go downs.
3. Expected date of starting of such specified audit area and accordingly the team members shall be
allocated. Ex: Starting inventory counting after completion of sales verification and
4. Coordination, direction and supervision of resources namely team members and time.
5. Audit team meetings expected to be held and periodicity of such meetings to discuss and review
the status of work performed by engagement team.
6. Location of these audit meetings to take place. For example, On-site: Client premises and Off-site:
Auditors premises
Q.NO.13 WRITE ABOUT DOCUMENTATION OF OVERALL AUDIT STRATEGY AND AUDIT PLAN?
ANSWER:
A. NEED FOR DOCUMENTATION:

1. It is a record of the key decisions regarding planning of the audit and to communicate to the
engagement team.
2. It also serves as evidence that the audit is properly planned and performed in accordance with
the standards on auditing.
3. The auditor may summarize the overall audit strategy in the form of a memorandum (Also
Known As Audit Programme Memorandum) which may be in standard form or customized as
per the client business nature.
B. THE AUDITOR SHALL DOCUMENT:
1. The overall audit strategy.
2. The audit plans.
3. Any significant changes to the overall audit strategy or the audit plan along with the reasons
for such changes.
4. A summary of discussions with the entity’s key persons.
5. Other communications or agreements with management or those charged with governance
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w.r.t any other services.

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Q.NO.14 RELATIONSHIP BETWEEN OVERALL AUDIT STRATEGY AND AUDIT PLAN
ANSWER:
The audit strategy is prepared before the audit plan. The audit plan is more detailed than the overall
audit strategy. Audit strategy and audit plan are inter-related because change in one would result
into change in the other. The audit strategy provides the guidelines for developing the audit plan. It
establishes the scope and conduct of the audit procedures and thereby, works as basis for
developing a detailed audit plan. Detailed audit plan would include the nature, timing and extent of
the audit procedures so as to obtain sufficient appropriate audit evidence.
Example: CA. Sam has already developed an audit strategy for Hitesh Ltd. While a detailed audit
plan is being developed, she decided that materiality levels set earlier need to be lowered as
weaknesses in the internal controls were highlighted in the internal audit report. Subsequently, a
deviation from the audit strategy is felt necessary. Therefore, Sam would firstly modify the overall
strategy and thereafter, prepare the audit plan in line with the strategy. This shows that the audit
strategy and audit plan are closely inter-related as change in one is resulting into change in the
other.
Q.NO.15 EXPLAIN DIRECTION, SUPERVISION AND REVIEW OF THE AUDIT BY THE AUDITOR OR
REVIEWER? [SELF STUDY – CA INTER]
ANSWER:
A. INCLUSION IN PLANNING:
1. While developing overall audit strategy and audit plan, the auditor shall also include periodical
review of audit procedures performed by the engagement team.
2. This ensures whether the engagement team members are complying with relevant auditing
standards and whether the audit is going on in a planned manner.
3. This review may be carried out by the engagement partner or independent reviewer who also
belongs to the auditor’s firm.
B. FACTORS INFLUENCING EXTENT OF DIRECTION, SUPERVISION AND REVIEW:
2. The areas of the audit.
3. The assessed risks of material misstatement.
4. The capabilities and competence of the individual team members performing the audit work.
Meaning of reviewer: Reviewer is another person from the same audit firm but doesn’t belong to
engagement team.
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Q.NO.16 WRITE ABOUT AUDIT PROGRAMME AND THE ELEMENTS OF SUCH PROGRAMME?
ANSWER:
1. An audit programme is commonly prepared to allocate work to team members which may include
the list of audit procedures and instructions to be followed by the member. It also estimates the
duration for completing an audit task.
2. It is very useful for students to know how to plan an audit programme. The programme may
contain audit objectives for each area and should have sufficient detail to serve as a set of
instructions to the assistants involved in the audit and as means to control the proper execution
of work. It may be emphasised that a clear spelling out of audit objectives for each area is
important to link up the procedures with audit objectives and to ensure a purposeful audit
MATTERS NEED TO BE CONSIDERED:

1. Nature of business in which the organisation is engaged:
a. On his first appointment, the auditor should examine in detail the financial and accounting
organisation of the business by visiting the client’s office; by observing different stages
through which documents pass before each transaction is authorised and recorded; the
record that is kept and the type of books maintained.
b. In the case of an industrial concern, he must also visit the factory to acquaint himself with
the different processes of manufacture, the quantitative records maintained and the
manner in which statistics are compiled in respect of losses in process.
c. The auditor, therefore, should draw up the audit programme after considering the
technical, financial and accounting set-up of the company.
2. Overall plan:
a. Overall plan for the audit programme should be drawn up to ensure a systematic approach
to the work.
b. If in drawing the audit programme, any divergence from the overall plan becomes
necessary, first the overall plan should be modified after due consideration and thereafter,
only that specific matter may be taken in the audit programme.
c. The framework provided under the overall plan should be strictly adhered to.
3. System of internal control and accounting procedures:

a. The existence of a system of internal control ensures that both financial and statistical
records are checked continuously;
b. It also unearths errors, both of omission and of commission. The auditor, in framing his
opinion on financial statements needs reasonable assurance that transactions are properly
authorised and recorded in the accounting records and that transactions have not been
omitted.
c. The study and evaluation of internal control helps the auditor to establish the reliance he
can place on the internal controls in determining the nature, timing and extent of his
substantive auditing procedures.
d. The auditor’s examination of the system of internal control should have three features -
review and preliminary evaluation, testing of compliance and evaluation.
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4. Size of the organisation and structure of its management:

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An increase in the size of the organisation enhances the complexity of the examination of its
accounting records specially when it has a number of branches, deals in several products or has a
very large turnover.
EXAMPLE: The reports of the Comptroller and Auditor General on audit of accounts of Public
Enterprises show that some of them have a very poor system of internal controls. In such cases,
the magnitude of the tasks of the auditor increases considerably.
5. Information as regards organisation of the business: To plan audit programme, it is necessary

that the auditor should obtain from his client information as regards the client’s history and
business, purpose and nature of engagement and time schedule for the completion of audit.
6. Accounting and management policies: The auditor should review the financial statements of the
past several years, audited by his predecessors specially those of the immediately preceding
previous year. This would reveal to him a great deal of information regarding accounting and
management policies which have been followed in the past and whether these have been
employed consistently.
DRAWING UP THE AUDIT PROGRAMME:

1. After the auditor has collected the aforementioned information, he will be in a position to draw
up the programme of audit. He can now decide the areas to be covered by audit, also those to be
covered in detail and those which should be covered by the applications of the test checks. He will
also be able to decide the specific audit procedures which should be applied in each case. These
procedures vary widely because of the conditions under which each concern operates, its form of
organisation, its nature of business and the condition of its accounts. On this account, it is not
practicable to draw up a typical audit programme.
2. FIRST TIME AUDIT: When an auditor is appointed to audit the accounts of an entity for the first
time, the audit programme should be developed in three stages stated below:
a. To begin with, a broad outline of the audit programme should be drawn up.
b. After the internal and accounting procedures have been reviewed, the details should be
filled up on a consideration of the deficiencies in the system of internal control.
c. After the detailed checking procedure is over, the extent to which the special procedures
(first time/ opening balance audit procedures) that are required to be applied should be
determined, e.g., independent verification of balances of debtors and creditors, physical
inspection of fixed assets, personal inspection of various items of stock included in closing
inventories and testing their values. At times, special procedures may have to be applied
on a consideration of the nature of business e.g. verification of provision for tax liability in
case of a shipping company regarding freight booked in different countries or for making
a provision for unexpired liability in case of an insurance company, etc.
3. SUBSEQUENT AUDITS:
At each subsequent engagement, the programme should be reviewed and, if necessary, modified
on account of:
a. Experience gained during the previous audits.
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b. Important changes that have taken place in the business specially in the system of internal
control, accounting procedures or in the structure of management or of the scope of
business and
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c. Evaluation of internal control made for the current year.

CIRCUMSTANCES WHERE IN THE AUDIT PROGRAMME WOULD HAVE TO BE SUITABLY ALTERED:
1. If the audit procedures were designed for a certain volume of turnover and subsequently the
volume have substantially increased. Also, when there have been significant changes in the
accounting organisation, procedures and personnel subsequent to the audit procedures.
2. Where during the course of an audit, it has been discovered that internal control procedures were
not as effective as assumed at the time the audit programme was framed.
3. Where there has been an extraordinary increase in the amount of book debts or that in the value
of stocks as compared to that in the previous year.
4. When a suspicion has aroused during the course of audit or information has been received that
asset of the company have been misappropriated.
It may be noted that the audit plan and related programme should be reconsidered as the audit
progresses. Such re-consideration is based on the auditor’s review of internal control, his preliminary
evaluation thereof and the result of his compliance and substantive procedures.
Q.NO.17 WRITE ABOUT AUDIT EXECUTION?
ANSWER:
Key phases in the audit execution stage are Execution Planning, Risk and Control Evaluation,
Testing and Reporting.
A. EXECUTION PLANNING
Prior to commencement of an audit engagement, it is important to lay down the roadmap for audit
execution to ensure timely and quality audit results. The auditors need to plan their work in order to
carry out the audit in an effective, efficient and timely manner. A detailed audit program is prepared
laying down the audit objectives, scope and audit approach. The manpower requirement, audit
team qualifications, and the time element, etc. are some of the important considerations during
execution planning. In order to plan effectively, the auditor may need some more information about
the audit area. A preliminary survey would help in gathering the required information.
B. RISK AND CONTROL EVALUATION:
For each segment of audit, the auditors should conduct a detailed risk and control assessment i.e.,
list the risks that must be reviewed in that segment, capture for each risk the controls that exist or
those that are needed to protect against the risk and show for each control, the work steps required
to test the effectiveness of the controls. While making Risk & Control assessment, it is necessary to
bear in mind the Materiality levels as the same is linked to Audit Risks.
C. TESTING:
Once a comprehensive understanding is gained of the key risks and the controls to be evaluated in a
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given audit area, the auditors should test the operating effectiveness of the controls to determine
whether controls are operating as designed. There are multiple test methods which can be used to
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arrive at the conclusions on the effectiveness of the controls.
D. REPORTING:
SA 700, “Forming an Opinion and Reporting on Financial Statements” establishes standards on the
form and content of the auditor’s report issued as a result of an audit performed by an auditor of
the financial statements of an entity. The auditor should review and assess the conclusions drawn
from the audit evidence obtained as the basis for the expression of an opinion on the financial
statements. This review and assessment involve considering whether the financial statements have
been prepared in accordance with an acceptable financial reporting framework applicable to the
entity under audit. It is also necessary to consider whether the financial statements comply with the
relevant statutory requirements such as compliance of Provisions & Enactments of the Company
Law, Accounting Standards framed by ICAI, latest Guidelines etc.
The auditor’s report should contain a clear written expression of opinion on the financial statements
taken as a whole. A measure of uniformity in the form and content of the auditor’s report is
desirable because it helps to promote the reader’s understanding of the auditor’s report and to
identify unusual circumstances when they occur.
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18. RISK ASSESSMENT AND INTERNAL CONTROL
Q.NO.1 WRITE ABOUT RISK ASSESSMENT AND COMPONENTS OF AUDIT RISK AND INTER
RELATION BETWEEN THOSE COMPONENTS?
ANSWER:
A. RISK ASSESSMENT:
1. Risk assessment assesses the level of risk in the various business processes. Risk assessment
focuses on the business environment, regulatory environment, organisation structure,
organizational and business environmental changes and specific concerns of management
and the audit committee to determine the areas of greatest risk.
2. The auditor identifies assertions where there are risks of material misstatement and
concentrates audit procedures on those areas.
3. In designing and evaluating the results of performing procedures, the auditor should
consider the possibility of [SKEPTICISM]:
a. Selecting an inappropriate audit procedure.
b. Misapplying an appropriate audit procedure or
c. Misinterpreting the results from an audit procedure.
B. AUDIT RISK: Audit risk is the risk of expressing an inappropriate audit opinion on financial
statements that are materially misstated.
C. COMPONENTS OF AUDIT RISK:
1. INHERENT RISK:
a. Susceptibility of an assertion to a misstatement that could be material, individually or
when aggregated with other misstatements, assuming that there are no related controls.
Inherent risk is addressed at both the financial statement level and at the assertion level.
b. For example, technological developments might make a particular product obsolete,
thereby causing inventory to be more susceptible to overstatement.
c. These are the business and other risks that arise from the entity’s objectives, nature of
operations and industry, the regulatory environment in which it operates and its size and
complexity.
d. Risks of particular concern to the auditor might include:
1) Complex calculations which could be misstated
2) High value inventory
3) Accounting estimates that are subject to significant measurement uncertainty
4) Lack of sufficient working capital to continue operations
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5) A declining or volatile industry with many business failures and

6) Technological developments that might make a particular product obsolete.
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2. CONTROL RISK:
a. Risk that the entity’s internal control system will not prevent, or detect and correct on a
timely basis, a misstatement that could be material, individually or when aggregated with
other misstatements.
b. The entity should identify and assess its business and other risks (such as fraud) and
respond by designing and implementing a system of internal control.
c. Entity level controls such as board oversight, IT general controls, and HR policies are
pervasive to all assertions whereas Activity level controls generally, relate to specific
assertions.
d. Some control risk will always exist because of the inherent limitations of any internal
control system.
e. The auditor is required to understand the entity’s internal control and perform
procedures to assess the risks of material misstatement at the assertion level.
3. DETECTION RISK:
This is the risk that the auditor will not detect a misstatement that exists in an assertion that
could be material, either individually or when aggregated with other misstatements.
D. RELATIONSHIP BETWEEN COMPONENTS:
1. The relationship can be defined as follows:

a. Audit Risk = Risk of Material Misstatement X Detection Risk
b. RISK OF MATERIAL MISSTATEMENT: Risk of material misstatement is anticipated risk
that a material misstatement may exist in financial statement before start of the
audit. It has two components inherent risk and control risk.
c. The relationship can be defined as Risk of material Misstatement = Inherent risk X
Control risk
d. DETECTION RISK: It is a risk that a material Misstatement remained undetected even
if all Audit procedures applied.
2. It should be noted that the combined level of Inherent Risk and Control Risk is inversely
related with Detection Risk, and Audit Materiality is also inversely related with audit risk.
Mathematically Audit Risk (AR) can be expressed as a product of Inherent Risk (IR), Control Risk
(CR) and Detection Risk (DR), i.e., AR = IR x CR x DR
Q.NO.2 WRITE ABOUT DIFFERENT TYPES OF ASSERTIONS MADE BY MANAGEMENT EXPLICITLY OR

IMPLICITLY?
ANSWER:
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Management makes number of assertions that are embedded as part of financial statements and by
way of representations. These relate to the recognition, measurement, presentation and disclosure
of the various elements (amounts and disclosures) in the financial statements.
EXAMPLE 1: Management of ABC Ltd. may assert to the auditor that the sales balance in the
accounting records contains all the sales transactions (completeness assertion), the transactions
took place and are valid (occurrence assertion), and transactions have been properly recorded in the
accounting records and in the appropriate accounting period (accuracy and cut-off assertion).
The objective of the audit is to reduce this audit risk to an acceptably low level. This can be achieved
by performing audit procedures in response to the assessed risks at the financial statement, class of
transactions, account balance and assertion levels.
SA 315 - “Identifying and Assessing the Risks of Material Misstatement Through Understanding the
Entity and Its Environment” categorises the types of assertions used by the auditor to consider the
different types of potential misstatements that may occur, as follows:
A. ASSERTIONS ABOUT CLASSES OF TRANSACTIONS AND EVENTS FOR THE PERIOD UNDER AUDIT:
1. OCCURRENCE: Transactions and events that have been recorded have occurred and pertain
to the entity.
2. COMPLETENESS: All transactions and events that should have been recorded have been
recorded.
3. ACCURACY: Amounts and other data relating to recorded transactions and events have been
recorded appropriately.
4. CUT-OFF: Transactions and events have been recorded in the correct accounting period.
5. CLASSIFICATION: Transactions and events have been recorded in the proper accounts.
B. ASSERTIONS ABOUT ACCOUNT BALANCES:

1. EXISTENCE: Assets, liabilities, and equity interests exist.
2. RIGHTS AND OBLIGATIONS: The entity holds or controls the rights to assets, and liabilities
are the obligations of the entity.
3. COMPLETENESS: All assets, liabilities and equity interests that should have been.
4. VALUATION AND ALLOCATION: Assets, liabilities, and equity interests are included in the FS
at appropriate amounts and any resulting valuation or allocation adjustments are
appropriately Recorded.
C. ASSERTIONS ABOUT PRESENTATION AND DISCLOSURE:

1. OCCURRENCE AND RIGHTS AND OBLIGATIONS: Disclosed events, transactions, and other
matters have occurred and pertain to the entity.
2. COMPLETENESS: All disclosures that should have been included in the financial statements
have been included.
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3. CLASSIFICATION AND UNDERSTANDABILITY: Financial information is appropriately

presented and described, and disclosures are clearly expressed.
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4. ACCURACY AND VALUATION: Financial and other information are disclosed fairly and at
appropriate amounts.
ILLUSTRATION
BACKGROUND: During the process of extracting the exception reports, the auditors noted
numerous purchase entries without valid purchase orders.
ANALYSIS: In terms of percentage, about 40% of purchases were made without valid purchase
orders and few purchase orders were validated after the actual purchase. Also, there was no
reconciliation between the goods received and the goods ordered.
ASSERTIONS: Validity of purchases Pervasive/Account Balance Level: Account Balance level.
ACCOUNT BALANCE(S) AFFECTED: (i) Purchases, (ii) Account Payable
AUDIT PROCEDURES: The following procedures may address the validity of the account balance:
• Make a selection of the purchases, review correspondence with the vendors, purchase
requisitions (internal document) and reconciliations of their accounts.
• Review Vendor listing along with the ageing details. Follow up the material amounts paid
before the normal credit period and analyse the reasons for exceptions.
• Meet with the company's Purchase officer and obtain responses to our inquiries
regarding the purchases made without purchase orders.
• Discuss the summary of such issues with the client.
Q.NO.3 WRITE ABOUT LEVELS OF ASSESSMENT OF RISK OF MATERIAL MISSTATEMENTS?
ANSWER:
Auditors are required to assess the risks of material misstatement at two levels.
FINANCIAL STATEMENT LEVEL:
1. The risk at overall financial statement level refers to risks of material misstatement that relate
pervasively to the financial statements as a whole and potentially affect many assertions.
2. EXAMPLE: If the top accountant is not competent enough for the assigned tasks, it is quite
possible that errors could occur in the financial statements. However, the nature of such errors
will not often be confined to a single account balance, transaction stream or disclosure. In
addition, the error is not likely be confined to a single assertion such as the completeness of
sales. It could easily relate to other assertions such as accuracy, existence and valuation.
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ASSERSTION LEVEL:
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1. The risks identifiable with specific assertions at the class of transactions, account balance, or
disclosure level. This means that for each account balance, class of transactions and disclosure.
2. An assessment of risk (such as high, moderate, or low) should be made for each individual
assertion being addressed.
3. EXAMPLE: While considering the valuation assertion, the auditor could assess the risk of error in
payables as low; however, for inventory where obsolescence is a factor, the auditor would
assess the valuation risk as high.
4. Another example would be where the risks of material misstatement due to completeness
(missing items) in the inventory balance are low, but high in relation to the sales balance.
Q.NO.4 WHAT ARE THE STEPS INVOLVED IN RISK IDENTIFICATION?
ANSWER:
1. Assess the significance of the assessed risk, impact of its occurrence and also revise the
materiality accordingly for the specific account balance.
2. Determine the likelihood for assessed risk to occur and its impact on our auditing procedures.
3. Document the assertions that are affected.
4. Consider the impact of the risk on each of the assertions (completeness, existence, accuracy,
validity, valuation and presentation) relevant to the account balance, class of transactions, or
disclosure.
5. Identify the degree of Significant risks that would require separate attention and response by
the auditor. Planned audit procedures should directly address these risks.
6. Enquire and document the management’s response.
7. Consider the nature of the internal control system in place and its possible effectiveness in
mitigating the risks involved. Ensure the controls:
a. Routine in nature (occur daily) or periodic such as monthly.
b. Designed to prevent or detect and correct errors.
c. Manual or automated.
8. Consider any unique characteristics of the risk.
9. Consider the existence of any particular characteristics (inherent risks) in the class of
transactions, account balance or disclosure that need to be addressed in designing further audit
procedures.
10. Examples could include high value inventory, complex contractual agreements, absence of a
paper trail on certain transaction streams or a large percentage of sales coming from a single
customer.
Q.NO.5 WRITE ABOUT POSSIBLE POTENTIAL MISSTATEMENT INDICATORS?

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ANSWER:
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COMPLETENESS:
1. Transactions not identified.
2. Source documents not prepared.
3. Source documents not captured.
4. Rejected source documents not represented.
EXISTENCE:
1. Fictitious or unauthorised transactions entered on source documents.
2. Source documents overstated.
3. Transactions duplicated on source documents.
4. Capture of source documents duplicated.
5. Invalid source documents captured on subsidiary ledgers.
RECORDING:
1. Source documents captured inaccurately.
2. Processing of transactions is inaccurate.
3. Inaccurate adjustments made in subsidiary ledgers.
CUT-OFF PROCEDURES: Transactions that occur in one period are recorded in another period.
Q.NO.6 WRITE ABOUT RISK BASED AUDIT APPROACH?
ANSWER: Audit should be risk-based or focused on areas of greatest risk to the achievement of the
audited entity’s objectives.
RISK BASED AUDIT:
1. Risk-based audit (RBA) is an approach to audit that analyzes audit risks, sets materiality
thresholds based on audit risk analysis and develops audit programmes that allocate a larger
portion of audit resources to high-risk areas.
2. The auditor does not normally need to perform specific audit procedures on all areas of audit.
He only needs to design audit programmes and procedures on areas earlier identified as major
risks that could result in the financial statements being materially misstated.
3. Risk Based Audit is an essential element of financial audit- both in the attest audit of the
financial statements and in the audit of financial systems and transactions including evaluation
of internal controls.
4. It focuses primarily on the identification and assessment of the financial statement
misstatement risks and provides a framework to reduce the impact to the financial statement of
these identified risks to an acceptable level before rendering an opinion on the financial
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statements.
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5. It also provides indicators of risks as a basis of opportunity for improvement of auditee risk
management and control processes.
RBA – PERFORMANCE AUDIT VIEW:

1. In the context of performance audit, it is the risk to delivery of an activity or scheme or
programme of the entity with economy, efficiency and effectiveness.
2. Awareness of areas that puts the programme or resources at risk from the point of view of
economy, efficiency and effectiveness helps focus audit attention on them. The risk analysis
provides a framework for assurance in performance auditing.
Q.NO.7 WRITE ABOUT AUDIT RISK ANALYSIS?
ANSWER:
1. The auditor should perform an analysis of the audit risks that impact on the auditee before
undertaking specific audit procedures. Risk assessment is a subjective process. It is part of the
professional judgment of the auditor and of the particular circumstances. It is the risk that the
auditor may unknowingly fail to appropriately modify his opinion on financial statements that
are materially misstated.
2. Audit risks are brought about by error and fraud:
a. Error is an unintentional mistake resulting from omission, as when legitimate
transactions and/or balances are excluded from the financial statements; or by
commission, as when erroneous transactions and/or balances are included in the
b. Fraud is an intentional misstatement in the accounting records or supporting documents
from which the financial statements are prepared. It is intended to deceive financial
statement users or to conceal misappropriations.
3. The auditor has the responsibility to plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatements, whether caused by
error or fraud.
4. An error risk may arise from an error in principle, estimate, critical information processing,
financial reporting process or disclosure.
5. Fraud risk involves manipulation, falsification of accounting records, or misrepresentation in the
financial statements of events, transactions or other significant information, or misapplication of
accounting principles or misappropriation of funds.
Q.NO.8 WHAT ARE THE GENERAL STEPS IN CONDUCTING RISK BASED AUDIT?
ANSWER:
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1. The auditor’s objective in a risk-based audit is to obtain reasonable assurance that no material
misstatements whether caused by fraud or errors exist in the financial statements.
2. This involves the following 3 key steps:
a. Assessing the risks of material misstatement in the financial statements
b. Designing and performing further audit procedures that respond to assessed risks and
reduce the risks of material misstatements in the financial statements to an acceptably
low level and
c. Issuing an appropriate audit report based on the audit findings.
3. The risk-based audit process is presented in 3 distinct phases:
a. Risk assessment.
b. Risk response and
c. Reporting.
Q.NO.9 WRITE IN DETAILED ABOUT THREE DISTINCT PHASES OF RISK BASED AUDIT PROCESS?
ANSWER:
PHASE 1 – RISK ASSESSMENT:

The risk assessment phase of the audit involves the following steps:
1. Performing client acceptance or continuance procedures.
2. Planning the overall engagement.
3. Performing risk assessment procedures to understand the business and identify inherent and
control risks.
4. Identifying relevant internal control procedures and assessing their design and implementation
(those controls that would prevent material misstatements from occurring or detect and correct
misstatements after they have occurred).
5. Assessing the risks of material misstatement in the financial statements.
6. Identifying the significant risks that require special audit consideration and those risks for which
substantive procedures alone are not sufficient.
7. Communicating any material weaknesses in the design and implementation of internal control
to management and those charged with governance and
8. Making an informed assessment of the risks of material misstatement at the financial statement
level and at the assertion level.
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PHASE 2 – RISK RESPONSE:
1. This phase of the audit is to design and perform further audit procedures that respond to the
assessed risks of material misstatement and will provide the evidence necessary to support the
audit opinion.
2. Some of the matters the auditor should consider when planning the audit procedures include:
a. Assertions that cannot be addressed by substantive procedures alone. This can occur
where there is highly automated processing of transactions with little or no manual
intervention.
b. Existence of internal control that, if tested, could reduce the need/scope for other
substantive procedures.
c. The potential for substantive analytical procedures that would reduce the need/scope
for other types of procedures.
d. The need to incorporate an element of unpredictability in procedures performed.
e. The need to perform further audit procedures to address the potential for management
override of controls or other fraud scenarios.
f. The need to perform specific procedures to address “significant risks” that have been
identified.
g. Audit procedures designed to address the assessed risks could include a mixture of:
i. Tests of the operational effectiveness of internal control and
ii. Substantive procedures such as tests of details and analytical procedures.
EXAMPLE: Before the conclusion of the audit, based on the results of substantive procedures
and other audit evidence obtained by the auditor, the auditor should consider whether the
assessment of control risk is confirmed. In case of deviations from the prescribed accounting and
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internal control systems, the auditor would make specific inquiries to consider their implications.
Where, based on such inquiries, the auditor concludes that the deviations are such that the
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preliminary assessment of control risk is not supported, he would amend the same unless the
audit evidence obtained from other tests of control supports that assessment. Where the
auditor concludes that the assessed level of control risk needs to be revised, he would modify
the nature, timing and extent of his planned substantive procedures.
PHASE 3 – REPORTING:
1. The final phase of the audit is to assess the audit evidence obtained and determine whether it is
sufficient and appropriate to reduce the risks of material misstatement in the financial
statements to an acceptably low level.
2. It is important at this stage to determine:
a. If there had been a change in the assessed level of risk.
b. Whether conclusions drawn from work performed are appropriate and
c. If any suspicious circumstances have been encountered.
d. Any additional risks should be appropriately assessed, and further audit procedures
performed as required.
3. When all procedures have been performed and conclusions reached:
a. Audit findings should be reported to management and those charged with governance;
and
b. An audit opinion should be formed, and a decision made on the appropriate wording for
the auditor’s report.
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Q.NO.10 WRITE ABOUT INTERNAL CONTROL SYSTEMS?
ANSWER:
DEFINITION:
"Internal Control System" means all the policies and procedures (internal controls) adopted by the
management of an entity to assist in achieving management's objective of ensuring, as far as
practicable, the orderly and efficient conduct of its business, including adherence to management
policies, the safeguarding of assets, the prevention and detection of fraud and error, the accuracy
and completeness of the accounting records, and the timely preparation of reliable financial
information.
RELEVANCE OF UNDERSTANDING OF INTERNAL CONTROL:
1. The auditor should obtain an understanding of the control environment sufficient to assess
management's attitudes, awareness and actions regarding internal controls and their
importance in the entity. Such an understanding would also help the auditor to make a
preliminary assessment of the adequacy of the accounting and internal control systems as a
basis for the preparation of the financial statements, and of the likely nature, timing and extent
of audit procedures.
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2. Ordinarily, development of the overall audit plan does not require an understanding of control
procedures for every financial statement assertion in each account balance and transaction
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class.
3. An auditor’s judgement as to what is sufficient and appropriate audit evidence is affected by the
degree of risk of misstatement. The auditor should obtain audit evidence through tests of
control to support any assessment of control risk which is less than high. The lower the
assessment of control risk, the more evidence the auditor should obtain that accounting and
internal control systems are suitably designed and operating effectively.
4. When obtaining audit evidence about the effective operation of internal controls, the auditor
considers:
a. how they were applied,
b. the consistency with which they were applied during the period and
c. by whom they were applied
5. The concept of effective operation recognises that some deviations may have occurred.
Deviations from prescribed controls may be caused by such factors as changes in key personnel,
significant seasonal fluctuations in volume of transactions and human error. When deviations
are detected, the auditor makes specific inquiries regarding these matters, particularly, the
timing of staff changes in key internal control functions. The auditor then ensures that the tests
of control appropriately cover such a period of change or fluctuation.
6. Based on the results of the tests of control, the auditor should evaluate whether the internal
controls are designed and operating as contemplated in the preliminary assessment of control
risk. The evaluation of deviations may result in the auditor concluding that the assessed level of
control risk needs to be revised. In such cases, the auditor would modify the nature, timing and
extent of planned substantive procedures.
EXAMPLE: The auditor might obtain audit evidence about the proper segregation of duties by
observing the individual who applies a control procedure or by making inquiries of appropriate
personnel. However, audit evidence obtained by some tests of control, such as observation,
pertains only to the point in time at which the procedure was applied. The auditor may decide,
therefore, to supplement these procedures with other tests of control capable of providing audit
evidence about other periods of time.
7. The auditor should consider whether the internal controls were in use throughout the period. If
substantially different controls were used at different times during the period, the auditor would
consider each separately. A breakdown in internal controls for a specific portion of the period
requires separate consideration of the nature, timing, and extent of the audit procedures to be
applied to the transactions and other events of that period.
Q.NO.11 WRITE ABOUT NATURE OF INTERNAL CONTROL?
ANSWER:
1. A set of internally generated policies and procedures adopted by the management of an

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enterprise is a prerequisite for an organisations efficient and effective performance. It is thus, a

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primary responsibility of every management to create and maintain an adequate system of
internal control appropriate to the size and nature of the business entity.
2. SA 315 defines the system of internal control as the process designed, implemented, and
maintained by those charged with governance, management and other personnel to provide
reasonable assurance about the achievement of an entity’s objectives with regard to reliability
of financial reporting, effectiveness and efficiency of operations, safeguarding of assets, and
compliance with applicable laws and regulations.
3. Internal control is a process/set of processes designed to facilitate and support the achievement
of business objectives. Any system of internal control is based on a consideration of significant
risks in operations, compliance, and financial reporting. Objectives such as improving business
effectiveness are included, as are compliance and reporting objectives.
Q.NO.12 WRITE ABOUT SCOPE OF INTERNAL CONTROL AS PER SA 315?
ANSWER:
1. The scope of internal controls extends beyond mere accounting controls and includes all
administrative controls concerned with the decision - making process leading to managements
authorization of transaction, such controls include, production method, time and motion study,
pricing policies, quality control, work standard, budgetary control, policy appraisal, quantitative
controls etc.
2. In an independent financial audit, the auditor is primarily concerned with those policies and
procedures having a bearing on the assertions underlying the financial statements. These
comprise primarily controls relating to:
a. Safeguarding of assets,
b. Prevention and detection of fraud and error,
c. Accuracy and completeness of accounting records and
d. Timely preparation of reliable financial information.
3. Administrative controls, on the other hand, have only a remote relationship with financial
records and the auditor may evaluate only those administrative controls which have a bearing
on the reliability of the financial records.
4. Fundamental to a system of internal control is that it is integral to the activities of the company,
and not something practiced in isolation.
EXAMPLES:
1. If production statistics were used as a basis for an analytical procedure, the controls to ensure
the accuracy of such data would be relevant.
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2. If non-compliance with certain laws and regulations has a direct and material effect on the
financial statements, the controls for detecting and reporting on such non-compliance would be
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relevant.
Q.NO.13 WRITE ABOUT OBJECTIVES OF INTERNAL CONTROLS?
ANSWER:
1. The objectives of internal control systems are determined by the management, after considering
the nature of business, scale operations, the extent of professionalism of the management etc.
The objectives of internal controls relating to the accounting system are:
a. Transactions are executed through general or specific management authorization.
b. All transactions are promptly recorded in an appropriate manner to permit the
preparation of financial information and to maintain accountability of assets.
c. Assets and records are safeguarded from unauthorized access, use or disposition.
d. Assets are verified at reasonable intervals and appropriate action is taken about the
discrepancies.
2. Precisely, the control objectives ensure that the transactions processed are complete, valid, and
accurate. The basic accounting control objectives which are sought to be achieved by any
accounting control system are:
3. If the response to all the above answer is positive, the auditor would be justified in limiting his
account balance tests considerably.
4. In case of excellent companies, it may also be possible to rely on account balance with minimum
of external tests, such as direct confirmation, management representation etc. Where in a
system a particular control is found to be deficient, audit attention can be focused on the areas
where basic accounting control objectives are not being adhered to.
EXAMPLE: In case, if it found that sales transactions are not being properly valued in accordance
with the price list determined by the management, the auditor would have to perform extensive
searching tests on sales invoices to assure himself that the recoverable amounts are correctly
posted. He may also want to expand his confirmation request at the year end to cover a large
majority of trade receivables.
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Q.NO.14 WRITE ABOUT LIMITATIONS OF INTERNAL CONTROLS?
ANSWER:
Internal control, no matter how effective, can provide an entity with only reasonable assurance and
not absolute assurance about achieving the entity’s operational, financial reporting and compliance
objectives. Internal control systems are subject to certain inherent limitations, such as:
1. Management's consideration that the cost of an internal control does not exceed the
expected benefits to be derived.
2. The fact that most internal controls do not tend to be directed at transactions of unusual
nature.
3. The potential for human error, such as, due to carelessness, distraction, mistakes of
judgement and misunderstanding of instructions.
4. The possibility of circumvention of internal controls through collusion with employees or
with parties outside the entity.
5. The possibility that a person responsible for exercising an internal control could abuse that
responsibility, for example, a member of management overriding an internal control.
6. Manipulations by management with respect to transactions or estimates and judgements
required in the preparation of financial statements.
Q.NO.15 WRITE ABOUT STRUCTURE OF INTERNAL CONTROL?
ANSWER:
To achieve the objectives of internal controls, it is necessary to establish adequate control policies
and procedures. Most of these policies and procedures cover:
A. SEGREGATION OF DUTIES:
1. WHY AND WHERE: Transaction processing are allocated to different persons in such a
manner that no one person can carry through the completion of a transaction from start to
finish or the work of one person is made complimentary to the work of another person. The
purpose is to minimize the occurrence of fraud and errors and to detect them on a timely
basis when they take place. The following functions are segregated -
a. Authorization of transactions.
b. Execution of transactions.
c. Physical custody of related assets and
d. Maintenance of records and documents.
2. CARE TO BE TAKEN: While allocating duties, the considerations of cost and efficacy should
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be kept in mind as there is a tendency to stretch the allocation of tasks involved in a job to
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more persons than what is required resulting in cumbersome procedures, over-elaboration
of records and unduly high cost of administration.
3. ROTATION OF DUTIES: Apart from segregation of duties, periodic rotation of duties of

personnel is also desirable. The rotation of duties seeks to ensure that if a fraud and error is
committed by a person, it does not remain undetected for long. It also ensures that a person
cannot develop vested interest by holding a position for too long. Rotation of duties also
ensures that each employee keeps his work up to date. This also makes an employee to be
careful because he is aware that his performed tasks will be reviewed by others when duties
are rotated.
B. AUTHORIZATION OF TRANSACTION:
1. Delegation of authority to different levels and to particular persons are required to establish
by the management for controlling the execution of transaction in accordance with
prescribed conditions. Authorization may be general, or it may be specific with reference to
a single transaction.
2. It is necessary to establish procedures which provide assurance that authorizations are
issued by persons acting within the scope of their authority, and that the transactions
conform to the terms of the authorizations. This objective can be achieved by making
independent comparison of transaction document with general or specific authorizations.
C. ADEQUACY OF RECORDS AND DOCUMENTS: [AKA ACCOUNTING CONTROLS]
1. Accounting controls should ensure that:

a. Transactions are executed in accordance with management’s general or specific
authorization. Transactions and other events are promptly recorded at correct
amounts.
b. Transactions should be classified in appropriate accounts and in the appropriate
period to which it relates.
c. Transaction should be recorded in a manner so as to facilitate preparation of financial
statements in accordance with applicable financial reporting framework.
d. Recording of transaction should facilitate maintaining accountability for assets.
e. Assets and records are required to be protected from unauthorized access, use or
disposition.
f. Records of assets such as sufficient description of the assets (to facilitate
identification) its location should also be maintained so that the assets could be
physically verified periodically.
2. For prompt, accurate, complete, and appropriate recording of accounting transaction,

several procedures are often established by the management.
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D. ACCOUNTABILITY AND SAFEGUARDING OF ASSETS:

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1. The process of accountability of assets commences from acquisitions of assets its use and
final disposal. Safeguarding of assets requires appropriate maintenance of records, their
periodic reconciliation with the related assets.
2. Assets like cash, inventories, investment scrips require frequent physical verification with
book records.
3. The frequency of reconciliation would differ for different assets depending upon their nature
and amount Assets which are considered sensitive or susceptible to error need to be
reconcile more frequently than others.
4. For proper safeguarding of assets, only authorized personnel should be given access to such
asset. This not only means physical access but also exercising control over processing of
documents relating to authorization for use and disposal of assets.
5. It is essential to have effective controls over physical custody of cash, inventories,
investments, and other fixed assets.
E. INDEPENDENT CHECKS:
Independent verification of the control systems, designed and implemented by the
management, involves periodic or regular review by independent persons to ascertain whether
the control procedures are operating effectively or not. Such process may be carried out by
specially assigned staff under the banner of external audit or Internal audit.
Q.NO.16 WRITE ABOUT COMPONENTS OF INTERNAL CONTROLS?
ANSWER:
The division of internal control into the following five components provides a useful framework for
auditors to understand how different aspects of an entity’s internal control may affect the audit.
The following are components of control environment:
1. The control Environment (Governance, management structure and Culture of honesty).
2. Entity’s risk assessment process (Identification of risk to design a control to mitigate it).
3. Information system, including related business process, relevant to financial reporting.
4. Control activities (Implement and Review of policies to be implemented).
5. Monitoring of controls (Testing of controls to update them).
Q.NO.17 THE AUDITOR OF MARUT LTD, ENGAGED IN MANUFACTURING OF SMART MOTOR BIKES,
OBTAINS AN UNDERSTANDING OF THE CONTROL ENVIRONMENT. AS PART OF OBTAINING
THIS UNDERSTANDING, THE AUDITOR EVALUATES WHETHER:
a) MANAGEMENT HAS CREATED AND MAINTAINED A CULTURE OF HONESTY AND ETHICAL
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BEHAVIOUR.
b) THE STRENGTHS IN THE CONTROL ENVIRONMENT ELEMENTS COLLECTIVELY PROVIDE AN
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APPROPRIATE FOUNDATION FOR THE OTHER COMPONENTS OF INTERNAL CONTROL.

ADVISE WHAT IS INCLUDED IN CONTROL ENVIRONMENT. ALSO EXPLAIN THE ELEMENTS OF
CONTROL ENVIRONMENT.
(OR)
WHAT IS INCLUDED IN CONTROL ENVIRONMENT AND ALSO EXPLAIN ITS ELEMENTS?
ANSWER:
CONTROL ENVIRONMENT INCLUDES:

The control environment includes:
1. The governance and management functions.
2. The attitudes, awareness, and actions of those charged with governance and management.
3. The control environment sets the tone of an organization, influencing the control
consciousness of its people.
ELEMENTS OF CONTROL ENVIRONMENT: Elements of control environment may be relevant to

obtain an understanding of control environment which includes the following:
1. COMMUNICATION AND ENFORCEMENT OF INTEGRITY AND ETHICAL VALUES:

a. The effectiveness of controls cannot rise above the integrity and ethical values of the
people who create, administer, and monitor them.
b. Integrity and ethical behaviour are the product of the entity’s ethical and behavioural
standards, how they are communicated, and how they are reinforced in practice.
c. The enforcement of integrity and ethical values includes, for example, management
actions to eliminate or mitigate incentives or temptations that might prompt personnel
to engage in dishonest, illegal, or unethical acts.
d. The communication of entity policies on integrity and ethical values may include the
communication of behavioural standards to personnel through policy statements and
codes of conduct and by example.
2. COMMITMENT TO COMPETENCE:
Competence is the knowledge and skills necessary to accomplish tasks that define the
individual’s job.
3. PARTICIPATION BY THOSE CHARGED WITH GOVERNANCE:

An entity’s control consciousness is influenced significantly by those charged with governance.
The importance of the responsibilities of those charged with governance is recognised in codes
of practice and other laws and regulations or guidance produced for the benefit of those
charged with governance. Other responsibilities of those charged with governance include
oversight of the design and effective operation of whistle blower procedures and the process for
reviewing the effectiveness of the entity’s internal control.
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4. MANAGEMENT’S PHILOSOPHY AND OPERATING STYLE:

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Management’s philosophy and operating style encompass a broad range of characteristics. For
example, management’s attitudes and actions toward financial reporting may manifest
themselves through conservative or aggressive selection from available alternative accounting
principles, or conscientiousness and conservatism with which accounting estimates are
developed.
5. ORGANISATIONAL STRUCTURE:
Establishing a relevant organizational structure includes considering key areas of authority and
responsibility and appropriate lines of reporting. The appropriateness of an entity’s
organisational structure depends, in part, on its size and the nature of its activities.
6. ASSIGNMENT OF AUTHORITY AND RESPONSIBILITY:

a. The assignment of authority and responsibility may include policies relating to
appropriate business practices, knowledge and experience of key personnel, and
resources provided for carrying out duties.
b. In addition, it may include policies and communications directed at ensuring that all
personnel understand the entity’s objectives, know how their individual actions
interrelate and contribute to those objectives, and recognize how and for what they will
be held accountable.
7. HUMAN RESOURCE POLICIES AND PRACTICES:

a. RECRUITMENT POLICY: Human resource policies and practices often demonstrate
important matters in relation to the control consciousness of an entity. For example,
standards for recruiting the most qualified individuals – with emphasis on educational
background, prior work experience, past accomplishments, and evidence of integrity and
ethical behaviour – demonstrate an entity’s commitment to competent and trustworthy
people.
b. TRANING POLICY: Training policies that communicate prospective roles and
responsibilities and include practices such as training schools and seminars illustrate
expected levels of performance and behaviour.
c. APPRAISALS POLICY: Promotions driven by periodic performance appraisals demonstrate
the entity’s commitment to the advancement of qualified personnel to higher levels of
responsibility.
Q.NO.18 WRITE ABOUT ENTITY’S RISK ASSESSMENT PROCESS WHICH IS A COMPONENT OF

CONTROL ENVIRONMENT?
ANSWER:
1. The auditor shall obtain an understanding of whether the entity has a process for:
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a. Identifying business risks relevant to financial reporting objectives. (E.g., Doctor

Prescription vs Bill)
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b. Estimating the significance of the risks.

c. Assessing the likelihood of their occurrence and
d. Deciding about actions to address those risks.
2. The entity’s risk assessment process helps to identify the basis for the risks to be managed. If that
process is appropriate, it would assist the auditor in identifying risks of material misstatement.
Whether the entity’s risk assessment process is appropriate to the circumstances is a matter of
judgment.
3. Risks can arise or change due to circumstances such as the following:
a. Changes in operating environment: Changes in the regulatory or operating
environment can result in changes in competitive pressures and significantly different
risks.
b. New personnel: new personnel may have a different focus on or understanding of
internal control.
c. New or revamped information systems: Significant and rapid changes in information
systems can change the risk relating to internal control.
d. Rapid growth: Significant and rapid expansion of operations can strain controls and
increase the risk of a breakdown in controls.
e. New technology: Incorporating new technologies into production processes or
information systems may change the risk associated with internal control.
f. New business models, products, or activities: Entering into business areas or
transactions with which an entity has little experience may introduce new risks
associated with internal control.
g. Corporate restructurings: Restructurings may be accompanied by staff reductions and
changes in supervision and segregation of duties that may change the risk associated
with internal control.
h. Expanded foreign operations: The expansion or acquisition of foreign operations
carries new and often unique risks that may affect internal control, for example,
additional or changed risks from foreign currency transactions.
i. New accounting pronouncements: Adoption of new accounting principles or changing
accounting principles may affect risks in preparing financial statements.
Q.NO.19 WRITE ABOUT CONTROL ACTIVITIES WHICH IS A COMPONENT OF INTERNAL CONTROL

SYSTEM?
ANSWER:
MEANING OF CONTROL ACTIVITIES: The policies and procedures that help ensure that management
directives are carried out.
A. PERFORMANCE REVIEWS: These control activities include reviews and analyses of actual
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performance versus budgets, forecasts, and prior period performance; relating different sets of
data – operating or financial – to one another, together with analyses of the relationships and
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investigative and corrective actions; comparing internal data with external sources of
information; and review of functional or activity performance.
B. INFORMATION PROCESSING:
1. The two broad groupings of information systems control activities are application
controls, which apply to the processing of individual applications, and general IT-controls,
which are policies and procedures that relate to many applications and support the
effective functioning of application controls by helping to ensure the continued proper
operation of information systems.
2. Examples of application controls include checking the arithmetical accuracy of records,
maintaining, and reviewing accounts and trial balances, automated controls such as edit
checks of input data and numerical sequence checks, and manual follow-up of exception
reports.
3. Examples of general IT-controls are program change controls, controls that restrict access
to programs or data, controls over the implementation of new releases of packaged
software applications, and controls over system software that restrict access to or
monitor the use of system utilities that could change financial data or records without
leaving an audit trail.
C. PHYSICAL CONTROLS: Controls that encompass:

1. The physical security of assets, including adequate safeguards such as secured facilities
over access to assets and records.
2. The authorisation for access to computer programs and data files.
3. The periodic counting and comparison with amounts shown on control records (for
example, comparing the results of cash, security and inventory counts with accounting
records).
4. The extent to which physical controls intended to prevent theft of assets are relevant to
the reliability of financial statement preparation, and therefore the audit, depends on
circumstances such as when assets are highly susceptible to misappropriation.
D. SEGREGATION OF DUTIES:
1. Assigning different people, the responsibilities of authorising transactions, recording
transactions, and maintaining custody of assets.
2. Segregation of duties is intended to reduce the opportunities to allow any person to be in
a position to both perpetrate and conceal errors or fraud in the normal course of the
person’s duties.
3. Certain control activities may depend on the existence of appropriate higher-level
policies established by management or those charged with governance.
4. For example, authorisation controls may be delegated under established guidelines, such
as, investment criteria set by those charged with governance; alternatively, non-routine
transactions such as, major acquisitions or divestments may require specific high-level
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approval, including in some cases that of shareholders.

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Q.NO.20 ONE OF THE COMPONENTS OF INTERNAL CONTROLS IS “THE INFORMATION SYSTEMS
AND RELATED BUSINESS PROCESS WHICH ARE RELEVANT FOR FINANCIAL REPORTING AND
COMMUNICATION”. EXPLAIN IN DETAILED?
ANSWER:
1. An information system consists of infrastructure (physical and hardware components), software,
people, procedures, and data. Many information systems make extensive use of information
technology (IT).
2. The information system relevant to financial reporting objectives, which includes the financial
reporting system, encompasses methods and records that:
a. Identify and record all valid transactions.
b. Describe on a timely basis the transactions in sufficient detail to permit proper
classification of transactions for financial reporting.
c. Measure the value of transactions in a manner that permits recording their proper
monetary value in the financial statements.
d. Determine the time in which transactions occurred to permit recording of
transactions in the proper accounting period.
e. Present properly the transactions and related disclosures in the financial statements
3. The quality of system-generated information affects management’s ability to make appropriate
decisions in managing and controlling the entity’s activities and to prepare reliable financial
reports.
4. Communication may take such forms as policy manuals, accounting and financial reporting
manuals, and memoranda. Communication also can be made electronically, orally, and through
the actions of management.
Q.NO.21 WRITE ABOUT MONITORING OF CONTROLS WHICH IS A FINAL COMPONENT OF

INTERNAL CONTROL?
ANSWER:
1. OBJECTIVE: Management’s monitoring of controls includes considering whether they are

operating as intended and that they are modified as appropriate for changes in conditions.
Monitoring is done also to ensure that controls continue to operate effectively over time. For
example, if the timeliness and accuracy of bank reconciliations are not monitored, personnel are
likely to stop preparing them.
2. INCLUDES: Monitoring of controls may include activities such as,

a. Management’s review of whether bank reconciliations are being prepared on a timely
basis,
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b. Internal auditors’ evaluation of sales personnel’s compliance with the entity’s policies on
terms of sales contracts, and
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c. A legal department’s oversight of compliance with the entity’s ethical or business
practice policies.
d. Monitoring activities may include using information from communications from external
parties that may indicate problems or highlight areas in need of improvement.
3. WHO PERFORMS MONITORING: Internal auditors or personnel performing similar functions
may contribute to the monitoring of an entity’s controls through separate evaluations.
Ordinarily, they regularly provide information about the functioning of internal control, focusing
considerable attention on evaluating the effectiveness of internal control, and communicate
information about strengths and deficiencies in internal control and recommendations for
improving internal control.
Q.NO.22 WRITE ABOUT THE CONCEPT, OBJECTIVES AND GENERALISATIONS OF INTERNAL CHECK?
ANSWER:
CONCEPT AND MEANING: Internal check system implies organization of the overall system of book-
keeping and arrangement of Staff duties in such a way that no one person can carry through a
transaction and record every aspect thereof.
It is a part of overall control system and operates basically as a built-in-device as far as organization
and job-allocation aspects of the controls are concerned.
The system provides existence of checks on the day-to-day transactions which operate continuously
as part of the routine system whereby the work of each person is either proved independently or is
made complimentary to the work of another.
OBJECTIVES OF INTERNAL CHECK: The following are the objectives of the internal check system:
1. To detect error and frauds with ease.
2. To avoid and minimize the possibility of commission of errors and fraud by any staff.
3. To increase the efficiency of the staff working within the organization.
4. To locate the responsibility area or the stages where actual fraud and error occurs.
5. To protect the integrity of the business by ensuring that accounts are always subject to proper
scrutiny and check.
6. To prevent and avoid the misappropriation or embezzlement of cash and falsification of
accounts.
FACTORS FOR EFFECTIVENESS OF INTERNAL CHECKS: The effectiveness of an efficient system of

internal check depends on the following considerations:
1. Clarity of Responsibility: The responsibility of different persons engaged in various operations
of business transactions should be properly identified. A well-integrated organizational chart
depicting the names of responsible persons associated with specific functions may help to fix up
responsibility.
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2. Division of Work: The segregation of work should be made in such a manner that the free flow
of work is not interrupted and helps to determine that the work of one person is complementary
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to the other. Then, it is suggested that rotation of different employees through various
components of job should be effectively implemented.
3. Standardization: The entire process of accounting should be standardized by creating suitable
policies commensurate with the nature of the business, so as to strengthen the system of
internal check.
4. Appraisal: Periodic review should be made of the chain of operations and workflow. Such
process may be carried out by preparing an audit flow chart.
GENERAL CONDITIONS OR ASPECTS OF INTERNAL CHECK: The general condition pertaining to the
internal check system may be summarized as under:
1. SEGREGATION OF DUTIES: No single person should have complete control over any important
aspect of the business operation. Every employee’s action should come under the review of
another person.
2. ROTATION OF DUTIES: Staff duties should be rotated from time to time so that members do not
perform the same function for a considerable length of time.
3. MANDATORY LEAVES: Every member of the staff should be encouraged to go on leave at least
once a year.
4. Persons having physical custody of assets must not be permitted to have access to the books of
accounts.
5. ACCOUNTING CONTROL: There should exist an accounting control in respect of each class of
assets, in addition, there should be periodical inspection so as to establish their physical
condition.
6. Mechanical devices should be used, wherever practicable to prevent loss or misappropriation of
cash.
7. Budgetary control should be exercised, and wide deviations observed should be reconciled.
8. For inventory taking, at the close of the year, trading activities should, if possible be suspended,
and it should be done by staff belonging to several sections of the organization.
9. The financial and administrative powers should be distributed very judiciously among different
officers and the manner in which those are actually exercised should be reviewed periodically.
10. Procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.
NOTE: The scope of statutory audit is limited by both time and cost. Therefore, it is increasingly being
recognized that for an audit to be effective especially in case of large organization, the existence of a
system of internal check is essential.
Q.NO.23 WRITE ABOUT REVIEW OF SYSTEM OF INTERNAL CONTROLS BY THE AUDITOR?
ANSWER:
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1. Evaluating the design of a control involves considering whether the control, individually or in
combination with other controls, is capable of effectively preventing, or detecting and
correcting, material misstatements.
2. Implementation of a control means that the control exists, and that the entity is using it.
3. There is little point in assessing the implementation of a control that is not effective, and so the
design of a control is considered first. An improperly designed control may represent a material
weakness or significant deficiency in the entity’s internal control.
4. An entity’s system of internal control contains manual elements and often contains automated
elements. The use of manual or automated elements in internal control also affects the manner
in which transactions are initiated, recorded, processed, and reported. An entity’s mix of manual
and automated elements in internal control varies with the nature and complexity of the entity’s
use of information technology.
5. Manual elements in internal control may be more suitable where judgment and discretion are
required such as for the following circumstances:
a. Large, unusual, or non-recurring transactions.
b. Circumstances where errors are difficult to define, anticipate or predict.
c. In changing circumstances that require a control response outside the scope of an
existing automated control.
d. In monitoring the effectiveness of automated controls.
6. The extent and nature of the risks to internal control vary depending on the nature and
characteristics of the entity’s information system.
7. REVIEW OF INTERNAL CONTROLS: The review of the internal control system enables the
auditor:
a) To formulate his opinion as to the reliance he may place on the system itself i.e., whether
the system is such as would enable the management to produce a true and fair set of
financial statements; and
b) To locate the areas of weakness in the system so that the audit programme and the nature,
timing and extent of substantive and compliance audit procedures can be adjusted to meet
the situation.
c) Example: If the auditor is not satisfied with the control system as regards trade receivable,
he may decide to have a wider coverage for confirmation of trade receivables’ balances.
Normally, investments and cash are physically verified at the end of the period and this
routine is known to the client and his employees. In case the auditor comes across a
weakness in the control either he may provide in the programme for a surprise cash count or
investment verification on a day preceding or succeeding the routine verification. In such a
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case, a surprise check will be more useful if it is undertaken after the routine verification is
over. Similarly, if he is of the view that because of weak controls the possibility of wrong
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billing to customers exists, may extend the programme for comparison of the invoices with
the forwarding notes and for checking of the extensions and castings of the invoices.
8. TIMING OF REVIEW OF INTERNAL CONTROLS:

a) Deciding the point of time appropriate for undertaking the review of the internal controls is
a matter for individual judgement of the auditor. This decision can be taken on a
consideration of the size and complexity of the client’s operations.
b) If the auditor, because of his continuing relationship with his client, is already aware of the
features and efficacy of internal controls, he may just review the changes that have taken
place in the intervening period because of changes in the operations of the client. However,
a comprehensive review in such cases must be made at an interval of, say, 3 years.
c) Ordinarily, the review of internal controls should be undertaken as a distinct phase of audit
before finalisation of the audit programme. However, if the size of operations is rather small,
the review can be undertaken in conjunction with other audit procedures and the
programmes can be adjusted for any extension or elimination of checking.
9. LETTER OF WEAKNESS: When the auditor finds inadequacies or weaknesses in the internal
control system, he should advise his client about such inadequacies and weaknesses and the
consequences that may follow. It should be the duty of the auditor to see, in the course of his
audit, how far the inadequacies and weaknesses have been removed. He will take this into
account in preparing his audit report. It is a useful practice to note the following after each
function, set out in the audit programme -
a. Any change in the system of internal control from that record in the appropriate
section of the internal control questionnaire.
b. Any further weakness noted in the internal control.
c. Any instance where the prescribed system or procedure has not been followed.
These should be considered in deciding whether any further modification in the audit
programme is called for. Also, these should be communicated to the client and confirmation
should be sought as regards changes in the system.
10. REVIEW PROCEDURES: The review of internal control consists mainly of enquiries of personnel
at various organisational levels within the enterprise together with reference to documentation
such as procedures, manuals, job description and flow-charts, to gain knowledge about the
controls which the auditor has identified as significant to his audit. The auditor may trace a few
transactions through the accounting system to assist in understanding that system and it is
related to internal controls. The auditor’s preliminary evaluation of internal controls should be
made on the assumption that the controls operate generally as described and that they function
effectively throughout the period of intended reliance The purpose of the preliminary evaluation
is to identify the particular controls on which the auditor still intends to rely and to test through
compliance procedures.
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Q.NO.24 WRITE ABOUT INTERNAL CONTROL ASSESSMENT AND EVALUATION?

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ANSWER:
COMMITMENT OF TCWG: The quality & effectiveness of internal controls is directly dependent on
the organisational environment. The tone at the top (the Board & Executive Management) & the
credibility of the message on internal controls from top plays an important role in establishing
strong control environment.
Following are some of the key components to assess & evaluate the controls environment:
1. STANDARD OPERATING PROCEDURES (SOPS): A well-defined set of SOPs helps define role,
responsibilities, process & controls & thus helps clearly communicate the operating controls to
all touch points of a process. The controls are likely to be clearly understood & consistently
applied even during employee turnover
2. ENTERPRISE RISK MANAGEMENT: An organization which has robust process to identify &
mitigate risks across the enterprise & its periodical review will assist in early identification of
gaps & taking effective control measures. In such organizations, surprises of failures in controls
are likely to be few.
3. SEGREGATION OF JOB RESPONSIBILITIES: A key element of control is that multiple activities in a

transaction/decision should not be concentrated with one individual. Segregation of duties is an
important element of control such that no two commercial activities should be conducted by the
same person.
4. JOB ROTATION IN SENSITIVE AREAS: Any job carried out by the same person over a long period
of time is likely to lead to complacency & possible misuse in sensitive areas. It is therefore
important that in key commercial functions, the job rotation is regularly followed to avoid
degeneration of controls.
For example, if the same buyer continues to conduct purchase function for long period, it is
likely that he gets into comfort zone with existing vendors & hence does not exercise adequate
controls in terms of vendor development, competitive quotes etc.
5. DELEGATION OF FINANCIAL POWERS DOCUMENT: As the organization grows, it needs to

delegate the financial & other powers to their employees. A clearly defined document on
delegation of powers allows controls to be clearly operated without being dependent on
individuals.
6. INFORMATION TECHNOLOGY BASED CONTROLS: With the advent of computers & enterprise
resource planning (ERP) systems, it is much easier to embed controls through the system instead
of being human dependent. The failure rate for IT embedded controls is likely to be low, is likely
to have better audit trail & is thus easier to monitor. For example, at the stage of customer
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invoicing, application of correct rates in invoices or credit control can all be exercised directly
through IT system improving control environment.
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Q.NO.25 WHAT ARE THE TECHNIQUES OF EVALUATION OF INTERNAL CONTROLS?
ANSWER:
The following are the 3 popular techniques of evaluation of internal control:
QUESTIONNAIRE
1. QUESTIONS: A questionnaire is a set of questions framed in an organised manner, about each

functional area, which has as purpose the evaluation of the effectiveness of control and
detection of its weakness if any.
2. ADDRESSES VARIOUS AREAS: A questionnaire usually consists of several separate sections
devoted to areas such as purchases, sales, trade receivables, trade payables, wages, etc.
3. FILLED BY CLIENT:
a. The questionnaire is intended to be filled by the company executives who are in charge
of the various areas.
b. It is an accepted practice that the auditor (or his representative) arranges meetings with
the executives concerned and gets the answers filled by each executive. Sometimes, the
auditor himself may be required to fill the answers. In such a case, he should ensure that
the concerned executive has initiated the answers as a token of his agreement therewith.
c. Questions are so framed as generally to dispense with the requirement of a detailed
answer to each question. For this purpose, often one general question is broken down
into a number of questions and sub-questions to enable the executive to provide a just
‘Yes’, ‘No’ or ‘Not applicable’ form of reply.
d. Questions are also framed in such a manner that generally a “No” answer will imply
weakness in the control system. Questions may also be framed to indicate an ‘Yes’
answer would indicate weakness. The only thing that should be borne in mind is that the
scheme of questions should be consistent, sequential, logical, and if possible
corroborative.
e. Wherever it is necessary, slightly detailed answers also may be asked for to bring clarity
to the matter.
4. STANDARDISED ICQ: In the use of standardized internal control questionnaire, certain basic
assumptions about elements of good control are taken into account. These are:
a. Organisations have an extensive division of duties and responsibilities. The larger the
organisation, the greater is the scope of such division.
b. Employees concerned with accounting function are not assigned any custodial function.
c. No single person is thrust with the responsibility of completing a transaction all by
himself.
d. There should always be evidence to identify the person who has done the work whether
involving authorisation, implementation or checking.
e. The work performed by each one is expected to come under review of another in the
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usual course of routine.

f. There is proper documentation and recording of the transactions.
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5. The questionnaire serves the purpose of a record so far as the auditor is concerned about the
state of internal control as given to him officially.
6. PERIODICITY: A question naturally arises as to whether it is necessary to issue questionnaire for
every year of the auditor’s engagement.
a. For the first year of engagements issue of questionnaire is necessary.
b. For subsequent years, the auditor, instead of issuing a questionnaire again, may request
the client to confirm whether any change in the nature and scope of business or whether
the control system has undergone a change.
c. If there has been a change, the auditor should take note of its and enter appropriate
comments on the relevant part of the questionnaire.
d. EVERY 3RD YEAR: It would be a good practice in the case of continuing engagements to
issue a questionnaire irrespective of any change, say, every 3rd year.
e. The rationale for issuance of a questionnaire every three years, in the case of even no
change, lies in altering the client as regards unnoticed and unspectacular changes that
might have taken place during the intervening period; also this will make the client more
control-conscious.
CHECK LIST
1. It is a series of instructions or questions on internal control which the auditor must follow or
answer.
2. When a particular instruction is carried out, the auditor initials the space opposite the
instruction.
3. If it is in the form of a question, the answer generally ‘Yes’, ‘No’ or ‘Not Applicable’ is entered
opposite the question.
4. A check list is more in the nature of a reminder to the auditor about the matters to be checked
for testing the internal control system.
5. The question form of check list may even be meant for the auditor’s own staff.
6. When the check list is in question form, it is hardly different from a questionnaire. However,
generally questionnaire is a popular medium for the evaluation of the internal control system.
7. ICQ vs CHECKLIST: While a questionnaire is basically a set of questions put to the client, a check
list which may be in a form of instructions, questions or just points to be checked may be meant
for the auditor’s own staff it is a set of instructions or points. The basic distinction between
internal control questionnaire and check list are as under:
a. The ICQ incorporates a large number of detailed questions, but the check list generally
contains questions relating to the main control objective with the area under review.
b. ICQ, the weaknesses are highlighted by the ‘Yes’ while in the check list, it is indicated by
‘No’.
c. The significance of ‘No’ in an ICQ does indicate a weakness but the significance of that
weakness is not revealed automatically. However, in the check list, a specific statement is
required where an apparent weakness may prove to be material in relation to the
accounts as a whole.
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8. Example: Questions in the check list may be formed in the following manner (this is an
illustrative set of questions to be answered by the audit staff). Have you checked that the
cashier?
a. Is not responsible for opening the incoming mails.
b. Does not authorise any of the ledgers.
c. Does not authorise any expenditure or receipt; (iv) does not sign cheques; (v) takes his
annual leave regularly.
d. Inks and balances the cash book every day.
e. Verifies physical cash balance with the book figure daily at the end of the day.
f. Prepares monthly bank reconciliation statement
g. Holds no other funds or investment.
h. Holds no unnecessary balance in hand
i. Does not pay money without looking into compliance with proper procedure and due
authorisation and
j. Has tendered proper security or has executed a fidelity bond?
FLOW CHART
1. GRAPHICAL: It is a graphic presentation of internal controls in the organisation and is normally
drawn up to show the controls in each section or sub-section. As distinct from a narrative form,
it provides the most concise and comprehensive way for reviewing the internal controls and the
evaluator’s findings.
2. LESS NARRATIVES: In a flow chart, narratives, though cannot perhaps be totally banished are
reduced to the minimum and by that process, it can successfully bring the whole control
structure, especially the essential parts thereof, in a condensed but wholly meaningful manner.
3. BIRD EYE VIEW: It gives a bird’s eye view of the system and is drawn up as a result of the
auditor’s review thereof.
4. EVERY DETAIL: It should, however, not be understood that details are not reflected in a flow
chart. Every detail relevant from the control point of view and the details about how an
operation is performed can be included in the flow chart.
5. A DIAGRAM: Essentially a flow chart is a diagram full with lines and symbols and, if judicious use
of them can be made, it is probably the most effective way of presenting the state of internal
controls in the client’s organisation.
6. FLOW OF ACTIVITIES: A properly drawn up flow chart can provide a neat visual picture of the
whole activities of the section or department involving flow of documents and activities. More
specifically it can show:
a. At what point a document is raised internally or received from external sources.
b. The number of copies in which a document is raised or received.
c. The intermediate stages set sequentially through which the document and the activity
pass.
d. Distribution of the documents to various sections, department or operations.
e. Checking authorisation and matching at relevant stages.
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f. Filing of the documents and

g. Final disposal by sending out or destruction.
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NOTE: As a matter of fact, a very sound knowledge of internal control requirements is imperative
for, adopting flow-charting technique for evaluation of internal controls and it demands a highly
analytical mind to be able to see clearly the inter division of a job and the appropriate control at
relevant points.
The flow charts should be made section-wise or department-wise. The suggestion has been made to
ensure readability and intelligibility of the flow charts.
[Note: Students are advised to read “Drawing of Flow Charts is Discussed in Detailed in ICAI Study
Material Pg. 3.37 to 3.43”]
Q.NO.26 WRITE ABOUT COMMUNICATING WEAKNESSES IDENTIFIED IN INTERNAL CONTROLS?
ANSWER:
During audit work, the auditor may notice material weaknesses in the internal control system.
Material weaknesses are defined as absence of adequate controls on flow of transactions that
increases the possibility of errors and frauds in the financial statements of the entity.
The auditor should communicate such material weaknesses to the management or the audit
committee, if any, on a timely basis. This communication should be, preferably, in writing through a
letter of weakness or management letter.
Important points with regard to such a letter are as follows:
1. The letter lists down the area of weaknesses in the system and offers suggestions for
improvement.
2. It should clearly indicate that it discusses only weaknesses which have come to the attention of
the auditor because of his audit and that his examination has not been designed to determine
the adequacy of internal control for management.
3. This letter serves as a valuable reference document for management for the purpose of revising
the system and insisting on its strict implementation.
4. It should be appreciated that by writing a letter to the management about the weaknesses in
the system, the auditor is not absolved from his duty to report the shortcomings in the accounts
by way of qualification where the defects have not been corrected to the auditor’s satisfaction
weighing the materiality of weaknesses and their impact, if considered necessary.
5. CASE LAW: The practice of the issue of letter of weaknesses has a great merit in relieving the
auditor from liability in case serious frauds or losses have occurred, which probably would not
have taken place had the client taken due note of the auditor’s points in the letter of weakness.
In the case Re S.P. Catterson & Ltd. (1937, 81, Act L.R. 62), the auditor was acquitted of the
charge of negligence for employee’s fraud since he had already informed the client about the
unsatisfactory state in the specific areas of accounts and had suggested improvements which
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6. SA 265 VIEW: The Council of ICAI has issued SA 265 on “Communicating Deficiencies in Internal
Control to Those Charged with Governance and Management” in this regard. This Standard on
Auditing (SA) deals with the auditor’s responsibility to communicate appropriately to those
charged with governance and management deficiencies in internal control that the auditor has
identified in an audit of financial statements. This SA does not impose additional responsibilities
on the auditor regarding obtaining an understanding of internal control and designing and
performing tests of controls over and above the requirements of SA 315 and SA 330.
7. AUDIT PROCEDURE:
a. The auditor shall determine whether, on the basis of the audit work performed, the
auditor has identified one or more deficiencies in internal control.
b. If the auditor has identified one or more deficiencies in internal control, the auditor shall
determine, on the basis of the audit work performed, whether they constitute
significant deficiencies.
c. The auditor shall also communicate to management at an appropriate level of
responsibility on a timely basis in writing, that, in the auditor’s professional
judgment, are of sufficient importance to merit management’s attention:
i. Significant deficiencies in internal control that the auditor has communicated or
intends to communicate to those charged with governance, unless it would be
inappropriate to communicate directly to management in the circumstances; and
ii. Other deficiencies in internal control identified during the audit that have not
been communicated to management by other parties and
8. CONTENTS OF LETTER OF WEAKNESS: The auditor shall include in the written communication of
significant deficiencies in internal control:
a. A description of the deficiencies and an explanation of their potential effects and
b. Sufficient information to enable those charged with governance and management to
understand the context of the communication. In particular, the auditor shall explain
that:
i. The purpose of the audit was for the auditor to express an opinion on the
ii. The audit included consideration of internal control relevant to the preparation of
the financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of internal control and
iii. The matters being reported are limited to those deficiencies that the auditor has
identified during the audit and that the auditor has concluded are of sufficient
importance to merit being reported to those charged with governance.
Q.NO.27 WHAT IS THE NEED OF INTERNAL CONTROL FRAMEWORKS?

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ANSWER:
NEED OF ICS:
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1. Corporate internal controls are part of governance mechanisms of every organisation and,
whether a company adopts a global internal control framework or develops its own,
management should always be guided by the need to safeguard business value. There are a
number of global internal control frameworks that provide guidance to entities for developing
and establishing their internal control systems.
2. Control should be built and established within the processes through which the company
pursues its objectives. It would be more appropriate to build early warning mechanisms into
existing management information systems. The board of directors or those charged with
governance need to consider whether they have enough timely, relevant, and reliable reports on
progress against business objectives and significant risks.
OBJECTIVE OF ICS:
Internal control is fundamental to the successful operation and day-to-day running of a business,
and it assists the company in achieving its business objectives. It is wider in scope and encompasses
all controls incorporated into the strategic, governance and management process, covering the
company’s entire range of activities and operations, and not limited to those directly related to
financial operations and reporting. There are many internal control frameworks. The objective of
this chapter is to give an overview of the common international frameworks.
GUIDANCE NOTE ON AUDIT OF INTERNAL FINANCIAL CONTROLS OVER FINANCIAL REPORTING:
1. ICAI has issued a Guidance Note on Audit of Internal Financial Controls Over Financial Reporting
which covers aspects such as Scope of reporting on internal financial controls under Companies
Act 2013, essential components of internal controls, Technical guidance on audit of Internal
Financial Controls, Implementation guidance on audit of Internal Financial Controls. The
Guidance Note states as below:
“To state whether a set of financial statements presents a true and fair view, it is essential to
benchmark and check the financial statements for compliance with the financial reporting
framework”
2. FR FRAMEWORK: The Accounting Standards specified under the Companies Act, 1956 (which
are deemed to be applicable as per Section 133 of the 2013 Act, read with Rule 7 of Companies
(Accounts) Rules, 2014) is one of the criteria constituting the financial reporting framework
based on which companies prepare and present their financial statements and against which the
auditors evaluate if the financial statements present a true and fair view of the state of affairs
and operations of the company in an audit of the financial statements carried out under the
Companies Act, 2013.
3. IC FRAMEWORK: Similarly, a benchmark internal control system, based on suitable criteria, is
essential to enable the management and auditors to assess and state adequacy of and
compliance with the system of internal control.
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Q.NO.28 WRITE ABOUT INTERNATIONALLY RECOGNISED INTERNAL CONTROL FRAMEWORKS?

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ANSWER:
COSO [Committee of Sponsoring Organisation] FRAMEWORK
Integrated Framework issued by Committee of the Sponsoring Organisations of the Treadway

Commission (COSO Framework)
COSO’s Internal Control:

1. Integrated Framework was introduced in 1992 as guidance on how to establish better controls
so that companies can achieve their objectives. COSO categorizes entity-level objectives into
operations, financial reporting, and compliance.
2. COMPONENTS: The framework includes more than 20 basic principles representing the
fundamental concepts associated with its five components:
a. Control environment,
b. Risk assessment,
c. Control activities,
d. Information and communication, and
e. Monitoring.
3. 17 PRINCIPLES: Some of the principles include key elements for compliance, such as integrity
and ethical values, authorities and responsibilities, policies and procedures, and reporting
deficiencies. COSO Framework was largely done through the articulation of the 17 principles,
which are relevant to every entity and must be present and functioning in order to have an
effective system of internal control.
Here are the tiles of the 17 internal control principles by internal control component as
presented in COSO’s framework:
a. CONTROL ENVIRONMENT:
i. Demonstrates commitment to integrity and ethical values.
ii. Exercises oversight responsibility.
iii. Establishes structure, authority, and responsibility.
iv. Demonstrates commitment to competence.
v. Enforces accountability.
b. RISK ASSESSMENT:
i. Specifies suitable objectives.
ii. Identifies and analyses risk.
iii. Assesses fraud risk.
iv. Identifies and analyses significant changes.
c. CONTROL ACTIVITIES:
i. Selects and develops control activities.
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ii. Selects and develops general controls over technology.

iii. Deploys through policies and procedures.
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d. INFORMATION AND COMMUNICATION:
i. Uses relevant information.
ii. Communicates internally.
iii. Communicates externally.
e. MONITORING:
i. Conducts ongoing and/or separate evaluations.
ii. Evaluates and communicate deficiencies.
4. OBJECTIVES OF COSO: The COSO Framework is designed to be used by organizations to assess

the effectiveness of the system of internal control to achieve objectives as determined by
management. The Framework lists three categories of objectives as below:
a. Operations Objectives: Related to the effectiveness and efficiency of the entity’s
operations, including operational and financial performance goals, and safeguarding
assets against loss.
b. Reporting Objectives: Related to internal and external financial and non-financial
reporting to stakeholders, which would encompass reliability, timeliness, transparency,
or other terms as established by regulators, standard setters, or the entity’s policies.
c. Compliance objectives: Relating to the entity’s compliance with applicable laws and
regulations. The Framework considers the increased demands and complexities in laws,
regulations, and accounting standards.
5. LIMITATIONS OF INTERNAL CONTROL:

a. The Framework acknowledges that there are limitations related to a system of internal
control. For example, certain events or conditions are beyond an organization’s control,
and no system of internal control will always do what it was designed to do. Controls are
performed by people and are subject to human error, uncertainties inherent in
judgment, management override, and their circumvention due to collusion.
b. An effective system of internal control recognizes their inherent limitations and
addresses ways to minimize these risks by the design, implementation, and conduct of
the system of internal control. However, an effective system will not eliminate these
risks. An effective system of internal control provides reasonable assurance, not absolute
assurance, that the entity will achieve its defined operating, reporting, and compliance
objectives.
COCO [Criteria of Control] FRAMEWORK
1. The Criteria of Control (CoCo) framework was developed by the Canadian Institute of Chartered
Accountants with the objective of improving organisational performance and decision making
with better controls, risk management, and corporate governance. [Introduced in 1992]
2. The framework includes 20 criteria for effective control in 4 areas of an organization:

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a. Purpose (direction),
b. Commitment (identity and values),
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c. Capability (competence) and
d. Monitoring and learning (evolution).
3. The framework emphasizes that control involves the entire organization but begins on an
individual level, with the employee.
4. In order to assess whether controls exist and are operating effectively, each criterion would be
examined to identify the controls that are in place to address them.
COBIT [Control Objectives for Information and Related Technology]
1. It is a framework created by the ISACA (Information Systems Audit and Control Association) for
IT governance and management.
2. COBIT has 34 high-level processes that cover 210 control objectives categorized in 4 domains:
planning and organization, acquisition and implementation, delivery and support, and
monitoring and evaluation.
3. It is designed as a supportive tool for managers and allows bridging the crucial gap between
technical issues, business risks and control requirements.
4. Business managers are equipped with a model to deliver value to the organization and practice
better risk management practices associated with the IT processes.
5. It is a control model that guarantees the integrity of the information system. Today, COBIT is
used globally by all managers who are responsible for the IT business processes.
6. It is a thoroughly recognized guideline that can be applied to any organization across industries.
Overall, COBIT ensures quality, control and reliability of information systems in organization,
which is also the most important aspect of every modern business.
7. This framework guides an organization on how to use IT resources (i.e., applications,
information, infrastructure, and people) to manage IT domains, processes, and activities to
respond to business requirements, which include compliance, effectiveness, efficiency,
confidentiality, integrity, availability, and reliability.
8. Well-governed IT practices can assist businesses in complying with laws, regulations, and
contractual arrangements.
COMBINED CODE OF COMMITTEE ON CORPORATE GOVERNANCE
Guidance for Directors on the Combined Code, published by the Institute of Chartered Accountants
in England & Wales (known as the Turnbull Report). When the Combined Code of the Committee on
Corporate Governance (the Code) was published, the Institute of Chartered Accountants in England
& Wales agreed with the London Stock Exchange that it would provide guidance to assist listed
companies to implement the requirements in the Code relating to internal control. The key
principles of the Code are enunciated as below:
1. The board should maintain a sound system of internal control to safeguard shareholders’
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investment and the company’s assets.

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2. The directors should, at least annually, conduct a review of the effectiveness of the group’s
system of internal control and should report to shareholders that they have done so. The review
should cover all controls, including financial, operational and compliance controls and risk
management.
3. Companies which do not have an internal audit function should from time to time review the
need for one.
4. The guidance requires directors to exercise judgement in reviewing how the company has
implemented the requirements of the Code relating to internal control and reporting to
shareholders thereon.
5. The guidance is based on the adoption by a company’s board of a risk-based approach to
establishing a sound system of internal control and reviewing its effectiveness. This should be
incorporated by the company within its normal management and governance processes.
6. It should not be treated as a separate exercise undertaken to meet regulatory requirements.
SARBANES-OXLEY SECTION 404
1. SOX Section 404 (Sarbanes-Oxley Act Section 404) mandates that all publicly traded companies
must establish internal controls and procedures for financial reporting and must document, test
and maintain those controls and procedures to ensure their effectiveness.
2. The purpose of SOX is to reduce the possibilities of corporate fraud by increasing the stringency
of procedures and requirements for financial reporting.
3. The Sarbanes Oxley Act, signed into law in 2002, has revamped federal regulations pertaining to
publicly traded companies’ corporate governance and reporting obligations.
4. The SEC rules and PCAOB [Public Company Accounting Oversight Board] [Similar to NFRA in
India] standards require that:
a. Management performs a formal assessment of its controls over financial reporting
including tests that confirm the design and operating effectiveness of the controls.
b. Management includes in its annual report an assessment of ICFR.
c. The external auditors provide two opinions as part of a single integrated audit of the
company:
i. An independent opinion on the effectiveness of the system of ICFR.
ii. The traditional opinion on the financial statements.
5. There are a number of different definitions of the term internal control. For the purposes of
Section 404, the great majority of companies and all the CPA firms use the definition in COSO’s
Internal Control — Integrated Framework. The COSO framework has made it easier for
management to see what’s covered and here gaps may exist in their SOX 404 compliance
program.
6. Management needs to determine whether the system of internal control in effect as of the date
of the assessment provides reasonable assurance that material errors, in either interim or
annual financial statements, will be prevented or detected.
7. The rules issued by Securities and Exchange Commission require a company’s annual report to
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include an internal control report of management that contains:

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a. A statement of management’s responsibility for establishing and maintaining adequate
internal control over financial reporting for the company.
b. A statement identifying the framework used by management to conduct the required
evaluation of the effectiveness of the company’s internal control over financial reporting.
c. Management’s assessment of the effectiveness of the company’s internal control over
financial reporting as of the end of the company’s most recent fiscal year, including a
statement as to whether or not the company’s internal control over financial reporting is
effective. The assessment must include disclosure of any “material weaknesses” in the
company’s internal control over financial reporting identified by management.
Management is not permitted to conclude that the company’s internal control over
financial reporting is effective if there are one or more material weaknesses in the
company’s internal control over financial reporting.
d. A statement that the registered public accounting firm that audited the financial
statements included in the annual report has issued an attestation report on
management’s assessment of the registrant’s internal control over financial reporting.
8. The final rules also require a company to file, as part of the company’s annual report, the
attestation report of the registered public accounting firm that audited the company’s financial
statements.
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PRACTICAL QUESTIONS
Q.NO.1 SA 315, “Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment” categorises the types of assertions used by the
auditor to consider the different types of potential misstatements that may occur. Briefly explain
with example.
ANSWER:
Write Answer to Q No. 2
Q.NO.2 During the course of his audit, the auditor noticed material weaknesses in the internal
control system, and he wishes to communicate the same to the management. You are required to
elucidate the important points the auditor should keep in the mind while drafting the letter of
weaknesses in internal control system.
ANSWER:
Refer Q No. 26 – Write Point No. 7 and 8
Q.NO.3 As auditor of Z Ltd., you would like to limit your examination of account balance tests. What
are the control objectives you would like the accounting control system to achieve to suit your
purpose?
ANSWER:
Basic Accounting Control Objectives: The basic accounting control objectives which are sought to be
achieved by any accounting control system are -
1. Whether all transactions are recorded.

2. Whether recorded transactions are real.
3. Whether all recorded transactions are properly valued.
4. Whether all transactions are recorded timely.
5. Whether all transactions are properly posted.
6. Whether all transactions are properly classified and disclosed.
7. Whether all transactions are properly summarized.
Q.NO.4 New Life Hospital is a multi-speciality hospital which has been facing a lot of pilferage and
troubles regarding their inventory maintenance and control. On investigation into the matter it
was found that the person in charge of inventory inflow and outflow from the store house is also
responsible for purchases and maintaining inventory records. According to you, which basis
system of control has been violated? Also list down the other general conditions pertaining to
such system which needs to be maintained and checked by the management.
ANSWER:
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Internal Checks and Internal Audit are important constituents of Accounting Controls. Internal check
system implies organization of the overall system of book-keeping and arrangement of Staff duties in
such a way that NO ONE PERSON can carry through a transaction and record every aspect thereof.
In the given case of New Life Hospital, the person-in-charge of inventory inflow and outflow from the
store house is also responsible for purchases and maintaining inventory records. Thus, one of the basic
systems of control i.e. internal check which includes segregation of duties or maker and checker has
been violated where transaction processing are allocated to different persons in such a manner that no
one person can carry through the completion of a transaction from start to finish or the work of one
person is made complimentary to the work of another person.
GENERAL CONDITIONS OR ASPECTS OF INTERNAL CHECK: The general condition pertaining to the
internal check system may be summarized as under:
1. SEGREGATION OF DUTIES: No single person should have complete control over any important
aspect of the business operation. Every employee’s action should come under the review of another
person.
2. ROTATION OF DUTIES: Staff duties should be rotated from time to time so that members do not
perform the same function for a considerable length of time.
3. MANDATORY LEAVES: Every member of the staff should be encouraged to go on leave at least once
a year.
4. Persons having physical custody of assets must not be permitted to have access to the books of
accounts.
5. ACCOUNTING CONTROL: There should exist an accounting control in respect of each class of assets,
in addition, there should be periodical inspection so as to establish their physical condition.
6. Mechanical devices should be used, wherever practicable to prevent loss or misappropriation of
cash.
7. Budgetary control should be exercised, and wide deviations observed should be reconciled.
8. For inventory taking, at the close of the year, trading activities should, if possible be suspended, and
it should be done by staff belonging to several sections of the organization.
9. The financial and administrative powers should be distributed very judiciously among different
officers and the manner in which those are actually exercised should be reviewed periodically.
10. Procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.
Q.NO.5 Compute the overall Audit Risk if looking to the nature of business there are chances that
40% bills of services provided would be defalcated, inquiring on the same matter management
has assured that internal control can prevent such defalcation to 75%.At his part the Auditor
assesses that the procedure he could apply in the remaining time to complete Audit gives him
satisfaction level of detection of frauds & error to an extent of 60%. Analyse the Risk of Material
Misstatement and find out the overall Audit Risk.
ANSWER:
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According to SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the Audit Risk is a risk that Auditor will issue an inappropriate
opinion while Financial Statements are materially misstated.
Audit Risk has 2 components: Risk of material Misstatement and Detection Risk.
The relationship can be defined as follows:
Audit Risk = Risk of material Misstatement X Detection Risk
Risk of material Misstatement: Risk of Material Misstatement is anticipated risk that a material
Misstatement may exist in Financial Statement before start of the Audit. It has two components
Inherent risk and Control risk. The relationship can be defined as
Risk of material Misstatement = Inherent risk X control risk
Inherent risk: It is a susceptibility of an assertion about account balance; class of transaction, disclosure
towards misstatements which may be either individually or collectively with other Misstatement
becomes material before considering any related internal control which is 40% in the given case.
Control risk: it is a risk that there may be chances of material Misstatement even if there is a control
applied by the management and it has prevented defalcation to 75%.
Hence, control risk is 25% (100%-75%)
Risk of material Misstatement: Inherent risk X control risk i.e., 40% X 25 % = 10%
Chances of material Misstatement are reduced to 10% by the internal control applied by management.
Detection risk: It is a risk that a material Misstatement remained undetected even if all Audit
procedures applied, Detection Risk is 100-60=40%
In the given case, overall Audit Risk can be reduced up to 4% as follows:
Audit Risk: Risk of Material Misstatement X Detection Risk = 10X 40% = 4%
Q.NO.6 ST Ltd is a growing company and currently engaged in the business of manufacturing of tiles.
The company is planning to expand and diversify its operations. The management has increased
the focus on the internal controls to ensure better governance. The management had a discussion
with the statutory auditors to ensure the steps required to be taken so that the statutory audit is
risk based and focused on areas of greatest risk to the achievement of the company’s objectives.
Please advise the management and the auditor on the steps that should be taken for the same.
ANSWER:
Refer Answer to Q No. 8.

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Q.NO.7 Y Co. Ltd. has five entertainment centers to provide recreational facilities for public especially
for children and youngsters at 5 different locations in the peripheral of 200 kilometers.
Collections are made in cash. Specify the adequate system towards collection of money.
ANSWER:
Control System over Selling and Collection of Tickets: In order to achieve proper internal control over
the sale of tickets and its collection by the Y Co. Ltd., following system should be adopted:
(i) Printing of tickets: Serially numbered pre-printed tickets should be used and designed in such a way
that any type of ticket used cannot be duplicated by others in order to avoid forgery. Serial numbers
should not be repeated during a reasonable period, say a month or year depending on the turnover.
The separate series of the serial should be used for such denomination.
(ii) Ticket sales: The sale of tickets should take place from the Central ticket office at each of the 5
centres, preferably through machines. There should be proper control over the keys of the machines.
(iii) Daily cash reconciliation: Cash collection at each office and machine should be reconciled with the
number of tickets sold. Serial number of tickets for each entertainment activity/denomination will
facilitate the reconciliation.
(iv) Daily banking: Each day’s collection should be deposited in the bank on next working day of the
bank. Till that time, the cash should be in the custody of properly authorized person preferably in joint
custody for which the daily cash in hand report should be signed by the authorized persons.
(v) Entrance ticket: Entrance tickets should be cancelled at the entrance gate when public enters the
centre.
(vi) Advance booking: If advance booking of facility is made available, the system should ensure that all
advance booked tickets are paid for.
(vii) Discounts and free pass: The discount policy of the Y Co. Ltd. should be such that the concessional
rates, say, for group booking should be properly authorized and signed forms for such authorization
should be preserved.
(viii) Surprise checks: Internal audit system should carry out periodic surprise checks for cash counts,
daily banking, reconciliation and stock of unsold tickets etc.
Q.NO.8 The effectiveness of controls cannot rise above the integrity and ethical values of the people
who create, administer, and monitor them. Explain.
ANSWER:
Refer Q No. 17 [Point No. 1 - Communication and enforcement of integrity and ethical values]
Q.NO.9 Your engagement team is seeking advice from you as engagement partner regarding steps for
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risk identification. Elaborate.
ANSWER:
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Refer answer to Q No. 4.
Q.NO.10 BSF Limited is engaged in the business of trading leather goods. You are the internal auditor
of the company for the year 2019-20. In order to review internal controls of the Sales Department
of the company, you visited the Department and noticed the work division as follows:
(1) An officer was handling the sales ledger and cash receipts.
(2) Another official was handling dispatch of goods and issuance of Delivery challans.
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.
As an internal auditor, you are required to briefly discuss the general condition pertaining to the
internal check prevalent in internal control system. Do you think that there was proper division of
work in BSF Limited? If not, why?
ANSWER:
Write about General Conditions as to Internal Check and then write the following conclusions:
In the given scenario, Company has not done proper division of work as:
1. The receipts of cash should not be handled by the official handling sales ledger and
2. Delivery challans should be verified by an authorised official other than the officer handling
despatch of goods.
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19. AUDIT IN AUTOMATED ENVIRONMENT
Q.NO.1 WHAT ARE THE KEY FEATURES IN AN AUTOMATED ENVIRONMENT?
ANSWER:
An automated environment is an ecosystem that combines people, processes, and technology
within an overall business environment. Typically, the automated environment is driven by
computer-based systems which are also known as information technology (IT) systems or
information systems (IS). There are several types of applications that could exist in a business
depending on several factors including the nature, size, location of a business. These applications ca
be:
1. Packaged Software’s [AKA Off the shell Applications] [E.g., QuickBooks]
2. Small ERP’s [E.g., Tally, Focus, SAP One]
3. ERP’s used in Large Business Entities [E.g., SAP ECC, Oracle]
The applications described above form one layer of the overall automated environment. The other
layers are made up of the technology infrastructure and the physical & environmental aspects
including:
1. Databases - Oracle 19C, MS-SQL Server.
2. Operating systems - Windows, Unix, Linux.
3. Hardware and Storage devices – servers, disks, tapes, network storage.
4. Network devices - switches, routers, and firewalls.
5. Networks - local area networks, wide area networks, virtual private networks, etc.
6. Physical and environmental landscape –IT facilities like Data center, physical access control
mechanisms like biometric based access system, CCTVs, adequate HVAC system, fire suppression
system etc.
Physical Environment
Networks [LAN, WAN]
SAP ECC
Operating System
Oracle DATA Base

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It is also likely that some automated environments could have more than one application being
used.
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Examples:
1. In a manufacturing factory, apart from ERP with integrated modules like Finance, Sales,
Purchase, Production and Logistics, many standalone application software for attendance
recording and payroll processing may be used. Separate system for GST may also be used.
2. In a hotel there could be one application for front desk & reservations, another application for
restaurant & kitchen orders, a guest billing system, and an accounting system. In large
multinational companies, specifically in the financial services, the number of applications could
be hundreds and even thousands of applications.
Q.NO.2 EXPLAIN KEY CONCEPTS OF AUDITING IN REAL-TIME ENVIRONMENT SUCH AS E-

COMMERCE, ERP, CORE BANKING, ETC.
ANSWER:
A real-time environment is a type of automated environment in which business operations and
transactions are initiated, processed and recorded immediately as they happen without delay.
Example:
In a bank that is using core banking system a customer account balance is instantly updated when
the customer withdraws cash from an ATM. If there is a time delay in updating the customer
account, there is a risk that the customer may initiate another transaction through internet or
mobile banking channel, and this could result in withdrawing more than account balance.
Similarly, when a customer makes an online order on a shopping e-commerce portal using credit
card, the credit limit of the customer will be reduced immediately. However, all transactions in Core
Banking are not necessarily real time, e.g., several functions are triggered during day end including
general ledger update, periodic interest calculation etc.
A real-time environment has several critical IT components that enable anytime, anywhere
transactions to take place. They include:
Real Time Environment IT Components
Applications Middleware Networks Hardware
To facilitate transactions in real-time, it is essential to have the systems, networks and applications
available during all times. Any failure even in one component could render the real-time system
unavailable and could result in a loss of revenue and goodwill.
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Example:
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If an e-commerce portal that normally processes a several hundred of orders per day goes down for
an hour due to a malware attack on one of the webservers hosting the portal, the revenue loss
could be significant, apart from the loss of customer confidence and goodwill.
Most real-time systems and environments are accessible through public domain and internet and
hence, they are more likely to be vulnerable to network and cyber-attacks including denial of
service, distributed denial of service.
Hence, it is critical for a company that operates in a real-time environment to constantly monitor all
the IT components to identify and resolve issues and failures. Understanding of the automated
environment, the risks and controls that should be considered.
Q.NO.3 WRITE ABOUT UNDERSTANDING AND DOCUMENTING AUTOMATED ENVIRONMENT BY

AUDITORS?
ANSWER:
Understanding of the automated environment of a company is required as per SA 315. The auditor’s
understanding of the automated environment should include the following:
1. The applications that are being used by the company.
2. Details of the IT infrastructure components for each of the application.
3. The organisation structure and governance.
4. The policies, procedures and processes followed.
5. IT risks and controls.
The auditor is required to document the understanding of a company’s automated environment as
per SA 230.
Application Used For Database Operating Network Server and
System Storage
SAP ECC/HANA Integrated Oracle 19c HP-UX LAN, WAN HP Server and
application NAS
software
BILLSYS Billing Oracle 12c Windows Packaged HP Server
2016 Server Software Internal HDD
Q.NO.4 WRITE ABOUT CONSIDERATION OF AUTOMATED ENVIRONMENT AT EACH PHASE OF

AUDIT CYCLE?
ANSWER:
In a controls-based audit in an automated environment, the audit approach can be classified into
three broad phases comprising of planning, execution, and completion. In this approach, the
considerations of automated environment will be relevant at every phase as given below:
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1. During risk assessment, the auditor should consider risk arising from the use of IT systems at the
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company.
2. When obtaining an understanding of the business process and performing walkthroughs the use
of IT systems and applications should be considered.
3. While assessing the entity level controls the aspects related to IT governance need to be
understood and reviewed.
4. Pervasive controls including segregation of duties, general IT controls and applications should be
considered and reviewed.
5. During testing phase, the results of general IT controls would impact the nature, timing and
extent of testing.
6. When testing of reports and information produced by the entity (IPE) generated through IT
systems and applications.
7. At completion stage, evaluation of control deficiencies may require using data analytics and
CAATS.
Let’s Understand what activities the auditor considers in each of 4 phases of audit in automated
environment:
PHASE 1 - RISK ASSESSMENT:
1. Identify significant accounts and disclosures.
2. Qualitative and Quantitative considerations.
3. Relevant Financial Statement Assertions (FSA).
4. Identify likely sources of misstatement.
5. Consider risk arising from use of IT systems.
PHASE 2 – UNDERSTAND AND EVALUATE:
1. Document understanding of business processes using Flowcharts / Narratives.
2. Prepare Risk and Control Matrices (RCM).
3. Understand design of controls by performing walkthrough of end-to-end process.
4. Process wide considerations for Entity Level Controls, Segregation of Duties.
5. General IT Controls and Application Controls.
PHASE 3 – TEST FOR OPERATING EFFECTIVENESS:
1. Assess Nature, Timing and Extent (NTE) of controls testing.
2. Assess reliability of source data and completeness of population.
3. Testing of key reports and spreadsheets
4. Sample testing.
5. Consider competence and independence of staff /team performing controls testing.
PHASE 4 – REPORTING:
1. Evaluate Control Deficiencies.
2. Significant deficiencies, Material weaknesses.
3. Remediation of control weaknesses.
4. Internal Controls Memo (ICM) or Management Letter or Letter of Weakness.
5. Auditor’s report.
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Q.NO.5 WRITE ABOUT ENTERPRISE RISK MANAGEMENT?
ANSWER:
Businesses today operate in a dynamic environment. The volatility, unpredictability and pace of
changes that exist in the business environment today is far greater than in the past. Some of the
reasons for this dynamic environment include globalisation, use of technology, new regulatory
requirements, etc. Because of this dynamic environment the associated risks to business have also
increased and companies have a need to continuously manage risks.
Examples of risks include:
1. Market Risks.
2. Regulatory & Compliance Risks.
3. Technology & Security Risks.
4. Financial Reporting Risks.
5. Operational Risks.
6. Credit Risk.
7. Business Partner Risk.
8. Product or Project Risk.
9. Environmental Risks.
RISK: Risk is the possibility that something could go wrong. In other words, Risk is the possibility that
an event will happen which prevents a company from achieving business objectives.
RISK MANAGEMENT: Risk Management is a combination of process, people, tools and techniques
through which companies identify, assess, respond, mitigate and monitor risks. Enterprise Risk
Management is a formal program or framework that is implemented across an enterprise or
company for enabling risk management.
INDIA’s APPROACH TO RISK MANAGEMENT:
1. Globally, companies in several countries are required by law to have a formal enterprise risk
management program.
2. In India, section 134 of Companies Act, 2013 requires the board report to include a statement
indicating development and implementation of a risk management policy for the company
including identification therein of elements of risk, if any, which in the opinion of the board may
threaten the existence of the company.
3. The existence of an appropriate system of internal financial control does not by itself provide an
assurance to the board of directors that the company has developed and implemented an
appropriate risk management policy. While the law makes the Board of directors responsible, an
Enterprise Risk Management program of a company is implemented by the board of directors,
top management, and employees across all levels.
INTEGRATED FRAMEWORK:
1. This Enterprise Risk Management – Integrated Framework expands on internal control,
providing a more robust and extensive focus on the broader subject of enterprise risk
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management. While it is not intended to and does not replace the internal control framework,
but rather incorporates the internal control framework within it, companies may decide to look
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to this enterprise risk management framework both to satisfy their internal control needs and to
move toward a fuller risk management process.
2. The internal control framework of a company is not separate, though it is an integral part of an
Enterprise Risk Management program. The scope of an Enterprise Risk Management program is
much broader than an internal control framework and encompasses both internal and external
factors that are relevant to business strategy, governance, business process and transaction and
activity level. The focus of an internal control framework is primarily around financial reporting,
operations and compliance risks associated with an account balance, business process,
transaction and activity level, which form a sub-set of the overall enterprise risks.
COSO ERM:
One of the most common framework that is suitable for implementing an effective enterprise risk
management is the COSO Enterprise Risk Management – Integrated Framework developed by the
Committee of Sponsoring Organisations (COSO) in 2004 and subsequently updated in 2017 to
address the changes in business environment.
One of the most critical components of Enterprise Risk Management is the Risk Assessment
process. The risk assessment process involves considerations for:
1. Risk identification.
2. Assessment criteria including qualitative and quantitative factors.
3. definition of key performance and risk indicators.
4. risk appetite.
5. risk scores, scales and maps.
6. assess risks.
7. use of data & metrics.
8. prioritise risk.
9. Benchmarking.
A typical risk assessment process would be as given below:
1. Define business objectives and goals.
2. Identify events that affect achievement of business objectives.
3. Assess likelihood and impact.
4. Respond and mitigate risks.
5. Assess residual risk.
ISO 31000 RM:
Apart from COSO framework, another relevant and widely available framework is the ISO 31000 Risk
Management standard published by the International Organization for Standardization. The ISO
31000:2018 is Risk Management standard published by the International Organization for
Standardization and provides guidelines on managing risk faced by organizations.
The application of these guidelines can be customized to any organization. It also provides a
common approach to managing any type of risk and is not industry or sector specific and can be
used throughout the life of the organization and can be applied to any activity, including decision-
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making at all levels.

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Q.NO.6 THE AUDITING STANDARDS SA 315 AND SA 330 REQUIRE AN AUDITOR TO UNDERSTAND,
ASSESS AND RESPOND TO THE RISKS WITHIN A COMPANY, INCLUDING THOSE RISKS THAT
PERTAIN TO THE USE OF IT SYSTEMS. EXPLAIN?
ANSWER:
1. The auditing standards SA 315 and SA 330 require an auditor to understand, assess and respond
to the risks within a company, including those risks that pertain to the use of IT systems and
applications in an automated environment. When assessing IT risks in the automated
environment, the auditor should consider the following:
a. Entity level aspects of risks that are related to the governance, organisation and
management of IT.
Examples:
i. Has management established an IT Security Policy (Control Environment),
communicated the policy to all employees and provided relevant training
(Information & Communication)?
ii. How does management monitor adherence to the established policies
(Monitoring)?
b. Risks in the IT processes and procedures being followed.
Examples:
i. Are unauthorised changes to IT systems applications prevented and detected in a
timely manner?
ii. Is user access to systems commensurate with roles and responsibilities of the
user?
c. IT risks at each layer of the automated environment.
Example: Are direct data changes to database prevented, are strong passwords used in
the operating system?
2. As systems evolve and version updates happen so will new risks emerge.
For example, as systems these days are highly interconnected and accessible through public
networks like the internet, cyber risks are a serious threat.
3. The controls that are put in place to mitigate the IT risks and to maintain the confidentiality,
integrity, availability and security of data are as follows:
a. General IT Controls.
b. Application Controls.
c. IT-Dependent Controls.
Q.NO.7 WRITE ABOUT GENERAL IT CONTROLS AND ITS CONTROL OBJECTIVES AND ACTIVITIES
COVERED?
ANSWER:
GENERAL IT CONTROLS: General IT controls are policies and procedures that relate to many
applications and support the effective functioning of application controls. They apply to mainframe,
mini frame, and end-user environment. General IT controls that maintain the integrity of
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information and security of data commonly include controls over the following:
A. DATA CENTRE AND NETWORK OPERATIONS:
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1. Objective: To Ensure that production systems are processed to meet financial reporting [F/R]
objectives.
2. Activities Covered:
a. Overall Management of Computer operations activities.
b. Batch Jobs – Preparing, Scheduling and Executing.
c. Backups – Monitoring, Storage and Retention.
d. Performance Monitoring – OS, Database and Networks.
e. Recovery from Failures – BCP, DRP.
f. Help Desk Functions – Recording, Monitoring and Compliance.
g. SLA – Monitoring and Compliance.
h. Documentation – Operation manuals, Service Reports.
i. System software acquisition, change and maintenance.
B. PROGRAM CHANGE:
1. Objective: To ensure modified systems continue to meet F/R objective.
a. Change Management Process – Definition, Roles and Responsibilities.
b. Change Requests – Record, Manage and Track.
c. Making Changes – Analyse, Design and Develop.
d. Test Changes – Test plan, Test Cases, UAT [User Acceptance Testing].
e. Apply Changes in Production.
f. Emergency and Minor Changes.
g. Documentation – User or Technical Manuals.
h. User Training.
C. ACCESS SECURITY
1. Objective: To ensure that the access to programs and data is authenticated and authorised
to meet F/R Objectives.
a. Security Organisation and Management.
b. Security Policies and Procedures.
c. Application Security.
d. Data Security.
e. OS Security.
f. Network Security.
g. Physical Security.
h. System administrator and Privileged accounts – Sys Admins, DBA’s and Super users.
D. Application system acquisition, development, and maintenance (Business Applications).
Conclusion: These are IT controls generally implemented to mitigate the IT specific risks and applied
commonly across multiple IT systems, applications and business processes. Hence, General IT
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controls are known as “pervasive” controls or “indirect” controls.

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Q.NO.8 WRITE A SHORT NOTE ON “APPLICATION CONTROLS” AND “IT DEPENDANT CONTROLS” IN
AN AUTOMATED ENVIRONMENTS?
ANSWER:
APPLICATION CONTROLS:
1. Application controls include both automated and manual controls that operate at a business
process level. Application controls can be preventive as well as detective in nature and are
designed to ensure the integrity of the accounting records.
2. Application controls relate to procedures used to initiate, record, process and report
transactions or other financial data. These controls help ensure that transactions occurred, are
authorised, and are completely and accurately recorded and processed.
3. Automated Application controls are embedded into IT applications viz., ERPs and help in
ensuring the completeness, accuracy and integrity of data in those systems.
Examples of automated applications include edit checks and validation of input data, sequence
number check, limit check, format check, range check, reasonableness check, mandatory data fields,
existence check etc.
IT DEPENDENT CONTROLS:
1. IT dependent controls are basically manual controls that make use of some form of data or
information, or report produced from IT systems and applications.
2. In this case, even though the control is performed manually, the design and effectiveness of
such controls depend on the reliability of source data. Due to the inherent dependency on
Information Technology, the effectiveness and reliability of Automated application controls and
IT dependent controls require the General IT Controls to be effective.
RELATIONSHIP BETWEEN GENERAL IT CONTROLS AND APPLICATION CONTROLS:
1. These two categories of control over IT systems are interrelated.
2. The relationship between the application controls and the General IT Controls is such that
General IT Controls are needed to support the functioning of application controls, and both are
needed to ensure complete and accurate information processing through IT systems.
Q.NO.9 WRITE ABOUT EVALUATING RISKS AND CONTROLS AT ENTITY LEVEL AND PROCESS LEVEL?
ANSWER:
A. ENTITY LEVEL RISKS AND CONTROLS:
The controls that operate across a company at all levels i.e., from board and top management to
the department and transaction level are known as entity level controls or ELCs. The
characteristics of ELCs include the following:
1. Entity Level controls are known as pervasive controls since they operate across all
organisation levels.
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2. ELCs are part of a company’s overall internal control framework and relate to the internal
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control components other than control activities.
3. Entity level controls are subjective by nature and hence require application of more
professional judgement in their evaluation and testing. There are direct entity level controls
and indirect entity level controls.
a. Direct ELCs operate at a level higher than business activity or transaction level such as a
business process or sub-process level, account balance level, at a sufficient level of
precision, to prevent, detect or correct a misstatement in a timely manner. Examples
include:
i. Business performance reviews.
ii. Monitoring of effectiveness of controls activities by Internal Audit function.
b. Indirect ELCs do not relate to any specific business process, transaction or account
balance and hence, cannot prevent or detect misstatements. However, they contribute
indirectly to the effective operation of direct ELC and other control activities. Examples
include:
i. Company code of conduct and ethics policies.
ii. Human resource policies.
iii. Employee job roles & responsibilities.
As per these examples, a company that has established policies and procedures, hires people
with good background, promotes a culture of fairness and follows ethical practices, is less
likely to see the occurrence of a fraud being committed in the company.
4. From the perspective of an ERP environment, the internal control component that is more
relevant is the Information & Communication component.
5. As part of understanding and evaluation of the Information & Communication component

the auditor is required to obtain an understanding of:
a. How business processes operate.
b. The relevant information systems used in the processing of business transactions and
activities.
c. The risks and controls pertaining to the information systems and underlying
infrastructure.
d. Reliability of information generated from systems.
6. While Information & Communication is more relevant to the use of information systems in a
company, in large and complex ERP environments it is very likely that the other components
of internal controls viz., Control Environment, Risk Assessment, Control Activities and
Monitoring will also be relevant and important.
7. Auditors are required to understand, evaluate and validate the entity level controls as a part
of an audit engagement. The results of testing entity level controls could have an impact on
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the nature, timing and extent of other audit procedures including testing of controls.
For example, when the entity level controls at a company are effective, the auditor may
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consider reducing the number of samples in the test of controls and where the auditor finds
the entity level controls ineffective, the auditor may consider increasing the rigour of testing
by increasing sample sizes.
In small and less complex companies, the entity level controls may not formally define or
documented. In such situations, the auditor should design audit procedures accordingly to
obtain evidence of the existence and effectiveness of entity level controls.
8. The following example shows how the auditor performs an understanding and evaluation of
the whistle-blower policy in a company:
a. Does the company have a whistle-blower policy?
b. Is this policy documented and approved?
c. Has the whistle-blower policy been communicated to all the employees?
d. Are employees aware of this policy and understand its purpose and their obligations?
e. Has the company taken measures viz., training, to make the employees understand
the contents and purpose of the policy?
f. Does the company monitor effectiveness of the policy from time-to-time?
g. How does the company deal with deviations and non-compliance?
B. PROCESS LEVEL RISKS AND CONTROLS:

1. Auditing standards (SA 315) require the auditor to understand the business process that
makes up an account balance or financial statement line item (FSLI). A business process is a
sequence of activities that take place from the initiation of a transaction, recording it,
approving, posting accounting entries and reporting. A business process is typically made up
of sub-process - a logical grouping of related activities.
2. Understanding the business process helps the auditor in identification of risks and controls
within each process, sub-process and activity. The auditor should document this
understanding of the company’s business process and flow of transactions in the audit file in
NOTE: Refer Diagram in Page – 4.17 in ICAI SM.
Q.NO.10 WRITE ABOUT USING ANALYTICAL PROCEDURES AND TESTING THROUGH DATA
ANALYTICS?
ANSWER:
1. In an automated environment, the data stored and processed in systems can be used to get
various insights into the way business operates. This data can be useful for preparation of
management information system (MIS) reports and electronic dashboards that give a high-level
snapshot of business performance. Generating and preparing meaningful information from raw
system data using processes, tools, and techniques is known as Data Analytics.
2. The data analytics methods used in an audit are known as Computer Assisted Auditing
Techniques or CAATs. When auditing in an automated environment, auditors can apply the
concepts of data analytics for several aspects of an audit including the following:
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a. Preliminary analytics.
b. Risk assessment.
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c. Control testing.
d. Non-standard journal analysis.
e. Evaluation of deficiencies.
f. Fraud risk assessment.
3. There are several steps that should be followed to achieve success with CAATs and any of the
supporting tools. A suggested approach to benefit from the use of CAATs is given in the
illustration below:
a. Understand Business Environment including IT.
b. Define the Objectives and Criteria.
c. Identify Source and Format of Data.
d. Extract Data.
e. Verify the Completeness and Accuracy of Extracted Data.
f. Apply Criteria on Data Obtained.
g. Validate and Confirm Results.
h. Report and Document Results and Conclusions [SA 230].
Q.NO.11 WRITE ABOUT IT RELATED STANDARDS, GUIDELINES AND PROCEDURES - USING

RELEVANT FRAMEWORKS AND BEST PRACTICES?
ANSWER:
When auditing in an automated environment the auditor should be aware, adhere to and be guided
by the various standards, guidelines and procedures that may be relevant to both audit and the
automated environment. Given below are some of the common standards and guidelines that are
relevant in this context include:
1. Standards on Auditing issued by the Institute of Chartered Accountants of India, are required to
be followed for an audit of financial statements.
2. Section 143 of Companies Act 2013 requires statutory auditors to provide an Independent
Opinion on the Design and Operating Effectiveness of Internal Financial Controls Over Financial
Reporting (IFC-FR) of the company as at Balance Sheet date. For this purpose, the Guidance Note
on Audit of Internal Financial Controls Over Financial Reporting issued by the Institute of
Chartered Accountants of India, provides the framework, guidelines and procedures for an audit
of financial statements.
3. Sarbanes Oxley Act of 2002, commonly known as SOX, is a requirement in America. Section 404
of this act requires public listed companies to implement, assess and ensure effectiveness of
internal controls over financial reporting and auditors’ independent opinion on the design and
operating effectiveness of internal controls over financial reporting (ICFR) – which is similar to
the requirements of IFC-FR for Indian companies. Similar legal and statutory requirements over
internal controls exist in several other countries including Japan, China, European Countries, etc.
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4. ISO 27001:2013 is the Information Security Management System (ISMS) standard issued by the
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International Organization for Standardization (ISO). This standard provides the framework,
guidelines, and procedures for implementing information security and related controls in a
company. For example, these standard covers password security, application security, physical
security, backup and recovery, that are relevant when auditing in an automated environment.
5. ITIL (Information Technology Infrastructure Library) and ISO 20000 provide a set of best
practice processes and procedures for IT service management in a company. For example,
change management, incident management, problem management, IT operations, IT asset
management are some of the areas that could be relevant to audit.
6. The Payment Card Industry – Data Security Standard or PCI-DSS, is the most widely adopted
information security standard for the payment cards industry. Any company that is involved in
the storage, retrieval, transmission or handling of credit card/debit card information are
required to implement the security controls in accordance with this standard.
7. The American Institute of Certified Public Accountants has published a framework under the
Statements on Standards for Attest Engagements (SSAE) No.16 for reporting on controls at a
service organisation that include:
a. SOC 1 for reporting on controls at a service organization relevant to user entities’ internal
control over financial reporting (ICFR).
b. SOC 2 and SOC 3 for reporting on controls at a service organization relevant to security,
availability, processing integrity, confidentiality or privacy i.e., controls other than ICFR.
c. While SOC 1 and SOC 2 are restricted use reports, SOC 3 is general use report.
8. Control Objectives for Information and Related Technologies (CoBIT) is best practice IT
Governance and Management framework published by Information Systems Audit and Control
Association. CoBIT provides the required tools, resources and guidelines that are relevant to IT
governance, risk, compliance and information security.
9. The Cybersecurity Framework (CSF) published by the National Institute of Standards and
Technology is one of the most popular frameworks for improving critical infrastructure
cybersecurity. This framework provides a set of standards and best practices for companies to
manage cybersecurity risks.
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PRACTICAL QUESTIONS
Q.NO.1 Describe application controls and give three examples of automated application controls.
ANSWER:
Application Controls are automated or manual controls that operate at a business process level.
Automated Application controls are embedded into IT applications viz., ERPs and help in ensuring the
completeness, accuracy, and integrity of data in those systems.
Examples of automated applications include:
1. Edit checks and validation of input data.
2. Sequence number check.
3. Limit check.
4. Reasonableness check.
5. Format check.
6. Mandatory data fields.
Q.NO.2 A real-time environment is a type of automated environment in which business operations

and transactions are initiated, processed and recorded immediately (without any delay) as they
happen. It has several critical IT components that enable anytime, anywhere transactions to take
place. You are required to name the components and its example of real-time environment.
ANSWER:
Real Time Environment: To facilitate transactions in real-time, it is essential to have the systems,
networks and applications available during all times. A real-time environment has several critical IT
components that enable anytime, anywhere transactions to take place. Any failure even in one
component could render the real-time system unavailable and could result in a loss of revenue. IT
Components include:
1. Applications: For example, ERP applications SAP, Oracle E-Business Suite, Core banking applications.
2. Middleware: For example, Webservers like Apache, Oracle Fusion, IIS.
3. Networks: For example, Wide Area Networks, Local Area Network.
4. Hardware: For example, Servers, Backup and Storage devices.
Q.NO.3 The Entity’s Risk Assessment Process includes how management identifies business risks
relevant to the preparation of financial statements in accordance with the entity’s applicable
financial reporting framework, estimates their significance, assesses the likelihood of occurrence
and decides upon actions to respond to and manage them and the results thereof. Elucidate the
circumstances in which risks can arise or change.
ANSWER:
Risks can arise or change due to circumstances such as the following:
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1. Changes in operating environment: Changes in the regulatory or operating environment can result
in changes in competitive pressures and significantly different risks.
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2. New personnel: new personnel may have a different focus on or understanding of internal control.
3. New or revamped information systems: Significant and rapid changes in information systems can
change the risk relating to internal control.
4. Rapid growth: Significant and rapid expansion of operations can strain controls and increase the
risk of a breakdown in controls.
5. New technology: Incorporating new technologies into production processes or information systems
may change the risk associated with internal control.
6. New business models, products, or activities: Entering into business areas or transactions with
which an entity has little experience may introduce new risks associated with internal control.
7. Corporate restructurings: Restructurings may be accompanied by staff reductions and changes in
supervision and segregation of duties that may change the risk associated with internal control.
8. Expanded foreign operations: The expansion or acquisition of foreign operations carries new and
often unique risks that may affect internal control, for example, additional or changed risks from
foreign currency transactions.
9. New accounting pronouncements: Adoption of new accounting principles or changing accounting
principles may affect risks in preparing financial statements.
Q.NO.4 In an automated environment, the data stored and processed in systems can be used to get
various insights into the way business operates. This data can be useful for preparation of
management information system (MIS) reports and electronic dashboards that give a high-level
snapshot of business performance. In view of above you are required to briefly discuss the
meaning of data analytics and example of circumstances when auditing in an automated
environment, auditors can apply the concepts of data analytics.
ANSWER:
Write answer to Q No. 10 [Point – 1 and 2]
Q.NO.5 In a risk-based audit, the audit approach can be classified into three broad phases comprising
of planning, execution, and completion. You are required to briefly explain the relevant
considerations for every phase in above audit approach in case of an automated environment.
ANSWER:
Write answer to Q No. 4 [Write about Phases about audit approach].
Q.NO.6 Generating and preparing meaningful information from raw system data using processes,
tools, and techniques is known as Data Analytics and the data analytics methods used in an audit
are known as Computer Assisted Auditing Techniques or CAATs.” You are required to give
illustration of a suggested approach to get the benefit from the use of CAATs.
ANSWER:
Write answer to Q No. 10 [ Point - 3]
Q.NO.7 A Company is using ERP for all its business processes including Procurement, Sales, Finance
and Reporting. You are required to explain the Statutory Auditor’s approach to identify the risks
associated with the IT systems.
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ANSWER:
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1. The Auditor should understand and document each of the business processes in form of narratives
and / or flowcharts.
2. The next process will be to identify areas / events that can lead to risks, viz. manual Invoicing and
accounting once goods are dispatched could lead to incorrect Invoicing and accounting and hence is
a ‘risk’.
3. The Auditor should also analyse the risks i.e., the impact it will have if materializes.
4. Next will be prioritization in terms of probability of how often the risks will materialize.
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20A. AUDIT DOCUMENTATION AND EVIDENECE
Q.NO.1 WRITE ABOUT DIFFERENT AUDIT PROCEDURES?

ANSWER:
A. RISK ASSESSMENT PROCEDURES: Will be Discussed in Detailed In the chapter “Risk assessment
and Internal Control”
B. FURTHER AUDIT PROCEDURES: These audit procedures are broadly classified into the following
types:
1. COMPLIANCE PROCEDURES:
The auditor shall design and perform tests of controls to obtain sufficient appropriate audit
evidence as to the operating effectiveness of relevant controls when:
1. The auditor’s assessment of risks of material misstatement at the assertion level includes
an expectation that the controls are operating effectively. (i.e., Auditor expects to
understand operating effectiveness of controls in order to determine nature, timing and
extent of substantive procedures to be performed.)
2. Substantive procedures alone cannot provide sufficient appropriate audit evidence at the
assertion level.
In both the above cases a higher level of assurance may be sought by auditor about operating
effectiveness of controls at assertion level. Because substantive procedures alone cannot provide
sufficient appropriate audit evidence.
Note: Compliance Procedures are also known as TEST OF CONTROLS.
2. SUBSTANTIVE PROCEDURES:
1. Irrespective of the assessed risks of material misstatement, the auditor shall design and
perform substantive procedures for each material class of transactions, account balance,
and disclosure. Substantive procedures must be performed because:
a) The auditor’s assessment of risk is judgmental and may not identify all risks and
b) There are inherent limitations to internal control.
2. Substantive procedures includes:

a) Test of Details.
b) Substantive analytical procedures as per SA – 520.
c) Combination of test of details and analytical procedures.
3. When the results from test of controls are unsatisfactory, the auditor may need to increase
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extent of substantive procedures.

4. Generally substantive procedures which includes test of details are ordinarily performed
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by using sampling techniques as per SA – 530.

Q.NO.2 DEFINE THE TERM “AUDIT EVIDENCE” AND EXPLAIN SUFFICIENCY AND APPROPRIATENESS
OF AUDIT EVIDENCE.
ANSWER:
As per SA 200 - “Overall objectives of an independent auditor and conduct of an audit in accordance
of standards on auditing”, one of the basic responsibilities of an auditor is to obtain sufficient and
appropriate audit evidence.
A. AUDIT EVIDENCE:
1. The information used by the auditor in arriving at the conclusions on which the auditor’s
opinion is based.
2. It includes both information contained in the accounting records that are underlying the
financial statements and other information.
3. The auditor cannot express opinion unless he has examined the financial statements
objectively. Further he shall obtain sufficient appropriate evidence.
4. Audit evidence is necessary to support the auditor opinion and report. It is cumulative in
nature and is obtained from audit procedures performed.
5. A combination of tests of accounting records and other information is generally used by the
auditor to support his opinion on the financial statements.
B. AUDIT EVIDENCE INCLUDES:

1. ACCOUNTING RECORDS: Accounting records include the records of Journal registers,
subsidiary ledgers and supporting bills or invoices.
2. OTHER INFORMATION: It may include minutes of board meetings, Management information
systems, confirmations from debtors or creditors etc.
C. SUFFICIENCY OF AUDIT EVIDENCE:

Sufficiency is the measure of the quantity of audit evidence. The following factors influence the
auditor’s judgement of sufficiency:
1. NATURE AND SIZE of organization.
2. SOURCE: The quantum of evidence to be obtained is affected by their Source.
E.g.: Generally external evidence is more reliable than internal evidence.
3. Risk of MMS: It also depends upon assessment of risk of material misstatement by the auditor.
E.g.: If auditor assessed higher risk, then the quantum will be more.
4. MATERIALITY: If assertions are more material, then more evidence to be obtained.
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5. INTERNAL CONTROL: If the controls are more effective then quantum of audit procedures
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decreases and resultantly the number of evidence also decreases.
6. SIZE OF THE POPULATION: In case of smaller level of population, a smaller number of evidence
will be sufficient. For Larger level of population, a greater number of evidence will be required.
7. CHARACTERISTICS OF POPULATION: For homogeneous population, lesser number of evidence
will be sufficient. For Heterogeneous population, a greater number of evidence will be
obtained.
D. APPROPRIATENESS OF AUDIT EVIDENCE:

1. Appropriateness is the measure of the quality of audit evidence i.e., its relevance and its
reliability in providing support for the audit conclusions.
2. The reliability of evidence is influenced by its source and by its nature.
RELEVANT QUESTIONS:
1. Audit evidence includes both information contained in the accounting records

underlying the financial statements and other information. Discuss
A. Write about Intro para, Point A and B.
B.
2. Explain the factors that influence the auditor’s judgement in obtaining sufficient
audit evidence.
A. Write Point A and then Point C.
3. General factors which may influence the auditor’s judgment as to what is
sufficient and appropriate audit evidence?
A. Write Point A and then Point C.
4. Obtaining more evidences may not compensate for their poor quality. Explain
the factors affecting the auditor’s judgment of sufficiency and appropriateness
of audit evidence.
A. Write Point A and then Point C and D.
Q.NO.3 WRITE ABOUT INFORMATION TO BE USED AS AUDIT EVIDENCE?

ANSWER:
INFORMATION PREPARED BY MANAGEMENT EXPERT:
When information to be used as audit evidence has been prepared using the work of a
management’s expert, the auditor shall, to the extent necessary, having regard to the significance of
that expert’s work for the auditor’s purposes:
1. Evaluate the competence, capabilities and objectivity of that expert.
2. Obtain an understanding of the work of that expert. and
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3. Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.
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INFORMATION PREPARED BY ENTITY:
When using information produced by the entity, the auditor shall evaluate whether the information
is sufficiently reliable for the auditor’s purposes, including as necessary in the circumstances:
1. Obtaining audit evidence about the accuracy and completeness of the information; and
2. Evaluating whether the information is sufficiently precise and detailed for the auditor’s
purposes.
Q.NO.4 WRITE ABOUT DIFFERENT TYPES OF AUDIT EVIDENCES?

ANSWER:
A. BASED ON FORM / NATURE:

1. Documentary: Evidence obtained in paper or electronic form. E.g.: Registration documents,
title deeds, vouchers and Bills etc.
2. Oral: Evidence which is obtained through inquiry. E.g.: Response to Inquiries made by auditor.
3. Visual: Evidence obtained by the auditor through actual observation. E.g.: Physical inspection
of Fixed Assets, Cash, etc.
B. BASED ON SOURCE:
1. Internal evidence: Evidence which originates within the entity being audited is called internal
evidence. E.g.: Sales invoice, GRN, Debit and Credit note, internal confirmations, etc.
2. External evidence: Evidence, which originates outside the entity being audited, is called
external evidence. E.g.: Purchase invoice, Debit notes and Credit notes, Quotations, External
confirmation, etc.
C. BASED ON STRENGTH: (AUTHOR NOTE)
1. Prima facie Evidence
2. Persuasive Evidence / convincing evidence
3. Conclusive Evidence
RELEVANT QUESTIONS:
1. Mention the audit evidence that an auditor can obtain based on its Source.
A. Write Point B
2. Mention the audit evidence that an auditor can obtain based on its Nature.
A. Write Point A
Q.NO.5 DISTINGUISH BETWEEN INTERNAL EVIDENCE AND EXTERNAL EVIDENCE.

ANSWER:
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A. ON THE BASIS OF DEFINITION:

1. Internal evidence is the evidence which originates from within the organization being audited.
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E.g.: sales invoice, goods received notes, cash memo, etc.
2. External evidence is the evidence that originates from outside the client’s organization.
E.g.: purchase invoice, quotations, confirmations, etc.
B. ON THE BASIS OF AVAILABILITY:
The bulk of evidence that an auditor gets is internal in nature. However, Substantial external
evidence is also available to the auditor but lesser in comparison to internal audit evidence.
C. ON THE BASIS OF RELIABILITY:
1. INTERNAL EVIDENCE:
i) Client’s staff will have control on the internal evidence. So, the auditor should be careful
in placing reliance on such evidence.
ii) It does not mean that all the internal evidence needs to be suspected every time. But the
auditor shall be alert to the possibilities of manipulation, creation of false and misleading
evidences.
2. EXTERNAL EVIDENCE:
i) It is generally considered to be more reliable as they come from third parties who are
independent of the entity being audited.
ii) However, if the auditor has any reason to doubt the independence of any third party, then
he should exercise greater care in that matter. E.g., collusion of third party with the client.
CONCLUSION: As an ordinary rule the auditor should try to match internal and external evidence
as far as practicable. Where external evidence is not readily available to match, the auditor should
try to match various internal evidence in support of each other.
In other words, the information contained in internal and external evidence shall be same. If there
is a difference, then it shall be resolved immediately and shall ensure there are no MMS in financial
statements.
RELEVANT QUESTIONS:
1. “As an ordinary rule the auditor should try to match internal and external
evidence as far as practicable. Where external evidence is not readily available
to match, the auditor should see as to what extent the various internal
evidence corroborates each other”. You are required to distinguish between
the two evidence in the given statements.
A.
Q.NO.6 DISCUSS THE PRINCIPLES OR RELIABILITY STANDARDS WHICH ARE USEFUL IN ASSESSING
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THE RELIABILITY OF AUDIT EVIDENCE.

ANSWER:
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The following are the principles useful in assessing the reliability of audit evidence:
1. External evidence is generally more reliable than internal evidence.
2. Evidence directly obtained from third party by the auditor is more reliable than the same obtained
through client.
3. Evidence in documentary form is more reliable than oral evidence.
4. Original evidence is more reliable than photocopy or duplicate.
5. Internal evidence is also reliable provided the related controls are effective.
6. The audit evidence, obtained through different sources or of different nature are more reliable
when they are more consistent. In case of any inconsistency further audit procedures have to be
performed.
RELEVANT QUESTIONS:
1. Write about audit procedures if Inconsistency in or Doubts over Reliability of

Audit Evidence exist?
ANSWER:
If:
1. audit evidence obtained from one source is inconsistent with that obtained
from another or
2. the auditor has doubts over the reliability of information to be used as audit
evidence,
The auditor shall determine what modifications or additions to audit procedures are
necessary to resolve the matter, and shall consider the effect of the matter, if any, on
other aspects of the audit.
2. Even when information to be used as audit evidence is obtained from sources
external to the entity, circumstances may exist that could affect its reliability”.
Explain. Also state clearly generalisations about the reliability of audit evidence.
A.
3. The reliability of audit evidence is influenced by its source, nature and
circumstances under which it is obtained. Discuss.
A.
4. The reliability of information to be used as audit evidence, and therefore of the
audit evidence itself, is influenced by its source and its nature, and the
circumstances under which it is obtained, including the controls over its
preparation and maintenance where relevant. Therefore, generalizations about
the reliability of various kinds of audit evidence are subject to important
exceptions. While recognizing that exceptions may exist, state the generalizations
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about the reliability of audit evidence that may be useful.

A.
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Q.NO.7 WRITE ABOUT DIFFERENT AUDIT PROCEDURES / METHODS TO OBTAIN AUDIT EVIDENCE?
ANSWER:
Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating audit
evidence.
Audit Procedures are broad framework within which the audit shall be carried out. Sometimes audit
procedures and the term audit techniques are used interchangeably. Typically, techniques are tools
for performing audit. The following are various Procedures/Methods of obtaining audit evidence.
A. INSPECTION:
1. Inspection involves examining records or documents, whether internal or external, in paper
form, electronic form, or other media, or a physical examination of an asset.
2. Inspection of records and documents provides audit evidence of varying degrees of reliability,
depending on their nature and source and, in the case of internal records and documents, on
the effectiveness of the controls over their production.
3. Examples: Some documents represent direct audit evidence of the existence of an asset, for
example:
a. a document constituting a financial instrument such as an inventory or bond.
Inspection of such documents may not necessarily provide audit evidence about
ownership or value.
b. In addition, inspecting an executed contract may provide audit evidence relevant to
the entity’s application of accounting policies, such as revenue recognition.
c. Inspection of tangible assets may provide reliable audit evidence with respect to their
existence, but not necessarily about the entity’s rights and obligations or the valuation
of the assets.
d. Inspection of individual inventory items may accompany the observation of inventory
counting.
B. INQUIRY:
1. Inquiry consists of seeking information from knowledgeable persons, both financial and non-
financial, within the entity or outside the entity.
2. Inquiries may range from formal written inquiries to informal oral inquiries.
3. Evaluation of responses to inquiries is an integral part of inquiry process.
4. Through inquiry the auditor may obtain following three types of information:
a) New information which auditor originally not aware of;

b) Changes to the original information known to the auditor; and
c) Additional information in support for existing information which is corroborative in nature.
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5. The evidence often comes from inquires may not be persuasive as it is less reliable.
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C. OBSERVATION:
1. Observation consists of looking at a process or procedure being performed by others, for
example, the auditor’s observation of inventory counting by the entity’s internal controls
2. Observation provides audit evidence about the performance of a process or procedure, but it
is limited to the point in time at which the observation takes place.
D. EXTERNAL CONFIRMATION:
1. An external confirmation represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party).
2. It can be obtained in paper form or by electronic or other medium.
E. RE-CALCULATION:
Recalculation consists of checking the arithmetical accuracy of documents or records.

Recalculation may be performed manually or electronically.
F. RE-PERFORMANCE:
Re-performance involves the auditor’s independent execution of procedures or controls that were
originally performed by the entity’s internal control. [E.g., BRS, Aging analysis]
G. ANALYTICAL PROCEDURES:
1. Analytical procedures consist of evaluation of financial information by a study of acceptable

relationships among both financial and non-financial data.
2. Analytical procedures also include:
a) Analysis of trends and ratios;
b) Identification of abnormal deviations and
c) Investigation of those deviations.
RELEVANT QUESTIONS:
1. Evaluating responses to inquiries is an integral part of the inquiry process.

Explain.
A. Write Point A in Q No. 3 and Point B of this answer.
2. “Inquiry is used extensively throughout the audit in addition to other audit
procedures”.
3. Inquiry is one of the audit procedures to obtain audit evidence. Discuss.
4. Write short note on audit techniques?
A. Write above answer
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5. With reference to SA 500 “audit evidence”, discuss the different sources and
their reliability of audit evidence.
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A. Write Point A in Q No. 3 and then above answer in full.

6. Write short note on the methods of obtaining audit evidence?
7. Mr. A was appointed statutory auditor of P Ltd., but he was not able to gather
the sufficient audit evidences. Discuss how he should proceed to gather more
audit evidences.
8. Most of the auditor’s work in forming the auditor’s opinion consists of obtaining
and evaluating audit evidence. Explain.
A. Write Meaning of Audit Evidence and then above answer (4 points).
Q.NO.8 WRITE ABOUT AUDIT DOCUMENTATION. STATE ITS PURPOSE AND ADVANTAGES?
ANSWER:
A. AUDIT DOCUMENTATION:
3. It refers to the record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached.
4. These are also called as “working papers” or “work papers” or “audit files”.
B. PURPOSE OF DOCUMENTATION:
Audit documentation provides:
3. Evidence of the auditor’s basis for a conclusion and achievement of overall objective and
4. Evidence that the audit was planned and performed in accordance with SAs.
C. ADVANTAGES OF AUDIT DOCUMENTATION:
The following are the purpose of Audit documentation:
6. Assisting the engagement team to plan and perform the audits of next years.
7. Assisting the engagement team to direct and supervise the audit work.
8. Enabling the engagement team to be accountable for its work.
9. Enabling quality control reviews and inspections within the auditors firm.
10. Enabling of external inspections in accordance legal, regulatory or other requirements.
Example: Peer reviews.
D. AUDIT DOCUMENTATION INCLUDES:
8. Audit Programmes
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9. Analyses
10. Issues Memorandum (Query Sheet)
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11. Evidences obtained
12. Summary of Significant matters
13. Confirmation and representation letters
14. Correspondence relating to significant matters.
The auditor may include copies of the entity’s records (for example, significant and specific
contracts and agreements) as part of audit documentation. Audit documentation is not a substitute
for the entity’s accounting records.
RELEVANT QUESTIONS:
1. What do you mean by audit documentation? Also explain the nature and
purpose of audit documentation.
A. Write above answer.
2. Define audit documentation. Also give some examples.
A. Write Point A and then Point D.
3. Write short note on the importance of working papers.
A. Write Points A, B and C.
4. Audit documentation serves a number of purposes. Explain with reference to
SA-230.
5. Audit documentation provides evidence of the auditor’s basis for a conclusion
about the achievement of the overall objectives of the auditor and evidence
that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements. Explain stating clearly purpose of
audit documentation.
A. Write Points A, B and C
6. Audit documentation provides evidence of the auditor’s basis for a conclusion
about the achievement of the overall objectives of the auditor. Explain clearly
stating the nature and purpose of Audit Documentation.
Q.NO.9 DISCUSS THE PRINCIPLES WHICH GOVERN THE FORM AND CONTENT OF WORKING
PAPERS?
ANSWER:
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A. MANNER OF DOCUMENTATION: The documentation shall be such that an experienced auditor

having no previous connection with the audit shall understand:
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1. The nature, timing and extent of the audit procedures performed. In this regard the auditor
shall record:
a. The identifying characteristics of the specific items or matters tested.
b. Who performed the audit work and the date such work was completed and?
c. Who reviewed the audit work performed and the date and extent of such review?
2. The results of the audit procedures performed, and the audit evidence obtained and
3. Significant matters arising during the audit and the conclusions reached thereon and
significant professional judgements made in reaching those conclusions.
B. FORM, CONTENT AND EXTENT OF AUDIT DOCUMENTATION:

It depends on the following factors:
8. The identified risks of material misstatement.
9. The nature and extent of exceptions identified.
10. The extent of audit carried out and methods used.
11. Level of Effectiveness of internal controls.
12. The Significance of evidence obtained.
13. The need to document a conclusion or the basis for a conclusion not readily determinable from
the documentation of the work performed or audit evidence obtained.
MEANING OF AN EXPERIENCED AUDITOR:

A person who has a reasonable knowledge of:
e) Applicable financial reporting,
f) Accounting standards,
g) Auditing standards and
h) Knowledge of clients’ business.
RELEVANT QUESTIONS:
1. The form, content and extent of audit documentation depend on factors such as
the size and complexity of the entity, the nature of the audit procedures to be
performed etc. Explain in detail.
A. Write about Point A and then Entire Point B
2. Discuss with reference to SA-230, factors affecting form, contents and extent of
audit documentation.
A. Write about Point A and then Entire Point B
Q.NO.10 Write a short note on Audit File, its retention and ownership.
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ANSWER:
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A. AUDIT FILE / WORKING PAPERS / DOCUMENTATION:
1. It is a record of audit procedures performed and relevant audit evidence obtained for a specific
engagement which can be stored in a physical file or electronic storage medium which is
referred as audit file.
2. The audit file is of two types:
a) Permanent audit file
b) Current audit file
B. TIMELY PREPARATION OF AUDIT DOCUMENTATION:

The auditor shall prepare audit documentation on a timely basis. Preparing sufficient and
appropriate audit documentation on a timely basis helps to enhance the quality of the audit and
facilitates the effective review and evaluation of the audit evidence obtained and conclusions
reached before the auditor’s report is finalised.
Documentation prepared after the audit work has been performed is likely to be less accurate
than documentation prepared at the time such work is performed.
C. ASSEMBLY OF THE FINAL AUDIT FILE:

4. The auditor shall after completion of audit i.e., after issuance of audit report, within 60 days
shall assemble the audit file so as to keep it for future reference. This process is also known as
working paper arrangement. (SQC - 1)
5. The assembly of audit file after completion of audit is an administrative process and does not
involve carrying out new or additional audit procedures or conclusions. Changes may be made
if applicable and administrative in nature. E.g., Deleting superseded documents, referencing
WP’s.
6. Once Final audit file assembly is completed, the auditor shall not delete or discard audit
documentation of any nature before completion of retention period.
D. RETENTION PERIOD:
The auditor shall retain the working paper file for a minimum period of 7 years from the date of
audit report or group audit report, whichever is later. (SQC - 1)
E. OWNERSHIP OF AUDIT DOCUMENTATION:

4. Audit documentation is the property of the auditor.
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5. The auditor may at his discretion, make portions of, or extracts from, audit documentation
available to clients or third parties.
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6. Even Documentation of Brach auditors and Internal auditors are property of their own. They
are not bound to share documentation with External Statutory auditor.
RELEVANT QUESTIONS:
1. The auditor shall assemble the audit documentation in an audit file and complete
the administrative process of assembling the final audit file on a timely basis
after the date of the auditor’s report. Explain.
A.
2. Write about documentation, its retention period and ownership?
A.
3. Can a Principal auditor demand/request the working papers of branch/
component auditor?
A. No. Audit Documentation is the property of auditor. The auditor at his discretion
can share the copy of documentation to others provided it does not amount to
breach of confidentiality.
Q.NO.11 DISCUSS VARIOUS CONTENTS OF PERMANENT AUDIT FILE AND CURRENT FILE?
ANSWER:
A. PERMANENT AUDIT FILE: It includes –

1. Information regarding the legal and organizational structure of the entity. For example, MOA
& AOA.
2. Copies of important legal documents, agreements.
3. A record of the study and evaluation of the internal controls.
4. Copies of audited financial statements for previous years.
5. Analysis of significant ratios and trends.
6. Record of communication with the retiring auditor.
7. Notes regarding significant accounting policies.
8. Significant audit observations of earlier years.
9. List of officers, their financial powers and authorities.
10. List of offices, factories, godowns, depots etc.,
B. CURRENT AUDIT FILE: It includes
1. Correspondence relating to acceptance of annual reappointment.
2. Annual letter of engagement if any sent by the auditor to the management.

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3. Evidence of the planning process of the audit and audit programme.

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4. A record of the nature, timing and extent of auditing procedures performed and the results of
such procedures.
5. Copies of communications with other auditors, experts and other third parties.
6. Written representations or confirmation received from the client.
7. Conclusions reached by the auditor concerning significant aspects of the audit.
8. Copies of current year financial statements and related information and the related audit
reports.
Q.NO.12 WRITE SHORT NOTES ON AUDIT NOTE-BOOK AND WHAT ARE THE CONTENTS OF AUDIT
NOTEBOOK.
ANSWER:
A. MEANING:
1. An audit notebook is usually a bound book in which a large variety of matters observed during
the course of audit are recorded.
2. It forms part of audit working papers and
3. For each year a fresh audit notebook is maintained.
B. CLASSIFICATION:
If an auditor classifies his working papers into permanent and current, then audit note book shall
form part of current file.
C. BENEFITS:
1. It helps in tracking the links of work when the concerned assistant is away, or the work is
stopped temporarily.
2. It is also used for recording various queries raised in the course of the work and their state of
disposal.
i) In respect of disposed queries, explanation obtained and evidence seen would be recorded
in the said book.
ii) While queries remaining undisposed of would be noted for follow up.
Q.NO.13 DEFINE THE WORD “ASSERTION” AND ALSO EXPLAIN DIFFERENT CATEGORIES OF
ASSERTIONS CHECKED BY THE AUDITOR WHILE PERFORMING AUDIT PROCEDURES.
ANSWER:
ASSERTIONS: Representations given by the management explicit or implicit with respect to class of
transactions, account balances or disclosures in financial statements which are used by auditor while
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carrying out the audit to consider different types of potential misstatements that may occur.
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The following are various assertions used by the auditor to consider the different types of potential
misstatements that may occur which may relate to Transactions and events [T], Account Balances [A]
and Presentation & Disclosures [P].
1) EXISTENCE [A]: Assets and liabilities are existing on a given date.
2) RIGHTS AND OBLIGATIONS [A / P]: The entity holds or controls the rights to assets, and liabilities
are the obligations of the entity
3) OCCURRENCE [T / P]: Transactions and events that have been recorded have occurred and pertain
to the entity.
4) CUT-OFF [T]: Transactions and events have been recorded in the correct accounting period.
5) ACCURACY [T / P]: Amounts and other data relating to recorded transactions and events have
been recorded appropriately.
6) VALUATION [A / P] AND ALLOCATION [A]: Assets and liabilities are included in the financial
statements at appropriate amounts and corresponding valuations are properly accounted.
7) COMPLETENESS [T / A / P]: All transactions and events that should have been recorded.
8) CLASSIFICATION AND UNDERSTANDABILITY [T / P]: Transactions and events have been recorded
in the proper accounts.
9) PRESENTATION AND DISCLOSURES: All the presentation and disclosures requirements are
applied in accordance with applicable financial reporting framework.
NOTE: The auditor may use the assertions as described above or may express them differently
provided all aspects described above have been covered. For example, the auditor may choose to
combine the assertions about transactions and events with the assertions about account balances.
NOTE: THIS QUESTION WILL BE COVERED AND EXPLAINED IN 18TH CHAPTER “RISK ASSESSMENT
AND INTERNAL CONTROL”
RELEVANT QUESTIONS:
1. Write About Negative Assertions or Implied Assertions?
ANSWER:
Negative assertions are also encountered in the financial statements and the same
may be expressed or implied. For example, if it is stated that there is no contingent
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liability it would be an expressed negative assertion;

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on the other hand, if in the balance sheet there is no item as “building”, it would be an
implied negative assertion that the entity did not own any building on the balance
sheet date.
2. In the context of SA-315, state the assertions used by auditor to consider the
different types of potential misstatements that may occur w.r.t. classes of
transactions and events for period under audit.
A.
3. Name the assertions for the following audit procedures:
i) Year-end inventory verification - Existence
ii) Depreciation has been properly charged on all assets - Valuation &
Measurement.
iii) The title deeds of the lands disclosed in the Balance Sheet are held in the name
of the company - Rights and Obligations.
iv) All liabilities are properly recorded in the financial statements - Completeness.
v) Related party transactions are shown properly - Presentation and Disclosure.
Q.NO.14 THE AUDITOR IN ORDER TO FORMULATE AND OFFER AN OPINION ON THE OVERALL
TRUTH OF THESE STATEMENTS HE HAS FIRST TO INQUIRE INTO THE TRUTH OF MANY SPECIFIC
ASSERTIONS, EXPRESSED AND IMPLIED, BOTH POSITIVE, AND NEGATIVE, THAT MAKES UP
EACH OF THESE STATEMENTS. COMMENT.
ANSWER:
1. Every financial statement contains an overall representation in addition to the specific assertions
as discussed.
2. Each financial statement purports to present something as a whole in addition to its component
details. For example, an income statement purports to present “the results of operations” a
balance sheet purports to present “financial position”.
3. The auditor’s opinion is typically directed to these overall representations. But to formulate and
offer an opinion on the overall truth of these statements he has first to inquire into the truth of
many specific assertions, expressed and implied, both positive, and negative, that makes up
each of these statements.
4. Out of his individual judgments of these specific assertions he arrives at a judgement on the
financial statement as a whole.
Q.NO.15 WRITE ABOUT NATURE AND EXTENT OF TEST OF CONTROLS?

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ANSWER:
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1. The auditor shall Perform audit procedures, including inquiry, to obtain audit evidence about
operating effectiveness of controls, which includes:
a. How the controls were applied during the relevant period under audit.
b. The consistency with which they were applied.
c. By whom or by what means they were applied.
2. Determine whether the controls tested are influenced by other controls (AKA indirect controls)
and if so, obtain sufficient appropriate evidence about operating effectiveness of such indirect
controls.
3. It is to be noted that inquiry alone may not provide sufficient evidence regarding operating
effectiveness of controls. Inquiry often to be combined with inspection or re-performance more
assurance than inquiry and observation.
4. Also Nature of control influences type of procedure (Inquiry, Inspection, Observation and Re-
performance) to obtain evidence about operating effectiveness of controls. (e.g: If controls are
documented then inspection is the right way to obtain evidence regarding operating
effectiveness.)
Q.NO.16 WHAT ARE THE MATTERS OR FACTORS THAT INFLUENCE EXTENT OF TEST OF CONTROLS?
ANSWER: When more persuasive audit evidence is needed regarding the effectiveness of a control
then the auditor may increase the extent of testing of the control. The auditor may consider the
following factors in determining the extent of test of controls:
1. The frequency of the performance of the control by the entity during the period. (e.g., higher
the frequency, higher the reliability about operating effectiveness.)
2. The length of time during the audit period that the auditor is relying on the operating
effectiveness of the control. (e.g., Higher the length of time of reliance by auditor, higher the
operating effectiveness.)
3. The expected rate of deviation from a control. (E.g., Lower the expected rate of deviation,
higher the reliability about operating effectiveness.)
4. The relevance and reliability of the audit evidence to be obtained regarding the operating
effectiveness of the control at the assertion level.
5. The extent of reliability of other controls on which controls tested depends upon.
Q.NO.17 WRITE ABOUT TIMING OF TEST OF CONTROLS?
ANSWER:
1. The auditor may test controls for

a. A particular time (Point in time) or
b. Throughout the period.
2. Generally, Audit evidence pertaining to controls effectiveness at a particular time is sufficient
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for auditor’s purpose. E.g., Testing of Controls over Inventory physical counting, at year end,
may be sufficient for auditor’s purpose.
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3. If auditor intends to rely on controls over a period of time then the testing must capable of
providing audit evidence regarding operating effectiveness throughout such period. In these
scenario auditors generally test entity’s monitoring of controls system instead of testing
directly the control at a point in time. (I.e., Test policy related to test of controls by
management).
Q.NO.18 CAN THE AUDITOR USE EVIDENCE OBTAINED IN PREVIOUS AUDITS REGARDING
OPERATING EFFECTIVENESS OF CONTROLS?
ANSWER:
The discussion about using audit evidence obtained in previous audit regarding operating
effectiveness of controls has been divided into two parts. Part – 1: For General controls. Part – 2:
Specific controls. (Note: From Exam perspective General controls discussion is most relevant.)
GENERAL CONTROLS: In determining whether the audit evidence obtained in previous audits is
useful, the auditor shall consider the length of time period that may elapse before retesting a
control. (I.e., Minimum tolerable time gap between testing controls to determine whether they are
operating effectively). In addition to time gap between previous testing and retesting, the auditor
shall consider certain other factors such as:
1. The effectiveness of other elements of internal control such as

a. Control environment,
b. Entity’s risk assessment process and
c. Entity’s monitoring of controls.
2. The risk arising from characteristics of control such as, manual or automated.
3. The effectiveness of general IT controls.
4. The extent of deviation identified in the implementation of controls in previous audits.
5. Whether there have been any changes in personnel who are implementing controls.
6. The risk of Misstatement and extent of reliance of control.
SPECIFIC CONTROL: If the auditor plans to use audit evidence from a previous audit about the
operating effectiveness of specific controls, the auditor shall establish the continuing relevance
of that evidence. Also auditor shall obtain evidence about whether significant changes in those
controls have occurred subsequent to the previous audit.
Q.NO.19 WRITE ABOUT EVALUATION OF OPERATING EFFECTIVENESS OF CONTROLS?
ANSWER:
When evaluating the operating effectiveness of relevant controls:

1. The auditor shall evaluate whether misstatements that have been detected by substantive
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procedures indicate that controls are not operating effectively.

2. The absence of misstatements detected by substantive procedures, however, does not
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provide audit evidence that controls being tested are effective.

3. A material misstatement detected by the auditor’s procedures is a strong indicator of the
existence of a significant deficiency in internal control.
Q.NO.20 STATE THE SPECIFIC INQUIRIES BY AUDITOR WHEN DEVIATION FROM CONTROLS ARE
DETECTED?
ANSWER:
When deviations from controls upon which the auditor intends to rely are detected, the auditor shall
make specific inquiries to understand these matters and their potential consequences, and shall
determine whether:
1. The tests of controls that have been performed provide an appropriate basis for reliance on the
controls;
2. Additional tests of controls are necessary; or
3. The potential risks of misstatement need to be addressed using substantive procedures.
Q.NO.21 WRITE ABOUT SUBSTANTIVE PROCEDURES RELATED TO FINANCIAL STATEMENT CLOSING

PROCESS?
ANSWER: The auditor’s substantive procedures shall include the following audit procedures related
to the financial statement closing process:
1. Agreeing or reconciling the financial statements with the underlying accounting records.
2. Examining material journal entries and other adjustments made during the course of preparing
3. The nature and extent of the auditor’s examination of journal entries and other adjustments
depends on the nature and complexity of the entity’s financial reporting process and the related
risks of material misstatement.
Q.NO.22 WRITE ABOUT SUBSTANTIVE PROCEDURES RESPONSIVE TO SIGNIFICANT RISKS?
ANSWER:
When the auditor has determined that an assessed risk of material misstatement at the assertion
level is a significant risk:
1. The auditor shall perform substantive procedures that are specifically responsive to that risk. (E.g.,
Test of details).
2. Also Audit evidence in the form of external confirmations received directly by the auditor from
appropriate confirming parties will provide high level of reliability in order to address the specific
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risks whether they are from fraud or error.

Example: If the auditor identifies that management is under pressure to meet earnings expectations,
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there may be a risk that management is inflating sales by improperly recognising revenue related to
sales agreements with terms that preclude revenue recognition or by invoicing sales before shipment.
In these circumstances, the auditor may, for example, design external confirmation procedures not
only to confirm outstanding amounts, but also to confirm the details of the sales agreements,
including date, any rights of return and delivery terms. In addition, the auditor may find it effective to
supplement such external confirmation procedures with inquiries of non-financial personnel in the
entity regarding any changes in sales agreements and delivery terms.
Q.NO.23 WRITE ABOUT AUDIT SUMMARY MEMORANDUM?
ANSWER:
1. The auditor may consider it helpful to prepare and retain as part of the audit documentation a
summary (sometimes known as a completion memorandum) that describes:
a. the significant matters identified during the audit and
b. how they were addressed.
2. Such a summary may facilitate effective and efficient review and inspection of the audit
documentation, particularly for large and complex audits. Further, the preparation of such a
summary may assist auditor’s consideration of the significant matters.
3. It may also help the auditor to consider whether there is any individual relevant SA objective
that the auditor cannot achieve that would prevent the auditor from achieving the overall
objectives of the auditor.
Q.NO.24 GIVE SOME EXAMPLES OF CIRCUMSTANCES IN WHICH IT IS APPROPRIATE TO PREPARE

AUDIT DOCUMENTATION RELATING TO THE USE OF PROFESSIONAL JUDGMENT, WHERE THE
MATTERS AND JUDGMENTS ARE SIGNIFICANT?
ANSWER:
DOCUMENTATION OF SIGNIFICANT MATTERS AND RELATED SIGNIFICANT PROFESSIONAL

JUDGMENTS:
1. Judging the significance of a matter requires an objective analysis of the facts and
circumstances.
2. SIGNIFICANT MATTERS: Examples of significant matters include:
a. Matters that give rise to significant risks.
b. Results of audit procedures indicating (a) that the financial statements could be
materially misstated, or (b) a need to revise the auditor’s previous assessment of the
risks of material misstatement and the auditor’s responses to those risks.
c. Circumstances that cause the auditor significant difficulty in applying necessary audit
procedures.
d. Findings that could result in a modification to the audit opinion or the inclusion of an
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Emphasis of Matter Paragraph in the auditor’s report.

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3. DOCUMENTATION RELATED TO PROFESSIONAL JUDGMENT:
a) An important factor in determining the form, content and extent of audit documentation of
significant matters is the extent of professional judgment exercised in performing the work
and evaluating the results
b) Documentation of the professional judgments made, where significant, serves to explain the
auditor’s conclusions and to reinforce the quality of the judgment. In the following cases the
auditor shall document his use of Professional judgment if such judgment is relating to
matters or decisions which are related to significant matters:
1. The rationale for the auditor’s conclusion when a requirement provides that the
auditor ‘shall consider certain information or factors, and that consideration is
significant in the context of the particular engagement. (E.g., Reliance company
changes useful life of 90% of fixed assets during FY 2018 – 2019 and here the auditor
can document the information about number of years, reasons for changes in useful
life etc. As these may be significant matters according to auditor.)
2. The basis for the auditor’s conclusion on the reasonableness of areas of subjective
judgments (E.g., the reasonableness of significant accounting estimates).
3. The basis for the auditor’s conclusions about the authenticity of a document when
further investigation (such as making appropriate use of an expert or of confirmation
procedures) is undertaken in response to conditions identified during the audit that
caused the auditor to believe that the document may not be authentic.
Q.NO.25 THE NATURE AND TIMING OF THE AUDIT PROCEDURES TO BE USED MAY BE AFFECTED
BY THE FACT THAT SOME OF THE ACCOUNTING DATA AND OTHER INFORMATION MAY BE
AVAILABLE ONLY IN ELECTRONIC FORM OR ONLY AT CERTAIN POINTS OR PERIODS IN TIME.
ANSWER:
The nature and timing of the audit procedures to be used may be affected by the fact that some of
the accounting data and other information may be available only in electronic form or only at
certain points or periods in time.
1. For example, source documents, such as purchase orders and invoices, may exist only in
electronic form when an entity uses electronic commerce, or may be discarded after
scanning when an entity uses image processing systems to facilitate storage and reference.
2. Certain electronic information may not be retrievable after a specified period of time, for
example, if files are changed and if backup files do not exist. Accordingly, the auditor may
find it necessary as a result of an entity’s data retention policies to request retention of some
information for the auditor’s review or to perform audit procedures at a time when the
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information is available.
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Q.NO.26 ALTHOUGH CORROBORATION OF EVIDENCE OBTAINED THROUGH INQUIRY IS OFTEN OF
PARTICULAR IMPORTANCE, IN THE CASE OF INQUIRIES ABOUT MANAGEMENT INTENT, THE
INFORMATION AVAILABLE TO SUPPORT MANAGEMENT’S INTENT MAY BE LIMITED. WHAT ARE
THE POINTS THE AUDITOR SHALL CONSIDER OBTAINING CORROBORATIVE EVIDENCE
REGARDING OF MANAGEMENT INTENT?
ANSWER:
In a case when the information to support management intent is limited, the auditor shall look into
the following points to assess the reliability of response obtained on inquiry of management
intentions:
1. Understanding management’s past history of carrying out its stated intentions.
2. Management’s stated reasons for choosing a particular course of action and
Management’s ability to pursue (execute) a specific course of action.
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20B. SA 530 – AUDIT SAMPLING
Q.NO.1 DEFINE THE TERM AUDIT SAMPLING AND MENTION THE OBJECTIVE OF AUDITOR?
ANSWER:
DEFINITION AS PER SA530:

According to SA 530 – Audit Sampling, Audit sampling refers to the application of audit procedures to
less than 100% of items within a population based on which the auditor draws conclusions about the
population.
OBJECTIVE OF AUDITOR UNDER SA- 530:
The objective of the auditor when using audit sampling is to provide a reasonable basis to draw
conclusions about the population from which the sample is selected.
Q.NO.2 WRITE A SHORT NOTE ON APPROACHES TO SAMPLING

ANSWER:
There are TWO approaches for sampling:

A. STATISTICAL SAMPLING: The characteristics of statistical sampling are as below:
1. It is an approach that has the random selection of the sample items;
2. The auditor uses the probability theory to evaluate sample results
3. The auditor will take into account sampling risk characteristics.
4. Statistical sampling widely used where a population consists of a large number.
5. The sample results can be measured as to adequacy and reliability of audit objectives.
B. NON-STATISTICAL SAMPLING:
1. Under this approach, the sample size and its composition are determined on the basis of the
personal experience and knowledge of the auditor.
2. A sampling approach that does not have characteristics of statistical sampling is considered
non-statistical sampling.
3. The non-statistical sampling is neither objective nor scientific.
4. In this approach the risk of personal bias in selection of sample items cannot be eliminated.
5. The sample results cannot be measured because the sample has been selected based on the
personal bias
CONCLUSION:
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1. Whatever may be the approach, the sample must be representative of Population. Otherwise it
would not be referred as appropriate sample.
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2. The sampling approach is a matter of professional judgment.

3. Sample size is not a valid criterion for distinguish between statistical and non-statistical
approaches.
Q.NO.3 WHAT ARE THE FACTORS SHOULD BE CONSIDERED FOR DECIDING UPON THE EXTENT OF
CHECKING ON A SAMPLING PLAN?
ANSWER:
1. The extent of checking to be undertaken is a matter of professional judgement of the auditor.

2. There is nothing statutorily stated anywhere which specifies what work is to be done, how it is to
be done and to what extent.
3. Further it is not mandatory for auditor to adopt sampling techniques and his duty is only to express
opinion.
4. When the auditor decided to express opinion based on part checking, then he shall adopt
standards and techniques that are widely accepted.
5. Since statistical law of sampling is scientifically tested, it can be relied upon to a greater extent.
6. The following are the factors that the auditor should consider for deciding upon the extent of
checking on a sampling plan:
a. Size of the organisation under audit.
b. Level of effectiveness of internal controls.
c. Adequacy and reliability of books and records.
d. Tolerable error range.
e. Degree of the desired confidence required for auditor.
Q.NO.4 WHAT ARE THE ADVANTAGES OF STATISTICAL SAMPLING?

ANSWER:
1. The sample size does not increase in proportion to the increase in the size of Population.
2. The sample selection is more objective and based on random numbers.
3. With the minimum sample size the associated risk can be calculated with precision.
4. It may provide a better description of a large mass of data than a prima facie examination of entire
data.
Q.NO.5 WHAT ARE THE REQUIREMENTS AS TO SAMPLE DESIGN, SAMPLE SIZE AND SAMPLE
SELECTION?
ANSWER:
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The Requirement relating to sample design, sample size and sample selection are as below:
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SAMPLE DESIGN: The auditor shall consider the purpose of audit procedure and characteristics of
population from which the sample will be drawn.
SAMPLE SIZE: The auditor shall determine the sample size that is sufficient to reduce sampling risk to
an acceptable low level.
SAMPLE SELECTION: The selection of sample shall be in such a way that each item of population will
have a chance of selection.
Q.NO.6 WHAT ARE THE FACTORS THAT INFLUENCE AUDITOR’S JUDGMENT IN DETERMINING AN
APPROPRIATE SAMPLE SIZE?
ANSWER:
The auditor shall determine the sample that sufficient to reduce sampling risk to an acceptable low level.
The following are the various factors that influence auditor’s judgment about sample size:
1. The degree of assurance the auditor is expecting to obtain. E.g., Higher the sample size, higher the
degree of assurance.
2. Auditor’s judgment about risk of material misstatements. E.g., If Risk of MMS increases then
sample size also increases.
3. Tolerable rate of deviation and tolerable misstatement. E.g., If the tolerable rate of deviation /
misstatements increases then the sample size decreases and vice versa.
4. Expected rate of deviation and expected misstatements. E.g., If the expected rate of deviation
increases then the sample size also increases.
5. The size and characteristics of population.
Note: Tolerance means risk acceptance. Higher the risk accepted, lower the sample size.
Q.NO.7 WRITE A SHORT NOTE ON SELECTION OF ITEMS FOR TESTING IN A STATISTICAL

SAMPLING.
ANSWER:
1. In Statistical sampling, sample items are selected in a way that each sampling unit has a
probability of being selected. The selection happens in an unbiased manner.
2. In non-statistical sampling, personal judgment is used to select sample items.
3. The principal methods of selecting samples are the use of random selection, systematic selection
and haphazard selection.
Q.NO.8 WRITE A SHORT NOTE ON THE STRATIFICATION AND VALUE WEIGHTED SELECTION
ANSWER:
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In considering the characteristics of the population from which the sample will be drawn, the auditor
may determine that stratification or value-weighted selection is appropriate
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1. STRATIFICATION:
a) Audit efficiency may be improved if the auditor stratifies a population by dividing it into sub-
populations which have an identifying characteristic.
b) The objective of stratification is to select sample from all parts of population having different
characteristics.
c) When performing tests of details, the population is often stratified based on monetary value.
2. VALUE-WEIGHTED SELECTION:
a) When performing tests of details it may be useful to identify the sampling unit as the individual
monetary units.
b) The auditor will be more focused towards larger value items (higher chances of selection) and
can results in smaller sample size.
c) This approach may be used in combination with the systematic method of sample and is most
efficient when selecting items using random selection.
Q.NO.9 WRITE A SHORT NOTE ON SAMPLE SELECTION METHODS

ANSWER:
1. RANDOM SAMPLING:
Random sampling includes two very popular methods which are discussed below
a) Simple Random Sampling:
Under this method each unit of the whole population has an equal chance of being selected
b) Stratified Sampling:
This method involves dividing the whole population to be tested in a few separate groups
called strata and taking a sample from each strata.
2. INTERVAL SAMPLING OR SYSTEMATIC SAMPLING:
a) Systematic selection is a selection method in which the number of sampling units in the
population is divided by the sample size to give a sampling interval.
b) For example, Item number-50 is determined as a starting point within the first 50, each 50th
sampling unit thereafter is selected.
3. MONETARY UNIT SAMPLING:
It is a type of value-weighted selection in which sample size, selection and evaluation of results
are in monetary amounts.
4. HAPHAZARD SAMPLING:
a) In this method the auditor selects the sample without following a structured technique.
b) Even though no structured technique is used, the auditor would on the other hand avoid any
conscious bias or predictability.
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c) This method is not superior when compared with other statistical sampling methods.
d) In this method also all the sampling units in the population have a chance of selection.
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Note: It is more or less the same as simple random sampling.
5. BLOCK SAMPLING:
This method involves selection of a block(s) of contiguous items from within the population.
Q.NO.10 WRITE A SHORT NOTE ON RANDOM SAMPLING.

ANSWER:
Random selection ensures that all items in the population or within each stratum have a known
chance of selection.
It may involve use of random number tables. These are further divided into two types:
1. SIMPLE RANDOM SAMPLING:
i) Under this method each unit of the whole population, e.g. purchase or sales invoice, has an
equal chance of being selected
ii) Random number tables are simple and easy to use and also provide assurance that the bias
does not affect the selection.
iii) This method is considered appropriate where the population has a reasonably similar units
and in a reasonable range.
2. STRATIFIED SAMPLING:
i) This method involves dividing the whole population to be tested in a few separate groups
called strata.
ii) Each stratum is treated as if it was a separate population and items are selected from each of
these stratums.
iii) The number of groups into which the whole population has to be divided is determined on the
basis of auditor judgment.
iv) Example: Trade receivables balances may be divided into four groups as follows:-
a) Balances in excess of Rs.10,00,000;
b) Balances in the range of Rs. 5, 50,001 to Rs. 10,00,000;
c) Balances in the range of Rs. 2,25,001 to Rs. 5,50,000; and
d) Balances Rs. 2,25,000 and below.
✓ From these above groups the auditor may pick up different percentage of items from each
of the group.
✓ From the top group i.e. balances in excess of Rs 10,00,000, the auditor may examine all
the items;
✓ From the second group - 25 per cent of the items; from the third group - 10 per cent of the
items; and
✓ From the lowest group - 2 per cent of the items may be selected.
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Q.NO.11 WRITE A SHORT NOTE ON SAMPLING RISK.

ANSWER:
MEANING:
1. The risk that the auditor’s conclusion based on a sample may be different from the conclusion if
the entire population were subjected to the same audit procedure.
2. In other words, the risk of selecting an inappropriate sample is also known as sampling risk.
3. The following are the consequences or erroneous conclusions due to sampling risk:
TEST OF CONTROLS:
RISK OF OVER RELIANCE: Treating that the controls are more effective than they actually are. The
auditor is primarily concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.
RISK OF UNDER RELIANCE: Treating that the controls are less effective than they actually are. This
type of erroneous conclusion affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
TEST OF DETAILS:
RISK OF INCORRECT ACCEPTANCE: Treating that a material misstatement does not exist when in fact
it exist in the population. This type of risk leads to audit risk.
RISK OF INCORRECT REJECTION: Treating that a material misstatement exists when in fact it does not
exist in the population. This may not affect the audit risk.
Q.NO.12 WRITE A SHORT NOTE ON NON-SAMPLING RISK

ANSWER:
1. Non-Sampling Risk is the risk that the auditor reaches an erroneous conclusion for any reason
other than sampling risk. Non sampling risk can never be mathematically measured.
2. Following are the examples of non-sampling risk
• Use of inappropriate audit procedures.
• Misinterpretation of audit evidence.
3. Following are the sources of Non-Sampling risk:
• Human Mistakes.
• Misinterpreting the sample results.
• Relying on erroneous information e.g. erroneous confirmation.
Q.NO.13 WRITE A SHORT NOTE ON PROJECTION OF MISSTATEMENT BASED ON SAMPLING.

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ANSWER:
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1. The auditor is required to project misstatements for the population to obtain a broad view of
the scale of misstatement.
2. When a misstatement has been established as an anomaly, it may be excluded when projecting
misstatements to the population. (Non-anomalous projection)
3. In case of tests of details, the auditor shall project misstatements found in the sample to the
population.
4. In case of tests of controls, no explicit projection of deviations is necessary since the sample
deviation rate is also the projected deviation rate for the population as a whole.
Note:
Anomaly refers to a misstatement or deviation that is demonstrably not representative of
population and hence it is not considered while calculating projected misstatement.
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ADVANCED CONCEPTS
Q.NO.14 WRITE A SHORT NOTE ON SAMPLE DESIGN.
ANSWER:
When designing an audit sample, the auditor shall consider the purpose of the audit procedures and
the characteristics of the population from which the sample will be drawn.
1. PURPOSE OF THE AUDIT PROCEDURE:
The auditor shall understand the purpose of audit procedure i.e., Is the sample about Test of
controls or Test of Details. Based on understanding the purpose the auditor shall determine the
characteristics of population to design an appropriate sample method (Simple or Stratified).
2. CHARACTERISTICS OF POPULATION: While considering the characteristics of population the
auditor shall also consider few other things such as:
a) TEST OF CONTROLS:
1. The auditor makes an assessment of the expected rate of deviation Based on the auditor’s
understanding of the relevant controls.
2. This assessment is made in order to design an audit sample and to determine sample size.
b) TEST OF DETAILS:
i) Stratification:
Audit efficiency may be improved if the auditor stratifies a population by dividing it into
sub-populations.
ii) Value-Weighted Selection:
When performing tests of details it may be efficient to identify the sampling unit as the
individual monetary units that make up the population.
Q.NO.15 DEFINE THE TERM POPULATION AND DISCUSS THE CHARACTERISTICS OF POPULATION.
ANSWER:
DEFINITION:
Population refers to the entire set of data from which a sample is selected and the auditor wishes to
draw conclusions on such population
The auditor should select sample items which can be expected to be representative of the population.
CHARACTERISTICS OF POPULATION:
1. APPROPRIATENESS:
• The auditor will need to determine that the population from which the sample is drawn is
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appropriate.
•
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The individual items of the population are known as sampling units.
• The population can be divided into sampling units.
2. COMPLETENESS:
The population needs to include all relevant items from throughout the entire period.
3. RELIABLE:
The auditor should consider the complete and accurate information while performing the audit
sampling.
Q.NO.16 WRITE ABOUT EVALUATION OF SAMPLE RESULTS?
Answer:
The auditor shall evaluate the results of the sample and assess whether the use of audit sampling has
provided a reasonable basis for conclusions about the population that has been tested.
1. In case of Test of Controls an unexpectedly high sample deviation rate may lead to an increase in
the assessed risk of material misstatement.
2. An unexpectedly high misstatement amount in a sample may cause the auditor to believe that a
class of transactions or account balance is materially misstated.
3. The best way to evaluate the result of sample by auditor is to consider projected misstatement
and anomalous misstatement.
4. When the projected misstatement plus anomalous misstatement exceeds tolerable
misstatement, the sample does not provide a reasonable basis for conclusions about the
population that has been tested.
5. The closer the projected misstatement plus anomalous misstatement is to tolerable
misstatement, the more likely that actual misstatement in the population may exceed tolerable
misstatement.
6. Also, if the projected misstatement is greater than the auditor’s expectations of misstatement
used to determine the sample size, the auditor may conclude that there is an unacceptable
sampling risk that the actual misstatement in the population exceeds the tolerable misstatement.
CONCLUSION:
If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about
the population that has been tested:
1. The auditor may request Management to investigate misstatements that have been identified or
2. Conduct additional audit procedures.
3. For example, the auditor might extend the sample size, test an alternative control or modify
related substantive procedures.
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Note:
1. Projected misstatements are calculated based on those that are repetitive in nature.
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2. Anomalous misstatements are those that are not repetitive in nature but are considered while
calculating materiality of aggregate misstatements on whole population.
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20C. SA 520 – ANALYTICAL PROCEDURES
Q.NO.1 WHAT ARE ANALYTICAL PROCEDURES AS PER SA 520. EXPLAIN WITH EXAMPLES?
ANSWER:
MEANING:
As per the SA-520:
a) “Analytical Procedures”, means evaluations of financial information through analysis of plausible
(acceptable) relationships among both financial and non-financial data.
b) Analytical procedures include
i) Investigating fluctuations or
ii) Relationships that are inconsistent with other information (or) which differ from expected
values by a significant amount.
iii) It also includes comparison of financial statements with consideration of relationships.
EXAMPLES:
1. Comparison of entity’s Financial information -
a) Comparable information for prior periods.
b) Anticipated results of the entity, such as budgets or forecasts.
c) Similar Industry information concerning the entity such as industry average.
2. Consideration of relationships -
a) Among elements of financial information that would be expected to conform to a

predictable pattern based on the entity’s experience, such as gross margin percentages.
E.g. An increase in sales must lead to increase in profit of the entity. (Margin of safety)
b) Between financial information and relevant non-financial information, such as payroll costs
to number of employees.
E.g. An increase in number of employees may lead to increase in earnings.
3. Thus analytical procedure broadly cover these types of comparison -
a) Comparison of Client and Industry data.
b) Comparison with prior period data.
c) Comparison with expected results.
d) Comparison with auditors expected results.

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e) Comparison of Financial and Non-Financial data.

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Q.NO.2 WHAT IS THE PURPOSE OF ANALYTICAL PROCEDURES?
ANSWER:
Analytical procedures use comparisons and relationships to determine whether account balances or
other data appear to be reasonable.
ANALYTICAL PROCEDURES ARE USED FOR THE FOLLOWING PURPOSES:
i) To obtain relevant and reliable audit evidence when using substantive analytical procedures;
and
ii) To design and perform analytical procedures near the end of the audit that assist the auditor
when forming an overall conclusion as to whether the financial statements are in consistent with
auditor’s understanding about the entity.
E.g. In XYZ Ltd., after applying analytical procedures as comparison of the gross profit ratio with that
of the previous year, it is discovered that there has been fall in the ratio. Therefore, it became
necessary for the auditor to make further enquiries as it may be due to pilferage of inventories/
misappropriation of a part of the sale proceeds/ a change in the cost of sales without a
corresponding increase in the sales price.
CONCLUSION: Thus, it is important to note that Analytical procedures may help identify the
existence of unusual transactions or events, and amounts, ratios, and trends that might indicate
matters that have audit implications.
Q.NO.3 WRITE ABOUT TIMING OF ANALYTICAL PROCEDURES. ESPECIALLY DURING THE PLANNING
PHASE?
ANSWER:
Analytical Procedures are used in three stages:

1. Planning Phase
2. Testing Phase
3. Completion Phase
DURING PLANNING PHASE:
1. In the planning stage, analytical procedures help the auditor in understanding the client’s
business and in identifying areas of potential risk by indicating aspects of and developments in
the entity’s business of which he is previously unaware.
2. This information will assist the auditor in determining the nature, timing and extent of his other
audit procedures.
3. Analytical procedures in planning the audit use both financial data and non-financial
information.
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Q.NO.4 WRITE A SHORT NOTE ON SUBSTANTIVE ANALYTICAL PROCEDURES?

ANSWER:
1. Substantive procedure includes Test of Details and Analytical Procedures. Therefore analytical
procedures are one of the substantive audit procedures.
2. When to use substantive analytical procedures: It is based on the auditor’s judgment so as to
reduce audit risk to an acceptably low level.
3. The auditor may inquire of management as to the availability and reliability of information
needed to apply substantive analytical procedures, and also inquire the results of any such
analytical procedures performed by the entity.
4. While carrying out the analytical procedures the auditor can use the analytical data prepared by
management provided, he verified its authenticity.
Q.NO.5 EXPLAIN THE TECHNIQUES AVAILABLE AS SUBSTANTIVE ANALYTICAL PROCEDURES?
ANSWER:
A. TREND ANALYSIS:
1. A commonly used technique is the comparison of current data with the prior period balance
or with a trend in two or more prior period balances.
2. We evaluate whether the current balance of an account moves in line with the trend
established with previous balances for that account
B. RATIO ANALYSIS:
1. Ratio analysis is useful for analysing asset and liability accounts as well as revenue and
expense accounts.
2. An individual balance sheet account is difficult to predict on its own, but its relationship to
another account is often more predictable
3. Financial ratios may include:
a) Trade receivables or inventory turnover
b) Freight expense as a percentage of sales revenue
C. REASONABLENESS TESTS:
These Procedures does not rely on events of prior periods, but upon non-financial data for the
audit period under consideration. These tests are generally more applicable to income
statement accounts while determining revenue and expenses.
D. STRUCTURAL MODELLING:
A modelling tool constructs a statistical model from financial and/or non-financial data of prior
accounting periods to predict current account balances. (E.g., It is a combination of various
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statistical tools such as regression, path analysis etc. It is most unused tool due to its complex
process and involvement of statistical technological tools).
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Q.NO.6 WRITE ABOUT SUITABILITY OF PARTICULAR ANALYTICAL PROCEDURES FOR GIVEN
ASSERTIONS?
ANSWER:
1. Substantive analytical procedures are generally more applicable to large volumes of transactions
that tend to be predictable over time.
2. However, the suitability of a particular analytical procedure will depend upon the auditor’s
assessment of how effective it will be in detecting a misstatement that may cause the financial
statements to be materially misstated.
3. In some cases, even an unsophisticated predictive model may be effective as an analytical procedure.
4. Further different analytical procedures provide different levels of assurance.
Q.NO.7 EXTENT OF RELIANCE ON ANALYTICAL PROCEDURES IS INFLUENCED BY RELIABILITY OF

UNDERLYING DATA. EXPLAIN?
ANSWER:
The reliability of results of analytical procedures is depends upon the reliability of underlying data.
Accordingly, the following are relevant factors to determine the reliability of data:
1. Source from which the data is obtained. E.g., Information may be more reliable when it is
obtained from independent sources outside the entity;
2. Comparability of the information available. E.g., Industry general sales data may not be
comparable with a company engaged in selling customised products.
3. Nature and relevance of information available E.g., Budgets may be more relevant to analyse
actual results.
4. Controls over the preparation of the information that are designed to ensure the data
completeness, accuracy and validity. E.g., when controls are effective, the auditor generally has
greater confidence in the reliability of the information and in the results of analytical
procedures.
Q.NO.8 WRITE A SHORT NOTE ON MATTERS RELEVANT TO THE AUDITOR’S EVALUATION OF RISK
OF MATERIAL MISSTATEMENTS WHILE USING EXPECTATIONS UNDER ANALYTICAL
PROCEDURES?
ANSWER:
Matters relevant to auditor for evaluating whether the expectations developed using analytical
procedures may detect material misstatements depends on the following factors:
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1. The accuracy with which the expected results of substantive analytical procedures can be predicted.
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Example: The auditor may expect greater consistency in comparing gross profit margins from
one period to another than in comparing discretionary expenses, such as research or
advertising.
2. The degree to which information can be disaggregated.
Example: Substantive analytical procedures may be more effective when applied to financial
information on individual sections of an operation or to financial statements of components of a
diversified entity rather when applied to the financial statements of the entity as a whole.
3. The availability of the information, both financial and non-financial which depends upon
reliability of underlying data.
Example: The auditor may consider whether financial information, such as budgets or forecasts,
and non-financial information, such as the number of units produced or sold, is available to
design substantive analytical procedures. If the information is available, the auditor may also
consider the reliability of the information.
Q.NO.9 HOW TO DEAL WITH INVESTIGATING RESULTS OF ANALYTICAL PROCEDURES?
ANSWER:
If the auditor identifies fluctuations or relationships that are inconsistent with expected values by
significant amounts, then he shall investigate such differences by:
A. INQUIRING OF MANAGEMENT:
Requesting the management to provide additional information regarding why there are such
huge differences. Further evaluate the response provided by management with audit evidence
obtained.
B. PERFORMING ADDITIONAL AUDIT PROCEDURES:
If management is unable to provide an appropriate explanation, then the auditor may perform
additional procedures to identify any material misstatements, if available.
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Q.NO.10 WHILE CARRYING OUT THE STATUTORY AUDIT OF A LARGE ENTITY, WHAT ARE THE
SUBSTANTIVE PROCEDURES TO BE PERFORMED TO ASSESS THE RISK OF MATERIAL
MISSTATEMENT?
ANSWER:
SUBSTANTIVE PROCEDURES TO BE PERFORMED TO ASSESS THE RISK OF MATERIAL

MISSTATEMENT:
As per SA 330, “The Auditor’s Response to Assessed Risk”, substantive procedure is an audit
procedure designed to detect material misstatements at the assertion level.
It consists tests of details and substantive analytical procedures.
a) TEST OF DETAILS: The nature of the risk and assertion is relevant to the design of tests of details.
Example:
i) Tests of details related to the existence or occurrence assertion may involve selecting from
items contained in a financial statement amount and obtaining the relevant audit evidence.
ii) Tests of details related to the completeness assertion may involve selecting from items that
are expected to be included in the relevant financial statement amount and investigating
whether they are included.
iii) In designing tests of details, the extent of testing is ordinarily thought of in terms of the
sample size.
b) SUBSTANTIVE ANALYTICAL PROCEDURES:
i) Substantive analytical procedures are generally more applicable to large volumes of
transactions that tend to be predictable over time.
ii) The application of planned analytical procedures is based on the expectation that relationships
among data exist and continue in the absence of known conditions to the contrary.
iii) However, the suitability of a particular analytical procedure will depend upon the auditor’s
assessment of how effective it will be in detecting a misstatement that, individually or when
aggregated with other misstatements, may cause the financial statements to be materially
misstated.
iv) In some cases, even an unsophisticated predictive model may be effective as an analytical
procedure.
v) The use of widely recognised trade ratios can often be used effectively in substantive
analytical procedures to provide evidence to support the reasonableness of recorded
amount.
Q.NO.11 WHAT ARE THE FACTORS TO BE CONSIDERED FOR SUBSTANTIVE AUDIT / ANALYTICAL
PROCEDURES?
ANSWER:
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The auditor should consider the following factors for Substantive Audit Procedures:
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a) Availability of Data: The availability of reliable and relevant data will facilitate effective
procedures.
b) Disaggregation: The degree of disaggregation in available data can directly affect the degree of
its usefulness in detecting misstatements
c) Account Type: Substantive analytical procedures are more useful for certain types of accounts
than for others.
i) Income statement accounts tend to be more predictable because they reflect accumulated
transactions over a period.
ii) Balance sheet accounts represent the net effect of transactions at a point in time or are
subject to greater management judgment.
iii) We can analyse data to understand the relationship to another account and through this,
disaggregate the transactions flowing to and from the balance sheet account (e.g., sales and
cash receipts flowing through trade receivables), or to compare ratios over time as this
enhances our ability to obtain audit evidence for balance sheet accounts.
d) Source: Some classes of transactions tend to be more predictable because they consist of
numerous, similar transactions, (e.g., through routine processes). Whereas the transactions
recorded by non-routine are more difficult to predict.
e) Predictability: Substantive analytical procedures are more appropriate when an account balance
or relationships between items of data are predictable. A predictable relationship is one that
may reasonably be expected to exist and continue over time.
f) Nature of Assertion: Substantive analytical procedures may be more effective in providing
evidence for some assertions (e.g., completeness or valuation) than for others (e.g., rights and
obligations). Predictive analytical procedures using data analytics can be used to address
completeness, valuation/measurement and occurrence.
What Can Go Wrong (WCGW): When we are designing audit procedures to address an inherent risk
or “what can go wrong”, we consider the nature of the risk of material misstatement in order to
determine if a substantive analytical procedure can be used to obtain audit evidence. When
inherent risk is higher, we may design tests of details to address the higher inherent risk. When
significant risks have been identified, audit evidence obtained solely from substantive analytical
procedures is unlikely to be sufficient.
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CA FINAL PAPER 3 CHAPTER GUIDE

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CA FINAL – PAPER 3

ADVANCED AUDITING AND PROFESSIONAL ETHICS

AS PER OUR STARTING

c) USERS OF FINANCIAL STATEMENTS:

Suppliers To determine the credit worthiness of the company.

3. APPLICABLE FINANCIAL REPORTING FRAMEWORK:

4. GENERAL PURPOSE FINANCIAL STATEMENTS (GPFS):

6. GENERAL PURPOSE FRAMEWORK:

7. COMPLIANCE FRAMEWORK (CFW):

8. FAIR PRESENTATION FRAMEWORK:

13. MEANING OF AUDIT:

14. OBJECTIVE OF THE AUDIT/AUDITOR:

16. ENGAGEMENT TEAM:

A. QUALIFICATIONS OF COMPANY AUDITOR [Sec 141(1)]:

Q.NO.2 WRITE ABOUT THE DISQUALIFICATIONS OF A COMPANY’S AUDITOR? OR CASES WHERE A

DISQUALIFICATIONS OF COMPANY AUDITOR: [Sec 141(3)]

Note: In other words, The below mentioned persons are disqualified:

brand is used by such individual.

SUBSEQUENT DISQUALIFICATION AFTER APPOINTMENT: [SEC. 141(4)]

of Section 141, he shall be deemed to have vacated his office as an auditor.

Q.NO.3 STATE THE SERVICES WHICH AN AUDITOR OF A COMPANY IS PROHIBITED TO RENDER TO

as auditor of the same company or group companies.

c) Small companies and

appointment as an Auditor in 4, 5, 6, 10 and 15 Companies respectively.

(1) Mr. P can hold: 20 - 4 = 16 more audits.

A. APPLICABILITY OF AUDIT COMMITTEE:

b) With turnover of Rs. 100 crore or more;

c) With aggregate outstanding loans or borrowings or debentures or deposits, Rs. 50 crore

B. MANNER AND PROCEDURE OF SELECTION AND APPOINTMENT OF AUDITORS: 139(11)

Q.NO.6 EXPLAIN THE PROVISIONS RELATED TO APPOINTMENT OF AUDITOR OF A COMPANY?

section divides the appointment into two parts:

A. Appointment of First Auditors.

APPOINTMENT OF SUBSEQUENT AUDITORS

2. IN CASE OF GOVERNMENT COMPANIES: [SEC. 139(5)]

A. DEFINITION OF GOVERNMENT COMPANY:

committee, within 30 days.

Q.NO.8 EXPLAIN THE DUTIES OF AN AUDITOR IN CASE OF RESIGNATION?

A. Provisions and Explanation: For non-compliance of sub-section (2) of section 140

Q.NO.9 EXPLAIN THE PROVISIONS RELATING TO ROTATION OF AN AUDITOR?

A. APPLICABILITY OF ROTATION OF AUDITORS: [Sec. 139(2)]

b) With borrowings from PFI’s or Banks or Public Deposits of 50 crore or more.

3. All Private Limited Companies:

intervals as may be resolved by members. (AKA Internal Rotation) or

Q.NO.10 BRIEFLY EXPLAIN THE PROVISIONS RELATING TO REMOVAL OF AUDITOR OF A COMPANY

PROCEDURE FOR REMOVAL OF AUDITOR BEFORE EXPIRY OF TERM [SEC. 140(1)]:

Meeting and pass the special resolution removing the auditor.

B. APPLICATION TO WHOM: The tribunal.

C. PROCEDURE FOR REMOVAL:

auditor for getting the representation of retiring auditor.

PROHIBITION ON RIGHT TO REPRESENTATION:

Q.NO.13 WHAT ARE THE POWERS OF AN AUDITOR AS PER SEC. 143(1)?

The auditor has the following powers/rights while conducting an audit:

A. RIGHT OF ACCESS TO BOOKS:

necessary for the purpose of the audit.

B. RIGHT TO OBTAIN INFORMATION AND EXPLANATION:

D. RIGHT TO LIEN: (General Principles of Law)

he worked on, can retain such property, on account of non-payment of dues.

Q.NO.14 WHAT ARE THE DUTIES OF THE AUDITOR?

A. DUTY TO REPORT: 143(2)

D. DUTY TO ATTEND GENERAL MEETINGS: Sec.146

B. IF THE AMOUNT OF FRAUD IS LESS THAN RS. 1 CRORE:

1. Nature of Fraud with description.