Inter CA Auditing and Assurance

Inter CA
Auditing and
Assurance
Dear Students,
Auditing is the subject which is given a step motherly treatment by most of

the students simply because it is a theoretical subject. The hard reality is that
ultimately it claims many casualties.
As we proceed with out course, you will be amazed when you realise that
auditing is actually the most practical oriented subject in C.A. curriculum. You
as students are going to have the rare opportunity to discuss the theoretical
concepts in relation to the practical situations. It is this rare opportunity which
will give you the chance of changing your entire attitude towards auditing.
In order to know the exact scope of the subject, the syllabus is divided into
many topics. Each topic has been created to comprehensively cover not only
the concepts but also carefully selected examination questions which are a
reflection of the past and a peep into the future.
The coaching is well-planned, systematic, time bound and totally examination

oriented. The coaching coupled with this study material is indeed your vehicle
to success.
I wish you a very happy study time.
Best of Luck
Prof. J. K. Shah
Chartered Accountant
INTER C.A. – AUDIT
INTER C.A. - AUDIT

INDEX AS GIVEN BY THE ICAI
Chapter No. Chapter Pg. No.
Part A - Content
1 Nature Scope and Objectives of Audit 01 - 40
2 Audit Strategy, Planning and Programming 41-64
3 Audit Evidence and Documentations 65-125
4 Risk Assessment and Internal Control 126-169
5 Auditor’s responsibility in relation to Fraud 170-198
6 Audit in an Automated Environment 199-218
7 Audit Sampling 219-243
8 Analytical Procedures 244-260
9 Audit of Items of Financial Statements 261-318
10 Company Audit 319-416
11 Audit Report 417-452
12 Audit of Banks 453-493
13 Audit of Different Types of Entities 494-547
Annexure: BARE SAs from Auditing Pronouncements 548-686

NATURE SCOPE AND

OBJECTIVES OF AUDIT
PART A - THEORY SECTION
Sr.No Particulars
1 Audit- Definition and meaning
1.1 Definition
As per the ICAI, “An audit is independent examination of financial information
of any entity, whether profit oriented or not, and irrespective of its size or legal
form, when such an examination is conducted with a view to expressing an opinion
thereon.”
1.2 Elaboration:
The person conducting this task should take care to ensure that financial
statements would not mislead anybody. This he can do honestly by
satisfying himself that:
1.2.1 the accounts have been drawn up with reference to entries in the books of
account
1.2.2 the entries in the books of account are adequately supported by sufficient
and appropriate evidence
1.2.3 none of the entries in the books of account has been omitted in the process
of compilation and nothing which is not in the books of account has found
place in the statements
1.2.4 the information conveyed by the statements is clear and unambiguous
1.2.5 the financial statement amounts are properly classified, described and
disclosed in conformity with accounting standards
1.2.6 the statement of accounts present a true and fair picture of the operational
results and of the assets and liabilities
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2 Objectives of Audit:
As per SA – 200 “Overall Objectives of the Independent Auditor”, in
conducting an audit of financial statements, the overall objectives of the
auditor are:
(a) To obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due
to fraud or error, thereby enabling the auditor to express an opinion on
whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework; and
(b) To report on the financial statements, and communicate as required
by the SAs, in accordance with the auditor’s findings.
3 Scope of Audit
Scope means areas and extent to be covered by an auditor while conducting
audit of financial statements. Scope of audit is governed by following
factors:
A. Applicable law and regulation
B. The ICAI Pronouncements E.g. Standards on Auditing issued by Auditing
and Assurance Standard Board.
C. The Terms of Engagement i.e. terms of contract between auditor and
the management.
Note : The terms of engagement cannot, however, restrict the scope of an audit in
relation to matters which are prescribed by legislation or by the pronouncements
of the Institute.
The following points merit consideration in regard to scope of audit:
3.1 The audit should be organized to cover adequately all aspects of the
enterprise.
3.2. The auditor should be reasonably satisfied as to whether the information
contained is reliable and sufficient so as to form the basis for the preparation
of the financial statements.S/he can assess the same by:
(a) making a study and evaluation of accounting systems and internal
controls and
(b) carrying out such other tests, enquiries and other verification
procedures as he considers appropriate.
3.3. The auditor should also decide whether the relevant information is properly
subject to statutory requirements.
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3.4. The auditor determines whether the relevant information is properly

disclosed in the financial statements by:
(a) comparing the financial statements with the underlying accounting
records and other source data; and
(b) considering the judgments that management has made in preparing
the financial statements ,the selection and consistent application of
accounting policies, the manner in which the information has been
classified, and the adequacy of disclosure.
3.5 The auditor is not expected to perform duties which fall outside the scope
of his competence.
3.6 Constraints on the scope of the audit of financial statements that impair the
auditor’s ability to express an unqualified opinion should be set out in his
report and a qualified opinion or disclaimer of opinion should be expressed
as appropriate.
3.7 The principal aspect to be covered in an audit concerning final statements of
account are the following:
3.7.1 An examination of the system of accounting and internal control to
ascertain whether it is appropriate for the business and helps in properly
recording all transactions.
3.7.2 Reviewing the system and procedures to find out whether they are adequate
3.7.3 Checking of the arithmetical accuracy of the books of account by the
verification of postings, balances, etc.
3.7.4 Verification of the authenticity and validity of transaction entered into by
making an examination of the entries in the books of accounts with the
relevant supporting documents.
3.7.5 Comparison of the balance sheet and profit and loss account or other
statements with the underlying record in order to see that they are in
accordance therewith.
3.7.6 Verification of the title, existence and value of the assets appearing in the
balance sheet.
3.7.7 Verification of the liabilities stated in the balance sheet.
3.7.8 Checking the result shown by the profit and loss and to see whether the
results shown are true and fair.
3.7.9 Confirming that the statutory requirements have been complied with.
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3.7.10 Reporting to the appropriate person/body whether the statements of

account examined do reveal a true and fair view of the state of affairs and
of the profit and loss of the organisation
4 Types of Audit
4.1 Statutory Audit- Audit required under law: The organisations which require
audit under law are the following:
(a) companies governed by the Companies Act, 2013;
(b) banking companies governed by the Banking Regulation Act, 1949;
(c) electricity supply companies governed by the Electricity Supply Act,
1948;
(d) co-operative societies registered under the Co-operative Societies Act,
1912;
(e) public and charitable trusts registered under various Religious and
Endowment Acts;
(f) Corporations set up under an Act of Parliament or State Legislature such
as the Life Insurance Corporation of India.
(g) Specified entities under various sections of the Income-tax Act, 1961
4.2 Voluntary Audit- In the voluntary category are the audits of the accounts
of proprietary entities, partnership firms, Hindu undivided families, etc. In
respect of such accounts, there is no basic legal requirement of audit.
5 Inherent Limitations of Auditing:
The process of auditing is such that it suffers from certain limitations,
i.e. The limitation which auditor cannot overcome irrespective of the nature and
extent of audit procedures. The limitations arise from:
5.1 The Nature of Financial Reporting: The preparation of financial statements
involves judgment by management in applying the requirements of
the entity’s applicable financial reporting framework to the facts and
circumstances of the entity.
In addition, many financial statement items involve subjective decisions
or assessments or a degree of uncertainty, and there may be a range of
acceptable interpretations or judgments that may be made.
5.2 The Nature of Audit Procedures: There are practical and legal limitations on
the auditor’s ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide,
intentionally or unintentionally, the complete information that
is relevant to the preparation and presentation of the financial
statements or that has been requested by the auditor.
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2. Fraud may involve sophisticated and carefully organised schemes

designed to conceal it. Therefore, audit procedures used to gather
audit evidence may be ineffective for detecting an intentional
misstatement. The auditor is neither trained as nor expected to be an
expert in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing.
We have to clearly understand that audit is distinct from investigation.
Investigation is a critical examination of the accounts with a special
purpose. For example, if fraud is suspected and it is specifically called
upon to check the accounts whether fraud really exists, it takes
character of investigation.
Audit is never started with a pre-conceived notion about state of affairs;
about wrong-doing; about some wrong having been committed. The
auditor seeks to report what he finds in normal course of examination
of accounts. However, it is quite possible that sometimes investigation
results from the prima facie findings of the auditor.
5.3 Timeliness of Financial Reporting and the Balance between Benefit and Cost:
1. There is an expectation by users of financial statements that the
auditor will form an opinion on the financial statements within a
reasonable period of time and at a reasonable cost. However, it is
impracticable to address all information that may exist or to pursue
every matter exhaustively
2. However, the matter of difficulty, time, or cost involved is not in itself
a valid basis for the auditor to omit an audit procedure for which
there is no alternative.
3. The relevance of information, and thereby its value, tends to diminish
over time, and there is a balance to be struck between the reliability
of information and its cost.
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5.4 Other Matters that Affect the Limitations of an Audit:

In case of certain subject matters, limitations on the auditor’s ability to
detect material misstatements are particularly significant.
Such assertions or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and
transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to
continue as a going concern.
Due to the above inherent limitations, the auditor is not expected to, and cannot, reduce audit
risk to zero and cannot therefore obtain absolute assurance that the financial statements are
free from material misstatement due to fraud or error.
6 Advantages of Audit
6.1 It safeguards the financial interest of persons who are not associated with
the management of the entity, whether they are partners or shareholders.
6.2 It acts as a moral check on the employees from committing defalcations
or embezzlement.
6.3 Audited statements of account are helpful in settling liability for taxes,
negotiating loans and for determining the purchase consideration for a
business.
6.4 These are also useful for settling trade disputes for higher wages or bonus
as well as claims in respect of damage suffered by property, by fire or some
other calamity.
6.5 An audit can also help in the detection of wastages and losses to show the
different ways by which these might be checked, especially those that occur
due to the absence or inadequacy of internal checks or internal control
measures.
6.6 Audit ascertains whether the necessary books of account and allied records
have been properly kept and helps the client in making good deficiencies or
inadequacies in this respect.
6.7 As an appraisal function, audit reviews the existence and operations of
various controls in the organisations and reports weaknesses, inadequacies,
etc., in them.
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6.8 Audited accounts are of great help in the settlement of accounts at the
time of admission or death of partner.
6.9 Government may require audited and certified statement before it gives
assistance or issues a license for a particular trade
7 Relationship of Auditing with other discipline
7.1 Auditing and Accounting: It has been pointed out earlier that both accounting
and auditing are closely related with each other as auditing reviews the
financial statements which are nothing but a result of the overall accounting
process
7.2 Auditing and Law: The relationship between auditing and law is very close
one.
Auditing involves examination of various transactions from the view point
of whether or not
these have been properly entered into
7.3 Auditing and Economics: As, it is well known, accounting is concerned with
the accumulation and presentation of data relating to economic activity.
From the auditing view point, the auditors are more concerned with Micro
economics rather than with the Macro economics
7.4 Auditing and Behavioural Science: The discipline of behavioural science is
closely linked with the subject of auditing. While it may be said that an
auditor, particularly the financial auditor, deals basically with the figures
contained in the financial statements but he shall be required to interact
with a lot of people in the organisation. The knowledge of human behaviour
is indeed very essential for an auditor so as to effectively discharge his
duties
7.5 Auditing and Statistics & Mathematics: With the passage of time, test check
procedures in auditing have become part of generally accepted auditing
procedures. With the emergence of test check procedure, discipline of
statistics has come quite close to auditing as the auditor is also expected
to have the knowledge of statistical sampling so as to arrive at meaningful
conclusions. The knowledge of mathematics is also required on the part of
auditor particularly at the time of verification of inventories.
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7.6 Auditing and Data Processing: Today, organisations are witnessing revolution
in
the field of data processing of accounts. Many organisations are carrying
out their financial
accounting activities with the help of computers. With such a phenomenal
growth in the field of computer sciences, the auditor should have good
knowledge of the components, general capability of the system and the
related terms
7.7 Auditing and Financial Management: Auditing is also closely related with
other functional fields of business such as finance, production, marketing,
personnel and other general areas of business management. With the
overgrowing field of auditing, the financial services sector occupies a
dominant place in our system.
7.8 Auditing and Production: Regarding production function, it may be stated
that a good auditor is one who understands the client and his business.
While carrying out the audit activity, the auditor is required to evaluate
transactions from the accounting aspect in relation to the process through
which it has passed through as accounting for by-products; joint-products
may also require to be done.
8 Independence of Auditor
8.1 Independence cannot be defined as it is a state of mind.
8.2 Independence means that auditor’s judgment should not be influenced in
any situation.
8.3 The ICAI has issued a guidance note on Independence of auditors.
According to the guidance note independence implies that judgment of a
person is not subordinate to wishes or directions of another person who
might have engaged him or to his own self-interest.
8.4 It is not only important to be independent but it is also important to appear
as independent i.e. independence of mind and independence of appearance
should co-exist. Independence of auditor must not only exist in fact, but
should also appear to exist to all reasonable persons
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8.5 Threats to Independence:

→ There are various threats to independence such as financial interest
threat, familiarity threat and self-review threat where auditor’s
judgment may come under influence.
→ In order to secure independence of auditor there are safeguards in the
form of statutory provisions mentioned in Companies Act, 2013 and
Chartered Accountants Act, 1949
→ The Code of ethics for professional Accountants prepared by the
International federation of Accountants (IFAC) identifies five types of
threats. These are:
8.5.1 Self-interest threats, which occur when an auditing firm, its partner or
associate could benefit from a financial interest in an audit client. Examples
include (i) direct financial interest or materially significant indirect financial
interest in a client, (ii) loan or guarantee to or from the concerned client
etc.
8.5.2 Self-review threats, which occur when during a review of any judgement or
conclusion reached in a previous audit or non-audit engagement (Non
audit
services include any professional services provided to an entity by an
auditor, other than audit or review of the financial statements etc.
8.5.3 Advocacy threats, which occur when the auditor promotes, or is perceived
to promote, a client’s opinion to a point where people may believe that
objectivity is getting compromised, e.g. when an auditor deals with shares
or securities of the audited company, or becomes the client’s advocate in
litigation and third party disputes etc.
8.5.4 Familiarity threats are self-evident, and occur when auditors form
relationships with the client where they end up being too sympathetic to
the client’s interests.
This can occur in many ways: (i) close relative of the audit team working in
a senior position in the client company, (ii) former partner of the audit firm
being a director or senior employee of the client etc.
8.5.5 Intimidation threats, which occur when auditors are deterred from acting
objectively with an adequate degree of professional skepticism.
Basically, these could happen because of threat of replacement over
disagreements with the application of accounting principles, or pressure to
disproportionately reduce work in response to reduced audit fees etc.
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8.5.6 SAFEGUARDS OF INDEPENDENCE

The Chartered Accountant has a responsibility to remain independent
by taking into account the context in which they practice, the threats to
independence and the safeguards available to eliminate the threats.
The following are the guiding principles in this regard:-
1. For the public to have confidence in the quality of audit, it is essential
that auditors should always be and appears to be independent of the
entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity,
objectivity and professional scepticism, which necessarily require the
auditor to be independent.
3. Before taking on any work, an auditor must conscientiously consider
whether it involves threats to his independence.
4. When such threats exist, the auditor should either desist from the task
or put in place safeguards that eliminate them.
5. If the auditor is unable to fully implement credible and adequate
safeguards, then he must not accept the work.
9 SA 220- Elements of Firm’s system of Quality Control
(Memory Code: LEHEM)
The firm’s system of quality control should include policies and procedures
addressing each of the following elements:
9.1 Leadership responsibilities for quality within the firm:
→ As per SA 220 “Quality Control for an Audit of Financial Statements”,
the engagement partner shall take responsibility for the overall
quality on each audit engagement to which that partner is assigned.
→ The actions of the engagement partner and appropriate messages to
the other members of the engagement team, in taking responsibility
for the overall quality on each audit engagement, emphasise:
(a) The importance to audit quality of:
(i) Performing work that complies with professional standards and
regulatory and legal requirements;
(ii) Complying with the firm’s quality control policies and procedures
as applicable;
(b) The fact that quality is essential in performing audit engagements
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9.2 Ethical requirements:

→ The auditor shall comply with relevant ethical requirements, including
those pertaining to independence, relating to financial statement
audit engagements.
→ Relevant ethical requirements ordinarily comprise the Code of Ethics
for Professional Accountants (IESBA Code) related to an audit of
financial statements.
→ The Code establishes the following as the fundamental principles of
professional ethics relevant to the auditor when conducting an audit
of financial statements :
a) Integrity
It requires auditor to be straight forward and honest in all professional
and business relationships. It implies fair dealing and truthfulness. It
effectively means that he shall not be associated with any reports,
returns, communications or other information which he believes
contains a materially false or misleading statement; contains
statements or information provided recklessly or omits required
information where such omission could be misleading.
(b) Objectivity
It requires an auditor not to compromise professional judgment
because of bias, conflict of interest or undue influence of others.
(c) Professional competence and due care
It requires that auditor attains and maintains professional knowledge
and skill at the level required to render competent professional
service based on current technical and professional standards and
legislation and also to act diligently and in accordance with technical
and professional standards.
(d) Confidentiality
It requires an auditor to respect the confidentiality of information
acquired as a result of professional or business relationships.
(e) Professional behaviour
It requires an auditor to comply with relevant laws and regulations
and avoid any conduct that he knows or should know might discredit
the profession.
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9.3 Human resources

→ The firm should establish policies and procedures designed to provide
it with reasonable assurance that it has sufficient personnel with the
capabilities, competence, and commitment to ethical principles.
→ Such policies and procedures shall address the following issues:
(a) Recruitment;
(b) Performance evaluation;
(c) Capabilities;
(d) Competence
(e) Career Development
9.4 Engagement performance.
Matters to be addressed for improving engagement performance include
the following:
9.4.1 How engagement teams are briefed on the engagement to obtain an
understanding of the objectives of their work
9.4.2 Processes for complying with applicable engagement standards
9.4.3 Processes of engagement supervision, staff training and coaching
9.4.4 Methods of reviewing the work performed, the significan’t judgments made
and the form of report being issued.
9.4.5 Appropriate documentation of the work performed and of the timing and
extent of the review.
9.4.6 Processes to keep all policies and procedures updated
9.5 Monitoring
Such policies and procedures should include an ongoing consideration
and evaluation of the firm’s system of quality control, including a periodic
inspection of a selection of completed engagements.
The purpose of monitoring compliance with quality control policies and
procedures is to provide an evaluation of:
(a) Adherence to professional standards and regulatory and legal
requirements;
(b) Whether the quality control system has been appropriately designed
and effectively implemented; and
(c) Whether the firm’s quality control policies and procedures have been
appropriately applied, so that reports that are issued by the firm or
engagement partners are appropriate in the circumstances.
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10 Acceptance and Continuance of Client Relationship

→ The engagement partner shall be satisfied that appropriate procedures
regarding the acceptance and continuance of client relationships and
audit engagements have been followed.
→ SQC 1 requires the firm to obtain information before accepting an
engagement. Information such as the following assists the engagement
partner in determining whether the decisions regarding the acceptance
and continuance of audit engagements are appropriate:
10.1 The integrity of the principal owners, key management and those charged
with governance of the entity
10.2 Whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and
resources
10.3 Whether the form and the engagement team can comply with relevant
ethical requirements
10.4 Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship
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
11 SA 210- Agreeing to the terms of Audit Engagement
11.1 Pre-conditions
11.1.1 Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable; and
11.1.2 Obtain the agreement of management that it acknowledges and
understands its responsibility:
(i) For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant
their fair presentation
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(ii) For such internal control as management determines is necessary to

enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error
(iii) To provide the auditor with:
a. Access to all information of which management is aware that
is relevant to the preparation of the financial statements such
as records, documentation and other matters;
b. Additional information that the auditor may request from
management for the purpose of the audit; and
c. Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence
11.1.3 If the preconditions for an audit are not present, the auditor shall discuss
the matter with management. Unless required by law or regulation to do
so, the auditor shall not accept the proposed audit engagement.
11.2 Terms of Engagement
the agreed terms of the audit engagement shall be recorded in an audit
engagement letter or other suitable form of written agreement and shall include:
11.2.1 The objective and scope of the audit of the financial statements;
11.2.2 The responsibilities of the auditor;
11.2.3 The responsibilities of management;
11.2.4 Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
11.2.5 Reference to the expected form and content of any reports to be issued by
the auditor and a statement that there may be circumstances in which a
report may differ from its expected form and content
11.2.6 Audit Remuneration and other matters as agreed between auditor and the
management.
11.3 Recurring Audit.
On recurring audits, the auditor shall assess whether circumstances require the
terms of the audit engagement to be revised and whether there is a need to
remind the entity of the existing terms of the audit engagement
11.3.1 Any indication that the entity misunderstands the objective and scope of
the audit
11.3.2 Any revised or special terms of the audit engagement.
11.3.3 A recent change of senior management.
11.3.4 A significant change in ownership
11.3.5 A significant change in nature or size of the entity‟s business
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11.3.6 A change in legal or regulatory requirements

11.3.7 A change in the financial reporting framework adopted in the preparation
of the financial statements
11.3.8 A change in other reporting requirements
11.4 Limitation on Scope prior to Audit Engagement
11.4.1 If management or those charged with governance impose a limitation on
the scope of the auditor’s work in the terms of a proposed audit engagement
then auditor shall evaluate the possible effect of such changes.
11.4.2 If the auditor believes the limitation will result in the auditor disclaiming
an opinion on the financial statements, the auditor shall not accept such
a limited engagement as an audit engagement, unless required by law or
regulation to do so.
11.5 Acceptance of a change in the terms of engagement
11.5.1 An auditor who, before the completion of the engagement, is requested to
change the engagement to one which provides a lower level of assurance,
s/he should consider the appropriateness of doing so. (Reasons could be a
change in circumstances, a misunderstanding as to the nature of an audit
or related service originally requested, a restriction on the scope of the
engagement)
11.5.2 If the auditor concludes that there is reasonable justification to change
the engagement and if the audit work performed complied with the
SAs applicable to the changed engagement, the report issued would
be appropriate for the revised terms of engagement. In order to avoid
confusion, the report would not include reference to:
(a) the original engagement; or
(b) any procedures that may have been performed in the original
engagement.
11.5.3 If the auditor is unable to agree to a change of the terms of the audit
engagement and is not permitted by management to continue the original
audit engagement, the auditor shall:
(a) Withdraw from the audit engagement where possible under applicable
law or regulation; and
(b) Determine whether there is any obligation, either contractual or
otherwise, to report the circumstances to other parties, such as those
charged with governance, owners or regulators.
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12 Basic Principles Governing an Audit of Financial Statements.

The basic principles which govern the auditor’s professional responsibilities
and which should be complied with wherever an audit is carried are
described below:
12.1 Planning: The auditor should plan his work to enable him to conduct an
effective audit in an efficient and timely manner. Plans should be based
on knowledge of the client’s business.
12.2 Confidentiality: The auditor should respect the confidentiality of information
acquired in the course of his work and should not disclose any such
information to a third party without specific authority or unless there is
a legal or professional duty to disclose.
12.3 Work performed by others: When the auditor delegates work to assistants
or uses work performed by other auditors and experts, he continues 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.
12.4 Accounting system and Internal Control: The auditor should gain an
understanding of the accounting system and related controls and should
study and evaluate the operation of those internal controls upon which he
wishes to rely in determining the nature, timing and extent of other audit
procedures.
12.5 Audit evidence: The auditor should obtain sufficient appropriate audit
evidence through the performance of audit procedures to enable him to
draw reasonable conclusions there from on which to base his opinion
on the financial information.
12.6 Audit Conclusions and Reporting: The auditor should review and assess
the conclusions drawn from the audit evidence obtained and from his
knowledge of business of the entity as the basis for the expression of his
opinion on the financial information.
12.7 Documentation: The auditor should document matters which are important
in providing evidence that the audit was carried out in accordance with the
basic principles.
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12.8 Integrity, objectivity and independence: The auditor should be straight

forward, honest and sincere in his approach to his professional work. He
should maintain an impartial attitude and both be and appear to be
free of any interest which might be regarded, whatever is actual effect,
as being incompatible with integrity and objectivity.
12.9 Skills and Competence: The audit should be performed and the report
prepared with due professional care by persons who have adequate
training, experience and competence in auditing. The auditor requires
specialised skills and competence along with a continuing awareness of
developments on accounting and auditing matters, and relevant regulations
and statutory requirements.
13 Qualities of Auditor:
13.1  The qualities required are tact, caution, firmness, good temper,
integrity, discretion, industry, judgement, patience, clear headedness
and reliability. In addition, he must have the shine of culture for
attaining a great height.
 He must have the highest degree of integrity & objectivity backed by
adequate independence.
 He must have a thorough knowledge of the general principles of law
which govern matters with which he is likely to be in intimate contact.
 He must pursue an intensive programme of theoretical education
in subjects like financial and management accounting, general
management, business and corporate laws, computers and
information systems, taxation, economics, etc.
 The auditor should be equipped not only with a sufficient knowledge
of the way in which business generally is conducted but also with
an understanding of the special features peculiar to a particular
business.
 The auditor, who holds a position of trust, must have the basic human
qualities apart from the technical requirement of professional training
and education.
 He is called upon constantly to critically review financial statements
and it is obviously useless for him to attempt that task unless his own
knowledge is that of an expert.
 He must possess an exhaustive knowledge of accounting in all its
branches along with the practice of auditing.
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INTRODUCTION- AUDITING AND ASSURANCE STANDARD BOARD, AUTHORITY OF THE

DOCUMENTS, CLASSIFICATION OF STANDARDS ETC.
S.N Main Point Details/Sub-point
14 Standard • The IAASB(International Auditing and Assurance Standards
Setting Process Board) functions as an independent standard-setting body under
the auspices of IFAC(International Federation of Accountants).
• The IAASB achieves its various objectives by:
 Establishing high quality auditing standards and
guidance for financial statement audits that are
generally accepted and recognized by investors,
auditors, governments, banking regulators, securities
regulators and other key stakeholders across the
world;
 Establishing high quality standards and guidance for
other types of assurance services on both financial
and non-financial matters;
 Establishing high quality standards and guidance for
other related services;
 Establishing high quality standards for quality control
covering the scope of services addressed by the IAASB;
 Publishing other pronouncements on auditing
and assurance matters, thereby advancing public
understanding of the roles and responsibility of
professional auditors and assurance service providers.
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14.1 Framework of ICAI is a member of the IFAC and is committed to work towards
Standards the implementation of the guidelines issued by the IFAC.
Standard on quality 01-99 This standard applicable
controls(SQC) to all engagements.
Standards on auditing 100-999 Applied in the audit
(SA’s) of Historical financial
information.
Introductory Matters (Not 100-199
yet issued)
General Principles and 200-299
Responsibility
Risk Assessment and 300-499
Response to Assessed Risks
Audit Evidence 500-599
Using the Work of Others 600-699
Audit Conclusion and 700-799
Reporting
Specialized Area 800-899
Standard on Review 2000-2699 Applied in the review
engagements(SRE’s) of Historical financial
information.
Standard on Assurance 3000-3699 Applied to engagements
engagements(SAE’s) other than related to
Historical financial
information.
Standards on Related 4000-4699 Applied to engagements
services(SRS’s) to apply agreed
upon procedures to
information & other
related services such as
compilation.
19
15 Scope and a) To review the existing auditing practices in India and to

Function of develop Statements on Standards on Auditing (SAs) so that
AASB these may be issued by the Council of the Institute
b) The SAs are issued under the authority of the Council of the
Institute
c) AASB also issues Guidance Notes on the issues arising from
the SAs wherever necessary
16 Auditing and Assurance Standards- Classification
16.1 SQC- Standards a) It prescribes General Quality Control Measures to be
on Quality implemented while providing assurance services
Control b) It 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
c) Total Standards Under this Category- 1
16.2 Standards on a) It prescribed Standard audit practices for conducting audit
Auditing of financial statements
b) SAs apply whenever an independent audit is carried
out; that is, in the independent examination of financial
information of any entity, whether profit oriented or not,
and irrespective of its size, or legal form
c) Compliance of SAs is a mandatory requirement as per the
Companies Act, 2013 (refer Sec 143(9) and (10) of Companies
Act, 2013
d) A member who does not perform his audit in accordance
with these statements and fails to disclose the material
departures there from, becomes liable to the disciplinary
proceedings of the Institute under Clause (9) of Part I of the
Second Schedule to the Chartered Accountants Act, 1949.
e) Total Standards Under this Category- 38
f) (HIGHEST LEVEL OF ASSURANCE BUT NOT A GUARANTEE)
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16.3 Standards a) It is prescribed for conducting review of financial statements

on Review b) Review means a moderate level of examination
Engagement c) Example, as per SEBI requirements auditor has to conduct
quarterly review (not an in depth examination) of interim
financial statements
d) Total Standards under this category- 2
(MODERATE LEVEL OF ASSURANCE)
16.4 Standards on a) Special Assurance Assignments other than audit/review of
Assurance financial statements
Engagement b) b) Total Standards under this category- 3
16.5 Standards a) It includes agreed-upon procedures and compilation
on Related engagement.
Services b) It is not an assurance service.
c) Example, certification of facts without expressing an
opinion, assist in preparation of summary or consolidated
financial statements etc.
(NO ASSURANCE ACTIVITY)
17 Authority Attached to the Documents issued by the Institute/MCA
17.1 Statements  issued with a view to securing compliance by members on
matters which, in the opinion of the Council, are critical for
the proper discharge of their functions.
 are mandatory.
 Accordingly, while discharging their attest function, it will
be the duty of the members of the Institute:
(a) to examine whether ‘Statements’ relating to accounting
matters are complied within the presentation of
financial statements covered by their audit. In the
event of any deviation from the ‘Statements’, it will
be their duty to make adequate disclosures in their audit
reports so that the users of financial statements may
be aware of such deviations; and
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(b) 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,
therefrom.
17.2 Guidance Notes  are primarily designed to provide guidance to members on
matters which may arise in the course of their professional
work and on which they may rely in the course of their
professional work and on which they may desire assistance
in resolving issues which may pose difficulty.
 are recommendatory in nature. A member should ordinarily
follow the same except where he is satisfied that in the
circumstances of the case, it may not be necessary to do so.
 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.
 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.
17.3 Accounting They become mandatory on the dates specified in the respective
Standards and document or notified by the council. There can be situations in
Standards on which certain matters are covered both by a ‘Statement’ and
Auditing 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.
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PROFESSIONAL SKEPTICISM
Professional skepticism refers to an attitude that includes a questioning mind being alert
to conditions which may indicate possible misstatement due to error of fraud, and a
critical assessment of audit evidence.
The auditor shall plan and perform an audit with professional skepticism recognising
that circumstances may exist that cause the financial statements to materially
misstated.
Professional skepticism includes being alert to, for example:
 Audit evidence that contradicts other audit evidence obtained.
 Information that brings into question the reliability of documents and responses
to inquiries to be used as audit evidence.
 Conditions that may indicate possible fraud.
 Circumstances that suggest the need for audit procedures in addition to those
required by the SAs.
 Maintaining professional skepticism throughout the audit is necessary if the auditor
is to reduce the risks of:
 Overlooking unusual circumstances.
 Over generalising when drawing conclusions from audit observations.
 Using inappropriate assumptions in determining the nature, timing, and extent of
the audit procedures and evaluating the results thereof.
Professional skepticism is necessary to the critical assessment of audit evidence.

It also includes consideration of the sufficiency and appropriateness of audit evidence
obtained in the light of the circumstances, for example in the case where fraud risk
factors exist and a single document, of a nature that is susceptible to fraud, is the sold
supporting evidence for a material financial statement amount.
The auditor may accept records and documents as genuine unless the auditor has
reason to believe the contrary. Nevertheless, the auditor is required to consider the
reliability of information to be used as audit evidence. In cases of doubt about the
reliability of information or indications of possible fraud, the SAs require that the
auditor investigate further and determine what modifications or additions to audit
procedures are necessary to resolve the matter.
The auditor cannot be expected to disregard pas experience of the honesty and integrity
of the entity’s management and those charged with governance. Nevertheless, a belief
that management and those charged with governance are honest and have integrity
does not relieve that auditor of the need to maintain professional skepticism.
23
PART B - BRIEF ANSWERS – PRACTICE QUESTIONS
Q. No Question and Answer

1 Explain clearly meaning of Auditing. How would you as an auditor perform the
audit
Ans Topic 1.1 & 1.2
2 “The independent audit of an entity’s financial statements is a vital service to
investors, trade payables, and other participants in economic exchange.” Explain
Ans Topic 6
3 State the objectives of Audit according to SA 200
Ans Refer SA 200 from Annexure
4 “The Code of Ethics for Professional Accountants, prepared by the International
Federation of Accountants (IFAC) identifies five types of threats.” Explain
Ans Topic 8.5
5 Explain Inherent Limitations of Auditing
Ans Topic 5
6 Explain Scope of audit and Principal Aspects to be covered
Ans Topic 3
7 Mention the Contents of letter of Engagement
Ans Topic 11.2
8 During the course of audit management of X ltd is proposing some changes in the
terms of engagement. What will be your response.
Ans Topic 11.5
9 Explain the elements of system of quality control
Ans Topic 9
10. There are practical and legal limitations on the auditor’s ability to obtain audit
evidence. Explain with examples.
Ans. The Nature of Audit Procedures: There are practical and legal limitations
on the auditor’s ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide,
intentionally or unintentionally, the complete information that
is relevant to the preparation and presentation of the financial
statements or that has been requested by the auditor.
24
2. Fraud may involve sophisticated and carefully organised schemes

designed to conceal it. Therefore, audit procedures used to gather audit
evidence may be ineffective for detecting an intentional misstatement
that involves, for example, collusion to falsify documentation which
may cause the auditor to believe that audit evidence is valid when it
is not. The auditor is neither trained as nor expected to be an expert
in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing.
Accordingly, the auditor is not given specific legal powers, such as the
power of search, which may be necessary for such an investigation.
11. In case of certain subject matters, limitations on the auditor’s ability to detect
material misstatements are particularly significant. Explain such assertions or
subject matters.
Ans. In the case of certain subject matters, limitations on the auditor’s ability to
detect material misstatements are particularly significant. Such assertions
or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and
transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to
12. As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor
should obtain information considered necessary in the circumstances before
accepting an engagement with a new client, when deciding whether to continue
an existing engagement and when considering acceptance of a new engagement
with an existing client. Explain
Ans. Information which assist the Auditor in accepting and continuing of
relationship with Client: As per SA 220, “Quality Control for an Audit of
Financial Statements” the auditor should obtain information considered
necessary in the circumstances before accepting an engagement with a
new client, when deciding whether to continue an existing engagement
and when considering acceptance of a new engagement with an existing
client. The following information would assist the auditor in accepting and
continuing of relationship with the client:
25
(i) The integrity of the principal owners, key management and those
charged with governance of the entity;
(ii) Whether the engagement team is competent to perform the audit
engagement and has the necessary capabilities, including time and
resources;
(iii) Whether the firm and the engagement team can comply with relevant
ethical requirements; and
(iv) Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship.
26
PART C : MULTIPLE CHOICE QUESTIONS
1. ____________ along with other disciplines such as accounting and law, equips you
with all the knowledge that is required to enter into auditing as a profession.
(a) Auditing (b) Taxation
(c) Finance (d) Law
2. No business or institution can effectively carry on its activities without the help of
proper..............................:
(a) Audit (b) Record and accounts
(c) neither (a) nor (b) (d) both (a) and (b)
3. As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an

audit of financial statements, the overall objectives of the auditor are:
(a) To obtain reasonable assurance (b) To report on the financial statements
(c) Both (a)and (b) above (d) to obtain absolute assurance.
4 (IESBA Code) related to an audit of financial statements establishes which of the

following as the fundamental principle of professional ethics relevant to the auditor
when conducting an audit of financial statements:
(a) professional judgement; (b) professional skepticism;
(c) professional intelligence; (d) Professional competence and due care.
5. The auditor’s _________ safeguards the auditor’s ability to form an audit opinion
without being affected by any influences.
(a) Objectivity (b) independence
(c) Confidentiality (d) Integrity
6. Which of the following is the responsibility of the auditor:

(a) Preparation and presentation of the financial statements in accordance with
applicable financial reporting
(b) Design, implementation and maintenance of internal controls
(c) Express an opinion on the Financial Statements
(d) To obtain limited assurance.
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7. An employee of Fruits and Vegetables Limited was of the opinion that auditor of
a company is required to express an opinion. On which one of the following the
auditor of a company is required to express an opinion:
(a) Only Balance Sheet of the Company.
(b) Financial Statements of the Company.
(c) Only Profit and Loss Account of the Company.
(d) Only Cash Flow Statement of the Company.
8. The auditor of Delicious Sweets Limited was of the opinion that objective of audit
of financial statements of a company is to provide reasonable assurance that
financial statements of that company are free from misstatements. Which type of
misstatements are mentioned by auditor of Delicious Sweets Limited:
(a) Simple (b) Material (c) Easy (d) Competent.
9. If the auditor concludes that there is reasonable justification to change the

engagement and if the audit work performed complied with the SAs applicable to
the changed engagement, the report issued would be appropriate for the revised
terms of engagement. In order to avoid confusion, the report would not include
reference to:
(a) the original engagement; or any procedures that may have been performed in
the original engagement.
(b) the original engagement ;
(c) any procedures that may have been performed in the original engagement
(d) the original engagement and any procedures that may have been performed
in the original engagement.
10. If the auditor is unable to agree to a change of the terms of the audit engagement
and is not permitted by management to continue the original audit engagement,
the auditor shall:
(a) Withdraw from the audit engagement where possible under applicable law or
regulation;
(b) Determine whether there is any obligation, either contractual or otherwise,
to report the circumstances to other parties, such as those charged with
governance, owners or regulators.
(c) Withdraw from the audit engagement where possible under applicable law or
28
regulation and determine whether there is any obligation, either contractual or

otherwise, to report the circumstances to other parties, such as those charged
with governance, owners or regulators.
(d) Withdraw from the audit engagement where possible under applicable law or
regulation or determine whether there is any obligation, either contractual or
otherwise, to report the circumstances to other parties, such as those charged
with governance, owners or regulators.
11. A request from the client for the auditor to change the engagement may result from
1. a change in circumstances affecting the need for the service,
2. a misunderstanding as to the nature of an audit or related service originally
requested
3. a restriction on the scope of the engagement, whether imposed by management
or caused by circumstances.
(a) (1) only (b) (1) and (2)
(c) (1), (2) and (3) (d) (1) or (2) or (3)
12. As explained in SA 200, “Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on Auditing”, _________is
obtained when the auditor has obtained sufficient appropriate audit evidence to
reduce audit risk (i.e., the risk that the auditor expresses an inappropriate opinion
when the financial statements are materially misstated) to an acceptably low level.
(a) absolute assurance (b) limited assurance
(c) reasonable assurance (d) reasonable or absolute assurance
13. ____________refers to 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 for the item to be in accordance with the
applicable financial reporting framework.
(a) Misstatement (b) Fraud (c) Error (d) Fraudulent financial reporting.
14. The type of errors, existence of which becomes apparent in the process of compilation
of accounts is known as:
(a) Self-revealing errors. (b) Intentional errors
(c) Concealed errors (d) Unconcealed errors.
29
15. Which of the following is Incorrect:

(a) An auditor conducting an audit in accordance with SAs is responsible for
obtaining absolute assurance that the financial statements taken as a whole
are free from material misstatement, whether caused by fraud or error.
(b) As described in SA 200, owing to the inherent limitations of an audit, there
is an unavoidable risk that some material misstatements of the financial
statements will not be detected, even though the audit is properly planned
and performed in accordance with the SAs.
(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
16. The factor which distinguishes an error from fraud and other irregularity is:
(a) Whether it is a caused by officer of the entity or employee of the entity
(b) Intention
(c) Materiality
(d) Whether it is caused by the auditor or the client
17. The basic requirement which is absent is auditing is

a) Exact accounts b) Certainty in financial statements
c) Conclusive evidence d) All of the above
18. The agreed terms of the audit engagement shall be recorded in an audit engagement
letter which shall include the following except-
(a) Responsibilities of the auditor
(b) Description of methods to be followed for obtaining audit evidence
(c) Responsibilities of management
(d) Objective and scope of the audit of the financial statements
19. Pick the odd one

a) Preparation of financial statements
b) Designing, implementation and maintenance of internal control system
c) Reporting on true and fair view of financial statements
d) Compliance with the applicable law and regulation
30
20. In which of the following engagement an opinion is expressed on a subject matter

other than the historical financial information
a) Auditing Engagement b) Review Engagement
c) Assurance Engagement d) Related Services Engagement
21. Which of the following is not principal of ethics

a) Objectivity b) Integrity
c) Communication skills d) Professional competence and due care
22. Standards on Auditing are____________

a) Mandatory b) Optional c) Discretionary d) All of these
23. SA Series 200-299 cover the aspects of

a) Introductory matters b) General Principles and Responsibilities
c) Audit Evidence d) Audit Conclusion and Reporting
24. Which of the following is exception of confidentiality by auditor

a) If permitted by client to disclose any information
b) If there is any legal professional duty of auditor to disclose any information
c) Both (a) and (b)
d) None of these
25. The auditor shall establish existence of preconditions for an audit of financial
statements
a) Before confirming common understanding between the auditor and
management of the terms of audit engagement.
b) After confirming common understanding between the auditor and management
of the terms of audit engagement.
c) Before appointment of auditor
d) After the date of auditor’s report.
26. If auditor is requested by management to change the audit engagement to an

engagement that conveys a lower level of assurance, then the auditor shall
a) Reject the management’s request
b) Accept the management’s request
31
c) Determine that there is a reasonable justification for doing so

d) Shall not entertain any such request
27. Which of the following SAs deals with responsibilities of auditor regarding quality
control procedures for an audit of financial statements
a) SA 200 b) SA 210 c) SA 220 d) SA 260
28. The partner who is responsible for the auditing engagement and its performance
and for the report that is issued on behalf of the firm is called as:
a) Active partner b) Performing partner
c) Engagement Partner d) Working Partner
29. Policies and procedures w.r.t human resources address which of the following issues
a) Recruitment b) Capabilities
c) Competence d) All of above
30. If in exceptional circumstances the auditor departs from Standards on Auditing, he

shall___________
a) Document the reason for departure
b) Perform alternative procedures
c) Both (a) and (b)
d) Auditor is not allowed to depart from SAs.
31. Mr. Vijay Kapoor, Chartered Accountant, has been appointed the statutory auditor
by M/s. XYZ Private Limited for the audit of their financial statements for the year
2015-16. The company has mentioned in the audit terms that they will not be able
to provide internal audit reports to Mr. Vijay during the course of audit. Advise,
whether Mr. Vijay should accept the proposed audit engagement and on what
grounds he can accept/ refuse the proposal?
i) As per SA 210 the auditor can refuse to accept the audit engagement as the
management is not giving access to internal audit reports which are necessary
in determining the internal controls in the company.
ii) There is no limitation on the scope of the auditor’s work, so the auditor should
accept the appointment.
iii) The auditor can accept the audit engagement if the management gives
representation on its responsibility.
32
Which of the following option is correct:

a) (ii) only b) Both (i) and (iii) c) Both (ii) and (iii) d) (iii) only
32. Due to inherent limitations of audit, there is ______________ that some mis-
statements will __________
a) Reasonable assurance, not be detected
b) Unavoidable risk, not be detected
c) Avoidable risk, not be detected
d) Unavoidable risk , not be prevented
33. Auditing has all features except

a) Done every financial year b) Based on conclusive evidence
c) Mandatory for companies d) None of the above
34. ‘Goods sent on approval basis’ have been recorded as ‘Credit sales’. This is an example
of _
a) Error of principle b) Error of commission
c) Error of omission d) Error of duplication
35. Independence comprises

a) Independence by mind b) Independence in appearance
c) Both (a) and (b) d) None of these
36. The primary objective of the ordinary examination of financial statement by an

auditor is the expression of an opinion on
a) The competence of management in accounting matters which is implied by
whether the opinion is qualified or not
b) The conformity of the statements with the book of account
c) The conformity of the financial statements with generally accepted auditing
standards applied on a basis consistent with that of the prior year
d) The fairness with which the financial statements present cash flows and results
of operations
33
37. If the professional becomes a witness where the part to litigation is his client, it will
result in
a) Self- review threat b) Advocacy threat
c) Familiarity threat d) Self-interest threat
38. If the professional who is preparing the books of accounts is also auditing the
financial statements, it shall give rise to
a) Self-review threat b) Advocacy threat
c) Familiarity threat d) Self-interest threat
39. Standards on Auditing are issued by

a) Accounting Standard Board b) Quality Review Board
c) Auditing & Assurance Standard Board d) Board of Studies
40. Which of the following is not type of engagement standard

a) Standards on Auditing
b) Standard on Quality Control
c) Standards on Review Engagement
d) Standards on Assurance Engagement
41. _____________ are designed to provide guidance to members on the matters which
may arise in the course of their professional work and on which they may desire
assistance in resolving issues that may pose difficulty.
a) Statements b) Guidance notes
c) Standards on Audit d) All of these
42. For which of the following entities statutory audit of financial statement is not
mandatory
a) Banking Companies b) Insurance Companies
c) Partnership Firm d) One Person Company
43. Reasonable assurance is _______ level of assurance but it is not __________

assurance.
a) High, Absolute b) Absolute, Guaranteed
c) Moderate, Absolute d) None of these
34
44. Which of the following statement is incorrect

a) Sampling is a inherent limitation of audit.
b) Auditor is not an insurer
c) Auditor’s primary responsibility is to detect errors and frauds in financial
statements
d) Auditor needs to be independent
45. When credit purchases of Rs. 5100 is recorded on credit side and credit sales of Rs.
5100 is recorded on debit side, this kind of error is called____________________.
a) Error of omission b) Compensating error
c) Error of principle d) Error of commission.
46. Which of the following error will affect the trial balance
a) Error of partial omission b) Error of principles
c) Error of complete omission d) Compensatory errors
47. Engagement letter is

a) Always required when auditor is appointed
b) Always required when auditor is reappointed
c) Not always required when auditor is reappointed but except for certain
exceptions
d) (a) and (C)
48. Which of the following is not self-revealing error

a) Wages paid for installation of machine debited in wages account.
b) Omission to post a part of a journal entry to ledger
c) A failure to record in the cash book, cash paid into or withdrawn from bank
d) Goods purchased from Mr. A omitted to be recorded.
49. Which of the following in not element of quality control in an audit of financial
statements
a) Leadership Responsibilities
b) Assignment of Engagement Team
c) Acceptance and Continuance of Client Relationship and Audit Engagements
d) Signing on Audit Report
35
50. udging the significance of a matter requires _____of the facts and circumstances.
(a) objective analysis (b) subjective analysis
(c) Both subjective and objective analysis (d) qualitative analysis
51. IESBA Code related to an audit of financial statements establishes which of the
following as the fundamental principles of professional ethics relevant to the
auditor when conducting an audit of financial statements :
(a)
Integrity; (b) Objectivity;
(c) Professional competence and due care; (d) All of the above
52. Loan or guarantee to or from the concerned client is an example of –

(a) Self-review threats (b) Self-interest threats
(c) Advocacy threats (d) Intimidation threats
53. When an auditor deals with shares or securities of the audited company is an
example of :
(a) Self-review threat (b) Self-interest threats
(c) Advocacy threats (d) Intimidation threats
54. __________refers to an attitude that includes a questioning mind, being alert to

conditions which may indicate possible misstatement due to error or fraud, and a
critical assessment of audit evidence.
(a) Professional skepticism (b) Professional Judgment
(c)
Integrity (d) Objectivity
Answer
1 A 9 A 17 D 25 A 33 B 41 B 49 D
2 B 10 C 18 B 26 C 34 A 42 C 50 A
3 C 11 D 19 C 27 C 35 C 43 A 51 D
4 D 12 C 20 C 28 C 36 D 44 C 52 B
5 B 13 A 21 C 29 D 37 B 45 B 53 C
6 C 14 A 22 A 30 C 38 A 46 A 54 A
7 B 15 A 23 B 31 B 39 C 47 D
8 B 16 B 24 C 32 A 40 B 48 A
36
PART E : CORRECT / INCORRECT QUESTIONS
COMMENT ALONGWITH REASONS WHETHER FOLLOWING ARE CORRECT OR INCORRECT.
1. The basic objective of audit does not change with reference to nature, size or form
of an entity
2. The purpose of an audit is to enhance the degree of confidence of intended users in

the financial statements
3. The auditor is not expected to, and cannot, reduce audit risk to zero and cannot
therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error.
4. The audit engagement letter is sent by the client to auditor.
5. Specific disclosure is required of the fundamental accounting assumptions followed

in the financial statements.\
6. An Auditor is considered to lack independence if the partner of the audit firm deals
with shares and securities of the audited entity.
7. The Audit Engagement documentations should ordinarily be retained by the auditor

for minimum of six years from the date of the auditor’s report or the date of the
group auditor’s report, whichever is later.
8. Mr. S, one of the new team members of the auditor of Extremely Effective Limited
was of the view that for the purpose of conducting an audit, only knowledge of
direct tax is required whereas no knowledge of indirect tax is required.
9. According to Mr. H, one of the team members of the auditor of Very Essential Limited
was of the view that no relation exists between accounting and auditing from the
point of view of a company.
10. SA 210 does not require the auditor to agree management’s responsibilities in an
engagement letter or other suitable form of written agreement.
37
11. Preconditions for an audit have not been defined in SA 210 “Agreeing the Terms of
Audit Engagements.”
12. Subjective examination connotes critical examination and scrutiny of the accounting
statements.
38
PART F : CORRECT / INCORRECT ANSWERS
1. Correct: An audit is an independent examination of financial information of any

entity, whether profit oriented or not, and irrespective of its size or legal form, when
such an examination is conducted with a view to expressing an opinion thereon. It
is clear that the basic objective of auditing, i.e., expression of opinion on financial
statements does not change with reference to nature, size or form of an entity.
2. Correct: As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct
of an Audit in Accordance with Standards on Auditing”, the purpose of an audit is to
enhance the degree of confidence of intended users in the financial statements. This
is achieved by the expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with an applicable
financial reporting framework.
3. Correct: As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct
of an Audit in Accordance with Standards on Auditing”, the auditor is not expected
to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement due to
fraud or error. This is because there are inherent limitations of an audit, which result
in most of the audit evidence on which the auditor draws conclusions and bases the
auditor’s opinion being persuasive rather than conclusive.
4. Incorrect: As per SA 210 “Agreeing the Terms of Audit Engagements”, the Audit
engagement letter is sent by the auditor to his client.
5. Incorrect, as per AS 1, “Disclosure of Accounting Policies”, specific disclosure of the

fundamental accounting assumption is required if they are not followed in the
6. Correct: As per section 141 (3)(d), a person shall not be eligible for appointment as
an auditor of a company namely- a person, 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. From the above it can be concluded
that if the partner deals with shares and securities of the audited entity, he would be
lacking independence, hence, disqualified to be appointed as an auditor.
39
Further, the Code of Ethics for Professional Accountants, prepared by the International
Federation of Accountants (IFAC) identifies five types of threats and if partner of the
firm deals with shares and securities of the audited firm then such threat is known
as the Advocacy Threats and auditor will be lacking independence.
7. Incorrect: SQC 1 requires firms to establish policies and procedures for the retention of
engagement documentation. The retention period for audit engagements ordinarily
is no shorter than seven years from the date of the auditor’s report, or, if later, the
date of the group auditor’s report.
8. Incorrect: The viewpoint of Mr. S is incorrect because for the purpose of conducting
an audit, proper knowledge of both direct tax as well as indirect tax is required.
9. Incorrect: The viewpoint of Mr. H is incorrect because there exists a proper relation
between accounting and auditing from the point of view of a company. Audit is
conducted for financial statements of a company and those financial statements are
prepared with the help of books of accounts of that company. In order to properly
conduct an audit of a company, an auditor is required to be aware of accounting
principles and accounting policies of that company.
10. Incorrect: SA 210 requires the auditor to agree management’s responsibilities in an

engagement letter or other suitable form of written agreement.
11. Incorrect: As per SA 210 “Agreeing the Terms of Audit Engagements”, preconditions
for an audit may be defined as the use by management of an acceptable financial
reporting framework in the preparation of the financial statements and the
agreement of management and, where appropriate, those charged with governance
to the premise on which an audit is conducted.
12. Incorrect: Objective examination connotes critical examination and scrutiny of the
accounting statements of the undertaking with a view to assessing how far the
statements present the actual state of affairs in the correct context and whether
they give a true and fair view about the financial results and state of affairs.
40
AUDIT STRATEGY PLANNING

AND PROGRAMMING
Sr.No ICAI module reference JKSC Textbook

Reference
1 Audit Planning Topic 1 & 2
2 Audit Strategy Topic 3
3 Relationship between audit strategy and audit plan Topic 4
4 Development of Audit Plan Topic 1.2
5 Audit Planning- A Continuous Process Topic 1.3
6 Overall audit strategy and the audit plan- the Topic 3

auditor’s responsibility
7 Changes to the planning decisions during the course Topic 6
of audit
8 Direction Supervision and Review Topic 7
9 Documentation of Audit Plan End of Topic 8
10 Audit Programme Topic 8
11 Quality Control for Audit Work- Delegation and SA 220- Chapter 1

Supervision of Audit Work
12 Audit Planning and Materiality Topic 9
41
Sr.No Particulars
1 Audit planning- Basics
1.1 The auditor should plan his work to enable him to conduct an effective audit in an
efficient and timely manner.
1.2 Plans should be based on knowledge of the client’s business”. Plans should be
made to cover, among other things:
1.2.1 acquiring knowledge of the client’s accounting systems, policies and
internal control procedures;
1.2.2 establishing the expected degree of reliance to be placed on internal
control;
1.2.3 determining and programming the nature, timing, and extent of the audit
procedures to be performed; and
1.2.4 Coordinating the work to be performed.
1.3 SA-300, “Planning an Audit of Financial Statements” further expounds this
principle.
According to it, planning is not a discrete phase of an audit, but rather a
continual and iterative process that often begins shortly after (or in connection
with) the completion of the previous audit and continues until the completion of
the current audit engagement.
For example, planning includes the need to consider,:
1. The analytical procedures to be applied as risk assessment procedures.
2. Obtaining a general understanding of the legal and regulatory
framework applicable to the entity and how the entity is complying with
that framework.
3. The determination of materiality.
4. The involvement of experts.
5. The performance of other risk assessment procedures
2 Audit Planning- Benefits
Adequate planning benefits the audit of financial statements in several ways,
including the following:
2.1 Helping the auditor to devote appropriate attention to important areas of
the audit.
2.2 Helping the auditor identify and resolve potential problems on a timely
basis.
42
2.3 Helping the auditor properly organize and manage the audit engagement
so that it is performed in an effective and efficient manner.
2.4 Assisting in the selection of engagement team members with appropriate
levels of capabilities and competence to respond to anticipated risks, and
the proper assignment of work to them.
2.5 Facilitating the direction and supervision of engagement team members
and the review of their work
3 Audit Strategy
3.1  The auditor shall establish an overall audit strategy that sets the
scope, timing and direction of the audit, and that guides the development
of the audit plan.
 The process of establishing the overall audit strategy assists the auditor
to determine such matters as:
3.1.1 The resources to deploy for specific audit areas- such as the use of
appropriately experienced team members for high risk areas or the
involvement of experts on complex matters
3.1.2 The amount of resources to allocate to specific audit areas- such as the
number of team members assigned to observe the inventory count at
material locations, the extent of review of other auditors’ work in the case
of group audits, or the audit budget in hours to allocate to high risk areas
3.1.3 When these resources are to be deployed- such as whether at an interim
audit stage or at key cut-off dates
3.1.4 How such resources are managed- such as when team meetings are
expected to be held, how engagement partner and manager reviews are
expected to take place (for example, on-site or off -site), and whether to
complete engagement quality control reviews.
3.2 Factors to be considered while developing overall audit strategy:
In establishing the overall audit strategy, the auditor shall:
3.2.1 Identify the characteristics of the engagement that define its scope;
example: The expected audit coverage
3.2.2 Ascertain the reporting objectives of the engagement to plan the timing
of the audit and the nature of the communications required; example: The
entity’s timetable for reporting
3.2.3 Consider the factors that are important in directing the engagement team’s
efforts
43
3.2.4 Consider the results of preliminary engagement activities and knowledge

gained on other engagements performed by the engagement partner.
3.2.5 Ascertain the nature, timing and extent of resources
4 Relationship between plan and strategy
4.1 Overall Audit plan includes:
4.1.1 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”.
4.1.2 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”.
4.1.3 Other planned audit procedures that are required to be carried out so that
the engagement complies with SAs
4.2 Once the overall audit strategy has been established, an audit plan can
be developed to address the various matters identified in the overall audit
strategy, taking into account the need to achieve the audit objectives
through the efficient use of the auditor’s resources.
4.3 The establishment of the overall audit strategy and the detailed audit plan
are not necessarily discrete or sequential processes, but are closely inter-
related since changes in one may result in consequential changes to the
other.
5 Knowledge of Client’s business- SA 315
Without adequate knowledge of client’s business, a proper audit is not possible
As per SA-315, “Identifying and Assessing the Risk of Material Misstatement
through Understanding the Entity and Its Environment”, the auditor shall obtain
an understanding of the following:
5.1 Relevant industry, regulatory and other external factors including the
applicable financial reporting framework
5.2 The nature of the entity, including:
(i) its operations;
(ii) its ownership and governance structures;
(iii) the types of investments that the entity is making and plans to make,
including investments in special-purpose entities; and
(iv) the way that the entity is structured and how it is financed;
to enable the auditor to understand the classes of transactions, account
balances, and disclosures to be expected in the financial statements.
44
5.3 The entity’s selection and application of accounting policies, including

the reasons for changes thereto. The auditor shall evaluate whether the
entity’s accounting policies are appropriate for its business and consistent
with the applicable financial reporting framework and accounting policies
used in the relevant industry.
5.4 The entity’s objectives and strategies, and those related business risks that
may result in risks of material misstatement
5.5 The measurement and review of the entity’s financial performance.
The understanding establishes a frame of reference within which the auditor plans the audit
and exercises professional judgment throughout the audit, for example, when:
a) Assessing risks of material misstatement of the financial statements
b) Determining materiality in accordance with SA 320
c) Considering the appropriateness of the selection and application of accounting
policies
d) Identifying areas where special audit consideration may be necessary, for example,
related party transactions, the appropriateness of management’s use of the going
concern assumption, or considering the business purpose of transactions
e) Evaluating the sufficiency and appropriateness of audit evidence obtained, such
as the appropriateness of assumptions and of management’s oral and written
representations
6 Revision of plan and strategy

6.1 The auditor shall update and change the overall audit strategy and the
audit plan as necessary during the course of the audit
6.2 As a result of unexpected events, changes in conditions, or the audit
evidence obtained from the results of audit procedures, the auditor may
need to modify the overall audit strategy and audit plan and thereby the
resulting planned nature, timing and extent of further audit procedures,
based on the revised consideration of assessed risks.
6.3 This may be the case when information comes to the auditor’s attention
that differs significantly from the information available when the auditor
planned the audit procedures.
For example, audit evidence obtained through the performance of
substantive procedures may contradict the audit evidence obtained through
tests of controls
45
7 The nature, timing and extent of the direction and supervision of engagement
team members and review of their work vary depending on many factors,
including:
7.1 The size and complexity of the entity.
7.2 The area of the audit.
7.3 The assessed risks of material misstatement
7.4 The capabilities and competence of the individual team members performing
the audit work.
8 Audit Programme
8.1 An audit programme consists of a series of verification procedures to be
applied to the financial statements and accounts of a given company
for the purpose of obtaining sufficient evidence to enable the auditor to
express an informed opinion on such statements.
8.2 In other words, an audit programme is a detailed plan of applying the audit
procedures in the given circumstances with instructions for the appropriate
techniques to be adopted for accomplishing the audit objectives.
8.3 Points to be considered while constructing programme
8.3.1 Stay within the scope and limitation of the assignment.
8.3.2 Determine the evidence reasonably available and identify the best evidence
for deriving the necessary satisfaction.
8.3.3 Apply only those steps and procedures which are useful in accomplishing
the verification purpose in the specific situation.
8.3.4 Consider all possibilities of error.
8.3.5 Co-ordinate the procedures to be applied to related items
8.4 Advantages
8.4.1 Provides Assistance:- It provides the assistance for carrying out the audit
with total and clear set of instructions of the work generally to be done.
8.4.2 Essential:- It is essential for major audits to provide a total perspective of
the work.
8.4.3 Selection of Assistants:- It helps in selection of assistants for the jobs on
the basis of capability.
8.4.4 Accountability:- Since assistants put their signature on programme, it is
possible to fix responsibility for work done.
8.4.5 Serves as a Guide:- It serves as a guide for audits to be carried out in the
succeeding year.
46
8.4.6 Serves as evidence:- A properly drawn up audit programme serves as

evidence in the event of any charge of negligence being brought against
the auditor.
8.4.7 Check the progress:- The principal can control the progress of the various
audits in hand by examination of audit programmes initiated by the
assistants deputed to the jobs for completed work.
8.4.8 Systematic work:- Without a written and pre-determined programme,
work is necessarily to be carried out on the basis of some ‘mental’ plan. In
such a situation there is always a danger of ignoring or overlooking certain
books and records.
8.5 Disadvantages
8.5.1 The work may become mechanical and particular parts of the programme
may be carried out without any understanding of the object of such parts
in the whole audit scheme.
8.5.2 The programme often tends to become rigid and inflexible following set
grooves; the business may change in its operation of conduct, but the old
programme may still be carried on. Changes in staff or internal control
may render precaution necessary at points different from those originally
decided upon.
8.5.3 Inefficient assistants may take shelter behind the programme i.e. defend
deficiencies in their work on the ground that no instruction in the matter is
contained therein.
8.5.4 A hard and fast audit programme may kill the initiative of efficient and
enterprising assistants.
8.6 Developing the Audit programme
8.6.1 Written Audit Programme :
The auditor should prepare a written audit programme setting forth the
procedures that are needed to implement the audit plan.
8.6.2 Audit Objective and Instruction to Assistants :
The programme may also contain the audit objectives for each area
and should have sufficient details to serve as a set of instructions to the
assistants as a means to control the proper execution of the work.
47
8.6.3 Reliance on Internal Controls :

In preparing the audit programme, the auditor, may wish to rely on certain
internal controls in determining the nature, timing and extent of required
audit procedures. However, the auditor may decide not to rely on internal
controls when there are other more efficient ways of obtaining sufficient
appropriate audit evidence.
8.6.4 Timings of Performance of Audit Procedures :
The auditor normally has flexibility in deciding when to perform audit
procedures. However, in some cases, the auditor may have no discretion as
to timing, for example, when observing the taking of inventories by client
personnel or verifying the cash balances at the year-end.
8.6.5 Audit Planning :
The audit planning ideally commences at the conclusion of the previous
year’s audit, and along with the related programme, it should be
reconsidered for modification as the audit progresses.
 Documentation of plan and strategy
DOCUMENTATION SHALL INCLUDE:
> the overall audit strategy;
> audit plan
> any significant changes made during the audit engagement to the overall
audit strategy or the audit plan, and the reasons for such changes
> A summary of discussions with the entity’s key decision makers
> Documentation of audit committee pre-approval of services, where
required.
> Audit documentation access letters
> Other communications or agreements with management or those charged
with governance regarding the scope, or changes in scope, of our services
> Previous Auditor’s report on the entity’s financial statements
9 Materiality
9.1 Financial statements should disclose all ‘material items, i.e. the items
the knowledge of which might influence the decisions of the user of the
financial statement. Materiality is not always a matter of relative size. For
example a small amount lost by fraudulent practices of certain employees
can indicate a serious flaw in the enterprise’s internal control system
requiring immediate attention to avoid greater losses in future. In certain
cases quantitative limits of materiality is specified. A few of such cases are
given below:
48
(a) A company should disclose by way of notes additional information

regarding any item of income or expenditure which exceeds 1% of
the revenue from operations or `1,00,000 whichever is higher (Refer
general Instructions for preparation of Statement of Profit and Loss in
Schedule III to the Companies Act, 2013).
(b) A company should disclose in Notes to Accounts, shares in the
company held by each shareholder holding more than 5 per cent
shares specifying the number of shares held.
9.2 Standard on Auditing (SA) -320 on “Materiality in Planning and Performing
an Audit” deals with the auditor’s responsibility to apply the concept of
materiality in planning and performing an audit of financial statements.
SA 450 explains how materiality is applied in evaluating the effect of
identified misstatements on the audit and of uncorrected misstatements
on the financial statements.
Financial reporting frameworks often discuss the concept of materiality in
the context of the preparation and presentation of financial statements.
Although financial reporting frameworks may discuss materiality in
different terms, they generally explain that:
1. Misstatements are material if expected to influence the economic
decisions of users taken on the basis of the financial statements.
2. Judgments about materiality are affected by the size or nature of a
misstatement and
3. Judgments about matters that are material are based on a
consideration of the common financial information needs of users as
a group.
Such a discussion, if present in the applicable financial reporting framework,
provides a frame of reference to the auditor in determining materiality for
the audit. If the applicable financial reporting framework does not include
a discussion of the concept of materiality, the characteristics referred above
provide the auditor with such a frame of reference.
49
9.3 The auditor’s determination of materiality is a matter of professional

judgment, and is affected by the auditor’s perception of the financial
information needs of users of the financial statements. In this context, it is
reasonable for the auditor to assume that users:
(a) Have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information in the financial
statements with reasonable diligence;
(b) Understand that financial statements are prepared, presented and
audited to levels of materiality;
(c) Recognize the uncertainties inherent in the measurement of amounts
based on the use of estimates, judgment and the consideration of
future events; and
(d) Make reasonable economic decisions on the basis of the information
in the financial statements.
9.4 Performance Materiality:
When establishing the overall audit strategy, the auditor shall determine
materiality for the financial statements as a whole. If, in the specific
circumstances of the entity, there is one or more particular classes of
transactions, account balances or disclosures for which misstatements
of lesser amounts than the materiality for the financial statements as a
whole could reasonably be expected to influence the economic decisions of
users taken on the basis of the financial statements, the auditor shall also
determine the materiality level or levels to be applied to those particular
classes of transactions, account balances or disclosures.
Performance materiality means the amount or amounts set by the auditor
at less than materiality for the financial statements as a whole
9.5 Benchmark Selection:
 Determining materiality involves the exercise of professional judgment.
A percentage is often applied to a chosen benchmark as a starting point in
determining materiality for the financial statements as a whole.
 Factors that may affect the identification of an appropriate benchmark
include the following:
9.5.1 The elements of the financial statements. Example: Assets, liabilities,
equity, revenue, expenses
9.5.2 Whether there are items on which the attention of the users of the particular
entity’s financial statements tends to be focused.
50
9.5.3 The nature of the entity, where the entity is at in its life cycle, and the
industry and economic environment in which the entity operates;
9.5.4 The entity’s ownership structure and the way it is financed.
9.5.5 The relative volatility of the benchmark
9.6 Revision in Materiality
9.6.1 Materiality for the financial statements as a whole may need to be revised
as a result of a change in circumstances that occurred during the audit (for
example, a decision to dispose of a major part of the entity’s business),
new information, or a change in the auditor’s understanding of the entity
and its operations as a result of performing further audit procedures
9.6.2 If the auditor concludes that a lower materiality for the financial statements
as a whole than that initially determined is appropriate, the auditor shall
determine whether it is necessary to revise performance materiality, and
whether the nature, timing and extent of the further audit procedures
remain appropriate.
9.7 Documenting Materiality:
The audit documentation shall include the following amounts and the factors
considered in their determination:
9.7.1 Materiality for the financial statements as a whole
9.7.2 If applicable, the materiality level or levels for particular classes of
transactions, account balances or disclosures
9.7.3 Performance materiality
9.7.4 Any revision of the above as the audit progressed
10 Mention the factors to be considered in development of an overall plan:
10.1 The terms of his engagement and statutory responsibilities
10.2 Nature and timing of reports
10.3 Applicable legal or statutory requirements
10.4 Accounting policies adopted by the client
10.5 Effect of new accounting or auditing pronouncements on the audit
10.6 Identification of significant audit areas
10.7 Setting of materiality levels for audit purposes
10.8 The degree of reliance on accounting system and internal control
10.9 Possible rotation of emphasis on specific audit areas
10.10 The nature and extent of audit evidence to be obtained
10.11 The work of internal auditors and the extent of their involvement
10.12 The involvement of other auditors
10.13 The involvement of experts.
51
10.14 The allocation of work between joint auditors

10.15 Establishing and coordinating staffing requirements
52
Q.No Question and Answer

1 “Once the overall audit strategy has been established, an audit plan can
be developed to address the various matters identified in the overall audit
strategy” Explain
Ans The establishment of the overall audit strategy and the detailed audit plan
are not necessarily discrete or sequential processes, but are closely inter-
related since changes in one may result in consequential changes to the
other.
The auditor shall develop an audit plan that shall include a description of
(a) The nature, timing and extent of planned risk assessment procedures, as
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 Planning is not a discrete phase of an audit, but rather a continual and

iterative process”. Discuss
Ans Topic 1.3
Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begins shortly after (or in connection with) the
completion of the previous audit and continues until the completion of the
current audit engagement.
Planning, however, includes consideration of the timing of certain activities
and audit procedures that need to be completed prior to the performance
of further audit procedures.
For example, planning includes the need to consider matters such as:
1. The analytical procedures to be applied as risk assessment procedures.
2. Obtaining a general understanding of the legal and regulatory
framework applicable to the entity and how the entity is complying with
that framework.
3. The determination of materiality.
4. The involvement of experts.
5. The performance of other risk assessment procedures
53
3 “The nature, timing and extent of the direction and supervision of

engagement team members and review of their work vary depending on
many factors.” Explain
Ans Topic 7
Factors affecting DSR:
1. The size and complexity of the entity.
2. The area of the audit.
3. The assessed risks of material misstatement.
4. The capabilities and competence of the individual team members
performing the audit work
4 “The utility of the audit programme can be retained and enhanced only
by keeping the programme and also the client’s operations and internal
control under periodic review so that inadequacies or redundancies of the
programme may be removed” Discuss stating clearly the advantages of an
audit programme.
Ans Topic 8.4
The advantages of an audit programme are:
a) It provides the assistant carrying out the audit with total and clear set
of instructions of the work generally to be done.
b) It is essential, particularly for major audits, to provide a total perspective
of the work to be performed.
c) Selection of assistants for the jobs on the basis of capability becomes
easier when the work is rationally planned, defined and segregated.
d) Without a written and pre-determined programme, work is unorganised.
e) The assistants, by putting their signature on programme, accept the
responsibility.
f) The principal can control the progress of the various audits in hand by
examination of audit programmes initiated by the assistants deputed
to the jobs for completed work.
5 “Determining materiality involves the exercise of professional judgment”.
Discuss stating the factors that may affect the identification of an
appropriate benchmark. Also give examples“Determining materiality
involves the exercise of professional judgment”. Discuss stating the factors
that may affect the identification of an appropriate benchmark. Also give
examples
Ans Topic 9.5
54
1. .......... sets the scope, timing & direction of the audit and guides the development
of the more detailed plan.
(a) Audit Programme (b) Overall Audit Strategy
(c) Completion Memorandum (d) Audit Plan
2. Planning is ______ process of an audit that often begins shortly after (or in connection
with) the completion of the previous audit and continues until the completion of the
current audit engagement:
(a)
continuous (b) discrete
(c) neither continuous nor discreet (d) strategic
3. Statement 1: The establishment of the overall audit strategy and the detailed audit
plan are not necessarily discrete or sequential process but are closely inter-related.
Statement 2: The auditor shall establish an overall audit strategy that guides the
development of audit plan.
(a) only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both Statements 1 & 2 are correct
(d) Both Statements 1 & 2 are incorrect
4. Which of the following is not addressed by the overall audit strategy :

(a) scope of the audit (b) timing of the audit
(c) direction of the audit (d) monitoring of the audit
5. The overall audit strategy and the audit plan remain the _______ responsibility
(a)
auditor’s (b) management’s
(c) those charged with governance.
(d) both management and those charged with governance.
6. Determining a percentage to be applied to a chosen benchmark (in relation to

materiality) involves the exercise of ________
(a) Independence (b) Professional judgement
(c) Professional skepticism (d) Professional behaviour.
55
7. Which of the following is not an example of benchmarks in determining materiality

for the Financial Statements as whole:
(a) Profit before tax (b) total revenue
(c) audit programme (d) total equity
8. Which of the following is correct :

(a) The auditor shall establish an audit plan that sets the scope, timing and
direction of the audit, and that guides the development of the overall audit
strategy.
(b) The auditor shall establish an overall audit strategy that sets the scope, timing
and direction of the audit, and there is no need to guide the development of the
audit plan.
(c) The auditor shall establish an overall audit strategy that sets the scope, timing
and direction of the audit, and that guides the development of the audit plan.
(d) The auditor shall establish an audit plan that sets the scope, timing and
direction of the audit, and that there is no need to guide the development of
the overall audit strategy.
9. Planning an audit involves

(a) establishing the overall audit strategy for the engagement and developing an
audit plan.
(b) establishing the overall audit plan for the engagement and developing an audit
strategy.
(c) establishing the overall audit plan for the engagement
(d) developing an audit strategy.
10. When planning the audit,

(a) the auditor considers what would make the financial information materially
misstated.
(b) the auditor need not consider what would make the financial information
materially misstated.
(c) the auditor need not consider what would make the financial information
materially misstated at planning stage
(d) the auditor needs to consider what would make the financial information
materially misstated while conducting audit only
56
11. SA 320 on “Materiality in Planning and Performing an Audit” requires that an auditor
(a) should not consider materiality and its relationship with audit risk while
conducting an audit.
(b) should consider materiality and its relationship with audit risk while conducting
an audit.
(c) should not consider materiality but should consider its relationship with audit
risk while conducting an audit.
(d) should consider materiality but need not consider its relationship with audit
risk while conducting an audit.
12. Once the overall audit strategy has been established, _______can be developed
to address the various matters identified in the overall audit strategy, taking into
account the need to achieve the audit objectives through the efficient use of the
auditor’s resources.
(a) audit strategy (b) audit plan
(c) audit plan and audit strategy (d) audit note book
13. The auditor shall develop an audit plan that shall include a description of:
(a) The nature, timing and extent of planned risk assessment procedures
(b) The nature, timing and extent of planned further audit procedures at the
assertion level.
(c) Other planned audit procedures that are required to be carried out so that the
engagement complies with SAs.
(d) All of the above
14. Auditor can obtain knowledge of client’s business from

a) Discussion with people within client entity
b) Publication relating to industry
c) Previous experience
d) All of these
15. Audit materiality is to be considered from

a) Qualitative angle b) Quantitative angle
57
16. An auditor obtains knowledge about a new client’s business and its industry to
a) Make constructive suggestions concerning improvements to the client’s internal
control system.
b) Evaluate the appropriateness of audit evidence obtained
c) Understand the events and transactions that may have an effect on client’s
d) All of the above
17. Benefit(s) of audit planning is

a) Helping auditor to devote appropriate attention on important areas of the
audit
b) Better preparation of engagement letter
c) Effective communication with retiring auditor
d) It ensure compliance with applicable law and regulation
18. Which of the following is incorrect

a) In establishing the audit strategy the auditor shall identify characteristics of
the engagement that define its scope.
b) The auditor shall develop an audit plan that shall include a description of
the nature, timing and extent of risk assessment procedures and further audit
procedures which are proposed to be performed.
c) The auditor shall establish audit strategy on the basis of overall audit plan.
d) The auditor shall update and change the audit strategy and audit plan as
necessary during course of the audit.
19. Which of the following in incorrect w.r.t audit programme

a) An audit programme consists of a series of verification procedures to be applied.
b) It is desirable in respect of each audit and more particularly for bigger audits
an audit programme should be drawn up.
c) An audit programme is a summarized plan
d) There should be periodic review of the audit programme to assess whether the
same continues
20. Responsibility fixing is a feature of

a)
Audit plan b) Audit
c) Audit programme d) All of the above
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21. With reference to SA 300, the auditor shall document:

(a) The overall audit strategy
(b) The audit plan
(c) Any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes.
Answer
1 B 5 A 9 A 13 D 17 A 21 D
2 A 6 B 10 A 14 D 18 C
3 C 7 C 11 B 15 C 19 C
4 D 8 C 12 B 16 C 20 C
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PART D : CASE STUDY BASED MCQ’s
CASE 1. M/s JK & Associates have been appointed as auditors of Venus Ltd. For the
financial year 2019-20. The team consist of Mr. J & Mr. K both Chartered Accountants
as also the engagement partners and the audit staff consisting of 2 article assistants.
While starting the audit work of Venus Ltd, the engagement partners briefed the audit
staff about the audit work, areas to be covered and the various auditing concepts and
their application in the audit of Venus Ltd along with applicable Standard on Auditing.
Various topics like audit planning, overall audit strategy, audit programme were discussed
in detail. The team was told about the purpose and implication of various statements
and guidance notes issued by the Institute of Chartered Accountants of India (ICAI) from
time to time. Mr. K also briefed the team about the concept of materiality to be applied
while planning and performing audit. The team was also explained in detail about the
area where benchmark materiality can be applied in case of Venus Ltd.
Based on the above facts, answer the following:-
1 .........sets the scope, timing & direction of the audit and guides the development of
the more detailed plan.
(a) Audit Programme (b) Overall Audit Strategy
(c) Completion Memorandum (d) Audit Plan
2 Statement 1: The establishment of the overall audit strategy and the detailed audit
plan are not necessarily discrete or sequential process but are closely inter-related.
Statement 2: The auditor shall establish an overall audit strategy that guides the
development of audit plan.
(a) Only Statement 1 is correct (b) Only Statement 2 is correct
(c) Both Statements 1 & 2 are correct (d) Both Statements 1 & 2 are incorrect
3 .........means the amount set by the auditor at less than materiality for the financial
statements as a whole to reduce to an appropriately low level the probability that
the aggregate of uncorrected and undetected misstatement exceeds materiality for
the financial statements as a whole :-
(a) Benchmark Materiality (b) Materiality in Planning
(c) Performance Materiality (d) Materiality.
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4. Which of the following is not an example of benchmark that can be used in

determining the materiality in the case of financial statements:-
(a) Total Revenue (b) Profit before tax
(c) Net Asset Value (d) None of the above
5. (i) Guidance notes issued by ICAI provide guidance to members on matters which
may arise in the course of their professional work.
(ii) Statements are issued by ICAI with a view to secure compliance by members on
some matters.
(iii) Guidance notes are recommendatory in nature.
(iv) Statements are mandatory in nature.
(a) All the above statements are correct. (b) Statements 1 & 2 are correct
(c) Statements 1, 2 & 3 are correct (d) Statements 1,2 & 4 are correct
Answer
1 b 2 c 3 c 4 d 5 a
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COMMENT ALONGWITH REASONS WHETHER FOLLOWING ARE CORRECT OR INCORRECT.
1. The establishment of the overall audit strategy and the detailed audit plan are
not necessarily discrete or sequential processes, but are closely interrelated since
changes in one may result in consequential changes to the other.
2. Establishing an overall audit strategy that sets the scope, timing and direction of
the audit, and that guides the development of the audit plan is prerogative of the
management.
3. Planning is a discrete phase of an audit
4. Materiality for the financial statements as a whole (and, if applicable, the materiality
level or levels for particular classes of transactions, account balances or disclosures)
does not need any revision.
5. A detailed Audit Programme once prepared for a business can be used for all
business under all circumstances.
6. The audit plan is more detailed than the overall audit strategy
7. Overall audit plan sets the scope, timing and direction of the audit, and guides the
development of the more detailed audit strategy
8. The auditor need not discuss elements of planning with the entity’s management in
any case.
9. There is no relation between Audit Plans and knowledge of the client’s business
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1. Correct: Once the overall audit strategy has been established, an audit plan can be
developed to achieve the audit objectives through the efficient use of the auditor’s
resources. The establishment of the overall audit strategy and the detailed audit
plan are not necessarily discrete or sequential processes, but are closely inter-
related since changes in one may result in consequential changes to the other.
2. Incorrect. The auditor shall establish an overall audit strategy that sets the scope,
timing and direction of the audit, and that guides the development of the audit
plan.
3. Incorrect. Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begin shortly after (or in connection with) the completion
of the previous audit and continues until the completion of the current audit
engagement. Planning, however, includes consideration of the timing of certain
activities and audit procedures that need to be completed prior to the performance
of further audit procedures
4. Incorrect: Materiality for the financial statements as a whole (and, if applicable, the
materiality level or levels for particular classes of transactions, account balances
or disclosures) may need to be revised as a result of a change in circumstances that
occurred during the audit (for example, a decision to dispose of a major part of the
entity’s business), new information, or a change in the auditor’s understanding of
the entity and its operations as a result of performing further audit procedures.
5. Incorrect. Businesses vary in nature, size and composition; work which is suitable
to one business may not be suitable to others; efficiency and operation of internal
controls and the exact nature of the service to be rendered by the auditor are the other
factors that vary from assignment to assignment. On account of such variations,
evolving one audit programme applicable to all business under all circumstances is
not practicable.
6. Correct. 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. Planning for these audit procedures takes place over the course of
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the audit as the audit plan for the engagement develops.
7. Incorrect: Overall audit strategy sets the scope, timing and direction of the audit,
and guides the development of the more detailed audit plan.
8. Incorrect: The auditor may decide to discuss elements of planning with the entity’s
management to facilitate the conduct and management of the audit engagement.
9. Incorrect: The auditor should plan his work to enable him to conduct an effective
audit in an efficient and timely manner. Plans should be based on knowledge of the
client’s business
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AUDIT DOCUMENTATION
AND EVIDENCE
Sr.No ICAI module reference JKSC Textbook

Reference
1 Audit Documentation SA 230 Topic 1
\
2 SA 500 Audit Evidence Topic 2
3 SA 315 & 330 Audit Procedures Topic 3
4 SA 580 Written Representation Topic 5
5 SA 501 Audit Evidence- Specific consideration for Topic 6

selected items
6 SA 505 External Confirmation Topic 4
7 SA 510 Initial Audit Engagement Topic 7
8 SA 550 Related Party Topic 8
9 Concept of true and fair view Topic 11
10 SA 560 Subsequent Events Topic 9
11 SA 570 Going Concern Topic 10
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Sr.No Particulars
1 SA 230- Audit Documentation
1.1 Meaning:
 Audit documentation refers to the record of audit procedures performed,
relevant audit evidence obtained, and conclusions the auditor reached.
 Audit documentation provides:
(a) evidence of the auditor’s basis for a conclusion about the achievement of the
overall objectives of the auditor; and
(b) Evidence that the audit was planned and performed in accordance with SAs
and applicable legal and regulatory requirements.
1.2 Purpose of Documentation
1.2.1 Assisting the engagement team to plan and perform the audit.
1.2.2 Assisting members of the engagement team to direct and supervise the
audit work, and to discharge their review responsibilities.
1.2.3 Enabling the engagement team to be accountable for its work.
1.2.4 Retaining a record of matters of continuing significance to future audits.
1.2.5 Enabling the conduct of quality control reviews and inspections.
1.2.6 Enabling the conduct of external inspections in accordance with applicable
legal, regulatory or other requirements
1.3 Form, Content and Extent of Documentation
1.3.1 The nature, timing, and extent of the audit procedures performed to
comply with the SAs and applicable legal and regulatory requirements. In
Documenting this, the auditor shall record:
(i) identifying characteristics of the specific items or matters tested
(ii) Who performed the audit work and the date such work was completed
(iii) Who reviewed the audit work performed and the date and extent of
such review
1.3.2 The results of the audit procedures performed, and the audit evidence
obtained
1.3.3 Significant matters arising during the audit, the conclusions reached
thereon, and significant professional judgments made in reaching those
conclusions
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1.3.4 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
1.3.5 Document how the auditor addressed the inconsistency to resolve the
doubts as identified during the course of audit.
1.4 Factors affecting Form, Content and Extent of Documentation
1.4.1 The size and complexity of the entity
1.4.2 The nature of the audit procedures to be performed
1.4.3 The identified risks of material misstatement
1.4.4 The significance of the audit evidence obtained
1.4.5 The nature and extent of exceptions identified
1.4.6 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
1.4.7 The audit methodology and tools used
1.5 Audit File
1.5.1 Audit file may be defined as one or more folders or other storage media, in
physical or electronic form, containing the records that comprise the audit
documentation for a specific engagement.
In case of recurring audit,It can be classified in two type Permanent File:-
The papers which are updated currently with information of continuing
importance to succeeding audit & Current File:- The papers which contain
information relating primarily to the audit of a single period.
1.5.2 The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the final audit fi le on
a timely basis after the date of the auditor’s report.
1.5.3 SQC 1 “Quality Control” requires firms to establish policies and procedures for
the timely completion of the assembly of audit files. An appropriate time limit
within which to complete the assembly of the final audit file is ordinarily not more
than 60 days after the date of the auditor’s report.
1.6 Completion Memorandum
1.6.1 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-
- The significant matters identified during the audit and
- How they were addressed.
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1.6.2 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
1.7 Ownership of Working Papers
1.7.1 Standard on Quality Control (SQC) 1 issued by the Institute, provides that,
unless otherwise specified by law or regulation, audit documentation is the
property of the auditor
1.7.2 He may at his discretion, make portions of, or extracts from, audit
documentation available to clients, provided such disclosure does not
undermine the validity of the work performed, or, in the case of assurance
engagements, the independence of the auditor or of his personnel
1.8 Retention of Working Papers
1.8.1 After the assembly of the final audit file has been completed, the auditor
shall not delete or discard audit documentation of any nature before the
end of its retention period.
1.8.2 SQC 1 requires firms to establish policies and procedures for the retention of
engagement documentation. The retention period for audit engagements
ordinarily is no shorter than seven years from the date of the auditor’s
report, or, if later, the date of the group auditor’s report
2 SA 500- Audit Evidence
2.1 Meaning
 Audit evidence may be defined as the information used by the auditor in
arriving at the conclusions on which the auditor’s opinion is based.
Audit evidence includes both information contained in the accounting
records underlying the financial statements and other information.
Explaining this further, audit evidence includes:-
(1) Information contained in the accounting records: Accounting records
include the records of initial accounting entries and supporting records,
such as checks and records of electronic fund transfers; invoices; contracts;
the general and subsidiary ledgers, journal entries.
(2) Other information that authenticates the accounting records and also
supports the auditor’s rationale behind the true and fair presentation of
the financial statements: Other information which the auditor may use
as audit evidence includes, for example minutes of the meetings, written
confirmations from trade receivables and trade payables etc.
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2.2 Sufficiency and Appropriateness

2.2.1 Sufficiency of Audit Evidence: Sufficiency is the measure of the quantity of audit
evidence. The quantity of audit evidence needed is affected by the auditor’s
assessment of the risks of misstatement (the higher the assessed risks, the more
audit evidence is likely to be required).
2.2.2 Auditor’s judgment as to sufficiency may be affected by the factors such as:
(i) Materiality
May be defined as the significance of classes of transactions, account
balances and presentation and disclosures to the users of the financial
statements. Less evidence would be required in case assertions are less
material to users of the financial statements. But on the other hand if
assertions are more material to the users of the financial statements, more
evidence would be required
(ii) Risk of material misstatement
May be defined as the risk that the financial statements are materially
misstated prior to audit. This consists of two components described as
follows at the assertion level
(a) Inherent risk
(b) Control risk
(iii) Size and characteristics of the population.’
refers to the number of items included in the population. Less evidence
would be required in case of smaller, more homogeneous population but
on the other hand in case of larger, more heterogeneous populations, more
evidence would be required.
2.2.3 Appropriateness of Audit Evidence: Appropriateness is the measure of the
quality of audit evidence; that is, its relevance and its reliability in providing
support for the conclusions on which the auditor’s opinion is based. In order
to obtain reliable audit evidence, information produced by the entity that
is used for performing audit procedures needs to be sufficiently complete
and accurate.
2.2.4 Sufficiency and appropriateness are inter-related and both of them should
co-exist.
2.3 Type of Audit Evidence
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2.3.1 Based upon Source of Information

 Internal evidence and external evidence: Evidence which originates
within the organisation being audited is internal evidence. E.g. Sales
invoice, Copies of sales challan and forwarding notes, goods received note,
inspection report, copies of cash memo, debit and credit notes, etc.
 External evidence on the other hand is the evidence that originates
outside the client’s organization. Eg. Purchase invoice, supplier’s challan
and forwarding note, debit notes and credit notes coming from parties,
quotations, confirmations, etc.
2.3.2 Based upon Nature of Information
 Visual Evidence
 Oral Evidence
 Documentary Evidence
2.4 Reliability of Evidence
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.
2.4.1 The reliability of audit evidence is increased when it is obtained from
independent sources outside the entity
2.4.2 The reliability of audit evidence that is generated internally is increased
when the related controls, including those over its preparation and
maintenance, imposed by the entity are effective.
2.4.3 Audit evidence obtained directly by the auditor (for example, observation of
the application of a control) is more reliable than audit evidence obtained
indirectly or by inference (for example, inquiry about the application of a
control).
2.4.4 Audit evidence in documentary form, whether paper, electronic, or other
medium, is more reliable than evidence obtained orally (for example, a
contemporaneously written record of a meeting is more reliable than a
subsequent oral representation
of the matters discussed).
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2.4.5 Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or facsimiles, or documents that have
been filmed, digitised or otherwise transformed into electronic form, the
reliability of which may depend on the controls over their preparation and
maintenance.
2.5 Audit Techniques- Methods to obtain audit evidence includes:
2.5.1 Inspection: 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.
2.5.2 Observation: Observation consists of looking at a process or procedure
being performed by others. Example: The auditor’s observation of inventory
counting by the entity’s personnel, or of the performance of control
activities.
2.5.3 External Confirmation: 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), in paper form, or by electronic or
other medium. External confirmation procedures frequently are relevant
when addressing assertions associated with certain account balances and
their elements. However, external confirmations need not be restricted to
account balances only.
2.5.4 Recalculation: Recalculation consists of checking the mathematical
accuracy of documents or records. Recalculation may be performed
manually or electronically.
2.5.5 Re-performance: Re-performance involves the auditor’s independent
execution of procedures or controls that were originally performed as part
of the entity’s internal control.
2.5.6 Analytical Procedures: Analytical procedures consist of evaluations of
financial information made by a study of plausible relationships among
both financial and non financial data.
2.5.7 Inquiry: Inquiry consists of seeking information of knowledgeable persons,
both financial and non-financial, within the entity or outside the entity.
Inquiry is used extensively throughout the audit in addition to other audit
procedures. Inquiries may range from formal written inquiries to informal
oral inquiries. Evaluating responses to inquiries is an integral part of the
inquiry process.
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2.6 Information to Be Used as Audit Evidence

2.6.1 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:
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that expert’s work as audit evidence
for the relevant assertion.
2.6.2 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:
(a) Obtaining audit evidence about the accuracy and completeness of the
information; and
(b) Evaluating whether the information is sufficiently precise and detailed
for the auditor’s purposes.
3 SA 315 & 330 Audit Procedures
3.1 Risk assessment procedures (It refer to the audit procedures performed
to obtain an understanding of the entity and its environment including
the entity’s internal control, to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement
and assertion levels); and
3.2 Further audit procedures, which comprise:
(i) Test of controls, when required by the SAs or when the auditor has
chosen to do so; and
(ii) Substantive procedures, including tests of details and substantive
analytical procedures.
3.3 A. Compliance procedures/Test of controls :-
3.3.1 Test of controls may be defined as an audit procedure designed to evaluate
the operating effectiveness of controls in preventing, or detecting and
correcting, material misstatements at the assertion level.
The auditor shall perform such procedure when-
(a) the auditor intends to rely on the operating effectiveness of controls in
determining the nature, timing and extent of substantive procedures
or
(b) Substantive procedures alone cannot provide sufficient appropriate
audit evidence at the assertion level.
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3.3.2 In designing and performing test of controls, the auditor shall:

(a) Perform other audit procedures in combination with inquiry to obtain
audit evidence about the operating effectiveness of the controls,
including:
(i) How the controls were applied.
(ii) The consistency with which they were applied.
(iii) By whom or by what means they were applied.
(b) Determine whether the controls to be tested depend upon other controls
(indirect controls), and if so, whether it is necessary to obtain audit
evidence supporting the effective operation of those indirect controls.
NOTE : Inquiry alone is not sufficient to test the operating effectiveness
of controls. In this regard, inquiry combined with inspection or
reperformance may provide more assurance than inquiry and
observation, since an observation is pertinent only at the point in time
at which it is made
3.3.3 Matters the auditor may consider in determining the extent of test of
controls:
→ The frequency of the performance of the control by the entity during
the period.
→ The length of time during the audit period that the auditor is relying
on the operating effectiveness of the control.
→ The expected rate of deviation from a control.
→ The relevance and reliability of the audit evidence to be obtained
regarding the operating effectiveness of the control at the assertion
level.
→ The extent to which audit evidence is obtained from tests of other
controls related to the assertion.
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3.3.4 Using audit evidence obtained in previous audits

In determining whether it is appropriate to use audit evidence about the
operating effectiveness of controls obtained in previous audits, and, if so,
the length of the time period that may elapse before retesting a control,
the auditor shall consider the following:
(a) The effectiveness of other elements of internal control, including the
control environment, the entity’s monitoring of controls, and the
entity’s risk assessment process;
(b) The risks arising from the characteristics of the control, including
whether it is manual or automated;
(c) The effectiveness of general IT-controls;
(d) The effectiveness of the control and its application by the entity,
including the nature and extent of deviations in the application of the
control noted in previous audits, and
(e) whether there have been personnel changes that significantly affect
the application of the control;
(f) Whether the lack of a change in a particular control poses a risk due
to changing circumstances; and
(g) The risks of material misstatement and the extent of reliance on the control.
3.3.5 Specific inquiries by auditor when deviations from controls are detected
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:
(a) The test of controls that have been performed provide an appropriate
basis for reliance on the controls;
(b) Additional test of controls are necessary; or
(c) The potential risks of misstatement need to be addressed using
substantive procedures.
3.4 Substantive procedures :-
3.4.1 Substantive procedure may be defined as an audit procedure designed
to detect material misstatements at the assertion level. Substantive
procedures comprise:
(i) Tests of details (of classes of transactions, account balances, and
disclosures), and
(ii) Substantive analytical procedures.
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3.4.2 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.
This requirement reflects the facts that:
(i) the auditor’s assessment of risk is judgmental and so may not identify
all risks of material misstatement; and
(ii) there are inherent limitations to internal control..
3.4.3 Depending on the circumstances, the auditor may determine that:
(i) Performing only substantive analytical procedures will be sufficient to
reduce audit risk to an acceptably low level. For example, where the
auditor’s assessment of risk is supported by audit evidence from test
of controls.
(ii) Only tests of details are appropriate.
(iii) A combination of both is required to respond to the risk
3.4.4 Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time.(SA 520)
4 External Confirmation- SA 505
4.1 Meaning
External confirmation may be defined as an audit evidence obtained as a
direct written response to the auditor from a third party (the confirming
party), in paper form, or by electronic or other medium.
4.2 Types of Confirmation Request
4.2.1 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
4.2.2 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
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4.2.3 Factors to be considered before sending negative confirmation request:

i) The risk of material misstatement is low i.e. internal records are more
reliable
ii) Too many similar items are required to be confirmed which are very
small.
iii) There is a low chance that such requests will be ignored.
iv) Exception rate expected is low i.e. there are low chances of disagreement.
4.3 External Confirmation Procedure

4.3.1 Determining the information to be confirmed or requested
4.3.2 Selecting the appropriate confirming party
4.3.3 Designing the confirmation requests after considering following factors:`
a) Risk of Material Misstatement involved in matters
b) Method of communication
c) Prior experience in the audit engagement
4.3.4 Sending the requests, including follow-up requests when applicable, to
the confirming party.
4.4 Factors to be considered while designing a confirmation request
The design of a confirmation request may directly affect the confirmation
response rate, and the reliability and the nature of the audit evidence
obtained from responses.
4.4.1 Specific identified risks of material misstatement, including fraud risks.
4.4.2 The layout and presentation of the confirmation request.
4.4.3 Prior experience on the audit or similar engagements.
4.4.4 The assertions being addressed.
4.4.5 The method of communication [for example, in paper form, or by electronic
4.4.6 Mode (like e-mail) or other medium].
4.4.7 Management’s authorisation or encouragement to the confirming parties
to respond to the auditor. Confirming parties may only be willing to respond
to a confirmation request containing management’s authorisation.
4.5 Management’s refusal to allow auditor to send a confirmation request
4.5.1 Inquire as to management’s reasons for the refusal, and seek audit evidence
as to their validity and reasonableness;
4.5.2 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
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4.5.3 Perform alternative audit procedures designed to obtain relevant and

reliable audit evidence.
4.5.4 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
4.5.5 The auditor also shall determine the implications for the audit and the
auditor’s opinion in accordance with SA 705
4.6 Factors creating doubt over reliability of external confirmation responses
4.6.1 Unauthorised Confirmation
4.6.2 Management’s intervention in the confirmation sent by third party
4.6.3 Doubt over integrity and reliability of third party
4.6.4 Incomplete information given by third party
4.6.5 Delayed response from third party
4.7 Factors that may assist the auditor in determining whether external
confirmation procedures are to be performed as substantive audit
procedures include:
4.7.1 The confirming party’s knowledge of the subject matter – responses may
be more reliable if provided by a person at the confirming party who has
the requisite knowledge about the information being confirmed.
4.7.2 The ability or willingness of the intended confirming party to respond –
For example, the confirming party:
→ may not accept responsibility for responding to a confirmation request;
→ may consider responding too costly or time consuming;
→ may have concerns about the potential legal liability resulting from
responding;or
→ may operate in an environment where responding to confirmation
requests is not a significant aspect of day-to-day operations.
In such situations, confirming parties may not respond, may respond
in a casual manner or may attempt to restrict the reliance placed on
the response.
4.7.3 The objectivity of the intended confirming party – if the confirming party
is a related party of the entity, responses to confirmation requests may be
less reliable.
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5 Written Representation- SA 580

5.1 Meaning
 Written representations may be defined as a written statement by
management provided 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.
Auditor’s Objective
A. To obtain Written Repesentation :- Obtain general and specific written
representations from management (having appropriate responsibilities
for financial statements and knowledge of matters concerned.)
B. To Support other audit evidence :- relevant to the financial statements
or specific assertions.
C. To Respond appropriately :- on the receipt or non-receipt of written
representation
5.2 Form and Content
5.2.1 It should be in paper form as a representation letter addressed to the
auditor
5.2.2 It should be taken at the end of the audit but before signing auditor’s
report
5.2.3 Content of Written Representation:
a) Management has fulfilled its responsibility for the preparation of the
b) Management has provided the auditor with all relevant information and
access as agreed in the terms of the audit engagement
c) All transactions have been recorded and are reflected in the financial
statements
d) As required by other SAs and as requested by the auditor
5.2.4 The written representations shall be for all financial statements and
period(s) referred to in the auditor’s report
5.3 Reliability of Written Representation
5.3.1 Although written representations provide necessary audit evidence, they
do not provide sufficient appropriate audit evidence on their own about
any of the matters with which they deal.
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5.3.2 It cannot substitute verification

5.3.3 Furthermore, the fact that management has provided reliable written
representations does not affect the nature or extent of other audit
evidence that the auditor obtains about the fulffilment of management’s
responsibilities, or about specific assertions
5.4 Management’s refusal to provide written representation
5.4.1 Discuss the matter with those charged with governance as per SA 260
5.4.2 Re-evaluate the integrity of management and evaluate the effect that this
may have on the reliability of representations (oral or written) and audit
evidence in general
5.4.3 Take appropriate actions, including determining the possible effect on the
opinion in the auditor’s report in accordance with SA 705
5.4.4 The auditor shall disclaim an opinion on the financial statements in accordance
with SA 705
5.5 Doubt over reliability of written representation
5.5.1 If the auditor has concerns about the competence, integrity, ethical values
or diligence of management the auditor shall determine the effect that
such concerns may have on the reliability of representations
5.5.2 In particular, if written representations are inconsistent with other audit
evidence, the auditor shall perform audit procedures to attempt to resolve
the matter
5.5.3 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
5.5.4 The auditor shall disclaim an opinion on the financial statements in accordance
with SA 705
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5.6 Ask management to reconfirm

The auditor may sometimes ask management to reconfirm its
acknowledgement and understanding of those responsibilities in written
representations. This is particularly appropriate when:
→ Those who signed the terms of the audit engagement on behalf of the
entity no longer have the relevant responsibilities;
→ The terms of the audit engagement were prepared in a previous year;
→ There is any indication that management misunderstands those
responsibilities; or
→ Changes in circumstances make it appropriate to do so.
6 Audit Evidence- Specific Considerations for selected items- SA 501
6.1 Objective of SA 501
To obtain sufficient and appropriate audit evidence regarding
6.1.1 Existence and condition of inventory.
6.1.2 Completeness of litigation and claims involving the entity.
6.1.3 Presentation and disclosure of segment information in accordance with the
6.2 Audit procedures- Inventory
When inventory is material to the financial statements, the auditor shall
obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory by:
6.2.1 Evaluate management’s instructions and procedures for recording and
controlling the results of the entity’s physical inventory counting
6.2.2 Observe the performance of management’s count procedures
6.2.3 Inspect the inventory
6.2.4 Perform test counts
6.2.5 Performing audit procedures over the entity’s final inventory records to
determine whether they accurately reflect actual inventory count results.
6.2.6 When inventory under the custody and control of a third party is material
to the financial statements, the auditor shall obtain sufficient appropriate
audit evidence regarding the existence and condition of that inventory by
performing one or both of the following:
 Request confirmation from the third party as to the quantities and
condition of inventory held on behalf of the entity
 Perform inspection or other audit procedures appropriate in the
circumstances
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6.2.7 Factors to be considered while planning attendance at Physical Inventory

Counting:
(a) Nature of inventory.
(b) Stages of completion of work in progress.
(c) The risks of material misstatement related to inventory.
(d) The nature of the internal control related to inventory.
(e) Whether adequate procedures are expected to be established and
proper instructions issued for physical inventory counting.
(f) The timing of physical inventory counting.
(g) Whether the entity maintains a perpetual inventory system.
(h) The locations at which inventory is held, including the materiality of the
inventory and the risks of material misstatement at different locations, in
deciding at which locations attendance is appropriate
(i) Whether the assistance of an auditor’s expert is needed
6.3 Auditor is unable to attend inventory count
6.3.1 If the auditor is unable to attend physical inventory counting due to
unforeseen circumstances, the auditor shall make or observe some physical
counts on an alternative date, and perform audit procedures on intervening
transactions
6.4 Inventory count is performed as on alternate date
6.4.1 If physical inventory counting is conducted at a date other than the date of
the financial statements, the auditor shall, in addition to the procedures
required above, perform audit procedures to obtain audit evidence about
whether changes in inventory between the count date and the date of the
financial statements are properly recorded
6.5 Physical verification is impracticable
6.5.1 If attendance at physical inventory counting is impracticable, the auditor
shall perform alternative audit procedures (refer annexure for key audit
considerations amid COVID 19) to obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory. If it is not
possible to do so, the auditor shall modify the opinion in the auditor’s
report in accordance with SA 705.
6.6 Verification of completeness of 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:
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6.6.1 Inquiry of management and, where applicable, others within the entity,
including in-house legal counsel
6.6.2 Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel
6.6.3 Reviewing legal expense accounts
6.6.4 Seek direct communication with the entity’s external legal counsel (if risk
of material misstatement is high) as per SA 505.
 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
 If law, regulation or the respective legal professional body prohibits
the entity’s external legal counsel from communicating directly with the
auditor, the auditor shall perform alternative audit procedures
6.6.5 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 applicable financial reporting framework.
6.7 Verification of presentation and disclosure of segment reporting
6.7.1 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
(b) Performing analytical procedures or other audit procedures appropriate
in the circumstances
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7 Initial Audit Engagement- Verification of opening balances- SA 510

7.1 Initial Audit Engagement- Meaning
An engagement in which either:
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a
predecessor auditor.
Objective of the auditor
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 financial
reporting framework.
7.2 Verification of opening balances- procedures
7.2.1 The auditor should obtain sufficient appropriate audit evidence that:
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;
7.2.2 Determining whether the opening balances reflect the application of
appropriate accounting policies; and
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7.2.3 Performing one or more of the following:

(i) Where the prior year financial statements were audited, perusing the
copies of the audited financial statements including the other relevant
documents relating to the prior period financial statements;
(ii) Evaluating whether audit procedures performed in the current period
provide evidence relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the
opening balances.
{Note :- If the auditor obtains audit evidence that the opening balances
contain material misstatements or accounting policy not consistently
applied with, then he shall perform such additional audit procedures as
are appropriate in the circumstances to determine the effect on the current
period’s financial statements.}
7.3 Audit Conclusions
7.3.1 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
7.3.2 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
7.3.3 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) a change in accounting policies is not properly accounted for or not
adequately presented or disclosed in accordance with the applicable
financial reporting framework, the auditor shall express a qualified opinion
or an adverse opinion as appropriate in accordance with SA 705
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7.3.4 If the predecessor auditor’s opinion regarding the prior period’s financial
statements included a modification to the auditor’s opinion that remains
relevant and material to the current period’s financial statements, the
auditor shall modify the auditor’s opinion on the current period’s financial
statements in accordance with SA 705(Revised)
8 Related Party- SA 550
8.1 Meaning
8.1.1 A related party as defined in the applicable financial reporting framework;
or
8.1.2 (ii) 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
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: However, 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
8.2 Risks associated with related party relationships and transactions
The nature of related party relationships and transactions may, in some
circumstances, give rise to higher risks of material misstatement of the
financial statements than transactions with unrelated parties. For example:
8.2.1 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
8.2.2 Information systems may be ineffective at identifying or summarising
transactions and outstanding balances between an entity and its related
parties
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8.2.3 Related party transactions may not be conducted under normal market
terms and conditions; for example, some related party transactions may
be conducted with no exchange of consideration
8.3 Auditor’s responsibilities for verifying related party transactions
8.3.1 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.
8.3.2 To see that all Financial statement framework and statutory compliance in
connection with Related party relationship and transactions.
8.3.3 To understand the entity’s Related party relationship and transactions to
conclude whether the financial statements i. achieve true & fair presentation
& ii. are not misleading.
8.3.4 To evaluate fraud risk factors relating to related party.
8.3.5 To have an attitude of professional skepticism
8.3.6 To appropriately respond to the results of audit procedures.
8.3.7 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:
 Management may be unaware of the existence of all related party
relationships.
 Related party relationships may present a greater opportunity for
collusion, concealment or manipulation by management.
8.4 How to Identify Related parties?
8.4.1 Entity income tax returns.
8.4.2 Information supplied by the entity to regulatory authorities.
8.4.3 Shareholder registers to identify the entity’s principal shareholders.
8.4.4 Statements of conflicts of interest from management and those charged
with governance.
8.4.5 Records of the entity’s investments and those of its pension plans.
8.4.6 Contracts and agreements with key management or those charged with
governance.
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8.4.7 Significant contracts and agreements not in the entity’s ordinary course of
business.
8.4.8 Specific invoices and correspondence from the entity’s professional advisors.
8.4.9 Life insurance policies acquired by the entity.
8.4.10 Significant contracts re-negotiated by the entity during the period.
8.4.11 Internal auditors’ reports.
8.4.12 Documents associated with the entity’s filings with a securities regulator
(e.g, prospectuses)
9 Subsequent Events- SA 560
9.1 Meaning
Subsequent events are such events which occur after date of financial
statements and before date of auditor’s report and facts that come to the
knowledge of auditor after issue of auditor’s report
9.2 Objective of auditor regarding subsequent events
9.2.1 To 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 of, or disclosure in, the financial
statements are appropriately reflected in those financial statements
9.2.2 To Respond appropriately to facts that become known to the auditor after
the date of the auditor’s report, that, had they been known to the auditor
at that date, may have caused the auditor to amend the auditor’s report.
9.3 Audit Procedures- Events occurring after date of financial statements
but before the date of auditor’s report (refer annexure for key audit
considerations amid COVID 19)
9.3.1 Obtaining an understanding of any procedures management has established
to ensure that subsequent events are identified
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9.3.2 Inquiring of management and, where appropriate, those charged with

governance as to whether any subsequent events have occurred which
might affect the financial statements
Examples of inquiries of management on specific matters are:
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 there have been any agreement to merge or liquidate has
been made or is planned.
d) Whether any unusual accounting adjustments have been made or are
contemplated.
e) Whether any events have occurred or are likely to occur which will
bring into question the appropriateness of going concern assumption.
9.3.3 Reading minutes, if any, of the meetings, of the entity’s owners, management
and those charged with governance, that have been held after the date of
9.3.4 Reading the entity’s latest subsequent interim financial statements, if any.
9.3.5 Obtain written representations as per SA 580, that all events occurring
subsequent to the date of the financial statements and for which the
applicable financial reporting framework requires adjustment or disclosure
have been adjusted or disclosed
9.4 Audit Procedures- Facts which become known to the auditor after date of
auditor’s report but before the date the financial statements are issued
9.4.1 Discuss the matter with management and, where appropriate, those
charged with governance
9.4.2 Determine whether the financial statements need amendment and, if so,
9.4.3 Inquire how management intends to address the matter in the financial
statements
9.4.4 If management amends the financial statements, the auditor shall:
(a) Carry out the audit procedures necessary in the circumstances on the
amendment.
(b) Unless prohibited by law:
(i) Extend the audit procedures referred to such events up to the date of the
new auditor’s report and
(ii) Provide a new auditor’s report on the amended financial statements. The
new auditor’s report shall not be dated earlier than the date of approval
of the amended financial statements
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9.5 Audit Procedures- Facts Which Become Known to the Auditor After the Financial
Statements have been Issued
9.5.1 (a) 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 are
involved in managing the entity, not to issue the financial statements to
third parties before the necessary amendments have been made.
9.5.2  If management does not take the necessary steps to ensure that anyone
in receipt of the previously issued financial statements is informed of the
situation, the auditor shall notify management and those charged with
governance.
 If, despite such notification, management or those charged with
governance do not take these necessary steps, the auditor shall take
appropriate action to seek to prevent reliance on the auditor’s report
10 Going Concern- SA 570

10.1 Meaning
Under the going concern basis of accounting, the financial statements are
prepared on the assumption that the entity is a going concern and will
continue its operations for the foreseeable future i.e. atleast one more
accounting period
10.2 Auditor’s responsibilities
10.2.1 The auditor’s responsibilities are to obtain sufficient appropriate audit
evidence regarding, and conclude on, the appropriateness of management’s
use of the going concern basis of accounting in the preparation of the
10.2.2 To conclude, based on the audit evidence obtained, whether a material
uncertainty exists about the entity’s ability to continue as a going concern.
10.3 Indicators of Material Uncertainty
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10.3.1 Financial
• Net liability or net current liability position.
• Fixed-term borrowings approaching maturity without realistic prospects
of renewal or repayment; or excessive reliance on short-term borrowings
to finance long-term assets.
• Indications of withdrawal of financial support by creditors.
• Negative operating cash flows indicated by historical or prospective
• Adverse key financial ratios.
• Substantial operating losses or significant deterioration in the value of
assets used to generate cash flows
10.3.2 Operating
• Management intentions to liquidate the entity or to cease operations.
• Loss of key management without replacement.
• Loss of a major market, key customer(s), franchise, license, or principal
supplier(s).
• Labor difficulties.
• Shortages of important
10.3.3 Other
• Non-compliance with capital or other statutory or regulatory
requirements, such as solvency or liquidity requirements for financial
institutions.
• 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.
• Changes in law or regulation or government policy expected to adversely
affect the entity.
• Uninsured or under insured catastrophes when they occur
10.4 Audit procedures to evaluate feasibility of Management’s assessment
10.4.1  In evaluating management’s assessment of the entity’s ability to
continue as a going concern, the auditor shall cover the same period
as that used by management to make its assessment as required by
the applicable financial reporting framework, or by law or regulation
if it specifies a longer period.
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 If management’s assessment of the entity’s ability to continue as a

going concern covers less than twelve months from the date of the
financial statements ,the auditor shall request management to extend
its assessment period to at least twelve months from that date
10.4.2 The auditor shall consider whether management’s assessment includes all
relevant information of which the auditor is aware as a result of the audit
10.4.3 The auditor shall inquire of management as to its knowledge of events or
conditions beyond the period of management’s assessment that may cast
significant doubt on the entity’s ability to continue as a going concern
10.4.4 Evaluating management’s plans for future actions in relation to its going
concern assessment, whether the outcome of these plans is likely to
improve the situation and whether management’s plans are feasible in the
circumstances
10.4.5 Considering whether any additional facts or information have become
available since the date on which management made its assessment
10.4.6 Where the entity has prepared a cash flow forecast, and analysis of the
forecast is a significant factor in considering the future outcome of events
or conditions in the evaluation of management’s plans for future actions:
(i) Evaluating the reliability of the underlying data generated to prepare
the forecast; and
(ii) Determining whether there is adequate support for the assumptions
underlying the forecast.
10.5 Audit procedures that are relevant to the requirement as stated above may
include the following:
 Analyzing and discussing cash flow, profit and other relevant forecasts
with management.
 Analyzing and discussing the entity’s latest available interim financial
statements.
 Reading the terms of debentures and loan agreements and determining
whether any have been breached.
 Reading minutes of the meetings of shareholders, those charged with
governance and relevant committees for reference to financing difficulties.
 Inquiring of the entity’s legal counsel regarding the existence of
litigation and claims.
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 Confirming the existence, legality and enforceability of arrangements

to provide or maintain financial support with related and third parties
and assessing the financial ability of such parties to provide additional
funds.
 Evaluating the entity’s plans to deal with unfilled customer orders.
 Performing audit procedures regarding subsequent events to identify
those that either mitigate or otherwise affect the entity’s ability to
 Confirming the existence, terms and adequacy of borrowing facilities.
 Obtaining and reviewing reports of regulatory actions.
 Determining the adequacy of support for any planned disposals of
assets.
10.6 Implications for the Auditor’s Report
10.6.1 Use of Going Concern Basis of Accounting 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 in the preparation of the financial
statements is inappropriate, the auditor shall express an adverse opinion.
When the use of the going concern basis of accounting is not appropriate in
the circumstances, management may be required, or may elect, to prepare
the financial statements on another basis (e.g., liquidation basis).
The auditor may be able to express an unmodified opinion on those financial
statements, provided there is adequate disclosure therein about the basis
of accounting on which the financial statements are prepared, but may
consider it appropriate or necessary to include an Emphasis of Matter
paragraph in accordance with SA 706 (Revised) in the auditor’s report to
draw the user’s attention to that alternative basis of accounting and the
reasons for its use.
10.6.2 Use of the Going Concern Basis of Accounting is Appropriate but a Material
Uncertainty Exists
The identification of a material uncertainty is a matter that is important
to users’ understanding of the financial statements. The use of a separate
section with a heading that includes reference to the fact that a material
uncertainty related to going concern exists alerts users to this circumstance.
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(1) Adequate Disclosure of a Material Uncertainty is Made in the Financial

Statements
If adequate disclosure about the material uncertainty is made in the
financial statements, the auditor shall express an unmodified opinion
and the auditor’s report shall include a separate section under the
heading “Material Uncertainty Related to Going Concern.”
(2) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial
Statements
If adequate disclosure about the material uncertainty is not made in
the financial statements, the auditor shall:
(a) Express a qualified opinion or adverse opinion, as appropriate, in
accordance with SA 705 (Revised); 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.
11 Points to be considered while examining true and fair view of the financial
statements
11.1 The phrase “true and fair view” is used in many statutes but it is not defined
in any act.
11.2 In order to form and express an opinion on true and fair view, auditor
needs to examine that all assets, liabilities, income and expenses are
recorded at such amounts and in such accounts which are in accordance
with accounting policies and principles and no material transaction has
been omitted
11.3 General considerations for verifying true and fair view:
a. No asset or liability should be undervalued or over valued
b. No material asset should be omitted
c. No material liability should be omitted
d. Charge on asset, if any should be separately disclosed
e. Format of financial statements should be as per applicable financial
reporting framework
f. Selection and application of accounting policies should be as per
accounting standards
g. Any extraordinary or non-recurring item should be separately disclosed
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1 The auditor P of PAR and Co., a firm of Chartered Accountants is conducting audit
of Kapur 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. How Would you deal with this situation?
Ans Refer Topic 5
Although written representations provide necessary audit evidence, they do
not provide sufficient appropriate audit evidence on their own about any of
the matters with which they deal. Furthermore, the fact that management
has provided reliable written representations does not affect the nature or
extent of other audit evidence that the auditor obtains about the fulfillment
of management’s responsibilities, or about specific assertions.
Applying the above to the given problem, the auditor would further request
the management to provide him with the Banker’s certificate in support of
fixed deposits held by the company.
3 Pride India Ltd is a manufacturer of various FMCG (fast moving consumable

goods) ranges 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 with reference to SAs
Ans Refer Topic 6.6
The auditor shall design and perform audit procedures in order to identify
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.
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
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4 While conducting the audit of Jay Kay Ltd, the auditor K of KLM and Associates,
Chartered Accountants observes that there are large number of Trade payables
and receivables standing in the books of accounts as on 31st March. The
auditor wanted to send confirmation request to few trade receivables but the
management refused the auditor to send confirmation request. How would the
auditor proceed?
Ans Refer Topic 4.5
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.
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 also shall determine the implications for the auditor’s opinion
in accordance with SA 705.
5 When we find in the balance sheet, an item under current assets reading as “cash
in hand - ` 8,000” the obvious assertions that would strike the mind are?
Ans Chapter 9 – Refer introduction
the obvious assertions that would strike the mind are the following:
a) The firm concerned had ` 8,000 in hand in valid notes and coins on the
balance sheet day;
b) That the cash was free and available for expenditure to the firm; and
c) That the books of account show a cash balance of identical amount
at the end of the day on which the balance sheet is drawn up
6 Define audit documentation. Also give some examples
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Ans Refer Topic 1

Audit documentation may be recorded on paper or on electronic or other
media
Example:
 Audit programmes.
 Analyses.
 Issues memoranda.
 Summaries of significant matters.
 Letters of confirmation and representation.
 Checklists.
 Correspondence (including e-mail) concerning significant matters.
The auditor may include copies of the entity’s records.
7 “Audit documentation summary may facilitate effective and efficient reviews
and inspections of the audit documentation, particularly for large and complex
audits”. Explain
Ans Refer Topic 1.6
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-
the significant matters identified during the audit and
how they were addressed.
Such a summary may facilitate effective and effcient review and inspection
of the audit documentation, particularly for large and complex audits.
8 “Although written representations provide necessary audit evidence yet they do
not provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal”. Discuss
Ans Refer Topic 5
Although written representations provide necessary audit evidence, they do
extent of other audit evidence that the auditor obtains about the fulfillment
9 Discuss the objective of Auditor with respect to Opening balances – in conducting
an initial audit engagement
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Ans Refer Topic 7

Initial audit engagement:
An engagement in which either: (i) The financial statements for the prior
period were not audited; or (ii) The financial statements for the prior period
were audited by a predecessor auditor
Objective:
(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
10 Define Risk of material misstatement. Explain its components also
Ans Refer Chapter 4 Topic 1.2
11 “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” Explain
Ans 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:
a) The test of controls that have been performed provide an appropriate
basis for reliance on the controls;
b) Additional test of controls are necessary; or
c) The potential risks of misstatement need to be addressed using
substantive procedures
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1. Standard on Quality Control (SQC) 1 provides that,

(a) unless otherwise specified by law or regulation, audit documentation is the
property of the management.
(b) unless otherwise specified by law or regulation, audit documentation is the
property of those charged with governance.
(c) unless otherwise specified by law or regulation, audit documentation is the
property of the management or those charged with governance.
(d) unless otherwise specified by law or regulation, audit documentation is the
property of the auditor.
2. Statement 1: A response that indicates a difference between information requested to

be confirmed and information provided by confirming party is Negative Confirmation.
Statement 2: A failure of the confirming party to respond, or fully respond, to a
positive confirmation request, or a confirmation request returned undelivered is
exception.
(a) Statement 1 is correct (b) Statement 2 is correct
(c) Both 1 & 2 are incorrect (d) Both 1 & 2 are correct
3. CA Vijay is the statutory auditor of XYZ Ltd. for the FY 2020-21. During the process
of assembling the audit file, CA Vijay briefed his team as to what all changes can
be made to the audit documentation at that stage. Which of the following changes
cannot be made to the audit documentation during the final assembly process?
(a) Sorting, collating & cross referencing of working papers.
(b) Signing off completion checklists relating to the file assembly process.
(c) Deleting or discarding superseded documents.
(d) Recalculation of Depreciation.
4. Which of the following is not correct?

(a) SA 230- Audit Documentation (b) SA 500- Audit Evidence
(c) SA 505- Written Representation (d) SA 560- Subsequent Events
5. Audit documentation provides:

(a) evidence of the auditor’s basis for a conclusion about the achievement of
the overall objectives of the auditor; or evidence that the audit was planned
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and performed in accordance with SAs and applicable legal and regulatory
requirements.
(b) 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.
(c) evidence of the auditor’s basis for a conclusion about the achievement of the
overall objectives of the auditor
(d) evidence that the audit was planned and performed in accordance with SAs
and applicable legal and regulatory requirements.
6. Which of the following is correct :

(a) 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.
(b) The auditor shall assemble the audit documentation in an audit file and shall
not complete the administrative process of assembling the final audit file.
(c) The auditor shall assemble the audit documentation in an audit file and
timely basis before the date of the auditor’s report.
(d) The auditor shall not assemble the audit documentation in an audit file.
7. Audit evidence includes

(a) information contained in the accounting records underlying the financial
statements
(b) both information contained in the accounting records underlying the financial
statements and other information.
(c) other information.
(d) information contained in the accounting records underlying the financial
statements or other information.
8. 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.
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(b) Reviewing minutes of meetings of those charged with governance and

correspondence between the entity and its external legal counsel.
(c) Reviewing legal expense accounts.
9. If the auditor is unable to obtain sufficient appropriate audit evidence regarding the
opening balances, the auditor shall express :
(a) a disclaimer opinion
(b) a qualified opinion
(c) a qualified opinion or a disclaimer of opinion, as appropriate
(d) unmodified opinion
10. Auditor’s judgment as to sufficiency may be affected by the factors such as:
(a) Materiality
(b) Risk of material misstatement
(c) Size and characteristics of the population
11. The auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of the auditor’s report. However, when, after the
date of the auditor’s report but before the date the financial statements are issued,
a fact becomes known to the auditor that, had it been known to the auditor at the
date of the auditor’s report, may have caused the auditor to amend the auditor’s
report, the auditor shall:
(a) Discuss the matter with management and, where appropriate, those charged
with governance.
(b) Determine whether the financial statements need amendment.
(c) Inquire how management intends to address the matter in the financial
statements.
12. When deviations from controls upon which the auditor intends to rely are detected,
(a) the auditor shall not make any inquiries to understand these matters and their
potential consequences
(b) the auditor shall make specific inquiries to understand these matters and their
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(c) the auditor shall make general inquiries to understand these matters and their
(d) the auditor shall make both general as well as specific inquiries to understand
these matters and their potential consequences
13. Because the assessment of the risk of material misstatement takes account of
internal control,
(a) the extent of substantive procedures may need to be increased irrespective of
the results from tests of controls.
(b) the extent of substantive procedures may need to be increased when the results
from tests of controls are satisfactory.
(c) the extent of substantive procedures may need to be decreased when the
results from tests of controls are unsatisfactory.
(d) the extent of substantive procedures may need to be increased when the results
from tests of controls are unsatisfactory
14. Where no reply is received during the performance of direct confirmation procedures
as part of audit of accounts receivable balances, the auditor should perform:
(a) No additional testing
(b) Additional testing including subsequent collections testing and agreeing the
detail of the respective balance to the customer’s remittance advice.
(c) Additional testing including preparing a detailed analysis of the balance,
ensuring it consists of identifiable transactions and confirming that these
revenue transactions actually occurred.
(d) Both (b) and (c)
15. _____________refers to the record of audit procedures performed, relevant audit

evidence obtained, and conclusions the auditor reached.
(a) Audit Techniques (b) Audit evidence
(c) Audit Documentation (d) Audit Procedures record
16. __________may be defined as one or more folders or other storage media, in physical
or electronic form, containing the records that comprise the audit documentation
for a specific engagement.
(a) Audit File (b) Audit evidence
(c) Completion Memorandum (d) Audit Folder
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17. As per SQC-1 “An appropriate time limit within which to complete the assembly
of the final audit file is ordinarily not more than______days after the date of the
auditor’s report”.
(a) 30 (b) 60 (c) 90 (d) 45
18. A request that the confirming party respond directly to the auditor only if the
confirming party disagrees with the information provided in the request.
(a) Positive confirmation request (b) Non Response
(c) Negative Confirmation request (d) Exception
19. Which of the following is not an Audit procedure to obtain audit evidence:
(a)
Inspection (b) Observation
(c) External Confirmation (d) Internal Control
20. Nature, timing and extent of substantive audit procedures are determined by auditor
on the basis of
a) Test of controls performed
b) Understanding of entity and its related environment
c) Test of details
d) All of these
21. Which of following SA deals with auditor’s responsibility to design and perform audit
procedures in such a way to enable the auditor to obtain sufficient and appropriate
audit evidence to be able to draw reasonable conclusions on which to base the
auditor’s opinion
a) SA 500 b) SA 501 c) SA 330 d) SA 315
22. Which of the following is the least persuasive type of audit evidence?
a) Bank statements obtained from the client
b) Documents obtained by auditor from third parties directly
c) Carbon copies of sales invoices inspected by the auditor
d) Computations made by the auditor.
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23. Observation consists

a) Review of financial statements
b) Looking at a process, procedure being performed by others
c) Independent execution of procedure or controls that were originally performed
as part of entity’s internal control.
d) All of these
24. A current audit file would always contain which of following?

a) Loan agreements, pension plans, agreements with parent company and
subsidiaries
b) Company documents such as corporate charter or articles of association and
corporate bylaws.
c) A record of the nature, timing and extent of audit procedures performed and
the results of such procedures.
d) Prior year analysis of fixed assets, long term debt, and terms of stock and bond issues.
25. After assembly of audit file, the auditor_______________

a) May delete audit documentation if it is of no use
b) May delete audit documentation if it is occupying much of its space
c) Shall not delete audit documentation before its retention time period
d) May delete audit documentation before its retention period if it is required by
any law.
26. 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, is
a) Negative Confirmation Request b) Exception
c) Positive Confirmation Request d) Non-Response
27. In case any exception is identified by auditor by conducting external confirmation,

he shall perform
a) Alternative audit procedures b) Additional audit procedures
c) Test of Controls d) Both (a) and (b)
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28. A failure of the confirming party to respond, or fully respond, to a positive

confirmation request, or a confirmation request returned undelivered is called-
(a) Negative confirmation request (b) Non-response (c) Exception d) Positive
confirmation request
29. The auditor is required to evaluate management’s assessment of the entity’s ability
to continue as a going concern. Certain events/ conditions were identified that may
cast significant doubt on the entity’s ability to continue as a going concern but, based
on the audit evidence obtained, the auditor concludes that no material uncertainty
exists, and no disclosures are explicitly required by the applicable financial reporting
framework regarding these circumstances.
If management’s assessment of the entity’s ability to continue as a going concern
covers less than twelve months from the date of the financial statements, the auditor
is required to request management to extend its assessment period to at least
twelve months from that date. The management of the company would provide the
financial support letter extended by its parent company.
In the given case, which one of the following options is correct?
a) The auditor may obtain the financial support letter from the parent company
fo r a period of 12 months from year end date.
b) The auditor may obtain the financial support letter from the parent company
for a period of 12 months from date of signing of the financial statements.
c) The auditor may obtain the financial support letter from the parent company
for a period of 12 months or less from year end date.
d) The auditor may obtain the financial support letter from the parent company for
a period of 12 months or less from date of signing of the financial statements.
30. If auditor is unable to attend physical inventory counting due to unforeseen

circumstances the auditor shall
a) Obtain a written representation from management of entity
b) Conduct external confirmation form third party
c) Make or observe some physical count on an alternative date, and perform
audit procedures on intervening transactions
d) All of these.
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31. An initial audit engagement in engagement in which :

a) The financial statements for the prior period were not audited
b) The financial statements for the prior period were audited by a predecessor
auditor
c) Either (a) or (b)
d) None of (a) or (b)
32. Which of the following is not a record or document that may provide information
about related party relationships and transactions:
a) Entity income tax return
b) Internal auditor’s report
c) Memorandum of Association
d) Life insurance policies acquired by the entity.
33. If auditor identifies significant related party transactions, not conducted on the terms
and conditions like normal rate and market conditions then, he should evaluate
a) Business rationale behind these transactions
b) Consistency of terms with management’s explanation
c) Accounting and disclosure of such transactions in financial statements
d) All of these
34. Statement(1)
Regarding related party relationships and transactions with them, auditor shall not
obtain any written representation; rather obtain extra evidences independently as he
cannot rely on written representations when it comes to related party transactions.
Statement (2)
As per SA-550, he should maintain documentation regarding name and nature of
related party relationships.
a) Only Statement (1) is true b) Only Statement (2) is true
c) Both the statements are true d) None of the Statements is true
35. The auditor shall obtain sufficient and appropriate evidence that all events after
the balance sheet date but before or up to the date of __________ that require
adjustment or disclosure in _______ have been identified.
a) Board’s approval; Board report
b) Board’s approval; financial statements
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c) Auditor’s report; Board report

d) Auditor’s report; financial statements
36. A limited company is having a pending case filed against it on 31th March, 2018. A
decision has been received from the court on 14th April, 2018. i.e. after the balance
sheet date.
a) It is a subsequent event
b) It should be considered by the management while preparing the financial
statements.
c) Auditor needs to check whether it has been dealt with in the financial statements
as per applicable financial reporting framework.
d) All of these
37. Statement (1)

Under the going concern assumption, an entity is viewed as continuing in business
forever.
Statement (2)
General purpose financial statements are prepared on a going concern basis if
management neither intends to liquidate the entity nor to cease the operations
a) Only Statement (1) is true
b) Only Statement (2) is true
c) Both the statements are true
d) None of the Statements is true
38. If going concern basis of accounting is appropriate, however, there is a material

uncertainty which is not disclosed in the financial statements, then auditor shall
express
a) Qualified opinion b) Adverse opinion
c) (a) or (b) d) Disclaimer of opinion
39. Which of the following is operating event or condition which may cast significant
doubt on the entity’s ability to continue as going concern
a) Loss of major market segment b) Loss of key customer
c) Inability to pay creditors on due date d) (a) and (b)
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40. When any event or condition is identified by auditor which may cast significant
doubt on the entity’s ability to continue as going concern, the auditor’s additional
procedure shall include the following
a) Communicating the facts to the regulatory auditory of the entity
b) Communicate the matter to the Central Government
c) Request written representation from management or TCWG regarding their
future action and feasibility of these plan
d) All of the above
41. You are an article assistant in PQR & Associates. You are assigned an internal audit
of X Ltd., a leading company in business of dairy products. While evaluating internal
controls associated with related party relationships and transactions, you come
across some discrepancies. What is the basic information to be collected by you
related to related party relationships and transactions?
i. The identity of the entity’s related parties including changes from the prior
period
ii. The nature of the relationships between the entity and these related parties
iii. Understanding of business activities of related parties
iv. Whether the entity has entered into any transaction with these related parties
during the period and, if so, the nature and extent, and the purpose of the
transaction
v. Materiality of related party transactions
(a) i, ii & v (b) i, ii & iv (c) ii, iii & iv (d) iii, iv & v
42. Statement 1
Written representation do not include financial statements and supporting records
etc.
Statement 2
Written representation should be addressed to the management and TCWG
a) Only Statement 1 is true b) Only Statement 2 is true
43. Which of the following is the most appropriate potential reaction of the auditor
to his assessment that the risk of material misstatement due to fraud is high in
relation to existence of inventory?
a) Visit location on surprise basis to observe test counts
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b) Request inventory count at a date close to year end

c) Vouch goods sent on approval very carefully
d) Perform analytical procedures.
44. In determining the level of materiality for an audit, what should not be considered?
a) Prior year’s errors
b) The auditor’s remuneration
c) Adjusted interim financial statements
d) Prior year’s financial statements
45. Which of the following statements is not true with respect to management
representations obtained as per SA¬ 580?
a) Authenticated copy of relevant minutes of meetings may be regarded as
management representation
b) It should always be in working
c) It may be dated prior to the report date
d) It should be addressed to the auditor
46. The auditor has serious concern about the going concern of the company. It is
dependent on company’s obtaining a working capital loan from a bank which has
been applied for. The management of the company has made full disclosure of
these facts in the notes to the balance sheet. The auditor is satisfied with the level
of disclosure. He should issue_
a) unqualified opinion
b) unqualified opinion with reference in the going concern paragraph in audit
report
c) qualified opinion
d) disclaimer of opinion
47. Which of the following is not external audit evidence

a) Bank Statements b) Purchase Invoice
c) External Confirmation d) Salary Sheet
48. Which of following statement is incorrect

a) Recalculation consists checking reasonableness of appropriates of accounting
policies
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b) Inspection consists of examining records, documents whether internal or

external in paper form or electronic form and physical examination of assets
c) An external confirmation represents audit evidence obtained by auditor as
direct written response to the auditor from a third party.
d) Evaluating responses of inquiry is an integral part of inquiry process.
49. Pick the most appropriate. Auditing evidence is more reliable when
a) Received from third party b) Received from reliable third party
c) Received from audited organization resources
d) Both a & b
50. Loan agreement are the integral parts of

a) Permanent audit file b) Current audit file
c) Temporary audit file d) None of the above
51. Pick the odd one

a) Written representations and confirmation from clients.
b) Audit planning and audit programme
c) Correspondence relating to annual reappointment
d) Memorandum and Article of Association of the Company.
52. Which of the following is not true of working papers?

a) They record the audit evidence to provide support for the auditor’s opinion
b) They assist in review of the audit work
c) They are a direct aid in the planning of the audit
d) They provide proof of the correctness of the financial statements.
53. Reliability of data is influenced by

a) Its source b) Its nature
c) Circumstances under which it is obtained d) All of these
54. Statement (1)

Generally, auditor has no obligation to perform any audit procedures regarding the
financial statements after the date of auditor’s report.
Statement (2)
In case auditor comes to know about a fact after the date of auditor’s report, he
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should not consider the same.

a) Only Statement (1) is true b) Only Statement (2) is true
55. If the management has prepared financial statements based on going concern
assumption but auditor concludes that use of going concern basis is inappropriate,
then auditor shall
a) Express a qualified opinion b) Express an adverse opinion
c) Disclaim his opinion d) Either option (a) or option (b)
56. ALM Ltd. is a trading company engaged in the business of selling readymade
garments with a turnover of around Rs. 85 crore in the year 2017-18. Your firm has
been appointed as statutory auditors for the year 2018-19. In the process of audit
for the half year ending 30th September, 2018 your senior has instructed you to
verify the debtors of the company.
While verifying the same it came to your notice that the company is not taking
balance confirmations from the debtors and the balance shown in the books of
company is considered final for the preparation of accounts. As a statutory auditor
what should be your decision on the debtors balances:
(a) Statutory auditor should review the internal audit report and ensure as per
section 143 of the Companies Act, 2013 that the company has adequate
internal financial controls in place.
(b) There is no need to take debtors confirmation as it is immaterial for the purpose
of Audit Report.
(c) The auditor is required to take external confirmation independently and
wherever the auditor gets negative or no response or the response is doubtful
an alternative audit procedure should be followed
(d) A management representation letter should be obtained by the auditor.
57. AMS & Co is a computer hardware specialist and has been trading for over 6
years. The company is funded through overdrafts and loans and by several large
shareholders. The financial year end is 31 March 2017.
AMS had significant growth in business in previous years; however, in the current
year a new competitor BOM & Co, has entered the market and through competitive
pricing has gained considerable market share from AMS. One of AMS’s customers
has stopped trading with them and has moved its business to BOM. In addition,
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a few specialist developers have left the company and joined the new company
BOM. AMS has found it difficult to replace these employees due to the level of their
skills and knowledge. AMS has just received notification that its main supplier who
provides the company with specialist electrical equipment has ceased to trade.
Which of the following audit procedures should NOT be performed in assessing
whether or not AMS is a going concern?
(a) Evaluating management’s plans for the future of the business, by finding out
from the financial director whether the company has gained any new customers
to replace the customers lost
(b) Review board meeting minutes for evidence of progress on recruiting specialist
developers to replace the ones who have left to join BOM.
(c) Analyse and discuss the entity’s last 2 years of financial statements to determine
whether it is consistent with the cash flow forecast.
(d) Review the correspondence with the shareholders to assess the probability
that any of the shareholders choose to increase or sell their investment
58. Your firm has been appointed as the statutory auditors of GBM Private Limited for
the financial year 2017-18. While verification of company’s inventories as on 31st
March 2018 you found that the significant amount of inventories belonging to the
company are held by other parties. However, the company has kept all the records
of the inventories maintained by other parties, what is your duty as an auditor in
order to ensure that third parties are not such with whom the stock should not be
held and the stock as disclosed in company’s records actually belongs to them?
a) Ensure that the total stock including the stock with third party tally with the
stock register maintained by the company.
b) Obtain confirmation from the third party/s with whom the inventories of the
company are held and reconcile the same with stock register.
c) Conduct a physical verification of stock maintained with third party/s.
d) Obtain a written confirmation from the departmental head of the company for
the inventories maintained at other places as audit evidence.
59. Coyote Ltd. is dealing in trading of electronic goods. Huge inventory (60%
approximately) of the company islying on consignment (i.e. under the custody
of third party). CA. Star, the auditor of the company, wants to obtain sufficient
appropriate audit evidence regarding the existence and condition of the inventory
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lying on consignment. Thus, he requested & obtained confirmation from the third
party as to the quantities and condition of inventory held on behalf of the entity,
however, it raised doubts about the integrity and objectivity of the third party. Which
of the following other audit procedures may be performed by CA. Star to obtain
sufficient appropriate audit evidence regarding the existence and condition of the
inventory under the custody of third party?
(a) Attend third party’s physical counting of inventory.
(b) Arrange for another auditor to attend third party’s physical counting of inventory.
(c) Inspect warehouse receipts regarding inventory held by third parties.
(d) All of the above.
60. An important factor in determining the form, content and extent of audit
documentation of significant matters is the extent of _________exercised in
performing the work and evaluating the results.
(a) professional skepticism (b) professional integrity
(c) professional judgment (d) Professional sincerity
61. Audit evidence is necessary to support the auditor’s opinion and report. It is_____in
nature and is primarily obtained from audit procedures performed during the course
of the audit.
(a) cumulative (b) regressive (c) selective (d) objective
62. When more persuasive audit evidence is needed regarding the effectiveness of a
control,
(a) it may be appropriate to increase the extent of testing of the control and reduce
the extent of the degree of reliance on controls.
(b) it may be appropriate to decrease the extent of testing of the control as well
as the degree of reliance on controls.
(c) it may be appropriate to decrease the extent of testing of the control and
increase the extent of the degree of reliance on controls.
(d) it may be appropriate to increase the extent of testing of the control as well as
the degree of reliance on controls.
63. Which of the following is not an example of audit documentation:

(a) Audit programmes (b) Summaries of significant matters
(c) Audit file (d) Checklists.
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64. Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and
evaluating audit evidence.
(a) obtaining audit evidence
(b) evaluating audit evidence
(c) obtaining or evaluating audit evidence.
(d) obtaining and evaluating audit evidence.
65. Audit procedures to obtain audit evidence can include

(a) inspection, observation, confirmation, recalculation, re-performance and
analytical procedures
(b) inspection, observation, confirmation, recalculation and re-performance
(c) inspection, observation, confirmation and analytical procedures
(d) inspection, observation, recalculation, re-performance and analytical
procedures
Answer
1 D 11 D 21 A 31 C 41 B 51 D 61 A
2 C 12 B 22 C 32 C 42 A 52 D 62 D
3 D 13 D 23 B 33 D 43 A 53 D 63 A
4 C 14 D 24 C 34 B 44 B 54 A 64 D
5 B 15 C 25 C 35 D 45 B 55 B 65 A
6 A 16 A 26 C 36 D 46 B 56 C
7 B 17 B 27 A 37 B 47 D 57 C
8 D 18 C 28 B 38 C 48 A 58 B
9 C 19 D 29 A 39 D 49 B 59 D
10 10 20 A 30 C 40 C 50 A 60 C
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CASE 1.
M/s JJ & associates having office in Chennai are statutory auditors under Companies Act,
2013 of a company viz. Sweet Aroma Private Limited engaged in business of obtaining and
manufacturing rice from paddy catering to both domestic as well as international market
mainly in Gulf nations. The company has a huge plant capacity for rice extraction in one
of the states in Northern India. Needless to state that inventories are in huge quantity
in such type of business consisting of raw material, work in progress and finished goods.
The auditors want to obtain sufficient appropriate audit evidence regarding inventories.
In above context, answer the following questions: -
1 Which of the following is most likely correct in relation to obtaining of sufficient

appropriate audit evidence regarding existence and condition of inventory?
(a) It is mandatory for the auditor to attend physical inventory counting on the
date of financial statements in all circumstances.
(b) Physical inventory counting may be attended by auditor on the date of financial
statement or at a date other than date of financial statements in his discretion
mandatorily in all circumstances.
(c) The attendance of auditors at physical inventory counting is impracticable
due to time and costs involved because of auditor’s office location vis-à-vis
company’s plant location. Hence, attendance at physical inventory counting
may be skipped and alternative audit procedures may be performed to obtain
sufficient appropriate evidence.
(d) The auditor shall attend at physical inventory counting unless impracticable.
However, issue of time and costs involved because of auditor’s office location
vis-à-vis company’s plant location is not a valid basis for skipping physical
inventory counting.
2 Below are given certain cluster of matters which are relevant in planning attendance
of auditor at physical inventory counting.
Which of the following clusters consists of a likely inappropriate combination?
(a) Nature of inventory, timing of physical inventory counting and stages of
completion of work in progress
(b) Nature of inventory, timing of physical inventory counting and valuation
method of inventory
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(c) Nature of inventory, timing of physical inventory counting, considerations

regarding maintenance of a perpetual inventory system
(d) Risks of material misstatements related to inventory, nature of internal control
pertaining to inventory, considerations regarding maintenance of a perpetual
inventory system
3 Which of the following is the most likely logical sequence of steps in relation to
attendance at physical inventory counting by auditor?
(a) Observance of performance of management’s count procedures, inspection of
inventory, performing test counts and evaluation of management’s procedures
for recording and controlling results of physical inventory counting
(b) Observance of performance of management’s count procedures, performing
test counts, inspection of inventory and evaluation of management’s procedures
(c) Performing test counts, inspection of inventory, Observance of performance of
management’s count procedures and evaluation of management’s procedures
(d) Evaluation of management’s procedures for recording and controlling results
of physical inventory counting, Observance of performance of management’s
count procedures, inspection of inventory and performing test counts
4 During attendance at physical inventory counting, the auditor inspects inventory.

Following outcomes stated as I, II & III are given below of this inspection procedure: -
Outcome I --- Existence of inventory
Outcome II ---- Ownership of inventory
Outcome III ------ Condition of inventory
Which of following statements is most likely true?
(a) Outcomes I, II and III are all necessarily established after inspection.
(b) Only Outcomes I and III are established after inspection and Outcome II is
never established.
(c) Outcomes I and III are established after inspection. However, outcome II may
not be necessarily established.
(d) Outcome II and III are established after inspection. However, outcome I may
not be necessarily established.
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5. It was observed by auditors that, out of total rice physically counted on 31st March,
2020 about 67 quintals of rice belonged to M/s PQR, a proprietary concern which had
sent paddy to this company’s plant for extraction of rice. What would be treatment
of this item in financial statements of company?
(a) The value of 67 quintals rice would be reflected in company’s financial
statements as per method of valuation adopted by the company.
(b) The value of 67 quintals rice would be reflected in company’s financial
statements as per method of valuation adopted by the proprietary concern.
(c) The value of 67 quintals rice would not be reflected in company’s financial
statements.
(d) The value of 67 quintals rice would be reflected in proprietary concern’s
financial statements as per method of valuation adopted by the company.
Answer
1 d 2 b 3 d 4 c 5 c
CASE 2
• M/s PQR & Associates are appointed as auditors of Jupiter Ltd. for the Financial Year
2019-20.
• The team consisted of Mr. P, Mr. Q, Mr. R all Chartered Accountants and three article
assistants.
• Mr. P, one of the engagement partners, briefed the audit staff about various items of
financial statement to be checked in detail in case of Jupiter Ltd and about various
aspects to be covered in the audit of the company.
• Mr. P told the audit staff about audit documentation, audit evidence, audit file,
completion memorandum and many other things along with relevant Standards of
Auditing applicable.
• Mr. P also told the staff about the risk of material misstatement that the financial
statements are prone to and how it affects the sufficiency and appropriateness of
audit evidence.
• The audit staff was also apprised about the various audit procedures to be adopted
while conducting the audit of Jupiter Ltd.
• Further discussions were done about various types of risks related to financial
statement and the audit work, the related audit procedures, and the risk assessment
procedures.
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• The engagement partners are also very particular about the application of various
Standards on Auditing applicable in case of Jupiter Ltd.
1. .............. is the summary of significant matters identified during audit and way they
are addressed :-
(a) Audit File (b) Audit Programme
(c) Completion memorandum (d) Checklists
2. The susceptibility of an assertion to a misstatement that could be material before

consideration of any related control is....................:-
(a) Control Risk (b) Inherent Risk
(c) Audit Risk (d) Significant Risk
3. Statement 1: Audit procedures consist of Risk Assessments Procedures and other

procedures.
Statement 2: Substantive procedures consist of test of details and analytical
procedures.
(c) Both 1 & 2 are correct (d) Both 1 & 2 are incorrect
4. ...........refers to the audit procedures performed to obtain an understanding of the

entity and its environment, including the entity’s internal control, to identify and
assess the risks of material misstatement, whether due to fraud or error at the
financial statement and assertion levels:-
(a) Analytical Procedures (b) Risk Assessment Procedures
(c) Audit Procedures (d) Substantive Analytical Procedures
5. Statement 1:- Substantive Procedures alone can provide sufficient and appropriate
audit evidence at the assertion level.
Statement 2:-Test of Controls is audit procedure designed to evaluate the
operating effectiveness of controls in prevention, detection and correcting material
misstatement at the assertion level.
Answer
1 c 2 b 3 c 4 b 5 b
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CASE 3.
M/s UVW & Associates have been appointed as auditors of Mars Ltd. For the Financial
Year 2019-20.
• During the course of audit, the auditors notice that there are certain legal expenses
been charged to revenue during the financial year by Mars Ltd.
• These legal expenses are related to litigations going against the company regarding
its Corporate Social Responsibility expenses incurred near its factory area.
• Further, M/s UVW & Associates noticed that there is a major change in the debtors
and creditors account of Mars Ltd. During the financial year under audit. The auditors
have decided to send balance confirmation requests to the debtors and creditors
of Mars Ltd. Also the auditors decide to take management representation letters
wherever required.
• Also, the auditors have noticed certain related party transactions reflected in the
financial statements of Mars Ltd during the financial year under audit. The transaction
is between Mars Ltd and a Company owned by wife of one of the directors of Mars
Ltd.
• The auditors have become aware of certain subsequent events occurring in case of
Mars Ltd. These are related to the outcomes of the litigations going against Mars
Ltd.
• The auditors are also concerned whether the litigations going against Mars Ltd. and
their outcomes have any impact on the going concern of the company.
1. Statement 1: Although Written Representations provide necessary audit evidence,

they do not provide sufficient and appropriate audit evidence on their own about
the matters with which they deal.
Statement 2: Written Representations do not include financial statements, the
assertions within, or supporting books and records.
(c) Both Statement 1 & 2 are correct (d) None of Statement 1 & 2 is correct
2. The auditor can perform the following procedures to identify litigation and claims
of Mars Ltd:-
(a) Inquiry of management including in house legal counsel.
(b) Reviewing legal expenses account.
(c) Reviewing of minutes of meetings of those charged to governance and
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correspondence between entity and external legal counsel.

3. Negative confirmation requests require the third party to respond in the following
cases :-
(a) If there is agreement
(b) If there is disagreement
(c) In both cases of agreement as well as disagreement
(d) None of the above.
4. Statement 1:- A failure of the confirming party to respond, or fully respond to a

positive confirmation request or a confirmation request returned undelivered is a
case of Non Response.
Statement 2:- A response that indicates difference between information requested
to be confirmed and contained in entity’s records and information provided by the
confirming part is a caseof Exception.
(c) Both Statement 1 & 2 are correct (d) None of Statement 1 & 2 is correct
5. Which of the following is incorrect so far as the related party transactions are
concerned:-
(a) Many related party transactions are in the normal course of business.
(b) Related party transactions may not be conducted under normal market term
and conditions.
(c) In some circumstances, related party transactions may give rise to higher risks
of material misstatement.
Answer
1 c 2 d 3 b 4 c 5 d
CASE 4.
Auditors while conducting audits are governed by SA 230 “Audit Documentation” in
relation to record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached.
CA. Harry is a statutory auditor of Potter Ltd. The auditor of Rowling Ltd. a parent
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company of Potter Ltd. asked Harry the working papers of Potter Ltd for commenting on
the important requirement of the Central Government.
Also, CA. Bean is statutory auditor of Rowling Ltd. against which Income tax department
started search and seizer procedure .CA. Bean was asked for the working papers of
the company on the directions and permission of CIT (A) to provide for the relevant
information asked.
Based on the above specific cases and in general, answer the following questions as per
guidance provided by SA 230.
1. _______ is the file containing the records and data that comprise the audit
documentation for a specific engagement.
(a) Audit file (b) Engagement file
(c) Working file (d) Client’s file
2. Which of the following does not affects form, content & extent of documentation
(a) Size and complexity of the entity
(b) nature of audit team who will perform audit
(c) identified Risk of material misstatement
(d) audit methodology and tools to be used
3. If in exceptional circumstances the auditor departs from Standards on Auditing, he

shall___
(a) Document the reason for departure
(b) document how the alternative procedures were performed for achieving the
objective
(c) Both (a) and (b)
(d) Auditor is not allowed to depart from SAs.
4. Which of the following is not true of working papers?

(a) They record the audit evidence to provide support for the auditor’s opinion
(b) They assist in review of the audit work
(c) They are a direct aid in the planning of the audit
(d) They provide proof of the correctness of the financial statements.
5. Can CA. Bean provide access to working papers to Income Tax department during
search & seizure operation?
(a) CA. Bean can provide as it is the requirement of law
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(b) CA. Bean is guilty of professional misconduct

(c) CA. Bean should not provide the working paper
(d) None of the above
Answer
1 a 2 b 3 c 4 d 5 a
CASE 5.
Cheenu & Co are the auditors of a manufacturing industry. During the course of the audit,
the following are the observations:
a) Due to paucity of time, one of the partners of Cheenu & Co. suggests that the team
may complete the audit procedures and issue the audit report. They may carry out
the audit documentation at a later stage.
b) Cheenu & Co. has identified the benchmark for the materiality level. However, there
is a difference of opinion in documenting materiality for the financial statements.
One of the partners is of the opinion that there is no need to document the same as
per SA 230.
c) During the course of the audit, Cheenu & Co. wants to verify the inventory of the
company held under the custody and control of the third party. The management
refuses the same as it is not practicable.
d) There exists a litigation matter in which the auditor assesses a risk of material
misstatement and wants to directly communicate with the entity’s external legal
counsel. The management however refuses to give the auditor permission to
communicate or meet the entity’s external legal counsel. Further, the auditor is
unable to obtain sufficient appropriate audit evidence by performing alternate
procedures.
From the above information, answer the following by choosing the correct option:
1 As per SQC1, what is the retention period of the audit documentation?

(a) It should be no shorter than seven years from the date of the auditor’s report.
(b) It should be no shorter than eight years from the date of the auditor’s report
(c) There is no such retention period; audit documentation must be there
permanently as a defense in favor of the auditor in any litigation
(d) It should be no shorter than eight years from the date of entering into the audit
agreement with client
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2. As part of the audit documentation, the auditor may consider it helpful to prepare
and retain a summary that describes significant matters identified during the audit
and how they were addressed. What is this summary known as?
(a) Audit File (b) Completion Memorandum
(c) Evidence summary (d) Control Memorandum
3. How should the auditor verify the inventory held in custody with the third party?
(a) SA 501 mandates auditor to verify the same physically, hence management
refusal will lead to a disclaimer of opinion
(b) The auditor should perform other procedures like requesting confirmation from
third party or inspecting documentation like warehouse receipts to confirm
existence of the inventory
(c) The auditor should obtain written representation from management on the
inventory held in custody with third party (d) Inventory of client held with third
party is outside the scope of audit; hence auditor need not verify the same for
his audit opinion on the financial statements.
4. Is the opinion of the auditor on not to document the materiality level correct?
(a) Yes, SA 230 does not prescribe any documentation of materiality level as it is
derived out of auditor’s professional judgment.
(b) Yes, none of the auditing standards prescribe documentation of materiality
level.
(c) No, though SA 230 does not prescribe any documentation, it should be
documented as per SA 320.
(d) No, SA 230 explicitly states that materiality level should be documented.
5 Which among the following is not a factor for identification of an appropriate

benchmark?
(a) The elements of the financial statements
(b) The relative volatility of the benchmark
(c) The entity’s ownership structure and the way it is financed.
(d) Previous experience of audit with the entity
Answer
1 a 2 b 3 b 4 c 5 d
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1. As per SA 230 on “Audit Documentation”, the working papers are not the property
of the auditor.
2. Purchase invoice is an example of internal evidence.
3. Sufficiency is the measure of the quality of audit evidence.
4. Inquiry alone is sufficient to test the operating effectiveness of controls.
5. Mr. A is a statutory auditor of ABC Ltd. The branch of ABC Ltd. is audited by Mr.
B, another Chartered Accountant. Mr. A requests for the photocopies of the audit
documentation of Mr. B pertaining to the branch audit.
6. When auditor inquires the management as part of the audit procedures it should be
formal written form only and not informal oral inquiries.
7. Assertions refer to the representations by the auditor to consider the different types
of the potential misstatements that may occur.
8. If an entity has a known number of employees at fixed rates of pay throughout the
period, there would be more need to perform tests of details on the payroll
9. The matter of difficulty, time, or cost involved is in itself a valid basis for the auditor
to omit an audit procedure for which there is no alternative.
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1. Incorrect: As per SA 230 on “Audit Documentation” the working papers are the
property of the auditor and the auditor has right to retain them. He may at his
discretion can make available working papers to his client. The auditor should
retain them long enough to meet the needs of his practice and legal or professional
requirement.
2. Incorrect: Internal evidence is the evidence that originates within the client’s
organisation. Since purchase invoice originates outside the client’s organisation,
therefore, it is an example of external evidence.
3. Incorrect: Sufficiency is the measure of the quantity of audit evidence. On the other
hand, appropriateness is the measure of the quality of audit evidence.
4. Incorrect: Inquiry along with other audit procedures (for example observation,
inspection, external confirmation etc.) would only enable the auditor to test the
operating effectiveness of controls. Inquiry alone is not sufficient to test the operating
effectiveness of controls.
5. Incorrect: SA 230 issued by ICAI on Audit Documentation, and “Standard on Quality

Control (SQC) 1, provides that, unless otherwise specified by law or regulation,
audit documentation is the property of the auditor. He may at his discretion, make
portions of, or extracts from, audit documentation available to clients, provided
such disclosure does not undermine the validity of the work performed, or, in the
case of assurance engagements, the independence of the auditor or of his personnel.
6. Incorrect: When auditor inquires the management as part of audit procedures such
inquiries may range from formal written inquiries to informal oral inquiries.
7. Incorrect: Assertions refer to representations by management that are embodied in

the financial statements as used by the auditor to consider the different types of the
potential misstatements that may occur.
8. Incorrect: If an entity has a known number of employees at fixed rates of pay

throughout the period, it may be possible for the auditor to use this data to estimate
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the total payroll costs for the period with a high degree of accuracy, thereby providing
audit evidence for a significant item in the financial statements and reducing the
need to perform tests of details on the payroll.
9. Incorrect: The matter of difficulty, time, or cost involved is not in itself a valid
basis for the auditor to omit an audit procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for
the conduct of the audit. Notwithstanding this, the relevance of information, and
thereby its value, tends to diminish over time, and there is a balance to be struck
between the reliability of information and its cost.
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RISK ASSESSMENT AND

INTERNAL CONTROL
Sr.No List of Topics as per Module JKSC Topic reference

1 Audit Risk Topic 2
2 Identifying and assessing the Risks of Material Topic 1, 3 & 4

Misstatement
3 Internal Control Topic 5
4 Evaluation of Control by the auditor Topic 11 & 12
5 Testing of Internal control Topic 13
6 Internal Control and IT environment Topic 14 and 15
7 Materiality and Audit Risk Topic 16
8 Documenting the Risk Topic 17
9 Internal Audit Topic 10
10 Standards of Internal Audit Topic 10
11 & 12 Basics of Internal Financial Controls and reporting Topic 18

Requirements
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Sr.No Particulars
1 Risk Assessment Procedure
1.1 Meaning:
To identify and assess the risks of material misstatement, whether due
to fraud or error, at the financial statement and assertion levels, through
understanding the entity and its environment, including the entity’s
internal control, thereby providing a basis for designing and implementing
responses to the assessed risks of material misstatement
1.2 Components of Risks of Material Misstatement
Risk of material misstatement may be defined as the risk that the financial
statements are materially misstated prior to audit.
This consists of two components, described as follows:
1.2.1 Inherent Risk: The susceptibility of an assertion about a class of transaction,
account balance or disclosure to a misstatement that could be material,
either individually or when aggregated with other misstatements, before
consideration of any related controls
1.2.2 Control Risk: The risk that a misstatement that could occur in an assertion
about a class of transaction, account balance or disclosure and that
could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a
timely basis by the entity’s internal control.
1.3 Risks of Material Misstatement at two levels
1.3.1 The overall financial statement level- Risks of material misstatement at the
overall financial statement level refer to risks of material misstatement that
relate pervasively to the financial statements as a whole and potentially
affect many assertions
1.3.2 The assertion level for classes of transactions, account balances, and
disclosures-Risks of material misstatement at the assertion level are
assessed in order to determine the nature, timing, and extent of further
audit procedures necessary to obtain sufficient appropriate audit evidence.
This evidence enables the auditor to express an opinion on the financial
statements at an acceptably low level of audit risk.
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2 Audit Risk
The risk that the auditor expresses an inappropriate audit opinion when
the financial statements are materially misstated. Audit risk is a function
of the risks of material misstatement and detection risk
2.1 Components of Audit risk
 Risks of Material Misstatement as discussed above
 Detection Risk: The risk that the procedures performed by the auditor to
reduce audit risk to an acceptably low level will not detect a misstatement
that exists and that could be material, either individually or when
aggregated with other misstatements
2.2 Inter-Relationship amongst the components
If Risks of Material Misstatement is high then it increases doubt over internal
records and hence auditor shall perform extensive procedures to reduce
Detection risk and thereby it helps to reduce audit risk to an acceptably
low level.
2.3 Audit Risk excludes:
(i) Audit risk does not include the risk that the auditor might express an
opinion that the financial statements are materially misstated when they
are not. This risk is ordinarily insignificant.
(ii) Further, audit risk is a technical term related to the process of auditing;
it does not refer to the auditor’s business risks such as loss from litigation,
adverse publicity, or other events arising in connection with the audit of
3 Considerations for identification and assessment of risks of material misstatement
3.1 Identify risks throughout the process of obtaining an understanding of the
entity and its environment, including relevant controls that relate to the
risks, and by considering the classes of transactions, account balances,
and disclosures in the financial statements
3.2 Assess the identified risks, and evaluate whether they relate more
pervasively to the financial statements as a whole and potentially affect
many assertions
3.3 Relate the identified risks to what can go wrong at the assertion level,
taking account of relevant controls that the auditor intends to test
3.4 Consider the likelihood of misstatement, including the possibility of multiple
misstatements, and whether the potential misstatement is of a magnitude
that could result in a material misstatement
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4 Techniques used for performing risk assessment procedure

4.1 Inquiries of management and of others within the entity who in the
auditor’s judgment may have information that is likely to assist in identifying
risks of material misstatement due to fraud or error.
 Examples of such INQUIRIES:
a) Inquiries directed towards those charged with governance may help the
auditor understand the environment in which the financial statements are
prepared
b) Inquiries of employees involved in initiating, processing or recording
complex or unusual transactions may help the auditor to evaluate the
appropriateness of the selection and application of certain accounting
policies
c) Inquiries directed toward in-house legal counsel may provide information
about such matters as litigation, compliance with laws and regulations,
knowledge of fraud or suspected fraud affecting the entity, warranties,
post-sales obligations, arrangements (such as joint ventures) with business
partners and the meaning of contract terms.
4.2 Analytical procedures
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. Unusual or unexpected relationships
that are identified may assist the auditor in identifying risks of material
misstatement, especially risks of material misstatement due to fraud
4.3 Observation and inspection for e.g observing entity’s operations
5 Internal Control
5.1 Meaning
As per SA-315, “Identifying and Assessing the Risk of Material Misstatement
Through Understanding the Entity and its Environment”, the internal control
may be defined 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.”
5.2 Objectives
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5.2.1 transactions are executed in accordance with managements general or

specific authorization;
5.2.2 all transactions are promptly recorded in the correct amount in the
appropriate accounts and in the accounting period in which executed so
as to permit preparation of financial information within a framework
of recognized accounting policies and practices and relevant statutory
requirements, if any, and to maintain accountability for assets;
5.2.3 assets are safeguarded from un authorised access, use or disposition; and
5.2.4 the recorded assets are compared with the existing assets at reasonable
intervals and appropriate action is taken with regard to any differences
5.3 Benefits of understanding of internal control
It assists the auditor in :
(i) identifying types of potential misstatements ;
(ii) identifying factors that affect the risks of material misstatement, and
(iii) designing the nature, timing, and extent of further audit procedures
6 Limitations of Internal Control
6.1 (i) Internal control can provide only reasonable assurance:
Internal control, no matter how effective, can provide an entity with only
reasonable assurance about achieving the entity’s financial reporting
objectives. The likelihood of their achievement is affected by inherent
limitations of internal control
6.2 Human judgment in decision-making:
Realities that human judgment in decision-making can be faulty and that
breakdowns in internal control can occur because of human error
6.3 Judgements by Management:
Further, in designing and implementing controls, management may make
judgments on the nature and extent of the controls it chooses to implement,
and the nature and extent of the risks it chooses to assume. Management
may end up with faulty design of internal control system.
6.4 Lack of understanding the purpose:
Equally, the operation of a control may not be effective, such as where
information produced for the purposes of internal control (for example, an
exception report) is not effectively used because the individual responsible
for reviewing the information does not understand its purpose or fails to
take appropriate action
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6.5 Collusion among People:

Additionally, controls can be circumvented by the collusion of two or more
people or inappropriate management override of internal control. For
example, management may enter into side agreements with customers
that alter the terms and conditions of the entity’s standard sales contracts,
which may result in improper revenue recognition. Also, edit checks in a
software program that are designed to identify and report transactions
that exceed specified credit limits may be overridden or disabled
6.6 Limitations in case of Small Entities:
Smaller entities often have fewer employees due to which segregation of
duties is not practicable.
However, in a small owner-managed entity, the owner-manager may
be able to exercise more effective oversight than in a larger entity. This
oversight may compensate for the generally more limited opportunities for
segregation of duties.
On the other hand, the owner-manager may be more able to override
controls because the system of internal control is less structured. This is
taken into account by the auditor when identifying the risks of material
misstatement due to fraud
7 Mention the controls relevant to audit and factors to decide which controls
are relevant:
The entity’s objectives, and therefore controls, relate to financial reporting,
operations and compliance; however, not all of these objectives and
controls are relevant to the auditor’s risk assessment
7.1 Materiality.
7.2 The significance of the related risk.
7.3 The size of the entity.
7.4 The nature of the entity’s business, including its organisation and ownership
characteristics.
7.5 The diversity and complexity of the entity’s operations.
7.6 Applicable legal and regulatory requirements.
7.7 The circumstances and the applicable component of internal control.
7.8 The nature and complexity of the systems that are part of the entity’s
internal Control
7.9 Whether, and how, a specific control, individually or in combination with
others, prevents, or detects and corrects, material misstatement.
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8 Components of Internal Control

The division of internal control into the following five components provides
a useful framework for auditors to consider how different aspects of an
entity’s internal control may affect the audit:
8.1 Control Environment:
The auditor shall obtain an understanding of the control environment. As
part of obtaining this understanding, the auditor shall evaluate whether:
(i) Management has created and maintained a culture of honesty and
ethical behavior; and
(ii) The strengths in the control environment elements collectively provide
an appropriate foundation for the other components of internal
control.
Elements of control environment include:
8.1.1 Communication and enforcement of integrity and ethical values–
These are essential elements that influence the effectiveness of the design,
administration and monitoring of controls
8.1.2 Commitment to competence – Matters such as management’s consideration
of the competence levels for particular jobs and how those levels translate
into requisite skills and knowledge
8.1.3 Management’s philosophy and operating style – Characteristics such as
management’s:
Approach to taking and managing business risks.
Attitudes and actions toward financial reporting.
Attitudes toward information processing and accounting functions and
personnel
8.1.4 Organisational structure – The framework within which an entity’s activities
for achieving its objectives are planned, executed, controlled, and reviewed.
8.1.5 Participation by those charged with governance– Attributes of those
charged with governance such as their independence from management,
their experience, the extent of their involvement and the information they
receive, the appropriateness of their actions, etc.
8.1.6 Assignment of authority and responsibility– i.e. reporting relationships and
authorisation hierarchies.
8.1.7 Human resource policies and practices
{Note- Even if the entity has satisfactory control environment – it not an
absolute deterrent to fraud}
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8.2 The Entity’s Risk Assessment Process:

The auditor shall obtain an understanding of whether the entity has a
process for:
8.2.1 Identifying business risks relevant to financial reporting objectives;
8.2.2 Estimating the significance of the risks;
8.2.3 Assessing the likelihood of their occurrence; and
8.2.4 Deciding about actions to address those risks
8.3 The information system, including the related business processes, relevant
to financial reporting and communication
8.3.1 The classes of transactions in the entity’s operations that are significant to
the financial statements;
8.3.2 The procedures by which those transactions are initiated, recorded,
processed, corrected as necessary, transferred to the general ledger and
reported in the financial statements;
8.3.3 The related accounting records, supporting information and specific
accounts in the financial statements that are used to initiate, record,
process and report transactions;
8.3.4 How the information system captures events and conditions that are
significant to the financial statements
8.3.5 Understanding of How entity Communicates Financial Roles and
Responsibilities
(i) Understanding of Roles and Responsibilities: i.e. individual roles and
responsibilities pertaining to internal control over financial reporting.
(ii) Understanding regarding Relation of Activities: It includes
understanding by employees as to how their activities relate to the
work of others and the means of reporting exceptions to higher level
within the entity.
(iii) Policy Manuals and Financial Reporting Manuals
(iv) Open Communication Channels: help ensure that exceptions are
reported and acted on.
(v) Less structured and easier for Small Entities: Communication may be
less structured and easier to achieve in a small entity due to fewer
levels of responsibility and management’s greater visibility and
availability.
8.4 Control Activities
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8.4.1 The auditor shall obtain an understanding of control activities relevant

to the audit, which the auditor considers necessary to assess the risks of
material misstatement
8.4.2 An audit requires an understanding of only those control activities related
to significant class of transactions, account balance, and disclosure in the
financial statements and the assertions which the auditor finds relevant in
his risk assessment process.
8.4.3 Examples of control activities are authorization, approval, segregation of
duties etc
8.5 Monitoring of Controls
8.5.1 The auditor shall obtain an understanding of the major activities that the
entity uses to monitor internal control over financial reporting.
8.5.2 Management accomplishes monitoring of controls through ongoing
activities(regular management & supervisory activities), separate
evaluations, or a combination of the two.
8.5.3 Management’s monitoring activities may include using information from
communications from external parties such as customer complaints and
regulator comments that may indicate problems or highlight areas in need
of improvement.
8.5.4 In case of Small Entities- Management’s monitoring of control is often
accomplished by management’s or the owner-manager’s close involvement
in operations.
8.5.5 If the entity has an internal audit function, the auditor shall obtain an
understanding of the following-
(a) The internal audit function’s responsibilities and how the internal
audit function fits in the entity’s organisational structure; and
(b) The activities performed, or to be performed, by the internal audit
function.
9 Risks that require Special Audit Considerations
9.1 Whether the risk is a risk of fraud;
9.2 Whether the risk is related to recent significant economic, accounting, or
other developments like changes in regulatory environment, etc., and,
therefore, requires specific attention
9.3 The complexity of transactions
9.4 Whether the risk involves significant transactions with related parties
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9.5 The degree of subjectivity in the measurement of financial information

related to the risk, especially those measurements involving a wide range
of measurement uncertainty
9.6 Whether the risk involves significant transactions that are outside the
normal course of business for the entity, or that otherwise appear to be
unusual
10 Internal Audit
10.1 Meaning
Audit of Internal Control system designed, implemented and maintained
by management and those charged with governance of the entity.
10.2  Applicability
(a) every listed company;
(b) every unlisted public company having-
(i) paid up share capital of fifty crore rupees or more during the preceding
financial year; or
(ii) turnover of two hundred crore rupees or more during the preceding
financial year; or
(iii) outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any point of
time during the preceding financial year; or
(iv) outstanding deposits of twenty five crore rupees or more at any point
of time during the preceding financial year; and
(c) every private company having-
(i) turnover of two hundred crore rupees or more during the preceding
financial year; or
(ii) outstanding loans or borrowings from banks or public financial
institutions exceeding one hundred crore rupees or more at any point of
time during the preceding financial year
 Eligibility
As per section 138, the internal auditor shall either be a chartered
accountant or a cost accountant (whether engaged in practice or not), or
such other professional as may be decided by the Board to conduct internal
audit of the functions and activities of the companies.
The internal auditor may or may not be an employee of the company
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10.3 Scope
It is majorly governed by the terms of engagement between management
and internal auditor. The main functions are as follows:
Activities Relating to Governance: The internal audit function may assess
the governance process in its accomplishment of objectives on ethics and
values, performance management and accountability
Activities Relating to Risk Management: The internal audit function may
assist the entity by identifying and evaluating significant exposures to risk
and contributing to the improvement of risk management. The internal
audit function may perform procedures to assist the entity in the detection
of fraud
Activities Relating to Internal Control:
(i) Evaluation of internal control: The internal audit function may be
assigned specific responsibility for reviewing controls, evaluating their
operation and recommending improvements thereto
(ii) Examination of financial and operating information: The internal audit
function may be assigned to review the means used to identify, recognize,
measure, classify and report financial and operating information, and to
make specific inquiry into individual items, including detailed testing of
transactions, balances and procedures
(iii) Review of operating activities: The internal audit function may be
assigned to review the economy, efficiency and effectiveness of operating
activities, including non financial activities of an entity
(iv) Review of compliance with laws and regulations: The internal audit
function may be assigned to review compliance with laws, regulations and
other external requirements
10.4 Independence
Internal Auditor is relatively less independent than external auditor
10.5 SA 610: Relying Upon the Work of an Internal Auditor
10.5.1 Internal audit is an independent management function, which involves a
continuous and critical appraisal of the functioning of an entity with a view
to suggest improvements thereto and add value to and strengthen the
overall governance mechanism of the entity.
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10.5.2 External auditor needs :-

(a) To determine whether the work of the internal audit function or direct
assistance from internal auditors can be used, and if so, in which areas
and to what extent;
(b) If using the work of the internal audit function, to determine whether
that work is adequate for purposes of the audit; and
(c) If using internal auditors to provide direct assistance, to appropriately
direct, supervise and review their work.
{Internal Audit function typically include assurance and consulting
activities designed to evaluate and improve the effectiveness of the
entity’s activities related to (a) Governance ;(b) Risk management ;(c)
Internal controls (i. Evaluation of internal control ; ii. Examination of
financial and operating information ; iii. Review of operating activities
; iv. Review of compliance with laws and regulations) }
10.5.3 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) The extent to which the internal audit function’s 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.
10.5.4 The external auditor may be prohibited by law or regulation from obtaining
direct assistance from internal auditors. If using internal auditors to provide
direct assistance is not prohibited by law or regulation, and the external
auditor plans to use internal auditors to provide direct assistance on the
audit, the external auditor shall evaluate (i) the existence and significance
of threats to objectivity and (ii) the level of competence of the internal
auditors who will be providing such assistance.
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10.5.5 Prior to using internal auditors to provide direct assistance for purposes of
the audit, the external
auditor shall:
(a) Obtain written agreement from an authorized representative of the
entity 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.
10.5.6 In discussing the planned use of their work with the internal audit function
as a basis for coordinating the respective activities, it may be useful to
address the following:
-- The timing of such work, -- The nature of the work performed, --The
extent of audit coverage, -- Materiality for the financial statements as a
whole and performance materiality, --Proposed methods of item selection
and sample sizes, --Documentation of the work performed, --Review and
reporting procedures
10.5.7 External Auditor should review internal auditor’s work :-
a) Whether the work was properly planned and work of assistants was
properly supervised , reviewed and documented;
b) Whether sufficient appropriate evidence was obtained to afford a
reasonable basis for the conclusions reached;
c) Whether conclusions reached are appropriate in the circumstances
and
d) Whether any exceptions or unusual matters disclosed by internal
auditor’s procedures have been properly resolved.
10.5.8 External Auditor shall document conclusions reached regarding the
adequacy of the work of
internal auditor & the audit procedures performed by the external auditor
on that work in
accordance with this SA
10.6 Standards on Internal Audit (SIA):
There are 18 SIAs issued by Internal Audit Standard Board which are
recommendatory in nature.
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10.7 Auditor assesses control risk as Rely or Not rely on Controls.

When making control risk assessments, consider:
• The control environment’s influence over internal control. A control
environment that supports the prevention, and detection and
correction, of material misstatements allows greater confidence in
the reliability of internal control and audit evidence generated within
the entity. However it does not guarantee the effectiveness of specific
controls. We therefore, test the operating effectiveness of controls
over significant class of transactions (SCOTs) when we plan to take a
controls reliance strategy. Conversely, the control environment may
undermine the effectiveness of specific controls and is a key factor in
our control risk assessments.
• Evaluations of the related IT processes that support application and
IT dependent manual controls.
• Our testing approach over SCOTs and disclosure processes (i.e.,
controls reliance or substantive only strategy).
• The expectation of the operating effectiveness of controls based on
the understanding of entity’s processes.
11 Benefits of Evaluation of Internal Control
11.1 whether errors and frauds are likely to be located in the ordinary course of
operations of the business;
11.2 whether an adequate internal control system is in use and operating as
planned by the management;
11.3 whether the controls adequately safeguard the assets;
11.4 how far and how adequately the management is discharging its function in
so far as correct recording of transactions is concerned;
11.5 how reliable the reports, records and the certificates to the management
can be;
11.6 the extent and the depth of the examination that he needs to carry out in
the different areas of accounting;
11.7 what would be appropriate audit technique and the audit procedure in the
given circumstances;
11.8 what are the areas where control is weak and where it is excessive; and
11.9 whether some worthwhile suggestions can be given to improve the control
system.
12 Methods to Evaluate Internal Control
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12.1 The Narrative Record

This is a complete and exhaustive description of the system as found in
operation by the auditor. Actual testing and observation are necessary
before such a record can be developed. It may be recommended in cases
where no formal control system is in operation and would be more suited
to small business
12.2 A Check List
This is a series of instructions which a member of the auditing staff must
follow. When he completes instruction, he initials the space against the
instruction. Answers to the check list instructions are given by adopting
distinctive “ticks
12.3 Internal Control Questionnaire
In the questionnaire, generally questions are so framed that a ‘Yes’ answer
denotes satisfactory position and a ‘No’ answer suggests weakness.
Provision is made for an explanation or further details of ‘No’ answers. In
respect of questions not relevant to the business, ‘Not Applicable’ reply is
given.
12.4 A Flow Chart
It is a graphic presentation of each part of the company’s system of internal
control. A flow chart is considered to be the most concise way of recording
the auditor’s review of the system. It minimises the amount of narrative
explanation and thereby achieves a consideration or presentation not
possible in any other form.
It is also necessary for the auditor to study the significant features of the
business carried on by the concern; the nature of its activities and various
channels of goods and materials
13 Test of Controls (SA 330)
13.1 Test of controls are performed to obtain audit evidence about the
effectiveness of the:
a) design of the accounting and internal control systems
b) operation of internal controls throughout the period
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13.2 Test of Control may include:-

a) Inspection of documents supporting transactions and other events to
gain audit evidence that internal controls have operated properly.
b) Inquiries about and observation of Internal Controls..
c) Re- performance of Internal Control.
d) Testing of Internal Control operating on specific computerized
applications or over the overall information technology function.
13.3 It has been suggested that actual operation of the internal control should
be tested by the application of procedural tests and examination in depth
 Procedural Test: Procedural tests simply mean testing of the compliance
with the procedures laid down by the management in respect of initiation,
authorisation, recording and documentation of transaction at each stage
through which it flows.
 Examination in depth: It means in-depth verification of selected
transactions to examine the process from beginning to end. Auditor not
only verifies compliance with the procedures laid down by the management
but also suggests additions or deletions in the processes.
13.4 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
14 Benefits of Information technology to an entity’s control
14.1 Consistently apply predefined business rules and perform complex
calculations in processing large volumes of transactions or data;
14.2 Enhance the timeliness, availability, and accuracy of information;
14.3 Facilitate the additional analysis of information;
14.4 Enhance the ability to monitor the performance of the entity’s activities
and its policies and procedures;
14.5 Reduce the risk that controls will be circumvented; and
14.6 Enhance the ability to achieve effective segregation of duties by
implementing security controls in applications, databases, and operating
systems.
15 Examples of Risks to an entity’s internal control due to information technology
15.1 Reliance on systems or programs that are inaccurately processing data,
processing inaccurate data, or both.
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15.2 Unauthorised access to data that may result in destruction of data or

improper changes to data
15.3 The possibility of IT personnel gaining access privileges beyond those
necessary to perform their assigned duties thereby breaking down
segregation of duties
15.4 Unauthorised changes to data in master files
15.5 Unauthorised changes to systems or programs
15.6 Potential loss of data or inability to access data as required
16 Materiality and Audit Risk
16.1 The concept of materiality is applied by the auditor both in planning
and performing the audit, and in evaluating the effect of identified
misstatements on the audit and of uncorrected misstatements, if any, on
the financial statements and in forming the opinion in the auditor’s report
16.2 Audit risk is the risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated
16.3 Materiality and audit risk are considered throughout the audit, in particular,
when: (a) Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures
(c) Evaluating the effect of uncorrected misstatements, if any, on the
financial statements and in forming the opinion in the auditor’s report
17 Documentation in relation to risk of material misstatement
17.1 The discussion among the engagement team and the significant decisions
reached;
17.2 Key elements of the understanding obtained regarding each of the aspects
of the entity and its environment and of each of the internal control
components, the sources of information from which the understanding was
obtained; and the risk assessment procedures performed;
17.3 The identified and assessed risks of material misstatement at the financial
statement level and at the assertion level ; and
17.4 The risks identified, and related controls about which the auditor has
obtained an understanding
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18 Internal financial controls & Reporting requirement

 Section 134(5)(c) explains the meaning of internal financial controls
as, “the policies and procedures adopted by the company for ensuring
the orderly and efficient conduct of its business, including adherence
to company’s policies, the safeguarding of its assets, the prevention
and detection of frauds and errors, the accuracy and completeness
of the accounting records, and the timely preparation of reliable
financial information.”
 Section 143(3)(i) of the Act requires the auditors’ report to state
whether the company has adequate internal financial controls system
in place and the operating effectiveness of such controls.
 Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires
the board report of all companies to state the details in respect of
adequacy of internal financial controls with reference to the financial
statements.
 The table below gives a summary of the requirements of the Act
Internal Financial Control vs Internal controls over financial reporting

-- Internal Financial Control as per Section 134(5)(e)(already explained
above)
-- Internal controls over financial reporting-is required where auditors
are required to express an opinion on the effectiveness of an entity’s
internal controls over financial reporting, such opinion is in addition to
and distinct from the opinion expressed by the auditor on the financial
statements.
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1 XYZ Ltd is engaged in the business and running several stores dealing in
variety of items such as ready made garments for all seasons, shoes, gift
items, watches etc.
There are security tags on each and every item. Moreover, inventory records
are physically verified on monthly basis.
Discuss the types of inherent, control and detection risks as perceived by
the auditor.
Ans Inherent Risk:
Because items may have been misappropriated by employees, therefore,
risk to the auditor is that inventory records would be inaccurate.
Control Risk:
There is a security tag on each item displayed. Moreover, inventory records
are physically verified on monthly basis. Despite various controls being
implemented at the stores, still collusion among employees may be
there and risk to auditor would again be that inventory records would be
inaccurate.
Detection Risk:
Auditor checks the efficiency and effectiveness of various control systems
in place. He would do that by making observation, inspection, enquiry, etc.
In addition to these, the auditor would also employ sampling techniques
to check few sales transactions from beginning to end. However, despite all
these procedures, the auditor may not detect the items which have been
stolen or misappropriated
2 The auditor of ABC Textiles Ltd chalks out an audit plan without
understanding the entity’s business. Since he has carried out many audits
of textile companies, there is no need to understand the nature of business
of ABC Ltd. Advise the auditor how he should proceed
Ans Obtaining an understanding of the entity and its environment, including
the entity’s internal control (referred to hereafter as an “understanding of
the entity”), is a continuous, dynamic process of gathering, updating and
analysing information throughout the audit. The auditor should proceed
accordingly {REFER CHAPTER 2 “understanding the entity”}
3 Prince Blankets is engaged in business of blankets. Its major portion of
sales is taking place through internet. Advise the auditor how he would
proceed in this regard as to understanding the entity and its environment.
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Ans While understanding entity and its environment, internet sales is being
perceived as risky area by the auditor and thereby would be spending
substantial time and extensive audit procedures on this particular area
{REFER CHAPTER 2 “understanding the entity”}
4 Auditor GR and Associates, appointed for audit of PNG Ltd, a manufacturing
company engaged in manufacturing of various food items. While planning
an audit, the auditor does not think that it would be necessary to understand
internal controls. Advise the auditor in this regard
Ans The auditor shall obtain an understanding of internal control relevant to
the audit. Although most controls relevant to the audit are likely to relate
to financial reporting, not all controls that relate to financial reporting are
relevant to the audit. It is a matter of the auditor’s professional judgment
whether a control, individually or in combination with others, is relevant to
the audit. {REFER TOPIC 7}
5 “The auditor shall obtain an understanding of the major activities that the
entity uses to monitor internal control over financial reporting” Explain
Ans a) Monitoring of controls Defined: Monitoring of controls is a process to
assess the effectiveness of internal control performance over time.
b) Helps in assessing the effectiveness of controls on a timely basis: It
involves assessing the effectiveness of controls on a timely basis and
taking necessary remedial actions.
c) Management accomplishes through ongoing activities, separate
evaluations etc.:
d) Management accomplishes monitoring of controls through ongoing
activities, separate evaluations, or a combination of the two.
e) Ongoing monitoring activities are often built into the normal recurring
activities of an entity and include regular management and supervisory
activities.
f) Management’s monitoring activities include: Management’s monitoring
activities may include using information from communications
from external parties such as customer complaints and regulator
comments that may indicate problems or highlight areas in need of
improvement.
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g) (v) In case of Small Entities: Management’s monitoring of control

is often accomplished by management’s or the owner-manager’s
close involvement in operations. This involvement often will identify
significant variances from expectations and inaccuracies in financial
data leading to remedial action to the control.
6 Risk of material misstatement consists of two components” Explain clearly
defining risk of material misstatement
Ans Refer topic 1.2
7 The SAs do not ordinarily refer to inherent risk and control risk separately, but
rather to a combined assessment of the “risks of material misstatement””
Explain
Ans Refer Topic 1.2
8 “The auditor shall obtain an understanding of the control environment”
Explain stating what is included in control environment.
Ans Topic 8.1
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1. Which of the following is true:

(a) The internal audit plan should be comprehensive enough to ensure that it helps
in achieving of the above overall objectives of an internal audit.
(b) The internal audit plan should, generally be consistent with the goals and
objectives of the internal audit function as listed out in the internal audit
charter as well as the goals and objectives of the organisation.
(c) In case the entire internal audit or the particular internal audit engagement
has been outsourced, the internal auditor should also ensure that the plan is
consistent with the terms of the engagement.
(d) All the above
2. ..............refers to the audit procedures performed to obtain an understanding of

the entity and its environment, including the entity’s internal control to identify and
assess the risk of material misstatement.
(a) Risk Assessment procedures (b) Test of controls
(c) Substantive Analytical Procedures (d) Observation
3. Audit risk is a function of the risks of material misstatement and __________

(a) detection risk (b) inherent risk
(c) control risk (d) business risk
4. For a given level of audit risk, the acceptable level of detection risk bears ________
relationship to the assessed risks of material misstatement at the assertion level.
(a)
direct (b) Inverse
(c) no relationship (d) either (a) or (c)
5. Risk of material misstatement has ________ components

(a) one (b) two (c) three (d) four
6. Controls can be related to an assertion.

(a) directly (b) indirectly
(c) directly or indirectly (d) no relationship between controls and assertion.
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For the purpose of Identifying and assessing the risks of material misstatement, the
auditor shall :
(a) Identify risks throughout the process of obtaining an understanding of the entity
and its environment, including relevant controls that relate to the risks, and by
considering the classes of transactions, account balances, and disclosures in
(b) Assess the identified risks, and evaluate whether they relate more pervasively
to the financial statements as a whole and potentially affect many assertions;
(c) Relate the identified risks to what can go wrong at the assertion level, taking
account of relevant controls that the auditor intends to test; and
(d) Not consider the likelihood of misstatement, including the possibility of multiple
that could result in a material misstatement.
8. Components of risk of material misstatement at the assertion level are:

(a) Inherent risk and detection risk
(b) inherent risk and control risk
(c) control risk and detection risk
(d) inherent risk, control risk and detection risk
9. Risk of material misstatement may be defined as the risk

(a) that the financial statements are materially misstated after audit.
(b) that the financial statements are materially misstated during audit.
(c) that the financial statements are materially misstated prior to audit.
10. The susceptibility of an assertion about a class of transaction, account balance or

disclosure to a misstatement that could be material, either individually or when
aggregated with other misstatements, before consideration of any related controls is-
(a) Control Risk (b) Inherent Risk
(c) Detection Risk (d) Audit Risk
11. The assessment of risks is a

(a) matter capable of precise measurement rather than matter of professional
judgment
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(b) matter of professional judgment, rather than a matter capable of precise

measurement.
(c) matter of professional judgement as well as capable of precise measurement
sometimes.
12. The assessment of the risks of material misstatement may be expressed in

(a) quantitative terms, such as in percentages, or in non-quantitative terms.
(b) quantitative terms, such as in percentages,
(c) non-quantitative terms.
13. SA 315 establishes requirements and provides guidance on identifying and assessing
the risks of material misstatement
(a) at the financial statement levels only.
(b) at the assertion levels only.
(c) at the financial statement and assertion levels.
(d) at the financial statement or assertion levels.
14. Who is mainly responsible for implementation of internal financial controls in a

company?
(a)
Auditors (b) Directors
(c) Employees (d) Regulators
15. The Guidance Note on Audit of Internal Financial Controls over Financial Reporting
has been issued by?
(a)
ICAI (b) SEBI (c) MCA (d) RBI
16. _______ is a control deficiency or a combination of deficiencies in internal controls

that is important enough to merit the attention of those charged with governance
since there is a reasonable possibility that amaterial misstatement will not be
prevented or detected in a timely manner by management.
(a) Material Weakness (b) Material deficiency
(c) Control Risk (d) Significant Deficiency
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17. Who among the following is required to comply with Section 149(8) read with
Schedule IV to the companies Act,2013 ?
(a) Board of Directors (b) Audit Committee
(c) Statutory Auditor (d) Independent Directors
18. Risk assessment procedures are performed by auditor

a) To detect material misstatements in the financial statements
b) To identify and assess material misstatements in the financial statements
c) To identify and assess operational risk in the operations of the entity
d) All of these
19. If before considering the internal controls at the audited entity, there is a high
probability of certain errors in the financial statements, we particularly speak of
a) a high sampling risk b) a high inherent risk
c) a high control risk d) a high detection risk
20. There is inverse relationship between

a) Inherent risk and control risk
b) Combined risk of inherent and control risk with risk of material misstatements
c) Materiality and Audit Risk
d) Detection Risk and Audit Risk
21. Significant risk refers to

a) Audit Risk
b) Sampling Risk
c) Risk of material misstatements
d) Risk of material misstatements requiring special audit considerations
22. For better assessing the audit risk, auditor inquires different groups in the
organizations EXCEPT:
a) Board of governance and top level management
b) Legal counsel
c) Middle level management
d) Shareholders
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23. _____________ is sent by auditor to management and TCWG to communicate

weakness in internal control system
a) Letter of weakness b) Engagement letter
c) Internal control questionnaire d) Written representation
24. Which of the following in incorrect

a) The external auditor may use internal auditor to provide direct assistance w.r.t.
area that involve significant judgements in audit
b) The external auditor shall not use internal auditor to provide direct assistance
w.r.t. area where risk of material misstatements is highly assessed by auditor
c) Both (a) and (b)
d) None of these
25. The nature, timing and extent of substantive procedures is related to assessed level
of control risk
a)
randomly b) disproportionately
c)
directly d) inversely
26. The sequence of steps in the auditor’s consideration of internal control is as follows
–
a) Obtain an understanding, design substantive test, perform tests of control,
make a preliminary assessment of control risk
b) Design substantive tests, obtain an understanding, perform tests of control,
make a preliminary assessment of control risk
c) Obtain an understanding, make a preliminary assessment of control risk,
perform tests of control, design substantive procedures.
d) Perform tests of control, obtain and understanding, make a preliminary
assessment of control risk, design
27. Which of the following is not an inherent limitation of internal control system?
a) Management override b) Collusion among employees
c) Inefficiency of internal auditor d) Abuse of authority
28. The primary purpose of performing tests of control is to provide reasonable assurance
that_
a) there are no material misstatements due to fraud or error in financial statement
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b) accounting system is well documented

c) Written evidence is there to support transactions
d) if internal control is effective
29 The overall attitude and awareness of an entity’s board of directors concerning the
importance of internal control is reflected in
a) accounting controls b) control environment
c) control procedures d) supervision
30. Control risk is assessed at

a) Overall financial statements level b) Fraud risk factor level
c) Assertion level d) Control environment level
31. A flow chart, made by the auditor, of an entity’s internal control system is a graphic
representation that depicts the auditor’s.
a) understanding of the system
b) understanding of fraud risk factors
c) documentation of assessment of control risk
d) Both (a) and (c)
32. The performance of tests of control is documented in

a) audit programme b) flow charts
c) working papers d) any of the above
33. Which of the following statements is not correct?

a) Inherent risk and control risk cannot be controlled by the management i.e are
uncontrollable
b) Detection risk is related directly to they effectiveness of the auditor’s procedure
c) Detection risk related inversely to control risk
d) Inhernt risk and control risk are highly interrelated
34. Proper segregation of duties reduces the opportunities in which a person would both
a) establish controls and executes them
b) records cash receipts and cash payments
c) perpetuate errors and frauds and conceals them
d) record the transaction in journal and ledger.
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35. After testing a client’s internal control activities, an auditor discovers a number of
significant deficiencies in the operation of a client’s internal controls. Under these
circumstances the auditor most likely would
a) Issue a disclaimer of opinion about the internal controls as part of the auditor’s
report
b) Increase the assessment of control risk and increase the extent of substantive
tests
c) Issue a qualified opinion of this finding as part of the auditor’s report
d) Withdraw from the audit because the internal controls are ineffective
36. _______________ is a complete and exhausted description of the system as found

in operation by the auditors.
a) Check List b) Flow Chart
c) Narrative Records d) Internal Control Questionnaire
37. _____________ gives a bird’s eye view of the system and flow of transactions.
a) Narrative Records b) Check List
c) Internal Control Questionnaire d) Flow Chart
38. Internal control system provides reasonable assurance about the achievements of
entity’s objectives, except
a) Reliability of financial reporting b) Safeguarding of assets
39. Examination in depth refers to

a) Examining 100% items of a population
b) Examining all the assets and liabilities
c) Examination of a few selected transactions from the beginning to the end
through the entire flow of transaction
d) None of these
40. Prakash & Co. Chartered Accountants are the internal auditor of Textbook Private
Limited, for the year 2016-17. You have been instructed by your senior to check the
internal controls for the investments done by the company during the year.
While verifying the same you noticed that the property documents, share certificates
and other investment documents have been kept in a safe custody locker, whose
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keys are kept with an authorised official of Accounts Department of the company
and none other than that official has access to locker. As an internal auditor do you
consider as material weakness in internal controls? If yes, how will you report the
matter?
a) It cannot be considered as material weakness in internal control as the company
might not have any other reliable employee within in its staff members.
b) The safe custody locker should always be under the control of two authorised
officials. Therefore, the auditor should communicate such material weakness
to the management or audit committee.
c) It is not material weakness to be reported as giving the keys to two or more
persons can lead a situation of confusion only.
d) The auditor should discuss the observation with the management and there is
no need of any written communication.
41. Control activities, whether within IT or manual systems, have various objectives and
are applied at various organisational and functional levels. Which of the following
is an example of control activities:
(a) Authorization. (b) Performance reviews.
(c) Information processing. (d) All of the above
Answer
1 D 11 B 21 D 31 A
2 A 12 A 22 D 32 C
3 A 13 C 23 A 33 A
4 B 14 B 24 A 34 C
5 B 15 A 25 C 35 B
6 C 16 D 26 C 36 C
7 D 17 D 27 C 37 D
8 B 18 D 28 D 38 D
9 C 19 B 29 B 39 C
10 10 20 C 30 C 40 B
41 D
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CASE 1.
Moon Group of companies is a retail chain involved in the selling of daily consumer needs
directly to the customer. They are in the process of appointing an audit firm for the audit
of their accounts for the financial year 2019-20. Moon Group is a South Indian based
consumer store having a total of 16 outlets across 4 cities in South India.
Sumant & Co. is appointed as the principal auditor for the entire group. ompanies Act
2013 prescribes in detail the terms of this audit engagement. Further, there are many
branch auditors appointed for the outlets in the other cities. The company also has an
internal audit function conducted on quarterly basis by Ram & Co. Following are the
observations during the course of the statutory audit:
(a) One of the discounts offered by the store is in the form of payback cards where reward
points are accumulated and the customer can redeem the same on subsequent
purchase. The management and internal auditors are of the opinion that the points
redeemed are to be treated as trade discount. The external auditors are doubtful on
the matter.
(b) One of the outlet in Chennai region is in the verge of getting closed and is only left
with low value stock to be cleared before closure. During the year, the sales were
only around 1,40,000/- and the auditor considers this component immaterial. All
other outlets are performing well with good revenue share.
(c) The gratuity valuation of the employees of the retail chain is done by an external
valuer. The auditor, considering the quantum involved appoints an external auditor’s
expert for the verification of the actuarial calculation of gratuity.
From the above facts, answer the following questions by choosing the correct answer:
1 As per SA 210 – Agreeing the Terms of Audit Engagement, which of the following
statement is correct?
(a) Though law prescribes in sufficient detail the terms of the audit engagement,
the auditor still needs to record them in a written agreement and also seek
written agreement from management that it acknowledges and understands
that it has responsibility for the preparation of financial statements.
(b) Since law prescribes in sufficient detail the terms of the audit engagement, the
auditor need not record them in a written agreement except for the fact that law
or regulation applies and also seek written agreement from management that
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it acknowledges and understands that it has responsibility for the preparation

of financial statements.
(c) The auditor has to take an extract of the law prescribing the details of the terms
of the audit engagement and obtain the counter signature of the management
in it.
(d) Though law prescribes in sufficient detail the terms of the audit engagement,
the auditor still needs to record them in a written agreement, however it
need not seek written agreement from management that it acknowledges
and understands that it has responsibility for the preparation of financial
statements.
2. With respect to the treatment of discount on redemption of points in payback card,

what should be the action of the external auditor?
(a) The auditor can place reliance and go by the opinion of the branch auditor and
internal auditor as they have only done a thorough and detailed audit of the
accounts
(b) The auditor can place reliance on the management’s accounting policy as
prima facie they are only responsible for preparation of financial statements.
(c) The external auditor has sole responsibility for the audit opinion expressed and
hence he should perform procedures to satisfy himself on the correct treatment
and issue opinion accordingly.
(d) The auditor can advise management on correct treatment but cannot qualify
his opinion as branch auditor’s opinion has higher authority than external
auditor’s opinion.
3. What is the main objective of the external auditor, when he uses the work of the
internal audit function of Ram & Co.?
(a) To determine as to which areas, what extent the work can be used and whether
that work is adequate for the purposes of the audit.
(b) To appropriately direct, supervise and review the work of the internal audit
function
(c) Review the internal audit report and audit the areas not covered by the internal
audit function
(d) Enquire from management on the special points that arose during internal
audit and follow up on the course of action on those points.
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4. The external auditor finds that the branch auditor of the outlet in the Chennai region,
which is in the verge of closing down, is audited by an auditor who is not a member
of the Institute of Chartered accountants of India. What should the external auditor
do?
(a) Since the professional competence of the auditor is in question, the external
auditor should himself visit the premise and audit the accounts.
(b) Since the financial statement of the component is immaterial, the provisions of
SA 600 do not apply.
(c) The auditor can rely on the financial statements of that component by obtaining
written representation from management that the branch auditor is otherwise
well qualified.
(d) Since the professional competence of the auditor is in question, the external
auditor should co-ordinate with the branch auditor and call for the books of
accounts and other explanations.
5. Which of these is not a factor affecting the external auditor’s evaluation of the
objectivity of the internal audit function?
(a) Whether the organizational status of the internal audit function supports the
ability of the function to be free from bias, conflict of interest or undue influence
of others to override professional judgment.
(b) Whether the internal audit function is free of any conflicting responsibilities.
(c) Whether the internal auditors have adequate technical training and proficiency
in auditing.
(d) Whether those charged with governance oversee employment decisions related
to internal audit function.
Answer
1 B 2 C 3 A 4 B 5 c
CASE 2
Roop & Co. are the auditors of Onda group of Hotels. This is the first time the firm is
auditing an industry in food and beverage and it is day one of the audit. The engagement
partner along with his team wants to make a thorough understanding of the entity
and its environment in order to identify and assess the risks of material misstatements,
whether due to fraud or error. The following are some of the points identified by them
on Day 1.
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- The hotel has two banquet halls. The documentation available for verification
of banquet hall revenue is only the invoice raised by the hotel and some mail
conversations on customer enquiry and finalization of price. On audit trial, it is
found that finance approval of the transaction is only after invoice is sent to them for
accounting at final settlement. Advance paid by the clients are not vetted through
finance team. The auditor suspects a weakness in this system.
- The auditor also finds a control deficiency in the process of procurement of stores.
A goods receipt note is not prepared at the time of receipt of goods. On enquiry
with management, the auditor finds that there exists a system control wherein
goods receipt note is automatically prepared and approved in the system once the
quantity and price of goods is entered against specific vendor. This entry is on real-
time basis and system does not allow back dated entries.
- The auditor enquires of the management as to what is risk assessment process
followed by the entity for prevention and detection of risk of material misstatement
due to fraud and error.
The auditor finds there is no documented risk assessment process.
With the help of the above facts, answer the following questions by choosing the correct
option.
1 What kind of a risk is portrayed in the booking of revenue with respect to Banquet
halls?
(a) Inherent risk in the class of transaction
(b) Control risk in the class of transaction
(c) Detection risk in the audit procedures
(d) Audit risk in the opinion on the financial statements.
2. Which among the following statement is incorrect in the context of Audit Risk?
(a) The more extensive the audit procedures performed, the lower is the detection
risk
(b) Greater the risk of material misstatement the auditor believes exist, less is the
detection risk that can be accepted and accordingly more persuasive evidence
is required by the auditor.
(c) Audit risk also includes the risk that the auditor may express an opinion that
the financial statements are materially misstated when they are actually not.
(d) Risk of material misstatement at the assertion level is of two kinds – control
risk and inherent risk.
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3. In the case of procurement of stores, the auditor has tested more than one control for
the same assertion. In that given case, what should be his reliance on the control?
(a) Since compensating controls are identified, if tested and evaluated to be
effective, the auditor can rely on the control.
(b) Even though compensating controls are there, since one control is ineffective,
the auditor should not rely on control for this assertion and should perform
extensive procedures.
(c) Documentation in electronic medium cannot be accepted, hence, he cannot
rely only on system control.
(d) Even though compensating controls are there, since one control is ineffective,
the auditor should not rely on control for this assertion as well as associated
assertions.
4. In the context of SA 315, which among the following is NOT a risk assessment
procedure?
(a) Inquiries of management, of appropriate individuals within internal audit
function and of others within the entity
(b) Analytical Procedures
(c) Observation and Inspection
(d) External Confirmation
5. What should be the course of action of the auditor for the entity not having a
documented risk assessment process?
(a) The auditor should obtain management written representations on how risks
are identified
(b) The auditor shall discuss with management on how risks are identified, addressed
and determine whether the absence is appropriate in the circumstances or
whether it represents a significant deficiency in internal control.
(c) The auditor should advise the management to document the same immediately
and accordingly opine on the same in his audit report too.
(d) The auditor shall discuss with management on how risks are identified by
system and place reliance on the same as documentation in this context is
immaterial
Answer
1 b 2 c 3 a 4 d 5 b
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CASE 3.
One Mr. K. Narhari, senior faculty at Board of studies of The Institute of Chartered
Accountants of India had prepared a lecture for some of the novice students who had just
enrolled for Chartered accountancy course to be hosted on online platform. The lecture
pertained to basic theme of overall objectives of independent auditor and conduct of
audit in accordance with Standards on auditing mainly revolving around SA-200.
As it was first lecture of the session, an inexperienced apprentice operator in office of Mr.
Narhari made some mistakes in certain key words including some blunders, modifications
and omissions. The text typed by operator read as under: -
“The purpose of audit is to embrace the level of confidence of intended users in the
financial statements. This is achieved by the expression of an opinion by the auditor on
whether financial statements are prepared, in all critical respects, in accordance with an
applicable financial reporting framework. In conducting audit of financial statements,
the overall objectives of the auditor are to obtain reasonable assurance about whether
financial statements as a whole are free from material misstatement, whether due
to fraud, mistake and errors, thereby enabling the auditor to express an opinion on
whether the financial statements are prepared, in all critical respects, in accordance with
financial reporting framework and to report on the financial statements and corroborate
as required by the SAs, in accordance with auditor’s findings.”
(Para 1)
SAs require the auditor to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatements. Reasonable assurance
is a high level of assurance. It is obtained when the auditor has obtained complete
and correct audit evidence to reduce audit risk i.e (the risk that the auditor expresses
an appropriate opinion when the financial statements are critically misstated) to an
acceptable level. (Para 2)
Audit risk is a function of risks of material misstatements and detection risk. Detection risk
relates to nature, timing and extent of audit plans to reduce audit risks. The assessment
of risk is a matter of professional judgment. Risk of material misstatement may exist at
level of overall financial statement level and assertion level for transactions, account
balances and disclosures. Further, risk of material misstatement at assertion level
consists of inherent risk and control risks. These are dependent upon audit of financial
statements. In case auditor believes that risk of material misstatements is less, the less
would be detectionrisk that can be accepted. (Para 3)
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The auditor can eliminate audit risk and most of the audit evidence on which auditor
draws conclusions and bases the auditor’s opinion are conclusive in nature. Further, the
matter of difficulty, time or cost involved is not in itself a valid basis for the auditor to be
satisfied with evidence that is less than conclusive. (Para 4)
The SAs, taken together, provide the standards for the auditor’s work in fulfilling the
overall objectives of the auditor. The SAs deal with general rights of the auditor as
well as further considerations relevant to application of those rights to specific topics.
The SAs are paramount and these are to be strictly followed irrespective of laws and
regulations that govern audit of financial statements. The SAs are not relevant for certain
government entities like agencies, boards and commissions. (Para 5)
While conducting audit, the auditor is subject to relevant ethical requirements, including
those pertaining to independence, relating to financial statements audit engagements.
Relevant ethical requirements ordinarily comprise Code of Ethics issued by ICAI. The code
establishes honesty, objectivity, professional judgment, loyalty and logical behaviour as
fundamental principles of professional ethics relevant to the auditor when conducting an
audit of financial statements.” (Para 6)
1. On perusal of para 1, given below is combination of options which would rectify

errors, if any. Which is of the combinations is most appropriate?
Embrace, level of confidence, in all critical aspects, whether due to fraud, mistake
and errors, corroborate Enhance, degree of confidence, in all material respects,
whether due to fraud, mistake or error, satisfy Embrace, level of confidence, in all
critical aspects, whether due to fraud, mistake and errors, corroborate Enhance,
degree of confidence, in all material respects, whether due to fraud and error, satisfy
Embrace, level of confidence, in all critical aspects, whether due to fraud, mistake
and errors, corroborate Enhance, degree of confidence, in all material respects,
whether due to fraud or error, communicate Embrace, level of confidence, in all
critical aspects, whether due to fraud, mistake and errors, corroborate Enhance,
degree of confidence, in all material respects, whether due to fraud or mistake,
communicate
2. Identify the meaningful and correct statement as per SA-200 in place of underlined
subject matter in para 2.
(a) It is obtained when the auditor has obtained complete and meaningful
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audit evidence to reduce audit risk i.e (the risk that the auditor expresses an
appropriate opinion when the financial statements are materially misstated)
to an acceptable level.
(b) It is obtained when the auditor has obtained complete and exact audit evidence
to reduce audit risk i.e (the riskthat the auditor expresses an appropriate opinion
when the financial statements are materially misstated) to an acceptable level.
(c) It is obtained when the auditor has obtained sufficient and necessary audit
evidence to reduce audit risk i.e (the risk that the auditor expresses an
inappropriate opinion when the financial statements are materially misstated)
to an acceptable low level.
(d) It is obtained when the auditor has obtained sufficient and appropriate
audit evidence to reduce audit risk i.e (the risk that the auditor expresses an
inappropriate opinion when the financial statements are materially misstated)
to an acceptably low level.
3. Consider the following statements which may or may not be erroneous.

Statement I--- Detection risk relates to nature, timing and extent of audit plans to
reduce audit risks.
Statement II--- Inherent risk and control risk are dependent upon audit of financial
statements.
Statement III--- The acceptable level of detection risk varies in direct proportion to
the assessed risk of material misstatement at assertion level.
Which of the following options is correct?
(a) Statement I is true. Statements II and III are false.
(b) Statement I and II are true. Statement III is false.
(c) Statement I and II are false. Statement III is true.
(d) Statements I, II and III are false.
4. Identify correct group of meaningful words to replace underlined erroneous words

in para 4 in the same order in which these are underlined: -
(a) Prevent, binding and conclusive (b) Prevent, conclusive and binding
(c) Forego, conclusive and persuasive (d) Reduce, persuasive and persuasive
5. Consider accompanying underlined statement: The SAs deal with general rights of
the auditor as well as further considerations relevant to application of those rights
to specific topics. Which of the following is likely to be true?
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(a) The above underlined statement is completely correct.

(b) The above underlined statement is completely incorrect.
(c) The above statement is partly correct.
(d) No inference about correctness of statement can be drawn.
Answer
1 c 2 d 3 d 4 d 5 b
CASE 4.
A Partnership Firm of Chartered Accountants by the name of WN and Associates was
appointed to audit books of accounts of Healthy and Talented Private Limited for the
financial year 2020-21. WN and Associates consisted of two partners, Mr. W and Mr.
N. The main responsibility to audit books of accounts of Healthy and Talented Private
Limited for the financial year 2020-21 was given to Mr. W by WN and Associates. A team
of seven members was provided to Mr. W for the purpose of helping him in conducting
the audit of Healthy and Talented Private Limited for the financial year 2020-21. In the
initial stages of conducting audit of Healthy and Talented Private Limited, Mr. W decided
to evaluate internal control operating in the company. To gather information required
for evaluation of internal control, Mr. W asked his team members to suggest a method
which would help in gathering information so that internal control of the company can
be evaluated.
First team member of team helping Mr. W suggested that they should follow a method,
according to which number of instructions were required to be followed to collect
information about internal control.
The second team member of team helping Mr. W suggested a method in which complete
description of internal control in operation is recorded.
The third team member of team helping Mr. W suggested a method in which internal
control of a company is presented in graphic form. The fourth team member of team
helping Mr. W suggested a method in which a series of questions were required to be
answered which would provide information for internal control. After analyzing all the
suggestions Mr. W was satisfied with the suggestion of the third team member because
according to Mr. W the suggestion of third team member was suitable from WN and
Associates point of view and also from the point of view of Healthy and Talented Private
Limited. Keeping the basic concepts of Internal Control in mind, answer the following
multiple choice questions:
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1. In initial stage of conducting audit of Healthy and Talented Private Limited, Mr. W
decided to evaluate internal control of the company. Evaluation of internal control
is very important part of:
(a) Audit Report. (b) Audit Evidence.
(c) Audit Documentation. (d) Audit Programme.
2. The first team member of team helping Mr. W suggested a method according to
which, number of instructions were required to be followed to collect information
about internal control. This method is called as :
(a) Flow Chart. (b) Check List.
(c) Narrative Record. (d) Questionnaire.
3. The second team member of team helping Mr. W suggested a method in which
complete description of internal control in operation is recorded. This method is
known as :
(a) Narrative Record. (b) Flow Chart.
(c) Questionnaire. (d) Check List.
4. The third team member of team helping Mr. W suggested a method in which
internal control of company is presented in graphic form. This method of gathering
information so that internal control can be evaluated is known as :
(a) Check List. (b) Questionnaire.
(c) Flow Chart. (d) Narrative Record.
5 The fourth team member of team helping Mr. W suggested a method in which a
series of questions were required to be answered to gather information for internal
control. This method of gathering information so that internal control can be
evaluated is called as :
(a) Questionnaire. (b) Flow Chart.
(c) Narrative Record. (d) Check List.
Answer
1 d 2 b 3 a 4 c 5 a
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1. As per section 138 of the Companies Act, 2013 private companies are not required
to appoint internal auditor.
2. There is direct relationship between materiality and the degree of audit risk.
3. Control risk is the susceptibility of an account balance or class of transactions to

misstatement that could be material either individually or, when aggregated with
misstatements in other balances or classes, assuming that there were no related
internal controls.
4. Tests of control are performed to obtain audit evidence about the effectiveness of
Internal Controls Systems.
5. Maintenance of Internal Control System is the responsibility of the Statutory Auditor.
6. One of the directors of Very Fresh Fruits Limited was of the view that internal auditor
to be appointed must be an employee of Very Fresh Fruits Limited.
7. Mr. W, one of the team members of auditor of Different Limited was of the view that
understanding the Internal Control of Different Limited will not help in developing
an Audit Programme.
8. Information obtained by performing risk assessment procedures shall not be used

by the auditor as audit evidence to support assessments of the risks of material
misstatement.
9. The assessment of risks is a matter capable of precise measurement
10. The SAs ordinarily refer to inherent risk and control risk separately.
11. Satisfactory Control environment is not an absolute deterrent to fraud.
12. The auditor’s reporting on internal financial control will be applicable with respect
to interim financial statements.
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13. For an auditor, the Risk assessment procedure provides sufficient appropriate audit
evidence to base the audit opinion.
166
1. Incorrect: Section 138 of the Companies Act, 2013 requires every private company
to appoint an internal auditor having turnover of 200 crore or more during the
preceding financial year; or outstanding loans or borrowings from banks or public
financial institutions exceeding 100 crore or more at any point of time during the
preceding financial year.
2. Incorrect: There is an inverse relationship between materiality and the degree of

audit risk. The higher the materiality level, the lower the audit risk and vice versa.
For example, the risk that a particular account balance or class of transactions
could be misstated by an extremely large amount might be very low but the risk
that it could be misstated by an extremely small amount might be very high.
3. Incorrect: Inherent risk is the susceptibility of an account balance or class of

transactions to misstatement that could be material either individually or, when
aggregated with misstatements in other balances or classes, assuming that there
were no related internal controls.
4. Correct: Tests of Control are performed to obtain audit evidence about the
effectiveness of:
(a) the design of the accounting and internal control systems that is whether, they
are suitably designed to prevent or detect or correct material misstatements
and (b) the operation of the internal controls throughout the period.
5. Incorrect: The management is responsible for maintaining an adequate accounting

system incorporating various internal controls to the extent appropriate to the size
and nature of the business. Maintenance of Internal Control System is responsibility
of management because the internal control is the process designed, implemented
and maintained by those charged with governance/management to provide
reasonable assurance about the achievement of entity’s objectives.
6. Incorrect: As per section 138, the internal auditor shall either be a chartered
accountant or a cost accountant (whether engaged in practice or not), or such
other professional as may be decided by the Board to conduct internal audit of the
functions and activities of the companies. The internal auditor may or may not be
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an employee of the company.
7. Incorrect: Understanding the Internal Control of Different Limited will help in

developing an Audit Programme because it will assist the auditor and his team to
understand as to how much they can rely on internal control of the company and
what audit procedures would be appropriate to be used during the course of audit.
8. Incorrect: Information obtained by performing risk assessment procedures and related

activities may be used by the auditor as audit evidence to support assessments of
the risks of material misstatement.
9. Incorrect: The assessment of risks is based on audit procedures to obtain information

necessary for that purpose and evidence obtained throughout the audit.
The assessment of risks is a matter of professional judgment, rather than a matter
capable of precise measurement.
10. Incorrect: The SAs do not ordinarily refer to inherent risk and control risk separately,
but rather to a combined assessment of the “risks of material misstatement”.
However, the auditor may make separate or combined assessments of inherent
and control risk depending on preferred audit techniques or methodologies and
practical considerations. The assessment of the risks of material misstatement may
be expressed in quantitative terms, such as in percentages, or in non-quantitative
terms. In any case, the need for the auditor to make appropriate risk assessments
is more important than the different approaches by which they may be made.
11. Correct- The existence of a Satisfactory Control environment can be a positive factor
when an auditor assesses the risk of material misstatement. However, although
it may help reduce the risk of fraud, a satisfactory Control environment is not an
absolute deterrent to fraud
12. Incorrect: Clause (i) of Sub-section 3 of Section 143 of the Act requires the auditors’
report to state whether the company has adequate internal financial controls
system in place and the operating effectiveness of such controls. It may be noted
that auditor’s reporting on internal financial controls is a requirement specified in
the Act and, therefore, will apply only in case of reporting on financial statements
prepared under the Act and reported under Section 143.
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Accordingly, reporting on internal financial controls will not be applicable with

respect to interim financial statements, such as quarterly or half-yearly financial
statements, unless such reporting is required under any other law or regulation
13. Incorrect: The auditor shall perform risk assessment procedures to provide a basis
for the identification and assessment of risks of material misstatement at the
financial statement and assertion levels. Risk assessment procedures by themselves,
however, do not provide sufficient appropriate audit evidence on which to base the
audit opinion.
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AUDITOR’S RESPONSIBILITIES IN
RELATION TO FRAUD

1 Meaning of fraud Topic 1.1 & 1.2
2 Characteristics of fraud Topic 1.3 & 1.4
3 Detection of fraud and error- Duty of auditor Topic 2
4 Fraud Risk factors and possibility of fraud Topic 6 and Topic 7
5 Fraud Reporting Topic 8
6 Auditor’s Responsibilities Relating to Fraud in an Topic 9

Audit of Financial Statements (SA 240)
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Sr.No Particulars
1 Meaning and characteristics of fraud
Meaning
1.1 The Standard on Auditing (SA) 240 “The Auditor’s Responsibilities Relating
to Fraud in an Audit of Financial Statements” 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”.
1.2 The auditor is concerned with fraud that causes a material misstatement
in the financial statements.
Two types of intentional misstatements are relevant to the auditor–
Misstatements resulting from fraudulent financial reporting and
Misstatements resulting from misappropriation of assets.
Characteristics
1.3 Fraudulent Financial Reporting:
It means manipulating the operating results and the financial statements.
It is often perpetrated by management.
It is achieved by:
Manipulation/Falsification/alteration
Misrepresentation/Intentional Omission
Intentional Misapplication of accounting principles
1.4 Misappropriation of assets:
It involves the theft of an entity’s assets and is often perpetrated by
employees in relatively small and immaterial amounts.
Misappropriation of assets can be accomplished in a variety of ways
including:
Embezzling receipts
Stealing physical assets or intellectual property
Causing an entity to pay for goods and services not received
Using an entity’s assets for personal use
2 Auditor’s Responsibilities
2.1 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
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2.2 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.
2.3 Owing to the inherent limitations of an audit, there is an unavoidable risk
that some material misstatements of the financial statements will not
accordance with the SAs.
2.4 The risk of not detecting a material misstatement resulting from fraud is
higher than the risk of not detecting one resulting from error.
2.5 The question of whether the auditor has adhered to the basic principles
governing an audit is determined by the adequacy of the procedures
undertaken in the circumstances and the suitability of the auditor’s report
based on the results of these procedures.
2.6 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 the auditor can prove with the help of his papers (documentation) that
he has followed adequate procedures necessary for the proper conduct of
an audit, he cannot be held responsible for the same. If however, the same
cannot be proved, he would be held responsible
2.7 If the auditor can prove with the help of his papers (documentation) that
he has followed adequate procedures necessary for the proper conduct of
an audit, he cannot be held responsible for the same. If however, the same
cannot be proved, he would be held responsible.
2.8 Although the auditor may suspect or, in rare cases, identify the occurrence of
fraud, the auditor does not make legal determinations of whether fraud has
actually occurred
3 Manipulation of accounts
3.1 Why it is done?
3.1.1 to avoid incidence of income-tax or other taxes
3.1.2 For declaring a dividend when there are insufficient profits
3.1.3 To withhold declaration of dividend even when there is adequate profit
(this is often done to manipulate the value of shares in stock market to
make it possible for selected persons to acquire shares at a lower cost.
3.1.4 for receiving higher remuneration where managerial remuneration is
payable by reference to profits
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3.2 How it is done?

3.2.1 inflating or suppressing purchases and expenses
3.2.2 inflating or suppressing sales and other items of income
3.2.3 inflating or deflating the value of closing inventory
3.2.4 failing to adjust outstanding liabilities or prepaid expenses
3.2.5 charging items of capital expenditure to revenue or by capitalising revenue
expenses
4 Management Override of Controls
It means management manipulating or not following procedures to commit
fraud. It usually involves the following:
4.1 Recording fictitious journal entries, particularly close to the end of an
accounting period, to manipulate operating results or achieve other
objectives
4.2 Inappropriately adjusting assumptions and changing judgments used to
estimate account balances.
4.3 Omitting, advancing or delaying recognition in the financial statements of
events and transactions that have occurred during the reporting period.
4.4 Concealing, or not disclosing, facts that could affect the amounts recorded
in the financial statements
4.5 Engaging in complex transactions that are structured to misrepresent the
financial position or financial performance of the entity
4.6 Altering records and terms related to significant and unusual transactions
5 Misappropriation of assets
5.1 Misappropriation of Goods
Fraud in the form of misappropriation of goods is more difficult to detect;
for this management has to rely on various measures. Apart from the
various requirements of record keeping about the physical quantities and
their periodic checks, there must be rules and procedures for allowing
persons inside the area where goods are kept. In addition there should be
external security arrangements to see that no goods are taken out without
proper authority.
5.2 Defalcation of Cash
It usually involves:
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5.2.1 By inflating cash payments:

Examples of inflation of payments:
(1) Making payments against fictitious vouchers.
(2) Making payments against vouchers, the amounts whereof have been
inflated.
(3) Manipulating totals of wage rolls either by including therein names of
dummy workers or by inflating them in any other manner.
(4) Casting a larger totals for petty cash expenditure and adjusting the
excess in the totals of the detailed columns so that cross totals show
agreement
5.2.2 By suppressing cash receipts:
(1) Teeming and Lading: Amount received from a customer being
misappropriated; also to prevent its detection the money received
from another customer subsequently being credited to the account of
the customer who has paid earlier. Similarly, moneys received from
the customer who has paid thereafter being credited to the account
of the second customer and such a practice is continued so that no
one account is outstanding for payment for any length of time, which
may lead the management to either send out a statement of account
to him or communicate with him
(2) Adjusting unauthorised or fictitious rebates, allowances, discounts,
etc. to customer’ accounts and misappropriating amount paid by
them.
(3) Writing off as debts in respect of such balances against which cash
has already been received but has been misappropriated.
(4) Not accounting for cash sales fully.
(5) Not accounting for miscellaneous receipts, e.g., sale of scrap
5.2.3 By casting wrong totals in the cash book.
6 Fraud Risk Factors
Fraud Risk Factors may be defined as events or conditions that indicate
an incentive or pressure to commit fraud or provide an opportunity to
commit fraud.
For each of these types of fraud, the risk factors are further classified based
on the three conditions generally present when material misstatements
due to fraud occur:
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6.1 Risk Factors Relating to Misstatements Arising from Fraudulent Financial

Reporting:
6.1.1 Incentives/Pressures:
1. High degree of competition or market saturation, accompanied by
declining margins.
2. High vulnerability to rapid changes.
3. Significant declines in customer demand and increasing business
failures.
4. Operating losses making the threat of bankruptcy, foreclosure, or
hostile takeover.
5. Recurring negative cash flows from operations or an inability to
generate cash flows from operations.
6. New accounting, statutory, or regulatory requirements.
6.1.2 Opportunities
1. Significant related-party transactions not in the ordinary course of
business or with related entities not audited.
2. A strong financial presence or ability to dominate a certain industry
sector that allows the entity to dictate terms or conditions to suppliers
or customers that may result in inappropriate or non-arm’s-length
transactions.
3. Assets, liabilities, revenues, or expenses based on significant estimates
that involve subjective judgments or uncertainties.
4. Significant, unusual, or highly complex transactions, especially those
close to period end that pose difficult “substance over form” questions.
5. Significant bank accounts or subsidiary or branch operations in tax-
haven jurisdictions for which there appears to be no clear business
justification.
6.1.3 Attitudes/Rationalizations:
1. Known history of violations of securities laws or other laws and
regulations.
2. Excessive interest by management in maintaining or increasing the
entity’s inventory price or earnings trend.
3. Management failing to remedy known significant deficiencies in
internal control on a timely basis.
4. An interest by management in employing inappropriate means to
minimize reported earnings for tax-motivated reasons.
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5. The owner-manager makes no distinction between personal and

business transactions.
6. The relationship between management and the current or predecessor
auditor is strained, as exhibited by the following:
• Frequent disputes with the current or predecessor auditor on
accounting, auditing or reporting matters.
• Unreasonable demands on the auditor such as unrealistic time
constraints regarding the completion of the audit or the issuance
of the auditor’s report.
• Restrictions on the auditor that inappropriately limit access to
people or information.
• Domineering management behavior in dealing with the auditor.
6.2 Risk Factors Arising from Misstatements Arising from Misappropriation of
Assets:.
6.2.1 Incentive/Pressures:
1. Known or anticipated future employee layoffs.
2. Recent or anticipated changes to employee compensation or benefit
plans.
3. Promotions, compensation, or other rewards inconsistent with
expectations.
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6.2.2 Opportunities
1. Large amounts of cash on hand or processed.
2. Inventory items that are small in size, of high value, or in high demand.
3. Easily convertible assets, such as bearer bonds, diamonds, or computer
chips.
4. Fixed assets which are small in size, marketable, or lacking observable
identification of ownership.
5. Inadequate internal control over assets may increase the susceptibility
of misappropriation of those assets.
• Inadequate segregation of duties or independent checks.
• Inadequate oversight of senior management expenditures such
as travel and other reimbursements.
• Inadequate record keeping with respect to assets.
• Inadequate system of authorization and approval of transactions.
• Inadequate physical safeguards over cash, investments, inventory
or fixed assets.
• Lack of complete and timely reconciliations of assets.
• Lack of timely and appropriate documentation of transactions.
• Lack of mandatory vacations for employees performing key
control functions.
• Inadequate management understanding of information
technology, which enables information technology employees to
perpetrate a misappropriation.
• Inadequate access controls over automated records.
6.2.3 Attitudes/Rationalizations:
1. Disregard for internal control over misappropriation of assets by
overriding existing controls or by failing to take appropriate remedial
action on known deficiencies in internal control.
2. Behavior indicating displeasure or dissatisfaction with the entity or its
treatment of the employee.
3. Changes in behavior or lifestyle that may indicate assets have been
misappropriated.
4. Tolerance of petty theft.
7 Circumstances relating to possibility of fraud
7.1 Discrepancies in the accounting records, including:
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7.1.1 Transactions that are not recorded in a complete or timely manner or are
improperly recorded as to amount, accounting period, classification, or
entity policy.
7.1.2 Unsupported or unauthorized balances or transactions
7.1.3 Last-minute adjustments that significantly affect financial results
7.1.4 Evidence of employees’ access to systems and records inconsistent with
that necessary to perform their authorized duties.
7.1.5 Tips or complaints to the auditor about alleged fraud
7.2 Conflicting or missing evidence, including:
7.2.1 Missing documents
7.2.2 Documents that appear to have been altered
7.2.3 Significant unexplained items on reconciliations
7.2.4 Unusual discrepancies between the entity’s records and confirmation replies
7.2.5 Missing or non-existent cancelled cheques in circumstances where cancelled
cheques are ordinarily returned to the entity with the bank statement
7.2.6 Missing inventory or physical assets of significant magnitude.
7.2.7 Unavailable or missing electronic evidence inconsistent with the entity’s
record retention practices or policies.
7.3 Problematic or unusual relationships between the auditor and management,
including:
7.3.1 Denial of access to records, facilities, certain employees, customers,
vendors, or others from whom audit evidence might be sought
7.3.2 Undue time pressures imposed by management to resolve complex or
contentious issues
7.3.3 Unusual delays by the entity in providing requested information
7.3.4 Unwillingness to facilitate auditor access to key electronic files for testing
through the use of computer-assisted audit techniques
7.3.5 Denial of access to key IT operations staff and facilities, including security,
operations, and systems development personnel.
7.3.6 An unwillingness to address identified deficiencies in internal control on a
timely basis.
7.4 Other
7.4.1 Unwillingness by management to permit the auditor to meet privately with
those charged with governance.
7.4.2 Accounting policies that appear to be at variance with industry norms
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7.4.3 Frequent changes in accounting estimates that do not appear to result

from changed circumstances
7.4.4 Tolerance of violations of the entity’s Code of Conduct
8 Fraud Reporting
8.1 Section 143(12) of Companies Act, 2013 read with Rule 13 of CAAR, 2014
8.1.1 If an auditor of a company in the course of the performance of his duties as
auditor, has reason to believe that an an offence of fraud, which involves
or is expected to involve individually 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 Central Government
8.1.2 the auditor shall report the matter to the Board or the Audit Committee, as
the case may be, immediately but not later than 2 days of his knowledge
of the fraud, seeking their reply or observations within 45 days
8.1.3 on receipt of such reply or observations, the auditor shall forward his
report and the reply or observations of the Board or the Audit Committee
along with his comments (on such reply or observations of the Board or the
Audit Committee) to the Central Government within 15 days from the date
of receipt of such reply or observations
8.1.4 in case the auditor fails to get any reply or observations from the Board
or the Audit Committee within the stipulated period of 45 days, he shall
forward his report to the Central Government along with a note containing
the details of his report that was earlier forwarded to the Board or the
Audit Committee for which he has not received any reply or observations
8.1.5 the report shall be sent to the Secretary, Ministry of Corporate Affairs in a
sealed cover by Registered Post with Acknowledgement Due or by Speed
Post followed by an e-mail in confirmation of the same
8.1.6 the report shall be on the letter-head of the auditor containing postal
address, e-mail address and contact telephone number or mobile number
and be signed by the auditor with his seal and shall indicate his Membership
Number.
The report shall be in the form of a statement as specified in Form ADT-4.
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8.1.7 In case of a fraud involving lesser than the amount specified [i.e. less
than ` 1 crore], the auditor shall report the matter to Audit Committee
constituted under section 177 or to the Board immediately but not later
than 2 days of his knowledge of the fraud and he shall report the matter
specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
Company shall disclose the details about such frauds in the Board’s
report
8.1.8 This Duty is also applicable to Cost auditor and Secretarial auditor of the
company
If a suspected offence of fraud has already been reported under section 143(12) by
such other person, and the auditor becomes aware of such suspected offence involving
fraud, he need not report the same since he has not per se identified the suspected
offence of fraud.
8.2 Clause Xl of CARO 2020
8.2.1 Whether any fraud by the company or any fraud on the Company by its
officers or employees has been noticed or reported during the year. If yes,
the nature and the amount involved is to be indicated
8.2.2 Auditor should report frauds “noticed or reported during the year”, even
though fraud has been noticed or reported by other parties.
8.2.3 Audit procedure to report under CARO 2020:
(1) While planning the audit, the auditor should make inquiries of
management to determine whether management is aware of any
known fraud or suspected fraud that the company is investigating.
(2) 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) The auditor should examine the minutes of the audit committee, if
available, to ascertain whether any instance of fraud pertaining to
the company has been reported and actions taken thereon.
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8.2.4 The scope of auditor’s inquiry under this clause is restricted to following:
(a) frauds ‘noticed or reported’ during the year;
(b) reporting on filing of any report in Form ADT–4 during the year; and
(c) whistle-blower complaints, if any, received during the year
Note that irrespective of the auditor’s comments under this clause, the
auditor is also required to comply with the requirements of SA 240
(4) The auditor should obtain written representations from management
that:
(i) 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;
(ii) it has:
(a) disclosed to the auditor all significant facts relating to any
frauds or suspected frauds known to management that
may have affected the entity; and
(b) 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.
9 Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements (SA 240)
9.1 A. Primary Responsibility
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
9.2 B. Objectives of the auditor are:
a) To identify and assess the risks of material misstatement in the
financial statement due to fraud;
b) To obtain sufficient appropriate audit evidence about the assessed
risks of material misstatement due to fraud, through designing and
implementing appropriate response ; and
c) To respond appropriately to identified or suspected fraud
9.3 C. Auditor Responsibility
 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.
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 The risk of not detecting a material misstatement resulting from

fraud is higher than the risk of not detecting one resulting from
error , because management is frequently in a position to directly or
indirectly manipulate accounting records, present fraudulent financial
information or override control procedures designed to prevent similar
frauds by other employees. Therefore, when planning and performing
audit procedures and evaluating and reporting the results thereof,
auditor should consider the risk of material misstatements in financial
statements resulting from fraud.
 For this, Auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit, considering the
potential for management override of controls and recognizing the
fact that audit procedures that are effective for detecting error may
not be effective in detecting fraud.
 When auditor identifies a misstatement, s/he should consider whether
such a misstatement may be indicative of fraud and if there is such
an indication, s/he should consider the implications of misstatement
in relation to other aspects of the audit, particularly the reliability of
management representations.
9.4 D. Written Representation
The auditor shall obtain written representations from management that:
(a) It acknowledges its responsibility for the design, implementation and
maintenance of internal control to prevent and detect fraud;
(b) It has disclosed to the auditor the results of its assessment of the risk
that the financial statements may be materially as a result of fraud;
(c) It has disclosed to the auditor its knowledge of fraud or suspected
fraud affecting the entity involving:
(i) Management;
(ii) Employees who have significant roles in internal control; or
(iii) Others where the fraud could have a material effect on the
financial statements;
9.5 E. Communication
It is auditor’s responsibility to communicate that information to
management, those charged with governance and, in some circumstances,
when so required by laws and regulations, to regulatory and enforcement
authorities also.
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9.6 F. Auditor’s Responsibility when frauds are identified after completion of

audit
 Owing to the inherent limitations of an audit, there is an unavoidable
risk that some material misstatements of the financial statements
will not be detected, even though the audit is properly planned and
performed in accordance with the SAs.
 The subsequent discovery of material misstatement of the financial
information resulting from fraud or error existing during the period
covered by the auditor’s report does not, in itself, indicate that whether
the auditor has adhered to the basic principles governing an audit.
 The question of whether the auditor has adhered to the basic principles
governing an audit is determined by the adequacy of the procedures
undertaken in the circumstances and the suitability of the auditor’s
report based on the results of these procedures.
 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 the auditor can prove with the help of his papers (documentation)
that he has followed adequate procedures necessary for the proper
conduct of an audit, he cannot be held responsible for the same. If
however, the same cannot be proved, he would be held responsible
 Although the auditor may suspect or, in rare cases, identify the
occurrence of fraud, the auditor does not make legal determinations
of whether fraud has actually occurred
9.7 G. Unable to Continue the Engagement
If, as a result of a misstatement resulting from fraud or suspected fraud,
the auditor encounters exceptional circumstances that bring into question
the auditor’s ability to continue performing the audit, the auditor shall:
(a) Determine the professional and legal responsibilities applicable in the
circumstances, including whether there is a requirement for the auditor
to report to the person or persons who made the audit appointment
or, in some cases, to regulatory authorities;
(b) Consider whether it is appropriate to withdraw from the engagement,
where withdrawal is possible under applicable law or regulation; and
(c) If the auditor withdraws:
(i) Discuss with the appropriate level of management and those
charged with governance the auditor’s withdrawal from the
engagement and the reasons for the withdrawal; and
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(ii) Determine whether there is a professional or legal requirement

to report to the person or persons who made the audit
appointment or, in some cases, to regulatory authorities, the
auditor’s withdrawal from the engagement and the reasons for
the withdrawal.
NOTE : Additional Duty of Auditor On Reporting on Fraud is given under
section 143(12) & CARO which is discussed later
10 SELF REVEALING ERRORS
These are such errors the existence of which becomes apparent in the
process of compilation of accounts. A few illustrations of such errors are
given hereunder, showing how they become apparent:
a) Omission to post a part of a journal entry to the ledger.
b) Wrong totaling of the Purchase Register
c) A mistake in recording amount received from X in the account of Y.
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1 What do you understand by the term ‘fraud’? Provide its meaning as given
under the Standard on Auditing (SA) 240
Ans Meaning: “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
Two types of intentional misstatements are relevant to the auditor–
a) misstatements resulting from fraudulent financial reporting and
b) misstatements resulting from misappropriation of assets
2 Briefly explain self-revealing errors with the help of some illustration
Ans These are such errors the existence of which becomes apparent in the
process of compilation of accounts. A few illustrations of such errors are
given hereunder, showing how they become apparent:
a) Omission to post a part of a journal entry to the ledger.
b) Wrong totaling of the Purchase Register
c) A mistake in recording amount received from X in the account of Y.
3 There are many ways for cash defalcation, one of which is by suppressing
cash receipts. List out few techniques of how the receipts are suppressed
Ans Few techniques of how receipts are suppressed are:
a) Teeming and Lading: Amount received from a customer being
misappropriated; also to prevent its detection the money received from
another customer subsequently being credited to the account of the
customer who has paid earlier
b) Adjusting unauthorised or fictitious rebates, allowances, discounts,
etc. to customer’ accounts and misappropriating amount paid by them
c) Writing of as debts in respect of such balances against which cash
has already been received but has been misappropriated
d) (4) Not accounting for cash sales fully
4 Fraud Risk Factors are the events or conditions that indicate an incentive
or pressure to commit fraud or provide an opportunity to commit fraud.
Further, the nature of the industry or the entity’s operations also provides
opportunities to engage in fraudulent financial reporting. List out some of
the cases from where theses opportunities may arise.
185
Ans 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:
1. Significant related-party transactions not in the ordinary course of
business or with related entities not audited or audited by another firm.
2. A strong financial presence or ability to dominate a certain industry
sector that allows the entity to dictate terms or conditions to suppliers
or customers that may result in inappropriate or non-arm’s-length
transactions.
3. Assets, liabilities, revenues, or expenses based on significant estimates
that involve subjective judgments or uncertainties that are difficult to
corroborate.
4. Significant, unusual, or highly complex transactions, especially those
close to period end that pose difficult “substance over form” questions. 5.
Significant bank accounts or subsidiary or branch operations in tax-haven
jurisdictions for which there appears to be no clear business justification.
5 You notice a misstatement resulting from fraud or suspected fraud during
the audit and conclude that it is not possible to continue the performance
of audit. As a Statutory Auditor, how would you deal?
Ans If, as a result of a misstatement resulting from fraud or suspected fraud,
the auditor encounters exceptional circumstances that bring into question
the auditor’s ability to continue performing the audit, the auditor shall:
a) Determine the professional and legal responsibilities applicable in the
circumstances, including whether there is a requirement for the auditor
to report to the person or persons who made the audit appointment
or, in some cases, to regulatory authorities;
b) Consider whether it is appropriate to withdraw from the engagement,
where withdrawal is possible under applicable law or regulation; and
c) If the auditor withdraws:
a) Discuss with the appropriate level of management and those charged
with governance the auditor’s withdrawal from the engagement and
the reasons for the withdrawal; and
b) Determine whether there is a professional or legal requirement to
report to the person or persons who made the audit appointment
or, in some cases, to regulatory authorities, the auditor’s withdrawal
from the engagement and the reasons for the withdrawal.
186
6 Fraud can be committed by management overriding controls using such

techniques as engaging in complex transactions that are structured to
misrepresent the financial position or financial performance of the entity.
In view of the above-mentioned circumstances of management fraud,
explain briefly duties and responsibilities of an auditor in case of material
misstatement resulting from such Management Fraud.
Ans Fraud involving one or more members of management or those charged
with the governance is referred to as “management fraud”. The primary
responsibility for the prevention and detection of fraud rests with those
charged with the governance and the management of the entity.
Owing to the inherent limitations of an audit, there is an unavoidable risk
accordance with the SAs
The risk of the auditor not detecting a material misstatement resulting
from management fraud is greater than for employee fraud, because
management is frequently in a position to directly or indirectly manipulate
accounting records
Reporting fraud as per Sec 143(12) of Companies Act, 2013 to the central
government.
Reporting fraud as per Clause X of CARO 2016 in audit report.
7 Intelligent Ltd. entered into an agreement with Mr. Intellectual on 15th
March, 2017, whereby it agreed to pay him ` 2 lakhs per month as
retainer ship fee for consultation in IT department. However, no amount
was actually paid and ` 24 lakhs was provided in the Statement of Profit
and Loss for the year ending on March 31st, 2017. Management of the
company uttered that need-based consultation was obtained throughout
the year. However, on investigation, no documentary or other evidence of
receipt of such service was found. As the auditor of Innocent Ltd., what
would be your approach? Would your approach be different if the amount
involved is ` 1 crore or above
187
Ans As per SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an

Audit of Financial Statements”, fraud can be committed by management
overriding controls using such techniques as recording fictitious journal
entries, particularly close to the end of an accounting period, to manipulate
operating results or achieve other objectives
Explain auditor’s responsibilities as per Sec 143(12) of Companies Act,
2013 of reporting fraud to Board of Directors and Audit Committee (since
amount is less than Rs. 1 Cr)
Reporting fraud as per Clause X of CARO 2016 in audit report
Consider Withdrawal from the engagement after ascertaining legal
obligations and discussing the matter with management and those charged
with governance.
188
1. If as a result of a misstatement resulting from fraud, the auditor encounters

exceptional circumstances that bring into question his ability to continue performing
the audit, he shall-
(a) Withdraw from the engagement immediately
(b) Report to Audit team regarding withdrawal
(c) Determine the professional and legal responsibilities applicable in the
circumstances.
(d) Ask the management for his withdrawal
2. Which of the following is an example of inflating cash payments?

(a) Making payments against purchase vouchers
(b) Teeming and lading
(c) Not accounting for cash sales fully
(d) Making payments against inflated vouchers.
3. The standard that requires auditors to analyse journal entries in an audit is?
(a) SA 260 (b) SA 230 (c) SA 315 (d) SA 240
4. Fraud is an intentional act involving use of deception to obtain an unjust advantage

and can be committed by
a) TCWG b) Employees c) Third parties d) Any of these
5. The most difficult type of misstatement to detect fraud is based on:

a) Related party purchases b) Related party sales
c) The restatement of sales
d) Omission of a sales transaction from being recorded.
6. Which of the following factors likely to be identified as a fraud factor by the auditor?
a) The company is planning a initial public offer of shares to raise additional
capital for expansion.
b) Bank reconciliation statement includes deposits¬ in ¬transit.
c) Plant and machinery is sold at a loss.
d) The company has made political contributions.
189
7. Misappropriation of assets may occur because there is

a) Adequate record keeping with respect to assets.
b) Know history of violations of securities laws.
c) Lack of complete and timely reconciliations of assets.
d) Dispute between shareholders in a closely held entity.
8. Which of the following is an example of fraudulent financial reporting

a) Defalcation of cash by cashier
b) Misappropriation of inventory by store keeper
c) Overvaluation of assets
d) All of these
9. Which of the following is not an example of suppressing cash receipts

a) Teeming and Lading
b) Payment against fictitious vouchers
c) Not accounting for cash sales fully
d) Not accounting for miscellaneous receipts.
10. Which of the following is an indicator of fraud due to problematic or unusual

relationship between auditor and management
a) Unsupported or unauthorized transaction
b) Unusual delays by the entity in providing requested information
c) Last minute adjustments that significantly affect financial results
d) All of above.
11. Which of the following is least likely to be included in an auditor’s inquiry

of management while obtaining information to identify the risks of material
misstatement due to fraud?
a) Are financial reporting operations controlled by and limited to one location?
b) Does it have knowledge of fraud or suspect fraud?
c) Does it have programs to mitigate fraud risks?
d) Has it reported to the audit committee the nature of the company’s internal control?
Answer
1 C 4 D 7 C 10 B
2 D 5 D 8 C 11 A
3 D 6 A 9 B
190
CASE 1.
Mr Laxman is appointed as statutory auditor of Best Limited for the Financial Year ended
31st March, 2020. During the course of audit, it was found that few doubtful transactions
had been committed by finance manager who retired in March, 2020. The fraud was
going on since last 4-5 years and the total amount misappropriated is approximately 75
lacs. Balance sheet of Best Ltd. reflected a cash balance of 7 crores. The company has
taken a loan of 2 crores from the bank despite of the huge cash balance with the company.
Also, Companies Act bestows some duties on auditors to report matters to Central
Government in case of fraud. On the basis of above facts answer below questions in
relation to Mr Laxman’s role and duties while conducting statutory audit of Best Limited.
1. Mr Laxman shall obtain ____________________ that the financial statements are

free from fraud and misstatement.
(a) Absolute assurance (b) Reasonable assurance
(c) Management’s assurance (d) Chief Financial Officer assurance
2. Mr Laxman suspects that cash payments were inflated. Out of the below which
could be probable reason for such inflated cash payments.
(a) Not accounting for cash sales completely
(b) Making payments against purchase vouchers
(c) Making payments against inflated vouchers
(d) Teeming and Lading
3. As per Section 143 (12) of Companies Act, 2013 & Rule 13 of CAAR, 2014; Mr Laxman
shall
(a) report the matter to the audit committee constituted under section 177 or to
the Board in other cases within such time and in such manner as prescribed.
(b) report the matter to the audit committee constituted under section 177 within
such time and in such manner as prescribed.
(c) report the matter to the audit committee constituted under section 177 and
also to the Board within such time and in such manner as prescribed.
(d) report the matter to the Board within such time and in such manner as
prescribed.
191
4. Owing to the _______ limitations of an audit, there is _________ risk that some
material misstatements of the financial statements will not be detected, even
though the audit is properly planned and performed in accordance with the SAs.
(a) Inherent, unavoidable (b) Inherit, complete
(c) Management, unavoidable (d) Regulatory, control
5. As an auditor what conclusion can Mr Laxman draw looking at the huge cash reserve
of the company and corresponding bank loan?
(a) Report this matter to the Central Government u/s 143(12)as there is a possibility
of fraud
(b) Obtain sufficient and appropriate audit evidence of existence of fraud
(c) Report the matter under CARO, 2020
(d) There is nothing to report as it’s a normal financial decision
Answer
1 b 2 c 3 a 4 a 5 b
CASE 2.
Deenan and Co. is the auditor of a service industry Niranjan Groups. The auditor during
the course of identifying and assessing the risk of material misstatement through
understanding the entity and its environment and during the course of performing the
audit procedures comes across the following circumstances:
Issue 1: The auditor, in general, finds that there are a lot of discrepancies in accounting.
These circumstances indicate to the auditor that there is a possibility of fraud.
Issue 2: The auditor finds that there is something unusual about the balances outstanding
in the receivables. Date wise verification of the bank reconciliation performed by the
auditor has resulted in mismatch in dates in most of the receivable ledger. The auditor has
identified a pattern in the mismatches. He suspects that there might be a misappropriation
of cash and the detection of this misappropriation is being prevented by crediting the
amount received subsequently to the account of customer who paid earlier.
Issue 3: On deeper scrutiny, the auditor also finds that the company is holding significant
bank accounts and having branch operations in tax haven jurisdictions. Also, there are
significant related party transactions which do not appear to be in the ordinary course
of business.
Issue 4: During the course of verification, it is found by the auditor that there is no proper
hierarchy and approval procedure for the senior management expenditure such as travel
192
re-imbursement.
Issue 5: The auditor also assesses and suspects material misstatements in asset value.
As a response to this, he plans to carry out physical observation of certain assets by
using computer assisted audit techniques. From the above facts, answer the following
questions by choosing the right option.
1. Which among the following is NOT a fraud risk factor leading to a fraud in an
organization?
(a) Incentive or pressure to commit fraudulent financial reporting
(b) A perceived opportunity to commit fraud
(c) Individuals being able to rationalize the act of committing a fraudulent act
(d) Taking undue advantage of the inefficient internal control in the organization
2. What is the kind of fraud that the auditor has faced in Issue 2 raised in the case
above?
(a) Teeming and Lading
(b) Cash skimming
(c) Defalcation of cash by inflating cash payment
(d) Misappropriation of receivables
3. Which among the following statement is incorrect in the context of the two types of
fraud “Fraudulent financial reporting” and “Misappropriation of assets”?
(a) Fraudulent financial reporting is achieved by manipulation, falsification or
alteration of accounting records from which financial statements are prepared
(b) Misappropriation of assets is achieved by intentional misapplication of
accounting principles relating to amount, classification, presentation and
disclosure.
(c) Fraudulent financial reporting is achieved by management override of controls
(d) Misappropriation of assets is achieved by causing an entity to pay for goods
and services not received.
4. Issue 3 identified by the auditor is a fraud risk factor. What is the condition created
by that fraud risk factor and what fraud does it result in?
(a) The risk factor creates a rationalization for the fraud and results in a
misstatement due to fraudulent financial reporting.
(b) The risk factor creates an incentive/pressure for the fraud and results in a
misstatement due to misappropriation of assets
193
(c) The risk factor creates a perceived opportunity for the fraud and results in
(d) The risk factor creates a perceived opportunity for the fraud and results in
misstatement due to misappropriation of assets.
5. Issue 4 identified by the auditor is also a fraud risk factor. What is the condition
created by that fraud risk factor and what fraud does it result in?
(a) The risk factor creates a rationalization for the fraud and results in a
(b) The risk factor creates an incentive/pressure for the fraud and results in a
misstatement due to misappropriation of assets
(c) The risk factor creates a perceived opportunity for the fraud and results in
(d) The risk factor creates a perceived opportunity for the fraud and results in
misstatement due to misappropriation of assets.
Answer
1 d 2 a 3 b 4 c 5 d
CASE 3.
Mr. Balwant Singh, the MD of Suvidha Stores Ltd., has requested CA Arun Kumar to carry
out the Statutory Audit of his Store’s Head office at Pune. On a discussion w.r.t. the terms
of Engagement of the Audit, Mr. Balwant tells CA Arun that he smells something fishy
going on in the Accounts department and wants CA Arun to report keeping susceptibility of
Fraud as per SA-240 in mind. CA Arun tells MR. Balwant that Fraud results from material
misstatements arising either due to Fraudulent Financial Reporting or Misappropriation
of Assets. He also tells him about the various Fraud Risk Factors which form the reason
behind Commitment of Fraud by the employees and also tells him about his reporting
procedure.
On scrutiny of the accounts of the Company and after discussing with the employees at
the Head office, CA Arun notes down following observations:-
1. Mr. X, the Head Accountant seems to have colluded with the Cashier Mr. Y.
2. Mr. X has reported higher than usual profits in the books of accounts because apart
from his salary, he also receives incentives based upon the profits earned by the Co.
194
3. Mr. Y, the Cashier has shown some bogus expenses which have not actually been
incurred.
4. CA Arun estimates the amount involved in Fraud to be 5 crores.
1. Fraud in the above case scenario has been committed by resorting to which of the
following Material Misstatements identified during the audit:-
(a) Fraudulent Financial Reporting (b) Misappropriation of Goods
(c) Defalcation of Cash (d) Either (b) or (c)
2. The Fraud Risk Factor behind committing of Fraud by Mr. X in2the above case was:-
(a) Incentives or Pressure (b) Rationalization
(c) Perceived Opportunity (d) Adventure
3. How has the Fraud been Committed by Mr. X ?

(a) Manipulation/Falsification
(b) Misrepresentation
(c) Intentional Misapplication of Application Accounting Principles
(d) Error
4. Mr. Y resorted to Defalcation of Cash by

(a) Inflating Cash Payments (b) Suppressing Cash Receipts
(c) Casting wrong totals in Cash Book (d) Stealing Cash
5. CA Arun found significant unexplained items on many reconciliations. This is an

example of possibility of Fraud due to
(a) Discrepancies in accounting Records
(b) Problematic relationship between auditor & management
(c) Conflicting or Missing Evidence
(d) Other
Answer
1 a 2 a 3 a 4 a 5 c
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1. Teeming and lading is one of the techniques of inflating cash payments.
2. Fraud can be termed as intentional error.
3. Auditor needs to report to Central Government in case of fraud involving 20 lakhs

rupees.
4. The primary responsibility for the prevention and detection of fraud rests with both
those charged with governance of the entity and management.
5. Fraudulent financial reporting only involves manipulation, falsification or alteration

of accounting records or supporting documents from which financial statements are
prepared.
6. Unusual delays by the entity in providing requested information shows problematic

or unusual relationships between the auditor and management.
7. In comparing management fraud with employee fraud, the auditor’s risk of failing
to discover the fraud is less for management fraud.
8. Excessive interest by management in maintaining or increasing the entity’s inventory

price or earnings trend is an example of Fraud Risk Factor related to Opportunities.
9. Misstatements in the financial statements can arise from fraud only.
10. Misappropriation of Assets involves the theft of an entity’s assets and is often
perpetrated by employees in relatively large and material amounts.
11. An auditor conducting an audit in accordance with SAs is responsible for obtaining
absolute assurance that the financial statements taken as a whole are free from
material misstatement, whether caused by fraud or error.
196
1. Incorrect: Teeming and Lading is one of the techniques of suppressing cash

receipts and not of inflating cash payments. Money received from one customer
is misappropriated and the account is adjusted with the subsequent receipt from
another customer and so on.
2. Correct: Fraud is the word used to mean intentional error. This is done deliberately
which implies that there is intent to deceive, to mislead or at least to conceal the truth.
It follows that other things being equal they are more serious than unintentional
errors because of the implication of dishonestly which accompanies them.
3. Incorrect: As per section 143(12) of the Companies Act, 2013, if an auditor of a

company, in the course of the performance of his duties as auditor, has reason to
believe that an offence involving fraud is being or has been committed against the
company by officers or employees of the company, he shall immediately report the
matter to the Central Government (in case amount of fraud is 1 crore or above) or
Audit Committee or Board in other cases (in case the amount of fraud involved is
less than 1 crore) within such time and in such manner as may be prescribed.
Thus, fraud involving amount of 20 lakh rupees should be reported to Audit
Committee.
4. Correct: As per SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit

of Financial Statements’. It is important that management, with the oversight of
those charged with governance place a strong emphasis on fraud prevention, which
may reduce opportunities for fraud to take place, and fraud deterrence, which could
persuade individuals not to commit fraud because of the likelihood of detention
and punishment. This involves a commitment to create a culture of honesty and
ethical behavior which can be reinforced by an active oversight by those charged
with governance.
5. Incorrect: As per SA 240, ”The Auditor’s Responsibilities Relating to fraud in an Audit

of Financial Statements’, fraudulent financial reporting may involve manipulation,
falsification or alteration of accounting records or supporting documents from which
financial statements are prepared, misrepresentation in or intentional omission
from, financial statements of events, transaction or other significant information
197
or intentional misapplication of accounting principles relating to amounts,

classification, manner of presentation or disclosure.
6. Correct: It is a strong example of circumstances that indicate the possibility of fraud.

This happiness only because of the Management’s intolerance towards the auditor’s
Professional skepticism
7. Incorrect: In comparing management fraud with employee fraud, the auditor’s

risk of failing to discover the fraud is greater for management fraud because of
management’s ability to override existing internal controls
8. Incorrect: Excessive interest by management in maintaining or increasing the entity’s

inventory price or earnings trend is an example of Fraud Risk Factor related to
Rationalization.
9. Incorrect: Misstatements in the financial statements can arise from either fraud or
error. The distinguishing factor between fraud and error is whether the underlying
action that results in the misstatement of the financial statements is intentional or
unintentional.
10. Incorrect:- Misappropriation of Assets involves the theft of an entity’s assets and is
often perpetrated by employees in relatively small and immaterial amounts.
11. Incorrect:- 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.
As described in SA200, “Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on Auditing,” owing to the
inherent limitations of an audit, there is an unavoidable risk that some material
misstatements of the financial statements will not be detected, even though the
audit is properly planned and performed in accordance with the SAs.
198
AUDIT IN AN AUTOMATED
ENVIRONMENT

1 What is an Automated environment Topic 1
2 Relevance of IT in audit Topic 2

3 Risks and controls in an automated environment Topic 4
4 Testing Methods Topic 7
5 Internal financial controls as per regulatory Company audit

requirements
6 Data analytics for Audit Topic 8
7 Assess and Report Audit findings Topic 9
8 The auditor should consider relevance of IT in an Topic 11

audit of financial statements
9 A suggested approach to benefit from the use of Topic 12
CAATs
10 Audit Approach in Automated environment Topic 13
199
Sr.No Particulars
1 Features of an automated environment
An automated environment basically refers to a business environment where the
processes, operations, accounting and even decisions are carried out by using
computer systems – also known as Information Systems (IS) or Information
Technology (IT) systems.
Features are as follows:
1.1 Enables faster business operations
1.2 Accuracy in data processing and computation
1.3 Ability to process large volumes of data
1.4 Integration between business operations
1.5 Better security and controls
1.6 Connectivity and networking capability
1.7 Less prone to human errors
1.8 Provides latest information
2 Relevance of IT in audit
IT helps in performing several business functions and activities within the system
such as :-
2.1 Computation and Calculations are automatically carried out (for example,
bank interest computation and inventory valuation).
2.2 Accounting entries are posted automatically (for example, sub-ledger to
GL postings are automatic).
2.3 Business policies and procedures, including internal controls, are applied
automatically (for example, delegation of authority for journal approvals,
customer credit limit checks are performed automatically).
2.4 Reports used in business are produced from systems.
2.5 Management and other stakeholders rely on these reports and information
produced (for example, debtors ageing report).
2.6 User access and security are controlled by assigning system roles to users
(for example, segregation of duties can be enforced effectively).
3 Understanding of the company’s automated environment
3.1 Information systems being used (one or more application systems and
what they are).
3.2 Their purpose (financial and non-financial).
3.3 Location of IT systems - local vs global.
200
3.4 Architecture (desktop based, client-server, web application, cloud based).

3.5 Version (functions and risks could vary in different versions of same
application).
3.6 Interfaces within systems (in case multiple systems exist).
3.7 In-house vs Packaged.
3.8 Outsourced activities (IT maintenance and support).
3.9 Key persons (CIO, CISO, Administrators).
4 Risks that arise from the use of IT systems.
4.1 Inaccurate processing of data, processing inaccurate data, or both.
4.2 Unauthorized access to data.
4.3 Direct data changes (backend changes).
4.4 Excessive access / Privileged access (super users).
4.5 Lack of adequate segregation of duties.
4.6 Unauthorized changes to systems or programs.
4.7 Failure to make necessary changes to systems or programs.
4.8 Loss of data
5 Impact of IT related risks
5.1 Impact on Substantive Audit
 cannot rely on the data obtained from systems
more audit evidence is needed
 system data and report should be tested substantively for completeness
and accuracy
5.2 Impact on Controls
 cannot rely on IT dependent Manual controls
cannot rely on automated controls, system calculations and accounting
procedures built into applications
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5.3 Impact on Reporting

 due to the regulatory requirement of auditors to report on internal
financial controls of a company, the audit report also may have to be
modified in some instances.
6 Types of Controls in Automated Environment
6.1 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, miniframe, and end-user environments.
General IT-controls that maintain the integrity of information and
security of data commonly include controls over the following:” (SA 315)
Data center and network operations
Program change
Access security
Application system acquisition, development, and maintenance (Business
Applications)
6.1.1 A. Data center and network operations
Objective:
To ensure that production systems are processed to meet financial reporting
objectives.
Activities:
• Overall Management of Computer Operations Activities
• Batch jobs – preparing, scheduling and executing
• Backups – monitoring, storage & retention
• Performance Monitoring – operating system, database and networks
• Recovery from Failures – BCP, DRP
• Help Desk Functions
• Service Level Agreements – monitoring & compliance
• Documentation – operations manuals, service reports
6.1.2 B. Program change
Objective: To ensure that modified systems continue to meet financial
reporting objectives.
Activities:
• Change Management Process – definition, roles & responsibilities
• Change Requests – record, manage, track
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• Making Changes – analyze, design, develop

• Test Changes – test plan, test cases
• Apply Changes in Production
• Emergency & Minor Changes
• Documentation – user/technical manuals
• User Training
6.1.4 C. Access security
Objective:
To ensure that access to programs and data is authenticated and authorized
to meet financial reporting objectives.
Activities:
• Security Organization & Management
• Security Policies & Procedures
• Application Security
• Data Security
• Operating System Security
• Network Security
• Physical Security
• System Administration & Privileged Accounts
6.1.5 D. Application system acquisition, development, and maintenance (Business
Applications)
Objective:
To ensure that systems are developed, configured and implemented to
meet financial reporting objectives.
Activities:
• Overall Mgmt. of Development Activities
• Project Initiation
• Analysis & Design
• Construction
• Testing & Quality Assurance
• Data Conversion
• Go-Live Decision
• Documentation & Training
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6.2 Application Controls

Application controls include both automated and 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 edit checks and validation
of input data, sequence number checks, user limit checks, reasonableness
checks, mandatory data fields.
6.3 IT-dependent Controls
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.
In this case, even though the control is performed manually, the design
and effectiveness of such controls depends on the reliability of source data.
7 Testing Methods
7.1 Obtain an understanding of how an automated transaction is processed by
doing a walk through of one end-to-end transaction using a combination
of inquiry, observation and inspection.
7.2 Observe how a user processes transactions under different scenarios
7.3 Inspect the configuration defined in an application.
7.4 Inspect the system logs to determine any changes made since last audit
testing.
7.5 Carry out a test check (negative testing) and observe the error message
displayed by the application
7.6 Common methods:
 Inquiry
 Observation
 Inspection
 Re-performance
A combination of inquiry and inspection is generally the most effective
and efficient testing method. However, determining the most effective and
efficient testing method is a matter of professional judgement and depends
on the several factors including risk assessment, control environment,
desired level of evidence required, history of errors/misstatements,
complexity of business, assertions being addressed
204
7.7 Conduct reperformance using raw source data and independently applying
formulae, business rules or validations on the source data using CAATs.
8 Data analytics
The combination of processes, tools and techniques that are used to tap
vast amounts of electronic data to obtain meaningful information is called
data analytics.
 The tools and techniques that auditors use in applying the principles
of data analytics are known as Computer Assisted Auditing Techniques
or CAATs in short.
 Data analytics can be used in testing of electronic records and data
residing in IT systems using spread sheets and specialised audit tools
viz., IDEA and ACL to perform the following:
8.1 Check completeness of data and population that is used in either test of
controls or substantive audit tests.
8.2 Selection of audit samples – random sampling, systematic sampling.
8.3 Re-computation of balances – reconstruction of trial balance from
transaction data.
8.4 Re performance of mathematical calculations – depreciation, bank interest
calculation.
8.5 Analysis of journal entries as required by SA 240.
8.6 Fraud investigation.
8.7 Evaluating impact of control deficiencies.
9 Assess and Report Audit Findings
9.1 Are there any weaknesses in IT controls?
9.2 What is the impact of these weaknesses on overall audit?
9.3 Report deficiencies to management – Internal Controls Memo or
Management Letter.
9.4 Communicate in writing any significant deficiencies to Those Charged With
Governance.
The auditor needs to assess each finding or exception to determine impact on the audit and
evaluate if the exception results in a deficiency in internal control.
10 Situations where Information Technology is needed in audit
Given below are some situations where IT will be needed in audit:
10.1 Increased use of Systems and Application software in Business (for example,
use of ERPs)
10.2 Complexity of transactions has increased (multiple systems, network of
systems)
205
10.3 Hi-tech nature of business (Telecom, e-Commerce).

10.4 Volume of transactions are high (Insurance, Banking, Railways ticketing).
10.5 Company Policy (Compliance).
10.6 Regulatory requirements - Companies Act 2013 IFC, IT Act 2008. Required
by Indian and
10.7 International Standards - ISO, PCI-DSS, SA 315, SOC, ISAE.
10.8 Increases efficiency and effectiveness of audit.
11 The auditor should consider relevance of IT in an audit of financial
statements for the following reasons:
(a) Since auditors rely on the reports and information generated by IT
systems, there could be risks in the IT systems that could have an
impact on audit.
(b) SA 315 and SA 330 require auditors to understand, assess and respond
to risks that arise from the use of IT systems.
(c) By relying on automated controls and using data analytics in an audit,
it is possible to increase the effectiveness and efficiency of the audit
process.
12 A suggested approach to benefit from the use of CAATs is given below :-
a. Understanding business environment including IT
b. Define objectives & criteria
c. Identify source & format of data
d. Extract data
e. Verify the completeness & accuracy of extracted data
f. Apply criteria on data obtained
g. Validate & confirm results
h. Report & document result conclusion
13 Audit Approach in Automated environment
13.1 A. Risk Assessment
• Identify significant accounts and disclosures.
• Qualitative and Quantitative considerations.
• Relevant Financial Statement Assertions (FSA).
• Identify likely sources of misstatement.
• Consider risk arising from use of IT systems.
{Stages in Risk Assessment are a)Define business objectives & goals b)
Identify events that affect achievement of business objectives c)Assess
likelihood & impact d) Respond & Mitigate risk e) Assess residual risk.}
206
13.2 B. Understand and Evaluate

• Document understanding of business processes using Flowcharts /
Narratives.
• Prepare Risk and Control Matrices (RCM).
• Understand design of controls by performing walkthrough of end-to-
end process.
• IT General Controls, Application Controls.
13.3 C. Test for Operating Effectiveness
• Assess Nature, Timing and Extent (NTE) of controls testing.
• Assess reliability of source data; completeness of population.
• Testing of key reports.
• Sample testing.
• Consider competence and independence of staff /team performing
controls testing.
13.4 D. Reporting
• Evaluate Control Deficiencies.
• Whether its Significant deficiencies or Material weaknesses.
• Remediation of control weaknesses.
• Report it to management vias Internal Controls Memo (ICM) or
Management Letter or letter of weakness
• Include in Auditor’s report,if necessary
NOTE: STUDENTS SHOULD READ GLOSSARY AND ABBREVIATIONS GIVEN AT THE END OF
CHAPTER 6 FROM THE ICAI MODULE
207

1 Briefly mention three reasons why IT should be considered relevant to an
audit of financial statements
Ans The auditor should consider relevance of IT in an audit of financial
statements for the following reasons:
a) Since auditors rely on the reports and information generated by IT
systems, there could be risks in the IT systems that could have an impact
on audit.
b) Standards on auditing SA 315 and SA 330 require auditors to
understand, assess and respond to risks that arise from the use of IT
systems.
c) By relying on automated controls and using data analytics in an
audit, it is possible to increase the effectiveness and efficiency of the audit
process
2 Describe how risks in IT systems, if not mitigated, could have an impact on
audit
Ans When risks in IT systems are not mitigated the audit impact could be as
follows:
a) The auditor may not be able rely on the reports, data obtained,
automated controls, calculations and accounting procedures in the IT
system.
b) The auditor has to perform additional audit work by spending more
time and efforts.
c) The auditor may have to issue a modified opinion, if necessary
3 What are the different testing methods used when auditing in an automated
environment. Which is the most effective and efficient method of testing
208
Ans When auditing in an automated environment, the following testing methods

are used:
(a) Inquiry
(b) Observation
(c) Inspection
(d) Reperformance
A combination of inquiry and inspection is generally the most effiective and
efficient testing method.
However, determining the most effective and efficient testing method is
a matter of professional judgement and depends on the several factors
including risk assessment, control environment, desired level of evidence
required, history of errors/misstatements, complexity of business, assertions
being addressed.
209
1. Which of the following is a General IT control?

(a) IT Environment (b) Application Control
(c) Access Security (d) IT Dependent Control
2. Which of the following is an automated control?

(a) Program change (b) System generated report
(c) Application control (d) Configurations
3. In WH Limited every business activity was being carried out manually. The top
management of WH Limited decided to change the business environment of WH
Limited by using computer systems and computer systems related technology to
carry out all the major business activities of WH Limited.
This business environment of WH Limited, where all the major business activities are
done using computer systems and
computers related technology is an example of:
(a) Operational Environment (b) Computational Environment.
(c) Control Environment (d) Automated Environment
4. ___________are also known as pervasive or indirect controls :-

(a) General IT Controls (b) Application Controls
(c) IT dependent Controls (d) None of the above
5. _____________is the combination of processes, tools and techniques that are used
to tap vast amounts of electronic data to obtain meaningful information:-
(a) Computer Assisted Audit Techniques
(b) Automated Controls
(c) Data Analytics
(d) Combination Controls
6. _________ are manual or automated procedures that typically operate at a

business process level and apply to the processing of individual applications.
(a) Application controls (b) General IT controls
(c) Process controls (d) All of these
210
7. _______are the manual controls that make use of some form of data or information
or report produced from the IT systems and applications.
(a) Application (b) IT dependent Controls
(c) Automated Controls (d) General IT Controls
8. _______________ is a logical subsystem within a larger information system where

electronic data is stored in a predefined form and retrieved for use.
(a) Data Mining (b) Data warehouse
(c) Database (d) Data Analytics
9. Which of the following Audit testing methods is most effective as an audit test and
gives the best audit evidence ?
(a) Inquiry (b) Observation
(c) Inspection (d) Reperformance
10. User Training is an activity related to which of the following General IT Controls ?
(a) Data center and network operations
(b) Program change
(c) Access security
(d) Application system acquisition, development, and maintenance (Business
Applications)
11. The Objective of establishing Security Policies and Procedures is to

(a) To ensure that production systems are processed to meet financial reporting
objectives.
(b) To ensure that modified systems continue to meet financial reporting objectives
(c) To ensure that access to programs and data is authenticated and authorized
to meet financial reporting objectives.
(d) To ensure that systems are developed, configured and implemented to meet
financial reporting objectives.
12. IT related risks, if not mitigated, may put an impact on

(a) Substantive Audit (b) Controls
(c) Reporting (d) All of above
211
13. Which of the following Audit Testing methods give the least audit evidence?
(a) Inquiry (b) Inspection
(c) Observation (d) Reperformance
14. Applying __________ gives the most effective and efficient audit evidence while
using Audit testing methods.
(a) Inquiry in combination with Inspection
(b) Inspection in combination with Observation
(c) Observation in combination with reperformance
(d) Reperformance in combination with Inquiry
15. _______________ are needed to support the functioning of_________________

(a) General IT Controls ; Application Controls
(b) Application Controls ; General IT Controls
(c) IT Dependent Controls ; General IT Controls
(d) Application Controls ; IT Dependent Controls
Answer
1 C 5 C 9 D 13 A
2 C 6 A 10 B 14 A
3 D 7 B 11 C 15 A
4 A 8 C 12 D
212
CASE 1.
M/s NSG & Associates have been appointed as auditors of Viaan Ltd. for the financial
year 2019-20.
• The processes, operations, accounting and decisions are carried out by using
computers in Viaan Ltd.
• The auditors understand that there are several aspects that they should consider to
determine the level of automation and complexity in the business environment of
Viaan Ltd.
• While planning the audit work, the engagement partners discussed with the audit
staff about the various types of controls in the automated environment.
• The different types of audit tests that can be used in audit of an automated business
environment were also discussed within the engagement team.
• The responsibility regarding the Internal Financial Controls was also discussed in
detail.
• Further the tools and techniques that can be used to deal with the enormous data
and information of Viaan Ltd. were briefed to the audit staff by the engagement
partners.
1. ...... are the manual controls that make use of some form of data or information or
report produced from the IT systems and applications.
(a) Application Controls (b) IT dependent Controls
(c) Automated Controls (d) General IT Controls
2. Statement 1: Application controls include both manual and automated controls

that operate at a business process level.
Statement 2: General IT Controls apply to mainframe, miniframe as well as end
user environment.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both Statements 1 & 2 are correct
(d) Both Statements 1 & 2 are incorrect
213
3. ......... are also known as pervasive or indirect controls :-

(a) General IT Controls (b) Application Controls
(c) IT dependent Controls (d) None of the above
4. ........ is the combination of processes, tools and techniques that are used to tap
vast amounts of electronic data to obtain meaningful information:-
(a) Computer Assisted Audit Techniques (b) Automated Controls
(c) Data Analytics (d) None of the above
5. Which of the following is not a correct statement :-

(a) Inquiry should always be used in combination with any of the audit testing
methods.
(b) Re performance is the most effective but is very time consuming and least
efficient most of the times.
(c) Applying inquiry in combination with inspection gives the least effective and
least efficient audit evidence.
(d) Use of audit tests is a matter of professional judgment of auditor.
Answer
1 b 2 c 3 a 4 c 5 c
CASE 2.
Zenith Software Ltd has appointed Ram Laxman & Associates as its auditors for financial
year 2019-2020.
The audit would cover all the usual aspects of financial auditing but would be more
focused on Systems Audit as Zenith Software is a company which maintains its financial
records extensively on digital platform.
The processes, operations, accounting and decisions are carried out by using computers
in Zenith Software Ltd.
Standards on Auditing SA 315 and SA 330 require auditors to understand, assess and
respond to risks that arise from the use of IT systems.
Ram Laxman & Associates have been seasoned auditors but have not carried out Systems
audit in detail.
The tools and techniques that can be used to deal with the enormous data and information
of Zenith Software Ltd. were briefed to the audit staff by the engagement partners but
they still have some queries and doubts and seek your assistance for conducting this
214
special assignment.
Based on below queries/cases, you are required to answer on specific areas which require
special attention while conducting audit in an automated environment.
1. __________________ are policies and procedures that relate to many applications
and support the effective functioning of application controls
(a) General IT Controls (b) IT Dependent Manual Controls
(c) Both a) and b) (d) None of these
2. The objective of which of the following is to ensure that access to programs and
data is authenticated and authorized to meet financial reporting objectives
(a) Data Centre and Network Operations
(b) Program Change
(c) Access Security
(d) Application system, acquisition, development and maintenance
3. Tools and techniques that auditors use in applying the principles of data analytics
are known as-
(a) Computer Aided Audit Technique
(b) Computer Aided Audit Tools
(c) Computer Accounting and Auditing Technique
(d) Computer Assisted Audit Technique
4. ____________ is a term that is used to describe a very large computer with high
computing power, memory and storage that are required for running large business
operations.
(a) Application (b) Read Access Memory
(c) Automated (d) Mainframe
5. __________ are needed to support the functioning of ____________ and both are
needed to ensure complete and accurate information processing through IT systems.
(a) Internal controls, Automated controls
(b) IT- Dependent controls, General IT controls
(c) Application controls, IT- Dependent controls
(d) General IT controls, Application controls
Answer
1 a 2 c 3 d 4 d 5 d
215
1. All automated environments are complex.
2. In an audit of financial statements, the auditor should plan response to all IT risks.
3. General IT controls support the functioning of Application controls.
4. Inquiry is often the most efficient audit testing method, but least effective.
5. Specialised audit tools like IDEA, ACL are required to perform data analytics.
6. A combination of processes, tools and techniques that are used to tap vast amounts
of electronic data to obtain meaningful information is known as meaningful data.
7. During the assessment of Internal Controls , if the auditor can test Compensating
controls , he should obtain evidence of other mitigating factors.
8. An automated environment basically refers to a business environment where the

processes, operations, accounting except the decisions are carried out by using
computer systems.
9. The Company auditor need not report on the efficacy of Internal Financial controls
in his Audit Report in the case of a One Person Company .
10. Generally, applying inquiry in combination with reperformance as audit testing

method gives the most effective and efficient audit evidence
216
1. Incorrect: The complexity of an automated environment depends on various factors

including the nature of business, level of automation, volume of transactions,
use of ERP and so on. There could be environment where dependence on IT and
automation is relatively less or minimal and hence, considered less complex or even
non-complex.
2. Incorrect. The auditor should plan response to those IT risks that are relevant to
financial reporting and not “all” IT risks.
3. Correct. General IT controls support the functioning of automated application

controls and IT dependent controls.
4. Correct. Inquiry is the most efficient but least effective. Moreover, testing through
inquiry alone is not sufficient. Inquiry should be corroborated by applying any one
or a combination of observation, inspection or reperformance.
5. Incorrect. Even though specialised audit tools are very useful, such tools are not
always required or necessary to carry out data analytics. More commonly available
spreadsheet applications like MS-Excel can also be effectively used for carrying out
data analytics.
6. Incorrect. A combination of processes, tools and techniques that are used to tap
vast amounts of electronic data to obtain meaningful information is known as Data
Analytics.
7. Incorrect. If the auditor can test Compensating controls , he should obtain additional
evidence that may be required.
Obtaining evidence of other.mitigating factors is required when he can’t test
compensating controls during his assessment of the Internal Controls.
8. Incorrect. An automated environment basically refers to a business environment

where the processes, operations, accounting and even decisions are carried out by
using computer systems
217
9. Correct. A One Person Company and Small Company are exempted from this
requirement as per proviso to Section 143(3)(i).
10. Incorrect. Generally, applying inquiry in combination with inspection gives the most
effective and efficient audit evidence
218
AUDIT SAMPLING

1 Sampling: An Audit Procedure Refer note
2 Meaning of audit sampling Topic 1
3 Approaches to Sampling Topic 6
4 Sample design and selection of items for testing Topic 4, 5, & 6
5 Sampling Design ,Size & Selection of items for testing Chapter 3
6 Nature and cause of deviations and misstatements Topic 7
7 Projecting Misstatements Topic 7

8 Evaluating Results of Audit Sampling Topic 7
9 Precautions to be taken while applying test check techniques Topic 8
Note:
Is auditor justified in sampling technique? What is the need of sampling procedure in auditing
financial statements?
a) The extent of the checking to be undertaken is primarily a matter of judgment of the auditor,
there is nothing statutorily stated anywhere which specifies what work is to be done, how
it is to be done and to what extent.
b) It is also not obligatory that the auditor must adopt the sampling technique. What he is to
do is to express his opinion and become bound by that.
c) With the shift in favour of formal internal controls in the management of affairs of
organisations, the possibilities of routine errors and frauds have greatly diminished and
auditors often find extensive routine checking as nothing more than a ritual because it
seldom reveals anything material.
d) To ensure good and reasonable standard of work, he should adopt standards and techniques
that can lead him to an informed professional opinion.
e) On a consideration of this fact, it can be said that it is in the interest of the auditor that if
he decides to form his opinion on the basis of a part checking, he should adopt standards
and techniques which are widely followed and which have a recognised basis.
f) Since statistical theory of sampling is based on a scientific law, it can be relied upon to a
greater extent than any arbitrary technique which lacks in basis and acceptability
219
Sr.No Particulars
1 Meaning
According to SA 530 “Audit sampling”, ‘audit sampling’ refers to the application
of audit
procedures to less than 100% of items within a population of audit relevance such
that all
sampling units have a chance of selection in order to provide the auditor with a
reasonable basis on which to draw conclusions about the entire population.
2 Population and its characteristics
 Population: Population refers to the entire set of data from which a
sample is selected and about which the auditor wishes to draw conclusions.
The auditor should select sample items in such a way that the sample can
be expected to be representative of the population.
 Characteristics of the population are as follows:
2.1 Appropriateness : The auditor will need to determine that the population
from which the sample is drawn is appropriate for the specific audit objective
2.2 Completeness : The population also needs to be complete, the population
needs to include all relevant items from throughout the entire period.
2.3 Reliable : When performing the audit sampling, the auditor performs audit
procedures to ensure that the information upon which the audit sampling
is performed is sufficiently complete and accurate.
3 Sampling Design ,Size & Selection of items for testing
3.1 Sample design
When designing an audit sample, the auditor shall consider the purpose of
the audit procedure and the characteristics of the population from which
the sample will be drawn. The auditor shall determine a sample size
sufficient to reduce sampling risk to an acceptably low level.
3.1.1 Selection of Items for Testing
-- When determining sample size, auditor should also consider sampling
risk, tolerable error, and expected error.
-- Sampling risk is the risk that auditor’s conclusion based on a sample
may be different from the conclusion if the entire population were
tested.
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(i) In the case of a test of controls, that controls are more effective than
they actually are, or in the case of a test of details, that a material
misstatement does not exist when in fact it does. 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. This is because of over reliance on the internal controls.
(ii) In the case of a test of controls, that controls are less effective than
misstatement exists when in fact it does not. This type of erroneous
conclusion affects audit efficiency as it would usually lead to
additional work to establish that initial conclusions were incorrect.
This is because of under reliance on the test of controls and detailed
substantive procedures performed by the auditor. Here risk of giving
wrong opinion is minimum but it will lead to more detailed checking
which is time consuming.
{Non sampling risk is the risk of erroneous conclusion for reasons
unrelated to sampling risk. Example –Human mistake, Misinterpreting
sample results, failure to recognize a deviation or misstatement ,etc.
These risks can never be mathematically measured. }
-- Expected error is the error which the auditor expects to be present in
the sample looking to the accounting system and internal control.
-- Tolerable error is the maximum error in population that the auditor
would be willing to accept and still conclude that the result from
sample has achieved audit objective.
{Note : Tolerable misstatement/rate of deviation – A monetary amount/
rate of deviationset by the auditor in respect of which the auditor seeks to
obtain an appropriate level of assurance that the monetary amount /rate
of deviation set by the auditor is not exceeded by the actual misstatement/
rate of deviation in the population.}
3.1.2 Factors that should be considered for deciding upon the extent of checking
on a sampling plan are as follows:
(i) Size of the organisation under audit.
(ii) State of the internal control.
(iii) Adequacy and reliability of books and records.
(iv) Tolerable error range.
(v) Degree of the desired confidence
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3.2 Audit Procedure

After having carried out those audit procedures on each sample item that
are appropriate to particular audit objective, auditor should analyse any
errors detected in the sample, project the errors found in the sample to the
population and reassess sampling risk.
♦ The auditor shall perform audit procedures, appropriate to the
purpose, on each item selected.
♦ If the audit procedure is not applicable to the selected item, the
auditor shall perform the procedure on a replacement item.
♦ If the auditor is unable to apply the designed audit procedures, or
suitable alternative procedures, to a selected item, the auditor shall
treat that item as a deviation from the prescribed control, in the case
of tests of controls, or a misstatement, in the case of tests of details.
♦ An example of when it is necessary to perform the procedure on a
replacement item is when a voided check (Cancelled cheque) is selected
while testing for evidence of payment authorization. If the auditor is
satisfied that the cheque has been properly cancelled such that it
does not constitute a deviation, an appropriately chosen replacement
is examined. A replacement would then mean a proper and valid
cheque through which payment has been made.
♦ An example of when the auditor is unable to apply the designed audit
procedures to a selected item is when documentation relating to that
item has been lost. If the documentation of a sales is lost, like the
sales order record, sales invoice, document for dispatch etc, then
confirmation can be sought from the debtor as per SA 505. If it is a
cash sale, the cash book can be cross verified for the existence of such
transactions.
♦ An example of a suitable alternative procedure might be the
examination of subsequent cash receipts together with evidence of
their source and the items they are intended to settle when no reply
has been received in response to a positive confirmation request.
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♦ Another example for replacement of a sample could be, if all

transactions of computerized sales are being checked, for example
sales recorded through a bar code scanner, and incidentally a sample
of manual billing gets selected, then such item can be replaced after
adequately checking the correctness of the manual bill with the
supporting documents available. If replacement is not possible or
reasonable, alternative audit procedure can be applied.
3.3 Evaluating Results of Audit Sampling
(Discussed in topic 7)
4 Sample Selection Techniques
4.1 Random Sampling: 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. Random sampling includes two
very popular methods which are discussed below:
(i) Simple Random Sampling: Under this method each unit of the whole
population e.g. purchase or sales invoice has an equal chance of being
selected. The mechanics of selection of items may be by choosing numbers
from table of random numbers by computers or picking up numbers
randomly from a drum. It is considered that random number tables are
simple and easy to use and also provide assurance that the bias does not
affect the selection. This method is considered appropriate provided the
population to be sampled consists of reasonably similar units and fall
within a reasonable range.
(ii) 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 of them. Each stratum is treated as if it was a separate population
and if proportionate of items area selected from each of these stratum.
The number of groups into which the whole population has to be divided is
determined on the basis of auditor judgment.
It is widely accepted way of sampling as it is more scientific, without
personal bias and the result of sample can be evaluated and projected in
more reliable way
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4.2 Systematic or Interval Sampling:

Systematic selection is a selection method in which the number of sampling
units in the population is divided by the sample size to give a sampling
interval, for example 50, and having determined a starting point within
the first 50, each 50th sampling unit thereafter is selected. When using
systematic selection, the auditor would need to determine that sampling
units within the population are not structured in such a way that the
sampling interval corresponds with a particular pattern in the population.
4.3 Monetary Unit Sampling:
It is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts.
4.4 Block Sampling:
This method involves selection of a block(s) of contiguous items from within
the population. Block selection cannot ordinarily be used in audit sampling
because most populations are structured such that items in a sequence
can be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population.
4.5 Haphazard Sampling:
Haphazard selection, in which the auditor selects the sample without
following a structured technique. Although no structured technique is used,
the auditor would nonetheless avoid any conscious bias or predictability
(for example, always choosing or avoiding the first or last entries on a
page) and thus attempt to ensure that all items in the population have
a chance of selection. Haphazard selection is not appropriate when using
statistical sampling.
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4.6 a) Stratification:
 Audit efficiency may be improved if the auditor stratifies a population
by dividing it into discrete sub-populations which have an identifying
characteristic. The objective of stratification is to reduce the variability of
items within each stratum and therefore allow sample size to be reduced
without increasing sampling risk.
 When performing tests of details, the population is often stratified
by monetary value. This allows greater audit effort to be directed to the
larger value items, as these items may contain the greatest potential
misstatement in terms of overstatement.
 Similarly, a population may be stratified according to a particular
characteristic that indicates a higher risk of misstatement, for example,
when testing the allowance for doubtful accounts in the valuation of
accounts receivable, balances may be stratified by age.
 The results of audit procedures applied to a sample of items within
a stratum can only be projected to the items that make up that stratum.
To draw a conclusion on the entire population, the auditor will need to
consider the risk of material misstatement in relation to whatever other
strata make up the entire population.
b) 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.
 Having selected specific monetary units from within the population, for
example, the accounts receivable balance, the auditor may then examine
the particular items, for example, individual balances, that contain those
monetary units
 One benefit of this approach to defining the sampling unit is that audit
effort is directed to the larger value items because they have a greater
chance of selection, and can result in smaller sample sizes.
 This approach may be used in conjunction with the systematic method
of sample selection and is most efficient when selecting items using random
selection.
5 Approaches to Sampling
5.1 Statistical Approach
5.1.1 Statistical sampling is an approach to sampling that has the random
selection of the sample items; and the use of probability theory to evaluate
sample results, including measurement of sampling risk characteristics
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5.1.2 Audit testing done through statistical approach is more scientific than
testing based entirely on the auditor’s own judgment because it involves
use of mathematical laws of probability in determining the appropriate
sample size in varying circumstances
5.1.3 The advantages of statistical sampling may be summarized as follows -
The amount of testing (sample size) does not increase in proportion to
the increase in the size of the area (universe) tested.
The sample selection is more objective and thereby more defensible.
The method provides a means of estimating the minimum sample size
associated with a specified risk and precision.
It provides a means for deriving a “calculated risk” and corresponding
precision (sampling error) i.e. the probable difference in result due to the
use of a sample in lieu of examining all the records in the group (universe),
using the same audit procedures.
It may provide a better description of a large mass of data than a
complete examination of all the data, since non-sampling errors such as
processing and clerical mistakes are not as large.
5.2 Non Statistical approach
5.2.1 A sampling approach that does not have above characteristics is considered
non-statistical sampling
5.2.2 The non-statistical sampling is criticized on the grounds that it is neither
objective nor scientific
5.2.3 The expected degree of objectivity cannot be assured in non-statistical
sampling because the risk of personal bias in selection of sample items
cannot be eliminated
5.2.4 Under some audit circumstances, statistical sampling methods may not be
appropriate. The auditor should not attempt to use statistical sampling
when another approach is either necessary or will provide satisfactory
information in less time or with less effort, for instance when exact accuracy
is required or in case of legal requirements etc.
 The decision whether to use a statistical or non-statistical sampling approach is
a matter for the auditor’s judgment; however, sample size is not a valid criterion to
distinguish between statistical and non-statistical approaches.
 Whatever may be the approach non-statistical or statistical sampling, the sample
must be representative. This means that it must be closely similar to the whole
population although not necessarily exactly the same. The sample must be large
enough to provide statistically meaningful results.
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6 Examples of Factors influencing Sample size

6.1 The higher the auditor’s assessment of the risk of material misstatement,
the larger the sample size needs to be. The auditor’s assessment of the risk
of material misstatement is affected by inherent risk and control risk.
6.2 The more the auditor is relying on other substantive procedures (tests of
details or substantive analytical procedures) to reduce to an acceptable level
the detection risk regarding a particular population, the less assurance the
auditor will require from sampling and, therefore, the smaller the sample
size can be. Hence, if there is an increase in the use of other substantive
procedures directed at the same assertion, the size of sample will decrease.
6.3 Greater the level of assurance that the auditor requires that the results of
the sample are in fact indicative of the actual amount of misstatement in
the population, the larger the sample size needs to be
6.4 An increase in tolerable misstatement will decrease the sample size as
lower the tolerable misstatement; the larger the sample size needs to be.
6.5 When a population can be appropriately stratified, the aggregate of the
sample sizes from the strata generally will be less than the sample size
that would have been required from the whole population
7 Projecting Misstatements
♦ The auditor is required to project misstatements for the population to
obtain a broad view of the scale of misstatement but this projection
may not be sufficient to determine an amount to be recorded.
♦ When a misstatement has been established as an anomaly, it may be
excluded when projecting misstatements to the population. However,
the effect of any such misstatement, if uncorrected, still needs to
be considered in addition to the projection of the non-anomalous
misstatements.
♦ For tests of details, the auditor shall project misstatements found in
the sample to the population whereas for tests of controls, no explicit
projection of deviations is necessary since the sample deviation rate is
also the projected deviation rate for the population as a whole.
For tests of controls, an unexpectedly high sample deviation rate may lead
to an increase in the assessed risk of material misstatement, unless further
audit evidence substantiating the initial assessment is obtained.
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♦ For tests of details, 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, in the absence of further
audit evidence that no material misstatement exists.
♦ In the case of tests of details, the projected misstatement plus
anomalous misstatement, if any, is the auditor’s best estimate of
misstatement in the population.
♦ When the projected misstatement plus anomalous misstatement, if
any, exceeds tolerable misstatement, the sample does not provide
a reasonable basis for conclusions about the population that has
been tested. 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.
♦ 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.
♦ Considering the results of other audit procedures helps the auditor to
assess the risk that actual misstatement in the population exceeds
tolerable misstatement, and the risk may be reduced if additional
audit evidence is obtained.
In case the auditor concludes that audit sampling has not provided a
reasonable basis for conclusions about the population that has been
tested, the auditor may request management
I. to investigate misstatements that have been identified and the
potential for further misstatements and
II. to make any necessary adjustments; or tailor the nature, timing and
extent of those further audit procedures to best achieve the required
assurance.
For example, in the case of tests of controls, the auditor might extend
the sample size, test an alternative control or modify related substantive
procedures.
8 Evaluating Results of Audit Sampling
8.1 The auditor shall perform audit procedures, appropriate to the purpose,
on each item selected.
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8.2 The auditor shall evaluate-

(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a reasonable basis for
conclusions about the population that has been tested
8.3 In analyzing the deviations and misstatements identified, the auditor
may observe that many have a common feature, for example, type of
transaction, location, product line or period of time.
In such circumstances, the auditor may decide to identify all items in the
population that possess the common feature, and extend audit procedures
to those items
The auditor shall investigate the nature and cause of any deviations or
misstatements identified, and evaluate their possible effect on the purpose
of the audit procedure and on other areas of the audit.
8.4 In the extremely rare circumstances when the auditor considers a
misstatement or deviation discovered in a sample to be an anomaly, the
auditor shall obtain a high degree of certainty that such misstatement or
deviation is not representative of the population.
The auditor shall obtain this degree of certainty by performing additional
audit procedures to obtain sufficient appropriate audit evidence that the
misstatement or deviation does not affect the remainder of the population
8.5 For tests of details, the auditor shall project misstatements found in the
sample to the population.
Total Misstatements= Projection of Non-Anomalous misstatement +
Anomaly
8.6 In case the auditor concludes that audit sampling has not provided a
reasonable basis for conclusions about the population that has been tested,
the auditor should tailor the nature, timing and extent of those further
audit procedures to best achieve the required assurance. For example, in
the case of tests of controls, the auditor might extend the sample size, test
an alternative control or modify related substantive procedures.
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9 Precautions to be taken while applying test check techniques

• Thorough study of accounting system should be done before adopting
sampling
• Proper study of internal control systems.
• Areas which are not suitable for sampling should be carefully
considered. Eg: compliance with statutory provisions, transactions of
unusual nature etc.
• Proper planning for Sampling methods to be used and explaining the
staff,
• Transactions and balances have to be properly classified (stratified)
• Sample size should be appropriately determined.
• Sample should be chosen in unbiased way,
• Errors located in the sample should be analysed properly
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1 What is the meaning of Sampling? Also discuss the methods of Sampling.
Explain in the light of SA 530 “Audit Sampling
Ans “Audit Sampling” means the application of audit procedures to less than
100% of items within a population of audit relevance such that all sampling
units have a chance of selection in order to provide the auditor with a
reasonable basis on which to draw conclusions about the entire population
{REFER TOPIC 5}
2 With reference to Standard on Auditing 530, state the requirements relating
to audit sampling, sample design, sample size and selection of items for
testing
Ans {REFER TOPIC 8}
3 While planning the audit of S Ltd. you want to apply sampling techniques.
What are the risk factors you should keep in mind?
Ans {REFER TOPIC 3}
4 Short note on Advantages of Statistical sampling in Auditing
Ans {REFER TOPIC 6.1.3}
5 Short note on Stratified sampling
Ans {REFER TOPIC 5.6}
6 Evaluating results of audit sampling:
Ans 1. The auditor shall evaluate
• The results of the sample , and
• Whether the use of audit sampling has provided reasonable basis for
conlcusion
2. Analyzing Deviation → Observe Common Features → Extend audit
procedures to all those items
3. Misstatement/Deviation → Anomaly → Obtain high degree of certainty
that such MS is not representative of population
4. In case auditor concludes that audit sampling has not provided a
reasonable basis for conclusions about the population, the auditor
should tailor (i.e extend) the nature, timing and extent of audit
procedures.
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7 The extent of the checking to be undertaken is primarily a matter of

judgment of the auditor.
It is in the interest of the auditor that if he decides to form his opinion on
the basis of a part checking, he should adopt standards and techniques
which are widely followed. Explain
Ans The extent of the checking to be undertaken is primarily a matter of judgment
of the auditor, there is nothing statutorily stated anywhere which specifies
what work is to be done, how it is to be done and to what extent. It is also
not obligatory that the auditor must adopt the sampling technique. What
he is to do is to express his opinion and become bound by that.
To ensure good and reasonable standard of work, he should adopt

standards and techniques that can lead him to an informed professional
opinion. On a consideration of this fact, it can be said that it is in the
interest of the auditor that if he decides to form his opinion on the basis
of a part checking, he should adopt standards and techniques which are
widely followed and which have a recognized basis. Since statistical theory
of sampling is based on a scientific law, it can be relied upon to a greater
extent than any arbitrary technique which lacks in basis and acceptability.
8 The auditor is required to project misstatements for the population to
obtain a broad view of the scale of misstatement. Explain
Ans • The auditor is required to project misstatements for the population to
obtain a broad view of the scale of misstatement but this projection
may not be sufficient to determine an amount to be recorded. When a
misstatement has been established as an anomaly, it may be excluded
when projecting misstatements to the population. However, the effect
of any such misstatement, if uncorrected, still needs to be considered
in addition to the projection of the non-anomalous misstatements.
• For tests of details, the auditor shall project misstatements found in
the sample to the population whereas for tests of controls, no explicit
projection of deviations is necessary since the sample deviation rate is
also the projected deviation rate for the population as a whole.
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1. The main advantage of using statistical sampling techniques is that such techniques:
(a) Mathematically measure risk
(b) Eliminate the need for judgmental sampling
(c) Defines the values of tolerable error
(d) All of the them.
2. Which of the following factors is (are) considered in determining the sample size for
tests of control?
(a) Projected error (b) tolerable error
(c) Expected error (d) Both (b) and (c)
3. Tolerable error is the maximum monetary error that the auditor is prepared to
accept in the population and still conclude that audit objective has been achieved,
is directly related to
(a) Sample size (b) Audit risk (c) Materiality (d) Expected error
4. Which of the following is source of Non Sampling risk :

(a) Human Mistakes
(b) Applying audit procedures not appropriate to the objectives of audit
(c) Misinterpreting the sample results
5. Which of the following is more scientific :

(a) Statistical (b) Non- statistical
(c) both (a) and (b) (d) none of the above
6. As the number of transactions of WY Limited for the financial year 2018-19 were in
very large number, the auditor of WY Limited decided to use the technique of Audit
Sampling. Before selecting the sample from Repair and Maintenance
Expenses, the auditor of WY Limited wished that entire data of Repair and Maintenance
Expenses of WY Limited for financial year 2018-19 should have three characteristics.
These three characteristics are:
(a) Simple, Completeness, Relevant. (b) Appropriateness, Simple, Relevant.
(c) Reliable, Simple, Relevant. (d) Appropriateness, Completeness, Reliable.
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7. In random Sample, each item of population has

(a) equal chance of selection
(b) has varying chance of selection depending upon placing of items.
(c) may have a chance of selection based on auditors professional judgement
(d) All of these
8. The relationship between tolerable error and sample size is

(a) Inverse (b) Direct (c) Close (d) There is no relationship.
9. Statistical sampling has the following characteristics

(a) Random selection (b) Use of Probability theory
(c) both (a) and (b) (d) Judgmental approach
10. Tolerable error is _______________error in population that auditor is willing to

_______________ for a given sample size.
a) Minimum, Forego b) Maximum, Forego
c) Minimum, Accept d) Maximum, Accept
11. Which of the following statements is correct?

a) Lower the sampling risk greater the sample size
b) Smaller the tolerable error, greater the sample size
c) Lower the expected error, smaller the sample size
d) All are correct
12. In non-statistical sampling, the sample size and its composition are determined on
the basis of
a) Personal experience of auditor b) Knowledge of auditor
c) Judgement of auditor d) All of above
13. In which of the following sampling, sampling units are selected from population at
fixed intervals
a) Random Sampling b) Systematic Sampling
c) Block Sampling d) Cluster Sampling
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14. In stratified random sampling

a) Sample is taken from whole of the population
b) It requires special attention to judge contents of stratum
c) There is application of different concept and not an extension of simple random
sampling
d) All of these
Answer
1 A 5 A 9 C 13 B
2 D 6 D 10 D 14 B
3 C 7 A 11 D
4 D 8 A 12 D
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CASE 1.
M/s KDR & associates, Chartered accountants have been appointed auditors of a company
having operations spread in three states in India for the first time. The nature of business of
company is such that that there are about 50000 monthly entries in its books of accounts
accompanied with commensurate records. The company has also robust internal control
system. The auditors want reliable evidence. However, they are desirous of curtailing
non-consequential routine checking.
Hence, while formulating strategy and plan for conducting audit, auditors desire to rely
upon good audit samples both for tests of controls and tests of details.
In above context, answer the following questions: -
1. Consider the following statements for determining sample size for tests of control: -
Statement I--- An Increase in the tolerable rate of deviation leads to decrease in
sample size.
Statement II--- An increase in the expected rate of deviation of the population to
be tested leads to increase in sample size.
Statement III—An increase in the number of sampling units in the population leads
to substantial increase in sample size.
Which of the following is most likely correct option?
(a) All Statements I, II and III are true.
(b) Statements I and II are true. However, Statement III is false.
(c) Statements I and III are true. However, Statement II is false.
(d) Statements II and III are true. However, Statement I is false.
2. Consider the following statements for determining sample size for tests of details: -
Statement I--- An increase in tolerable misstatement leads to increase in sample
size.
Statement II--- An increase in the auditor’s desired level of assurance that tolerable
misstatement is not exceeded by actual misstatement in the population leads to
decrease in sample size.
Statement III—An increase in the amount of misstatement auditor expects to find in
the population leads to increase in sample size.
Which of the following is most likely correct option?
(a) All Statements I, II and III are true.
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(b) Statements I and II are false. However, Statement III is true.

(c) Statements I and III are true. However, Statement II is false.
(d) Statements II and III are true. However, Statement I is false.
3. Which of the following is not likely to be correct in evaluating results of audit

sampling in case of tests of details?
(a) The projected misstatement combined with anomalous misstatement is
auditor’s best estimate of misstatement in population.
(b) In case projected misstatement combined with anomalous misstatement
exceeds tolerable misstatement, the sample provides a reasonable basis for
conclusions about population.
(c) The closer the projected misstatement combined with anomalous statement
is to tolerable misstatement, it is more likely that actual misstatement in the
population may exceed tolerable misstatement.
(d) In case the projected misstatement is greater than auditor’s expectation of
misstatement used to determine sample size, the auditor may conclude that
there is unacceptable sampling risk of actual misstatement in the population
exceeding tolerable misstatement.
4. Which of the following is not likely to be correct in relation to Block Sampling and
audit samples drawn upon using this technique?
(a) Block selection involves selection of a block/blocks of contiguous items within
the population.
(b) Most populations from which audit samples are drawn are structured in such
a way that items in a sequence can be expected to have similar characteristics
to each other but different characteristics from items elsewhere in population.
Hence, it is not used ordinarily in audit sampling.
(c) Block sampling has characteristics of simplicity and economy.
(d) It is generally an appropriate sample selection technique when auditor intends
to draw valid inferences about the entire population based upon sample.
5. Consider the below stated steps in relation to audit sampling.

What is the most likely logical order of these steps to be followed by auditors of this
company?
Step I—Performing audit procedures
Step II ---- Projecting Misstatements
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Step III---- Sample design and selection of items for testing

Step IV-- Investigating Nature and cause of deviations
Step V--- Evaluating results of audit Sampling
(a) Step I, Step II, Step III, Step IV and Step V
(b) Step II, Step I, Step III, Step V and Step IV
(c) Step III, Step I, Step IV, Step II and Step V
(d) Step I, Step II, Step III, Step V and Step IV
Answer
1 b 2 b 3 b 4 d 5 c
CASE 2.
M/s CA & Co is a firm of Chartered Accountants based at Mumbai, Mr C and Mr A being the
Partners of the Firm. They are engaged, inter alia, in the Statutory Audit of Great Trading
Company who is dealing in FMCG Products and sells its products to Wholesalers and
Retailers. During the course of their primary discussion with the Accounting Personnel of
the Company, Mr C found out that the number of Transactions are very high and the value
of Transactions also vary a great length especially in the case of Sales Transactions - as
their base is very large and number of sales transactions run into Hundreds of Invoices per
month. Mr C and Mr A are thinking about checking the Sales Transactions and Balances
of Account Receivables on a Sampling basis and for that they are discussing about
which of the main two approaches to sampling would be appropriate in this case.
They mostly are satisfied with the Internal Control Procedures as far as Sales Order
Processing is concerned. After discussion, they have decided that they would divide the
Sales Transactions into Value Buckets viz. Less than 1 Lakh, 1 Lakh to 5 Lakh, 5 Lakh and
above. For Accounts Receivables they would go for Age-wise Receivables viz. up to 45
Days, 45 to 90 Days, 90 to 180 Days and Above 180 Days.
Checking of Sales and Receipts Transactions on the above basis was carried out and
though the Auditors didn’t find any major irregularity in the Sales, it was observed that
most of the Receivables in Above 180 Days category were from individual Sales Bill of 1
Lakh or less and most of the parties were local ones. So it was decided to follow-up this
matter by asking for Balance confirmation from those Debtors whose balance remained
outstanding for more than 180 Days.
1. Which of the following Statement is correct?

(a) Hundred Percent Checking will give absolute satisfaction to the Auditor about
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correctness of transactions.
(b) Sampling Methods cannot be relied upon to reveal the true feature and
characteristics of the population.
(c) If drawn properly, a sample would give reasonable basis to an Auditor to draw
conclusions about the entire population
(d) Sampling should be done only when Hundred Percent Checking is not possible
2. Mr C and Mr A are discussing different approaches to Sampling, which are they?

(a) Statistical Sampling and Non-statistical Sampling
(b) Large Sample and Small Sample
(c) Random Sampling and Systematic Sampling
(d) Scientific Sampling and Non-Scientific Sampling
3. Which of the following method is used by the Auditor for Drawing of the Samples?
(a) Simple Random Sampling (b) Haphazard Sampling
(c) Systematic Sampling (d) Stratified Sampling
4. What is the initial perception of control risk as far as Sales Transactions are
concerned?
(a)
High (b) Medium
(c)
Low (d)
Non-existent
5. To satisfy about the genuineness of Balances of Debtors outstanding for more than
180 Days, M/s CA & Co would have to lower which risk?
(a) Inherent Risk (b) Detection Risk
(c) Control Risk (d) All of the above
Answer
1 c 2 a 3 d 4 a 5 b
CASE 3.
Sargam Ltd appoints Kishore & Mukesh as statutory auditors for the financial year 2019-
2020. Kishore & Mukesh seem to have different opinions on Audit approach to be adopted
for audit of Sargam Ltd. Kishore wants to check all transactions without exception in
order to ensure that nothing is missed from the scope so as to give them (auditors)
reasonable assurance on the coverage of Audit. On the other hand, Mukesh is of the
239
opinion that 100% checking is not required and they can rely on Audit Sampling techniques
in order to provide them a reasonable basis on which they can draw conclusions about
the entire population. Based on above facts, please respond to below queries posed by
them as per SA 530.
1. Sampling risk can lead to two types of erroneous conclusions one of them is when
test of control appears to be more effective than they actually are which affects
________________and is more likely to lead to an inappropriate audit opinion.
(a) audit efficiency (b) audit effectiveness
(c) audit quality (d) none of the above
2. When auditor decides to select less than 100% of the population for testing, the
auditor is said to be using___________________
(a) Audit sampling (b) Representative sampling
(c) Test Checking (d) Internal Audit
3. Tolerable error is _______________ in population that auditor is willing to

_______________ for a given sample size.
(a) Minimum, Forego (b) Maximum, Forego
(c) Minimum, Accept (d) Maximum, Accept
4. The application of audit sampling is such that all sampling units have a chance of
selection in order to draw conclusion about the _______.
(a) Entire population (b) Selective population
(c) Audited population (d) Universe
5. ____________________ is a method of audit testing which is more scientific than

testing based entirely on the auditor’s own judgement because it involves use of
mathematical laws of probability in determining the appropriate sample size.
(a) Statistical Sampling (b) Non statistical Sampling
(c) Haphazard Sampling (d) Cluster Sampling
Answer
1 b 2 a 3 d 4 a 5 a
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1. The method which involves dividing the population into groups of items is knows as
block sampling.
2. Universe refers to the entire set of data from which a sample is selected and about
which the auditor wishes to draw conclusions.
3. Non Statistical sampling is an approach to sampling that has the random selection
of the sample items; and the use of probability theory to evaluate sample results,
including measurement of sampling risk characteristics.
4. Sample need not be representative
5. The objective of stratification is to increase the variability of items within each

stratum and therefore allow sample size to be reduced without increasing sampling
risk.
6. When statistical sampling is used to select a sample, sample need not be

representative because the statistical sampling takes care of the representation.
7. Stratified Sampling is used for homogeneous population.
8. Non statistical sampling is considered to be more scientific than the statistical

sampling.
9. In case of Statistical sampling, auditor’s bias in choosing sample is involved.
10. In stratified sampling, the conclusion drawn on each stratum can be directly
projected to the whole population.
11. Low acceptable sampling risk requires larger sample size.
12. Statistical sampling has narrower application where a population to be tested

consists of a large number of similar items.
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1. Incorrect: The method which involves dividing the population into groups of items
is known as cluster sampling whereas block sampling involves the selection of a
defined block of consecutive items.
2. Incorrect: Population refers to the entire set of data from which a sample is selected
and about which the auditor wishes to draw conclusions.
3. Incorrect: Statistical sampling is an approach to sampling that has the random

selection of the sample items; and the use of probability theory to evaluate sample
results, including measurement of sampling risk characteristics.
4. Incorrect: Whatever may be the approach non-statistical or statistical sampling,

the sample must be representative. This means that it must be closely similar to the
whole population although not necessarily exactly the same. The sample must be
large enough to provide statistically meaningful results.
5. Incorrect: The objective of stratification is to reduce the variability of items within

each stratum and therefore allow sample size to be reduced without increasing
sampling risk.
6. Incorrect: Whatever may be the approach non-statistical or statistical sampling,

the sample must be representative. This means that it must be closely similar to the
whole population although not necessarily exactly the same. The sample must be
large enough to provide statistically meaningful results.
7. Incorrect: Stratified sampling is used when the population is diversified i.e
heterogeneous. The population is divided into sub population having similar
characteristics. Sample are then chosen from these sub populations which are called
as Stratum. Therefore, stratified sampling is not useful in case of homogeneous
population.
8. Incorrect: Statistical sampling uses scientific method of choosing samples from a
given population. The use of probability theory is involved in statistical sampling
so that every sampling unit has an equal chance of getting selected. In the non
statistical sampling, auditors’ judgment and past experience is used to choose
samples without any scientific method.
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9. Incorrect: Statistical sampling uses scientific method choosing samples from a given
population. The use of probability theory is involved in statistical sampling so that
every sampling unit has an equal chance of getting selected. In the non statistical
sampling, auditor’s judgment and past experience is used to choose samples without
and scientific method.
Hence, personal bias is involved in Non statistical sampling and not Statistical.
10. Incorrect: In case of stratified sampling, the conclusions are drawn on the stratum.
The combination of all the conclusions on stratum together will be used to determine
the possible effect of misstatement or deviation. Hence the samples are used to
derive conclusion only on the respective stratum from where they are drawn and
not the whole population.
11. Correct: Sampling risk arises from possibility that the auditor’s conclusion based
upon sample may be different from conclusion that would have been reached if same
audit procedures were applied on the entire population. If acceptable sampling risk
is low, large sample size is needed.
12. Incorrect: Statistical sampling has reasonably wide application where a population
to be tested consists of a large number of similar items and more in the case of
transactions involving compliance testing, trade receivables’ confirmation, payroll
checking, vouching of invoices and petty cash vouchers.
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ANALYTICAL PROCEDURE
Sr.No List of Topics as per Module JKSC topic reference

1 Meaning of Analytical Procedures Topic 1
2 Purpose and timing of analytical procedures Topic 2
3 Substantive Analytical Procedures Topic 4 & 6
4 Suitability of Particular Analytical Procedures for
given assertions
5 Extent of Reliance on Analytical Procedures Topic 7
6 Risk of Material Misstatements Topic 4
7 Investigating Results of Analytical Procedures Topic 8
8 Analytical Procedures that assist when forming an Topic 10
overall conclusion
9 Considerations specific to Public sector entities Topic 9
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Sr.No Particulars
1 Meaning
 As per SA-520 “Analytical Procedures” means
1. analysis of significant ratios and trends
2. including the resulting investigation of fluctuations and
3. relationship that are inconsistent with other relevant information
or
4. which deviate from predicted amounts.
In short, it means evaluations of financial information through analysis of
plausible relationships among both financial and non-financial data.
 As per SA 520, the term “analytical procedures” means evaluations
of financial information through analysis of plausible relationships
among both financial and non-financial data.
Thus, analytical procedures include the consideration of comparisons
of the entity’s financial information with as well as consideration of
relationships.
 Analytical procedures are performed having the following purpose:
i.) To assist the auditor in planning the nature, timing and extent of
other audit procedures.
ii.) As substantive procedures to obtain relevant & reliable audit
evidence when their use can be more effective than tests of
details and,
iii.) As an overall review near the end of the audit that assist the auditor
when forming an overall conclusion as to whether the financial
statements are consistent with the auditor’s understanding of
the entity. SA 520 discusses use of analytical procedures as
substantive procedures
 The use of analytical procedures as risk assessment procedures is
discussed in SA 315 i.e. Chapter 4
2 Examples of Analytical procedures
2.1 Examples of Analytical Procedures having consideration of comparisons of
the entity’s financial information with are:
 Comparable information for prior periods.
 Anticipated results of the entity, such as budgets or forecasts, or
expectations of the auditor, such as an estimation of depreciation.
245
2.2 Examples of Analytical procedures having consideration of relationships

are:
 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.
 Between financial information and relevant non-financial information,
such as payroll costs to number of employees.
3 Timing of Analytical procedures
3.1 Analytical procedures can be applied at planning, testing and completion
phase.
3.2 a) Planning phase: Trend analysis of past profits
b) Testing phase: Comparing salary with total number of employees
c) Completion phase: Overall ratio analysis of current year financial
performance
4 Factors to be considered for substantive audit procedures
4.1 Availability of Data – The availability of reliable and relevant data will
facilitate effective procedures
4.2 Disaggregation – The degree of disaggregation in available data can
directly affect the degree of its usefulness in detecting misstatements
4.3 Predictability – Substantive analytical procedures are more appropriate
when an account balance or relationships between items of data are
predictable (e.g., between sales and cost of sales or between trade
receivables and cash receipts). A predictable relationship is one that may
reasonably be expected to exist and continue over time
4.4 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
4.5 Inherent Risk or “What Can Go Wrong” – 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.
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4.6 Account Type –Income statement accounts tend to be more predictable

because they reflect accumulated transactions over a period, whereas
balance sheet accounts represent the net effect of transactions at a point
in time or are subject to greater management judgment.
4.7 Source – Some classes of transactions tend to be more predictable because
they consist of numerous, similar transactions. Whereas the transactions
recorded by non-routine and estimation are often subject to management
judgment and therefore more difficult to predict.
5 Techniques available as substantive analytical procedures
5.1 Trend analysis – 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. We evaluate whether the current balance of an account
moves in line with the trend established with previous balances for that
account, or based on an understanding of factors that may cause the
account to change.
5.2 Ratio analysis – Ratio analysis is useful for analysing asset and liability
accounts as well as revenue and expense accounts. An individual balance
sheet account is difficult to predict on its own, but its relationship to
another account is often more predictable (e.g., the trade receivables
balance related to sales). Ratios can also be compared over time or to
the ratios of separate entities within the group, or with the ratios of other
companies in the same industry.
5.3 Reasonableness tests – Unlike trend analysis, this analytical procedure
does not rely on events of prior periods, but upon non-financial data for
the audit period under consideration (e.g., occupancy rates to estimate
rental income or interest rates to estimate interest income or expense).
These tests are generally more applicable to income statement accounts
and certain accrual or prepayment accounts.
5.4 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., linear regression).
6 Precautions to be taken before performing analytical procedures
6.1 Determine the suitability of particular substantive analytical procedures
for given assertions, taking account of the assessed risks of material
misstatement and tests of details, if any, for these assertions
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6.2 Evaluate the reliability of data from which the auditor’s expectation
of recorded amounts or ratios is developed, taking account of source,
comparability, and nature and relevance of information available, and
controls over preparation
6.3 Develop an expectation of recorded amounts or ratios and evaluate
whether the expectation is sufficiently precise to identify a misstatement
that, individually or when aggregated with other misstatements, may
cause the financial statements to be materially misstated.
Matters relevant to the auditor’s evaluation of whether the expectation can
be developed sufficiently precisely to identify a misstatement that, when
aggregated with other misstatements, may cause the financial statements
to be materially misstated, include:
6.3.1 The accuracy with which the expected results of substantive analytical
procedures can be predicted
6.3.2 The degree to which information can be disaggregated
6.3.3 The availability of information, both financial and non-financial
6.4 Determine the amount of any difference of recorded amounts from expected
values that is acceptable without further investigation
The suitability of a particular analytical procedure will depend upon the auditor’s
assessment of how effective it will be in detecting a misstatement.
7 Extent of Reliance on Analytical procedures
The reliability of data is influenced by its source and nature and is dependent
on the circumstances under which it is obtained. Accordingly, the following
are relevant when determining whether data is reliable for purposes of
designing substantive analytical procedures:
7.1 Source of the information available. For example, information may be more
reliable when it is obtained from independent sources outside the entity;
7.2 Comparability of the information available
For example, broad industry data may need to be supplemented to be
comparable to that of an entity that produces and sells specialised products
7.3 Nature and relevance of the information available. For example, whether
budgets have been established as results to be expected rather than as
goals to be achieved
7.4 Controls over the preparation of the information that are designed to
ensure its completeness, accuracy and validity. For example, controls over
the preparation, review and maintenance of budgets.
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8 Results of Analytical Procedure

If analytical procedures performed in accordance with SA 520 identify
fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount,
the auditor shall investigate such differences by:
8.1 (i) Inquiring of management and obtaining appropriate audit evidence
relevant to management’s responses:
Audit evidence relevant to management’s responses may be obtained by
evaluating those responses taking into account the auditor’s understanding
of the entity and its environment, and with other audit evidence obtained
during the course of the audit.
8.2 (ii) Performing other audit procedures as necessary in the circumstances:
The need to perform other audit procedures may arise when, for example,
management is unable to provide an explanation, or the explanation,
together with the audit evidence obtained relevant to management’s
response, is not considered adequate.
9 Considerations specific to public sector entities
9.1 The relationships between individual financial statements items traditionally
considered in the audit of business entities may not always be relevant in
the audit of governments or other non-business public sector entities
9.2 For example, in many public sector entities there may be little direct
relationship between revenue and expenditure.
9.3 In addition, because expenditure on the acquisition of assets may not be
capitalized, there may be no relationship between expenditures on, for
example, inventories and fixed assets and the amount of those assets
reported in the financial statements
9.4 Also, industry data or statistics for comparative purposes may not be
available in the public sector.
9.5 However, other relationships may be relevant, for example, variations
in the cost per kilometer of road construction or the number of vehicles
acquired compared with vehicles retired.
10 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. Explain and Give 4 Examples of such
unusual or unexpected relationships/ transactions
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 Various methods may be used to perform analytical procedures. These methods

range from performing simple comparisons to performing complex analyses using
advanced statistical techniques.
 Analytical procedures may be applied to consolidated financial statements,
components and individual elements of information
Examples are as follows:
10.1 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.
10.2 By setting up certain expenses ratios on the basis of balances included in
the Statement of Profit and Loss, for the year under audit, comparing them
with the same ratios for the previous year, it is possible to ascertain the
extent of increase or decrease in various items of expenditure in relation to
sales and that of trading profit in relation to sales. If differences are found
to be material, the auditor would ascertain the reasons thereof and assess
whether the accounts have been manipulated to inflate or suppress profits
10.3 an abnormal fall in the cost of manufacture or that in the administrative
cost apart from economy in expenses, there could be no provision or less
provision for expenses incurred in the year
10.4 By reconciling the amounts of interest and dividends collected with the
amounts which had accrued due and that which are outstanding for
payment, the mistake, if any, in the adjustment of such an income would
be detected
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1 Define Analytical Procedures
Ans Topic 1
2 What are the factors that determine the extent of reliance that the auditor
places on results of analytical procedures? Explain with reference to SA-
520 on “Analytical procedures
Ans Topic 7
3 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
Ans 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.
They comprise tests of details and substantive analytical procedures.
 Test of details: The nature of the risk and assertion is relevant to
the design of tests of details. For example, 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. On the other hand, 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. In designing tests of
details, the extent of testing is ordinarily thought of in terms of the
sample size.
 Substantive analytical procedures: Substantive analytical procedures
are generally more applicable to large volumes of transactions that
tend to be predictable over time. The application of planned analytical
procedures is based on the expectation that relationships among
data exist and continue in the absence of known conditions to the
contrary. However, the suitability of a particular analytical procedure
will depend upon the auditor’s assessment of how effective it will be
in detecting a misstatement that, individually or when aggregated
with other misstatements, may cause the financial statements to be
materially misstated.
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4 Explain how a statutory auditor of a company can apply analytical

procedures at the planning phase of audit.
Ans In the planning stage, analytical procedures assist the auditor in
understanding the client’s business and in identifying areas of potential
risk by indicating aspects of and developments in the entity’s business of
which he was previously unaware. This information will assist the auditor
in determining the nature, timing and extent of his other audit procedures.
• Analytical procedures in planning the audit use both financial data and
non- financial information, such as number of employees, square feet
of selling space, volume of goods produced and similar information.
• For example, analytical procedures may help the auditor during the
planning stage to determine the nature, timing and extent of audit
procedures that will be used to obtain audit evidence for specific
account balances or classes of transactions.
5 Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time. Explain.
Ans Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time.
The application of planned analytical procedures is based on the expectation
that relationships among data exist and continue in the absence of
known conditions to the contrary. However, the suitability of a particular
analytical procedure will depend upon the auditor’s assessment of how
effective it will be in detecting a misstatement that, individually or when
aggregated with other misstatements, may cause the financial statements
to be materially misstated.
6 Give examples of Analytical Procedures having consideration of comparisons
of the entity’s financial information
Ans • Comparable information for prior periods.
• Anticipated results of the entity, such as budgets or forecasts, or
• Similar industry information, such as a comparison of the entity’s ratio
of sales to accounts receivable with industry averages or with other
entities of comparable size in the same industry
7 Discuss the audit procedure to be considered by an auditor while performing
analytical procedure to obtain audit evidence as to overall reasonableness
of purchase quantity and price.
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Ans Auditor needs to perform analytical procedures to obtain audit evidence

as to overall reasonableness of purchase quantity and price which may
include:
• Consumption Analysis: Auditor should scrutinize raw material
consumed as per manufacturing account and compare the same
with previous years with closing stock and ask for the reasons from
management if any significant variations found.
• Stock Composition Analysis: Auditor to collect the reports from
management for composition of stock i.e. raw materials as a
percentage of total stock and compare the same with compare the
same with previous years and ask for the reasons from management
if any significant variations found.
• Ratios: Auditor should compare the creditors turnover ratios and stock
turnover ratios of the current year with previous years.
• Auditor should review quantitative reconciliation of closing stocks
with opening stock, purchases and consumption.
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1. When significant risk had been identified by the auditor, then:

(a) Audit evidence obtained solely from substantive analytical procedures is sufficient.
(b) Audit evidence obtained solely from substantive analytical procedures is
unlikely to be sufficient.
(c) Auditor will perform test of details also.
(d) Both b and c
2. Substantive Analytical Procedures are generally more applicable to:

(a) Large volumes of transactions (b) Transactions predictable over time
(c) Both a and b (d) None of a and b
3. .............is the comparison of current data with the prior period balance.
(a) Ratio Analysis (b) Trend analysis
(c) Reasonableness test (d) Structural Modelling
4. Statement1: Analytical procedures are more useful while conducting the audit and
at the completion phase and are of no use at the planning stage.
Statement 2 : In the planning stage, audit procedures assist the auditor in
understanding the client’s business and identifying the areas of potential risks.
(a) Statement 1& 2 are correct (b) Statement 1 & 2 are incorrect
(c) Only Statement 1 is correct (d) Only Statement 2 is correct
5. What are analytical procedures?

(a) Substantive tests designed to assess control risk
(b) Substantive tests designed to evaluate the validity of management’s
representation letter
(c) Substantive tests designed to study relationships between financial and non-
financial data
6. Which of the following is not an analytical procedure?

(a) Tracing of purchases recurred in the purchase book to purchase invoices.
(b) Comparing aggregate wages paid to number of employees
(c) Comparing the actual costs with standard costs
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(d) All of them are analytical procedures
7. Analytical procedures issued in the planning stage of an audit, generally:

(a) help to determine the nature, timing and extent of other audit procedures
(b) direct attention to potential risk areas
(c) indicate important aspects of business
8. The basic assumption underlying the use of analytical procedures is:

(a) It helps the auditor to study relationship among elements of financial
information
(b) Relationship among data exist and continue in the absence of known condition
to the contrary
(c) Analytical procedures will not be able to detect unusual relationships
9. What is the primary objective of analytical procedures used in the overall review
stage of an audit?
(a) To help to corroborate the conclusions drawn from individual components of
(b) To reduce specific detection risk
(c) To direct attention to potential risk areas
(d) To satisfy doubts when questions arise about a client’s ability to continue.
10. Auditor Compares Gross Profit Ratio with that of previous year and it is discovered
that there has been a fall in the ratio. This is an example of:
(a) Analytical Procedure
(b) Test of Controls
(c) Walk through Test
(d) Audit Sampling
11. ________________ means evaluation of financial information through analysis of

plausible relationships among bothfinancial and non-financial data.
a) Risk assessment b) Analytical Procedures
c) Substantive Procedures d) Test of Controls
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12. Marvin Ltd. is a renowned food chain supplier in a posh area providing restaurant
facility along with food delivering.
CA. Felix was appointed as an auditor of the company for the Financial Year 2017-
18. While examining the books of account of the company, CA. Felix came to know
about one of the major expenses of the company i.e. rent expense of Rs.1,20,000
per month, for which he applied substantive analytical procedure for verification
purpose. Explain, how would
CA. Felix perform substantive analytical procedure in the given scenario?
(a) CA. Felix would inspect every single rent invoice per month of Rs. 1,20,000 and
verify other elements appropriately.
(b) CA. Felix would compare the rental expense of the company with that of
another nearby company having corresponding dimensions, for high degree of
accuracy.
(c) CA. Felix would select the first month rent invoice of Rs. 1,20,000 and
appropriately verifying other elements would predict that the rent for the
whole year would be Rs. 14,40,000 (i.e. Rs. 1,20,000 *12). Thereafter, he would
compare the actuals with his prediction and follow-up for any fluctuation.
(d) (a) and (b), both.
13. Which of the following statement is correct :

(a) Substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time
(b) Substantive analytical procedures are generally less applicable to large
volumes of transactions that tend to bepredictable over time
(c) Substantive analytical procedures are generally more applicable to small
volumes of transactions that tend to be predictable over time
Answer
1 D 5 C 9 A 13 A
2 C 6 A 10 A
3 B 7 D 11 B
4 D 8 B 12 C
256
CASE 1.
Sun Private Limited is a newly formed private limited company, engaged in the
manufacturing of solar panels. Company has appointed M/s M&S Associates, a
Partnership Firm of Mr Meticulous and Mr Sincere - as their First Auditors. M/s M&S
Associates accepted the assignment and Mr Meticulous being the engagement Partner,
started their Audit. During the course of Audit, Mr Meticulous asked the Management
for name of the companies operating in similar business so that they can compare the
Company’s Figures. During this procedure, Mr Meticulous found that the Gross Margin of
the Company is lower than the Industry Standard / Fellow Companies. He prepared an
Interim Report dealing with this matter and asked the Management about the reasons
for this deviation. Management asked him to give all the working along with the Working
Papers as they believed it is the Company’s Property. Mr Meticulous advised them that he
can provide working but cannot give them the working papers as they are the property
of the Firm. Management agreed to that and asked Mr Meticulous to go into detail and
tell him the reasons for lower Gross Margin to which he agreed.
During the detailed audit, Mr Meticulous came to know about the fact that the company
dispatched its solar panels to its Distributors on Delivery Challans and once the goods
were accepted, Sales bills were raised. Checking each Challan against Sales Invoices,
Mr Meticulous found that there were many challans for which no Invoices were raised
and thus Sales was grossly understated and there was no mechanism where unbilled
Challans were recorded or tracked. Company employed a person to reconcile all the
Challans and prepared a list where Bills are yet to be sent to the Customers. In addition,
Company was also asked to seek Confirmation of Balances from all its Customers. The
Management assured Mr Meticulous that Inventories are physically verified and hence
there will be no impact on them.
1. Mr Meticulous asked about other Companies, he was intending to perform which

audit procedure?
(a) Analytical Procedures (b) Substantive Procedures
(c) Random Sampling (d) Statistical Sampling
2. What was the initial procedure carried on by Mr Meticulous?

(a) Trend Analysis (b) Ratio Analysis
(c) Statistical Modelling (d) Random Sampling
257
3. Who has the right to retain the audit working papers of the Company in current
case?
(a) Audit Committee (b) Board of Directors
(c) Auditor (d) Chairman of the Audit Committee
4. When Mr Meticulous decided to go in detail checking of Sales, which Audit Procedure

he applied to obtain the evidence?
(a) Test of Transactions (b) Test of Balances
(c) Both (a) and (b) (d) Analytical Procedures
5. The impact of the exercise carried on by the Company for unbilled challans will have
an impact on
(a) Gross Receipts and Debtors (b) Gross Receipts and Inventory
(c)
Debtors (d)
Inventory
Answer
1 a 2 b 3 c 4 c 5 a
258
1. As per the Standard on Auditing (SA) 520 “Analytical Procedures” ‘the term “analytical
procedures” means evaluations of financial information through analysis of
plausible relationships among financial data only.
2. Auditor can depend on routine checks to disclose all the mistakes or manipulation
that may exist in accounts.
3. Only purpose of analytical procedures is to obtain relevant and reliable audit

evidence when using substantive analytical procedures.
4. Analytical Procedures are required in the planning phase only.
5. Substantive analytical procedures are generally less applicable to large volumes of

transactions that tend to be predictable over time
6. Ratio analysis is useful in analyzing revenue and expense account only.
7. Reasonableness test rely only on the events of the prior period like other analytical
procedures.
8. The statutory auditor of the company can apply analytical procedures to the
standalone financial statements of a company only and not to the consolidated
259
1. Incorrect. As per the Standard on Auditing (SA) 520 “Analytical Procedures” the
term “analytical procedures” means evaluations of financial information through
analysis of plausible relationships among both financial and nonfinancial data.
2. Incorrect. Routine checks cannot be depended upon to disclose all the mistakes or
manipulation that may exist in accounts, certain other procedures also have to be
applied like trend and ratio analysis in addition to reasonable tests.
3. Incorrect. Analytical procedures use comparisons and relationships to assess

whether account balances or other data appear 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 consistent with the auditor’s understanding of the
entity.
4. Incorrect. Analytical Procedures are required in the planning phase and it is often
done during the testing phase. In addition these are also required during the
completion phase.
5. Incorrect. Substantive analytical procedures are generally more applicable to large

volumes of transactions that tend to be predictable over time.2
6. Incorrect: Ratio analysis is useful for analysing asset and liability accounts as well
as revenue and expense accounts
7. Incorrect: Unlike trend analysis, Reasonableness test does not rely on events of
prior periods, but upon non-financial data for the audit period under consideration.
8. Incorrect: Analytical procedures may be applied to consolidated financial statements,

components and individual elements of information.
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AUDIT OF ITEMS OF
FINANCIAL STATEMENTS
Introduction
1) This chapter deals with different aspects to be verified while auditing financial items.
2) Auditor needs to obtain sufficient and appropriate audit evidence to verify management’s
assertions i.e. representations made by management regarding financial items-
transactions, balances and disclosures.
3) While verifying transactions auditor needs to consider following assertions: (MOC)

 Measurement: Transactions have been recorded accurately at their appropriate
amounts and further, transactions have been classified and presented fairly in
the financial statements.
 Occurrence: Transactions recognized in the financial statements have occurred
and relate to the entity
 Completeness: All transactions that were supposed to be recorded have been
recognized in the financial statements and further, transactions have been
recognized in the correct accounting periods
4) While verifying balances auditor needs to consider following assertions: (EVOC)

 Existence: Assets, liabilities and equity balances exist as at the period end.
 Valuation: Assets, liabilities and equity balances have been valued appropriately.
 Rights & Obligations: Entity has the right to ownership or use of the recognized
assets, and the liabilities recognized in the financial statements represent the
obligations of the entity
 Completeness: All assets, liabilities and equity balances that were supposed to
be recorded have been recognized in the financial statements
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5) While verifying presentation and disclosure auditor needs to consider the following
assertions (Complete MOVE)
 Occurrence (O) and Existence (E): Transactions and events disclosed in the
financial statements have occurred and relate to the entity and further, the
closing balance does exist as at the period- end
 Completeness: All transactions, balances, events and other matters that should
have been disclosed have been disclosed in the financial statements.
 Measurement (M) and Valuation (V): Transactions, events, balances and other
financial matters have been measured and disclosed correctly at their
appropriate values and in a manner that promotes the understandability of
information contained in the financial statements.
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Sr.No Particulars
1 Share Capital
1.1 Existence
à It is the sum stated in the memorandum as the capital of the company
with which it is to be registered being the maximum amount which it
is authorised to raise by issuing shares, and upon which it pays the
stamp duty
1.2 Valuation
à Tally the period- end share capital balance- authorised, issued and
paid up, to the previous year audited financial statements
à In case there in no change during the year, obtain a written
confirmation/ representation from the Company Secretary that there
were no changes to entity’s capital structure during the year.
à In case there is any change, obtain the certified copies of relevant
resolutions passed at the meetings of board of directors, shareholders
authorising the increase/ decrease in authorised and paid up share
capital
à Verify whether the paid up capital as at the period- end is within the
limits of authorised capital
1.3 Completeness
à “issued capital” means that part of authorised capital which is offered
by the company for subscription and includes the shares allotted for
consideration other than cash.
1.4 Presentation and Disclosure
à It should be as per AS/IND AS as applicable to the entity and in
accordance with Schedule III of Companies Act, 2013
2 Reserves and Surplus
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2.1 Existence/Valuation/Completeness
à Tally the opening balance of reserves and surplus to the previous year
audited financial statements.
à For addition/ utilisation in current year, in case of:
a. Profit and Loss balance- trace the movement as disclosed in
Statement of changes in Equity to Surplus/ Deficit as per Income
Statement for the year under audit
b. For adjustment related to dividend payment and the tax related
thereto i.e. dividend distribution tax, verify the resolution passed
by the board of directors regarding declaration of dividend
c. Students should note that as per Ind AS 10 and AS-4 (revised),
if dividends to holders of equity instruments are proposed or
declared after the balance sheet date, an entity should not
recognize those dividends as a liability as at the balance sheet
date. It should, however, disclose the amount of dividends that
were proposed or declared after the balance sheet date, but
before the financial statements were approved for issue.
d. Utilisation of share premium as discussed under topic 1
3 Borrowings
3.1 Existence
à Review board minutes for approval of new lending agreements. During
review, make sure that any new loan agreements or bond issuances
are authorized. Ensure that significant debt commitments should be
approved by the board of directors.
à Agree details of loans recorded (interest rate, nature and repayment
terms) to the loan agreement. Verify that borrowing limits imposed by
agreements are not exceeded
à Agree overdrafts and loans recorded to bank confirmation /
confirmation to lenders
à Agree details of leases and hire purchase creditors recorded to
underlying agreement
à Examine trust deed for terms and dates of redemption, borrowing
restrictions and compliance with covenants
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3.2 Valuation
à Determine that the accounting policies and methods of recording debt
are appropriate and applied consistently.
à Recalculate the interest accrual, and discount or premium on
redemption
à For foreign current loans, agree the closing exchange rate(s) used and
test the translation calculations
à Check computation of the amortization of premium or discount.
3.3 Completeness
à Obtain a schedule of short term and long term borrowing (including
debt outstanding at the end of the prior year, as well as any new
debt or renewal of debt) showing beginning and ending balances
and borrowings and repayments during the year, and perform the
following:
a. Consider any evidence of additional debt obtained through
examination of minutes of the board, significant contracts,
confirmations of bank accounts, support for subsequent cash
disbursements (when testing payables), and other documents.
b. Test the summarization and trace the ending balances to the
general ledger
à For each lender (or, in some circumstances, selected lenders) with
which the client had debt outstanding at the prior year end or during
the current year, prepare, or have the client prepare, a confirmation
request for the amount(s) owed to the lender
à Examine the due dates on loans for proper classification between
long-term and current. Analyse relevant details of interest rates,
amounts due (e.g. between current and non-current payables), dates
and terms of redemption or conversion
à Verify whether liabilities to bank towards bills discounted, bills
negotiated, cheques discounted, etc. are correctly reflected and
disclosed in the accounts
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3.5 Other Aspects:

à Verify that the company has not contravened the restrictions laid
down by Section 180 of the Companies Act, on the borrowings of the
company. Also, check compliance of section 185 and 186 of Companies
Act, 2013.
à Check compliance of Section 2(22)(e) of Income Tax Act,1961 and
ensure that payment by way of advance or loan to a shareholder
holding not less than 10% of voting power or any concern in which
such shareholder is a member or a partner and in which he has
substantial interest, shall be treated as dividend
à Where the entity has accepted deposits, examine whether the directives
issued by the Reserve Bank of India or other appropriate authority
have been complied with.
4 Trade Receivables
4.1 Existence
à To ensure that trace receivables ledger reconciles to general ledger.
Ask for a period-end accounts receivable aging report and trace the
grand total to the amount in the accounts receivable account in the
general ledger
à Calculate the receivable report total. Add up the invoices on the
accounts receivable aging report to verify that the total traced to the
general ledger is correct.
à Investigate reconciling items. If there are journal entries in the accounts
receivable account in the general ledger, review the justification for
larger amounts. This implies that these journal entries should be fully
documented.
à See whether realization is recorded invoice wise or not. If not, check
that money received from debtors is adjusted chronologically invoice
wise and on FIFO basis i.e. previous bill is adjusted first. If realization
is made on account, verify if the Company has obtained confirmations
from debtors.
à A significant and important audit activity is to contact customers
directly and ask them to confirm the amounts of unpaid accounts
receivable as of the end of the reporting period under audit. This
should necessarily be done for all significant account balances as
at the period- end while certain random customers having smaller
outstanding invoices should also be selected.
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à The trade receivables may be requested to confirm the balances either

(a) as at the date of the balance sheet, or
(b) as at any other selected date which is reasonably close to the
date of the balance sheet. The date should be decided by the
auditor in consultation with the Company.
à If there are any related party receivables, review them for collectability,
as well as whether they were properly authorized and the value of
such transactions were reasonable and at arm’s length.
4.2 Valuation
 Assess the allowance for doubtful accounts. Review the process
followed by the Company to derive an allowance for doubtful
accounts. This will include a consistency comparison with the method
used in the last year, and a determination of whether the method is
appropriate for the underlying business environment.
 Obtain the ageing report of accounts receivable (both Dr/Cr balance),
split between not currently due, 30 days old, 30-60 days old, 60-
180 days old, 180- 365 days old and more than 365 days old (refer
screenshot below). Also, obtain the list of debtors under litigation and
compare with previous year.
 Assess bad debt write-offs. Prepare schedule of movements on
Bad Debts – Provision Accounts and Debts written off and compare
the proportion of bad debt expense to sales for the current year
in comparison to prior years, to see if the current expense appears
reasonable.
 Check that write-offs or other reductions in the receivable balances
have been approved by an appropriate and authorised member of
senior management, for example the financial controller or finance
director.
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4.3 Completeness
 The auditor needs to satisfy himself of correct and proper cut-offs.
Without a correct cut-off , sales could be understated or overstated,
hence, the need to perform the following cut-off tests:
a. For the invoices issued during the last few days (say 5 days)
closer to the reporting date/ cut-off date and which have been
included in the debtors; the goods should have been dispatched
and not lying with the Company and included in closing stock;
b. All good dispatched prior to the period/ year-end have been
invoiced and included in debtors;
c. No goods dispatched after the year- end have been invoiced and
included in debtors for the period under audit
 Study the system of giving discounts and check the following:
a. Whether the same is being given as per the Company policy/
general industry trends;
b. Whether cash discount is given on the basis of date of realization
of cheque or on the basis of date of receipt of cheque. If the
same is on the basis of date of receipt of cheques, verify that the
cheque has been realized within a reasonable time.
 It should be as per AS/IND AS as applicable to the entity and in
accordance with Schedule III of Companies Act, 2013.
 Verify that the split between more than 6 months and less than 6
months has been done from the due date instead of sales invoice date
5 Cash and Cash equivalents
5.1 Existence/Completeness/Valuation:
 Special care is necessary in regard to verification of cash balances for
unless they are checked by surprise, there can be no certainty that the
cash produced for inspection was in fact held by the custodian.
 For this reason, the cash should be checked not only on the last day of
the year, but also checked again sometime after the close of the year
without giving notice of the auditor’s visit either to the client or to his
staff
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 If there are more than one cash balances, e.g., when there is a
cashier, a petty cashier, a branch cashier and, in addition, there are
imprest balances with employees, all of them should be checked
simultaneously, as far as practicable so that the shortage in one
balance is not made good by transfer of amount from the other.
 It is desirable for the cashier to be present while cash is being counted
and he should be made to sign the statement prepared containing
details of the cash balance counted.
 If the auditor is unable to check the cash balance on the date of the
Balance Sheet, he should arrange with his client for all the cash
balance to be banked and where this cannot conveniently be done on
the evening of the close of the financial year, it should be deposited
the following morning.
 If there is any rough Cash Book or details of daily balance are
separately kept, the auditor should test entries from the rough Cash
Book with those in the Cash Book to prove that entries in the Cash
Book are correct.
 The auditor should also perform a cash sensitivity analysis by
compiling a summary of total cash receipts and payments each
month and analyse the trends to see if there have been variations in
any specific month and request explanations from the management
 In addition to the procedures performed above, the auditor should
ensure that all bank account holding foreign currency have been
restated at the closing exchange rates.
6 Inventories
6.1 Existence
 Review client’s plan for performing inventory count. Plan should
include procedures relating to shipments and receipts during count
and should also allocate staff responsible for each class of inventory.
 Ensure that consigned goods have been segregated
 Evidence of appropriate supervision for those performing count should
be examined.
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 Observe inventory being counted and personally perform test counts

to verify counts. Test counts by auditor should include:
{FURTHER CONSIDER SA 501}
6.2 Valuation
 Depending on how the business operates, the management may value
inventory using “first-in firstout,” “last-in first-out,” or a weighted
average system. First-in first-out, called FIFO, values inventory at
close to its current replacement cost. Last-in first-out, called LIFO,
values inventory at close to its original purchase cost. A weighted
average system values inventory according to an average cost of all
inventory items bought during the period.
 Ascertain what elements of cost are included e.g. carriage in, duties
etc
 If standard costs are used, enquire into basis of standards, how these
are compared with actual costs and how variances are analyzed and
accounted for/ treated in accounting records.
 Follow up valuation of all damaged or obsolete inventories noted
during observance of physical counting with a view to establishing a
realistic net realizable value.
 Ascertain how the various stages of production/ value add are
measured and in case estimates are made, understand the basis for
such estimates.
 Ascertain what elements of cost are included. If overheads are
included, ascertain the basis on which they are included and compare
such basis with the available costing and financial data/ information
maintained by the entity.
 Ensure that material costs exclude any abnormal wastage factors
 Enquire into what costs are included, how these have been established
and ensure that the overheads included have been determined based
on normal costs and appear reasonable in relation to the information
disclosed in the draft financial statements
 Follow up for items that are obsolete, damaged, slow moving and
ascertain the possible realizable value of such items. For the purpose,
request the client to provide inventory ageing split between less than
30 days, 30-60 days old, 60- 90 days old, 90- 180 days old, 180-
385 days old and more than 365 days old.
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6.3 Rights and Obligation

 Evaluate the consigned goods. Examine client correspondence, sales
and receivables records, purchase documents.
 Determine existence of collateral agreements
 For instances of inventory held by third party, the auditor should
insist on obtaining declaration from the third party on its business
letterhead and signed by an authorized personnel of that third party
confirming that the items of inventory belong to the entity and are
being held by such third party on behalf of and for the benefit of the
entity under audit
6.4 Completeness
 Perform purchase and sales cut-off tests. Trace shipping documents
(bills of lading and receiving reports, warehouse records, and inventory
records) to accounting records immediately before and after year-
end.
 Reconcile physical inventory amounts with perpetual records.
7 Fixed Assets (Property, Plant and Equipment)
7.1 Existence
 Review client’s plan for performing physical verification of PPE i.e.
whether performed by own staff or by a third party and the policy
regarding periodicity i.e. whether physical verification shall be done
on annual basis or once in two years/ three years.
 Evidence of appropriate supervision of those performing physical
verification of PPE should be examined.
 Assess if all items of PPE are properly tagged and carry identification
marks/ numbers and physical verification work papers do capture the
asset identification numbers for assets physically verified
 Verify the discrepancies noted, based on physical verification
undertaken and the manner in which such discrepancies have been
dealt with in the entity’s books and financial statements, for example
any identified shortages/ assets not in working condition and/ or active
use should be accounted for as deletions in the books of account post
approvals by the entity’s management
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7.2 Valuation
 It is a common understanding that the value of fixed assets/
PPE depreciates due to efflux of time, use and obsolescence. The
diminution of the value represents an item of cost to the entity for
earning revenue during a given period. Unless this cost in the form of
depreciation is charged to the accounts, the profit or loss would not
be correctly ascertained and the values of PPE would be shown at
higher amounts.
 Verify that the entity has charged depreciation on all items of PPE
unless any item of PPE is non- depreciating like freehold land
 Verify that the depreciation method used reflects the pattern in which
the asset’s future economic benefits are expected to be consumed by
the entity
 The auditor should also verify if the management has undertaken an
impairment assessment to determine whether an item of property,
plant and equipment is impaired.
 In addition to the procedures undertaken for verifying completeness
of additions to PPE during the period under audit, the auditor while
performing testing of additions should also verify that all PPE
purchase invoices are in the name of the entity that entitles legal title
of ownership to the respective entity.
 For all additions to land, building in particular, the auditor should
obtain copies of conveyance deed/ sale deed to establish whether the
entity is mentioned to be the legal and valid owner.
 The auditor should insist and verify the original title deeds for all
immoveable properties held as at the balance sheet date
 In addition, the auditor should also verify the register of charges,
available with the entity to assess the PPE that has been given as
security to any third parties
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7.4 Completeness
 Verify the movement in the PPE schedule (asset class wise like building,
P&M etc.) compiled by the management i.e. Opening + Additions -
Deletions= Closing and tally the closing balance to the entity’s books
of account.
 Check the arithmetical accuracy of the movement in PPE schedule;
tally the opening balances to the previous year audited financial
statements.
It should be as per AS/IND AS as applicable to the entity and in accordance
with Schedule III of Companies Act, 2013.
8 Intangible Asset
8.1 Existence
 Since an Intangible Asset is an identifiable non-monetary asset,
without physical substance, for establishing the existence of such
assets, the auditor should verify whether such intangible asset is in
active use in the production or supply of goods or services, for rental
to others, or for administrative purposes.
 In case any intangible asset is not in active use, deletion should have
been recorded in the books of account post approvals by the entity’s
management and amortization charge should have ceased to be
charged beyond the date of deletion.
8.2 Valuation
 Verify the movement in the Intangible assets schedule (asset class
wise like software, designs/ drawings, goodwill etc.) compiled by the
management i.e. Opening + Additions - Deletions= Closing and tally
the closing balance to the entity’s books of account.
 Check the arithmetical accuracy of the movement in intangible asset
schedule, tally the opening balances to the previous year audited
 For all material additions, verify if such expenditure meets the criterion
for recognition of an intangible asset.
 The value of intangible assets may diminish due to efflux of time, use
and/ or obsolescence. The diminution of the value represents an item
of cost to the entity for earning revenue during a given period.
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 Unless this cost in the form of amortization is charged to the accounts,

the profit or loss would not be correctly ascertained and the values of
intangible asset would be shown at higher amounts.
 Verify that the amortization method used reflects the pattern in which
the asset’s future economic benefits are expected to be consumed by
the entity
an intangible asset shall be recognised if, and only if:
a. the said asset is identifiable;
b. the entity controls the asset i.e. the entity has the power to obtain the
future economic benefits flowing from the underlying resource and to
restrict the access of others to those benefits;
c. it is probable that future economic benefits associated with the asset
will flow to the entity;
d. the cost of the item can be measured reliably.
To assess whether an internally generated intangible asset meets the
criteria for recognition, an entity classifies the generation of the asset into:
a. research phase; and
b. a development phase
9 Trade Payables and Current Liabilities
9.1 Existence
 Check whether there are controls in place to ensure that the same
purchase/ expense invoice cannot be recorded more than once and
payable balances are automatically recorded in the general ledger at
the time of recording of expense
 To ensure that trade payable ledger reconciles to general ledger, ask
for a period-end accounts payable aging report and trace the grand
total to the amount in the accounts payable account in the general
ledger.
 Calculate the accounts payable report total. Add up the expense/
liability items on the accounts payable aging report to verify that the
total traced to the general ledger is correct.
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 Investigate reconciling items. If there are journal entries in the accounts

payable account in the general ledger, review the justification for
larger amounts. This implies that these journal entries should be fully
documented.
 An important audit activity is to contact vendors directly and ask
them to confirm the amounts of accounts payable as of the end of
the reporting period under audit. This should necessarily be done for
all significant account payable balances as at the period- end and for
parties from whom material purchases have been made during the
period under audit even if period- end balance of such parties is not
significant.
 The trade creditors may be requested to confirm the balances either
(a) as at the date of the balance sheet, or
(b) as at any other selected date which is reasonably close to the
date of the balance sheet. The date should be decided by the
auditor in consultation with the Company.
9.2 Valuation
 Obtain the ageing of payable balances, split between current, less
than 30 days old, 30-60 days old, 60-180 days old, 180- 365 days
old and more than 365 days old (refer screenshot below). Also, obtain
the list of vendors with whom the Company has disputes and any
claims from customers, under litigation and compare with previous
year.
 Check that write backs in the liability balances assessed as no longer
payable have been approved by an appropriate and authorised
member of senior management, for example the financial controller
or finance director.
 Check that the restatement of foreign currency trade payables has
been done properly
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9.3 Completeness
 For the invoices received/ recorded during the last few days (say 5
days) closer to the reporting date/ cut off date and which have been
included in the trade payables; the goods should have been received/
risk and rewards of ownership in goods should have been transferred
in favour of the entity
 All good received prior to the period/ yearend should have been
booked in the form of purchases and included in trade creditors
 No goods received/ risk and rewards of ownership in goods transferred
in favour of the entity after the year- end should have been recorded
as purchases and included in trade creditors for the period under
audit.
10 Loans and Advances
10.1 Existence
 For establishing existence of loans and advances, direct confirmation
procedures, similar to those performed for ‘’Accounts receivable’’
balances are undertaken with the only difference that while
undertaking circularisation of direct confirmations, in addition to
the principal amount, interest received/ receivable, if any, as per the
agreed terms between the parties, may also be included as part of
the balance to be confirmed.
10.2 Valuation
 Assess the allowance for doubtful accounts. Review the process
followed by the Company to derive an allowance for doubtful
accounts. This will include a consistency comparison with the method
used in the last year, and a determination of whether the method is
appropriate for the underlying business environment
 Obtain the ageing report of loans and advances, split between not
currently due, 30 days old, 30-60 days old, 60- 180 days old, 180-
365 days old and more than 365 days old. Also, obtain the list of
loans and advances under litigation and compare with previous year.
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 Assess bad loans/ advances write-off. Prepare schedule of movements

on Bad loans/ advances – Provision Accounts and loans/ advances
written off .
 Check that the restatement of foreign currency loans and advances/
other current assets has been done properly.
10.3 Completeness
 Obtain a list of all advances and other current assets and compare
them with balances in the ledger
 Inspect loan agreements and acknowledgements of parties in respect
of outstanding loans
 Inspect the minutes of meeting of board of directors to confirm if all
material loans and advances were approved by the board of directors
 Further, the auditor should obtain copies of statutory returns filed
with the authorities like excise returns/ VAT returns etc. and verify
whether the amount recorded as per books of account tallies with the
claim made with the authorities
11 Provisions and Contingent Liability
11.1 Existence/Completeness/Valuation
 Obtain a list of all provisions and compare them with balances in the
ledger
 Inspect the underlying arrangements like appointment agreement with
employees to understand the entity’s commitment towards defined
benefits, agreement with customers to assess warranty commitments,
any legal and other claims on the entity i.e. litigations
 Obtain the underlying working and the basis for each of the provisions
made, from the management and verify whether the same is complete
and accurate.
 Wherever required, obtain experts report, calculation and underlying
working for the provision amount, example for employee defined
benefit provision, the auditor may request the management to share
the actuarial valuation report and in case of any matter under legal
dispute.
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12 Sale of Products and Services
12.1 Occurrence:
 Check whether a single sales invoice is recorded twice or a cancelled
sales invoice could also be recorded
 Whether any shipments were done without the consent and agreement
of the customer.
 Vouch from the sales journal to the supporting documents
 Check the sales return with sales invoice, challan, credit note, stock
register, reversal of excise duty and sales tax etc.
12.2 Measurement:
 If there are any export sales, consider calculating/reviewing “Exchange
gain/ loss” arising from the sales
 Recalculate prices and extensions on sales invoice
 Trace a few transactions from inception to completion
 Auditor must understand client’s operations and related GAAP issues
e.g. point of sale revenue recognition vs. percentage of completion
 Compare the rate of sales affected with related parties and review
them for collectability, as well as whether they were properly
authorized and the value of such transactions were reasonable and
at arm’s length
12.3 Completeness
 Perform cut-off test to ensure that revenues are recognised in the
current accounting period and sales were not tampered towards the
period end
 Auditors will also have to see “Credit notes” issued after the accounting
period. Sometimes sales team or sales personnel can make fictitious/
ghost sales before the year-end to meet performance target and
cancel out the sale with a post year end credit note.
13 Other Income Comprising interest Income, Dividend Income, Gain/ Loss on Sale
of Investments etc.
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13.1 Occurrence/Completeness/Measurement
 For verifying interest income on Fixed deposit:
a) Obtain a listing of fixed deposits opened during the period under
audit along with the applicable interest rate and the number of
days for which the deposit was outstanding during the period.
Verify the arithmetical accuracy of the interest calculation
made by the entity by multiplying the deposit amount with the
applicable rate and number of days during the period under
audit.
b) For deposits still outstanding as at the period- end, trace the
same to the direct confirmation obtained from the respective
bank/ financial institution
c) Obtain a confirmation of interest income from the bank and verify
that the interest income as per bank reconciles to the calculation
shared by the entity
d) Also, obtain a copy of Form 26AS (TDS withholding by the bank/
financial institution) and reconcile the interest reflected therein
to the calculation shared by client
 For Dividends, verify that the same are recognised in the statement
of profit and loss only when the entity’s right to receive payment of
the dividend is established, provided it is probable that the economic
benefits associated with the dividend will flow to the entity and the
amount of the dividend can be measured reliably.
 Verify that Gain/(loss) on sale of investment in mutual funds is recorded as
other income only on transfer of title from the entity and is determined
as the difference between the redemption price and carrying value of
the investments. For the purpose, obtain the mutual fund statement
and trace the gain / loss as recorded in the books of account to the
gain/ loss as reflected in the statement.
14 Purchases
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14.1 Occurrence:
 Whether any fictitious vendor and purchase has been recorded by
reviewing the vendor selection process followed by the entity and also
doing a search on web for ascertaining the existence of the vendor.
 Whether the goods were received at the factory gate and whether
there exists an entry in the security gate inward register
 Whether quality inspection of goods was done
 Whether a goods receipt note was prepared and signed by an
appropriate client personnel
 Whether stock record has been updated by the stores personnel
14.2 Measurement/Completeness:
 Perform cut-off test to ensure that purchases are recognised in
the correct accounting period. For the purpose, the auditor should
examine material inward records for few days say last 5 days prior to
closing date to check that all corresponding invoices have been duly
entered in the Purchases book and none have been omitted.
 Ensure correct accounting treatment of goods – in – transit as per the
agreed terms with the vendor regarding transfer of risk and reward of
ownership in goods.
 Perform analytical procedures to obtain audit evidence as to overall
reasonableness of purchase quantity and price which may include:
a. Consumption Analysis: Auditor should scrutinize raw material
consumed as per manufacturing account and compare the same
with previous years with closing stock and ask for the reasons
from Management If any significant variations found.
b. Stock Composition Analysis: Auditor to collect the reports from
management for composition of stock i.e. raw materials as a
percentage of total stock and compare the same with previous
year and ask for reasons from management in case of significant
variations.
c. Ratios: Auditor should compare the creditors turnover ratios and
stock turnover ratios of the current year with previous years.
d. Auditor should review quantitative reconciliation of closing
stocks with opening stock, purchases and consumption
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15 Employee Benefit Expense
15.1 Occurrence/Completeness/Measurement:
 Understanding of entity’s process of capturing employee attendance.
 There is always a risk that an entity could record expense for fictitious
employees.
 To address this risk, the auditor may choose to be physically present
at the entry gate at any given date and himself count the employees
entering the premises and also, understand the manner of recording/
capturing their time
 Obtain a list of employees as at the period- end along with a monthly
movement split between new hires, leavers and continuing employees
 For a sample (selected randomly) of resigned employees, obtain their
full and final computation and verify whether all their dues including
post-retirement benefits like gratuity, leave encashment have been
paid and whether the respective employee’s acknowledgement on
final computation has been obtained.
 Obtain the monthly salary registers for all 12 months. Compile monthly
payroll reasonability by calculating the average salary per employee
per month and compare with the previous year and preceding month
and analyse the reasons for variance which could be attributable to
annual increments, an employee at senior level joining/ leaving the
entity, bonus pay-out etc.
 In case provident fund (PF), employee state insurance (ESI) are
applicable to the entity, compile a reasonability by applying the rate
to the basic wages and comparing to the amount recorded in books
and analyse reasons for variance, if any. Also, obtain monthly deposit
challans to verify if the month on month liability was subsequently
deposited with the authorities and within the defined timelines.
16 Depreciation and Amortisation
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 Obtain an understanding of entity’s process of charging depreciation
and amortization.
 Obtain the fixed asset register maintained by the entity.
 There is always a risk that an entity could capitalize expense of revenue
nature to increase its profit or charge capital expenditure directly in
income and expense statement to reduce its profit.
 Obtain a list of all additions/ deletions along with their proper
approval from the authorised person for the same.
 Select the sample of assets from the Fixed Assets Register, on
materiality considerations and verify the rates of depreciation,
depreciation calculation.
 Obtain the list of all the components identified by the management
 Ensure Intangible assets like patents, goodwill, copy rights have been
properly amortized over the period
 Ensure depreciation is charged on the assets from the date when it is
ready to use
 Ensure depreciation on revalued amount has been properly accounted
from revaluation reserve
 Depreciation computation as per Income tax Act, 1961- Ensure that
additions are tallying with the additions as per Companies Act and
the opening WDV to the Tax audit schedule for the assessment year
preceding the previous year under audit.
17 Other Expenses like Power and Fuel, Rent, Repair to Building, Plant and Machinery,
Insurance, Travelling, Legal and Professional, Miscellaneous Expenses
 Rent expense- Obtain a month wise expense schedule along with the
rent agreements. Verify if expense has been recorded for all 12 months
and whether the rent amount is as per the underlying agreement.
Specific consideration should be given to escalation clause in the
agreement to verify if the rent was to be increased/ adjusted during
the period under audit. Also, verify if the agreement is in the name
of the entity and whether the expense pertains to premises used for
running business operations of the entity
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 Power and fuel expense- Obtain a month wise expense schedule

along with the power bills. Verify if expense has been recorded for
all 12 months. Also, compile a month wise summary of power units
consumed and the applicable rate and check the arithmetical accuracy
of the bill raised on monthly basis. In relation to the units consumed,
analyse the monthly power units consumed by linking it to units
of finished goods produced and investigate reasons for variance in
monthly trends
 Insurance expense- Obtain a summary of insurance policies taken
along with their validity period. Verify if the expense has been
correctly classified between prepaid and expense for the period based
on number of days.
 Legal and professional expenses- Obtain a month wise and consultant
wise summary. In case of monthly retainer ship agreements, verify if
the expenditure for all 12 months has been recorded correctly. For
non- recurring expenses, select a sample and vouch for the attributes
discussed above. The auditor should be cautious while vouching for
legal expenses as the same may highlight a dispute for which the
entity may not have made any provision and the matter may also
not have been discussed/ highlighted to the auditor for his specific
consideration.
 Travel, repair and maintenance, printing and stationery, miscellaneous
expenses – The auditor should select a sample and vouch for the
attributes discussed above. Wherever possible, the auditor and try
and prepare a summary of expenditure on monthly basis and then
analytically compare the trends
 Perform analytical procedures to obtain audit evidence as to overall
reasonableness of other expense which may include expenditure
per unit produced analysis. Auditor should analyse expense per unit
produced and compare the same with previous years and prevent
industry trends and ask for the reasons from Management If any
significant variations are found.
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 Ensure other expenses have been classified as follows in accordance with
AS/IND AS as applicable to the entity and Schedule III of Companies Act,
2013:
a. Rent.
b. Insurance.
c. Power and fuel.
d. Repairs and maintenance- Building, Plant and machinery, others.
e. Legal and professional.
f. Printing and stationary.
g. Travel expenses.
h. Miscellaneous expenses
Other Accounting and Company Law Concepts which can be questioned in exam
1) Share issued at premium:
 In case a company has issued shares at a premium, that is, at amount in excess
of the nominal value of the shares, whether for cash or otherwise, section 52 of
the Companies Act, 2013 provides that a Company shall transfer the amount
received by it as securities premium to securities premium account and state
the means in which the amount in the account can be applied
 The securities premium account may be applied by the Company:
(a) Towards the issue of unissued shares of the company to the members of
the company as fully paid bonus shares;
(b) In writing of the preliminary expenses of the Company;
(c) In writing of the expenses of, or the commission paid or discount allowed
on, any issue of shares or debentures of the company;
(d) In providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company; or
(e) For the purchase of its own shares or other securities under section 68. The
auditor needs to verify whether the premium received on shares, if any,
has been transferred to a “securities premium account” and whether the
application of any amount out of the said “securities premium account” is
only for the purposes mentioned above.
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2) Shares Issued at discount:

 According to section 53 of the Companies Act, 2013, a company shall not issue
shares at a discount, except in the case of an issue of sweat equity shares given
under section 54 of the Companies Act, 2013.
 Any share issued by a company at a discounted price shall be void
 The auditor needs to verify that the Company has not issued any of its shares at
a discount by reading the minutes of meeting of its directors and shareholders
authorizing issue of share capital and the issue price.
3) Issue of Sweat Equity Shares:

 According to section 54 of the Companies Act, 2013, the employees may be
compensated in the form of ‘Sweat Equity Shares”.
 “Sweat Equity Shares” means equity shares issued by the company to employees
or directors at a discount or for consideration other than cash for providing
know-how or making available right in the nature of intellectual property
rights or value additions, by whatever name called
 The auditor needs to verify that the Sweat Equity Shares issued by the company
are of a class of shares already issued and following conditions have been
complied with:
(a) The issue is authorised by a special resolution passed by the company;
(b) The resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees to
whom such equity shares are to be issued;
(c) Not less than one year has, at the date of such issue, elapsed since the
date on which the company had commenced business; and
(d) Where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the
regulations made by the Securities and Exchange Board in this behalf and
if they are not so listed, the sweat equity shares are issued in accordance
with such rules as may be prescribed.
4) Reduction of Capital
For verifying reduction of capital, the auditor needs to undertake the following procedures:
(i) Verify that the meeting of the shareholder held to pass the special resolution
was properly convened and that the proposal was circularised in advance
among all the shareholders;
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(ii) Verify that the Articles of Association authorises reduction of capital;

(iii) Examine the order of the Tribunal confirming the reduction and verify that
a copy of the order and the minutes have been registered and filed with the
Registrar of Companies;
(iv) Inspect the Registrar’s Certificate as regards to reduction of capital;
(v) Vouch the accounting entries recorded to reduce the capital and to write down
the assets by reference to the resolution of shareholders and other documentary
evidence; also check whether the requirements of Schedule III, Part I, have
been complied with;
(vi) Confirm whether the revaluation of assets has been properly disclosed in the
Balance Sheet;
(vii) Verify the adjustment made in the members’ accounts in the Register of
Members and confirm that either the paid up amount shown on the old share
certificates have been altered or new certificates have been issued in lieu of the
old, and the old ones have been cancelled;
(viii) Confirm that the words “and reduced”, if required by the order of the Tribunal,
have been added to the name of the company in the Balance Sheet.
(ix) Verify that the Memorandum of Association of the company has been suitably
amended.
5) Distinguish between reserves and provisions

 Reserves are amounts appropriated out of profits that are not intended to
meet any liability, contingency, commitment or diminution in the value of
assets known to exist as at the date of the Balance Sheet
 On the contrary, provisions are amounts charged against revenue to provide
for:
(i) Renewal or diminution in the value of assets; or
(ii) a known liability, the amount whereof could only be estimated and cannot
be determined with accuracy; or
(iii) a claim which is disputed.
 Provisions are normally charged to the Statement of Profit and Loss before
arriving at the amount of profit. Reserves are appropriations out of profits.
6) Revenue and Capital Reserve

 Revenue reserves represent profits that are available for distribution to
shareholders held for the time being or any one or more purpose.
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 Capital Reserve, on the other hand represents a reserve which does not include
any amount regarded as free for distribution through the Statement of Profit
and Loss.
7) Difference between Revenue and Capital Expenditure

 Revenue Expenditure
An expenditure, the benefits of which shall get expended or exhausted in the
process of earning revenue within a short span of time, maximum period being
one year, for example on purchase of goods for sale, on their movement from
one place to another, on maintenance of assets, etc
 Capital Expenditure
An expenditure incurred for the below mentioned purposes:
(i) Acquiring fixed assets, i.e., assets of a permanent or a semi-permanent
nature, which are held not for resale but for use within the business with
a view to earning profits and the benefit whereof is expected to last for
more than one year;
(ii) Making additions/ enhancements to the existing fixed assets with the
intent to increasing earning capacity of the business;
(iii) Minimising the cost of production;
(iv) Acquiring a benefit of enduring nature in the form of a valuable right like
patent, trademarks etc.
8) Expenses which are essentially of a revenue nature, if incurred for creating an asset or
adding to its value for achieving higher productivity, are also regarded as expenditure of a
capital nature. Examples.
Examples of such capital expenditure are:
(i) Material and wages- capital expenditure when expended on the construction of
a building or erection of machinery;
(ii) Legal expenses- capital expenditure when incurred in connection with the
purchase of land or building;
(iii) Freight- capital expenditure when incurred in respect of purchase of plant and
machinery;
(iv) Repair- Major repairs of a fixed asset that increases its productivity;
(v) Wages- Wages paid on installation costs incurred in Plant & machinery;
vi) Interest- Interest incurred during the eligible period as defined under AS 16 i.e.
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during the period of construction of the asset.
9) Note on other income

a) Dividend Income:
Dividends are recognised in the statement of profit and loss only when:
(i) The entity’s right to receive payment of the dividend is established;
(ii) It is probable that the economic benefits associated with the dividend will
flow to the entity; and
(iii) The amount of the dividend can be measured reliably.
b) Gain/(loss) on sale of investment in mutual funds is recorded as other income on

transfer of title from the entity and is determined as the difference between the
redemption price and carrying value of the investments.
10) Auditor needs to consider some attributes while verifying for depreciation and amortisation
expenses. List them.
• Obtain the understanding of entity’s accounting policy related to depreciation
and amortisation.
• Ensure the Company policy for charging depreciation and amortisation is as
per the relevant provisions of Companies Act, applicable accounting standards.
• Whether the depreciation has been calculated after making adjustment of
residual value from the cost of the assets.
• Whether depreciation and amortisation charges are valid.
• Whether depreciation and amortisation charges are accurately calculated and
recorded.
• Whether all depreciation and amortisation charges are recorded in the
appropriate period.
• Ensure the parts (components) of each item of property, plant and equipment
that are to be depreciated separately has been properly identified.
• Whether the most appropriate depreciation method for each separately
depreciable component has been used.
11) While the auditor may choose to analyse the monthly trends for expenses like rent,
power and fuel, an auditor generally prefers to vouch for other expenses to verify certain
attributes. List them.
 Whether the expenditure pertained to current period under audit
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 Whether the expenditure qualified as a revenue and not capital expenditure

 Whether the expenditure had a valid supporting like travel tickets, insurance
policy, third party invoice etc.
 Whether the expenditure has been classified under the correct expense head
 Whether the expenditure was authorised as per the delegation of authority
matrix.
 Whether the expenditure was in relation to the entity’s business and not a
personal expenditure.
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1 Goods sent out on Sale or Return Basis
Ans a) Check whether a separate memoranda record of goods sent out on
sale or return basis is maintained.
b) See that price of such goods is unloaded from the sales account and
the trade receivable’s record.
c) Ensure that the goods in respect of which the period of approval
has expired at the close of the year either have been received back
subsequently or customers’ accounts have been debited.
d) Confirm that the inventory of goods sent out on approval, the period
of approval in respect of which had not expired till the close of the
year lying with the party, has been included in the closing inventory.
2 Borrowing from Banks.
Ans a) Reconcile the balances in the overdraft or loan account with that
shown in the pass book(s) and confirm the last mentioned balance
by obtaining a certificate from the bank showing the balance in the
accounts as at the end of the year.
b) Obtain a certificate from the bank showing particulars of securities
deposited with the bank as security for the loans or of the charge
created on an asset or assets of the concern and confirm that the
same has been correctly disclosed and duly registered with Registrar
of Companies and recorded in the Register of charges.
c) Verify the authority under which the loan or draft has been raised. In
the case of a company, only the Board of Directors is authorised to
raise a loan or borrow from a bank.
d) Confirm, in the case of a company, that the restraint contained in
Section 180 of the Companies Act, 2013 as regards the maximum
amount of loan that the company can raise has not been contravened.
3 Goods sent on consignment
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Ans a) Verify the accounts sales submitted by the consignee showing goods
sold and inventory of goods in hand.
b) Reconcile the figure of the goods on hand, as given in the last accounts
sales, with the Performa invoices and accounts sales received during
the year.
c) Obtain confirmation from the consignee for the goods held on
consignment on the balance sheet date.
d) Ensure that the quantity of goods in hand with the consignee has
been valued at cost plus proportionate non-recurring expenses, e.g.,
freight, dock dues, customs due, etc., unless the value is lower. In case
net realisable value is lower, the inventory in hand of the consignee
should be valued at net realisable value. Also see that the allowance
has been made for damaged and obsolete goods in making the
valuation.
e) See that goods in hand with the consignee have been shown distinctly
under inventories.
4 Foreign travel expenses
Ans a) Examine Travelling Allowance bills submitted by the employees
stating the details of tour, details of expenses, etc.
b) Verify that the tour programme was properly authorised by the
competent authority.
c) Check the T.A. bills along with accompanying supporting documents
such as air tickets, travel agents bill and hotel bills with reference to
the internal rules for entitlement of the employees and also make
sure that the bills are properly passed
5 Receipt of capital subsidy
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Ans a) Refer to application made for the claim of subsidy to ascertain the
purpose and the scheme under which the subsidy has been made
available.
b) Examine documents for the grant of subsidy and note the conditions
attached with the same relating to its use, etc.
c) See that conditions to be fulfilled and other terms especially whether
the same is for a specific asset or is for setting up a factory at a
specific location.
d) Check relevant entries for receipt of subsidy.
e) Check compliance with requirements of AS 12 on “Accounting for
Government Grants” i.e. whether it relates to specific amount or in
the form of promoters’ contribution and accordingly accounted for as
also compliance with the disclosure requirements.
6 Provision for income tax
Ans a) Obtain the computation of income prepared by the auditee and
verify whether it is as per the Income-tax Act, 1961 and Rules made
thereunder.
b) Review adjustments, expenses, disallowed special rebates, etc. with
particular reference to the last available completed assessment.
c) Examine relevant records and documents pertaining to advance tax,
self assessment tax and other demands.
d) Compute tax payable as per the latest applicable rates in the Finance
Act.
e) Ensure that overall provisions on the date of the balance sheet is
adequate having regard to current year provision, advance tax paid,
assessment orders, etc.
f) Ensure that the requirements of AS 22 on Accounting for Taxes on
Income have been appropriately followed for the period under audit.
7 Payment of taxes
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Ans a) Payment on account of income-tax and other taxes consequent upon

a regular assessment should be verified by reference to the copy of
the assessment order, assessment form, notice of demand and the
receipted challan.
b) Payments or advance payments of income-tax should also be verified
with the notice of demand and the receipted challan acknowledging
the amount paid.
c) The interest allowed on advance payments of income-tax should
be included as income and penal interest charged for non-payment
should be debited to the interest account.
d) Nowadays, electronic payment of taxes is also in trend. Electronic
payment of taxes means payment of taxes by way of internet banking
facility or credit or debit cards.
e) The assessee can make electronic payment of taxes also from the
account of any other person. However, the challan for making such
payment must clearly indicate the Permanent Account Number (PAN)
of the assessee on whose behalf the payment is made.
8 Advertisement Expenses
Ans a) Verify the bill/invoice from advertising agency to ensure that rates
charged for different types of advertisement are as per contract.
b) See that advertisement relates to client’s business.
c) Inspect the receipt issued by the agency
d) Compare the statement of account with the ledger account.
9 Sale of Scrap
Ans a) Review the internal control as regards generation, storage and
disposal of scrap.
b) Check whether the organization is maintaining reasonable record for
generation of Scrap.
c) Analyze the raw material used, production and generation pattern of
scrap and compare the same with figures of earlier year.
d) Check the rates at which scrap has been sold and compare the rate
with previous year.
e) Vouch sales, with invoices raised, advertisement for tender, rate
contract with scrap dealers.
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1. Which assertion is common among the statement of profit and loss and balance
sheet captions:
(a) Existence (b) Valuation (c) Completeness d) Measurement
2. Direct confirmation procedures are performed during audit of accounts receivable

balances to address the following balance sheet assertion:
(a) Rights and obligations (b) Existence
(c)
Valuation (d)
Completeness
3. Obtaining trade receivables ageing report and analysis and identification of doubtful
debts is performed during audit of accounts receivable balances to address the
following balance sheet assertion:
(a) Valuation (b) Rights and obligations
(c)
Existence (d)
Completeness
4. Observing inventory being counted and personally performing test counts to verify
counts is performed during audit of inventory balances to address the following
balance sheet assertion:
(a) Rights and obligations (b) Valuation
(c) Completeness (d) Existence
5. Wages paid to workers would qualify as:

(a) Revenue expenditure
(b) Capital expenditure
(c) Revenue or capital expenditure depending upon facts and circumstances.
6. During the course of audit of intangible assets, expenditure incurred during following
phase is not capitalised:
(a) Development phase (b) Research phase
(c) None of the above (d) Both (a) and (b)
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7. Search for unrecorded liability is performed during audit of current liabilities to

address the following balance sheet assertion:
(a) Valuation (b) Rights and obligations
(c) Existence (d) Completeness
8. Cut-off testing is performed during audit of sales to address the following assertion:
(a) Occurrence (b) Measurement
(c) Completeness (d) All of the above
9. All inventory units held by the audit entity and that should have been recorded,
have been recognized in the financial statements. The assertion involved is :
(a) Existence (b) Completeness
(c) Rights and Obligations (d) Valuation
10. Which of the following is not an example of revenue expenditure -

(a) Salaries and wages of employees engaged directly or in-directly in production
(b) Repairs, maintenance and renewals of fixed assets
(c) Legal and professional expenses
(d) development expenditure on land
11. Useful life of assets is given in Schedule ------ of Companies Ac 2013.

(a) II (b) IV (c) V (d) VII
12. _________are charges against profits to provide for known liabilities for which
amounts cannot be determined with accuracy
(a) Contingent Liabilities (b) Provision
(c) Securities Premium Reserve (d) Liabilities
13. Which of the following is not correct:-

(a) AS 18 – Related Party Disclosures (b) AS 10 – Property, Plant & Equipment
(c) AS 28 – Impairment of Assets (d) AS 16 – Intangible Assets
14. Which of the following item should not be treated as an asset, as per provisions of
AS 26 :
(a) Computer software (b) Internally generated goodwill
(c) Fishing License (d) Brand Names
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15. Which of the following in not an assertion about classes of transactions and events
for the period under audit:
a) Occurrence b) Accuracy c) Classification d) Existence
16. Which of the following is not an assertion about presentation and disclosure:
(a) Occurrence and rights and obligations (b) Completeness
(c) Classification and understandability (d) Existence
Answer
1 C 5 C 9 B 13 D
2 B 6 B 10 D 14 B
3 A 7 D 11 A 15 D
4 D 8 C 12 B 16 D
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CASE 1.
A partnership firm of Chartered Accountants, YZ and Associates were appointed as
auditor of company UV Private Limited. The financial year for which YZ and Associates
were to audit books of accounts of UV Private Limited began on 1 April, 2018 and ended
on 31 March, 2019. YZ and Associates consisted of four partners namely Mr. Y, Mr. Z,
Mr. G and Mr. H. While auditing books of accounts of UV Private Limited for the period
beginning on 1 April, 2018 and ending on 31 March, 2019, one of the partners of YZ and
Associates namely Mr. H took up the expenses part for the purpose of audit.
The management of UV Private Limited had adopted various accounting policies and
principles related to expenses which Mr. H as auditor of UV Private Limited was unable
to understand. Some of the issues which Mr. H was unable to understand are mentioned
as follows:
(1) Power and Fuel expenses paid for the months of April, 2019 and May, 2019 have
been included and shown as Power and Fuel expenses for the period beginning 1
April, 2018 and ending 31 March, 2019.
(2) Personal Rent Expenses of the son of one of the director, Mr. T of UV Private Limited
have been shown as Rent Expenses of business of UV Private Limited.
(3) Repair and Maintenance Expenses for the months of February 2019 and March 2019
were still outstanding and ere not shown in Balance Sheet of UV Private Limited.
(4) Repair and Maintenance Expenses for the financial year 1 April, 2018 to 31 March,
2019 were very high as compared to financial year 1 April, 2017 to 31 March, 2018.
The auditor Mr. H asked the appropriate authority about the reasons for such huge
differences in amounts of two financial years.
(5) While verifying the insurance expenses, the insurance policies were not shown to
auditor Mr. H. The above mentioned five points were some of the issues which Mr. H
was unable to understand.
Answer the following questions:
1. As per the point number (1) mentioned in the above case, the Power and Fuel
Expenses paid for the months of April 2019 and May 2019 must be shown under
asset side of balance sheet of UV Private Limited as on 31 March, 2019 as:
(a) Outstanding Power and Fuel Expenses
(b) Prepaid Power and Fuel Expenses
(c) Power and Fuel Expenses
(d) Power and Fuel Expenses Payable
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2. As per point number (2) mentioned above in the case, the Personal Rent Expenses of
the son of one of the director Mr. T were added to Rent Expenses of business of UV
Private Limited. The amount of personal rent expenses of the son of the director Mr.
T must be:
(a) Subtracted from Rent Expenses of business of UV Private Limited
(b) Remain Added to Rent Expenses of business of UV Private Limited
(c) Again Added to Rent Expenses of business of UV Private Limited
(d) Subtracted twice from Rent Expenses of business of UV Private Limited
3. As per point number (3) mentioned above in the case, the Repair and Maintenance
Expenses outstanding for the months of February 2019 and March 2019 must be
shown under liability side of balance sheet of UV Private Limited as on 31 March,
2019 as:
(a) Prepaid Repair and Maintenance Expenses
(b) Repair and Maintenance Expenses
(c) Repair and Maintenance Expenses paid in advance
(d) Repair and Maintenance Expenses Payable
4. As per point number (4) mentioned in the case above, the auditor Mr. H asked
the appropriate authority for reasons of huge differences in the amount of two
financial years of repair and maintenance expenses. By appropriate authority Mr. H
was referring to:
(a) All employees of UV Private Limited
(b) Management of UV Private Limited
(c) Members of UV Private Limited
(d) Any one director of UV Private Limited
5. As per point number (5) mentioned in the case above, in verifying insurance expenses
the insurance policies would provide auditor Mr. H as:
(a) Invalid Supporting (b) No Supporting
(c) Lack of proper Supporting (d) Valid Supporting
Answer
1 b 2 a 3 d 4 b 5 d
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CASE 2.
M/s TPR & Associates have been appointed as the auditors of Octopus Ltd. for the Financial
Year 2019-20.
• During the course of audit, the auditor notices that there is significant change in
the number of debtors of the company. The auditor decided to check the debtors
account in detail.
• Further the company has made various provisions like the provisions for taxation,
provision for bad & doubtful debts.
• Also, during the current Financial Year, the auditor attended the physical verification
of the inventory being carried out by the management.
• The auditor notices that there is no substantial change in the bifurcation of amount
of items representing the liability side of the balance sheet of Octopus Ltd. Still the
auditor understands that he needs to check the liability side in detail.
• Further the company has also recognised various incomes like interest income and
dividend income which auditor understands need to be checked in detail.
• The auditor is of the understanding that certain matters need to be reported under
Companies Auditors Report Order
(CARO) Based on the above facts, answer the following:-
1. ........is a possible obligation that arises from the past events and whose existence
will be confirmed only by the occurrence/ non occurrence of one or more uncertain
future events not wholly within the control of the entity:-
(a)
Provision (b) Reserve
(c) Contingent Liability (d) Liability
2. Which of the following is not correct with respect to the inventory held by Octopus
Limited:-
(a) All inventory units held by the company should have been recorded and
recognized in the financial statements.
(b) Any inventory held by a third party on behalf of the company should not be
included as part of the inventory balance.
(c) Inventory should be recognized at cost or net realizable value whichever is
lower.
(d) Inventory balance as at the year end does not include any element of next year
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3. If the management of Octopus Ltd. refuses to allow the auditor, to send the
confirmation request to the debtors, the auditor should:-
(a) Withdraw from the engagement.
(b) Not listen at all to any requests of the management.
(c) Consider the management’s request for refusal and assess its validity and
decide the nature, timing, extent of his audit procedures accordingly.
(d) Agree to management request and proceed with audit of other items of the
4. Which of the following statements is not true so far as the liabilities of a company
are concerned:-
(a) Liabilities are the financial obligations of a company including owner’s funds.
(b) Liabilities include borrowing, trade payable and other current liabilities and
provisions.
(c) Verification of liabilities is as important as that of assets.
5. Statement 1: Confirmations as well as undelivered letters should be given/ returned

to the auditor and not to the client
Statement 2: When no reply is received, the auditor should perform alternate
procedures regarding the balances.
(a) Only statement 1 is correct (b) Only statement 2 is correct
Answer
1 c 2 b 3 c 4 a 5 c
CASE 3.
XYZ Ltd. is a company engaged in the development of computer hardware. The company
has purchased a software namely Zenith X in the current financial year i.e. FY 2019-20.
This software will be used by XYZ Ltd. for the production of various hardware. M/s. ABC
& Associates are working as the auditors of XYZ Ltd. since Financial Year 2017-2018.
Since XYZ Ltd. has purchased the software during the current Financial Year, the auditors
are of the understanding that there are certain requirements that the company should
follow as per relevant provisions applicable in this case. Also, the auditors had advised
their audit staff to give special consideration to the expenditure being capitalized during
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the year and those which are charged to revenue during the current financial year. The
auditors, M/s ABC & Associated have directed their audit staff to check the following in
detail:
• the provisions relating to the depreciation and amortisation of assets and intangible
assets and
• the applicability of various Accounting Standards applicable to the entity.
1. Which of the following expenses should not be charged to revenue by XYZ Ltd.:-
(a) Printing & Stationary
(b) Power & Fuel
(c) Salary & Wages of employees engaged directly or indirectly in production.
(d) Major repairs of fixed assets that increases its productivity.
2. XYZ Ltd. should recognize Zenith X software as intangible, if such software.........:-

(a) Is held for use in production or supply of goods or services
(b) Is held for administrative purpose
(c) Is held for rental to others
3. In case any intangible asset is not in active use by the entity , the auditor should
check whether:-
(a) The deletion with respect to the intangible asset has been recorded in the
books of accounts post approval by the entity’s management.
(b) The amortisation charge has ceased beyond the date of deletion.
(c) Both a & b
(d) None of a & b
4. With respect to the provisions of impairment of computer software, the following

Accounting Standard is applicable:-
(a) AS 18 (b) AS 28
(c) AS 26 (d) AS 10
5. The following expenditure should not be capitalized with respect to the intangible
assets:-
(a) Expenditure during Development Phase
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(b) Expenditure during Research Phase.

(c) None of the above (d) Both a & b.
Answer
1 d 2 d 3 c 4 b 5 b
CASE 4.
One audit team is conducting statutory audit of Delta Robotics Limited for financial year
ending 31st March, 2020 under Companies Act,2013. The revenue from operations of
company during year 2019-20 is 89,40,60,300. Certain observations and information
stated as under have been noted during the course of audit by audit team: -
[A] The said company is availing working capital credit facility to meet its normal
operating cycle requirements amounting to 7.50 crores from a scheduled bank
and outstanding balance as on 31st March, 2020 is 6,49,20,120. The financial
statements disclose this outstanding balance in financial statements under the
head “Long-term borrowings”. Further, the said credit facility is secured against
equitable mortgage of an immovable property located at NOIDA. The said facility
is guaranteed by all directors of the company, some of relatives of directors and
two persons viz. Mr. Krishnamurthy and Mr. Ramalingam who are not related to
directors in any manner.
[B] The company has made current investments in Ceekay Limited to the tune of
1,10,00,000 by way of equity instruments. Further, the company has also made
investment in a partnership firm to the tune of 25,00,000. The said partnership
concern is in an upcoming and promising line of business activity.
[C] It was observed that company had received some export orders during the year under
audit and these orders had resulted in fructifying export turnover of 3,88,25,000.
During the year under consideration, the company has reflected net loss in respect
of foreign currency transactions amounting to 5,50,000. Further, the company has
also imported components and spare parts having FOB value of 10.00 lacs (CIF
11.25 lacs) during the year.
[D] The trade payables of the company include dues to micro and small enterprises
amounting to 1,40,36,740.
[E] Printing and stationery expenses, travelling expenses and fair participation expenses
are 74,320, 88,38,250 and 1,63,26,260 respectively. Based upon above, answer
following questions keeping in view classification and disclosure requirements of
Schedule III of Companies Act, 2013: -
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1. Consider the following statements: -

Statement I--- The company has correctly classified and disclosed outstanding
balance of working capital credit facility under the head “Long- term borrowings.”
Statement-II--- Nature of security for availing working capital credit facility needs
to be disclosed.
Which of the following is correct?
(a) Both statements I and II are true.
(b) Statement I is true. However, statement II is false.
(c) Statement I is false. However, statement II is true.
(d) Both statements I and II are false.
2. Which of the following is most correct as regards to disclosure of fact of guarantee

of working capital credit facility?
(a) Disclosure regarding guarantee of loan by directors is in accordance with law.
(b) Disclosure regarding guarantee of loan by directors and relatives only is in
accordance with law.
(c) Disclosure regarding guarantee of loan by directors, relatives and non-related
persons i.e. Mr. Krishnamurthy and Mr. Ramalingam is in accordance with law.
(d) No disclosure is required regarding guarantee of loan.
3. As regards current investments made by company in Ceekay Limited, which of

following groups contain most valid requirements mandated by law?
(a) Name of body corporate in which investment is made, Basis of valuation of
individual investment, aggregate amount of quoted investments and their
market value
(b) Name of body corporate in which investment is made, Basis of valuation of
individual investment, aggregate amount of quoted investments
(c) Basis of valuation of individual investment, aggregate amount of quoted
investments and their market value
(d) Name of body corporate in which investment is made, aggregate amount of
quoted investments and their market value.
4. As regards current investments made by company in partnership firm, which of

following classification and disclosure requirements include requirements mandated
by law?
(a) Name of firm in which investment is made, names of all the partners, total
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capital and shares of each partner

(b) Name of firm in which investment is made, names of all the partners, nature
of business of firm and total capital
(c) Name of firm in which investment is made, names of all the partners, nature
of business of firm and shares of each partner
(d) names of all the partners, nature of business of firm, total capital and shares
of each partner.
5. As regards foreign currency transactions, consider the following statements: -

Statement I Earnings in foreign exchange regarding export of goods on CIF basis
needs to be disclosed in notes to accounts.
Statement II Net loss of foreign currency transactions is required to be disclosed
separately in statement of profit and loss.
Which of the following statements is correct?
(a) Both statements I and II are true.
(b) Both statement I and II are false.
(c) Statement I is true. Statement II is false.
(d) Statement I is false. Statement II is true.
Answer
1 c 2 c 3 a 4 a 5 d
CASE 5.
M/s Arun Karun & Associates have been appointed as the statutory auditors of HKM Ltd.
for the FY 2019-20. HKM Ltd. is a company engaged in the manufacture of computer
hardwares. CA Arun is the engagement partner and his team consists of two article
assistants, namely Mr. Ram & Mr. Shyam. While performing the audit procedures, Mr.
Ram did production analysis and calculated the expenditure per unit and compared the
same with the previous year and the present year industry trends. When Mr. Ram asked
the management about the reasons for variations, he was told that such reasons have
already been explained to the cost auditors and the statutory audit team need not spend
their time on matters which are of concern for the cost auditor. Mr. Ram was convinced
and agreed to the suggestions of the management of HKM Ltd. Further, during the course
of audit, CA Arun found that there has been an increase in the paid up share capital of
the company. CA Arun obtained a written representation from the management with
respect to such increase in the share capital. Also, CA Arun found that in the company
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there is a cashier, a petty cashier and in addition there are imprest balances with the
employees. Further, the audit team verified all the travelling expenses recognised during
the period to confirmwhether they relate to the current accounting period only.
CA Arun directed Mr. Ram to verify whether the employee benefit expense has been
fairly allocated between the operating expenses incurred in production activities and the
general expenses. CA Arun also directed his team to check in detail the particulars of
Revenue reserve and share premium account of the company. Based on the above facts,
answer the following:-
1. With respect to the contention of the management of HKM Ltd. regarding the
production analysis and the related variances, which of the following is correct?
(a) M/s Arun Karun & Associates need not waste its time in production analysis as
the same is the responsibility of the cost auditor of the company.
(b) M/s Arun Karun & Associates should perform production analysis and discuss
the reasons of variation with the management of HKM Ltd.
(c) M/s Arun Karun & Associates should mention in its audit report regarding the
fact of noticed variation in the production analysis. Also they need to mention
separately that the management along with the cost auditor is responsible for
such analysis.
(d) M/s Arun Karun & Associates should ensure that the cost auditor of HKM Ltd.
mentions the fact regarding the production analysis in their cost audit report
which is to be filed with the Board of Directors and the Central Government.
2. With respect to the audit of cash balance of HKM Ltd. which is the correct course of
action for M/s Arun Karun & Associates?
1. The cash balance with the cashier, petty cashier, and imprest balances with the
employees should be checked simultaneously.
2. The cashier should be present while cash is being counted and he should sign
the statement prepared containing the details of the cash balance so counted.
3. Since the company is having more than one cash balances i.e. with cashier,
petty cashier, and imprest balances with employees, CA Arun should ask the
management to get the cash balance verified by the main cashier and furnish
cashier’s report to him.
4. CA Arun should ask any of the cashiers to verify the cash balances and provide
him with a report on the same.
(a) Statement 1 & 2 (b) Statement 1 & 4
(c) Statement 1,3 & 4 (d) Statement 1 & 3
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3. Verification of all the travelling expenses of HKM Ltd. by the audit team addresses
the following assertion related to the Income Expense account:
(a)
Valuation (b) Completeness
(c)
Measurement (d)
Existence
4. Verifying whether employee benefit expense of HKM Ltd. has been fairly allocated
between the operating expense incurred in production activities and general expense
addresses which of the following assertions?
(a) Completeness (b) Presentation and Disclosure
(c)
Measurement (d)
Occurrence
5. Which of the following is correct with respect to the provisions relating to revenue
reserves of HKM Ltd?
i. Revenue Reserves of HKM Ltd. can be used to supplement divisible profits in
lean years.
ii. Revenue Reserve cannot be used to augment the working capital of the business
of HKM Ltd.
iii. Revenue Reserve cannot be used to finance an extension of the business of
HKM Ltd.
iv. Revenue Reserve can be used to generally strengthen the company’s financial
position.
(a) ii & iii are correct (b) i & iv are correct
(c) i, ii, iii are correct (d) i, ii, iii, iv are correct
Answer
1 b 2 a 3 b 4 b 5 b
CASE 6.
M/s ANS & Associates have been appointed as the auditors of Star Ltd. for the Financial
Year 2019-20.
• During the year under audit, Star Ltd has issued share capital at a premium of Rs
5 per share. The auditors understand that certain provisions as per the Companies
Act 2013 related to the issue of shares at premium are applicable to the company.
• Also, Star Ltd. has issued Sweat Equity shares to its employees during the year.
M/s ANS & Associates has advised its audit staff to check in particular whether the
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company has complied with the relevant provisions related to the issue of sweat
equity shares as per the Companies Act 2013.
• Further, the auditor understands that the Company Star Ltd. needs to file various
forms with different authorities when there is a change in the share capital of the
company during the year.
• Also special consideration is given under audit to the treatment of reserves as
Revenue vs Capital by the company during the financial year.
1. As there is a change in the share capital of Star Ltd. during the year, which of the
following combination related to the forms to be submitted is not correct:-
(a) Form SH 7: To be filed with Ministry of Corporate Affairs
(b) Form CRA 2: To be filed with the Central Government
(c) Form PAS: To be filed with the Ministry of Corporate Affairs.
(d) Form FCGPR: To be filed with the Reserve Bank of India.
2. The Securities Premium Account can be used by the Star Ltd. for various purposes,
except one:-
(a) In writing off the preliminary expenses of the company
(b) Towards the issue of the unissued shares of the company to the members of
the company as fully paid bonus shares
(c) For purchase of its own shares and other securities under section 68.
(d) To be used as working capital.
3. With regard to the issue of Sweat Equity shares following conditions have to be
complied. Identify the incorrect one:-
(a) The issue is authorized by ordinary resolution passed by the company.
(b) The resolution should specify the number of shares, the current market price.
(c) Not less than one year has at the date of such issue, elapsed since the date on
which the company has commenced business
(d) Where the equity shares of the company are listed on recognized stock exchange,
the shares are issued in accordance with requirements by SEBI.
4 Which of the following is not correct:-

(a) Section 52- Securities Premium Account
(b) Section 53- Issue of shares at discount
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(c) Section 54- Issue of Bonus Shares

(d) Section 68- Buyback of shares
5. With respect to which of the following, passing of a Special Resolution is required

by a company:-
(a) Issue of Sweat Equity Shares (b) Reduction of Share Capital
(c) Both a & b (d) None of a & b
Answer
1 b 2 d 3 a 4 c 5 c
CASE 7.
During the financial year 2020-21, a Partnership Firm of Chartered Accountants HW and
Associates was appointed to audit the books of accounts of Extremely Healthy and Very
Delicious Limited. HW and Associates consists of two partners, Mr. H and Mr. W. While
auditing the books of accounts of the above mentioned company for the financial year
2020-21, Mr. H observed certain accounting transactions and accounting treatments
which he was not able to understand. Such accounting transactions and accounting
treatments are provided as follows:
(1) The books of accounts of Extremely Healthy and Very Delicious Limited showed
profit for the financial year 2020-21. The closing stock was incorrectly recorded in
books of accounts of the company for 11,45,000. However, the actual closing stock
was of 11,05,000.
(2) Expenses and Incomes were not recorded on Accrual Basis and such fact was not
disclosed in the financial statements.
(3) Each and every type of inventory was valued at higher of Cost and Market Value.
(4) An amount of 15,500 received in cash from one of the trade receivable was presented
in the cash flow statement as Inflow of Cash of 15,500 from Investing Activities.
(5) A payment of 16,600 was done in cash for the purpose of purchasing Machinery 22.
This accounting transaction was presented in the cash flow statement as Inflow of
Cash of 16,600 from Financing Activities.
(6) Extremely Healthy and Very Delicious Limited received certain amount in cash on
issue of shares. One such amount of 19,100 received in cash was presented as
Outflow of Cash of 19,100 from Operating Activities in the Cash Flow Statement.
(7) Fair Value of Equipment 31 = 1,07,300.
Carrying Amount of Equipment 31 = 90,400.
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Residual Value of Equipment 31 = 79,600.

No depreciation was charged on Equipment 31 for the financial year 2020-21 as
Management of Extremely Healthy and Very Delicious Limited was of the opinion
that no depreciation would be charged as Fair Value of Equipment 31 was more
than Carrying Amount of Equipment 31.
Keeping the basic concepts of Accounting Standard 1 relating to Disclosure of
Accounting Policies, Accounting Standard 2 relating to Valuation of Inventories,
Accounting Standard 3 relating to Cash Flow Statements, Accounting Standard 10
relating to Property, Plant and Equipment and Audit of Items of Financial Statements
in mind answer the multiple choice questions that follow:
1. Closing Stock of 11,05,000 was incorrectly recorded in books of accounts of Extremely
Healthy and Very Delicious Limited for 11,45,000. This means profit before correction
in books of accounts of the company was:
(a) Understated by 20,000. (b) Understated by 40,000.
(c) Overstated by 20,000. (d) Overstated by 40,000.
2. Inventory of Extremely Healthy and Very Delicious Limited must be valued at:
(a) Cost (b) Lower of Cost and Net Realizable Value.
(c) Market Value. (d) Higher of Cost and Net Realizable Value.
3. The amount of 15,500 which was received in cash from one of the trade receivable
of Extremely Healthy and Very Delicious Limited, must be presented in Cash Flow
Statement as:
(a) Inflow of Cash of 15,500 from Miscellaneous Activities.
(b) Inflow of Cash of 15,500 from Operating Activities.
(c) Inflow of Cash of 15,500 from Investing Activities.
(d) Inflow of Cash of 15,500 from Financing Activities.
4. For the purpose of purchasing Machinery 22, a payment of 16,600 was done by
Extremely Healthy and Very Delicious Limited in cash. This accounting transaction
must be presented in the Cash Flow Statement as:
(a) Outflow of Cash of 16,600 from Investing Activities.
(b) Outflow of Cash of 16,600 from Operating Activities.
(c) Outflow of Cash of 16,600 from Financing Activities.
(d) Outflow of Cash of 16,600 from Miscellaneous Activities.
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5. During the financial year 2020-21, the fair value of Equipment 31 of Extremely
Healthy and Very Delicious Limited was more than the carrying amount of Equipment
31. In this situation which of the following statement is correct:
(a) No depreciation would be charged on Equipment 31 for the financial year
2020-21 as Fair Value was more than Carrying Amount for Equipment 31.
(b) No depreciation would be charged on Equipment 31 for the financial year
2020-21 as Fair Value was more than Residual Value for Equipment 31.
(c) Depreciation would be charged on Equipment 31 for the financial year 2020-
21 as Carrying Amount was less than Fair Value for Equipment 31.
(d) Depreciation would be charged on Equipment 31 for the financial year 2020-
21 as Residual Value is less than1 Carrying Amount for Equipment 31.
Answer
1 d 2 b 3 b 4 a 5 d
CASE 8.
A private company by the name of Very Composed Private Limited was required to be
audited for the financial year 2020-21. A partnership firm of Chartered Accountants, ST
and Associates was appointed as company auditor of Very Composed Private Limited. The
partnership firm ST and Associates had two partners, Mr. S and Mr. T. During the course
of audit, one of the partners of ST and Associates, Mr. S took up one of the important
item of financial statements namely tangible fixed assets for the purpose of audit. While
auditing tangible fixed assets Mr. S observed various accounting policies, procedures
and principles which management of Very Composed Private Limited had adopted for
maintaining books of accounts of the above mentioned company which he was unable to
understand. For Example:
(1) Expenses incurred on installation of new machinery purchased were treated as
revenue expenditure.
(2) Expenses incurred regarding normal maintenance of old machinery were treated as
capital expenditure.
(3) Depreciation was not charged on building of Very Composed Private Limited on the
reason that it was non – depreciating in nature.
(4) The appropriate authority of Very Composed Private Limited had not taken steps for
assessing impairment loss on machinery.
The above mentioned four examples were some of the issues which Mr. S was
unable to understand while auditing tangible fixed assets of Very Composed Private
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Limited. Keeping the basic concepts and accounting principles regarding tangible
fixed assets in mind answer the following multiple choice questions that follow:
1. Expenses incurred on installation of new machinery by Very Composed Private

Limited should be treated as:
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Deferred Revenue Expenditure
(d) Partly Revenue and Partly Capital Expenditure
2. Expenses incurred on normal maintenance of old machinery by Very Composed

Private Limited should be treated as:
(a) Capital Expenditure
(b) Deferred Revenue Expenditure
(c) Partly Revenue and Partly Capital Expenditure
(d) Revenue Expenditure
3. In books of accounts of Very Composed Private Limited, building should be treated

as:
(a) Depreciating Tangible Fixed Asset
(b) Non-Depreciating Tangible Fixed Asset
(c) Depreciating Intangible Fixed Asset
(d) Non-Depreciating Intangible Fixed Asset
4. In example 4 in integrated case scenario above, Mr. S mentions about appropriate

authority of Very Composed Private
Limited which has not taken steps for assessing impairment loss on machinery. By
appropriate authority Mr. S was referring to:
(a) Members of Very Composed Private Limited
(b) All employees of Very Composed Private Limited
(c) Management of Very Composed Private Limited
(d) Any one Director of Very Composed Private Limited
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5. The method of depreciation used by Very Composed Private Limited must be such
that it allocates amount of depreciation of a tangible fixed asset in a systematic
manner over its:
(a) Complete Life (b) Service life
(c) Economic life (d) Useful Life
Answer
1 b 2 d 3 a 4 c 5 d
CASE 9.
Vyom is a CA student who has just enrolled for his articleship training with M/s Kumar
& Co., a LLP of Chartered Accountants with Mr. Kumar& Mr. Kanwar as its designated
Partners. Vyom has only theoretical knowledge till now of accounting work and wants
to gain practical knowledge of Accounting & Auditing. He asks Mr. Kumar to take him to
important assignments along with him so that he can also get exposure to practical
auditing. Mr. Kumar, sensing his ambition, advises him to proceed slowly with less
complex work in the beginning to understand the process of accounting and auditing
from the core instead of jumping directly to be a part of the engagement teams for large
audits. He assigns him a small audit of a sole trader Client ‘X’ and asks him to document
each and every step of the Audit Programme being handed over to him as a part of the
audit team auditing the accounts of Mr. X. Mr X follows accrual system of accounting.
Vyom, on advice from Mr. Kumar, reads first about the FinancialStatements, their inclusions
and assertions they contain. He learns that a ‘Financial Statement Audit’ is the most
common one but different from all other audits. In preparing the financial statements,
an entity’s management makes implicit or explicit claims known as assertions regarding
the completeness, existence/occurrence, valuation/ measurement, rights and obligations
and presentation and disclosure of financial statement items. While auditing the books
of Mr. X, he observes the following and documents audit evidence gathered by him:-
 Assets have been shown at their Historical Cost in the Balance Sheet.
 Prepaid & Outstanding Expenses have not been accounted for as per accrual basis.
 Specific audit procedures to check the consistency of audit evidence obtained
externally with those generated internally have been carried out.
CA Kumar discusses the evidence collected by Vyom and tells him that they are insufficient
and makes him aware of the factors which he needs to consider in his future audits as to
determine the sufficiency of audit evidence collected.
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1. Company X’s Balance-Sheet shows Building with carrying amount of INR 5 Lakh,
the auditor gathers evidence about the Company’s ownership and control over such
building. This is an assertion w.r.t-
(a)
Completeness (b) Valuation
(c) Existence (d) Rights & Obligations.
2. The Advance Salary given to Mr. Y in the above case has not been accounted for
properly in the accounts of the Company and shown on payment basis only. This is
a violation of assertion of:
(a)
Completeness (b) Valuation
(c) Rights and obligations (d) Existence
3. Relating and tallying information obtained from audit evidence internally and
externally is an example of ________ evidences as observed in the above case.
(a)
Corroborative (b) Supplementary
(c)
Contrasting (d)
Contradictory
4. Which assertion would Vyom find to be common among Income Statement and
Balance Sheet.
(a)
Existence (b) Valuation
(c)
Completeness (d)
Measurement
5. Sufficiency of the Audit Evidence collected as per the above case is referred to by CA
Kumar as__________ of Audit Evidence?
(a) Quality (b) Quantum (c) Source (d) Form
Answer
1 d 2 a 3 d 4 c 5 b
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1. Employee benefits expenses represent the sum an entity pays to its employees for
their labour/ efforts only.
2. Dividends are recognised in the statement of profit and loss only when the entity’s
right to receive payment of the dividend is established.
3. “Sweat Equity Shares” means equity shares issued by the company to employees
or directors at a premium or for consideration other than cash for providing know-
how or making available right in the nature of intellectual property rights or value
additions, by whatever name called.
4. Capital reserves represent profits that are available for distribution to shareholders
held for the time being or any one or more purpose.
5. A capital reserve, generally, can be utilised for writing down fictitious assets or
losses or (subject to provisions in the Articles) for issuing bonus shares if it is realised.
6. If Company X’s balance sheet shows building with carrying amount of 100 lakh, the
auditor shall assume only one point that the management has only asserted that
the building recognized in the balance sheet exists as at the period-end.
7. The securities premium account may only be applied by the Company towards the
issue of unissued shares of the company to the members of the company as fully
paid bonus shares.
8. Material and wages are considered to be revenue expenditure when incurred for
construction of building.
9. Tangible assets are depreciated when the asset is actually put to active use.
10. Increase in authorised capital of the company requires special resolution to be

passed at the general meeting.
11. Capital redemption reserve can be used for distribution of dividends.
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12. Dividends are recommended by the Board, and declared by the Shareholders.
13. In verifying Trade Receivables balance, Direct Confirmation Procedure is one of the
important audit activity.
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1. Incorrect: Employee benefits expenses, commonly called payroll expenses, represent

the aggregate sum an entity pays to its employees for their labour/ efforts, as well
as associated expenses such as perquisites/ benefits, postemployment benefits like
gratuity, superannuation, leave encashment, provident fund contribution etc. as
well as towards their hiring, their welfare and training.
2. Incorrect: Dividends are recognised in the statement of profit and loss only when:
(i) the entity’s right to receive payment of the dividend is established;
(ii) it is probable that the economic benefits associated with the dividend will flow
to the entity; and
(iii) the amount of the dividend can be measured reliably.
3. Incorrect: “Sweat Equity Shares” means equity shares issued by the company
to employees or directors at a discount or for consideration other than cash for
providing know-how or making available right in the nature of intellectual property
rights or value additions, by whatever name called.
4. Incorrect: Revenue reserves represent profits that are available for distribution to
shareholders.
5. Correct: A capital reserve, generally, can be utilised for writing down fictitious assets
or losses or (subject to provisions in the Articles) for issuing bonus shares if it is
realised. But the amount of share premium or capital redemption reserve account
can be utilised only for the purpose specified in Sections 529and 55 respectively of
the Companies Act, 2013.
6. Incorrect: If Company X’s balance sheet shows building with carrying amount of 100
lakh, the auditor shall assume that the management has claimed/ asserted that:
• The building recognized in the balance sheet exists as at the periodend (existence
assertion);
• Company X owns and controls such building (Rights and obligations assertion);
• The building has been valued accurately in accordance with the measurement
principles (Valuation assertion);
All buildings owned and controlled by Company X are included within the carrying
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amount of 100 lakh (Completeness assertion).
7. Incorrect: The securities premium account may be applied by the Company:

(a) towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares;
(b) in writing off the preliminary expenses of the Company;
(c) in writing off the expenses of, or the commission paid or discount allowed on,
any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company; or (e) for the purchase
of its own shares or other securities under section 68.
8. Incorrect: Material and Wages incurred on construction of building qualify to be

capital expenditure as per AS 10 “Plant, Property and Equitment”. Therefore, these
have to be added to the cost of the asset i.e building and shall not be expensed off
to Statement of Profit and Loss.
9. Incorrect: Depreciation is a fall in value of asset due to obsolescence, usage and

effluxion of time, Therefore, depreciation is charged when the asset is ready for use.
Active use of asset is not a mandatory criteria for charge of depreciation.
10. Incorrect: Increase in Authorised capital requires alteration of capital clause of

memorandum of Association. Therefore, ordinary resolution is passed for increase
in authorised capital of the company as per the Companies Act, 2013.
11. Incorrect: Capital Redemption reserve is not a free reserve. It is a restrictive reserve
and can be used only for purposes given in the Act. Since it is not a free reserve, it
cannot be utilised for payment of dividends. CRR can be used only for the purpose
of issuing fully paid up bonus shares.
12. Correct: The dividends are recommended by the Board of Directors by passing a
resolution at the board meeting. The Shareholders declare the dividends at the
AGM by passing an ordinary resolution. Declaration of dividend is an item of
ordinary business. However, the shareholders can decrease the amount of dividends
recommended by the board but cannot increase it.
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13. Correct: While auditing trade receivable balance, direct confirmations as per SA
505, is considered to be the most important audit activity. Direct confirmation can
be sought from the debtors directly confirming their balance due. The replies to the
confirmation can be then matched with the records maintained by the client. Any
discrepancies so revealed, can be investigated and checked in detail for possibility
of any risk of material misstatement. Auditor selects few debtors’ balances and ask
the client to prepare the confirmations properly addressed to the debtors. Auditor
maintains strict control over this process.
318
COMPANY AUDIT
Coverage of the topic based upon Chapter X of Companies Act, 2013 read with Company
(Audit and Auditors) Rules, 2014
List of Sections
Sec. No Particulars
139 Appointment of Auditor etc
140 Removal and Resignation etc
141 Eligibility, Qualification and Disqualification
142 Remuneration
143 Rights and Duties of Auditor
144 Auditor not to render certain services
145 Duty to Sign Audit report
146 Right and Duty to attend General Meeting
147 Punishments
148 Cost Audit
Our Order of Discussion
Sec. No Particulars
1 Eligibility and Qualification
2 Disqualification
3 Appointment of Auditor
3.1 Government Company
3.2 Non Government Company
3.3 Casual Vacancy
4 Remuneration of Auditor
319
5 Removal of Auditor
5.1 Before Expiry of the term
5.2 Appointment of an auditor other than retiring auditor
5.3 By NCLT
6 Rights and Duties
6.1 Rights of auditor
6.2 Duties of Auditor
7 Penalties of Auditor
8 Branch Audit
9 CARO 2020
10 Cost Audit
320
Content Discussion:
1. Eligibility and Qualification- Sec 141 (1) and (2)
Section Reference Particulars

Sec 141(1) A person shall be eligible for appointment as an auditor of a
company only if
he is a chartered accountant:
Provided that a firm whereof majority of partners practising in India
are qualified for appointment as aforesaid may be appointed by its
firm name to be auditor of a company.
Sec 141(2) Where a firm including a limited liability partnership is appointed
as an auditor of a company, only the partners who are chartered
accountants shall be authorised to act and sign on behalf of the
firm
321
2. Disqualification- Section 141(3)

The following persons shall not be eligible for appointment as an auditor of a
company, namely:
Section Particulars
Reference
Sec 141(3)(a) a body corporate other than a limited liability partnership registered under
the Limited Liability Partnership Act, 2008
Discussion
1 Although LLP is a separate legal entity but as discussed in Sec 141(1)
and (2), it will be considered as a firm eligible for appointment.
Sec 141(3)(b) an officer or employee of the company
Discussion
1 officer” includes any director, manager or key managerial personnel
or any
person in accordance with whose directions or instructions the Board
of Directors or
any one or more of the directors is or are accustomed to act
2 If an individual is disqualified then his partners are also disqualified
from auditing such a company
3 IF a CA in Practice is a senior employee in a company then can he be
appointed as an auditor of the holding company?’
There are various situations which are not covered in the disqualifications
prescribed above. However requirement of independence is pre-requisite
in audit and hence even though a person may not be disqualified under
companies act, 2013 however he needs to evaluate his independence
before accepting the assignment because it is not only important to be
independent but it is also important to appear as independent as per
the guidance note given by The ICAI on Independence.
Sec 141(3) (c) a person who is a partner, or who is in the employment, of an officer or
employee of the company
Discussion
322
1 This sub-section disqualifies the below mentioned persons from being

appointed as auditor of a company :
(i) partner of an officer of the company;
(ii) employee of an officer of the company;
(iii) partner of an employee of the company;
(iv) employee of an employee of the company
Sec 141(3)(d) a person who, or his relative or partner:
Sec 141(3)(d) is holding any security of or interest in the company or its subsidiary, or
(i) 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 one thousand rupees or such sum as may be
prescribed; (rupees one lakh face value)
Discussion
1 The value of shares of ` 1,00,000 that can be hold by relative is the
face value not the market value
2 The limit of ` 1,00,000 would be applicable where the securities are
held by the relative of an auditor and not where the securities are
held by an auditor himself or his partner. In case of an auditor or his
partner, securities of even small value shall be a disqualification
3 Grace period of 60 days for corrective action shall apply only in respect
of securities held by relatives. This would not apply to auditor or his
partner
4 Limit of ` 1,00,000 and grace period of 60 days would be applicable
where securities are held in the company only.
5 It may also be noted that the condition of rupees one lakh shall,
wherever relevant, be also applicable in the case of a company not
having share capital or other securities
Sec 141(3)(d) is indebted to the company, or its subsidiary, or its holding or associate
(ii) company or a subsidiary of such holding company, in excess of such amount
as may be prescribed (rupees five lakh)
Discussion
1 As per the Guidance note issued by The ICAI, audit fees received on
progressive basis i.e. after beginning the engagement is not treated as
an advance of the fees and hence there is no indebtedness involved.
{DIRECT INDEBTEDNESS}
323
Sec 141(3)(d) has given a guarantee or provided any security in connection with the
(iii) indebtedness of any third person to the company, or its subsidiary, or its
holding or associate company or a subsidiary of such holding company, for
such amount as may be prescribed; (rupees one lakh)
Discussion
1 This provision is also called as INDIRECT INDEBTEDNESS.
Sec 141(3)(e) a person or a firm who, whether directly or indirectly, has business relationship
with the company, or its subsidiary, or its holding or associate company or
subsidiary of such holding company or associate company of such nature as
may be prescribed
Discussion
1 Business Relationship means any relationship apart from statutory
audit entered for commercial purpose EXCEPT FOR-
- Commercial transactions which are in the nature of professional
services permitted to be rendered by an auditor or audit firm
under the Act and the Chartered Accountants Act, 1949 (unless
such services are prohibited u/s 144 of the act).
- commercial transactions which are in the ordinary course of
business of the company at arm’s length price - like sale of
products or services to the auditor, as customer, in the ordinary
course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other
similar businesses.
Sec 141(3)(f) a person whose relative is a director or is in the employment of the company
as a director or key managerial personnel.
Sec 141(3)(g) a person who is in full time employment elsewhere or a person or a partner
of a firm holding appointment as its auditor, if such persons or partner is
at the date of such appointment or reappointment holding appointment as
auditor of more than twenty companies
Discussion
1 It should not exceed 20 companies per individual.
2 Following Companies are included in this limit:
• Public Companies
• Private Limited Companies having Paid up capital of Rs.100 crore
or more as on the date of appointment
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3 Person or Partner who is in whole time employment elsewhere cannot

conduct audit of companies.
4 This Means that the Limit does not include following companies:
• One Person Company
• Small Company
• Dormant Company
• Private Limited companies having Paid up Capital of Less than Rs.100
crore as on the date of appointment
5 The above exemption is not available if the company has not filed
its annual statements as required by Section 137 and Section 92 of
Companies Act, 2013.
Sec 141(3)(h) a person who has been convicted by a court of an offence involving fraud
and a period of ten years has not elapsed from the date of such conviction
Discussion
1 If person or partner is convicted by court for offence involving fraud
then we need to check the eligibility of the membership under CA Act,
1949
Sec 141(3)(i) a person who, directly or indirectly, renders any service referred to in
section 144 to the company or its holding company or its subsidiary
company. Explanation.—For the purposes of this clause, the term
"directly or indirectly" shall have the meaning assigned to it in the
Explanation to section 144.’.
Discussion
Sec 144- auditor not to render these services to the company, its holding and subsidiary
company.
1 List of Services which are not to be rendered
(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.
325
2 Relative of person or partner is also not allowed to render the above

services
3 Person or Partner shall not provide such services through any other
entity, whatsoever, in which such person or partner has significant
influence or control- e.g. Firms working under common brand name,
firms having common partners etc
Note:
Sec 141(4) 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.
Section 2(77) defines the term “relative” to mean anyone who is related to another
as:
(i) members of a Hindu Undivided Family;
(ii) husband and wife; or
(iii) one person is related to the other in such manner as may be
prescribed
Rule 4 of the Companies (Specification of Definitions Details) Rules,
2014 prescribes the list of relatives as per Section 2(77).;
→ Father (including step- father)
→ Mother (including step-mother)
→ Son (including step- son)
→ Son’s wife
→ Daughter
→ Daughter’s husband
→ Brother (including step- brother),
→ Sister (including step- sister).
3) Appointment of Auditor- Sec 139

Sec Content Given in
139(1) Discussion 3.2
139 (3) Discussion 3.2
326

Common Questions for appointment

1) Who will appoint?
2) How and when the auditors will be appointed?
3) What is the term of auditors?
4) Whether same auditors can be reappointed after expiry of their term?
5) Appointment in case of auditor’s death, resignation, disqualification, unsound mind
etc. i.e Casual Vacancy (3.3).
327
3.1 Appointment of Auditor- Government Companies

Sec Particulars
139(5) Notwithstanding anything contained in sub-section (1), in the case of a
Government
company or any other company owned or controlled, directly or
indirectly, 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, the Comptroller and Auditor-General of India
shall,
in respect of a financial year,
appoint an auditor duly qualified to be appointed as an auditor of
companies under this Act, within a period of one hundred and eighty
days from the commencement of the financial year,
who shall hold office till the conclusion of the annual general meeting.
139(7) Notwithstanding anything contained in sub-section (1) or sub-section
(5), in the case of a Government company or any other company owned
or controlled, directly or indirectly, 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, the first auditor shall be
appointed by the Comptroller and Auditor-General of India
within sixty days from the date of registration of the company and
in case the Comptroller and Auditor-General of India does not appoint
such auditor within the said period, the Board of Directors of the company
shall appoint such auditor within the next thirty days; and
in the case of failure of the Board to appoint such auditor within the next
thirty days,
it shall inform the members of the company who shall appoint such
auditor within the sixty days at an extraordinary general meeting,
who shall hold office till the conclusion of the first annual general
meeting.
328
SECTION 177 AUDIT COMMITTEE

A. Applicability
It is important to know that in addition to listed public companies,
following classes of companies shall constitute an Audit Committee -
(i) all public companies with a paid up capital of ten crore rupees or
more;
(ii) all public companies having turnover of one hundred crore rupees
or more;
(iii) all public companies, having in aggregate, outstanding loans or
borrowings or debentures or deposits exceeding fifty crore rupees
or more
329
B. Composition
It is to be remembered that audit committee consists of directors of the
company. It
consists of minimum 3 directors with independent directors forming
majority.
C. Functions
(i) the recommendation for appointment, remuneration and terms of
appointment of auditors of the company;]
(ii) review and monitor the auditor’s independence and performance,
and effectiveness of audit process;
(iii) examination of the financial statement and the auditors’ report
thereon;
(iv) approval or any subsequent modification of transactions of the
company with related parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is
necessary;
(vii) evaluation of internal financial controls and risk management
systems;
(viii) monitoring the end use of funds raised through public offers and
related matters.
3.2 Appointment of Auditor- Other than Government Companies
Sec 139- Appointment of Auditor

(1) Subject to the provisions of this Chapter, every company shall, at the first annual
general meeting, appoint an individual or a firm as an auditor who shall hold
office from the conclusion of that meeting till the conclusion of its sixth annual
general meeting and thereafter till the conclusion of every sixth meeting and the
manner and procedure of selection of auditors by the members of the company
at such meeting shall be such as may be prescribed:
330
Provided further that before such appointment is made, the written consent
of the auditor to such appointment, and a certificate from him or it that the
appointment, if made, shall be in accordance with the conditions as may be
prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies
the criteria provided in section 141:
(As per Rule 4 of CAAR, 2014:
The auditor appointed submit a certificate that –
(a) the individual or the firm, as the case may be, is eligible for appointment
and is not disqualified for appointment under the Act, the Chartered
Accountants Act, 1949 and the rules or regulations made thereunder;
(b) the proposed appointment is as per the term provided under the Act;
(c) the proposed appointment is within the limits laid down by or under the
authority of the Act;
(d) the list of proceedings against the auditor or audit firm or any partner of
the audit firm pending with respect to professional matters of conduct, as
disclosed in the certificate, is true and correct.)
Provided also that the company shall inform the auditor concerned of his or its
appointment, and also file a notice (FORM ADT-1) of such appointment with the
Registrar within fifteen days of the meeting in which the auditor is appointed.
Explanation.—For the purposes of this Chapter, “appointment” includes
reappointment.
(6) Notwithstanding anything contained in sub-section (1), the first auditor of a
company, other than a Government company, shall be appointed by the Board
of Directors within thirty days from the date of registration of the company and
in the case of failure of the Board to appoint such auditor, it shall inform the
members of the company, who shall within ninety days at an extraordinary
general meeting appoint such auditor and such auditor shall hold office till the
conclusion of the first annual general meeting.
(11) 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.
331
332
3.2. (i) Recommendation process

Rule 3 of CAAR, 2014
Manner and procedure of selection and appointment of auditors.-
1) In case of a company that is required to constitute an Audit Committee under section
177, the committee, and, in cases where such a committee is not required to be
constituted, the Board, shall take into consideration the qualifications and experience
of the individual or the firm proposed to be considered for appointment as auditor
and whether such qualifications and experience are commensurate with the size
and requirements of the company:
Provided that while considering the appointment, the Audit Committee or the Board,
as the case may be, shall have regard to any order or pending proceeding relating
to professional matters of conduct against the proposed auditor before the Institute of
Chartered Accountants of India or any competent authority or any Court.
(2) The Audit Committee or the Board, as the case may be, may call for such other
information from the proposed auditor as it may deem fit.
(3) Subject to the provisions of sub-rule (1), where a company is required to constitute
the Audit Committee, the committee shall recommend the name of an individual
or a firm as auditor to the Board for consideration and in other cases, the Board
shall consider and recommend an individual or a firm as auditor to the members
in the annual general meeting for appointment.
4) If the Board agrees with the recommendation of the Audit Committee, it shall
further recommend the appointment of an individual or a firm as auditor to
the members in the annual general meeting. (5) If the Board disagrees with the
recommendation of the Audit Committee, it shall refer back the recommendation
to the committee for reconsideration citing reasons for such disagreement.
(6) If the Audit Committee, after considering the reasons given by the Board, decides
not to reconsider its original recommendation, the Board shall record reasons
for its disagreement with the committee and send its own recommendation for
consideration of the members in the annual general meeting; and if the Board
agrees with the recommendations of the Audit Committee, it shall place the matter
for consideration by members in the annual general meeting.
(7) The auditor appointed in the annual general meeting shall hold office from the
conclusion of that meeting till the conclusion of the sixth annual general meeting,
with the meeting wherein such appointment has been made being counted as the
first meeting
333
334
3.2. (ii) What if proposed auditor is not appointed at the AGM? Can retiring auditor be
reappointed?- Sec 139(9) and (10)
(9) Subject to the provisions of sub-section (1) and the rules made thereunder, a
retiring auditor may be re-appointed at an annual general meeting, if—
(a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to be
re-appointed; and
(c) a special resolution has not been passed at that meeting appointing some
other auditor or providing expressly that he shall not be re-appointed.
(10) Where at any annual general meeting, no auditor is appointed or re-appointed,
the existing auditor shall continue to be the auditor of the company.
Possibilities
S.No Situation Solution
1 Members appoint the Company Needs to file FORM ADT-1 within 15
proposed auditor days of appointment.
2 Members don’t appoint the IF not auditor is appointed at the AGM then
proposed auditor retiring auditor is deemed as reappointed u/s
3 Proposed auditor withdraws 139(10) of Companies Act, 2013.
his consent or death before IF retiring auditor is not appointed due to any
appointment and similar reason as described in Sec 139(9) then it leads
contingencies occur to casual vacancy u/s 139(8) of Companies Act,
2013.
4 Members don’t want proposed They need to exercise their rights prescribed under
auditor to be appointed section 140(4) i.e. provisions for appointment of
and existing auditor to be an auditor other than retiring auditor.
reappointed
3.2. (iii) Rotation of auditor- Sec 139 (2), (3) & (4)
(2) No listed company or a company belonging to such class or classes of companies
as may be prescribed, shall appoint or re-appoint—
(a) an individual as auditor for more than one term of five consecutive years;
and
335
(b) an audit firm as auditor for more than two terms of five consecutive years:
Provided that—
(i) an individual auditor who has completed his term under clause (a) shall
not be eligible for re-appointment as auditor in the same company
for five years from the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not
be eligible for re-appointment as auditor in the same company for
five years from the completion of such term:
Provided further that as on the date of appointment no audit firm having a
common partner or partners to the other audit firm, whose tenure has expired
in a company immediately preceding the financial year, shall be appointed as
auditor of the same company for a period of five years:
Provided also that every company, existing on or before the commencement of
this Act which is required to comply with provisions of this sub-section, shall
comply with the requirements of this sub-section within three years from the
date of commencement of this Act:
Provided also that, nothing contained in this sub-section shall prejudice the
right of the company to remove an auditor or the right of the auditor to resign
from such office of the company.
(3) Subject to the provisions of this Act, members of a company may resolve to
provide that:
(a) in the audit firm appointed by it, the auditing partner and his team shall
be rotated at such intervals as may be resolved by members; or
(b) the audit shall be conducted by more than one auditor.
(4) The Central Government may, by rules, prescribe the manner in which the
companies shall rotate their auditors in pursuance of sub-section (2).
Explanation.—For the purposes of this Chapter, the word “firm” shall include a
limited liability partnership incorporated under the Limited Liability Partnership
Act, 2008.
336
Applicability of Rotation of auditor as per Rule 5 of CAAR, 2014

For the purposes of sub-section (2) of section 139, the class of companies shall mean the
following classes of companies excluding one person companies and small companies:-
(a) all unlisted public companies having paid up share capital of rupees ten crore or
more;
(b) all private limited companies having paid up share capital of rupees fifty crore or
more;
(c) all companies having paid up share capital of below threshold limit mentioned in
(a) and (b) above, but having public borrowings from financial institutions, banks or
public deposits of rupees fifty crores or more
Manner of Rotation as per Rule 6 of CAAR, 2014:
→ For the purpose of the rotation of auditors-
(i) in case of an auditor (whether an individual or audit firm), the period for which the
individual or the firm has held office as auditor prior to the commencement of the
Act shall be taken into account for calculating the period of five consecutive years
or ten consecutive years, as the case may be;
(ii) the incoming auditor or audit firm shall not be eligible if such auditor or audit firm
is associated with the outgoing auditor or audit firm under the same network of
audit firms.
→ Explanation. I - For the purposes of these rules the term “same network” includes the
firms operating or functioning, hitherto or in future, under the same brand name,
trade name or common control.
→ Explanation. II - For the purpose of rotation of auditors,-
(a) a break in the term for a continuous period of five years shall be considered as
fulfilling the requirement of rotation;
(b) 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.
→ Where a company has appointed two or more individuals or firms or a combination
thereof as joint auditors, the company may follow the rotation of auditors in such
a manner that both or all of the joint auditors, as the case may be, do not complete
their term in the same year.
337
338
3.3 Casual Vacancy
Sec 139 (8)

Any casual vacancy in the office of an auditor shall—
(i) in the case of a company other than a company whose accounts are subject to
audit by an auditor appointed by the Comptroller and Auditor-General of India,
be filled by the Board of Directors within thirty days, but if such casual vacancy
is as a result of the resignation of an auditor, such appointment shall also be
approved by the company at a general meeting convened within three months of
the recommendation of the Board and he shall hold the office till the conclusion
of the next annual general meeting;
(ii) in the case of a company whose accounts are subject to audit by an auditor
appointed by the Comptroller and Auditor-General of India, be filled by the
Comptroller and Auditor-General of India within thirty days.
Provided that in case the Comptroller and Auditor-General of India does not fill the
vacancy within the said period, the Board of Directors shall fill the vacancy within next
thirty days.
As per section 140(2) the auditor who has resigned from the company shall file within
a period of 30 days from the date of resignation, a statement in the prescribed Form
ADT–3 (as per Rule 8 of CAAR) with the company and the Registrar, and in case of
Government company, the auditor shall also file such statement with the Comptroller
and Auditor-General of India, indicating the reasons and other facts as may be relevant
with regard to his resignation.
As per section 140(3) if auditor fails to file ADT-3 within stipulated time then he will be
liable to pay penalty of INR 50,000 or amount equal to his remuneration, whichever is
less.
In case of continuing failure, additional penalty of INR 500 for each day during which
defaults continues will be applicable. Such penalty will not exceed INR 2,00,000.
339
Auditor appointed under Casual Vacancy shall continue up to conclusion of Next AGM.
4. Remuneration of Auditor
Section Particulars
Sec 142(1) The remuneration of the auditor of a company shall be fixed in its
general
meeting or in such manner as may be determined therein:
Provided that the Board may fix remuneration of the first auditor
appointed by it.
Sec 142(2) The remuneration under sub-section (1) shall, in addition to the fee
payable to an
auditor, include the expenses, if any, incurred by the auditor in
connection with the audit of the company and any facility extended
to him but does not include any remuneration paid to him for any
other service rendered by him at the request of the company
340
Auditor appointed under Casual Vacancy shall continue up to conclusion of Next AGM.
4. Remuneration of Auditor
Section Particulars
Sec 142(1) The remuneration of the auditor of a company shall be fixed in its
general
meeting or in such manner as may be determined therein:
Provided that the Board may fix remuneration of the first auditor
appointed by it.
Sec 142(2) The remuneration under sub-section (1) shall, in addition to the fee
payable to an
auditor, include the expenses, if any, incurred by the auditor in
connection with the audit of the company and any facility extended
to him but does not include any remuneration paid to him for any
other service rendered by him at the request of the company
5. Removal of Auditor
Section Particulars
Sec 140(1) Removal of auditor before expiry of his term
The auditor appointed under section 139 may be removed from his
office
before the expiry of his term only by a special resolution of the company,
after obtaining the
previous approval of the Central Government in that behalf in the
prescribed manner:
Provided that before taking any action under this sub-section, the
auditor concerned shall be given a reasonable opportunity of being
heard.
Rule 7 of CAAR, 2014. Removal of the auditor before expiry of his term. —
(1) The application to the Central Government for removal of auditor shall be made
in Form ADT-2 and shall be accompanied with fees as provided for this purpose
under the Companies (Registration Offices and Fees) Rules, 2014.
(2) The application shall be made to the Central Government within thirty days of the
resolution passed by the Board.
(3) The company shall hold the general meeting within sixty days of receipt of approval
of the Central Government for passing the special resolution.
341
Sec 140(4) Appointment of an auditor other than retiring auditor

(i) Special notice shall be required for a resolution at an annual general
meeting appointing as auditor a person other than a retiring
auditor, or providing expressly that a retiring auditor shall not be
re-appointed, except where the retiring auditor has completed a
consecutive tenure of five years or, as the case may be, ten years,
as provided under sub-section (2) of section 139.
(ii) On receipt of notice of such a resolution, the company shall
forthwith send a copy thereof to the retiring auditor.
(iii) Where notice is given of such a resolution and the retiring
auditor makes with respect thereto representation in writing to
the company (not exceeding a reasonable length) and requests
its notification to members of the company, the company shall,
unless the representation is received by it too late for it to do so,—
(a) in any notice of the resolution given to members of the company,
state the fact of the representation having been made; and
(b) send a copy of the representation to every member of the
company to whom notice of the meeting is sent, whether
before or after the receipt of the representation by the
company, and 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 (without prejudice to his
right to be heard orally) require that the representation shall
be read out at the meeting.
Provided that if a copy of representation is not sent as aforesaid, a copy
thereof shall be filed with the Registrar:
Provided further that if the Tribunal is satisfied on an application either
of the company or of any other aggrieved person that the rights
conferred by this sub-section are being abused by the auditor, then,
the copy of the representation may not be sent and the representation
need not be read out at the meeting.
Special notice u/s 115 of Companies Act, 2013 can be given by-
It can be sent by Member or Members holding at least 1% of voting
power or Shares with paid up value of at least Rs. 5 Lacs. It must be
sent at least 14 days before the date of meeting.
342
Sec 140(5) Removal of auditor by National Company Law Tribunal

Without prejudice to any action under the provisions of this Act or any
other law for the time being in force, the Tribunal either suo moto or
on an application made to it by the Central Government or by any
person concerned, if it is satisfied that the auditor of a company has,
whether directly or indirectly, acted in a fraudulent manner or abetted
or colluded in any fraud by, or in relation to, the company or its directors
or officers, it may, by order, direct the company to change its auditors:
Provided that if the application is made by the Central Government and
the Tribunal is satisfied that any change of the auditor is required, it
shall within fifteen days of receipt of such application, make an order
that he shall not function as an auditor and the Central Government
may appoint another auditor in his place:
Provided further that an auditor, whether individual or firm, against
whom final order has been passed by the Tribunal under this section
shall not be eligible to be appointed as an auditor of any company for
a period of five years from the date of passing of the order and the
auditor shall also be liable for action under section 447.
Explanation I.—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.
Explanation II.—For the purposes of this Chapter the word “auditor”
includes a firm of auditors.
(i) Removal of Auditor before expiry of his term
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(ii) Appointment of an Auditor other than retiring auditor- Sec 140(4)
6.1 Rights of Auditor
Section Particulars
Sec 143(1) Right to Access Books of Accounts, etc
Section 143(1) of the Act provides that the auditor of a company, at all
times, shall have a right of access to the books of account and vouchers
of the company, whether kept at the registered office of the company
or at any other place and he is entitled to require from the officers
of the company such information and explanation as he may consider
necessary for the performance of his duties as auditor.
The right of access is not limited to those books and records maintained
at the registered or head office so that in the case of a company with
branches, the right also extends to the branch records, if the auditor
considers it necessary to have access thereto as per section143(8).
Further, the auditor of a company which is a holding company shall
also have the right of access to the records of all its subsidiaries and
associates in so far as it relates to the consolidation of its financial
statements with that of its subsidiaries and associates
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Sec 143(2) Right to Report to the members of the company

The auditor shall make a report to the members of the company on the
accounts examined by him and on every financial statements which are
required by or under this Act to be laid before the company in general
meeting and the report shall after taking into account the provisions
of this Act, the accounting and auditing standards and matters which
are required to be included in the audit report under the provisions of
this Act or any rules made there under or under any order made under
this section and to the best of his information and knowledge, the said
accounts, financial statements give a true and fair view of the state
of the company’s affairs as at the end of its financial year and profit
or loss and cash flow for the year and such other matters as may be
prescribed.
Sec 146 Right to attend General Meetings
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); also to receive all the notices and
other communications relating to the general meetings, which members
are entitled to receive and to be heard at any general meeting in any
part of the business of the meeting which concerns them as auditors.
According to the section 146:“all notices of, and other communications
relating to, any general meeting shall be forwarded to the auditor
of the company, and the auditor shall, unless otherwise exempted
by the company, attend either by himself or through his authorised
representative, who shall also be qualified to be an auditor, any general
meeting and shall have right to be heard at such meeting on any part
of the business which concerns him as the auditor.”
Thus, it is right of the auditor to receive notices and other communications
relating to any general meeting and to be heard at such meeting, relating to
the matter of his concern, however, it is duty of the auditor to attend the same
or through his authorised representative unless otherwise exempted
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Indian Right to Lien i.e. Right to retain Books of Accounts and other documents
Contract Act In terms of the general principles of law, any person having the lawful
possession of somebody else’s property, on which he has worked, may
retain the property for non-payment of his dues on account of the work
done on the property. On this premise, auditor can exercise lien on books
and documents placed at his possession by the client for non-payment
of fees, for work done on the books and documents.
HOWEVER RIGHT TO RETAIN BOOKS OF ACCOUNTS HAS BEEN RESTRICTED
BY ETHICAL STANDARD BOARD.
6.2 Duties of Auditor
Section Particulars
Sec 143(1) Duty to inquire upon Certain Matters:
It is the duty of auditor to inquire into the following matters:
Clause a whether loans and advances made by the company on the basis of
security have been properly secured and whether the terms on which
they have been made are prejudicial to the interests of the company or
its members
Clause b whether transactions of the company which are represented merely by
book entries are prejudicial to the interests of the company
Clause c where the company not being an investment company or a banking
company, whether so much of the assets of the company as consist of
shares, debentures and other securities have been sold at a price less
than that at which they were purchased by the company
Clause d whether loans and advances made by the company have been shown
as deposits
Clause e whether personal expenses have been charged to revenue account
Clause f where it is stated in the books and documents of the company that any
shares have been allotted for cash, whether cash has actually been
received in respect of such allotment, and if no cash has actually been
so received, whether the position as stated in the account books and the
balance sheet is correct, regular and not misleading.
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“The auditor is not required to report on the matters specified in sub-section (1) unless
he has any special comments to make on any of the items referred to therein. If he
is satisfied as a result of the inquiries, he has no further duty to report that he is so
satisfied. In such a case, the content of the Auditor’s Report will remain exactly the
same as the auditor has to inquire and apply his mind to the information elicited by
the enquiry, in deciding whether or not any reference needs to be made in his report. In
our opinion, it is in this light that the auditor has to consider his duties under section
143(1).”
Therefore, it could be said that the auditor should make a report to the members in case he
finds answer to any of these matters in adverse.
Sec 143(3) Duty to report upon certain matters.
As per sub-section (3) of section 143, the auditor’s report shall also
state:
Clause 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 and if not, the details thereof and the effect of such
information on the financial statements
Clause 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 adequate for the purposes of his audit
have been received from branches not visited by him
Clause c whether the report on the accounts of any branch office of the company
audited under subsection (8) by a person other than the company’s
auditors has been sent to him under the proviso to that sub-section and
the manner in which he has dealt with it in preparing his report
Clause d whether the company’s balance sheet and profit and loss account dealt
with in the report are in agreement with the books of account and
returns
Clause e whether, in his opinion, the financial statements comply with the
accounting standards
Clause f the observations or comments of the auditors on financial transactions
or matters which have any adverse effect on the functioning of the
company
Clause g whether any director is disqualified from being appointed as a director
under sub-section (2) of the section 164
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Clause h any qualification, reservation or adverse remark relating to the

maintenance of accounts and other matters connected therewith
Clause i whether the company has adequate internal financial controls with
reference to financial statements" in place and the operating effectiveness
of such controls
(Note: Clause (i) of Sub-Section (3) of Section143 shall not apply to
a private company:-(i) which is a one person company or a small
company; or (ii) which has turnover less than rupees fifty crores as per
latest audited financial statement and which has aggregate borrowings
from banks or financial institutions or anybody corporate at any point
of time during the financial year less than rupees twenty five crore)
Clause 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:-
(i) whether the company has disclosed the impact, if any, of pending
litigations on its financial position in its financial statement
(ii) 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
(iii) whether there has been any delay in transferring amounts, required to
be transferred, to the Investor Education and Protection Fund by the
company
(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,
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;
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(2) 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 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 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; and
(3) 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.
(v) Whether the dividend declared or paid during the year by the company
is in compliance with section 123 of the Companies Act, 2013
Sec 143(4) Duty to state reasons for negative remarks in audit report
As per sub-section (4) of section 143, where any of the matters required
to be included in the audit report is answered in the negative or with a
qualification, the report shall state the reasons there for
Sec 143(9) Duty to Comply with Auditing Standards
Every auditor shall comply with the auditing standards
Sec 143(10) 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.
349
Sec 143(11) Duty to report upon any other matter prescribed by Central Government:
The Central Government may, in consultation with the National Financial
Reporting Authority (NFRA), by general or special order, direct, in respect
of such class or description of companies, as may be specified in the
order, that the auditor's report shall also include a statement on such
matters as may be specified therein.
Sec 143(12) Duty to report fraud to Central Government:
if an auditor of a company in the course of the performance of his duties
as auditor, has reason to believe that an offence of fraud 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.
Rule 13 of CAAR, 2014
1) if an auditor of a company, in the course of the performance of his duties
as statutory auditor, has reason to believe that an offence of fraud,
which involves or is expected to involve individually an amount of ` 1
crore or above, is being or has been committed against the company
by its officers or employees, the auditor shall report the matter to the
Central Government.
2 The manner of reporting the matter to the Central Government is as follows:
(a) the auditor shall report the matter to the Board or the Audit Committee,
as the case may be, immediately but not later than 2 days of his
knowledge of the fraud, seeking their reply or observations within
45 days;
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(b) on receipt of such reply or observations, the auditor shall forward

his report and the reply or observations of the Board or the Audit
Committee along with his comments (on such reply or observations
of the Board or the Audit Committee) to the Central Government
within 15 days from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the
Board or the Audit Committee within the stipulated period of 45
days, he shall forward his report to the Central Government along
with a note containing the details of his report that was earlier
forwarded to the Board or the Audit Committee for which he has
not received any reply or observations
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs
in a sealed cover by Registered Post with Acknowledgement Due or
by Speed Post followed by an e-mail in confirmation of the same
(e) the report shall be on the letter-head of the auditor containing
postal address, e-mail address and contact telephone number or
mobile number and be signed by the auditor with his seal and shall
indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form
ADT-4
3  in case of a fraud involving lesser than the amount specified in sub-rule
(1) [i.e. less than ` 1 crore], the auditor shall report the matter to
Audit Committee constituted under section 177 or to the Board
immediately but not later than 2 days of his knowledge of the
fraud and he shall report the matter specifying the following:
a) Nature of Fraud with description.
b) Approximate amount involved.
c) Parties involved.
 The company is required to disclose in the Board’s Report the
following details of each of the fraud reported to the Audit
Committee or the Board under sub-rule (3) during the year:
a) Nature of Fraud with description
b) Approximate amount involved
c) Parties involved, if remedial action not taken
d) Remedial actions taken
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Section 143 Auditor not liable

(13) 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 if it is done in good faith.
Section Provisions applicable to others
143(14) The provisions of this section shall mutatis mutandis apply to—
(a) the cost accountant in practice conducting cost audit under section
148; or
(b) the company secretary in practice conducting secretarial audit
under section 204.
Section Punishment for non-compliance of Sec.143(12)
143(15) In case of listed company – 5 lacs
In case of other company – 1 lacs
Sec 145 Duty to Sign Audit Report
the person appointed as an auditor of the company shall sign the
auditor's report or sign or certify any other document of the company,
in accordance with the provisions of sub-section (2) of section 141 and
the qualifications, 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.
7. Penalties u/s 147 of Companies Act, 2013
Section Particulars
Sec 147(1) 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 twenty-five thousand rupees but which may extend to five
lakh rupees and every officer of the company who is in default shall be
punishable with fine which shall not be less than ten thousand rupees
but which may extend to one lakh rupees.
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Sec 147(2) 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 which shall not be less than twenty five thousand
rupees but which may extend to five lakh rupees or four times the
remuneration of the auditor, whichever is less.
It may be noted that if an auditor has contravened such provisions
knowingly or will fully with the intention to deceive the company or its
shareholders or creditors or tax authorities,
he shall be punishable with imprisonment for a term which may extend
to one year and with fine which shall not be less than fifty thousand
rupees but which may extend to twenty-five lakh rupees or eight times
the remuneration of the auditor, which every is less.
Sec 147(3) Where an auditor has been convicted under sub-section (2), he shall be
liable to:-
(i) refund the remuneration received by him to the company;
(ii) And pay for damages to the company statutory bodies or authorities
or to members or the creditors of the Company for loss arising out
of incorrect or misleading statements of particulars made in his
audit report.
Sec 147(4) The Central Government shall, by notification, specify any statutory
body or authority of an officer for ensuring prompt payment of damages
to the company or the persons under clause (ii) of sub-section (3) and
such body, authority or officer shall after payment of damages the such
company or persons file a report with the Central Government in respect
of making such damages in such manner as may be specified in the said
notification.
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Sec 147(5) 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 criminal as provided in this Act or in any other law for
the time being in force, for such act shall be the partner or partners
concerned of the audit firm and of the firm jointly and severally.
Provided that in case of criminal liability of an audit firm, in respect of
liability other than fine, the concerned partner or partners, who acted
in a fraudulent manner or abetted or, as the case may be, colluded in
any fraud shall only be liable.
8. Branch Audit- Section 143(8)
Section Particulars
Sec 143(8) It prescribes the duties and powers of the company’s auditor with
reference to the audit of the branch and the branch auditor.
Where a company has a branch office, the accounts of that office shall
be audited either by
 the auditor appointed for the company (herein referred to as the
company's auditor) under this Act or
 by any other person qualified for appointment as an auditor of the
company under this Act and appointed as such under section 139,
or
 where the branch office is situated in a country outside India,
the accounts of the branch office shall be audited either by the
company's auditor or
 by 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
The duties and powers of the company’s auditor with reference to the audit
of the branch and the branch auditor, if any, shall be such as may be
prescribed.
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It may be noted that the branch auditor shall prepare a report on the
accounts of the branch examined by him and send it to the auditor of
the company who shall deal with it in his report in such manner as he
considers necessary
Rule 12 of the branch auditor shall submit his report to the company’s auditor
CAAR, 2014 and reporting of fraud by the auditor shall also extend to such branch
auditor to the extent it relates to the concerned branch
SA 600 It makes clear that in certain situations, the statute governing the entity
may confer a right on the principal auditor to visit a component and
examine the books of account and other records of the said component,
if he thinks it necessary to do so. 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
CARO 2020
Section Particulars
1. What is  Additional Reporting Requirement prescribed by Ministry of
CARO 2020 Corporate affairs
 Prescribed Under Section 143(11) by MCA.
 Total Number of Clauses- 21
 Auditor Must comment upon all clauses in cases where CARO 2020
is applicable.
 It is issued as an annexure to the Independent Auditor’s Report
2. It is applicable to all companies including foreign companies except for
Applicability companies given below:
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Companies CARO is NOT APPLICABLE TO:

Excluded a. banking company as defined under Banking Regulation Act, 1949
b. an insurance company as defined under the Insurance Act, 1938
c. a company licensed to operate under section 8 of the Companies
Act, 2013
d. a One person Company as defined under section 2(62) of the
Companies Act, 2013
e. a Small Company as defined under 2(85) of the Companies Act
2013
f. a private limited company, not being a subsidiary or holding
company of a public company, having:
(i) a paid-up capital and reserves and surplus not more than
rupees one crore as on the balance sheet date and
(ii) 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
(iii) Which does not have a total revenue exceeding rupees ten
crores during the financial year as per the financial statements.
Consolidated The Order specifically provides that it shall not apply to the auditor’s
Financial report on consolidated financial statements. except clause (xxi) “whether
Statement there have been any qualifications or adverse remarks by the respective
auditors in the Companies (Auditor's Report) Order (CARO) reports of the
companies incn the consolidated financial statements, if yes, indicate
the details of the companies and the paragraph numbers of the CARO
report containing the qualifications or adverse remarks”.
Branch Audit The Order is also applicable to the audits of branch(es) of a company
since sub-section 8 of section 143 of the Act read with Rule 12 of the
Companies (Audit and Auditors) Rules, 2014 clearly specifies that a
branch auditor has the same duties in respect of audit as the company’s
auditor. It is, therefore, necessary that the report submitted by the
branch auditor contains a statement on all the matters specified in the
Order, as applicable to the company.
Status of the The applicability of the Order would be based on the status of the
Company company as at the balance sheet date for the financial year under audit.
3. Clause Reporting
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Clause (i) PROPERTY, PLANT, EQUIPMENT & INTANGIBLE ASSET

(a) (A) whether the company is maintaining proper records showing
full particulars, including quantitative details and situation of
Property, Plant and Equipment;
(B) whether the company is maintaining proper records showing
full particulars of intangible assets;
(b) whether these Property, Plant and Equipment have been physically
verified by the management at reasonable intervals; whether any
material discrepancies were noticed on such verification and if so,
whether the same have been properly dealt with in the books of
account;
(c) whether the title deeds of all the immovable properties (other
than properties where the company is the lessee and the lease
agreements are duly executed in favour of the lessee) disclosed in
the financial statements are held in the name of the company, if
not, provide the details thereof in the format
below:-
Description Gross Held in Whether promoter, Period held – Reason for not
of property carrying name of director or their indicate range, being held in
value relative or where name of
employee appropriate company*
- - - - - *also indicate
if in dispute
(d) 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, whether the revaluation is based on the valuation
by a Registered Valuer; 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;
(e) whether any proceedings have been initiated or are pending against
the company for holding any benami property under the Benami
Transactions (Prohibition) Act, 1988 (45 of 1988) and rules made
thereunder, if so, whether the company has appropriately disclosed
the details in its financial statements;
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Clause (ii) INVERNTORY

(a) whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether, in the opinion
of the auditor, the coverage and procedure of such verification by
the management is appropriate; 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) 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; 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;
Clause (iii) Investments, Guarantee,Security & loans granted by co
whether during the year the company has made investments in, provided
any guarantee or security or granted any loans or advances in the nature
of loans, secured or unsecured, to companies, firms, Limited Liability
Partnerships or any other parties, if so,-
(a) 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-
(A) 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;
358
(B) 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) 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) 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
receipts are regular;
(d) 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) 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, specify the aggregate amount
of such dues renewed or extended or settled by fresh loans and
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) 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, specify
the aggregate amount, percentage thereof to the total loans
granted, aggregate amount of loans granted to Promoters,
related parties as defined in clause (76) of section 2 of the
Companies Act, 2013;
Clause (iv) Compliance of sec 185 & 186
In respect of loans, investments, guarantees, and security, whether
provisions of sections 185 and 86 of the Companies Act have been
complied with, if not, provide the details thereof;
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Clause (v) PUBLIC DEPOSIT(Including Deemed deposits)

In respect of deposits accepted by the company or amounts which are
deemed to be deposits, whether the directives issued by the Reserve
Bank of India and the provisions of sections 73 to 76 or any other
relevant provisions of the Companies Act and the rules made thereunder,
where applicable, have been complied with, if not, the nature of such
contraventions be stated; if an order has been passed by Company Law
Board or National Company Law Tribunal or Reserve Bank of India or
any court or any other tribunal, whether the same has been complied
with or not;
Clause (vi) Cost records maintained as per sec 148
Whether maintenance of cost records has been specified by the Central
Government under subsection (1) of section 148 of the Companies Act and
whether such accounts and records have been so made and maintained;
Clause (vii) STATUTORY DUES (including GST)
(a) whether the company is regular in depositing undisputed statutory
dues including Goods and Services Tax, provident fund, employees'
state insurance, income-tax, sales-tax, service tax, duty of customs,
duty of excise, value added tax, cess and any other statutory dues
to the appropriate authorities and if not, the extent of the arrears of
outstanding statutory dues as on 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;
(b) where statutory dues referred to in sub-clause (a) have not been
deposited on account of any dispute, then the amounts involved
and the forum where dispute is pending shall be mentioned (a mere
representation to the concerned Department shall not be treated
as a dispute);
Clause (viii) Disclosure of transactions not recorded
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;
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Clause (ix) Default in repayment of loans or other borrowings

(a) whether the company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to any lender, if yes,
the period and the amount of default to be reported as per the format
below:-
Nature of Name of lender* Amount Whether No. of Remarks,
borrowing, not paid principal days if any
including on due or delay or
debt date interest unpaid
securities
*lender wise details
to be provided in case
of defaults to banks,
financial institutions and
Government.
(b) whether the company is a declared wilful defaulter by any bank or

financial institution or other lender;
(c) 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) whether funds raised on short term basis have been utilised for long
term purposes, if yes, the nature and amount to be indicated;
(e) 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) whether the company has raised loans during the year on the pledge
of securities held in its subsidiaries, joint ventures or associate
companies, if so, give details thereof and also report if the company
has defaulted in repayment of such loans raised;
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Clause (x) Money raised by IPO, FPO & preferential allotment/private placement of
shares or convertible debentures
(a) whether moneys raised by way of initial public offer or further public
offer (including debt instruments) during the year were applied for
the purposes for which those are raised, if not, the details together
with delays or default and subsequent rectification, if any, as may
be applicable, be reported;
(b) whether the company has made any preferential allotment or private
placement of shares or convertible debentures (fully, partially
or optionally convertible) during the year and if so, whether the
requirements of section 42 and section 62 of the Companies Act,
2013 have been complied with and the funds raised have been used
for the purposes for which the funds were raised, if not, provide
details in respect of amount involved and nature of non-compliance;
Clause (xi) FRAUD
(a) 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;
(b) 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) whether the auditor has considered whistle-blower complaints, if
any, received during the year by the company;
Clause (xii) NIDHI COMPANY
(a) whether the Nidhi Company has complied with the Net Owned Funds
to Deposits in the ratio of 1: 20 to meet out the liability;
(b) whether the Nidhi Company is maintaining ten per cent. unencumbered
term deposits as specified in the Nidhi Rules, 2014 to meet out the
liability;
(c) whether there has been any default in payment of interest on deposits
or repayment thereof for any period and if so, the details thereof;
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Clause (xiii) RELATED PARTY

whether all transactions with the related parties are in compliance with
sections 177 and 188 of Companies Act where applicable and the details
have been disclosed in the financial statements, etc., as required by the
applicable accounting standards;
Clause (xiv) Internal Audit System
(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;
Clause (xv) NON CASH TRANSACTION
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 have been complied with;
Clause (xvi) SEC 45 IA OF RBI, ACT 1934
(a) whether the company is required to be registered under section
45-IA of the Reserve Bank of India Act, 1934 (2 of 1934) and if so,
whether the registration has been obtained;
(b) 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) whether the company is a Core Investment Company (CIC) as defined
in the regulations made by the Reserve Bank of India, if so, 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;
(d) 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;
Clause (xvii) Cash losses
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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Clause (xviii) Resignation of Statutory Auditor

whether there has been any resignation of the statutory auditors during
the year, if so, whether the auditor has taken into consideration the
issues, objections or concerns raised by the outgoing auditors;
Clause (xix) Capability of Co meeting its liabilities existing at the BS date
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;
Clause (xx) Transfer amount remaining unspent u/s 135(5) to fund specified in Sch VII
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 of the said Act;
Clause (xxi) Reporting on Consolidated Financial Statements
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,
if yes, indicate the details of the companies and the paragraph numbers
of the CARO report containing the qualifications or adverse remarks.
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4. Explanations for Negative remarks or data not available:

(1) Where, in the auditor's report, the answer to any of the questions referred to
in paragraph 3 is unfavourable or qualified, the auditor's report shall also
state the basis for such unfavourable or qualified answer, as the case may
be.
(2) Were the auditor is unable to express any opinion on any specified matter, his
report shall indicate such fact together with the reasons as to why it is not
possible for him to give his opinion on the same.
10. Cost Audit- Sec 148

Section Deals with Particulars
148(1) Cost Records The CG may, by order, in respect of such class of companies
engaged in the production of such goods or providing such
services as may be prescribed to maintain cost records.
• Maintenance of Cost Records: Rule 3 of the Companies
(Cost Records and Audit) Rules, 2014 provides the
classes of companies, engaged in the production of
goods or providing services, having an overall
turnover from all its products and services of 35
crore or more during the immediately preceding
financial year, required to include cost records in
their books of account. These companies include
Foreign Companies defined in sub-section (42) of
section 2 of the Act(The rule excludes the foreign
companies having only liaison offices.), but exclude
a company classified as a Micro enterprise or a
Small enterprise under Micro, Small and Medium
Enterprises Development Act, 2006.
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Sec Cost Audit Rule 4 of the Companies (Cost Records and Audit) Rules,
148(2) 2014 states the provisions related to the applicability of
cost audit depending on the turnover of the company as
follows-
(i) Classes of companies specified under “Regulated
Sectors” are required to get its cost records audited if
-- the overall annual turnover of the company
from all its products and services during the
immediately preceding financial year is 50
crore or more and
-- the aggregate turnover of the individual
product(s) or service(s) for which cost records
are required to be maintained under rule 3 is
25 crore or more.
(ii) Classes of companies specified under “Non-Regulated
Sectors” are required to get its cost records audited
if -
-- the overall annual turnover of the company
from all its products and services during the
immediately preceding financial year is 100
crore or more and
-- the aggregate turnover of the individual
product(s) or service(s) for which cost records
are required to be maintained under rule 3 is
35 crore or more.
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Sec Appointment of The audit under sub-section (2) shall be conducted by a

148(3) Cost Auditor Cost Accountant in practice who shall be appointed by
the Board on such remuneration as may be determined by
the members in such manner as may be prescribed:
Provided that no person appointed under section 139
as an auditor of the company shall be appointed for
conducting the audit of cost records:
Provided further that the auditor conducting the cost
audit shall comply with the cost auditing standards.
Explanation.—For the purposes of this sub-section,
the expression “cost auditing Standards” mean such
standards as are issued by the Institute of Cost and Works
Accountants of India, constituted under the Cost and
Works Accountants Act, 1959, with the approval of the
Central Government.
Sec Cost audit An audit conducted under this section shall be in addition
148(4) clarification to the audit conducted under section 143.
Sec Qualifications The qualifications, disqualifications, rights, duties and
148(5) and obligations applicable to auditors under this Chapter
disqualifications shall, so far as may be applicable, apply to a cost auditor
of cost appointed under this section and it shall be the duty of
the company to give all assistance and facilities to the
cost auditor appointed under this section for auditing the
cost records of the company:
Provided that the report on the audit of cost records shall
be submitted by the cost accountant in practice to the
Board of Directors of the company.
Sec Cost audit report A company shall within thirty days from the date of receipt
148(6) of a copy of the cost audit report prepared in pursuance
of a direction under sub-section (2) furnish the Central
Government with such report along with full information
and explanation on every reservation or qualification
contained therein.
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Sec Right of Central If, after considering the cost audit report referred to
148(7) Government under this section and the information and explanation
furnished by the company under sub-section (6), the
Central Government is of the opinion that any further
information or explanation is necessary, it may call
for such further information and explanation and the
company shall furnish the same within such time as may
be specified by that Government.
Sec Punishment If any default is made in complying with the provisions
148(8) of this section,—
(a) the company and every officer of the company who
is in default shall be punishable in the manner as
provided in sub-section (1) of section 147;
(b) the cost auditor of the company who is in default
shall be punishable in the manner as provided in
sub-sections (2) to (4) of section 147.
Other Provisions 1. As per Rule 5 of the Companies (Cost Records and
In Cost Audit Audit) Rules, 2014, every company under these
rules including all units and branches thereof, shall,
in respect of each of its financial year, is required to
maintain cost records in Form CRA-1.
2. Rule 6 of the Companies (Cost Records and Audit)
Rules, 2014 requires the companies prescribed
under the said Rules to appoint an Auditor within
180 days of the commencement of every financial
year. However, before such appointment is made,
the written consent of the cost auditor to such
appointment and a certificate from him or it shall
be obtained.
3. Every referred company shall inform the cost auditor
concerned of his or its appointment as such and
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
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4. 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.
5. 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.
6. Casual Vacancy in the Office of a 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 central government in Form CRA-2 within
30 days of such appointment of cost auditor.
7. Submission of Cost Audit Report
(i) To the Board of Directors of the Company- The
cost auditor shall submit the cost audit report
along with his reservations or qualifications
or observations or suggestions, if any, in Form
CRA-3.
(ii) To the Central Government- The company shall
within 30 days from the date of receipt of a copy
of the cost audit report prepared (in pursuance
of a direction issued by Central Government)
furnish the Central Government with such report
along with full information and explanation
on every reservation or qualification contained
therein in Form CRA-4 in Extensible Business
Reporting Language (XBRL) format
List of Regulated/Non- Regulated Sectors subject to Cost Records and Audit.

Regulated and Non- Regulated Sectors
 List of Regulated Sectors
1. Telecommunication Services
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2. Generation, transmission distribution and supply of Electricity

3. Petroleum products
4. Drugs and pharmaceuticals
5. Fertilizers
6. Sugar and industrial alcohol
 List of Non Regulated Sectors

1. Machinery used for defence space atomic research
2. Turbo jets and Turbo propellers
3. Arms and ammunition
4. Aeronautical Services
5. Steel and Cement
6. Rubber and allied products
7. Roads and other infrastructure project
8. Ores and mineral products
9. Edible oil
10. Jute and Jute products
Applicability of Cost Audit

The requirement for cost audit under these rules shall not be applicable to a company
(i) Whose revenue from exports, in foreign exchange, exceeds 75% of its total revenue;
or
(ii) Which is operating from a special economic zone.
(iii) Which is engaged in generation of electricity for captive consumption through Captive
Generating Plant.
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CHAPTER 10 COMPANY AUDIT
These answers are only hints. While writing in exam, first explain provision followed by
facts of the case and conclusion
1 Mr. A, a practicing Chartered Accountant, is holding securities of XYZ Ltd. having
face value of ` 900. Whether Mr. A is qualified for appointment as an auditor of
XYZ Ltd.?
Ans Mr. A is Disqualified under section 141(3)(d)(i) of Companies Act, 2013.
Person/Partner not allowed to hold securities in the company and its
subsidiary company, holding company, associate company, subsidiary of
such holding company.
Relative can hold upto Rs. 1 lakh face value in the company
2 Mr. P is a practicing Chartered Accountant and Mr. Q, the relative of Mr. P, is holding
securities of ABC Ltd. having face value of ` 90,000. Whether Mr. P is qualified from
being appointed as an auditor of ABC Ltd.?
Ans Mr. P is not Disqualified under section 141(3)(d)(i) of Companies Act, 2013.
3 M/s BC & Co. is an Audit Firm having partners Mr. B and Mr. C, and Mr. A the
relative of Mr. C, is holding securities of MWF Ltd. having face value of ` 1,01,000.
Whether M/s BC & Co. is qualified from being appointed as an auditor of MWF Ltd.?
Ans M/s BC & Co. is Disqualified under section 141(3)(d)(i) of Companies Act, 2013.
4 M/s RM & Co. is an audit firm having partners CA. R and CA. M. The firm has been
offered the appointment as an auditor of Enn Ltd. for the Financial Year 201617. Mr.
Bee, the relative of CA. R, is holding 5,000 shares (face value of ` 10 each) in Enn
Ltd. having market value of ` 1,50,000. Whether M/s RM & Co. is disqualified to be
appointed as auditors of Enn Ltd?
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Ans M/s RM & Co. is not Disqualified under section 141(3)(d)(i) of Companies Act,
2013.
Relative can hold upto Rs. 1 lakh face value in the company.
5 CA. Poshin is providing the services of investment banking to C Ltd. Later on, he
was also offered to be appointed as an auditor of the company for the current
financial year. Advise.
Ans CA Poshin cannot be appointed as auditor when he is also simultaneously
engaged in providing investment banking service because:
According to Sec 141(3)(i) of Companies act, 2013 person cannot be appointed
as auditor if he is providing consultancy services prescribed in Sec 144 of
Companies Act, 2013 either directly or indirectly to the Company, its holding
Company & Subsidiary Company.
Investment Banking is a service which is prescribed under Section 144.
6 Managing Director of Pigeon Ltd. himself wants to appoint CA. Champ, a practicing
Chartered Accountant, as first auditor of the company
Ans As per Sec 139(6) of Companies Act, 2013 Board of Directors appoint first
auditor in case of non-government Company within 30 days of date of
registration.
Hence, Managing Director itself cannot appoint first auditor.
7 Rano Pvt. Ltd. is a private limited Company, having paid up share capital of
`18 crore but having public borrowing from nationalized banks and financial
institutions of ` 72 crore. Is rotation of auditor applicable
Ans Manner of rotation of auditor will be applicable under Section 139(2) of
Applicability of Rotation
Private limited companies having Paid up Share Capital of Rs.50 Crore or
More
OR
Borrowings from banks and financial institution of Rs. 50 Crore or More as per
immediately preceding financial year
8 Jolly Ltd., a listed company, appointed M/s Polly& Co., a Chartered Accountant
firm, as the statutory auditor in its AGM held at the end of September, 2016 for 11
years.
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Ans Here, the appointment of M/s Polly & Co. is not valid as the appointment can
be made only for one term of five consecutive years and then another one
more term of five consecutive years. It can’t be appointed for two terms in
one AGM only. Further, a cooling period of five years from the completion of
term is required i.e. the firm can’t be re-appointed for further 5 years after
completion of two terms of five consecutive years.
9 XYZ Ltd., a public company having paid up capital of ` 9 crore but having turnover
of ` 150 crore, 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 category. Examine.
Ans Audit Committee is required to be constituted.
Listed Company- Mandatory
Unlisted public Company having
Paid up Share Capital of Rs. 10 crore or More
Turnover Rs. 100 crore or More
Borrowings Rs. 50 crore or More
as per latest audited financial statements
10 ABC & Co.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”,
Chartered Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment
as an Auditor in 4, 6 and 10 Companies respectively. (i) Provide the maximum
number of Audits remaining in the name of “ABC & Co.” (ii) Provide the
maximum number of Audits remaining in the name of individual partner i.e.
Mr. A, Mr. B and Mr. C. (iii) Can ABC & Co. accept the appointment as an
auditor in 60 private companies having paid-up share capital less than ` 100
crore, 2 small companies and 1 dormant company? (iv) Would your answer
be different, if out of those 60 private companies, 45 companies are having
paid-up share capital of ` 110 crore each?
Ans As per Section 141(3)(g) of Companies Act, 2013 an individual cannot hold
appointment as an auditor, at any point of time, of more than 20 companies
excluding companies other than public companies and private limited
companies with paid up share capital of Rs. 100 crore or More as on date of
appointment.
Firm is already holding audit of 20 companies. It can hold audit of maximum
60 companies (3 CA partners * 20 Companies each= 60 Companies).
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Case 1:
ABC & Co. Can accept the appointment as an auditor in 60 private companies
having paid-up share capital less than ` 100 crore, 2 small companies and
1 dormant company.
Case 2:
If out of those 60 private companies, 45 companies are having paid-up share
capital of ` 110 crore each then maximum 40 companies can be accepted
11 The head accountant of a company entered fake invoices of credit purchases in the
books of account aggregate of ` 50 lakh and cleared all the payments to such bogus
creditor. What is your duty as an auditor
Ans 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
the central government as the amount of fraud involved is less than ` 1 crore,
however, reporting under CARO, 2016 is required.
12 Ashu Pvt. Ltd. has fully paid capital and reserves of `50 lakh. During the year,
the company had borrowed `70 lakh each from a bank and a financial institution
independently. It has the turnover of `900 lakh. Comment whether CARO 2016 is
applicable?
Ans In the given case of Ashu Pvt. Ltd., it has paid capital and reserves of `50 lakh
i.e. less than `1 crore, turnover of `9 crore i.e. less than `10 crore. However,
it has maximum outstanding borrowings of `1.40 crore (`70 lakh + `70 lakh)
collectively from bank and financial institution. Therefore, it fails to fulfill
the condition relating to borrowings. Thus, CARO, 2016 shall be applicable to
Ashu Pvt. Ltd. accordingly.
13 The company has dispensed with the practice of taking inventory of their inventories
at the year-end as in their opinion the exercise is redundant, time consuming and
intrusion to normal functioning of the operations. Explain reporting requirement
under CARO, 2016
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Ans Clause (ii) of Para 3 of CARO, 2016, requires the auditor to report whether
physical verification of inventory has been conducted at reasonable intervals
by the management and whether any material discrepancies were noticed
and if so, whether they have been properly dealt with in the books of account.
The physical verification of inventory is the responsibility of the management
of the company which should verify all material items at least once in a year
and more often in appropriate cases. In the given case, the above requirement
of physical verification of inventory by the management has not been taken
place and therefore the auditor should point out the same under CARO, 2016.
He may consider the impact on financial statement and report accordingly
14 An auditor purchased goods worth ` 501,500 on credit from a company being
audited by him. The company allowed him one month’s credit, which it normally
allowed to all known customers. Comment
Ans Disqualified under Sec 141(3)(d)(ii) of Companies Act, 2013.
Even though it is at arms length price but indebtedness cannot exceed Rs. 5
Lakh.
15 Ram and Hanuman Associates, Chartered Accountants in practice have been
appointed as Statutory Auditor of Krishna Ltd. for the accounting year, 2015-2016.
Mr. Hanuman holds 100 equity shares of Shiva Ltd., a subsidiary company of Krishna
Ltd. Discuss
Ans Ram and Hanuman Associates is Disqualified under section 141(3)(d)(i) of
16 Under what circumstances the retiring Auditor cannot be reappointed
Ans As per Sec 139(9) of Companies Act, 2013 retiring auditor cannot be
reappointed if
a) his term has expired under section 139(2) of Companies Act, 2013.
b) he is disqualified under section 141(3) of Companies Act, 2013
c) a specific resolution has been passed in general meeting stating expressly
that retiring auditor cannot be reappointed
d) he is not willing to be reappointed.
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1. Latest and Vibrant Limited is an unlisted public limited company. For the above
mentioned company, it will be required to appoint an internal auditor according
to the provisions of Companies Act, 2013 only when during the preceding financial
year, the paid up share capital of the company would be:
(a) Less than or equal to 50 crore (b) More than or equal to 50 crore
(c) Less than or equal to 100 crore (d) More than or equal to 100 crore
2. Bright and Smart Private Limited will be required, according to the provisions of
Companies Act, 2013 to appoint an internal auditor only if the turnover during the
preceding financial year would be:
(a) Less than or equal to200 crore (b) More than or equal to200 crore.
(c) Less than or equal to150 crore (d) More than or equal to150 crore
3. Reporting on fraud is to be made by an auditor to Central Government when fraud

amount is
(a) Exceeding10 lakh (b) Exceeding50 lakh
(c) Exceeding1 crore (d) 1 crore or above
4. Reporting on fraud is made by auditor to Central Government in statement in the form

(a) ADT – 1 (b) ADT – 2 (c) ADT – 3 (d) ADT – 4
5. Reporting on fraud is made by auditor under which of the following clause of para
3 of CARO, 2020
(a) Clause (xi) (b) Clause (xii) (c) Clause (xiii) (d) Clause (xiv)
6. ABC’s investee company- XYZ declares final dividend for financial year 2016-17
in the meeting of board of directors held on April 10, 2017. In which financial year
should ABC account for the dividend income:
(a) Proportionately i.e. considering 10 days of financial year 2017-18 and 355
days of financial year 2016-17
(b) Financial year 2016- 17
(c) Financial year 2017- 18
(d) Equally between financial year 2016-17 and financial year 2017-18
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7. PQR & Associates, a firm of Chartered Accountants, has three partners P, Q and R.
The firm is already having audit of 60 public companies. Now, the firm gets an offer
from three company audits, out which one is a dormant company, second is a one-
person company and third is a private company having paid up share capital of 90
Crores. In this situation:
(a) Auditor cannot accept any of the company audit being offered
(b) Auditor can accept the audit of one-person company only
(c) Auditor can accept the audit of one-person company and dormant company,
but not that of private company
(d) Auditor can accept audit of all three company audits being offered
8. 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 ______ days of
occurrence of such vacancy and the company shall inform the central government
in Form CRA-2 within 30 days of such appointment of cost auditor.
(a) 30 Days (b) 45 Days (c) 60 Days (d) 90 Days
9. Section 139(7) provides that in the case of a Government company or any other
company owned or controlled, directly or indirectly, 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, the first auditor shall be appointed
by the Comptroller and Auditor-General of India within __________ days from the
date of registration of the company.
(a) 30 Days (b) 45 Days (c) 60 Days (d) 90 Days
10. Section 139(1) of the Companies Act, 2013 provides that every company shall, at
the first annual general meeting appoint an individual or a firm as an auditor who
shall hold office from the conclusion of that meeting
(a) till the conclusion of its sixth annual general meeting and thereafter till the
conclusion of every sixth meeting.
(b) till the conclusion of its sixth annual general meeting only.
(c) till the conclusion of its sixth annual general meeting and thereafter till the
conclusion of every fifth meeting.
(d) till the conclusion of its fifth annual general meeting and thereafter till the
conclusion of every fifth meeting.
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11. Mr Hitendra is acting as a Statutory Auditor of Kitex Ltd, for last 5 years. Kitex Ltd is
unlisted and has no public borrowings. Rotation of auditor will be required for Kitex
Ltd, if
(a) Its paid up share capital is more than10 crore
(b) Its paid up share capital is equal to or more than10 crore
(c) Its paid up share capital is less than50 crore
(d) Its paid up share capital is equal to or more than50 crore
12. The first auditor of SW Limited was appointed by Board of Directors of SW Limited.
One of the employee of SW Limited named Mr. Y was of the opinion that remuneration
of first auditor of SW Limited would be decided only by the Members of SW Limited
in First Annual General Meeting of SW Limited.
The opinion of Mr. Y is incorrect because remuneration of first auditor of SW Limited
may be decided by:
(a) Only Members of SW Limited
(b) Only Members of SW Limited in Second Annual General Meeting of SW Limited.
(c) Only in EGM of SW Limited.
(d) Board of Directors of SW Limited.
13. The information related to four companies is provided as follows:

Public Limited Company 160 crore
Public Limited Company 180 crore
Private Limited Company 56 crore
Private Limited Company 43 crore
Which of the above mentioned company or companies is required to constitute an
Audit Committee:
(a) Only M4 Private Limited
(b) Both M4 Private Limited and N3 Private Limited.
(c) Both Y2 Limited and N3 Private Limited
(d) Both Y2 Limited and Z1 Limited.
14. A Partnership Firm of Chartered Accountants by the name of HK and Associates

were the auditor of the company named TR Limited. Due to some reasons HK and
Associates resigned from being the auditor of TR Limited. In this scenario who will
appoint another auditor for TR Limited:
(a) Members of TR Limited in Annual General Meeting.
378
(b) Members of TR Limited in Extra Ordinary General Meeting.

(c) Board of Directors of TR Limited but such appointment need not be approved
by company TR Limited in the next Annual General Meeting.
(d) Board of Directors of TR Limited but such appointment should be approved by
company TR Limited in a General Meeting held within 3 months.
15. There was a public limited company by the name of YW Limited. According to the
last audited Financial Statements of YW Limited, the Paid Up Capital was Rupees 20
crore. A Partnership Firm of Chartered Accountants was required to be appointed as
Auditor of YW Limited. In this scenario, which appropriate authority would consider
the qualifications and experiences of Partnership Firm of Chartered Accountants for
being appointed as an auditor of YW Limited considering the size and requirements
of YW Limited:
(a) Members of YW Limited (b) Audit Committee of YW Limited
(c) Board of Directors of YW Limited (d) Independent Directors of YW Limited
16. A private limited company by the name of WS Private Limited had a paid up share
capital of Rupees 65 crore for the financial year 2018-19. Which one of the following
statement is correct relating to Rotation of Auditor of WS Private Limited:
(a) Rotation of Auditor is applicable on WS Private Limited as WS Private Limited
had a paid up share capital of more than Rupees 40 crore.
(b) Rotation of Auditor is applicable on WS Private Limited as WS Private Limited
had a paid up share capital of more than Rupees 50 crore.
(c) Rotation of Auditor is not applicable on WS Private Limited as WS Private
Limited had a paid up share capital of less than Rupees 100 crore.
(d) Rotation of Auditor is not applicable on WS Private Limited as WS Private
Limited had a paid up share capital of less than Rupees 75 crore.
17. A Partnership Firm of Chartered Accountants by the name of HS and Associates

completed its two terms of five consecutive years as auditor of Y65 Private Limited
in the financial year 2018-19. Y65 Private Limited had a paid up share capital of
Rupees 58 crore.
HS and Associates cannot be reappointed as auditor of Y65 Private Limited for how
many years after completion of two terms of five consecutive years as auditor of
Y65 Private Limited in the financial year 2018-19:
(a) 10 years (b) 5 years (c) 3 years (d) 2 years.
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18. A director of YH Limited ( which is not a Government Company ) by the name of

Mr. W was of the opinion that first auditors of YH Limited must be appointed by
Members of YH Limited within 40 days from the date of registration of YH Limited.
The opinion of Mr. W is incorrect because:
(a) The first auditor of YH Limited shall be appointed by Board of Directors of YH
Limited within 30 days from the date of registration of YH Limited.
(b) The first auditor of YH Limited shall be appointed by Board of Directors of YH
Limited within 60 days from the date of registration of YH Limited.
(c) The first auditor of YH Limited shall be appointed by Members of YH Limited
within 30 days from the date of registration of YH Limited.
(d) The first auditor of YH Limited shall be appointed by Members of YH Limited
within 60 days from the date of registration of YH Limited.
19. In case of Frauds involving amount less than INR 1 crores , the auditor should report
to the :-
(a) Central Government (b) Reserve Bank of India
(c) Bank’s Board/Audit Committee (d) Comptroller & Audit General
20. Which of the following is eligible for appointment as auditor of company

a) Any Chartered Accountant
b) A Company whose all the directors are chartered accountants
c) Chartered Accountant holding valid certificate of practice
d) All of these
21. Which of the following statement is incorrect

a) Limited liability partnership firm can be appointed as auditor of company
b) A Body corporate can be appointed as auditor of company
c) A person who is chartered accountant within the meaning of the Chartered
Accountants Act, 1949 and holding valid certificate of practice can be appointed
as auditor of company.
d) None of these.
22. Which of the following is not covered within the meaning of relative u/s 2(77) of the
Co Act, 2013
a) Step Father b) Step Mother c) Step Sister d) Step Daughter
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a) Any partner of officer of company shall not be appointed as auditor of company
b) Any employee of officer of company shall not be appointed as auditor of
company
c) Any partner of employee of company shall not be appointed as auditor of
company
d) Any employee of employee of company can be appointed as auditor of company
24. If a relative acquires security exceeding Rs 1 Lakh, then auditor shall take corrective
action within ________ days of such acquisition so as to maintain the limit of Rs 1
Lakh.
a) 60 b) 30 c) 60 d) 120
25. An individual is disqualified for appointment as auditor of co if he is indebtedness

to co
a) Rs. 5,00,000 b) Exceeding Rs. 5,00,000
c) Exceeding Rs. 1,00,000 d) Any amount
26. Audit of which of the following companies is excluded from ceiling limit of audit
a) Government Companies
b) Private Limited Company having paid up share capital Rs 100 Crore or more
c) Audit of Public Companies
d) Dormant Companies
27. A person shall not be appointed as auditor of co if he has been convicted by court
for an offence involving fraud and a period of ___________ years has not been
elapsed since such conviction
a) 10 Years b) 7 Years c) 8 Years d) 5 Years
28. First auditor of non- government company is appointed

a) By BoD within 1 month of incorporation of Co
b) By BoD within 30 days of incorporation of Co
c) By Members within 90 days of incorporation of Co
d) By Members within 60 days of incorporation of Co
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29. Subsequent auditor of non-government company is a appointed

a) By Members in EGM by passing ordinary resolution
b) By Members in AGM by passing special resolution
c) By Members in AGM by passing ordinary resolution
d) By BoD in Board Meeting
30. The provision of section 139(1) are applicable to all companies except:
a) Government Companies b) One person companies
c) Dormant companies d) None of these
31. Which of the following Form is filed by Co with RoC as intimation of appointment of
subsequent auditor
a) ADT-1 b) ADT-2 c) ADT-3 d) ADT-4
32. Tenure of subsequent auditor of government company is

a) Till conclusion of next AGM b) Till conclusion of 5th AGM
c) Till conclusion of 5 years d) Till conclusion of 6th AGM
33. If at AGM no auditor is appointed or reappointed, the following consequence will be

there
a) CG shall appoint the auditor
b) CAG shall appoint the auditor
c) Existing auditor shall continue to be auditor of company
d) Due to casual vacancy, BoD shall appoint the auditor
34. Before making any appointment or reappointment of auditor also including filling
of casual vacancy recommendation of ________________ shall be considered if
company falls under section 177(1).
a) Board of Director b) Audit Committee
c) Tribunal d) Company Law Board
35. If vacancy in the office of auditor of other than government company is caused by
resignation by auditor, then appointment by BoD shall also be approved by company
at general meeting within _____________ months of the recommendation of BoD
a) 1 b) 3 c) 5 d) 6
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36. Which of the following in not a case of casual vacancy in the office of auditor of
company
a) Death of person appointed as auditor
b) Dissolution of partnership firm appointed as auditor
c) Refusal of appointment by auditor
d) If any disqualification is attracted to auditor after appointment of auditor
37. Pick the odd one out

a) Section 139(6) b) Section 139 (1)
c) Section 139(8) d) Section 139(10)
38. Remuneration of auditor of company is fixed

a) By company in general meeting b) By BoD of Co
c) By CG d) By CAG
39. Rotation of auditor is not applicable on

a) Dormant Company b) One Person Company
c) Small Company d) Both (b) and (c)
40. Rotation of auditor is applicable on unlisted public company if

a) Its paid up share capital is more than Rs 10 Crore
b) Its paid up share capital is equal to or more than Rs 10 Crore
c) Its paid up share capital is more than Rs. 50 Crore
d) Its paid up share capital is equal to or more than Rs 50 Crore.
41. Rotation of auditor is always applicable on

a) Listed Companies b) Government Companies
c) Private Limited Companies d) All of these
42. A break in the term for continuous period of ____________ years shall be considered
as fulfilling the requirement of rotation
a) 1 Year b) 5 Years c) 10 Years d) 20 Years
43. Which of the following services is not prohibited for auditor of company
a) Internal Audit b) Tax Audit
c) Book-keeping d) Actuarial Service
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44. Auditor shall not render prohibited services as specified u/s 144 of the Co Act, to
a) The Company
b) Holding Company of the Company
c) Subsidiary Company of the Company
d) All of the above
45. In case of removal of auditor under section 140 (1), an application for obtaining
approval of such removal is made to
a) CG b) CAG c) ROC d) NCLT
46. For removal of auditor before expiry of term of auditor, which of the following form
is filed with CG for getting approval of such removal
a) ADT-1 b) ADT-2 c) ADT-3 d) ADT-4
47. In case of resignation by auditor, ADT-3 shall be filed by auditor within _________
days of resignation
a) 7 b) 10 c) 15 d) 30
48. Under section 140(4), the retiring auditor is entitled to

a) Make a representation against his removal
b) Request the company to circulate the representation to members
c) Personally communicate the members on one to one basis
d) Both (a) and (b)
49. Under section 140(5), the power of order to change of auditor has been given to
a) Tribunal b) CAG c) ROC d) BOD

a) Branch office in relation to company means any establishment described as
branch by the company.
b) The provisions of regarding reporting of fraud by the auditor shall not be
applicable to the branch auditor.
c) The duties and power of the company’s auditor with reference to the audit
of the branch and branch auditor, if any, shall be as contained u/s 143(1) to
143(4).
d) The branch auditor shall prepare a report on the accounts of the branch
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examined by him and sent it to the auditor of the company who shall deal
with it in his report in such manner as he considers necessary.
51. Auditor’s right to access to books of account and vouchers of company extends to
all the books
a) Kept at registered office
b) Kept at any other place
c) Kept at registered office or at any other place
d) He is not entitled to such a right
52. Reporting on fraud is made by auditor to CG

a) Within 2 days of his knowledge of fraud
b) Within 15 days of his knowledge of fraud
c) Within 45 days of his knowledge of fraud
d) Within 60 days of his knowledge of fraud
53. CARO 2020 is applicable on which of the following companies

a) One Person Company b) Small Company
c) Public Company d) Banking Company
54. Which of the following is not reporting requirement w.r.t fixed assets under CARO
2020
a) Purchase and sale of fixed assets made during the FY
b) Maintenance of proper records
c) Physical verification by management at reasonable intervals
d) Title deeds of immovable properties
55. Outstanding statutory dues as at last day of financial year concerned for a period
of more than__________ months from the day they became payable, shall be
indicated by the auditor.
a) 1 b) 2 c) 5 d) 6
56. With respect of cost records, what is the reporting requirement under CARO 2020
a) Whether such accounts and record are properly audited
b) Whether such accounts and records have been made and maintained
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57. Any default in the repayment of loans or borrowings to________ are reported by
auditor under CARO 2020
a) Bank, Financial Institution b) Government
c) Debenture holders d) All of above
58. Application of money raised by way of preferential allotment or private placement

is reported under which clause of CARO 2020
a) Clause (xi) b) Clause (ix) c) Clause (xiii) d) Clause (x)
59. For the purpose of applicability of CARO 2020 status of company is considered
a) As on 1st day of FY
b) Though out the FY
c) As on Balance Sheet date of FY
d) As on Balance Sheet date of immediate preceding FY
60. How many matters are specified under CARO 2020 for reporting by Co’s auditor
a) 12 b) 13 c) 15 d) 21
61. Under section 148, the maintenance of cost accounting records are not required for
a) A micro enterprise or small enterprise
b) The company whose revenue from exports in Forex exceeds 75% of total
revenue
c) Which is operating from SEZ
d) All of these
62. Cost auditor of company shall be appointed by BoD within __________days from
commencement of FY
a) 30 b) 60 c) 120 d) 180
63. Any casual vacancy in the office of cost auditor of company is filed by
a) BoD within 1 month b) BoD within 30 days
c) CG within 30 days d) CAG within 60 days
64. Cost audit report shall be submitted in Form

a) CRA-1 b) CRA-2 c) CRA-3 d) CRA-4
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65. Which of the following person can be appointed as internal auditor of Co

a) Chartered Accountant b) Cost Accountant
c) Any Employee of Co d) Any of above (a) (b) (c)
66. CAG has a right to order conduct of supplementary audit within ____________
days from the date of receipt of audit report
a) 30 b) 60 c) 90 d) 120
67. Stages in prescribing accounting standards are performed in chronological order as

follows:
a) ICAI-CG-NFRA b) NFRA-ICAI-CG
c) CG-ICAI-NFRA d) ICAI-NFRA-CG
68. The auditor’s report shall be attached to_________

a) Annual report b) Board report c) Cost audit report, if any d) Every financial
statement
69. In case the directions fail to appoint first auditor (s), the shareholders shall appoint
them at...by passing a resolution
a) a general meeting b) first annual general meeting c) statutory meeting d)
annual general meeting
70. The section which contains provisions regarding remuneration of the auditor is_
a) Section 144 b) Section 141
c) Section 142 d) Section 143
71. Who out of the following cannot be appointed as a statutory auditor of the company?
a) Erstwhile director b) Internal auditor
c) Relative of a director d) Only (b) and (c)
72. A statutory auditor has a right of access at all times to

a) Books and accounts of a company
b) Books, accounts and documents of the company
c) Books, accounts and vouchers of the company
d) Notices and documents of the company
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73. The Guidance Note on Audit of Internal Financial Controls over Financial Reporting
has been issued by?
(a) ICAI (b) SEBI (c) MCA (d) RBI
74. LM Ltd. had obtained a Term Loan of rupees 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. Under which clause of CARO 2020
the auditor is required to report -
(a) Under Clause (viii) of paragraph 3 of the CARO, 2020
(b) Under Clause (xi) of paragraph 3 of the CARO, 2020
(c) Under Clause (x) of paragraph 3 of the CARO, 2020
(d) Under Clause (ix) of paragraph 3 of the CARO, 2020
75. Bhishm Limited decided to appoint Mr. Rajvir, chartered accountants as the branch
auditor for the audit of its Lucknow branch accounts for the year 2017-18. The
decision to appoint branch auditor as taken by way of Board Resolution in the meeting
of Board of Directors of the company, held in April 2017, subject to shareholders’
approval in AGM of the company scheduled to be held in June 2017. Meanwhile, the
Principal Auditor of the company raised an objection that the branch auditor cannot
be appointed without his consent. Whether the objection raised by company auditor
is valid?
a) The objection raised by company auditor is not valid as per section 143(8)
of the companies Act, 2013 and the Board has authority to appoint branch
auditor but should be approved by shareholders in General Meeting.
b) The objection raised by company auditor is valid as it is necessary to consult/
obtain the consent of Principal Auditor before appointing Branch Auditor.
c) The Board of Directors has no authority to appoint Branch Auditor so the
objection raised by Principal Auditor is valid.
d) The objection raised by company auditor is not valid as it is compulsory to
appoint branch auditor as per Sec.139 of the Companies Act, 2013.
76. CA. Daffy is the auditor of xBose Ltd. for the previous 2 years. However, due to
certain unavoidable circumstances, no
Annual General Meeting (AGM) was held for the current Financial Year ending on
31st arch, 2018 within every possible time limit and thus, the ratification procedure
for her appointment in the GM could not be performed. Whether she may continue
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to hold the office of the auditor?

(a) CA. Daffy may continue to hold the office of the auditor for the current Financial
Year only and thereafter shall resign herself as the ratification procedure could
not be completed.
(b) CA. Daffy shall continue to hold the office of the auditor and ask the Board to
re-appoint her in a private meeting.
(c) CA. Daffy shall continue to hold the office of the auditor as no such ratification
provisions for appointment by members at every AGM exist.
(d) CA. Daffy shall not continue to hold office of the auditor as the ratification
procedure could not be completed as per proviso to section 139(1) of the
77. 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 Companies Act, 2013?
(a) Nothing.
(b) Rs. 30,000.
(c) Not less than Rs. 30,000 but which may extend to Rs. 5, 00,000.
(d) Not less than Rs. 50,000 but which may extend to Rs. 5, 00,000.
78. CA. Sylvester, the statutory auditor of Yosemitee Pvt. Ltd., encountered unavoidable
circumstances that bring into question his ability to continue holding office of the
auditor. Considering it appropriate, CA. Sylvester resigned from the office of auditor
of Yosemitee Pvt. Ltd. and thus, the Board of Directors itself appointed CA. Granny,
a practicing Chartered Accountant, as the statutory auditor of the company to
hold office of the auditor till the conclusion of 6th meeting. Which of the following
statement is true in the given scenario?
(a) The appointment of CA. Granny made by the Board of Directors is invalid.
(b) Casual vacancy can be filled by the Board of Directors subject to approval
by the company at a general meeting convened within 3 months of the
recommendation of the Board.
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(c) CA. Granny cannot hold the office of auditor till the conclusion of 6th meeting
i.e. the appointment cannot be made for five years. The auditor can hold office
only till the conclusion of the next AGM.
79. Eeyore Pvt. Ltd. is incorporated on 1st July, 2021. During the Financial Year ending
on 31st March, 2022, the company did not opt for any borrowing at any point of
time and have a total revenue of Rs. 60 Lakh. At the year end, it provides the
following information regarding its paid-up capital and reserve & surplus :-
You are provided with the provisions regarding applicability of Companies (Auditor’s
Report) Order, 2020 (CARO, 2020)
issued under section 143(11) of the Companies Act, 2013 to a private limited
company that it specifically exempts a private limited company having a paid up
capital and reserves and surplus not more than Rs. 1 crore as on the Balance Sheet
date and which does not have total borrowings exceeding Rs. 1 crore from any
bank at any point of time during the financial year and which does not have a total
revenue as disclosed in Scheduled III to the Companies Act, 2013 exceeding Rs.
10 crore during the financial year. Considering the information given above, which
of the following shall be considered as a reason regarding applicability or non-
applicability of CARO, 2020?
(a) Reporting under CARO 2020shall be applicable as the company is having a
paid up capital and reserves and surplus of Rs. 1.07 crore i.e. more than Rs. 1
crore as on the Balance Sheet date.
(b) Reporting under CARO 2020shall be applicable as the company is having a
paid up capital and reserves and surplus of Rs. 1.02 crore i.e. more than Rs. 1
crore as on the Balance Sheet date.
(c) Reporting under CARO 2020shall not be applicable as the company is having
a paid up capital and reserves and surplus of Rs. 0.92 crore i.e. not more than
Rs. 1 crore as on the Balance Sheet date.
(d) Reporting under CARO 2020shall not be applicable as the company is having
a paid up capital and reserves and surplus of Rs. 0.82 crore i.e. not more than
Rs. 1 crore as on the Balance Sheet date.
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80. In case of a company that is required to constitute an Audit Committee under

section 177, the committee, and, in cases where such a committee is not required
to be constituted, __________, shall take into consideration the qualifications and
experience of the individual or the firm proposed to be considered for appointment
as auditor and whether such qualifications and experience are commensurate with
the size and requirements of the company.
(a) the board (b) any director
(c) Managing Director (d) Whole time director
Answer
1 B 21 B 41 A 61 A
2 B 22 D 42 B 62 D
3 D 23 D 43 B 63 B
4 D 24 A 44 D 64 C
5 A 25 B 45 A 65 D
6 C 26 D 46 B 66 B
7 D 27 A 47 D 67 D
8 A 28 B 48 D 68 D
9 C 29 C 49 A 69 A
10 A 30 A 50 B 70 C
11 B 31 A 51 C 71 B
12 D 32 A 52 D 72 C
13 D 33 C 53 C 73 A
14 D 34 B 54 A 74 D
15 B 35 B 55 D 75 A
16 B 36 C 56 B 76 C
17 B 37 D 57 D 77 C
18 A 38 A 58 D 78 D
19 C 39 D 59 C 79 C
20 C 40 B 60 D 80 A
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CASE 1.
ABC Ltd. is a company dealing in products namely chocolate and coffee. ABC Ltd.
approached audit firm XYZ & Associates for the statutory auditof its financial statements
for the year ended 31.03.2021. The Gross turnover of the company is 105 crores, out of
which turnover from one of its products namely coffee is of 95 crores during the immediate
preceding Financial Year. During the course of Audit, XYZ & Associates found certain
delay in the payment of the Employees Provident Fund by ABC Ltd. They understand that
the same needs to be reported under the relevant provisions of Companies (Auditors
Report) Order 2020.
During the FY 2020-2021, Mrs. X, wife of CA Mr. X who is partner in XYZ & Associates
acquires certain shares of ABC Ltd. The audit firm is of the opinion that this may call for
a disqualification for the firm for being working as the auditor of the company under the
relevant provisions of the Companies Act 2013. Further, ABC Ltd. also approached the
auditors to provide them the Investment Banking service to which the auditors denied as
per the provisions of Companies Act 2013.
During the course of audit, XYZ & Associates has reason to believe that an offence of
fraud involving some amount has been committed in the ABC Ltd. by its General Manager.
The auditors understand that there is a requirement for reporting of fraud by the auditors
under the Companies Act and the relevant rules.
1. After the appointment of XYZ & Associates, ABC Ltd. should inform the auditor and
file a notice of such appointment with registrar within:-
(a) 60 days (b) 30 days
(c) 15 days (d) 20 days
2. If Mrs. X acquires security exceeding the prescribed limit in the ABC Ltd., then XYZ
& Associates shall take corrective actions within.........days. What is the prescribed
limit:-
(a) 100 days, Market Value Rs 1,00,000
(b) 60 days, Face value Rs 1,00,000
(c) 90 days, Face value Rs 1,00,000
(d) 15 days, Market Value Rs 1,00,000
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3. Under which section reporting of fraud by an auditor to the Central Government is

required and what is the amount of fraud:-
(a) Section 143(12), 1 crore & above
(b) Section 139(12), 1 crore & above
(c) Section 143(12), 2 crore & above
4. What is the requirement for ABC Ltd as per the relevant provisions regarding
maintenance of cost records:-
(a) Maintenance of cost records is mandatory, in form CRA 1.
(b) Maintenance of cost records is mandatory, in form CRA 2.
(c) Maintenance of cost records is mandatory, in any general format.
(d) No requirement of maintenance of cost records.
5. Under relevant clause of CARO,2020, XYZ & Associates is required to report the
extent of arrears of Employees Provident Fund as at the balance sheet date:-
(a) Exceeding 9 months (b) Exceeding 3 months
(c) Exceeding 6 months (d) Exceeding 12 months
Answer
1 c 2 b 3 a 4 a 5 c
CASE 2.
One of your friends is preparing for auditing & assurance exams of CA (Intermediate new)
course. You are already well versed with provisions of Companies Act, 2013. He seeks
your help in better understanding of provisions of section 139 of companies act, 2013 in
light of certain practical issues and concomitant matters as contained in Companies Act,
2013 regarding auditor’s appointment. Further, he also provides you with text of Section
139 of companies Act, 2013 for ready reference and better understanding as below: -
“139. (1) Subject to the provisions of this Chapter, every company shall, at the first
annual general meeting, appoint an individual or a firm as an auditor who shall
hold office from the conclusion of that meeting till the conclusion of its sixth annual
general meeting and thereafter till the conclusion of every sixth meeting and the
manner and procedure of selection of auditors by the members of the company at
such meeting shall be such as may be prescribed: Provided further that before such
393
appointment is made, the written consent of the auditor to such appointment, and
a certificate from him or it that the appointment, if made, shall be in accordance
with the conditions as may be prescribed, shall be obtained from the auditor:
Provided also that the certificate shall also indicate whether the auditor satisfies
the criteria provided in section 141:
[Provided also that the company shall inform the auditor concerned of his or its
appointment, and also file a notice of such appointment with the Registrar within
fifteen days of the meeting in which the auditor is appointed.]
Explanation. —For the purposes of this Chapter, “appointment” includes
reappointment.
(2) No listed company or a company belonging to such class or classes of companies

as may be prescribed, shall appoint or re-appoint—
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:
[Provided that—
(i) an individual auditor who has completed his term under clause (a) shall not be
eligible for re-appointment as auditor in the same company for five years from
the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be
eligible for re-appointment as auditor in the same company for five years from
the completion of such term:
Provided further that as on the date of appointment no audit firm having a
common partner or partners to the other audit firm, whose tenure has expired
in a company immediately preceding the financial year, shall be appointed as
auditor of the same company for a period of five years:
[Provided also that every company, existing on or before the commencement
of this Act which is required to comply with the provisions of this sub-section,
shall comply with requirements of this sub-section within a period which shall
not be later than the date of the first annual general meeting of the company
held, within the period specified under sub-section (1) of section 96, after three
years from the date of commencement of this Act.]
Provided also that, nothing contained in this sub-section shall prejudice the
right of the company to remove an auditor or the right of the auditor to resign
from such office of the company.]
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(3) Subject to the provisions of this Act, members of a company may resolve to provide
that—
(a) in the audit firm appointed by it, the auditing partner and his team shall be
rotated at such intervals as may be resolved by members;
or
(b) the audit shall be conducted by more than one auditor.
(4) The Central Government may, by rules, prescribe the manner in which the companies
shall rotate their auditors in pursuance of subsection (2).
Explanation. — For the purposes of this Chapter, the word “firm” shall include a
limited liability partnership incorporated under the Limited Liability Partnership
Act, 2008.
(5) Notwithstanding anything contained in sub-section (1), in the case of a Government

company or any other company owned or controlled, directly or indirectly, 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, the Comptroller
and Auditor General of India shall, in respect of a financial year, appoint an auditor
duly qualified to be appointed as an auditor of companies under this Act, within
a period of one hundred and eighty days from the commencement of the financial
year, who shall hold office till the conclusion of the annual general meeting.
(6) Notwithstanding anything contained in sub-section (1), the first auditor of a

company, other than a Government company, shall be appointed by the Board of
Directors within thirty days from the date of registration of the company and in the
case of failure of the Board to appoint such auditor, it shall inform the members
of the company, who shall within ninety days at an extraordinary general meeting
appoint such auditor and such auditor shall hold office till the conclusion of the first
annual general meeting.
(7) Notwithstanding anything contained in sub-section (1) or subsection (5), in the case
of a Government company or any other company owned or controlled, directly or
indirectly, 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,
*the first auditor shall be appointed by the Comptroller and Auditor-General of
India within sixty days from the date of registration of the company and in case the
395
Comptroller and AuditorGeneral of India does not appoint such auditor within the
said period, the Board of Directors of the company shall appoint such auditor within
the next thirty days; and in the case of failure of the Board to appoint such auditor
within the next thirty days, it shall inform the members of the company who shall
appoint such auditor within the sixty days at an extraordinary general meeting, who
shall hold office till the conclusion of the first annual general meeting.
(8) Any casual vacancy in the office of an auditor shall—

(i) in the case of a company other than a company whose accounts are subject
to audit by an auditor appointed by the Comptroller and Auditor-General of
India, be filled by the Board of Directors within thirty days, but if such casual
vacancy is as a result of the resignation of an auditor, such appointment shall
also be approved by the company at a general meeting convened within three
months of the recommendation of the Board and he shall hold the office till
the conclusion of the next annual general meeting;
(ii) in the case of a company whose accounts are subject to audit by an auditor
appointed by the Comptroller and Auditor-General of India, be filled by the
Comptroller and Auditor-General of India within thirty days:
Provided that in case the Comptroller and Auditor-General of India does not
fill the vacancy within the said period, the Board of Directors shall fill the
vacancy within next thirty days.
(9) Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring
auditor may be re-appointed at an annual general meeting, if—
(a) he is not disqualified for re-appointment;
(b) he has not given the company a notice in writing of his unwillingness to be re-
appointed; and
(c) a special resolution has not been passed at that meeting appointing some
other auditor or providing expressly that he shall not be re-appointed.
(10) Where at any annual general meeting, no auditor is appointed or re-appointed, the
existing auditor shall continue to be the auditor of the company.
(11) 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
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this section shall be made after taking into account the recommendations of such
committee.”
* Responsibility to Inform C&AG
In light of above information, guide your friend and remove his dilemmas by
answering the following questions correctly: -
1 Section 139 prescribes that before appointment of an auditor, certificate is to be

obtained from auditor that appointment, if made, shall be in accordance with
certain conditions. Which of the following is not such condition in case of a listed
public company?
(a) the individual or the firm, as the case may be, is eligible for appointment and
is not disqualified for appointment under the Act, the Chartered Accountants
Act, 1949 and the rules or regulations made thereunder;
(b) the proposed appointment is as per the term provided under the Act;
(c) the proposed appointment is within the limits laid down by or under the
authority of the Act;
(d) the proposed appointment is as per regulations of SEBI
2. The provisions of rotation of auditors are not applicable to certain class of companies.
Which of the following is not a correct option?
(a) all unlisted public companies having paid up share capital up to a certain limit
(b) all private limited companies having paid up share capital up to a certain limit
(c) all unlisted public companies having paid up share capital and reserves up to
a certain limit
(d) all companies having public borrowings from banks up to a certain limit
3. In case of a government company, the statutory auditor under companies Act is

appointed by: -
(a) Shareholders in annual general meeting
(b) Board of directors in annual general meeting
(c) CAG which is a constitutional authority
(d) CAG which is a constitutional authority in consultation with Central Government
4. Which of the following is incorrect regarding scope of actions of audit committee

constituted under section 177 of Companies Act, 2013?
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(a) The audit committee can make recommendation regarding appointment and
terms of appointment of auditors.
(b) The audit committee cannot make recommendations regarding remuneration
of auditors.
(c) The audit committee can review and monitor auditor’s independence and
performance.
(d) The audit committee can undertake monitoring of effectiveness of audit process.
5. Which of the following is correct regarding formation of audit committee under

section 177 of Companies Act, 2013?
(a) The audit committee is to be constituted by every public company.
(b) The audit committee is to be constituted by every public company and private
company having paid up capital and reserves of more than 100 crore.
(c) The audit committee is to be constituted by every listed public company.
(d) The audit committee is to be constituted by every listed company and private
company having paid up capital and reserves of more than 100 crore.
Answer
1 d 2 c 3 c 4 b 5 c
CASE 3.
Venus Ltd. is a public limited company having turnover of 150 crores during the current
financial year i.e. FY 2019-20 which is the first financial year for the company after its
registration.
• M/s AMR & Associates are appointed as the first auditors of Venus Ltd.
• M/s AMR & Associates is having partners Mr. A, Mr. M, Mr. R all Chartered Accountants.
• Mr. A, Mr. M, Mr. R are holding appointment as auditors in 10, 15, 20 companies
respectively. The above numbers are after taking into account appointment of M/s
AMR & Associates as auditors in Venus Limited.
• During the course of audit, the auditors understand that since Venus Ltd is a public
limited company, their duty is to also report on the adequacy of internal financial
control of Venus Ltd .
• Further, Venus Ltd holds 20% equity share capital of Mercury Ltd which has approached
M/s AMR & Associates for certain assignments namely Tax audit, Actuarial Science,
Outsourced Financial services.
398
1. M/s AMR & Associates shall hold the office as auditor of Venus Ltd.:-
(a) For one term of five consecutive years
(b) Till the conclusion of first Annual General Meeting
(c) For two terms of five consecutive years
2. What are the relevant provisions of the Companies Act 2013 related to the audit
committee. Whether Venus Ltd. is required to constitute an Audit Committee?
(a) Section 167, No (b) Section 117, Yes
(c) Section 177, Yes (d) Section 176, No
3. What is the maximum number of audits remaining in the name of M/s AMR &
Associates:-
(a) 60 (b) 25 (c) 10 (d) 15
4. In case of a private company, under section 143(3)(i), the auditor has no duty to
report on the internal financial control of the Company if turnover and aggregate
borrowings are less than certain amount. What is the limit of Turnover and aggregate
borrowings from bank or financial institutions or any body corporate. :-
(a) 50 crore and 25 crore (b) 150 crore and 25 crore
(c) 50 crore and 125 crore (d) 25 crore and 50 crore
5. Had Venus Ltd. been a government company, who would have appointed the first
auditors of the company. Also state the relevant provisions of the Companies Act
2013 :-
(a) Board of Directors, within 10 days of registration, Section 139(7)
(b) Comptroller & Auditor General of India, within 60 days of registration, section
139(7)
(c) Central Government, within 60 days of registration of company, Section 139(5)
(d) Central Government, within 30 days of registration of company, Section 139(5)
Answer
1 b 2 c 3 d 4 a 5 b
399
CASE 4.
M/s FCA & Co (“The Firm”), Chartered Accountants is a Partnership Firm of Miss F, Miss C
and Mr A based at Delhi. Partners are also engaged in the Investing Activities - that is
they Purchase and Sale Shares of various firms and companies in their routine course of
action.
In past week, few Companies have approached the Firm to become their Auditors. Before
accepting the Audits, Partners want to ensure that they are not disqualified according
to the Provisions of the Companies Act. So they are looking into this matter - Company
wise - which is given below. You are requested to go through the following and answer
the ensuing questions. Company ABC P L - Miss C owns share of 1000 in the Company
and her Brother owns shares of Rs 50000 in the Company Company XYZ P L - Mr A’s
father owns shares of Rs 90000 in the Company. Mr A owes the Company in his personal
capacity for the goods purchased by him to the tune of Rs 20000 Company PQR P L - Miss
F has been advising the company for its Investment for past couple of years. Miss C is
indebted to the Company to the tune of Rs 1 Lakh.
1. Which of the following Statement is correct in respect of ABC P L (“Company”)

(a) The Firm is eligible to be appointed as an Auditor of the Company
(b) The Firm is not eligible to be appointed as an Auditor due to Shareholding of
Miss C’s Brother in the Company
(c) The Firm is not eligible to be appointed as an Auditor due to Shareholding of
Miss C in the Company
(d) The Firm is eligible to be appointed as an Auditor of the Company but they will
have to disclose about Shareholding in Auditor’s Report.
2. Which of the following Statement is correct in respect of XYZ P L (“Company”)

(a) The Firm is not eligible to be appointed as an Auditor due to the indebtedness
of Mr A
(b) The Firm is eligible to be appointed as an Auditor of the Company
(c) The Firm is not eligible to be appointed as an Auditor due to the Shareholding
of Mr A’s Father in the Company
(d) The Firm is eligible to be appointed as an Auditor of the Company only after Mr
A pays the amount due to the Company.
400
3. Which of the following Statement is correct in respect of PQR P L (“Company”)

(a) The Firm is eligible to be appointed as an Auditor of the Company
(b) The firm is not eligible to be appointed as an Auditor due to Miss C’s Indebtedness
towards the Company
(c) The firm is not eligible to be appointed as an Auditor due to Miss F’s involvement
as an Advisor to the Company
(d) The firm is eligible to be appointed as an Auditor of the Company but it will
have to disclose its indebtedness of Miss C in the Auditor’s Report
4. While considering the threshold limit for holding any interest or security in the
company for the Qualification for becoming an Auditor, which value is to be
considered?
(a) Market Value (b) Face Value
(c) Book Value (d) Higher of the above
5. In case, Shareholding by a relative exceeds the threshold then in how many days
Auditor is required to take corrective Action?
(a) 15 Days (b) 30 Days
(c) 45 Days (d) 60 Days
Answer
1 c 2 b 3 c 4 b 5 d
CASE 5.
Sections 139 to 148 of the Companies Act, 2013 relating to audit of companies which
broadly deal with who can be appointed as an auditor under the Act, i.e., qualifications
and disqualifications, the manner of appointment, removal of an auditor and rights
and duties of an auditor. Keeping above mentioned sections in mind, what guidelines/
procedures need to be followed by M/s ABC Ltd and Mr Samuel when M/s ABC Ltd
appointed Mr Samuel as statutory auditor of the company for the Financial Year 2019-
2020. Samuel’s father holds security of Rs 7 lakh face value in ABC Ltd. Would this
throw any challenges to Samuel’s appointment as statutory auditor of M/s ABC Ltd.
Also, Mr Samuel’s remuneration was fixed by Board of Directors which was subsequently
challenged by a shareholder in the company’s Annual General Meeting. Based on the
above facts and procedures, answer the following questions.
401
1. Mr Samuel needs to furnish his written consent and a certificate to the company
(a) Before his appointment
(b) Within 15 days of his appointment
(c) Within 30 days of his appointment
2. Mr Samuel (the auditor of the company) subsequently submitted his resignation. He

is required to intimate about his resignation to-
(a) The Company
(b) The Registrar of Companies
(c) Both a and b.
(d) Board of Directors, Registrar of Companies and Central Government
3. Mr Samuel needs to file a statement in the prescribed Form _____ (as per Rule 8 of
CAAR) within ______ days of resignation with the company and the registrar.
(a) ADT- 1, 10 (b) ADT- 2, 7
(c) ADT – 3, 30 (d) ADT - 4, 15
4. If Mr Samuel had been removed as auditor of the company under section 140(5) by
order of Tribunal, he could not be appointed as auditor of any company for a period
of ______from the date of order of Tribunal.
(a) 10 years (b) 8 years
(c) 5 years (d) 3 years
5. Mr Samuel’s remuneration as auditor of M/S ABC Ltd will be fixed by

(a) By Board of Directors of the company
(b) By Company in general meeting
(c) By Central Government
(d) By Comptroller & Auditor General of India
Answer
1 a, 2 c 3 c 4 c 5 b
402
(i) The first auditor of a Government company was appointed by the Board in its
meeting after 10 days from the date of registration.
(ii) Director’s relative can act as an auditor of the company.
(iii) If an LLP (Limited Liability Partnership Firm) is appointed as an auditor of a company,

every partner of a firm shall be authorized to act as an auditor.
(iv) AB & Co. is an audit firm having partners Mr. A and Mr. B. Mr. C, the relative of Mr. B
is holding securities having face value of 2,00,000 in XYZ Ltd. AB & Co. is qualified
for being appointed as an auditor of XYZ Ltd.
(v) The auditor of a Ltd. Company wanted to refer to the minute books during audit but
board of directors refused to show the minute books to the auditors.
(vi) Manner of rotation of auditor will not be applicable to company A, which is having
paid up share capital of 15 crores and having public borrowing from nationalized
bank of 50 crore because it is a Private Limited Company.
(vii) The auditor should study the Memorandum and Articles of Association to see the
validity of his appointment.0.62
(viii) Managing director of A Ltd. himself appointed the first auditor of the company.
(ix) A Chartered Accountant holding securities of S Ltd. having face value of 950 is
qualified for appointment as an auditor of S Ltd.
(x) Mr. N, a member of the Institute of Company Secretary of India, is qualified to be

appointed as auditor of XYZ Limited.
(xi) The Board of Director of ABC Ltd., a listed company at Bombay Stock Exchange, is
required to fill the casual vacancy of an auditor only after taking into account the
recommendations of the audit committee.
403
(xii) Bhartiya Gas Ltd. a Government Company, the Comptroller and Auditor General of
India shall, in respect of a financial year, appoint an auditor duly qualified to be
appointed as an auditor of companies under this Act, within a period of 180 days
from the end of the financial year, who shall hold office till the end of the next
Financial year.
(xiii) CA K has resigned as an auditor after 2 months of his appointment in NML Ltd. He
needs to file ADT-3 with the Registrar within 60 days from the date of resignation.
(xiv) The Board of Director of ABC Ltd., a listed company at Bombay Stock Exchange, is
required to fill the casual vacancy of an auditor only after taking into account the
recommendations of the audit committee.
(xv) Any partner of an LLP, who is appointed as an auditor of a company, can sign the
audit report.
(xvi) Audit committee is to be constituted by every public company to ensure better

standards of corporate governance.
(xvii) XYZ Ltd is engaged in manufacture of textiles specified under prescribed rules having
total revenue of Rs.100 crore (including export turnover of Rs.88 crores in foreign
exchange) in immediately preceding financial year. The said company is required to
get cost audit conducted for immediately preceding financial year.
(xviii) The auditor has to report under section 143 of companies act, 2013 whether
company has adequate internal controls in place and overall effectiveness of such
internal controls.
(xix) Discovery of an offence of a fraud of Rs.100 lakh by auditor against the company
committed by its officers is to be reported to Serious Fraud Investigation office(SFIO).63
(xx) The concept of “joint audit” has legal foothold under the Companies Act, 2013.
(xxi) The term “relative”, as defined under the Companies Act, 2013, means anyone who
is closely related to another.
404
(xxii) According to Section 140(1), the auditor appointed under section 139 may be removed
from his office before the expiry of his term only by passing a Board resolution.
(xxiii) all public companies, having in aggregate, outstanding loans or borrowings or

debentures or deposits exceeding hundred crore rupees or more shall constitute an
Audit Committee.
(xxiv) As per sub-section (5) of the section 140, the Tribunal cannot direct the company
to change its auditors.
(xxv) Where the firm is appointed as an auditor of the entity the audit report is signed
only in the name of audit firm.
405
(i) Incorrect: According to section 139(7) of the Companies Act, 2013, 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. If CAG fails to make the appointment within 60 days, the Board shall
appoint in next 30 days.
(ii) Incorrect: As per section 141(3) 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.
(iii) Incorrect: As per section 141(2) of the Companies Act, 2013, where a firm including
a limited liability partnership (LLP) is appointed as an auditor of a company, only
the partners who are Chartered Accountants shall be authorised to act and sign on
behalf of the firm.
(iv) Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified
to be appointed as an auditor of a company if his relative is holding any security of
or interest in the company of face value exceeding 1 lakh.
Therefore, AB & Co. shall be disqualified for being appointed as an auditor of XYZ
Ltd. as Mr. C, the relative of Mr. B who is a partner in AB & Co., is holding securities
in XYZ Ltd. having face value of 2 lakh.
(v) Incorrect: The provisions of Companies Act, 2013 grant rights to the auditor to
access books of account and vouchers of the company. He is also entitled to require
information and explanations from the company. Therefore, he has a statutory right
to inspect the minute book.
(vi) Incorrect: According to section 139 of the Companies Act, 2013, the provisions
related to rotation of auditor are applicable to all private limited companies having
paid up share capital of 50 crore or more; and all companies having paid up share
capital of below threshold limit mentioned above, but having public borrowings
from financial institutions, banks or public deposits of 50 crore or more.
Although company A is a private limited company yet it is having public borrowings
from nationalized bank of 50 crores, therefore it would be governed by provisions of
406
rotation of auditor.
(vii) Incorrect: The auditor should study the Memorandum of Association to check the
objective of the company to be carried on, amount of authorized share capital etc.
and Articles of Association to check the internal rules, regulations and ensuring the
validity of transactions relating to accounts of the company.
To see the validity of appointment, the auditor should ensure the compliance of the
provisions of section 139, 140 and 141 of the Companies Act, 2013.0.66 In addition,
the auditor should study the appointment letter & the prescribed Form submitted
to the Registrar of the Companies to see the validity of his appointment.
(viii) Incorrect: As per section 139(6) of the Companies Act, 2013, the first auditor of a
company, other than a government company, shall be appointed by the Board of
directors within 30 days from the date of registration of the company.
Therefore, the appointment of first auditor made by the managing director of A Ltd.
is in violation of the provisions of the Companies Act, 2013.
(ix) Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified
to be appointed as an auditor of a company if he is holding any security of or
interest in the company. As the chartered accountant is holding securities of S Ltd.
having face value of 950, he is not eligible for appointment as an auditor of S Ltd.
(x) Incorrect: As per section 141 of the Companies Act, 2013, a person shall be eligible
for appointment as an auditor of a company only if he is a chartered accountant.
Thus, Mr. N is disqualified to be appointed as an auditor of XYZ Limited.
(xi) Correct: 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
committee.
(xii) Incorrect- As per section 139(5), in the case of a Government company or any other
company owned or controlled, directly or indirectly, 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, the Comptroller and Auditor-General
of India shall, in respect of a financial year, appoint an auditor duly qualified to
407
be appointed as an auditor of companies under this Act, within a period of 180

days from the commencement of the financial year, who shall hold office till the
conclusion of the annual general meeting.
(xiii) Incorrect: As per section140(2) of the Companies Act, 2013, the auditor who has
resigned from the company shall file within a period of 30 days from the date of
resignation, a statement in the prescribed Form ADT–3(as per Rule 8 of CAAR) with
the company and the Registrar.67
(xiv) Correct: 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
committee.
(xv) Incorrect: Section 141(2) of the Companies Act, 2013 states that where a firm
including a limited liability partnership is appointed as an auditor of a company,
only the partners who are chartered accountants shall be authorised to act and
sign on behalf of the firm.
(xvi) Incorrect. Under Section 177 of Companies Act, 2013 read together with Rule 4 of
Companies( Appointment and qualification of Directors) Rules, 2014 prescribe that
audit committee is to be constituted by every listed public company and following
classes of public companies only:-
(i) the Public Companies having paid up share capital of ten crore rupees or more;
or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures
and deposits, exceeding fifty crore rupees: Hence, the statement that all public
companies are required to constitute audit committee is incorrect.
(xvii) Incorrect. The provisions of cost audit are not applicable in case of companies having
revenue from exports in foreign exchange being more than 75% of its total revenue.
As the company is having export turnover of Rs.88 crore in total revenues of Rs.100
core, the provisions of cost audit are not applicable to the said company.
408
(xviii) Incorrect: Under provisions of Section 143 of the companies Act, 2013, auditor has to
report whether the company has adequate internal financial controls with reference
to financial statements in place and operating effectiveness of such controls. The
auditor has to report on adequacy and effectiveness of internal financial controls
only and not internal controls.
(xix) Incorrect: Fraud of Rs.100.00 lakhs or above (i.e. Rs.1.00 crore or above) has to be
reported to Central government (precisely to Secretary, Ministry of Corporate affairs)
in Form ADT-4.
(xx) Correct: Under provisions of section 139(3), the members of a company may resolve
to provide that audit shall be conducted by more than one auditor. Hence, the
concept of “joint audit” has legal foothold also under Companies Act, 2013.
(xxi) Incorrect: The term “relative”, as defined under the Companies Act, 2013, means
anyone who is related to another as members of a Hindu Undivided Family; husband
and wife; Father (including step- father), Mother (including step-mother), Son
(including step- son), Son’s wife, Daughter, Daughter’s husband, Brother (including
step- brother), Sister (including step-sister).
(xxii) Incorrect: According to Section 140(1), the auditor appointed under section 139 may
be removed from his office before the expiry of his term only by a special resolution
of the company, after obtaining the previous approval of the Central Government in
that behalf as per Rule 7 of CAAR, 2014
(xxiii) Incorrect: all public companies, having in aggregate, outstanding loans or

borrowings or debentures or deposits exceeding fifty crore rupees or more shall
constitute an Audit Committee
(xxiv) Incorrect: As per sub-section (5) of the section 140, the Tribunal either suo motu or
on an application made to it by the Central Government or by any person concerned,
if it is satisfied that the auditor of a company has, whether directly or indirectly,
acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation
to, the company or its directors or officers, it may, by order, direct the company to
change its auditors.
409
(xxv) Incorrect: Where the firm is appointed as the auditor, the report is signed in the
personal name of the auditor and in the name of the audit firm. The partner/
proprietor signing the audit report also needs to mention the membership number
assigned by the Institute of Chartered Accountants of India along-with registration
number for the firm.
410
BRIEF ANSWERS – PRACTICE QUESTIONS
These answers are only hints. While writing in exam, first explain provision followed by
facts of the case and conclusion
1 Mr. A, a practicing Chartered Accountant, is holding securities of XYZ Ltd. having
face value of ` 900. Whether Mr. A is qualified for appointment as an auditor of
XYZ Ltd.?
Ans Mr. A is Disqualified under section 141(3)(d)(i) of Companies Act, 2013.
2 Mr. P is a practicing Chartered Accountant and Mr. Q, the relative of Mr. P, is
holding securities of ABC Ltd. having face value of ` 90,000. Whether Mr. P is
qualified from being appointed as an auditor of ABC Ltd.?
Ans Mr. P is not Disqualified under section 141(3)(d)(i) of Companies Act, 2013.
3 M/s BC & Co. is an Audit Firm having partners Mr. B and Mr. C, and Mr. A
the relative of Mr. C, is holding securities of MWF Ltd. having face value of
` 1,01,000. Whether M/s BC & Co. is qualified from being appointed as an
auditor of MWF Ltd.?
Ans M/s BC & Co. is Disqualified under section 141(3)(d)(i) of Companies Act, 2013.
4 M/s RM & Co. is an audit firm having partners CA. R and CA. M. The firm has
been offered the appointment as an auditor of Enn Ltd. for the Financial Year
201617. Mr. Bee, the relative of CA. R, is holding 5,000 shares (face value of
` 10 each) in Enn Ltd. having market value of ` 1,50,000. Whether M/s RM &
Co. is disqualified to be appointed as auditors of Enn Ltd?
411
Ans M/s RM & Co. is not Disqualified under section 141(3)(d)(i) of Companies Act,
2013.
Relative can hold upto Rs. 1 lakh face value in the company.
5 CA. Poshin is providing the services of investment banking to C Ltd. Later on, he
was also offered to be appointed as an auditor of the company for the current
financial year. Advise.
Ans CA Poshin cannot be appointed as auditor when he is also simultaneously
engaged in providing investment banking service because:
According to Sec 141(3)(i) of Companies act, 2013 person cannot be appointed
as auditor if he is providing consultancy services prescribed in Sec 144 of
Companies Act, 2013 either directly or indirectly to the Company, its holding
Company & Subsidiary Company.
Investment Banking is a service which is prescribed under Section 144.
6 Managing Director of Pigeon Ltd. himself wants to appoint CA. Champ, a practicing
Chartered Accountant, as first auditor of the company
Ans As per Sec 139(6) of Companies Act, 2013 Board of Directors appoint first
auditor in case of non-government Company within 30 days of date of
registration.
Hence, Managing Director itself cannot appoint first auditor.
7 Rano Pvt. Ltd. is a private limited Company, having paid up share capital of `18
crore but having public borrowing from nationalized banks and financial institutions
of ` 72 crore. Is rotation of auditor applicable
Ans Manner of rotation of auditor will be applicable under Section 139(2) of
Applicability of Rotation
Private limited companies having Paid up Share Capital of Rs.50 Crore or
More
OR
Borrowings from banks and financial institution of Rs. 50 Crore or More as
per immediately preceding financial year
8 Jolly Ltd., a listed company, appointed M/s Polly& Co., a Chartered Accountant
firm, as the statutory auditor in its AGM held at the end of September, 2016 for 11
years.
412
Ans Here, the appointment of M/s Polly & Co. is not valid as the appointment can
be made only for one term of five consecutive years and then another one
more term of five consecutive years. It can’t be appointed for two terms in
one AGM only. Further, a cooling period of five years from the completion of
term is required i.e. the firm can’t be re-appointed for further 5 years after
completion of two terms of five consecutive years.
9 XYZ Ltd., a public company having paid up capital of ` 9 crore but having turnover
of ` 150 crore, 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 category. Examine.
Ans Audit Committee is required to be constituted.
Listed Company- Mandatory
Unlisted public Company having
Paid up Share Capital of Rs. 10 crore or More
Turnover Rs. 100 crore or More
Borrowings Rs. 50 crore or More
as per latest audited financial statements
10 ABC & Co.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”, Chartered
Accountants. “Mr. A”, “Mr. B” and “Mr. C” are holding appointment as an Auditor
in 4, 6 and 10 Companies respectively. (i) Provide the maximum number of Audits
remaining in the name of “ABC & Co.” (ii) Provide the maximum number of Audits
remaining in the name of individual partner i.e. Mr. A, Mr. B and Mr. C. (iii) Can ABC
& Co. accept the appointment as an auditor in 60 private companies having paid-up
share capital less than ` 100 crore, 2 small companies and 1 dormant company?
(iv) Would your answer be different, if out of those 60 private companies, 45
companies are having paid-up share capital of ` 110 crore each?
413
Ans As per Section 141(3)(g) of Companies Act, 2013 an individual cannot hold
appointment as an auditor, at any point of time, of more than 20 companies
excluding companies other than public companies and private limited
companies with paid up share capital of Rs. 100 crore or More as on date of
appointment.
Firm is already holding audit of 20 companies. It can hold audit of maximum
60 companies (3 CA partners * 20 Companies each= 60 Companies).
Case 1:
ABC & Co. Can accept the appointment as an auditor in 60 private companies
having paid-up share capital less than ` 100 crore, 2 small companies and
1 dormant company.
Case 2:
If out of those 60 private companies, 45 companies are having paid-up share
capital of ` 110 crore each then maximum 40 companies can be accepted
11 The head accountant of a company entered fake invoices of credit purchases in
the books of account aggregate of ` 50 lakh and cleared all the payments to such
bogus creditor. What is your duty as an auditor
Ans 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
the central government as the amount of fraud involved is less than ` 1
crore, however, reporting under CARO, 2016 is required.
12 Ashu Pvt. Ltd. has fully paid capital and reserves of `50 lakh. During the year,
the company had borrowed `70 lakh each from a bank and a financial institution
independently. It has the turnover of `900 lakh. Comment whether CARO 2016 is
applicable?
Ans In the given case of Ashu Pvt. Ltd., it has paid capital and reserves of `50 lakh
i.e. less than `1 crore, turnover of `9 crore i.e. less than `10 crore. However,
it has maximum outstanding borrowings of `1.40 crore (`70 lakh + `70 lakh)
collectively from bank and financial institution. Therefore, it fails to fulfill
the condition relating to borrowings. Thus, CARO, 2016 shall be applicable
to Ashu Pvt. Ltd. accordingly.
414
13 The company has dispensed with the practice of taking inventory of their inventories
at the year-end as in their opinion the exercise is redundant, time consuming and
intrusion to normal functioning of the operations. Explain reporting requirement
under CARO, 2016
Ans Clause (ii) of Para 3 of CARO, 2016, requires the auditor to report whether
physical verification of inventory has been conducted at reasonable intervals
by the management and whether any material discrepancies were noticed
and if so, whether they have been properly dealt with in the books of
account. The physical verification of inventory is the responsibility of the
management of the company which should verify all material items at least
once in a year and more often in appropriate cases. In the given case, the
above requirement of physical verification of inventory by the management
has not been taken place and therefore the auditor should point out the
same under CARO, 2016. He may consider the impact on financial statement
and report accordingly
14 An auditor purchased goods worth ` 501,500 on credit from a company being
audited by him. The company allowed him one month’s credit, which it normally
allowed to all known customers. Comment
Ans Disqualified under Sec 141(3)(d)(ii) of Companies Act, 2013.
Even though it is at arms length price but indebtedness cannot exceed Rs. 5
Lakh.
15 Ram and Hanuman Associates, Chartered Accountants in practice have been
appointed as Statutory Auditor of Krishna Ltd. for the accounting year, 2015-
2016. Mr. Hanuman holds 100 equity shares of Shiva Ltd., a subsidiary company of
Krishna Ltd. Discuss
Ans Ram and Hanuman Associates is Disqualified under section 141(3)(d)(i) of
16 Under what circumstances the retiring Auditor cannot be reappointed
415
Ans As per Sec 139(9) of Companies Act, 2013 retiring auditor cannot be
reappointed if
a) his term has expired under section 139(2) of Companies Act, 2013.
b) he is disqualified under section 141(3) of Companies Act, 2013
c) a specific resolution has been passed in general meeting stating expressly
that retiring auditor cannot be reappointed
d) he is not willing to be reappointed.
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AUDIT REPORT
Sr.No List of Topics as per Module JKSC Topic Reference

1 Elements of Audit Report- SA 700 Topic 1
2 Modified opinion- SA 705 Topic 2
3 Emphasis of Matter and Other Matter Paragraph- SA Topic 3
706
4 Key Matter Paragraph- SA 701 Topic 4
5 SA 710 Topic 5
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Sr.No Particulars
1 SA 700- Forming an opinion
1.1 Objectives
(a) To form an opinion on the financial statements based on an evaluation
of the conclusions drawn from the audit evidence obtained; and
(b) To express clearly that opinion through a written report. The auditor
shall form an opinion on whether the financial statements are
prepared, in all material respects, in accordance with the applicable
That conclusion shall take into account:
(a) whether sufficient appropriate audit evidence has been obtained;
(b) whether uncorrected misstatements are material, individually or in
aggregate;
(c) The evaluations.
The auditor shall evaluate whether the financial statements are prepared
in accordance with the requirements of the applicable financial reporting
framework.
This evaluation shall include consideration of the qualitative aspects of
the entity’s accounting practices, including indicators of possible bias in
management’s judgments.
In considering the qualitative aspects of the entity’s accounting practices, the
auditor may become aware of possible bias in management’s judgments.
The auditor may conclude that lack of neutrality together with uncorrected
misstatements causes the financial statements to be materially misstated.
Indicators of a lack of neutrality include the following:
(i) The selective correction of misstatements brought to management’s
attention during the audit.
Example Correcting misstatements with the effect of increasing
reported earnings, but not correcting misstatements that have the
effect of decreasing reported earnings.
(ii) Possible management bias in the making of accounting estimates.
1.2 Specific Evaluations to be done by auditor
(a) The financial statements adequately disclose the significant accounting
policies selected and applied;
(b) The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;
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(c) The accounting estimates made by management are reasonable;

(d) The information presented in the financial statements is relevant,
reliable, comparable, and understandable;
(e) The financial statements provide adequate disclosures to enable the
intended users to understand the effect of material transactions and
events on the information conveyed in the financial statements; and
(f) The terminology used in the financial statements, including the title
of each financial statement, is appropriate.
1.3 Elements of Audit report
1.3.1 Title: The auditor’s report shall have a title that clearly indicates that it is
the report of an independent auditor. For example, “Independent Auditor’s
Report,” distinguishes the independent auditor’s report from reports issued
by others.
1.3.2 Addressee: The auditor’s report shall be addressed, as appropriate, based
on the circumstances of the engagement. Law, regulation or the terms
of the engagement may specify to whom the auditor’s report is to be
addressed. The auditor’s report is normally addressed to those for whom
the report is prepared, often either to the shareholders or to those charged
with governance of the entity whose financial statements are being audited.
1.3.3 Auditor’s Opinion: The first section of the auditor’s report shall include
the auditor’s opinion, and shall have the heading “Opinion.” The Opinion
section of the auditor’s report shall also:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(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 financial statements
1.3.4 Basis for Opinion:
The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with 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 relevant ethical requirements relating to the
audit and has fulfilled the auditor’s other ethical responsibilities in
accordance with these requirements.
(d) States whether the auditor believes that the audit evidence the auditor
has obtained is sufficient and appropriate to provide a basis for the
auditor’s opinion
1.3.5 Going Concern: Where applicable, the auditor shall report in accordance
with SA 570 (Revised).
1.3.6 Key Audit Matters: For audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate key audit
matters in the auditor’s report in accordance with SA 701.
When the auditor is otherwise required by law or regulation or decides to
communicate key audit matters in the auditor’s report, the auditor shall
do so in accordance with SA 701.
Law or regulation may require communication of key audit matters for
audits of entities other than listed entities.
The auditor may also decide to communicate key audit matters for other
entities, including those that may be of significant public interest, for
example because they have a large number and wide range of stakeholders
and considering the nature and size of the business.
1.3.7 Responsibilities for the Financial Statements: The auditor’s report shall
include a section with a heading “Responsibilities of Management for the
Financial Statements.”
SA 200 explains the premise, relating to the responsibilities of management
and, where appropriate, those charged with governance, on which an audit
in accordance with SAs is conducted. Management and, where appropriate,
those charged with governance accept responsibility for the preparation of
the financial statements. Management also accepts responsibility for such
internal control as it determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether
due to fraud or error. The description of management’s responsibilities in
the auditor’s report includes reference to both responsibilities as it helps to
explain to users the premise on which an audit is conducted.
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1.3.8 Auditor’s Responsibilities for the Audit of the Financial Statements:

This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement,
whether due to fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance with SAs will
always detect a material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in
the aggregate, they could reasonably be expected to influence
the economic decisions of users taken on the basis of these
financial statements; or
(ii) Provide a definition or description of materiality in accordance
with the applicable financial reporting framework.
(d) The Auditor’s report shall further :-
(i) To identify and assess the risks of material misstatement of the
(ii) To obtain an understanding of internal control relevant to the
audit in order to design audit procedures.
(iii) To evaluate the appropriateness of accounting policies used
and the reasonableness of accounting estimates and related
disclosures made by management.
(iv) To conclude on the appropriateness of management’s use of the
going concern basis .
(v) to evaluate the overall presentation, structure and content of
1.3.9 Location of the description of the auditor’s responsibilities for the audit of
the financial statements. ( Within the body of the auditor’s report or Within
an appendix to the auditor’s report or on a website of an appropriate
authority)
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1.3.10 Other Reporting Responsibilities: If the auditor addresses other reporting

responsibilities in the auditor’s report on the financial statements that
are in addition to the auditor’s responsibilities under the SAs, these other
reporting responsibilities shall be addressed in a separate section in the
auditor’s report with a heading titled-
“Report on Other Legal and Regulatory Requirements” or otherwise as
appropriate to the content of the section, 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.
1.3.11  Signature of the Auditor: The auditor’s report shall be signed. The
report is signed by the auditor (i.e. the engagement partner) in his
personal name. Where the firm is appointed as the auditor, the report
is signed in the personal name of the auditor and in the name of the
audit firm.
The partner/proprietor signing the audit report also needs to mention
the membership number assigned by the Institute of Chartered
Accountants of India. They also include the registration number of
the firm, wherever applicable, as allotted by ICAI, in the audit reports
signed by them.
 Auditor’s Address: The auditor’s report shall name specific location,
which is ordinarily the city where the audit report is signed.
 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.
2 SA 705- Modification to the opinion
2.1 Qualified Opinion
The auditor shall express a qualified opinion when:
2.1.1 (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
2.1.2 (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.
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2.2 Adverse Opinion

2.2.1 The auditor shall express an adverse opinion when the auditor,
having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are both material and
pervasive to the financial statements.
2.3 Disclaimer of an opinion
2.3.1 The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the
auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.
2.3.2 The auditor shall disclaim an opinion when, in extremely rare circumstances
involving multiple uncertainties.
2.4 Basis for opinion
When the auditor modifies the opinion on the financial statements, the
auditor shall, in addition to the specific elements required by SA 700
(Revised):
(a) Amend the heading “Basis for Opinion” required by para of SA 700
(Revised) to “Basis for Qualified Opinion,” “Basis for Adverse Opinion,”
or “Basis for Disclaimer of Opinion,” as appropriate; and
(b) Within this section, include a description of the matter giving rise to
the modification
2.5 Pervasive effects on the financial statements are those that, in the auditor’s
judgment:
(i) Are not confined to specific elements, accounts or items of the financial
statements;
(ii) If so confined, represent or could represent a substantial proportion
of the financial statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of
423
2.6
3 SA 706- Emphasis of Matter and other matter

3.1 Emphasis of Matter Para
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:
3.1.1 The auditor would not be required to modify the opinion in accordance with
SA 705 as a result of the matter and
3.1.2 When SA 701 applies, the matter has not been determined to be a key
audit matter to be communicated in the auditor’s report
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3.1.3 Drafting EOM Para

When the auditor includes an Emphasis of Matter paragraph in the auditor’s
 Include the paragraph within a separate section of the auditor’s
report with an appropriate heading that includes the term “Emphasis
of Matter
 Include in the paragraph a clear reference to the matter being
emphasized and to where relevant disclosures that fully describe
the matter can be found in the financial statements. The paragraph
shall refer only to information presented or disclosed in the financial
statements
 Indicate that the auditor’s opinion is not modified in respect of the
matter emphasized
Example : Effects of Fire in Company’s Factory
We draw attention to Note Y of the financial statements, which describes
the effects of a fire in the Company’s factory. Our opinion is not modified in
respect of this matter.
3.2 Other Matter
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:
3.2.1 This is not prohibited by law or regulation
3.2.2 When SA 701 applies, the matter has not been determined to be a key
audit matter to be communicated in the auditor’s report
3.2.3 Drafting OM Para
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
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Example
In case of auditor of CFS The report includes an Other Matter paragraph in
respect of the auditor’s responsibility in respect of subsidiaries not audited
by him but which form part of the consolidated financial statements under
report.
“ We did not audit the financial statements of certain subsidiaries, whose
financial statements reflect total assets (net) of Rs. XXXX as at March 31,
20XX, total revenues of Rs. XXXX and net cash outflows amounting to
Rs. XXXX for the year then ended. These financial statements have been
audited by other auditors whose reports have been furnished to us by the
Management, and our opinion is based solely on the reports of the other
auditors. Our opinion is not modified in respect of this matter.”
3.3 Emphasis of Matter and Other Matter Paragraph can be substituted by Key
Audit Matters.
3.4 Some examples of circumstances where the auditor may consider it
necessary to include an Emphasis of Matter paragraph.
• An uncertainty relating to the future outcome of exceptional litigation
or regulatory action.
• A significant subsequent event that occurs between the date of the
financial statements and the date of the auditor’s report.
• Early application (where permitted) of a new accounting standard
that has a material effect on the financial statements.
• A major catastrophe that has had, or continues to have, a significant
effect on the entity’s financial position.
4 SA 701 Communicating Key Audit matters in the Independent Auditor’s
Report
4.1 Objective
The objectives of the auditor are to determine key audit matters and,
having formed an opinion on the financial statements, communicate those
matters by describing them in the auditor’s report.
{Key audit matters— Those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial statements
of the current period. Key audit matters are selected from matters
communicated with those charged with governance.}
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4.2 Communicating key audit matters in the auditor’s report is not:

(a) A substitute for disclosures in the financial statements that the
applicable financial reporting framework requires management to
make, or that are otherwise necessary to achieve fair presentation;
(b) A substitute for the auditor expressing a modified opinion when
required as per SA 705;
(c) A substitute for reporting in accordance with SA 570 when a material
uncertainty exists relating to events or conditions that may cast
significant doubt on an entity’s ability to continue as a going concern;
or
(d) A separate opinion on individual matters.
4.3 In determining which are key matters auditor shall take the following
factors into consideration :-
(a) Areas of higher assessed risk of material misstatement, or significant
risks identified in accordance with SA 315.
(b) Significant Management judgment, including accounting estimates
that have been identified as having high estimation uncertainty.
(c) The effect on the audit of significant events or transactions that
occurred during the period.
4.4 The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading
“Key Audit Matters”
The introductory language shall state that:
(a) Key audit matters are those matters that, in the auditor’s professional
judgment, were of most significance in the audit of the financial
statements [of the current period]; and
(b) These matters were addressed in the context of the audit of the
financial statements as a whole, and in forming the auditor’s opinion
thereon, and the auditor does not provide a separate opinion on these
matters.
{Describing key matter will cover(a) Why the matter was considered to
be one of most significance in the audit and therefore determined to
be a key audit matter; and (b) How the matter was addressed in the
audit.}
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4.5 Interaction between Descriptions of Key Audit Matters and Other Elements
Required to Be Included in the Auditor’s Report
A matter giving rise to a modified opinion in accordance with SA 705
or a material uncertainty related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern in
accordance with SA 570 are by their nature are key audit matters. However,
these matters shall not be described in the Key Audit Matters provided they
are:
(a) Reported in accordance with the applicable SA(s)(i.e.705 or 570); and
(b) Include a reference to the Basis for Qualified (Adverse) Opinion or the
Material Uncertainty Related to Going Concern section in the Key Audit
Matters section.
4.6 If the auditor determines, depending on the facts and circumstances of the
entity and the audit, that there are no key audit matters to communicate
or that the only key audit matters communicated are those matters
addressed by preceeding para (discussed above) , the auditor shall include
a statement to this effect in a separate section of the auditor’s report
under the heading “Key Audit Matters.”
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.]
4.7 Circumstances in Which a Matter Determined to Be a Key Audit Matter Is
Not Communicated in the Auditor’s Report
The auditor shall describe each key audit matter in the auditor’s report
unless:
(a) Law or regulation precludes public disclosure about the matter; or
(b) In extremely rare circumstances, the auditor determines that the
matter should not be communicated in the auditor’s report because
the adverse consequences of doing so would reasonably be expected
to outweigh the public interest benefits of such communication. (This
shall not apply if the entity has publicly disclosed information about
the matter.)
5 SA 710 : Comparative information--Corresponding figures and comparative
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5.1 Comparative information means 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.
5.2 The frameworks and methods of presentation that are referred to in this
SA are:-
a) Corresponding figures where amounts and other disclosures for
preceding period are included as part of current period financial
statements, The level of detail presented in the corresponding
amounts and disclosures is dictated primarily by its relevance to the
current period and figures.
b) Comparative Financial Statements where amounts and other
disclosures for preceding period are included for comparison with
financial statements of current period, The level of information
included in those comparative financial statements is comparable
with that of the financial statements of the current period.
5.3 The objectives of the auditor are 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 for comparative information in the
applicable financial reporting framework; and to report in accordance with
the auditor’s reporting responsibilities.
5.4 Audit procedures :-
a. The auditor shall determine whether the financial statements include
the comparative information required by the applicable financial
reporting framework and whether such information is appropriately
classified. For this purpose, the auditor shall evaluate whether:
(i) The comparative information agrees with the amounts and other
disclosures presented in the prior period; and
(ii) The accounting policies reflected in the comparative information
are consistent with those applied in the current period or,if there
have been changes in accounting policies, whether those changes
have been properly accounted for and adequately presented and
disclosed.
429
b. If the auditor becomes aware of a possible material misstatement

in the comparative information while performing the current period
audit, the auditor shall perform such additional audit procedures as
are necessary in the circumstances to obtain sufficient appropriate
audit evidence to determine whether a material misstatement exists.
c. The auditor shall obtain specific written representation regarding any
prior item that is disclosed in current year’s financial statement.
5.5 The essential audit reporting differences between the approaches are:
(a) For corresponding figures, the auditor’s opinion on the financial
statements refers to the current period only; whereas
(b) For comparative financial statements, the auditor’s opinion refers to
each period for which financial statements are presented.
5.6 Reporting Requirements
5.6.1 With Reference to Corresponding Figures:
i. When corresponding figures are presented, the auditor’s opinion
shall not refer to the corresponding figures except in the following
circumstances:
• If the auditor’s report of the previous period contains other than
an unqualified opinion.
• 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.
ii. If the prior period financial statement are not audited, than he should
obtain sufficient audit evidence that the opening balance does not
contain any material misstatement.
5.6.2 With Reference to Comparative Financial Statement:
i. When comparative financial statement are presented -
• The auditor’s opinion shall refer to each period for which the
financial statements are presented.
• 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.
430
• 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 years statements are amended with new report by the
predecessor auditor, then the auditor shall report only on the
current period.
ii. Prior Period Financial Statements Audited by a Predecessor Auditor
If the financial statement of the prior period were audited by a
predecessor auditor, in addition to expressing an opinion on the
current period’s financial statements, the auditor shall state in an
Other Matter paragraph:
• That the financial statement of the prior period were audited by
a predecessor auditor;
• The type of the opinion expressed by the predecessor auditor;
• The date of that audit report.
iii. Prior Period Financial Statements 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
431

1 “The auditor shall form an opinion on whether the financial statements
are prepared, in all material respects, in accordance with the applicable
financial reporting framework.” Explain
Ans Topic 1.1 & 1.2
2 “The auditor shall evaluate whether the financial statements are prepared,
in all material respects, in accordance with the requirements of the
applicable financial reporting framework. This evaluation shall include
consideration of the qualitative aspects of the entity’s accounting practices,
including indicators of possible bias in management’s judgments.” Discuss
stating clearly qualitative aspects of the entity’s accounting practices.
Ans a) In considering the qualitative aspects of the entity’s accounting practices,
the auditor may become aware of possible bias in management’s judgments.
b) The auditor may conclude that lack of neutrality together with uncorrected
 The selective correction of misstatements brought to management’s
attention during the audit
 Possible management bias in the making of accounting estimates
3 Discuss the factors affecting the decision of the auditor regarding which
type of modified opinion is appropriate.
Ans The decision regarding which type of modified opinion is appropriate
depends upon:
a) 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
b) The auditor’s judgment about the pervasiveness of the effects or
possible effects of the matter on the financial statements
4 Discuss the objective of the auditor as per Standard on Auditing (SA) 705
“Modifications to The Opinion in The Independent Auditor’s Report”.
432
Ans As per Standard on Auditing (SA) 705 “Modifications To The Opinion In The
Independent Auditor’s Report”, the objective of the auditor is to express
clearly an appropriately modified opinion on the financial statements that
is necessary when:
a) The auditor concludes, based on the audit evidence obtained, that
the financial statements as a whole are not free from material
misstatement; or
b) The auditor is unable to obtain sufficient appropriate audit evidence
to conclude that the financial statements as a whole are free from
material misstatement.
5 “The auditor shall form an opinion on whether the financial statements
financial reporting framework.” Explain
Ans The auditor shall form an opinion on whether the financial statements
In order to form that opinion, the auditor shall conclude as to whether the
auditor has obtained reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due
to fraud or error.
• That conclusion shall take into account:
a) Whether suficient appropriate audit evidence has been obtained;
b) Whether
uncorrected misstatements are material, individually or in
aggregate;
c) The evaluations.
6 “The auditor shall evaluate whether the financial statements are prepared,
in all material respects, in accordance with the requirements of the
applicable financial reporting framework. This evaluation shall include
consideration of the qualitative aspects of the entity’s accounting practices,
including indicators of possible bias in management’s judgments.” Discuss
stating clearly qualitative aspects of the entity’s accounting practices
Ans Qualitative Aspects of the Entity’s Accounting Practices
i.) Management makes a number of judgments about the amounts and
disclosures in the financial statements.
ii.) SA 260 (Revised) contains a discussion of the qualitative aspects of
accounting practices.
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iii.) In considering the qualitative aspects of the entity’s accounting

practices, the auditor may become aware of possible bias in
management’s judgments.
a) The selective correction of misstatements brought to management’s
b) Possible management bias in the making of accounting estimates.
7 Discuss the objective of the auditor as per Standard on Auditing (SA) 705
“Modifications to The Opinion in The Independent Auditor’s Report”
Ans As per Standard on Auditing (SA) 705 “Modifications To The Opinion In The
Independent Auditor’s Report”, the objective of the auditor is to express
clearly an appropriately modified opinion on the financial statements that
is necessary when:
a) The auditor concludes, based on the audit evidence obtained, that
the financial statements as a whole are not free from material
misstatement; or
b) The auditor is unable to obtain suficient appropriate audit evidence
to conclude that the financial statements as a whole are free from
material misstatement.
8 In considering the qualitative aspects of the entity’s accounting practices, the
Explain and analyse the indicators of lack of neutrality with examples,
wherever required.
Ans In considering the qualitative aspects of the entity’s accounting practices, the
a) The selective correction of misstatements brought to management’s
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Example
 Correcting misstatements with the effect of increasing reported earnings,
but not correcting misstatements that have the effect of decreasing
reported earnings.
 The combination of several deficiencies affecting the same significant
account or disclosure (or the same internal control component)
could amount to a significant deficiency (or material weakness if
required to be communicated in the jurisdiction).
This evaluation requires judgment and involvement of audit executives.
b) Possible management bias in the making of accounting estimates.
9 “An auditor is required to make specific evaluations while forming an
opinion in an audit report.” State those evaluations.
Ans • In particular, the auditor shall evaluate whether :
i.) The financial statements adequately disclose the significant accounting
ii.) The accounting policies selected and applied are consistent with the
AFRF and are appropriate;
i) The accounting estimates made by management are reasonable;
ii) The information presented in the financial statements is relevant,
iii) The financial statements provide adequate disclosures to enable the
iv) The terminology used in the financial statements, including the title
of each financial statement, is appropriate.
10 The nature of the comparative information that is presented in an entity’s
financial statements depends on the requirements of the AFRF. There are
two different broad approaches to the auditor’s reporting responsibilities
in respect of such comparative information: corresponding figures and
comparative financial statements. Explain clearly stating the essential audit
reporting differences between the approaches. Also define comparative
information and audit procedures regarding comparative information.
435
Ans • The nature of the comparative information that is presented in an

entity’s financial statements depends on the requirements of the
• There are two different broad approaches to the auditor’s reporting
responsibilities in respect of such comparative information:
corresponding figures and comparative financial statements.
• The approach to be adopted is often specified by law or regulation but
may also be specified in the terms of engagement. The essential audit
reporting differences between the approaches are:
- For corresponding figures, the auditor’s opinion on the financial
- For comparative financial statements, the auditor’s opinion refers
to each period for which financial statements are presented.
436
1. Which of the following is not a type of modified opinion:

(a) qualified opinion (b) adverse opinion
(c) disclaimer of opinion (d) negative opinion.
2. The auditor shall express _______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.
(a) Adverse (b) Qualified
(c) Disclaimer (d) unmodified opinion with key audit matter paragraph.
3. SA-700 requires the use of specific headings, which are intended to assist in making
auditor’s reports that refer to audits that have been conducted in accordance with
SA more recognizable. Which of the following is the specific heading:
(a) Key audit matters (b) Basis of opinion
(c) Date (d) All of the above
4. The Opinion section of the auditor’s report shall:

5. As per SA 710, the auditor shall also consider—

a) SA 510 b) SA 560 c) SA 720 d) Both (a) and (b)
6. Under which of the following section auditor shall mention in his report that he
has conducted audit engagement in accordance with SAs issued by ICAI and has
complied with code of ethics and relevant ethical requirements
a) Opinion b) SA and Code of Ethics
c) Compliance with Standards d) Basis for Opinion
7. The auditor shall describe each key audit matter in the auditor’s report unless
a) Law or regulation precludes public disclosure about the matter
b) In extremely rare circumstances, the auditor determines that the matter should
437
not be communicated in the auditor’s report because the adverse consequences

of doing so would reasonably be expected outweigh the public interest benefits
of such communication
c) (a) or (b)
d) None of these
8. Which of the following is true

a) If auditor concludes that opening balances contain misstatements that
materially affects the current period’s financial statements, the auditor shall
express disclaimer of opinion.
b) If the auditor is unable to obtain sufficient appropriate audit evidence regarding
the opening balances, the auditor shall express a qualified opinion or disclaimer
of opinion, as appropriate, in accordance with SA 705.
c) If auditor concludes that the current period’s accounting policies are not
consistently applied in relation to opening balances, or a change in accounting
policies is not properly accounted for , or not adequately disclosed in accordance
with applicable reporting framework, the auditor shall express a qualified
opinion or an adverse opinion as appropriate, in accordance with SA 705.
d) Both (b) and (c)
9. The date on auditor’s report should not be__

a) the data of AGM
b) later than the date on which the accounts are approved in board’s meeting
c) earlier than the date on which the accounts are approved by the management
d) Both (a) and (b)
10. Auditor’s report on prior period i.e. year ended 31 March 2017 included a modified
opinion on an unresolved matter. If such matter is not relevant/ immaterial to the
current period figures in the financial statements for the year ended 31 March 2018,
how should the auditors deal with this matter in his auditors report for the year
ended 31 March 2018?
a) Since the matter is not relevant/ material to current period figures, no reporting
in respect of this matter would be required in the auditors report for the year
ended 31 March 2018.
b) Modify opinion on current period’s financial statements because of the effects
or possible effects of the unresolved matter on the comparability of the current
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period and corresponding figures in the auditors report for the year ended 31
March 2018.
c) Considering the matter is not relevant/ material to current period figures, the
management may include a note in the financial statements and basis that no
reporting in respect of this matter would be required in the auditors report for
the year ended 31 March 2018.
d) Include an emphasis of matter because of the effects or possible effects of the
unresolved matter on the comparability of the current period and corresponding
figuresin the auditors report for the year ended 31 March 2018.
11. If auditor is unable to obtain sufficient appropriate audit evidence with respect to
any material item(s) of the financial statements and possible effect if pervasive, he
shall express
a) Unmodified opinion b) Adverse opinion
c) Disclaimer of opinion d) Qualified opinion
12. Which of the following is title of auditor’s report

a) Auditor’s Report
b) Independent Auditor’s Report
c) Audit Report on the Financial Statements
d) Reporting on the Financial statements
13. Which of the following is not content of basis of opinion section

a) Name of the entity
b) Statement that audit was conducted in accordance with SAs
c) Statement that auditor believes that audit evidence the auditor has obtained
is sufficient and appropriate to provide a basis for the auditor’s opinion.
d) Reference to the section of auditor’s report that describes the auditor’s
responsibilities under the SAs.
14. The place in auditor’s report represent

a) Address of auditor
b) Name of city, where audit report has been signed
c) Name of city, where office of entity is situated
d) None of these
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15. Key Audit Matters are selected from matters

a) Communicated to members of engagement team
b) Communicated to management of the entity
c) Communicated to TCWG of the entity d) Communicated to CG.
16. The auditor’s report shall not include a Key Audit Matter section in accordance with
SA 701, in case of
a) Disclaimer of Opinion b) Adverse Opinion
c) Qualified Opinion d) All of the above
17. To disclose an early application by entity (where permitted) of a new accounting

standards that has a pervasive effect on the financial statements in advance of its
effective date, auditor shall introduce_________________ paragraph in his report.
a) Emphasis of Matter b) Other Matter
c) Key Audit Matter d) Basis for Modified Opinion
18. The matters relating to going concern may

a) Be a key audit matter as per SA 701
b) Should not be a key audit matter as per SA-701 because these are dealt only
in SA-570
c) Key audit matters must not include going concern matters
d) None of these
19. __________ framework means comparative information is included as an integral

part of current period financial statements---
a) Corresponding figures b) Comparative financial statements
c) Both option (a) and option (b) d) Either option (a) or option (b)
20. If last year financial statements are unaudited, then as per SA 710 the auditor shall
state in ______ section of audit report that corresponding financial statements are
unaudited.
a) Auditor’s responsibility b) Opinion
c) Emphasis of matter d) Other matters
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21. SA 299 does not deal with the relationship between

a) Principal auditor and component’s auditor b) Auditor and expert
c) Auditor and internal auditor d) All of these.
22. If joint auditors are in disagreement with respect to the opinion to be covered by
audit report, they shall
a) Express their opinion in a separate audit report
b) Notify to the client
c) Express their opinion in a common audit report through a note
d) Notify ROC regarding disagreement in audit opinion.
23. Which of the following statements is incorrect

a) The joint auditors shall obtain common engagement letter and common
management representation letter
b) Joint auditors are not entitled to rely on the work of other joint auditors
c) After identification and allocation of work among joint auditors, the work
allocation document shall be signed by all the joint auditors and the same
shall be communicated to TCWG of the entity.
d) Before finalizing their audit report, the joint auditors shall discuss and
communicate with each other their respective conclusions.
24. The auditor should state the reasons for his reservations in audit report and should
try to quantify the effect on them. This should be done in case he has expressed _
i) a qualified opinion
ii) an unqualified opinion with emphasis of matter paragraph
iii) an adverse opinion
iv) a disclaimer of opinion
a) i) only b) i) and (iv) only
c) i), iii) and (iv) only d) All of the above
25. Medivision Industries designs and manufactures spectacles. Medivision’s year end
was 31March 2018 and its draft financial statements show a profit before tax of
Rs.60 lakh. The fieldwork stage for this audit has largely been completed but there
are few outstanding issues.
On 1 January 2018, Medivision began the commercial production of a new range
of lightweight frames which have been proven to keep their shape regardless as to
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how roughly they are treated. Up to 31 December 2017, the company had correctly
capitalized development costs of Rs.45 lakh relating to this project. The directors
believe that the new frames will have a product life of three years. The financial
statements show development costs at a carrying amount of Rs.45 lakh. Medivision’s
accounting policy states that it amortizes intangible assets on a straight-line basis.
The auditor’s report for Medivision is due to be signed in the next week or so, and
you have been unable to resolve a disagreement with the directors concerning the
amortisation of the development costs. The directors have refused to include any
amortisation on the basis that sales of the product have not yet commenced.
Which of the following options correctly summarises the impact on the auditor’s
report if the issue remains unresolved?
(a) The auditor to provide an ‘Unmodified opinion’, since the directors are correct
not to include any amortisation on the basis that sales of the product have not
yet commenced.
(b) The auditor to provide an ‘Unmodified opinion’ with emphasis of matter
paragraph about the amortisation charge on the capitalised development
costs.
(c) The auditor to provide a Modified opinion - Adverse opinion since having
obtained sufficient appropriate evidence, concludes that the misstatement is
both material and pervasive.
(d). The auditor to provide a Modified opinion – Qualified opinion due to material
misstatement of not recording the amortization charge on the capitalised
development costs, which is material but not pervasive.
26. In order to form the opinion, the auditor shall conclude as to whether the auditor
has obtained ________about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error.
(a) reasonable assurance (b) absolute assurance
(c) Limited assurance (d) None of the above
27. Which of the following is not a type of modified opinion:

(c) disclaimer of opinion (d) None of the above
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Answer
1 D 8 D 15 C 22 A
2 A 9 C 16 A 23 B
3 D 10 B 17 A 24 A
4 D 11 C 18 A 25 D
5 D 12 B 19 A 26 A
6 D 13 A 20 D 27 D
7 C 14 B 21 D
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CASE 1.
M/s AB & Company is a firm of Chartered Accountants based in Mumbai. Mr A and Mr B
are the Partners of the Firm.
The Firm is engaged in various assignments including Audits. The Partners are taking a
summary of their work in order
to prepare themselves to finalize the Audit and issue the Audit Report to the clients. You
are requested to go through the
following and answer the questions that follow:
• During the Audit of M/s Persistent & Co, Mr A found out that the Firm has changed
the method of Depreciation from WDV to SLM but has not given the retrospective
effect. Mr A has calculated the Difference of Depreciation but M/s Persistent & Co
has stated that they don’t want to change the Financial Statements and if Auditor
persists they may give the effect in the next Financial Year.
• During the Audit of M/s Dubious Brothers, Mr B observed that the Firm had a very
large amount of Cash Sales and there were no details of the Customers to whom
the sale was made. Further, Cash generated was not even deposited into bank
regularly. When Mr B asked the Firm to give him an opportunity to count Cash, the
Manager of the Firm said that the Cash is with the Owner and it cannot be made
available to the Auditor for the checking purpose. The Manager also declined to
give an opportunity for stock verification to Mr B.
• During the Audit of M/s Honest & Associates, Mr A came to know that the Firm has
changed its method of Valuation of Stock. This change has a material impact on
the Financial Statement of the Firm. The Firm has made relevant disclosures in the
Financial Statements and has given proper accounting treatment to this exercise.
1 In case of M/s Persistent & Company, what would be an ideal Audit Opinion?
(a) Unmodified (b) Qualified
(c) Adverse (d) Disclaimer
2 In case of M/s Dubious Brothers, what Audit Opinion should the Auditor give?
(a) Qualified (b) Adverse
(c) Disclaimer (d) Unmodified
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3 According to you, what would be appropriate course to take in case of M/s Honest
& Associates?
(a) Issue Qualified Opinion
(b) Issue Adverse Opinion
(c) Mention the fact of change in method in Emphasis of Matter Paragraph
(d) Issue Disclaimer of Opinion
4 When the Auditor, after conclusion of an Audit exercise, is of the opinion that there
are material misstatements in the Financial Statements but they are not pervasive,
then what should an Auditor do?
(a) Issue Unmodified Opinion
(b) Issue Qualified Opinion
(c) Issue Disclaimer of Opinion
(d) Mention it in Emphasis of Matter Paragraph
5 When the Auditor concludes that the financial statements are prepared, in all
material respects, in accordance with the applicable financial reporting framework,
Auditor shall give:
(a) Modified Opinion (b) Qualified Opinion
(c) Disclaimer of Opinion (d) Unmodified Opinion
Answer
1 B 2 C 3 C 4 B 5 D
CASE 2.
ARG & Associates who have been the auditors of Sigma Ltd for the financial year 2019-
20 have concluded their audit, prepared their notes and are ready to draft the Auditor’s
Report. As per SA 700, the auditor shall form an opinion on whether the financial
statements are prepared, in all material respects, in accordance with the applicable
There seems to be some confusion between the audit team members in regard to format
of Audit report, its contents, issues to be incorporated etc. in the Auditor’s report.
Also, Sigma Ltd received a grant of ` 50 lakhs under the PM Make in India Subsidy Scheme
for acquiring machinery for setting up new plant.
The entire grant received was credited to Profit and Loss Account. Mr Ram and Mr Sham
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(two partners of ARG & Associates) differ on an audit point relating to audit of Sigma Ltd.
Mr Ram is of the view that it will attract qualification however Mr Sham disagreed with
his opinion. Based on above facts, you are required to answer below questions which
require special attention while preparing the Audit report of Sigma Ltd.
1 The auditor shall express ________________ when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the
(c) unmodified opinion (d) disclaimer of opinion
2 In relation to grant of ` 50 lakhs, while preparing the audit report, the auditor needs
to:
(a) qualify the report stating the fact that the income has been overstated to the
extent of the amount of grant net of proportionate credit that would have
been worked out.
(b) qualify the report stating the fact that the income has been understated to the
extent of the amount of grant net of proportionate debit that would have been
worked out.
(c) express unmodified opinion as Accounting Standard-12 allow the recognition
of grant received as income.
3 The auditor shall express __________________ when the auditor, having obtained
(c) unmodified opinion (d) disclaimer of opinion
4 Assume Mr Ram and Mr Sham from two different joint auditor’s firms. How audit
report should be made in circumstances where two joint auditors have difference of
opinion in relation to a specific issue -
(a) The view of Mr Ram will prevail because of prudence
(b) Joint Auditors should come at a common point and give opinion accordingly
(c) The matter should be referred to a senior joint auditor firm
(d) Mr Ram and Mr Sham would issue separate audit reports
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5 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, or that are
otherwise necessary to achieve fair presentation.
(b) 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) a substitute for reporting in accordance with SA 570 when a material uncertainty
exists relating to events or conditions that may cast significant doubt on an
entity’s ability to continue as a going concern;
(d) a separate opinion on individual matters.
Answer
1 C 2 A 3 B 4 D 5 A
CASE 3.
Ravish and Co, a chartered accountancy firm, has been auditing the books of PQ groups
of banks, from the past 6 years. Ravish and Co. has a good standing reputation as auditor
and there are regular quality control activities performed by the firm’s engagement
partner. The recent weekly meeting of the firm’s staff included discussions on each of the
element of the firm’s system of quality control as per SQC 1 and code of ethics as per
SA 200. During the 7th year of audit, there have been some changes in the bank due to
which the firm is considering revision of audit terms as per SA 210. Also, new laws and
updates in the field of accounting makes the auditor feel that the financial reporting
framework used by the bank is not acceptable as per law and is considering the impact
of this on his audit report. Owing to the changes, Mr. Ravish instructs his articles to go
through the audit programme once again and make necessary changes to it. He also
reviews the audit plan developed for the bank. After the above exercise of re-planning
and revision in terms of the engagement as per SA 210, Mr. Ravish and Co. carries on the
audit of the 7th year and observes the following issues:
a) As per the Income Tax Act 1961, the banks are to report certain high value transactions
to the department. On verification of certain records, the auditor suspects that
there is noncompliance with the law and in his judgment; the effect of the suspected
non-compliance may be material to the financial statements. On discussion with
management, he does not get sufficient information supportive that the bank is in
compliance with the law.
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b) The management of the bank shows recent investigation reports by external

authorities to the auditor wherein red flags have been raised in the internal control
system of the bank. The management blames the auditor that he has not audited the
entity’s internal system correctly and threatens to hold the auditor responsible for
the same. Considering the above facts, answer the following questions by choosing
the correct answer.
1 Which among the following is NOT an element of firm’s system of quality control?
(a) Ethical Requirements
(b) Acceptance and continuance of client relationships and specific engagements
(c) Engagement review
(d) Monitoring
2 When conducting an audit of financial statement, which of the following is NOT a

fundamental principle of professional ethics?
(a) Integrity (b) Professional Skepticism
(c) Confidentiality (d) Objectivity
3 Which of the following statement is incorrect considering the context of revision in

audit terms as per SA 210?
(a) Indication that the entity has misunderstood the objective and scope of the
audit
(b) A significant change in ownership of the bank
(c) A change in legal or regulatory requirements
(d) Significant change in the audit team
4 The auditor has found that the financial reporting framework provided by law or
regulation is unacceptable. What should be the impact of this on his report?
(a) Issue an adverse opinion owing to unacceptable financial reporting framework
(b) Include an “Emphasis of Matter Paragraph” drawing user’s attention to
additional disclosures other than those as per law.
(c) Include an “Other Matter paragraph” drawing user’s attention to additional
disclosure other than those as per law. (d) No need of any mention in report
as law or regulation has prescribed the framework and law holds highest
authority.
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5 Which among the following best defines an Audit Programme?

(a) An audit programme consists of a series of verification procedures to be applied
to the financial statements and accounts of a given company for the purpose
of obtaining sufficient evidence to enable the auditor to express an informed
opinion on such statements.
(b) An audit programme is a statement containing the details of the hours worked,
work done and output achieved by the staff of the audit firm used by the
principal for review purpose
(c) An audit programme is a checklist developed by the audit firm covering
verification aspects which are common to clients handled by the audit firm.
(d) An audit programme is the policies and procedures adopted by the company
for ensuring orderly and efficient conduct of audit, including timely provision
of records to auditors and prompt response to audit queries.
Answer
1 C 2 B 3 D 4 B 5 A
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(i) The auditor shall express a qualified opinion when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the
(ii) There is no need of addressee in the Auditor’s report.
(iii) The auditor shall modify the opinion in the auditor’s report only when the auditor
concludes that, based on the audit evidence obtained, the financial statements as
a whole are not free from material misstatement.
(iv) The auditor shall express a disclaimer of opinion when the auditor, having obtained
(v) Communicating key audit matter in the auditor’s report constitutes a substitute for
disclosure in the financial statements.
(vi) When the auditor has to express an adverse opinion, he need not communicate with
those charged with governance as this may have an impact on payment of his audit
fees.
(vii) Instead of modifying an opinion in accordance with SA 705, the statutory auditor
can use Key Audit Matter paragraph in the audit report with an unmodified opinion.
(viii) In considering the qualitative aspects of the entity’s accounting practices, the auditor
may not become aware of possible bias in management’s judgments.
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(i) Incorrect: 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.1.57
(ii) Incorrect: The auditor’s report shall be addressed, as appropriate, based on the
circumstances of the engagement. Law, regulation or the terms of the engagement
may specify to whom the auditor’s report is to be addressed. The auditor’s report
is normally addressed to those for whom the report is prepared, often either to the
shareholders or to those charged with governance of the entity whose financial
statements are being audited.
(iii) Incorrect: The auditor shall modify the opinion in the auditor’s report when: (a)
The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or (b) The auditor is
unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.
(iv) Correct: The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial
statements.
(v) Incorrect: Communicating key audit matters in the auditor’s report is in the context
of the auditor having formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor’s report is not a substitute for
disclosures in the financial statements that the applicable financial reporting
framework requires management to make, or that are otherwise necessary to
achieve fair presentation.
(vi) Incorrect: When the auditor expects to modify the opinion in the auditor’s report, the
auditor shall communicate with those charged with governance the circumstances
that led to the expected modification and the wording of the modification.
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(vii) Incorrect: Communicating key audit matters in the auditor’s report is 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 (Revised);
(viii) Incorrect: In considering the qualitative aspects of the entity’s accounting practices,
the auditor may become aware of possible bias in management’s judgments. The
auditor may conclude that lack of neutrality together with uncorrected misstatements
causes the financial statements to be materially misstated.
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AUDIT OF BANKS
Sr.No Particulars JKSC Topic Reference

1 Basics Introduction and
Topic 1
2 Form and Content of Financial Statements Topic 4.4
3 Audit of accounts Topic 4
4 Auditor’s Report Topic 4.5.5
5 Advances and its Audit Topic 6
6 Audit Approach & procedure for verification of Income Topic 8
earned by Bank
6 Audit Approach and Procedures for Verification of Topic 9
expenditure/Provision and contingency
7 Bank Audit Approach Topic 4
Introduction to Bank Audit

Peculiarities involved:
• Huge volumes and complexity of transactions,
• Wide geographical spread of banks’ network,
• Large range of products and services offered,
• Extensive use of technology,
• Strict vigilance by the banking regulator etc
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Sr.No Particulars
1 Types of Banks
1.1 Commercial Banks:
Commercial banks are the most wide spread banking institutions in India,
that provide a number of products and services to general public and other
segments of economy. Two of its main functions are (1) accepting deposits
and (2) granting advances.
1.2 Regional Rural Banks (RRBs):
Regional Rural Banks(RRBs) are Indian Scheduled Commercial Banks
(Government Banks) operating at regional level in different States of India.
They have been created with a view of serving primarily the rural areas of
India with basic banking and financial services.
 E.g Andhra Pragathi Grameena Bank.
1.3 Co-operative Banks
It function like Commercial Banks only but are set up on the basis of
Cooperative Principles and registered under the Cooperative Societies Act of
the respective state or the Multistate Cooperative Societies Act and usually
cater to the needs of the agricultural and rural sectors.
Examples are :- The Gujarat State Co-operative Bank Ltd.,etc.
1.4 Payments Banks
These are a new type of banks which have been recently introduced by RBI.
They are allowed to accept restricted deposits but they cannot issue loans
and credit cards. However , customers can open Current & Savings accounts
and also avail the facility of ATM cum Debit cards , Internet-banking &
Mobilebanking.
Examples are :- Airtel Payments Bank , India Post Payments Bank, Paytm
Payments Bank , etc.
1.5 Development Banks had been conceptualized to provide funds for
infrastructural facilities important for the economic growth of the country.
Examples are:- Industrial Finance Corporation of India (IFCI), Industrial
Development Bank of India (IDBI), Small Industries Development Bank of
India (SIDBI) , etc.
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1.6 Small Finance Banks have been set up by RBI to make available basic financial
and banking facilities to the unserved and unorganised sectors like small
marginal farmers, small & micro business units, etc.
Examples are:- Equitas Small Finance Bank , AU Small Finance Bank , etc.
2 Regulatory Framework
2.1 Banking Regulation Act, 1959
2.2 State Bank of India Act, 1955
2.3 Companies Act, 2013
2.4 State Bank of India (Subsidiary Banks) Act, 1959
2.5 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
2.6 Regional Rural Banks Act, 1976
2.7 Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
2.8 Information Technology Act, 2000
2.9 Prevention of Money Laundering Act, 2002
2.10 Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act,2002
2.11 Credit Information Companies (Regulation) Act, 2005
2.12 Payment and Settlement Systems Act, 2007
2.13 Reserve Bank of India Act, 1934
3 Accounting System of Banks
3.1 Banks may be divided into three board categorises based on the level of
computerisation:
 Non-computerised banks.
 Partially Computerised banks.
 Fully computerised banks.
3.2 In the Computerised environment, it is imperative that the auditor is
familiar with, and is satisfied that, all the norms/parameters as per the
latest applicable RBI guidelines are incorporated and built into the system
that generates information having a effect on the classification/ provisions
and income recognition.
3.3 A bank should have appropriate controls to manage its risks, including
effective segregation of duties
3.4 The auditor should not go by the assumption that the system generated
information is correct and can be relied upon without evidence that
demonstrates that the system driven information is based on validation of
the required parameters for the time being in force and applicable
4 Bank Audit
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4.1 Drawing an Audit Plan :-

An audit plan should be drawn up based on :-
• the nature and level of operations,
• nature of adverse features,
• level of compliance based on previous reports and
• audit risks based on inadequacy in or breach of internal controls and
the familiarization exercise carried out
4.2 Control Environment at the Bank
A bank should have appropriate controls to mitigate its risks, including
effective segregation of duties (particularly, between front and back
offices), accurate measurement and reporting of positions, verification and
approval of transactions, reconciliation of positions and results, setting
up limits, reporting and approval of exceptions, physical security and
contingency planning
4.2.1 The following are certain common questions /steps, which have to be kept
in mind while undertaking/ performing control activities:
Nature of Questions to be considered / answered

Questions
Who • Who performs the control?
• Does the above person have requisite knowledge and
authority to perform the control?
What • What evidence is generated to prove that the control is
performed?
When • When and with what frequency is the control performed?
• Is the frequency enough to prevent, detect and correct
Risk of misstatements?
Where • Where is the evidence of performance of the control
retained?
• For how long is the evidence retained?
• Is the evidence accessible for / available for audit?
Why • Why is the control being performed?
• What type of errors are prevented or detected through
the performance of the control?
How • How is the control performed?
• What are the control activities?
• Can these activities be bypassed?
• Can the bypass, if any, be detected?
• How are exceptions / deviations resolved on identification?
• What is the time frame for resolving the exceptions /
deviations?
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4.3 Engagement Team Discussion

I. The engagement team should hold discussions to gain better
understanding of the bank and its environment, including internal
control, and also to assess the potential for material misstatements
of the financial statements.
II. The engagement team discussion ordinarily includes a discussion of
the following matters:
(a) Errors that may be more likely to occur;
(b) Errors which have been identified in prior years;
(c) Method by which fraud might be perpetrated by bank personnel
or others within particular account balances and/or disclosures;
(d) Audit responses to Engagement Risk, Pervasive Risks, and Specific
Risks;
(e) Need to maintain professional skepticism throughout the audit
engagement;
(f) Need to alert for information or other conditions that indicates
that a material misstatement may have occurred (e.g., the
bank’s application of accounting policies in the given facts and
circumstances).
III. Advantages of such a discussion :-
• Specific emphasis should be provided to the susceptibility of
the bank’s financial statements to material misstatement due
to fraud, that enables the engagement team to consider an
appropriate response to fraud risks, including those related to
engagement risk, pervasive risks, and specific risks.
• It further enables the audit engagement partner to delegate
the work to the experienced engagement team members, and to
determine the procedures to be followed when fraud is identified.
• Further, audit engagement partner may review the need to
involve specialists to address the issues relating to fraud.
4.4 Form and Content of Financial Statements
4.4.1 Sub-sections (1) and (2) of section 29 of the Act deal with the form
and content of financial statements of a banking company and their
authentication.
4.4.2 These subsections are also applicable to nationalised banks, State Bank
of India, subsidiaries of the State Bank of India, and Regional Rural Banks.
457
4.4.3  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.
4.4.4 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 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
4.5 Bank Audit provisions
4.5.1 Eligibility and Qualification
Refer Section 141 of the Companies Act, 2013 discussed in the “Chapter-10
The Company Audit”.
4.5.2 Appointment
Auditor of Appointed By
Nationalised Bank Board of Directors (prior approval
of RBI)
State Bank of India Comptroller and Auditor General of
India (in consultation with Central
Government)
Subsidiaries of SBI Board of Directors of SBI
Regional Rural Bank Board of Directors (prior approval
of Central Government)
Any other Case Shareholders in General Meeting
(prior approval of RBI)
4.5.3 Remuneration
 Nationalised Bank and SBI- Remuneration is fixed by RBI in consultation
with Central Government
 Apart from the above specific provisions, in other cases Remuneration
is governed by Sec 142 of Companies Act, 2013.
4.5.4 Powers of Auditor
 As per Companies Act, 2013
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4.5.5 Bank Audit Report

 In the case of a nationalised bank, the auditor is required to make a report
to the Central Government in which he has to state the following:
(a) whether, in his opinion, the balance sheet is a full and fair
balance sheet containing all the necessary particulars and is
properly drawn up so as to exhibit a true and fair view of the
affairs of the bank, and in case he had called for any explanation
or information, whether it has been given and whether it is
satisfactory;
(b) whether or not the transactions of the bank, which have come to
his notice, have been within the powers of that bank;
(c) whether or not the returns received from the offices and branches
of the bank have been found adequate for the purpose of his
audit;
(d) whether the profit and loss account shows a true balance of
profit or loss for the period covered by such account
(e) any other matter which he considers should be brought to the
notice of the Central Government.
 The report of auditors of State Bank of India is also to be made to the
Central Government and is almost identical to the auditor’s report in
the case of a nationalised bank.
 Format of the report
a. It should comply with Standards on Auditing as issued by THE
ICAI.
b. Information related to number of unaudited branches should be
given
c. Quantification of advances, deposits, interest income and interest
expense for such unaudited branches has also been disclosed in
the audit report.
d. Banking company is also required to state in his report in respect
of matters covered by Section 143 of the Companies Act, 2013.
e. CARO 2016 is not applicable to Banks.
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 Long Form Audit Report

a. RBI requires require the auditors to also furnish a long form audit
report (LFAR).
b. The matters which the banks require their auditors to deal with
in the long form audit report have been specified by the Reserve
Bank of India.
c. The LFAR is to be submitted before 30th June every year.
 Reporting to RBI
a) 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).
b) Regarding liability of accounting and auditing profession, the
said circular provided as under:
“If an accounting professional, whether in the course of internal
or external audit or in the process of institutional audit finds
anything susceptible to be fraud or fraudulent activity or act of
excess power or smell any foul play in any transaction, he should
refer the matter to the regulator. Any deliberate failure on the
part of the auditor should render himself liable for action”.
c) As per the above requirement, the member shall be required to
report the kind of matters stated in the circular to RBI.
4.5.6 Types of Bank Audit Reports to be issued (generally):
Presently, the Statutory Central Auditors (SCAs) have to furnish the following
reports in addition to their main audit report:
(a) Report on adequacy and operating effectiveness of Internal Controls
over Financial Reporting in case of banks which are registered as
companies under the Companies Act in terms of Section 143(3)(i) of
the Companies Act, 2013 which is normally to be given as an Annexure
to the main audit report as per the Guidance Note on Audit of Internal
Financial Controls over Financial Reporting issued by the ICAI.
(b) Long Form Audit Report. (LFAR)
(c) Report on compliance with SLR requirements.
460
(d) 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.
(e) 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.
(f) Report on whether any serious irregularity was noticed in the working
of the bank which requires immediate attention.
(g) 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.
(h) Report on instances of adverse credit-deposit ratio in the rural areas.
4.6 Steps/Stages in Conducting a Branch Audit
4.6.1 Initial consideration by the statutory auditor
(i) Declaration of Indebtedness: The RBI has advised that the banks, before
appointing their statutory central/branch auditors, should obtain a
declaration of indebtedness.
(ii) Internal Assignments in Banks by Statutory Auditors: Not allowed
(iii) Planning :
(a) Performing procedures required by SA 220; and
(b) Establish understanding of terms of engagement as per SA 210.
(iv) 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 in writing.
(v) Terms of Audit Engagements (SA 210)
(vi) Initial Engagements (SA 510)
(vii) Assessment of Engagement Risk: 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 also in planning decisions if the audit
is accepted
461
(viii) Establish the Engagement Team : The size and composition of the
engagement team would depend on the size, nature and complexity
of the bank’s operations.
(ix) Understanding the Bank and its Environment including internal controls (
SA 315)
4.6.2 Identifying and Assessing the Risks of Material Misstatements (SA 315)
4.6.3 Understanding the Bank and Its Environment including Internal Control.
An understanding of the bank and its environment, including its internal
control, enables the auditor:
• to identify and assess risk;
• to develop an audit plan so as to determine the operating effectiveness
of the controls and to address the specific risks.
4.6.4 Understand the Bank’s Accounting Process : 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.
4.6.5 Understanding the Risk Management Process
An effective risk management system in a bank generally requires
the following:
(a) Oversight and involvement in the control process by those charged with
governance: Those charged with governance (Board of Directors/
Managing Director) should approve written risk management policies.
The policies should be consistent with the bank’s business objectives
and strategies, capital strength, management expertise, regulatory
requirements and the types and amounts of risk it regards as
acceptable.
(b) Identification, measurement and monitoring of risks: Risks that could
significantly impact the achievement of bank’s goals should be
identified, measured and monitored against pre-approved limits and
criteria.
(c) Control activities: A bank should have appropriate controls to mitigate
its risks including effective segregation of duties (particularly between
front and back offices), accurate measurement and reporting of
positions, verification and approval of transactions, reconciliation
of positions and results, setting up limits, reporting and approval of
exceptions, physical security and contingency planning.
462
(d) Monitoring activities: Risk management models, methodologies and

assumptions used to measure and mitigate risk should be regularly
assessed and updated. This function may be conducted by the
independent risk management unit.
(e) Reliable information systems: Banks require reliable information
systems that provide adequate financial, operational and compliance
information on a timely and consistent basis. Those charged with
governance and management require risk management information
that is easily understood and that enables them to assess the changing
nature of the bank’s risk profile.
4.6.6 Engagement Team Discussions
4.6.7 Establish the Overall Audit Strategy( SA 300)
4.6.8 Develop the Audit Plan( SA 300 )
4.6.9 Audit Planning Memorandum : The auditor should summarise the audit
plan by preparing an audit planning memorandum in order to:
• Describe the expected scope and extent of the audit procedures to be
performed by the auditor.
• Highlight all significant issues and risks identified during their planning
and risk assessment activities, as well as the decisions concerning
reliance on controls.
• 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
4.6.10 Determine Audit Materiality
4.6.11 Consider Going Concern
4.6.12 Assess the Risk of Fraud including Money Laundering ( SA 240)
4.6.13 Assess Specific Risks(i.e Risk of material misstatement at Financial
statement level)
4.6.14 Risk Associated with Outsourcing of Activities
4.6.15 Response to the Assessed Risks (SA 330)
4.6.16 Stress Testing: All commercial banks shall put in place a Board approved ‘Stress
Testing framework’ to suit their individual requirements which would integrate
into their risk management systems.
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4.6.17 BASEL III framework: Basel norms or accords are the International Banking
regulations issued by the BCBS. The Basel Committee on Banking Supervision
(BCBS) and the Financial Stability Board (FSB) has undertaken an extensive
review of the regulatory framework in the wake of the sub-prime crisis
for more resilient banks and banking systems’. It has proposed certain
minimum set of criteria for inclusion of instruments in the new definition of
regulatory capital.
4.6.18 Reliance on / review of other reports:
The auditor should take into account the adverse comments, if any, on
advances appearing in the following-
a. Previous audit reports.
b. Latest internal inspection reports of bank officials.
c. Reserve Bank’s latest inspection report.
d. Concurrent / Internal audit report.
e. Report on verification of security.
f. Any other internal reports specially related to particular accounts.
5 Advances
5.1 Advances Comprises of

5.1.1 Term loans
5.1.2 Cash credits, Overdrafts, Demand Loans
5.1.3 Bills Discounted and Purchased
5.1.4 Adverse balances in Deposit Accounts
5.1.5 Participation on Risk Sharing basis
5.1.6 Interest bearing Staff Loans
5.2 Legal Requirements of disclosure of advances in bank’s balance sheet
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5.2.1 (i) Bills purchased and discounted

(ii) Cash credits, Overdrafts and loans repayable on demand
(iii) Term Loans
5.2.2 (i) Secured by tangible assets
(ii) Covered by Bank/Government guarantees
(iii) Unsecured
5.2.3 I. Advances in India:
(i) Priority sectors
(ii) Public sector
(iii) Banks
(iv) Others
5.2.4 II. Advances outside India:
(i) Due from Banks
(ii) Due from Others:
(a) Bills Purchased and discounted
(b) Syndicated loans and
(c) Others
5.3 Classification of advances
5.3.1 Standard
Standard asset for a bank is an asset that is not classified as an NPA. The
asset exhibits no problem in the normal course other than the usual
business risk Standard asset for a bank is an asset that is not classified as
an NPA. The asset exhibits no problem in the normal course other than the
usual business risk.
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5.3.2 Non Performing Asset

REFER 5.8
5.4 Nature of Security against advances
5.4.1 Primary:
Primary security refers to the security offered by the borrower for bank
finance or the one against which credit has been extended by the bank.
This security is the principal security for an advance.
5.4.2 Collateral:
Collateral security is an additional security. Security can be in any form i.e.
tangible or intangible asset, movable or immovable asset.
5.4.3 Examples of most common types of securities accepted by banks are the following.
 Personal Security of Guarantor
 Goods/Stocks/Debtors /Trade Receivables
 Gold Ornaments and Bullion
 Immovable Property
5.5 Mode of Creation of Security
Depending on the nature of the item concerned, creation of security may
take the form of a mortgage, pledge, hypothecation, assignment, set-off,
or lien.
5.5.1 Mortgage: Mortgage are of several kinds but the most important are the
Registered Mortgage and the Equitable Mortgage.
 A Registered Mortgage can be affected by a registered instrument
called the ‘Mortgage Deed’ signed by the mortgagor. It registers the
property to the mortgagee as a security.
 Equitable mortgage, on the other hand, is effected by a mere delivery
of title deeds or other documents of title with intent to create security
thereof.
5.5.2 Pledge: A pledge thus involves bailment or delivery of goods by the borrower
to the lending bank with the intention of creating a charge thereon as
security for the advance. The legal ownership of the goods remains with
the pledger while the lending banker gets certain defined interests in the
goods. The pledge of goods constitutes a specific (or fixed) charge.
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5.5.3 Hypothecation:
 The hypothecation is the creation of an equitable charge (i.e., a charge
created not by an express enactment but by equity and reason), which
is created in favour of the lending bank by execution of hypothecation
agreement in respect of the moveable securities belonging to the
borrower.
 Neither ownership nor possession is transferred to the bank. However,
the borrower holds the physical possession of the goods as an agent/
trustee of the bank.
5.5.4 Assignment:
 Assignment represents a transfer of an existing or future debt, right
or property belonging to a person in favour of another person. Book
debts and life insurance policies are accepted by banks as security by
way of assignment.
 An assignment gives the assignee absolute right over the moneys/
debts assigned to him.
5.5.5 Set-off :
 Set-off is a statutory right of a creditor to adjust, wholly or partly, the
debit balance in the debtor’s account against any credit balance lying
in another account of the debtor.
 The right of set-off enables a bank to combine two accounts (a deposit
account and a loan account) of the same person provided both the
accounts are in the same name and in the same right.
5.5.6 Lien:
Lien is creation of a legal charge with consent of the owner, which gives
lender a legal right to seize and dispose / liquidate the asset under lien.
5.6 Criteria for classifying asset as Non-Performing Asset
5.6.1 Interest and/ or instalment of principal remain overdue for a period of
more than 90 days in respect of a term loan
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5.6.2 the account remains ‘out of order’ as given below, in respect of an Overdraft/
Cash Credit (OD/CC).
 An account should be treated as 'out of order' if the outstanding
balance remains continuously in excess of the sanctioned limit/
drawing power for 90 days.
 In cases where the outstanding balance in the principal operating
account is less than the sanctioned limit/drawing power, but there are
no credits continuously for 90 days as on the date of Balance Sheet or
credits are not enough to cover the interest debited during the same
period, these accounts should be treated as 'out of order'.
5.6.3 Agricultural advances
 the instalment of principal or interest thereon remains overdue for
two crop seasons for short duration crops
 the instalment of principal or interest thereon remains overdue for
one crop season for long duration crops,
5.6.4 Credit Card Accounts
(i) In credit card accounts, the amount spent is billed to the card users
through a monthly statement with a definite due date for repayment.
Banks give an option to the card users to pay either the full amount or
a fraction of it, i.e., minimum amount due, on the due date and roll-
over the balance amount to the subsequent months’ billing cycle.
(ii) A credit card account will be treated as non-performing asset if the
minimum amount due, as mentioned in the statement, is not paid
fully within 90 days from the next statement date. The gap between
two statements should not be more than a month.
5.6.5 Bill Discounted
The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted
5.7 Central Government Guaranteed advances
 Loan is guaranteed by CENTRAL GOVERNMENT (here there is no need to
create NPA provision on the amount of asset however, income accrued
but not realised must be reversed).
 State Government guaranteed advances and investments in State
Government guaranteed securities would attract asset classification
and provisioning norms if interest and/or principal or any other
amount due to the bank remains overdue for more than 90 days
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5.8 Provisioning
Asset Classification % Provision

a substandard asset would be  provision of 15 percent on
one, which has remained NPA for total outstanding
a period less than or equal to 12  ‘unsecured exposures’ which
months are identified as ‘substandard’
would attract additional
provision of 10 per cent, i.e.,
a total of 25 per cent on the
outstanding balance
an asset would be classified as Doubtful upto one year= 25%
doubtful if it has remained in the Doubtful from One to three years=
sub¬standard category for a period 40%
of 12 months Doubtful more than 3 years= 100%
A loss asset is one where loss has 100 percent of the extent to which
been identified by the bank or the advance is not covered by the
internal or external auditors or the realisable value of the security
RBI inspection but the amount has to which the bank has a valid
not been written off wholly. In other recourse and the realisable value is
words, such an asset is considered estimated on a realistic basis.
uncollectible and of such little value
that its continuance as a bankable
asset is not warranted although
there may be some salvage or
recovery value.
5.9 Reversal Of Income
5.9.1  If any advance, including bills purchased and discounted, becomes
NPA, the entire interest accrued and credited to income account in the
past periods, should be reversed if the same is not realised. This will
apply to Government guaranteed accounts also
5.9.2  In respect of NPAs, fees, commission and similar income that have
accrued should cease to accrue in the current period and should be
reversed with respect to past periods, if uncollected
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5.9.3 On Partial Recoveries in NPAs:

- In the absence of a clear agreement between the bank and the
borrower for the purpose of appropriation of recoveries in NPAs (i.e.,
towards principal or interest due), banks are required to adopt an
accounting policy and exercise the right of appropriation of recoveries
in a uniform and consistent manner.
- The appropriate policy to be followed is to recognise income as per
AS 9 when certainty attaches to realisation and accordingly amount
reversed/derecognised or not recognised in the past should be
accounted.
- Interest partly/fully realised in NPAs can be taken to income. However,
it should be ensured that the credits towards interest in the relevant
accounts are not out of fresh/additional credit facilities sanctioned to
the borrowers concerned.
5.10 Calculation of Drawing power
5.10.1 All accounts should be kept within both the drawing power and the
sanctioned limit at all times. 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.
5.10.2 Banks should ensure that drawings in the working capital account are
covered by the adequacy of the current assets. Drawing power is required
to be arrived at based on current stock statement. However, considering the
difficulties of large borrowers, stock statements relied upon by the banks
for determining drawing power should not be older than three months. The
outstanding in the account based on drawing power calculated from stock
statements older than three months is deemed as irregular.
5.10.3 The stock statements, quarterly returns and other statements submitted
by the borrower to the bank should be scrutinised in detail.
5.10.4 The stock audit should be carried out by the bank for all accounts having
funded exposure of more than ` 5 crores. Auditors can also advise for stock
audit in other cases if the situation warrants the same.
5.10.5 The audited Annual Report submitted by the borrower should be scrutinized
properly.
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5.10.6 It needs to be ensured that the drawing power is calculated as per the
extant guidelines formulated by the Board of Directors of the respective
bank and agreed upon by the concerned statutory auditors.
5.10.7 The drawing power needs to be calculated carefully in case of working
capital advances to companies engaged in construction business. The
valuation of working progress should be ensured in consistent and proper
manner
5.11 Erosion in the value of security
Accounts where there is erosion in the value of security / frauds committed
by borrowers:
Not prudent to follow stages of asset classification. It should be straight-
away classified as doubtful or loss asset as appropriate.
 Erosion in the value of security can be reckoned as significant when
the realisable value of the security is less than 50 per cent of the value
assessed by the bank or accepted by RBI at the time of last inspection,
as the case may be. Such NPAs may be straight-away classified under
doubtful category and provisioning should be made as applicable to
doubtful assets.
 If the realisable value of the security, as assessed by the bank/
approved valuers/ RBI is less than 10 per cent of the outstanding in
the borrowal accounts, the existence of security should be ignored
and the asset should be straight-away classified as loss asset. It may
be either written off or fully provided for by the bank.
5.12 Advances against term deposits
Interest on advances against Term Deposits, National Savings Certificates
(NSCs), Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies
may be taken to income account on the due date, provided adequate
margin is available in the accounts
5.13 Accounts regularized near about the Balance Sheet Date:
In case one or few credits are recorded before the balance sheet, it should
be handled with care and without scope for subjectivity. Where the account
indicates inherent weakness on the basis of the data available, the account
should be deemed as a NPA.
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5.14 Advances under Consortium:

Where the remittances by the borrower under consortium lending
arrangements are pooled with one bank and/or where the bank receiving
remittances is not parting with the share of other member banks, the
account should be treated as not serviced in the books of the other member
banks and therefore, an NPA.
The banks participating in the consortium, therefore, need to arrange to get
their share of recovery transferred from the lead bank or to get an express
consent from the lead bank for the transfer of their share of recovery, to
ensure proper asset classification in their respective books.
5.15 Advances to Staff
In the case of housing loan or similar advances granted to staf members
where interest is payable after recovery of principal, interest need not be
considered as overdue from the first quarter onwards. Such loans/advances
should be classified as NPA only when there is a default in repayment of
installment of principal or payment of interest on the respective due dates.
5.16 Exceptions to the general rule of treating advances as Non-performing Assets
(NPAs)
(i) Temporary deficiencies
(ii) Natural Calamities: Where, in the wake of natural calamities, short-
term agricultural loans are converted into term loans or there is
rescheduling of repayment period or fresh short-term loans are
sanctioned, the term loan as well as fresh short term loan may be
treated as current dues and need not be classified as NPA.
(iiii) Facilities Backed by Central Government Guarantees: should be
treated as NPA only when the government repudiates its guarantee
when invoked
6 Audit of Advances
6.1 In carrying out audit of advances, the auditor is primarily concerned with
obtaining evidence about the following:
(a) Amounts included in balance sheet in respect of advances which are
outstanding at the date of the balance sheet.
(b) Advances represent amount due to the bank.
(c) Amounts due to the bank are appropriately supported by loan
documents and other documents as applicable to the nature of
advances.
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(d) There are no unrecorded advances.

(e) The stated basis of valuation of advances is appropriate and properly
applied and the recoverability of advances is recognised in their
valuation.
(f) The advances are disclosed, classified and described in accordance
with recognised accounting policies and practices and relevant
statutory and regulatory requirements.
(g) Appropriate provisions towards advances have been made as per the
RBI norms, Accounting Standards and generally accepted accounting
practices.
6.2 The auditor can obtain sufficient appropriate audit evidence about advances by
study and evaluation of internal controls relating to advances, and by:
• examining the validity of the recorded amounts;
• examining loan documentation;
• reviewing the operation of the accounts;
• examining the existence, enforceability and valuation of the security;
• checking compliance with RBI norms including appropriate classification
and provisioning; and
• carrying out appropriate analytical procedures.
7 Evaluation of Internal Control over advances
The auditor should examine the efficacy of various internal controls over advances
to determine the nature, timing and extent of his substantive procedures.
In general, the internal controls over advances should include, inter alia, the
following:
7.1 The bank should make an advance only after satisfying itself as to the
credit worthiness of the borrower and after obtaining sanction from the
appropriate authorities of the bank.
7.2 All the necessary documents (e.g., agreements, demand promissory notes,
letters of hypothecation, etc.) should be executed by the parties before
advances are made.
7.3 The compliance with the terms of sanction and end use of funds should be
ensured.
7.4 Sufficient margin as specified in the sanction letter should be kept against
securities taken so as to cover for any decline in the value thereof. The
availability of sufficient margin needs to be ensured at regular intervals.
473
7.5 All securities requiring registration should be registered in the name of the
bank or otherwise accompanied by documents sufficient to give title to the
bank.
7.6 All the accounts which exceed the sanctioned limit or drawing power or
are otherwise irregular should be brought to the notice of the controlling
authority regularly
7.7 In the case of goods in the possession of the bank, contents of the
packages should be test checked at the time of receipt. The godowns should
be frequently inspected by responsible officers of the branch concerned, in
addition to the inspectors of the bank.
7.8 Drawing Power Register should be updated every month to record the value
of securities hypothecated. These entries should be checked by an officer.
7.9 The accounts should be kept within both the drawing power and the
sanctioned limit.
7.10 The operation of each advance account should be reviewed at least once a
year and at more frequent intervals in the case of large advances.
8 Audit Approach & procedure for verification of Income earned by Bank
8.1 Auditor’s Concern : The recorded income arose from transactions which took
place during the relevant period and that there is no unrecorded income.
8.2 RBI’s Direction: Any income which exceeds one percent of the total income
of the bank (if the income is reckoned on a gross basis) or one percent of
the net profit before taxes (if the income is reckoned net of costs,) should
be considered on accrual as per AS-9.
8.3 Materiality: If any item of income is not considered to be material as per the
above norms, it may be recognised when received and the auditors need
not qualify the statements in that situation.
8.4 Revenue Uncertainity: In view of the significant uncertainty regarding
ultimate collection of income arising in respect of non-performing assets,
it should not recognize income on non-performing assets until it is actually
realised. This will apply to Government guaranteed accounts also.
8.5 Advances against Security: Interest on advances against Term Deposits,
National Savings Certifi cates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas
Patras (KVPs) and Life policies may be taken to income account on the due
date, provided adequate margin is available in the accounts.
8.6 Bills Purchased: In the case of bills purchased outstanding at the close of
the year , the discount received thereon should be properly apportioned
between the two years..
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8.7 Bills for Collection : In the case of bills for collection, the auditor should also
examine the procedure for crediting the party on whose behalf the bill has
been collected.
8.8 Renegotitations: Fees and commissions earned by the banks as a result of
re-negotiations or rescheduling of outstanding debts should be recognised
on an accrual basis over the period of time covered by the re-negotiated or
rescheduled extension of credit.
Test check the Fees and commissions earned by the banks made for
commission on Bills for collection; Letters of credit; Bank Guarantees
9 Audit Approach and Procedures for Verification of expenditure/Provision

and contingency
9.1 Audit approach while Auditing the Operating Expenses of a Bank:-
(a) Internal Controls:- The auditor should study and evaluate the system
of internal control relating to expenses, including authorization
procedures in order to determine the nature, timing and extent of his
other audit procedures.
(b) Divergent Trends:- The auditor should examine whether there are any
divergent trends in respect of major items of expenses.
(c) Substantive analytical Procedures:- The auditor should perform
substantive analytical procedures in respect of these expenses. eg.
assess the reasonableness of expenses by working out their ratio to
total operating expenses and comparing it with the corresponding
figures for previous years.
(d) Vouching & Verification:- The auditor should also verify expenses
with reference to supporting documents and check the calculations
wherever required.
9.2 Audit approach & procedure while Auditing the Interest Expenses of a Bank
 Reasonableness of the amount of interest expense by analysing ratios
of interest paid on different types of deposits and borrowings to the
average quantum of the respective liabilities during the year.
 The auditor should obtain from the bank an analysis of various types
of deposits outstanding at the end of each quarter.
 The auditor should also compare the average rate of interest paid on
the relevant deposits with the corresponding figures for the previous
years and analyse any material differences.
475
 The auditor should, on a test check basis, verify the calculation of

interest and satisfy himself that:
(a) Interest has been provided on all deposits upto the date of the
balance sheet;
(b) Interest rates are in accordance with the bank’s internal
regulations, of the RBI directives, and agreements with the
respective depositors;.33
(c) In case of Fixed Deposits it should be examined whether the
Interest Rate in the accounting system are in accordance with the
Interest Rate mentioned in the Fixed Deposit Receipt/Certificate.
(d) Interest on Savings Account should be checked on a test check
basis in accordance with the rules framed by the bank in this
behalf.
(e) Interest on inter–branch balances has been provided at the rates
prescribed by the head office.
(f) Interest on overdue/ matured term deposits should be estimated
and provided for.
9.3 Audit approach & procedure while Auditing the Provisions & contingencies of a Bank
(a) Compliance :- the auditor should ensure that the compliances for
various regulatory requirements for provisioning as contained in the
various circulars have been fulfilled.
(b) Computation & Classification :- The auditor should obtain an
understanding as to how the bank computes provision on standard
assets and non-performing assets. It will primarily include checking
the basis of classification of loans and receivables into standard, sub-
standard, doubtful, loss and nonperforming assets. The auditor may
verify the loan classification on a sample basis.
(c) Compare :- The auditor should obtain the detailed break up of standard
loans, nonperforming loans and agree the outstanding balances with
the general ledger.
(d) Tax provision :- The auditor should obtain the tax provision computation
from the bank’s management and verify the nature of items debited
and credited to profit and loss account to ascertain that the same are
appropriately considered in the tax provision computation.
(e) Written representation :- The other provisions for expenses should be
examined vis-a-vis the circumstances warranting the provisioning
and the adequacy of the same by discussing and obtaining the
explanations from the bank’s management.
476

1 The functioning of banking industry in India is regulated by the Reserve Bank of
India (RBI) which acts as the Central Bank of our country. Explain
Ans The functioning of banking industry in India is regulated by the Reserve
Bank of India (RBI) which acts as the Central Bank of our country. RBI is
responsible for development and supervision of the constituents of the
Indian financial system (which comprises banks and non-banking financial
institutions) as well as for determining, in conjunction with the Central
Government, the monetary and credit policies keeping in with the need of
the hour.
Important functions of RBI are issuance of currency; regulation of currency
issue; acting as banker to the central and state governments; and acting
as banker to commercial and other types of banks including term-lending
institutions.
Besides, RBI has also been entrusted with the responsibility of regulating
the activities of commercial and other banks. No bank can commence the
business of banking or open new branches without obtaining licence from
RBI. The RBI also has the power to inspect any bank.
2 “The engagement team should hold discussions to gain better understanding
of the bank and its environment, including internal control, and also to assess
the potential for material misstatements of the financial statements. All these
discussions should be appropriately documented for future reference”. Explain
Ans The engagement team discussion ordinarily includes a discussion of the
following matters:
• Errors that may be more likely to occur;
• Errors which have been identified in prior years
• Method by which fraud might be perpetrated by bank personnel or
others within particular account balances and/or disclosures;
• Audit responses to Engagement Risk, Pervasive Risks, and Specific
Risks;
• Need to maintain professional skepticism throughout the audit
engagement;
• Need to alert for information or other conditions that indicates that a
material misstatement may have occurred (e.g., the bank’s application
of accounting policies in the given facts and circumstances).
477
3 Criteria for classifying asset as Non-Performing asset

Ans i) Term Loan: Interest and/ or installment of principal remain overdue
for a period of more than 90 days
ii) Overdraft/Cash Credit: An account should be treated as 'out of order'
if a. O/S balance remains continuously in excess of the sanctioned
limit/drawing power for 90 days.
b. In cases where the outstanding balance in the principal operating
account is less than the sanctioned limit/drawing power, but there are
no credits continuously for 90 days as on the date of Balance
Sheet or credits are not enough to cover the interest debited during
the Same period
iii) Agricultural advances:
 Short duration crops: The installment of principal or interest thereon
remains overdue for two crop seasons
 Long duration crops: The installment of principal or interest thereon
remains overdue for one crop season
iv) Credit Card Accounts: A credit card account will be treated as non-
performing asset if the minimum amount due, as mentioned in the
statement, is not paid fully within 90 days from the next statement
date.
v) Erosion in the value of security
Accounts where there is erosion in the value of security / frauds committed
by borrowers: Not prudent to follow stages of asset classification. It should
be straight-away classified as doubtful or loss asset as appropriate
 when the realizable value of the security is less than 50 percent of
the value assessed by the bank or accepted by RBI at the time of last
inspection
 If the realizable value of the security, as assessed by the bank/
approved valuers / RBI is less than 10 percent of the outstanding in
the borrowal accounts
vi) Central Government Guaranteed advances
 Loan is guaranteed by Central government (here there is no need to
create NPA provision on the amount of asset however, income accrued
but not realized must be reversed).
478
 State Government guaranteed advances and investments in State

Government guaranteed securities would attract asset classification
and provisioning norms if interest and/or principal or any other
amount due to the bank remains overdue for more than 90 days
vii) Accounts regularized near the Balance Sheet Date:
 The asset classification of borrower accounts where a solitary or a few
credits are recorded before the balance sheet should be handled with
care and without scope for subjectivity.
 Where the account indicates inherent weakness on the basis of the data
available the account should be deemed as NPA.
viii) Advances under Consortium :
 Consortium advances mean advancing loans to a borrower by two or
more Banks jointly by forming a Consortium.
 Joint appraisal, control and monitoring will facilitate for exchange of
valuable information among the Banks. Usually, a Bank with a higher
share will lead the consortium.
 Consortium advances should be based on the record of recovery of
the respective individual member banks and other aspects having a
bearing on the recoverability of the advances.
viii) Advances under Consortium :
 Where the remittances by the borrower under consortium lending
arrangements are pooled with one bank and/or where the bank
receiving remittances is not parting with the share of other member
banks, the account should be treated as not serviced in the books of
the other member banks and therefore, an NPA.
 The banks participating in the consortium, therefore, need to arrange
to get their share of recovery transferred from the lead bank or to get
an express consent from the lead bank for the transfer of their share
of recovery, to ensure proper asset classification in their respective
books
ix) Advances Against Term Deposits, NSCs, KVPs/ IVPs, etc :
 Advances against Term Deposits, NSCs eligible for surrender, KVP/IVP
and life policies need not be treated as NPAs, provided adequate
margin is available in the accounts
479
x) Advances to staff:
 Interest-bearing staff advances as a banker should be included as
part of advances portfolio of the bank.
 In the case of housing loan or similar advances granted to staff members
where interest is payable after recovery of principal, interest need not
be considered as overdue from the first quarter onwards.
 Such loans/advances should be classified as NPA only when there
is a default in repayment of installment of principal or payment of
interest on the respective due dates.
 The staff advances by a bank as an employer and not as a banker
are required to be included under the sub-head ‘Others’ under the
schedule of Other Assets.
Exception:
 Temporary deficiencies e.g non submission of stock statement.
 On lending arrangement (when bank lends money that they have
received from another person.) Hence bank is merely transferring the
funds
 Where natural calamities impair the repaying capacity of agricultural
borrowers, banks may decide on their own as a relief measure
conversion of the short-term production loan into a term loan or
re-scheduling of the repayment period; and the sanctioning of fresh
short-term loan, subject to guidelines.
4 Reversal of Income
Ans  If any advance, including bills purchased and discounted, becomes
NPA, the entire interest accrued and credited to income account in the
past periods, should be reversed if the same is not realized. This will
apply to Government guaranteed accounts also
 In respect of NPAs, fees, commission and similar income that have
accrued should cease to accrue in the current period and should be
reversed with respect to past periods, if Uncollected
 Further, in case of banks which have wrongly recognised income in the
past should reverse the interest if it was recognised as income during
the current year or make a provision for an equivalent amount if it
was recognized as income in the previous year(s).
 Furthermore, the auditor should enquire if there are any large debits
in the Interest Income account that have not been explained.
It should be enquired whether there are any communications from
borrowers pointing out differences in interest charge and whether
appropriate action has been taken in this regard.
480
5 Audit of advances
Ans Advances generally constitute the major part of the assets of the bank.
There are large number of borrowers to whom variety of advances are
granted. The audit of advances requires the major attention from the
auditors (ODD UV RAP)
O - Amounts included in balance sheet in respect of advances which are
outstanding at the date of the balance sheet
D- Advances represent amount due to the bank
D- Amounts due to the bank are appropriately supported by loan
documents and other documents as applicable to the nature of
advances.
U- There are no unrecorded advances
V- The stated basis of valuation of advances is appropriate and properly
applied
R- The recoverability of advances is recognised in their valuation
A- The advances are disclosed, classified and described in accordance
with recognised accounting policies and practices and relevant
statutory and regulatory requirements.
P- Appropriate provisions towards advances have been made as per the
RBI norms, Accounting Standards and generally accepted accounting
practices
The auditor can obtain suficient appropriate audit evidence about advances
by study and evaluation of internal controls relating to advances, and by:
(CA ViDEO)
C- checking compliance with RBI norms including appropriate classification
and provisioning;
A- carrying out appropriate analytical procedures
V- examining the validity of the recorded amounts
D- examining loan documentation;
E- examining the existence, enforceability and valuation of the security
O- reviewing the operation of the accounts
6 Evaluation of Internal control over advances
(C2 DEAR DROPS)
Ans C- The bank should make an advance only after satisfying itself as to the
credit worthiness of the borrower and after obtaining sanction from
the appropriate authorities of the bank.
481
C- The compliance with the terms of sanction and end use of funds
should be ensured
D- All the necessary documents (e.g., agreements, demand promissory
notes, letters of hypothecation, etc.) should be executed by the parties
before advances are made.
E- All the accounts which exceed the sanctioned limit or drawing power
or are otherwise irregular should be brought to the notice of the
controlling authority regularly
A- Sufficient margin as specified in the sanction letter should be kept
against securities taken so as to cover for any decline in the value
thereof. The availability of sufficient margin needs to be ensured at
regular intervals.
R- All securities requiring registration should be registered in the name
of the bank or otherwise accompanied by documents sufficient to give
title to the bank
D1- Drawing Power Register should be updated every month to record the
value of securities hypothecated. These entries should be checked by
an officer
D2- The accounts should be kept within both the drawing power and the
sanctioned limit.
R- The operation of each advance account should be reviewed at least
once a year and at more frequent intervals in the case of large
advances
O- If the securities taken are in the nature of shares, debentures, etc., the
ownership of the same should be transferred in the name of the bank
and the effective control of such securities be retained as a part of
documentation
P- In the case of goods in the possession of the bank, contents of the
packages should be test checked at the time of receipt. The godowns
should be frequently inspected by responsible officers of the branch
concerned, in addition to the inspectors of the bank
S- All the accounts which exceed the sanctioned limit or drawing power
or are otherwise irregular should be brought to the notice of the
controlling authority regularly
482
XII. AUDIT OF REVENUE ITEMS:

(BABU C RAM)
B- Bills Purchased :
• In the case of bills purchased outstanding at the close of the year the
discount received thereon should be properly apportioned between
the two years.
A-Auditor’s Concern :
• In carrying out audit of income, the auditor is primarily concerned
with obtaining reasonable assurance that the recorded income arose
from transactions, which took place during the relevant period and
pertained to the bank, there is no unrecorded income and the income
is recorded at appropriate amount
B- Bills for Collection :
• In the case of bills for collection, the auditor should also examine the
procedure for crediting the party on whose behalf the bill has been
collected.
• The procedure is usually such that the customer’s account is credited
only after the bill has actually been collected from the drawee either
by the bank itself or through its agents, etc.
• The commission of the branch becomes due only when the bill has
been collected..
• The commission of the branch becomes due only when the bill has
been collected.
U- Revenue Uncertainty:
• In view of the significant uncertainty regarding ultimate collection of
income arising in respect of non-performing assets, the guidelines
require that banks should not recognize income on non- performing
assets until it is actually realised.
• When a credit facility is classified as non-performing for the first
time, interest accrued and credited to the income account in the
corresponding previous year which has not been realized should be
reversed or provided for.
• This will apply to Government guaranteed accounts also.
C- Revenue Certainty:
• Banks recognise income (such as interest, fees and commission) on
accrual basis, i.e., as it is earned.
• It is an essential condition for accrual of income that it should not be
unreasonable to expect its ultimate collection.
483
• In modern day banking, the entries for interest income on advances

are automatically generated through a batch process in the CBS
system
R1- RBI’s Directions:
• RBI has advised that in respect of any income which exceeds 1% of the
total income of the bank if the income is reckoned on a gross basis or
1% of the net profit before taxes if the income is reckoned net of costs,
should be considered on accrual as per AS 9.
R2-Renegotiations:
• Fees and commissions earned by the banks as a result of re-negotiations
or rescheduling of outstanding debts should be recognised on an
accrual basis over the period of time covered by the re-negotiated or
rescheduled extension of credit.
A- Advances against Securities :
• Interest on advances against Term Deposits, National Savings
Certificates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs)
and Life policies may be taken to income account on the duedate,
provided adequate margin is available in the accounts
M-Materiality:
• If any item of income is not considered to be material as per the
above norms, it may be recognised when received and the auditors
need not qualify their report in that situation.
XIII. AUDIT OF EXPENSES:
(IFRS Me)
I- Interest provided on all Fixed deposits
F- Fixed deposit – interest as per receipt/certificate
R- Rates as per RBI & bank internal regulations
S- Savings account – interest as per rules of bank
M- Matured deposits- interest provided
484
1. Regulating body in case of banks is :

(a) SEBI (b) IRDA (c) RBI (d) ICAI
2. Which of the following is fund based advance :

(a) Term loans (b) Cash credits
(c) Demand Loans (d) All of the above
3. Which of the following is not classification of NPA-

(a) Impaired (b) sub standard
(c) doubtful (d) Loss
4. Engagement Team Discussions are usually done at which stage of Bank audit ?
(a) Appointment (b) Developing an Audit Plan
(c) Framing an Audit Programme (d) Issuing Audit Report
5. The auditor of a nationalised bank is to be appointed by:-

(a) The Bank concerned through its Board of Directors
(b) Shareholders in Annual General Meeting
(c) Comptroller & Auditor General of India
(d) Ministry of Corporate Affairs
6. The LFAR is to be submitted before _______every year

(a) 30th April (b) 31st May
(c) 30th June (d) 30th September
7. Which of the following is a Non-Funded facility as sanctioned by any bank :-

(a) Bank Guarantee (b) Term Loan
(c) Staff Advances (d) Bank Overdraft
8. The term “Drawing Power” is associated with which of the following facilities as
sanctioned by any Bank :-
(a) Letter of Credit (b) Term Loan
(c) Staff Advances (d) Cash Credit Limit
485
9. Drawing Power in case of a Consortium advance is computed and allocated to

member banks by the
(a) Bank members proportionately (b) Lead bank
(c) Borrower (d) Reserve Bank of India
10. A Ltd. has been assigned a Cash Credit limit of INR 20 lacs as against its Book Debts
furnished as security. What kind of Security creation is it?
(a) Pledge (b) Mortgage
(c) Assignment (d) Set-off
11. Mrs. Reema has availed a Personal Loan for her Boutique of INR 5 lakhs and a Vehicle
Loan to purchase an Activa Scooter for INR 60,000. She is regular in depositing EMI
of the Activa Loan but has not made any payments towards the Personal Loan due
to low business during the year. In this case , which of the following facilities should
be categorized as NPA ?
(a) Activa Loan (b) Personal Loan
(c) Higher of the two (d) Both the Activa Loan & the Personal Loan
Answer
1 C 5 A 9 B 13 B
2 D 6 C 10 C 14 B
3 A 7 A 11 D
4 B 8 D 12 D
486
CASE 1.
M/s RGL has been appointed as auditors of New Indian Bank (a nationalised bank) for
the Financial year 2018-19 by its Board of Directors. Appointment of M/s RGL has been
challenged by a shareholder in the Bank’s Annual General Meeting
stating that the appointment should have been made by the shareholders in the bank’s
AGM. Their appointment as auditors of the bank throws some questions for the bank’s
management. New Indian bank has exposure to crop loans
as many branches are located in the rural area. While conducting the audit, the auditors
are faced with the question of classification of non performing advances. Also, New
Indian bank has lot of Credit cards issued to its clients, some of which are overdue for
long. While conducting the audit, the auditors came across various peculiarities relating
to Bank Audits like classification of NPA’s, reporting etc. to name a few. On the basis of
above facts, please suggest appropriate treatments in respective cases.
1 As per the provisions of relevant enactments, please advise who can appoint
auditors of a Nationalised bank.
(a) Board of Directors of the Bank
(b) Reserve Bank of India
(c) Comptroller and Auditor General of India
(d) Central Government
2 The matters which the banks require their auditors to deal with in the Long Form
Audit Report is to be specified by
(a) Banking Regulation Act, 1949
(b) Central Government
(c) Comptroller and Auditor General of India
(d) Reserve Bank of India
3 The auditors should classify Credit card accounts as NPA, if ___________ amount
due, as mentioned in the credit card statement is not paid fully within ___________
days from next statement date.
(a) Total, 90 (b) Minimum, 90
(c) Minimum, 30 (d) Minimum, 60
487
4 An agricultural advance is classified as NPA, if interest or principal is overdue for

________ in case of short duration crops or if interest or principal is overdue for
________ in case of long duration crops.
(a) One crop season, two crop season (b) Two crop season, one crop season
(c) 90 days, 120 days (d) 120 days, 90 days
5 The bank is a consortium member of Cash Credit Facilities of Rs 100 crores to Bottle
Limited. Bank’s own share is Rs 20 crores only. During the last two quarters against
a debit of Rs 1.75 crores towards interest the credits in Bottle Ltd’s account are to
the tune of Rs 1.25 crores only.
The auditors have classified the account of Bottle Ltd as performing
(a) Incorrect, Bottle ltd is Non Performing Asset (NPA)
(b) Correct, Bottle ltd is performing asset
(c) Bottle Ltd’s classification is subjective
Answer
1 A 2 D 3 B 4 B 5 A
CASE 2.
PK & Associates, a 20 year old CA firm was duly appointed as Statutory Auditors of one
of the major branches of KBC Bank Ltd., a Nationalised bank , as per the applicable
procedure of the appointment of auditors. The Engagement Partner, CA Raman Kumar,
carries out discussions with the Engagement team on how to plan, start & conclude this
Statutory Bank Audit. He also makes them aware of the importance of such Engagement
discussion. CA Raman also discusses with other Partners of the firm regarding the
Professional Remuneration the firm will be getting against the completion of this
Statutory Audit assignment as fixed by the relevant authorities in this case.
He tells the engagement team about various reports they would be required to issue
after the conclusion of audit as the Statutory auditors such as the Statutory Report ,
LFAR , etc. During the course of the audit , the audit team suspects a fraud having been
committed in the Bank branch involving an amount of INR 2.5 crores and they report of
the same to the Bank’s Board of Directors (BOD) but receive no reply against it from them
and therefore proceed further as per their legal obligation as the Statutory auditors.
They also observe that more than 80% the Bank Branch’s advances consist of Gold Loans.
488
Also , more than 90% of the remaining advances are overdue between 61 to 90 days but
the Bank has not categorized them accordingly.
1 As per CA Raman’s discussions with other partners of the firm, their Professional
remuneration as per the assignment allotted in the above case is fixed by the
(a) The Shareholders of the Bank at their AGM.
(b) The Reserve Bank of India in consultation with the Central Government.
(c) The Bank through its Board of Directors.
(d) The Central Government.
2 The Engagement Team’s discussions as held by CA Raman are a part of which of the
following phases of an audit?
(a) Audit Planning (b) Developing an Audit Programme
(c) Risk Assessment (d) Audit Reporting.
3 Which of the following types of Audit Report do PK & Associates will have to issue
to comply with the requirements as laid down by RBI circulars as narrated by CA
Raman to the Engagement team ?
(a) Statutory Audit Report (b) Tax Audit Report.
(c) LFAR. (d) GST Audit Report.
4 In the given case , what should be CA Raman’s legal obligation & reporting
requirement w.r.t. the fraud noticed by the team during the course of the audit ?
(a) Report the nature of , amount & parties involved in the fraud in his audit
report .
(b) Ask for the matter to be disclosed in the Board’s Report by the BOD..
(c) Forward the reply received from the BOD to the Central Government along with
his report and his comments upon the reply received.
(d) Forward his Report with a Note to the Central Govt. stating the non-receipt of
any observations from the BOD.
5 The Bank’s major advances constitute a specific type of Loan product. What according
to you must have been the most common form of Security Creation in the Bank
against such types of Loans?
(a) Mortgage (b) Pledge (c) Hypothecation (d) Charge
489
Answer
1 B 2 A 3 C 4 D 5 B
CASE 3.
Kwatra & Co. is a CA firm based at New Delhi. They were appointed as the Statutory
Auditors of Mannalaxmi Bank Ltd. For the Financial year 2019-20. After having a good
discussion with the Engagement team , CA Vikas , the Engagement
Partner , started the Bank audit with his team and made the following observations
during the course of the audit:-
• One of the borrowers , Mr. Rakesh Verma has availed a Machinery Loan from the
Bank but has not paid the EMI since the past 100 days. However, his business is going
good and the Bank Manager is of the view that such loan need not be classified as
NPA as they have his Factory building available with them as Mortgaged Security
against the Machinery Loan and good amount could be realized by its auction in the
case of default by Mr. Verma.
• Mrs. Lata , one of the prime customers of the Bank has availed a CC facility for her
Garment business , a Car Loan for her personal purpose and an Education loan
for her son’s higher studies , all from the Bank branch under audit. She has been
regular in meeting the EMI obligations of all the loans except for the Car loan where
she has not been able to pay the EMI since the past 4 months.
• Mr. Kapoor has been sanctioned a Cash Credit Limit of INR 55 lakhs by the Bank and
the outstanding balance in his CC account is INR 55 lakhs since the past 3 months.
There are no credits continuously for 90 days as on the date of Balance Sheet
• Sakhi Cooperative Society’s Term Loan of INR 10 lakhs has been guaranteed by the
Central Government and is overdue since the past 120 days . The CG guarantee has
not been invoked or repudiated till now.
• Similarly , Vishwas NGO’s loan of INR 7 lakhs has been guaranteed by the State
Government but it is overdue since the past 105 days but the Bank manager is of
the view that this not be categorized as NPA as it has been guaranteed by the State
Government and the guarantee has not been invoked/repudiated.
• The RBI inspection team had identified a KCC Loan given to Mr. Khara , a farmer
as a Loss in its RBI Report but the Bank has not provisioned it accordingly as the
manager is hopeful of recovery from such loan.
• There is a Term Loan advance by the Bank as a Lead Bank together with two other
major banks under a specific agreement to a big Corporate house in the city.
490
1 Mr. Verma’s Loan account in the above case should be categorized as-
(a) NPA because of no recovery for more than 90 days.
(b) Loss asset as there are minute chances of recovery.
(c) Standard asset as per the Manager as security is available against this loan
and also the net worth of the borrower is strong.
(d) SMA 02 Loan.
2 Which of the following Loan facilities given to Mrs. Lata be categorized as NPA by
the Bank -
(a) Cash Credit Facility (b) Education Loan
(c) Car Loan (d) All loans advanced
3 Mr Kapoor’s loan account as per the above case is -

(a) Overdue (b) SMA 01
(c) Doubtful asset (d) Out of Order
4 The loan sanctioned to Sakhi Cooperative Society in the above case should be
categorized as _____ for the purpose of Provisioning of Assets but/and deemed/
taken to be as _______ for the purpose of Income recognition by the Bank ,
respectively.
(a) NPA ; NPA (b) NPA ; Standard
(c) Standard ; NPA (d) Standard ; Standard.
5 The loan sanctioned to Vishwas NGO in the above case should be categorized as
_____ for the purpose of Provisioning of Assets but/and deemed/taken to be as
_______ for the purpose of Income recognition by the Bank , respectively.
(a) NPA ; NPA (b) NPA ; Standard
(c) Standard ; NPA (d) Standard ; Standard
Answer
1 A 2 D 3 D 4 C 5 A
491
(1) RBI has been entrusted with the responsibility of regulating the activities of
commercial banks only.
(2) In the computerised environment, the auditor need not be familiar with latest
applicable RBI guidelines that have bearing on the classification/ provisions and
income recognition.
(3) The auditor can assume that the system generated information is correct and relied
upon without evidence that demonstrates that the system driven information is
based on validation of the required parameters for the time being in force and
applicable.
(4) Collateral security refers to the security offered by the borrower for bank finance or
the one against which credit has been extended by the bank.
(5) Registered mortgage is effected by a mere delivery of title deeds or other documents
of title with intent to create security thereof
(6) Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid
within 90 days of becoming due.
(7) An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power.
(8) Banks recognize income on Non-Performing Assets on accrual basis.
(9) Auditor of a Nationalised bank is to be appointed at the annual general meeting of

the shareholders.
492
(1) Incorrect. RBI has been entrusted with the responsibility of regulating the activities
of commercial and other banks.
(2) Incorrect. In the Computerised environment, it is imperative that the auditor is

familiar with, and is satisfied that, all the norms/parameters as per the latest
applicable RBI guidelines are incorporated and built into the system that generates
information/data having a bearing on the classification/ provisions and income
recognition.
(3) Incorrect. The auditor should not go by the assumption that the system generated
information is correct and can be relied upon without evidence that demonstrates
that the system driven information is based on validation of the required parameters
for the time being in force and applicable.
(4) Incorrect. Primary security refers to the security offered by the borrower for bank
finance or the one against which credit has been extended by the bank. This security
is the principal security for an advance..51
(5) Incorrect. Equitable mortgage, on the other hand, is effected by a mere delivery of
title deeds or other documents of title with intent to create security thereof.
(6) Incorrect. Any amount due to the bank under any credit facility is ‘overdue’ if it is not
paid on the due date fixed by the bank.
(7) Correct. An account should be treated as ‘out of order’ if the outstanding balance
remains continuously in excess of the sanctioned limit/drawing power.
(8) Incorrect: Income from non-performing assets (NPA) is not recognised on accrual
basis due to its uncertainty but is booked as income only when it is actually received.
(9) Incorrect- Auditor of a nationalized bank is to be appointed by the bank concerned

acting through its Boards of Directors and approval of the Reserve bank is required
before the appointment is made.
493
AUDIT OF DIFFERENT
ENTITIES
Sr.No ICAI MODULE REFERENCE JKSC Topic Reference

1 Government Audit Topic 1
2 Local Bodies Topic 2
3 Audit of NGO Topic 8
4 Audit of Sole trader General audit checklist
5 Audit of Firm General audit checklist
6 Basics of LLP audit Topic 10
7 Audit of Charitable institution Audit of NGO
8 Audit of Educational Institution Topic 3
9 Audit of Hospital Topic 4
10 Audit of Club Topic 7
11 Audit of Cinema Topic 5
12 Audit of Hire Purchase and Leasing Companies Topic 11
13 Audit of Hotels Topic 6
14 Audit of Co-operative Society Topic 9
15 Audit of a Sole Trader Topic 12
16 Audit of a Firm Topic 13
494
Sr.No Particulars
1 Government Audit
1.1 Meaning :
Government auditing is the objective, systematic, professional and
independent
examination of :-
a) Financial,
b) Administrative and
c) other operations of a public entity
d) for the purpose of evaluating and verifying them and,
e) thereby presenting a report containing explanatory comments on
audit findings together with conclusions and recommendations for
future actions by the responsible officials
f) and in case of examination of financial statements, expressing
the appropriate professional opinion regarding the fairness of the
presentation.
Objective :
a. Accounting for Public Funds :- It serves as a mechanism or process for
public accounting of government funds.
b. Appraisal of Govt. Policies :- It also provides public accounting of the
operational, management, programme and policy aspects of public
administration as well as accountability of the officials administering
them.
c. Corrective Actions :- Audit observations based on factual data collection
also serve to highlight the lapses of the lower hierarchy, thus helping
supervisory level officers to take corrective measures.
d. Administrative Accountability :- The main objective of audit is a
combination of ensuring accountability of administration to legislature
and functioning as an aid to administration
1.2 Consitutional Safegaurds to CAG
 The Constitution of India contains specific provisions regarding the
appointment, salary and duties and powers of the C&AG.
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 The constitution guarantees the independence of the C&AG of India by

prescribing that he shall be appointed by the President of India and
shall not be removed from office except on the ground of proven mis-
behaviour or incapacity
 He can be removed only when each House of Parliament decides to do
so by a majority of not less than 2/3rd of the members of the House
present and voting
 The Constitution further provides that the conditions of service of
person serving in the Indian Audit and Accounts Department and
the administrative powers of the C&AG shall be determined by the
President after consultation with him.
 The Comptroller & Auditor General’s (Duties, Powers and Conditions
of Service) Act, 1971 passed in pursuance of the provisions of the
Constitution lays down a fixed tenure of the office prescribing that he
shall be paid a salary which is equal to the salary of the Judge of the
Supreme Court thereby further strengthening his independence.
Various Constitutional Provisions
i. Article 149 states that the C&AG shall perform such duties and exercise
such powers in relation to the accounts of the Union and of the States
and of any other authority or body as may be prescribed by or under
any law made by the Parliament.
ii. Article 150 of the Constitution provides that the accounts of the Union
and of the States shall be kept in such form as the President may on
the advice of the C&AG prescribe.
iii. Article 151 requires that the reports of the C&AG relating to the
accounts of the Union/State shall be submitted to the President/
Governor who shall cause them to be laid before House of Parliament/
State Legislature.
496
1.3 Powers of CAG as per Companies Act, 2013
Sec 143 (5) In the case of a Government company, the Comptroller and Auditor-
General of India
shall
 appoint the auditor under section 139 and
 direct such auditor the manner in which the accounts of the
Government company are required to be audited and thereupon
 the auditor so appointed shall submit a copy of the audit report to
the Comptroller and Auditor-General of India which, among other
things, include the directions, if any, issued by the Comptroller and
Auditor-General of India, the action taken thereon and its impact on
the accounts and financial statement of the company.
Sec 143 (6) The Comptroller and Auditor-General of India shall within sixty
days from the date of receipt of the audit report under sub-section (5) have a
right to,—
 (a) conduct a supplementary audit of the financial statement of the
company by such person or persons as he may authorise 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 Comptroller and Auditor-
General of India may direct; and
 (b) comment upon or supplement such audit report:
Provided 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 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.
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Sec 143 (6) The Comptroller and Auditor-General of India shall within sixty
days from the date of receipt of the audit report under sub-section (5) have a
right to,—
 (a) conduct a supplementary audit of the financial statement of
the company by such person or persons as he may authorise
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 Comptroller and
Auditor-General of India may direct; and
Sec 143 (7) Without prejudice to the provisions of this Chapter, the Comptroller
and Auditor-
General of India may, in case of any company covered under 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.
1.4 Powers of C&AG:-
• To inspect any office of accounts under the control of the Union or a
State Government.
• To inspect office responsible for the creation of the initial or subsidiary
accounts.
• To require that any books papers, accounts and other documents
relevant to the transaction under audit, be sent to specified places.
• To put questions or make observations to the person in charge of
office.
• To call for information for the preparation of any account or report.
• To dispense with any part of detailed audit and to apply limited
checks.
1.5 Duties of the C&AG:-
1) Compile and submit accounts of Union and States:-
The C&AG should compile the accounts pertaining to annual receipts
and disbursements and submit to the President/Governor of a State.
498
2) General Provisions Relating to Audit:-

It shall be the duty of the C&AG to audit and report-
a) All expenditure from the consolidated fund of India and of each
State and Union Territory disdursed were legally available,
applied for stated purpose and confirms to the authority which
governs it.
b) All transactions relating to Contingency Funds and Public
Accounts of union and state.
c) All trading, manufacturing P&L accounts and Balance Sheets
and other Subsidiary accounts kept in any department of union
or state.
3) Audit of Receipts and Expenditure:-
The C&AG should audit and report all receipts and expenditure of any
body or authority which is substantially financed by grants or loans
from the consolidated fund of India or any Union and States. ( CFI
consists of all the revenue received from taxes, all loans taken and
repayment of loans by government of India.)
4) Audit of Grants or Loans:-
Where any grant or loan is given for any specific purpose to any authority
or body, not being a foreign state or international organization, the
C&AG shall scrutinize the procedures.
5) Audit of Receipts of Union or States:-
The C&AG should audit all receipts payable into the consolidated
fund.
6) Audit of Accounts of Stores and Stock:-
C&AG should audit and report on accounts of stores and stock kept in
any office of the Union or State.
7) Audit of Government Companies and Corporations:-
The C&AG should exercise duties and powers as per the provisions of
the companies act, 2013.
1.6 Expenditure Audit:-
Standards set for this audit are:-
1) Audit against Rules and orders:-
It aims to ensure that the expenditure conforms to the relevant
provisions of the constitution and of the laws and rules and in
accordance with the Financial Rules and Regulations framed by the
Competent authority. These rules falls under the following categories:
499
i) Rules and orders regulating the powers to incur and sanction

expenditure from the Consolidated Fund of India or of a State;
(ii) Rules and orders dealing with the mode of presentation of claims
against government, withdrawing moneys from the Consolidated
Fund, Contingency Fund and Public Accounts of the Government
of the India and of the States.
(iii) Rules and orders regulating the conditions of service, pay and
allowances, and pensions of government servants
2) Audit of sanctions :-
The auditor has to ensure that each item of expenditure is covered by
a sanction, either general or special, of the competent authority.
3) Audit against provisions of funds :-
It aims at ascertaining that the expenditure incurred has been on the
purpose for which the grant and appropriation had been provided and
that the amount of expenditure does not exceed the appropriation
made.
4) Propriety Audit :-
Audit against propriety seeks to ensure that expenditure conforms to
the following principles:-
a) The expenditure should not be prima facie more than the occasion
demands . Public money should be spent by the officers as of his
own with utmost diligence and care
b) No authority should exercise its powers of sanctioning expenditure
to pass an order which will be directly or indirectly to its own
advantage.
c) Public moneys should not be utilize for the benefit of a particular
person or community except
(i) the amount of expenditure involved is insignificant; or
(ii) a claim for the amount could be enforced in a Court of law;
or
(iii) the expenditure is in pursuance of a recognised policy or
custom; and
(iv) the amount of allowances, such as travelling allowances,
granted to meet expenditure of a particular type should be
so regulated that the allowances are not, on the whole,
sources of profit to the recipients.
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5) Performance Audit:-
The scope of audit has been extended to cover efficiency, economy
and effectiveness audit. It is an objective examination of the financial
and operational performance of an organization and is oriented
towards identifying opportunities for greater economy, effeciency and
effectiveness.
Efficiency audit looks into whether the various schemes/projects are
executed and their operations conducted economically and whether
they are yielding the results expected of them.
Economy audit looks into whether the entity has acquired the financial,
human and physical resources in an economical manner.
Effectiveness audit is an appraisal of the performance of programmes,
schemes, projects with reference to the overall targeted objectives as
well as efficiency of the means adopted for the attainment of the
objectives.
The procedure for conducting performance audit covers
• Identification of topic
• Preliminary Study
• Planning
• Execution
• Reporting
1.7 Audit of Receipts:-
a) Whether all revenues or other debts due to government have been
correctly assessed, realized and credited to the government account
by the designated authorities.
b) Whether adequate regulations and procedures have been framed to
secure an effective check on assessment, collection and allocation of
cases.
c) Whether such regulations and procedures are actually being carried
out.
d) Whether adequate checks are imposed to ensure the prompt detection
and investigation of irregularities, frauds etc.
e) Review of systems and procedures to see that the internal procedures
adequately secure correct and regular accounting of demands
collection and refunds.
501
1.8 Audit of Stores and Stocks:-

a. Audit is conducted to ascertain whether the Regulations governing
purchase, receipt and issue, custody, sale and stock taking of stores
are well devised and properly carried out.
b. The aim is to bring to the notice of the government any deficiency in
quantities of stores held or any defects in the system of control.
c. Check the valuation of the stock carefully so that value accounts tally
with physical accounts.
d. Verify the purchases are properly sanctioned, made economical and
in accordance with rules laid down.
e. Ensure that the prices paid are reasonable and in agreement with
those shown in the contract.
f. Check the accounts of receipts, issues and balances regarding accuracy,
correctness and reasonableness of balances.
1.9 Audit of Commercial Accounts:-
Public Enterprise are Required to maintain commercial account and are
classified into.
Enterprise Meaning Audit By

Departmental These are subject C&AG in same manner
Enterprise to same laws And as other government
other government depart ments.
departments.
Statutory Bodies These are created Depends upon nature
& Corporations by specific laws and and type of governing
mostly financed by statutes.
the government in the
form of grant, loans
etc.
Government Established under the Statutory Auditors
Companies Companies Act. appointed by C&AG.
He may also con duct
supplementary audit.
2 Audit of local bodies
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2.1  Property taxes and octroi are the major sources of revenue of the
municipal authorities; other municipal taxes are profession tax, non-
mechanised vehicles tax, taxes on advertisements, taxes on animals
and boats, tolls, show-tax, etc. Local bodies may receive different
types of grants from the state administration as well. Broadly, the
revenue grants are of three categories:
2.1.1 (a) General purpose grants: These are primarily intended to substantially
bridge the gap between the needs and resources of the local bodies
2.1.2 (b) Specific purpose grants: These grants which are tied to the provision
of certain services or performance of certain tasks.
2.1.3 (c) Statutory and compensatory grants: These grants, under various
enactments, are given to local bodies as compensation on account
of loss of any revenue on taking over a tax by state government from
local government
2.2 Expenditure incurred by the municipalities and corporations can be broadly
classified under the following heads: (a) general administration and
revenue collection, (b) public health, (c) public safety, (d) education, (e)
public works, and (f) others such as interest payments, etc.
2.3 Audit Programme for Local Bodies
(i) APPOINTMENT:-The Local Fund Audit Wing of the State Govt. is
generally incharge of the audit of municipal accounts. Sometimes
bigger municipal corporations e.g. Delhi, Mumbai etc have power to
appoint their own auditors for regular external audit. So the auditor
should ensure his appointment.
(ii) AUDITOR’S CONCERNS:- The auditor while auditing the local bodies
should report on the
• fairness of the contents and presentation of financial
statements,.23
• the strengths and weaknesses of system of financial control,
• the adherence to legal and/or administrative requirements;
• whether value is being fully received on money spent.
His objective should be to detect errors and fraud and misuse of
resources.
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(iii) RULES & REGULATIONS :- The auditor should ensure that the
expenditure incurred conforms to the relevant provisions of the law
and is in accordance with the financial rules and regulations framed
by the competent authority.
(iv) AUTHORISATIONS :- He should ensure that all types of sanctions,
either special or general, accorded by the competent authority.
(v) PROVISIONING :- He should ensure that there is a provision of funds
and the expenditure is incurred from the provision and the same has
been authorized by the competent authority.
(vi) PERFORMANCE :- The auditor should check that the different schemes,
programmes and projects, where large financial expenditure has been
incurred, are running economically and getting the expected results.
3 Audit of Educational Institution
3.1 General :-
1. Constitution - Examine the Trust Deed or Regulations, in the case of
school or college and note all the provisions affecting accounts. In the
case of a university, refer to the Act of Legislature and the Regulation
framed thereunder.
2. Minute books - Read through the minutes of the meetings of the
Managing Committee or Governing Body, noting resolutions affecting
accounts to see that these have been duly complied with, specially the
decisions as regards the operation of bank accounts and sanctioning
of expenditure.
3.2 Fee from Students :-
1. Internal check - Check names entered in the Students Fee Register for
each month or term, with the respective Class Registers, showing
names of students on rolls and test amount of fees charged; and
verify that there operates a system of internal check which ensures
that demands against the students are properly raised.
2. Compare - Check fees received by comparing counterfoils of receipts
granted with entries in the Cash Book and tracing the collections in
the Fee Register to confirm that the revenue from this source has been
duly accounted for.
3. Advances & arrears - Total up the various columns of the Fees Register
for each month or term to ascertain that fees paid in advance have
been carried forward and that the arrears that are irrecoverable have
been written off under the sanction of an appropriate authority.
504
4. Admission fees - Check admission fees with admission slips signed by

the head of the institution and confirm that the amount has been
credited to a Capital fund, unless the Managing Committee has taken
a decision to the contrary.
5. Scholarship - See that free studentship and concessions have been
granted by a person authorised to do so, having regard to the Rules
prepared by the Managing Committee.
6. Fines - Confirm that fines for late payment or absence, etc. have been
either collected or remitted under proper authority.
7. Hostel dues - Confirm that hostel dues were recovered before student’s
accounts were closed and their deposits of caution money refunded.
3.3 Other Receipts/Grants & Donations :-
1. Rental income - Verify rental income from landed property with the
rent rolls, etc.
2. Investment income - Vouch income from endowments and legacies,
as well as interest and dividends from investment; also inspect the
securities in respect of investments held.
3. Grant - Verify any Government or local authority grant with the memo
of grant. If any expense has been disallowed for purposes of grant,
ascertain the reasons thereof.
3.4 Expenditure :-
1. Provident fund - Verify that the Provident Fund money of the staff has
been invested in appropriate securities.
2. Donations - Vouch donations, if any with the list published with the
annual report. If some donations were meant for any specific purpose,
see that the money was utilised for the purpose.
3. Capital expenditure - Vouch, all capital expenditure in the usual way
and verify the same with the sanction for the Committee as contained
in the minute book.
4. Establishment expenses - Vouch, in the usual manner, all establishment
expenses and enquire into any unduly heavy expenditure under any
head. If there was any annual budget prepared, see that any excess
under any head over the budgeted amount was duly sanctioned by
the Managing Committee. If not, bring it to the Committee’s notice in
your report.
505
5. Salaries - See that increase in the salaries of the staff have been
sanctioned and minuted by the Committee.
3.5 Assets & Laibilities :-
1. Old arrear - Report any old heavy arrears on account of fees, dormitory
rents, etc. to the Managing Committee.
2. Caution money - Confirm that caution money and other deposits paid
by students on admission, have been shown as liability in the balance
sheet not transferred to revenue, unless they are not refundable.
3. Endowment funds - See that the investments representing endowment
funds for prizes are kept separate and any income in excess of the
prizes has been accumulated and invested along with the corpus.
4. System of ordering - Ascertain that the system ordering inspection
on receipt and issue of provisions, foodstuffs, clothing and other
equipment is efficient and all bills are duly authorised and passed
before payment.
5. Inventory - Verify the inventories of furniture, stationery, clothing,
provision and all equipment etc. These should be checked by reference
to Inventory Register or corresponding inventories of the previous year
and values applied to various items should be test checked.
3.6 Compliances :-
1. Refunds - Confirm that the refund of taxes deducted from the income
from investment (interest on securities etc.) has been claimed and
recovered since the institutions are generally exempted from the
payment of income-tax.
2. Annual statement - Finally, verify the annual statements of account
and, while doing so see that separate statements of account have
been prepared as regards Poor Boys Fund, Games Fund, Hostel and
Provident Fund of staff, etc.
4 Audit of Hospital
4.1 Register of Patients: Vouch the Register of patients with copies of bills issued
to them. Verify bills for a selected period with the patients’ attendance
record to see that the bills have been correctly prepared. Also see that bills
have been issued to all patients from whom an amount was recoverable
according to the rules of the hospital
506
4.2 Collection of Cash: Check cash collections as entered in the Cash Book with
the receipts, counterfoils and other evidence for example, copies of patients
bills, counterfoils of dividend and other interest warrants, copies of rent
bills, etc.
4.3 Income from Investments, Rent etc: See by reference to the property and
Investment Register that all income that should have been received by
way of rent on properties, dividends, and interest on securities have been
collected.
4.4 Legacies and Donations: Ascertain that legacies and donations received for a
specific purpose have been applied in the manner agreed upon.
4.5 Reconciliation of Subscriptions: Trace all collections of subscription and
donations from the Cash Book to the respective Registers. Reconcile the
total subscriptions due (as shown by the Subscription Register and the
amount collected and that still outstanding).
4.6 Authorisation and Sanctions: Vouch all purchases and expenses and verify
that the capital expenditure was incurred only with the prior sanction
of the Trustees or the Managing Committee and that appointments and
increments to staff have been duly authorised.
4.7 Grants and TDS: Verify that grants, if any, received from Government or
local authority has been duly accounted for. Also, that refund in respect of
taxes deducted at source has been claimed.
4.8 Budgets: Compare the totals of various items of expenditure and income
with the amount budgeted for them and report to the Trustees or the
Managing Committee, significant variations which have taken place.
4.9 Internal Check: Examine the internal check as regards the receipt and issue
of stores; medicines, linen, apparatus, clothing, instruments, etc. so as to
insure that purchases have been properly recorded in the Inventory Register
and that issues have been made only against proper authorisation.
4.10 Depreciation: See that depreciation has been written off against all the
assets at the appropriate rates.
4.11 Registers: Inspect the bonds, share scrips, title deeds of properties and
compare their particulars with those entered in the property and Investment
Registers
4.12 Inventories: Obtain inventories, especially of stocks and stores as at the end
of the year and check a percentage of the items physic ally; also compare
their total values with respective ledger balances.
507
4.13 Management Representation and Certificate: Get proper Management

Representation and Certificate with respect to various aspects covered
during the course of audit
5 Audit of Cinema Hall
5.1 Verify the internal control mechanism
(a) that entrance to the cinema-hall during show is only through printed
tickets;
(b) that they are serially numbered and bound into books;
(c) that the number of tickets issued for each show and class, are different
though the numbers of the same class for the show on the same day,
each week, run serially;
(d) that for advance booking a separate series of tickets is issued; and
(e) that the inventory of tickets is kept in the custody of a responsible
official.
5.2 Confirm that at the end of show, a statement of tickets sold is prepared
and cash collected is agreed with it.
5.3 Verify that a record is kept of the ‘free passes’ and that these are issued
under proper authority
5.4 Reconcile the amount of Entertainment Tax collected with the total number
of tickets issued for each class and vouch and verify the entertainment tax
returns filed each month.
5.5 Vouch the entries in the Cash Book in respect of cash collected on sale of
tickets for different shows on a reference to Daily Statements which have
been test checked as aforementioned with record of tickets issued for the
different shows held.
5.6 Verify the charges collected for advertisement slides and shorts by reference
to the Register of Slides and Shorts Exhibited kept at the cinema as well
with the agreements, entered into with advertisers in this regard.
5.7 Vouch the expenditure incurred on advertisement, rep airs and maintenance.
No part of such expenditure should be capitalized.
5.8 Confirm that depreciation on machinery and furniture has been charged at
an appropriate rate.
5.9 Vouch payments on account of film hire with bills of distributors and in the
process, the agreements concerned should be referred to.
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5.10 Examine unadjusted balance out of advance paid to the distributors against
film hire contracts to see that they are good and recoverable. If any film in
respect of which an advance was paid has already run, it should be enquired
as to why the advance has not been adjusted. The management should
be asked to make a provision in respect of advances that are considered
irrecoverable.
5.11 The arrangement for collection of the share in the restaurant income should
be enquired into either a fixed sum or a fixed percentage of the taking may
be receivable annually. In case the restaurant is run by the Cinema, its
accounts should be checked. The audit should cover sale of various items
of foods tuffs, purchase of foodstuffs, cold drink, etc. as in the case of club
6 Audit of Hotel
6.1 1 Internal Controls –
a. It is the responsibility of management to introduce controls which will
minimise the leakage/pilferage as far as possible.
b. Preparation of regular perhaps weekly, trading accounts for each
sales point and a detailed scrutiny of the resulting profit percentages,
with any deviation from the anticipated form being investigated.
The auditor should examine them and obtain explanations for any
apparent deviations.
c. The auditor should verify a few restaurant bills by reference to K.O.T.s
(Kitchen Order Tickets) or basic record. This would enable the auditor
to ensure that controls regarding revenue cycle are inorder.
d. The auditor should satisfy himself that all taxes collected from
occupants on food and occupation have been paid over to the proper
authorities.
e. If the internal control in a hotel is weak or perhaps breaks down, then
a very serious problem exists for the auditor. As a result, the scope
of his audit tests will necessarily be increased and, in the event of
a material discrepancy being unexplained, he will have to consider
qualifying his audit report.
509
6.2 Room Sales & Hall Bookings-

a. The charge for room sales is normally posted to guest bills by the
receptionist/ front office or in the case of large hotels by the night
auditor.
b. The source of these entries is invariably the guest register and audit
tests should be carried out to ensure that the correct numbers of
guests are charged for the correct period.
c. Any difference between the charged rates used on the guests’ bills
and the standard room rate should be investigated to ensure that
they have been properly authorised.
d. In many hotels, the housekeeper prepares a daily report of the rooms
which were occupied the previous night and the number of beds kept
in each room. This report tends not to be permanently retained and
the auditor should ensure that a sufficient number of reports are
available for him to test both with the guest register and with the
individual guest’s bill.
e. The auditor should ensure that proper valuation of occupancy-
in-progress at the balance sheet date is made and included in the
accounts.
f. The auditor should ensure that proper records are maintained for
booking of halls and other premises for special parties and recovered
on the basis of the tariff.
6.3 Inventories –
a. The inventories in any hotel are both readily portable and saleable
particularly the food and beverage inventories. It is therefore extremely
important that all movements and transfers of such inventories should
be properly documented. The auditor should carry out tests to ensure
that all such documentation is accurately processed.
b. Areas where large quantities of inventory are held should be kept
locked, the key being retained by the departmental manager. The
key should be released only to trusted personnel and unauthorised
persons should not be permitted in the stores areas . In particular,
any movement of goods in or out of the stores should be checked.
510
c. Many hotels use specialised professional valuers to take and value

the inventories on a continuous basis throughout the year.
Such a valuation is then almost invariably used as the basis of the
balance sheet inventory figure at the year end. Although such valuers
are independent of the audit client, it is important that the auditor
satisfies himself that the amounts included for such inventories are
reasonable by attending the physical inventory taking and carrying
out certain pricing and calculation tests.
6.4 Fixed Assets –
a. The accounting policies for fixed assets of individual hotels are likely
to differ. However, many hotels account for certain quasi-fixed assets
such as silver and cutlery on inventory basis. This can lead to confusion
between each inventory items and similar assets which are accounted
for on a more normal fixed assets basis.
b. In such cases, it is important that very detailed definitions of inventory
items exist and the auditor should carry out tests to ensure that the
definitions have been closely followed.
c. The auditor should see that costs of repairs and minor renovation
and redecoration are treated as revenue expenditure, where as costs
of major alterations and additions to the hotel building and facilities
capitalised.
6.5 Casual Labour –
a. The hotel trade operates to very large extent on casual labour. The
records maintained of such wage payments are frequently inadequate.
b. The auditor should ensure that defalcation on this account does not
take place by suggesting proper controls to the management.
6.6 Travel Agents & Shops -
a. For ledgers coming through travel agents or other booking agencies
the bills are usually made on the travel agents or booking agencies.
The auditor should ensure that money are recovered from the travel
agents or booking agencies as per the terms of credit allowed.
b. Commission, if any, paid to travel agents or booking agents should be
checked by reference to the agreement on that behalf.
7 Audit of Club
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7.1 Entrance Fee

Vouch the receipt on account of entrance fees with members’ applications,
counterfoils issued to them, as well as on a reference to minutes of the
Managing Committee.
7.2 Subscriptions :-
Vouch members’ subscriptions with the counterfoils of receipt issued to
them, trace receipts for a selected period to the Register of Members; also
reconcile the amount of total subscriptions due with the amount collected
and that outstanding.
7.3 Arrears of Subscriptions
Ensure that arrears of subscriptions for the previous year have been correctly
brought over and arrears for the year under audit and subscriptions received
in advance have been correctly adjusted.
7.4 Arithmetical accuracy
Check totals of various columns of the Register of members and tally them
across
7.5 Irrecoverable Member Dues :-
See the Register of Members to ascertain the Member’s dues which are
in arrear and enquire whether necessary steps have been taken for their
recovery; the amount considered irrecoverable should be mentioned in the
Audit Report.
7.6 Pricing :-
Verify the internal check as regards members being charged with the price
of foodstuffs and drinks provided to them and their guests, as well as, with
the fees chargeable for the special services rendered, such as billiards,
tennis, etc.
7.7 Member Accounts :-
Trace debits for a selected period from subsidiary registers maintained in
respect of supplies and services to members to confirm that the account of
every member has been debited with amounts recoverable from him.
7.8 Purchases :-
Vouch purchase of sports items, furniture, crockery, etc. and trace their
entries into the respective inventory registers.
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7.9 Margins earned :-

Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale price
so as to confirm that the normal rates of gross profit have been earned
on their sales. The inventory of unsold provisions and stores, at the end of
year, should be verified physically and its valuation checked.
7.10 Inventories :-
Check the inventory of furniture, sports material and other assets physically
with the respective inventory registers or inventories prepared at the end
of the year.
7.11 Investments :-
Inspect the share scrips and bonds in respect of investments, check their
current values for disclosure in final accounts; also ascertain that the
arrangements for their safe custody are satisfactory.
7.12 Management Powers :-
Examine the financial powers of the secretary and, if these have been
exceeded, report specific case for confirmation by the Managing Committee
8 Audit of NGO
8.1 Regulatory Framework:
 The auditors of an NGO registered under the Societies Registration
Act, 1860 (or under any law corresponding to this Act, in force in any
part of India) or the Indian Trusts Act 1882 are normally appointed by
the Management of the Society or Trust.
 The auditors of NGO registered under section 8 of the Companies Act,
2013 are appointed by the members of the company.
 Some of the statues such as the Companies Act, 2013, Foreign
Contribution (Regulation) Act 1976, Income Tax Act 1961 required that
the accounts of the NGO be audited and submitted to the prescribed
authorities and failure to do so could lead to forfeiture of certain
exemptions and benefits
8.2 Sources and Applications of funds:-
Sources:-
a. Revolving fund contribution ( Giving temporary loan from fund to
other NGO and then recovering the loan so as to give temporary loan
again and so on.)
b. Corpus contribution (contribution towards the capital of an NGO)
c. Specific donations ( acquired for specific fixed assets)
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d. Contributions in kind.
f. Advertisement fees from members.
g. Fund Raising Programmes.
Applications:- a. Establishment costs. b. Office and Administrative
Expenses. c. Maintenance Expenses. d. Programme/Project Expenses.
e. Charity. f. Donations and Contributions given etc.
8.3 While planning the audit, the auditor shall concentrate on the following:-
a) Knowledge of the NGO’s work, its mission and vision, areas of
operation.
b) Updating knowledge of relevant statutes.
c) Review the legal form of the organization, its MOA, AOA, Rules &
regulations ,etc.
d) Reviewing the NGO’s Organisation chart, Financial and Administrative
Manuals, Project and Programme Guidelines, Funding Agencies
Requirements and formats, budgetary policies, etc.
e) The auditor should examine the minutes of Board/Managing
Committee/Governing Body meetings.
f) Accounting system, procedures, internal controls and checks should
be studied.
g) The auditor should review the previous year’s audit report.
h) The involvement of experts and their reports
i) Materiality levels for audit purposes should be set out.
j) The nature and timing of reports or other communications.
8.4 The Audit programme should include in a sequential order all assets, liabilities,
income and expenditure ensuring that no material item is omitted.
(i) Corpus Fund: The contributions / grants received towards corpus be
vouched with special reference to the letters from the donor(s).
(ii) Reserves: Vouch transfers from projects / programmes with donors
letters and board resolutions of NGO.
(iii) Ear-marked Funds: Check requirements of donors institutions, board
resolution of NGO, rules and regulations of the schemes of the ear-
marked funds.
(iv) Project / Agency Balances: Vouch disbursements and expenditure as per
agreements with donors for each of the balances.
(v) Loans: Vouch loans with loan agreements, counterfoil of receipt issued.
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(vi) Fixed Assets: Vouch all acquisitions / sale or disposal of assets including
depreciation and the authorizations & title deeds for the same.
(vii) Investments: Check Investment Register and the investments physically
ensuring that investments are in the name of the NGO.
(viii) Cash in Hand: Physically verify the cash in hand at the close of the year
and whether it tallies with the books of account.
(ix) Bank Balance: Check the bank reconciliation statements and ascertain
details for old outstanding and unadjusted amounts.
(x) Inventory: Verify inventory in hand and obtain certificate from the
management for the quantities and valuation of the same.
(xi) Programme and Project Expenses: Verify agreement with donor/
contributor(s) supporting the particular programme or project to
ascertain the conditions with respect to undertaking the programme/
project and ensure that income tax is deducted, deposited and returns
filed and verify the terms of the contract.
(xii) Establishment Expenses: Verify that provident fund, life insurance
premium, employees state insurance and their administrative charges
are deducted, contributed and deposited within the prescribed time.
Also check other office and administrative expenses such as postage,
stationery, travelling, etc.
8.5 The Receipt of income of NGO may be checked on the following lines:
(i) Contributions and Grants for projects and programmes: Check agreements
with donors and grants letters to ensure that funds received have
been accounted for.
(ii) Receipts from fund raising programmes: Verify in detail the internal
control system and ascertain who are the persons responsible for
collection of funds and.mode of receipt.
(iii) Membership Fees: Check fees received with Membership Register with
proper classification between entrance and annual fees and life
membership fees.
(iv) Subscriptions: Check with subscription register and receipts issued.
Reconcile subscription received with printing and dispatch of
corresponding magazine / circulars / periodicals.
(v) Interest and Dividends: Check the interest and dividends received and
receivable with investments held during the year.
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8.6 Audit of Charitable Institutions:-

1) General:-
a) Constitution:- Study the constitution whether it is a society,
company or trust.
b) Verify that institution is managed as per law under which it has
been set up.
c) Examine the system of internal check as regards accounting of
amounts collected.
d) Verifying in detail the income and confirming that the amounts
received have been deposited in the bank regularly and promptly.
2) Subscriptions and Donations:-
a) Ascertain the changes made in amount of annual or life
membership subscription during the year.
b) Ensure that donations of asset or in kind have been properly
recorded.
c) Ensure that official receipts are issued properly by -
i) confirming that adequate control is imposed over unused
receipt books;
ii) obtaining all receipt books; test checking the counterfoils
with the cash book; any cancelled receipts being specially
looked into;
iii) obtaining the printed list of subscriptions and donations
and agreeing them with the total collections shown in the
accounts;
iv) examining the system of internal check regarding moneys
received from paying special attention to the system of
control exercised over collections and
v) verifying the total subscriptions and donations received with
any figures published in reports, etc. issued by the charity.)
3) Grants:-
a) Vouch the amount received with the relevant correspondence.
b) Obtain a certificate from a responsible official.
4) Legacies :-
Verifying the amounts received by reference to correspondence with
any figures and other available information
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5) Investment Income:-
a) Vouch the amount received with the dividend and interest
counterfoils.
b) Check the calculations of interest received on securities bearing
fixed rates.
c) Comparing the amounts of dividend received with schedule of
investments making special enquiries into any investments held
for which no dividend has been received.
6) Rent :-
a) Examining the rent roll and inspecting tenancy agreement noting
the amount & due dates.
b) Vouching the rents on to the rent roll from the counterfoils of
receipt books and checking the totals of the cash book.
7) Special Functions etc.:-
Vouch gross receipts and outgoings in respect of any special function
with such vouchers and cash statements
8) Income Tax Refunds:-
Where tax has been deducted from the investment income, it should
be seen that a refund has been obtained.
9) Expenditure :-
a) Vouching payment of grants, also verifying that the grants have
been paid only for a charitable purpose or purposes falling within
the purview of the objects for which the charitable institution
has been set up and that no trustee, director or member of the
Managing Committee has benefited there from either directly or
indirectly.
b) Verify the schedules of securities held and inventories of property.
c) Ascertain that any funds contributed for a special purpose have
been utilized for the purpose.
d) Verify the cash and bank balances.
9 Audit of Co-operative Society
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9.1 Who can be appointed?

Apart from a chartered accountant within the meaning of the Chartered
Accountants Act, 1949, some of the State Co-operative Acts have permitted
persons holding a government diploma in co-operative accounts or in co-
operation and accountancy and also a person who has served as an auditor
in the co-operative department of a government to act as an auditor
9.2 Who appoints auditor?
An auditor of a co-operative society is appointed by the Registrar of Co-
operative Societies and the auditor so appointed conducts the audit on
behalf of the Registrar and submits his report to him as also to the society.
The audit fees are paid by the society on the basis of statutory scale of
fees prescribed by the Registrar, according to the category of the society
audited.
9.3 Books of accounts of co-operative society
Under section 43(h) of the Central Act, a state government can frame rules
prescribing the books and accounts to be kept by a co-operative society.
9.4 Restriction on share-holdings
According to section 5 of the Central Act, in the case of a society where the
liability of a member of the society is limited, no member of a society other
than a registered society can hold such portion of the share capital of the
society as would exceed a maximum of twenty percent of the total number
of shares or of the value of shareholding to ` 1,000/-. The auditor of a co-
operative society will be concerned with this provision so as to watch any
breach relating to holding of shares. One should also watch whether any
provision in the bye-laws of the society is not contrary to this statutory
position. The State Acts may provide limits as to the shareholding, other
than that provided in the Central Act.
9.5 Restriction on loans
Section 29 of the Central Act puts restriction on loan. It states that
a registered society shall not make a loan to any person other than a
member. However, with the special sanction of the Registrar, a registered
society may make a loan to another registered society
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9.6 Restriction on borrowings

Section 30 of the Central Act further puts restriction on borrowings.
According to this section, a registered society shall accept loans and
deposits from persons who are not members subject to the restrictions and
limits of the bye-laws of the society. The auditor will have to examine the
bye-laws in this respect.
9.7 Investment of funds
According to section 32 of the Central Act, a society may invest its funds in
any one or more of the following:
a) In the Central or State Co-operative Bank
b) In any of the securities specified in section 20 of the Indian Trusts Act,
1882.
c) In the shares, securities, bonds or debentures of any other society
with limited liability.
d) In any co-operative bank, other than a Central or State co-operative
bank, as approved by the Registrar on specified terms and conditions.
e) In any other moneys permitted by the Central or State Government.
9.8 Reserve fund
According to section 33 of the Central Act, a prescribed percentage of
the profits should be transferred to Reserve Fund, before distribution as
dividends or bonus to members.
9.9 Contribution to charitable purposes
According to section 34, a registered society may, with the sanction of
the Registrar, contribute an amount not exceeding 10% of the net profits
remaining after the compulsory transfer to the reserve fund for any
charitable purpose as defined in section 2 of the Charitable Endowments
Act, 1890.
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9.10 Special features of Co-operative Society audit

a) Examination of overdue debts - Overdue debts for a period from 6
months to 5 years and more than 5 years will have to be classified
and shall have to be reported by an auditor. The auditor will have to
ascertain whether proper provisions for doubtful debts are made and
whether the same is satisfactory.
b) Overdue Interest - Overdue interest should be excluded from interest
outstanding and accrued due while calculating profit. Overdue interest
is interest accrued or accruing in accounts, the amount of which the
principal is overdue. In practice an overdue interest reserve is created
and the credit of overdue interest credited to interest account is
reduced.
c) Certification of Bad Debts - A peculiar feature regarding the writing off
of the bad debts as per Maharashtra State Co-operative Rules, 1961,
is very interesting to note. As per the said rules, bad debts can be
written off only when they are certified as bad by the auditor
d) Valuation of Assets and Liabilities - Regarding valuation of assets there
are no specific provisions or instructions under the Act and Rules and
as such due regard shall be had to the general principles of accounting
and auditing conventions and standards adopted.
e) Adherence to Co-operative Principles - The auditor will have to ascertain
in general, how far the objects, for which the co-operative organisation
is set up, have been achieved in the course of its working
f) Observations of the Provisions of the Act and Rules - An auditor of a co-
operative society is required to point out the infringement with the
provisions of Co-operative Societies Act and Rules and bye-laws.
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g) Verification of Members’ Register and examination of their pass books

h) Examination of entries in members pass books regarding the loan
given and its repayments, and confirmation of loan balances in person
is very much important in a co-operative organisation to assure that
the entries in the books of accounts are free from manipulation
i) Special report to the Registrar - During the course of audit, if the auditor
notices that there are some serious irregularities in the working of the
society he may report these special matters to the Registrar.
In the following cases, for instance, a special report may become
necessary:
(i) Personal profiteering by members of managing committee in
transactions of the society, which are ultimately detrimental to
the interest of the society.
(ii) Detection of fraud relating to expenses, purchases, property and
stores of the society.
(iii) Specific examples of mis-management. Decisions of management
against cooperative principles.
(iv) In the case of urban co-operative banks, disproportionate
advances to vested interest groups, such as relatives of
management, and deliberate negligence about the recovery
thereof. Cases of reckless advancing, where the management is
negligent about taking adequate security and proper safeguards
for judging the credit worthiness of the party.
j) Audit classification of society - After a judgement of an overall
performance of the society, the auditor has to award a class to the
society. This judgement is to be based on the criteria specified by the
Registrar
It may be noted here that if the management of the society is not
satisfied about the award of audit class, it can make an appeal
to the Registrar, and the Registrar may direct to review the audit
classification. The auditor should be very careful, while making a
decision about the class of society.
k) Discussion of draft audit report with managing committee - On conclusion
of the audit, the auditor should ask the Secretary of the society to
convene the managing committee meeting to discuss the audit draft
report.
Minor irregularities may be got settled and rectified. Matters of policy
should be discussed in detail.
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9.11 Audit report

 The form of the audit report to be submitted by the auditor, as
prescribed in various states, contains a number of matters which the
auditor has to state or comment upon
 In addition to the above, the auditor will have to attach schedules to
the report regarding the following information:
a) All transactions which appear to be contrary to the provisions of
the Act, the rules and bye-laws of the society
b) All sums, which ought to have been, but have not been brought
into account by the society.
c) Any material, or property belonging to society which appears to
the auditor to be bad or doubtful of recovery
d) Any material irregularity or impropriety in expenditure or in the
realisation or monies due to society.
e) e) Any other matters specified by the Registrar in this behalf.
 In the case of Nil report in any of the above matters, the auditor will have
to give a Nil report.
 Further in addition to the audit certificate in the prescribed form and
various schedules stated above, the auditor of co-operative society in
the applicable State has to answer two sets of questionnaires called
as audit memos:-
 The first set of audit memo or questionnaire is of general nature
and is applicable to all types of societies such as urban banks,
consumers’ stores, credit societies etc.
 The second set of questionnaire is specific for a particular type of
society.
These questionnaires are drafted in detail and serve the practical
purpose of audit programme.
 The audit report in a narrative form is also required to be submitted
by the auditor addressed to the Chairman of the society. Generally
the narrative audit report as per convention is divided into two parts
styled as part I and part II:-
 Part I of the report is very important which throws a light on
comparative financial position, capital structure, solvency
position and the profitability or otherwise of the society.
 Part II of the report points out the observations of routine nature,
such as missing vouchers,inadequacies of documents, etc.
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9.12 Audit of Multi-State Co-operative Societies

The Multi-State Co-operative Societies Act, 2002, which came into force
in August, 2002 applies to co-operative societies whose objects are not
confined to one State. The Act contains detailed provisions regarding
registration, membership and management of such societies
9.12.1 Qualification of auditor
Section 72 of the Multi-State Co-operative Societies Act, 2002 states that a
person who is a Chartered Accountant within the meaning of the Chartered
Accountants Act, 1949 can only be appointed as auditor of Multi-State co-
operative society.
9.12.2 Disqualification of auditor
However the following persons are not eligible for appointment as auditors
of a Multistate co-operative society
a) A body corporate
b) An officer or employee of the Multi-State co-operative society
c) A person who is a member or who is in the employment, of an officer
or employee of the Multi-State co-operative society.
d) A person who is indebted to the Multi-State co-operative society or
who has given any guarantee or provided any security in connection
with the indebtedness of any third person to the Multi-State co-
operative society for an amount exceeding one thousand rupees.
If an auditor becomes subject, after his appointment, to any, of the
disqualifications specified above, he shall be deemed to have vacated his
office as such.
9.12.3 Appointment
 Section 70 of the Multi-State Co-operative Societies Act, 2002 provides
that the first auditor or auditors of a Multi-State co-operative society
shall be appointed by the board within one month of the date of
registration of such society and the auditor or auditors so appointed
shall hold office until the conclusion of the first annual general
meeting
 If the board fails to exercise its powers under this sub-section, the
Multi-State co-operative society in the general meeting may appoint
the first auditor or auditors.
 The subsequent auditor or auditors are appointed by Multi-State co-
operative society, at each annual general meeting.
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 The auditor or auditors so appointed shall hold office from the

conclusion of that meeting until the conclusion of the next annual
general meeting.
9.12.4 Rights and Duties
 Section 73 of the Multi-State Co-operative Societies Act, 2002
discusses the powers and duties of auditors. According to this, every
auditor of a Multi-State co-operative society shall have a right of
access at all times to the books accounts and vouchers of the Multi-
State co-operative society
 As per section 73(2), the auditor shall make following inquiries:
a) Whether loans and advances made by the Multi-State co-
operative society on the basis of security have been properly
secured and whether the terms on which they have been made
are not prejudicial to the interests of the Multi-State cooperative
society or its members,
b) Whether transactions of the Multi-State co-operative society
which are represented merely by book entries are not prejudicial
to the interests of the Multi-State co-operative society
c) Whether personal expenses have been charged to revenue
account
d) Where it is Stated in the books and papers of the Multi-State
co-operative society that any shares have been allotted for
cash, whether cash has actually, been received in respect of such
allotment, and if no cash has actually been so received, whether
the position as stated in the account books and the balance
sheet as correct regular and not misleading.
9.12.5 Power of Central Government to direct special audit
 Under section 77 of the Multi-State Co-operative Societies Act, 2002,
where the Central Government is of the opinion:
(a) that the affairs of any Multi-State co-operative society are not
being managed in accordance with self-help and mutual deed
and co-operative principles or prudent commercial practices or
with sound business principles
(b) that any Multi-State co-operative society is being managed in a
manner likely to cause serious injury or damage to the interests
of the trade industry or business to which it pertains
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(c) that the financial position of any Multi-State co-operative

society is such as to endanger its solvency
(d) The Central Government may at any time by order direct that a
special audit of the Multi-State co-operative society’s accounts
for such period or periods as may be specified in the order, shall
be conducted and appoint either a chartered accountant or the
Multi-State co-operative society’s auditor himself to conduct
the special audit.
 However, Central Government shall order for special audit only if that
Government or the State Government either by itself or both hold
fifty-one percent or more of the paid-up share capital in such Multi-
State co-operative society.
 The special auditor shall have the same powers and duties in relation
to the special audit as an auditor of a Multi-State co-operative society
has. However the special auditor shall instead of making his report to
the members of the Multi-State co-operative society make the report
to the Central Government. The report of the special auditor shall,
include all the matters required to be included in the auditor’s report
and any other matter as directed by the Central Government.
 On receipts of the report of the special auditor the Central Government
may take such action on the report as it considers necessary in
accordance with the provision of the Act or any law for the time being
in force.
 However, if the Central Government does not take any action on the
report within four months from the date of its receipt, that Government
shall send to the Multi-State Co- operative society either a copy of,
or relevant extract from, the report with its comments thereon and
require the Multi-State Co-operative society either to circulate that
copy or those extracts to the members or to have such copy or extracts
read before the Multi-State Co-operative society at its next general
meeting.
 The expenses of, and incidental to, any special audit under this section
(including the remuneration of the special auditor) shall be determined
by the Central Government which determination shall be final and
paid by the Multi-State Co-operative society and in default of such
payment, shall be recoverable from the Multi-State Co-operative
society as an arrear of land revenue.
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9.12.6 Inquiry by Central Registrar under Section 78

1. When:- The Central Registrar may, on a request from :-
• a federal co-operative to which a Multi- State Co-operative
society is affiliated or
• a creditor or not less than one-third of the members of the board
or
• not less than one-fifth of the total number of members of a
Multi-state co-operative society,
2. How:- hold an inquiry or direct some person authorized by him by
order in writing in his behalf to hold an inquiry into the constitutions,
working and financial condition of a Multi-State Co-operative society.
3. Opportunity of being Heard:- However, before holding such inquiry fifteen
days notice must be given to the Multi-State co-operative society.
4. Powers given:- The Central Registrar or the person authorized by him
shall have the following powers, namely:
(a) he shall at all reasonable times have free access to the books,
accounts, documents, securities, cash and other properties
belonging to or in the custody of the Multi-State co-operative
society and may summon any person in possession or responsible
for the custody of any such books, accounts, documents
securities, cash or other properties to produce the same at any
place specified by him.
(b) he may, , require the officers of the society to call a general
meeting of the society by giving notice of not less than seven
days at such time and place at the head quarters of the society
to consider such matters as may be directed to him, and where
the officers of the society refuse or fail to call such a meeting, he
shall have power to call it himself.
(c) he may summon any person who is reasonably believed by him to
have any knowledge of the affairs of the Multi-State co-operative
society to appear before him at any place at the headquarters of
the society or any branch thereof and may examine such person
on oath.
5. Follow up :- The Central Registrar shall, within a period of three months
of the date of receipt of the report, communicate the report of inquiry
to the MultiState co-operative society, the financial institutions, if
any, to which the society is affiliated, and to the person or authority,
if any at whose instance the inquiry is needed.
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9.12.7 Inspection of Multi-State Co-operative societies under Section 79

1. When :- The Central Registrar may, on a request from
• federal co-operative to which a Multi- State Co-operative society
is affiliated or a creditor or
• not less than one-third of the members of the board or
• not less than one-fifth of the total number of members of a
Multi-State co-operative society
2. How :- By general or special order in writing in this behalf inspect or
direct any person authorized by him by order in writing in this behalf
to make an inspection into the constitution, working and financial
condition of a Multi- State co-operative society.
3. Opportunity of Being heard :- No inspection shall be made unless a
notice of not less than fifteen days has been given to the multi-state
co-operative society.
4. Powers available :- The Central Registrar or the person authorized by
him shall have the following powers:
(a) He shall at all times have access to all books, accounts, papers,
vouchers, securities, stock and other property of that society
and may, in the event of serious irregularities discovered during
inspection, take them into custody and shall have power to
verify the cash balance of the society and subject to the general
or special order of the central registrar to call a meeting of the
society where such general meeting is, in his opinion necessary.
(b) Every officer or member of a Multi-State Co-operative society
shall furnish such information with regard to the working of
the society as the central registrar or the person making such
inspection may require.
5. Inspection Report :- A copy of the report of inspection under this section
shall be communicated to the Multi-State Co-operative society
within a period of three months from the date of completion of such
inspection.
10 Audit of LLP
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10.1 Requirement of Audit:

 The accounts of every LLP shall be audited in accordance with Rule 24
of LLP, Rules 2009.
 Such rules, inter-alia, provides that any LLP, whose turnover does not
exceed, in any financial year, forty lakh rupees, or whose contribution
does not exceed twenty five lakh rupees, is not required to get its
accounts audited
 However, if the partners of such limited liability partnership decide to
get the accounts of such LLP audited, the accounts shall be audited
only in accordance with such rule.
10.2 Regulatory filings:
 An LLP shall be under obligation to maintain annual accounts
reflecting true and fair view of its state of affairs. A “Statement of
Accounts and Solvency” in prescribed form shall be filed by every LLP
with the Registrar every year
 Every LLP would be required to file annual return in Form 11 with
ROC within 60 days of closer of financial year. The annual return will
be available for public inspection on payment of prescribed fees to
Registrar.
 Every LLP is also required to submit Statement of Account and
Solvency in Form 8 which shall be filed within a period of thirty days
from the end of six months the financial year to which the Statement
of Account and Solvency relates
10.3 Appointment of Auditor: The auditor may be appointed by the designated
partners of the LLP –
1. At any time for the first financial year but before the end of first
financial year,
2. At least thirty days prior to the end of each financial year(other than
the first financial year),
3. To fill the causal vacancy in the office of auditor,
4. To fill the casual vacancy caused by removal of auditor.
The partners may appoint the auditors if the designated partners
have failed to appoint them.
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10.4 Advantages / Purpose / Need of Audit

a. Detection of Errors : Auditing the accounts of a LLP helps in detecting
errors & frauds & verification of financial statements
b. Disputes : Disputes if any between any partners in the matter of
accounts can be settled with the help of audited accounts.
c. Reliability : Banks & financial institutions lend money to the firms only
on the basis of audited accounts.
d. Better Compliance and Management : Periodical visits & suggestions by
the auditor will be helpful in improving the management of the LLP
e. Reconstitution : For settling accounts between partners at the time
of admission, death, retirement, insolvency, insanity, etc audited
accounts are accepted by those concerned who have dealings with
the LLP.
11 Audit of Hire purchase and leasing Companies
11.1 Hire purchase agreement is in writing and is signed by all parties.
11.2 Hire purchase agreement specifies clearly-
(a) The hire-purchase price of the goods to which the agreement relates;
(b) The cash price of the goods, that is to say, the price at which the
goods may be purchased by the hirer for cash;
(c) The date on which the agreement shall be deemed to have commenced;
(d) The number of instalments by which the hire- purchase price is to
be paid, the amount of each of those instalments, and the date, or
the mode of determining the date, upon which it is payable, and the
person to whom and the place where it is payable; and
(e) The goods to which the agreement relates, in a manner sufficient to
identify them
11.3 Ensure that instalment payments are being received regularly as per the
agreement
11.4 In respect of leasing transaction entered into by the leasing company, the
following procedures may be adopted by the auditor:
11.4.1 The object clause of leasing company to see that the goods like capital
goods, consumer durables etc. in respect of which the company can
undertake such activities. Further, to ensure that whether company can
undertake financing activities or not.
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11.4.2 Whether there exists a procedure to ascertain the credit analysis of lessee
like lessee’s ability to meet the commitment under lease, past credit record,
capital strength, availability of collateral security, etc.
11.4.3 The lease agreement should be examined and the following points may be noted:
(i) the description of the lessor, the lessee, the equipment and the
location where the equipment is to be installed. (The stipulation that
the equipment shall not be removed from the described location
except for repairs. For the sake of identification, the lessor may also
require plates or markings to be attached to the equipment).
(ii) the amount of tenure of lease, dates of payment, late charges,
deposits or advances etc. should be noted.
(iii) whether the equipment shall be returned to the lessor on termination
of the agreement and the cost shall be borne by the lessee.
(iv) whether the agreement prohibits the lessee from assigning the
subletting the equipment and authorises the lessor to do so.
11.4.4 Examine the lease proposal form submitted by the lessee requesting the
lessor to provide him the equipment on lease.
11.4.5 Ensure that the invoice is retained safely as the lease is a long-term
contract.
11.4.6 Examine the acceptance letter obtained from the lessee indicating that the
equipment has been received in order and is acceptable to the lessee.
11.4.7 See the Board resolution authorising a particular director to execute the
lease agreement has been passed by the lessee.
11.4.8 See that the copies of the insurance policies have been obtained by the
lessor for his records.
12 Audit of a Sole Trader:-
• A sole trader is under no legal obligation to get his accounts audited.
• Sole trader himself determine the scope and conditions under which
audit will be carried out.
• To prevent misunderstanding, the contract of appointment of auditor
should be in writing and clearly define the scope of the work. A sole
trader may also decide for a partial audit.
530
• The following are some of the advantages that can be derived from
an audit of this nature:
(i) The individual is assured of having his accounts properly
maintained and his expenditure vouched.
(ii) He is also assured of not being defrauded by the accountant and
his agents. Even if they have done some defalcations, etc.; these
may be discovered by the auditors.
(iii) The audited accounts are reliable and are generally accepted by
the Income-tax Department and hence, individuals do not feel
any difficulty for taxation assessments, etc.
(iv) The audited accounts of a deceased are very helpful for executors
and administrators.
13 Audit of a Firm:-
13.1 Special Points in Audit of a Partnership Firm:
i. Letter of Appointment : Confirming that the letter of appointment,
signed by a partner, duly authorised, clearly states the nature and
scope of audit contemplated by the partners, specially the limitation,
if any, under which the auditor shall have to function.
ii. Partnership Documents : Examine the partnership deed signed by all
partners and its registration with the registrar of firms. Also ascertain
from the partnership deed about capital contribution, profit sharing
ratios, interest on capital contribution, powers and responsibilities of
the partners, etc.
iii. Minute Books : Studying the minute book, if any, maintained to record
the policy decision taken by partners specially the minutes relating
to authorisation of extraordinary and capital expenditure, raising of
loans, purchase of assets, extraordinary contracts entered into and
other such matters which are not of a routine nature.
iv. Objects of Partnership : Verifying that the business in which the
partnership is engaged is authorised by the partnership agreement.
v. Books of Accounts : Examining whether books of account appear to be
reasonable and are considered adequate in relation to the nature of
the business of the partnership.
531
vi. Mutual Interest : Verifying generally that the interest of no partner

has suffered prejudicially by an activity engaged in by the partnership
which, it was not authorised to do under the partnership deed or by
any violation of a provision in the partnership agreement.
vii. Provision for Taxes : Confirming that a provision for the firm’s tax payable
by the partnership has been made in the accounts before arriving at
the amount of profit divisible among the partners. Also see various
requirements of legislations applicable to the partnership firm like
Section 44(AB) of the Income-tax Act, 1961 have been complied with.
viii. Division of Profits : Verifying that the profits and losses have been
divided among the partners in their agreed profit-sharing ratio.
13.2 Advantages of Audit of firm:-
Ø Disputes : Provides a convenient and reliable means of settling accounts
between the partners.
Ø Dissolution : On the retirement or death of a partner, audited accounts
helps in settlement of share of capital, profits and goodwill.
Ø Reliable : Helps in getting loans or other benefits from financial
institution.
Ø Admission : Helps in negotiating deals with new admitted partners.
Ø Control : Safeguards against any undue advantage taken by a working
partners.
532

1 You have been appointed as an auditor of an NGO, briefly state the points on which
you would concentrate while planning the audit of such an organisation?
Ans While planning the audit of an NGO, the auditor may concentrate on the
following:
a) Knowledge of the NGO’s work, its mission and vision, areas of operations
and environment in which it operate.
b) Updating knowledge of relevant statutes especially with regard to
recent amendments, circulars, judicial decisions related to the statutes.
c) Reviewing the legal form of the Organisation and its Memorandum of
Association, Articles of Association, Rules and Regulations.
d) Reviewing the NGO’s Organisation chart, then Financial and Administrative
Manuals, Project and Programme Guidelines, Funding Agencies Requirements
and formats, budgetary policies if any.
e) Examination of minutes of the Board/Managing Committee/Governing
Body/Management and Committees thereof to ascertain the impact of any
decisions on the financial records.
f) Study the accounting system, procedures, internal controls and internal
checks existing for the NGO and verify their applicability.
2 The general transactions of a hospital include patient treatment, collection of
receipts, donations, capital expenditures. You are required to mention special
points of consideration while auditing such transactions of a hospital?
533
Ans Special points of consideration while auditing certain transactions of a

hospital are stated below
a) Register of Patients: Vouch the Register of patients with copies of bills
issued to them. Verify bills for a selected period with the patients’
attendance record to see that the bills have been correctly prepared. Also
see that bills have been issued to all patients from whom an amount was
recoverable according to the rules of the hospital.
b) Collection of Cash: Check cash collections as entered in the Cash Book
with the receipts, counterfoils and other evidence for example, copies of
patients bills, counterfoils of dividend and other interest warrants, copies
of rent bills, etc.
c) Legacies and Donations: Ascertain that legacies and donations received
for a specific purpose have been applied in the manner agreed upon.
d) Reconciliation of Subscriptions: Trace all collections of subscription and
donations from the Cash Book to the respective Registers. Reconcile the
total subscriptions due (as shown by the Subscription Register and the
amount collected and that still outstanding).
e) Authorisation and Sanctions: Vouch all purchases and expenses and verify
that the capital expenditure was incurred only with the prior sanction
of the Trustees or the Managing Committee and that appointments and
increments to staff have been duly authorised.
3 Mention the special points to be examined by the auditor in the audit of a charitable
institution running hostel for students pursuing the Chartered Accountancy Course
and which charges only ` 500 per month from a student for his lodging/boarding
534
Ans 1. General
(i) Study the constitution under which the charitable institution has been
set up whether under the Society Registration Act, as a trust or as a
company limited by guarantee.
(ii) Examine the internal control structure particularly with reference to
admission to hostel, expenses incurred on different kinds of activities.
(iii) Verify the broad nature of expenses likely to be incurred with reference
to the previous year’s annual audited accounts
2. Verification of the receipts
(i) Check the amounts received on account of, monthly rentals, etc., and
receipts issued for the same.
(ii) Ascertain that there is adequate internal control over the issue of official
receipts, custody of unused receipt books, printing of receipt books, etc.
3. Verification of expenses
(i) Check the day-to-day administration expenses incurred along with the
necessary vouchers, supporting for the same like salary registers, repairs
register, etc.
(ii) Verify whether the expenses incurred are in conformity with the budgets
prepared internally or filed with the relevant authorities.
4. Verify investments made from surplus funds as well as existing investments
by physically verifying the same and that they are in the name of the
institution and that there is no charge/pledge against the same
5. Verify all capital expenditure and expenditure on repairs, etc., incurred
with the vouchers and also whether proper tenders, etc., were invited
for the same. See that all furniture, glass, cutlery, kitchen utensils, liner,
etc. are adequately depreciated
6. Verify whether the institution is eligible for income tax exemption and if
not, whether provision for taxation has been made
4 Explain in detail the duties of Comptroller and Auditor General of India
535
Ans The Comptroller & Auditor General’s (Duties, Powers and Conditions of Service)
Act, 1971 lays down duties of the C&AG as under
a) Compile and submit Accounts of Union and States - The C&AG shall
be responsible for compiling the accounts of the Union and of each
State from the initial and subsidiary accounts rendered to the audit and
accounts offices
b) to audit and report all transactions of the Union and of the States
relating to Contingency Funds and Public Accounts
c) Where any body or authority is substantially financed by grants or loans
from the Consolidated Fund of India or of any State or of any Union
Territory having a Legislative Assembly, the Comptroller and Auditor
General shall, subject to the provisions of any law for the time being in
force applicable to the body or authority, as the case may be, audit all
receipts and expenditure of that body or authority and to report on the
receipts and expenditure audited by him
d) Where any grant or loan is given for any specific purpose from the
Consolidated Fund of India or of any State or of any Union Territory
having a Legislative Assembly to any authority or body, not being a
foreign State or international organisation, the Comptroller and Auditor
Genera l shall scrutinise the procedures by which the sanctioning
authority satisfies itself as to the fulfillment of the condition
e) Where any grant or loan is given for any specific purpose from the
Consolidated Fund of India or of any State or of any Union Territory
having a Legislative Assembly to any authority or body, not being a
foreign State or international organisation, the Comptroller and Auditor
General shall scrutinise the procedures by which the sanctioning
authority satisfies itself as to the fulfillment of the condition.
f) The Comptroller and Auditor General shall have authority to audit and
report on the accounts of stores and inventory kept in any office or
department of the Union or of a State.
g) The duties and powers of the Comptroller and Auditor General in
relation to the audit of the accounts of government companies shall be
performed and exercised by him in accordance with the provisions of the
Companies Act, 2013
5 An NGO operating in Delhi had collected large scale donations for Tsunami victims.
The donations so collected were sent to different NGOs operating in Tamil Nadu
for relief operations. This NGO operating in Delhi has appointed you to audit its
accounts for the year in which it collected and remitted donations for Tsunami
victims. Draft audit programme for audit of receipts of donations and remittance of
the collected amount to different NGOs. Mention six points each, peculiar to the
situation, which you will like to incorporate in your audit programme for audit of
said receipts and remittances of donations
536
Ans Receipt of Donations:

a) Internal Control System: Existence of internal control system particularly
with reference to division of responsibilities in respect of authorised
collection of donations, custody of receipt books and safe custody of
money.
b) Custody of Receipt Books: Existence of system regarding issue of receipt
books, whether unused receipt books are returned and the same are
verified physically including checking of number of receipt books and
sequence of numbering therein.
c) Receipt of Cheques: Receipt Book should have carbon copy for duplicate
receipt and signed by a responsible official. All details relating to date
of cheque, bank’s name, date, amount, etc. should be clearly stated. (iv)
Bank Reconciliation: Reconciliation of bank statements with reference to
all cash deposits not only with reference to date and amount but also
with reference to receipt book.
d) Cash Receipts: Register of cash donations to be vouched more extensively.
If addresses are available of donors who had given cash, the same may
be cross-checked by asking entity to post thank you letters mentioning
amount, date and receipt number.
e) Foreign Contributions, if any, to receive special attention to compliance
with applicable laws and regulations.
f) Remittance of Donations to Different NGOs: (i) Mode of Sending
Remittance: All remittances are through account payee cheques.
Remittances through Demand Draft would also need to be scrutinised
thoroughly with reference to recipient.
g) Confirming Receipt of Remittance: All remittances are supported by
receipts and acknowledgements
h) Identity: Recipient NGO is a genuine entity. Verify address, 80G Registration
Number, etc.
i) Direct Confirmation Procedure: Send confirmation letters to entities to
whom donations have been paid.
j) Donation Utilisation: Utilisation of donations for providing relief to
Tsunami victims and not for any other purpose.
k) System of NGOs’ Selection: System for selecting NGO to whom donations
have been sent.
537
1. Public enterprises are required to maintain commercial accounts and are generally
classified under three categories.
Which of the following is not a category relating to above:
(a) departmental enterprises engaged in commercial and trading operations,
which are subject to the same laws, financial and other regulations as other
government departments and agencies;
(b) statutory bodies, corporations, created by specific statutes mostly financed by
government in the form of loans, grants, etc.; and
(c) government companies set up under the Companies Act, 2013.
(d) Charitable Trusts.
2. Article 151 requires that the reports of the C&AG relating to the accounts of the
Union/State shall be submitted to the -------- who shall cause them to be laid
before House of Parliament/State Legislature
(a) President/Governor
(b) Prime Minister/ Chief Minister
(c) Union Finance Minister/State Finance Minister
(d) Union Cabinet
3. ________aims at ascertaining that the expenditure incurred has been on the purpose
for which the grant and appropriation had been provided and that the amount of
such expenditure does not exceed the appropriation made.
(a) Audit against provision of funds (b) Propriety audit
(c) Audit of sanctions (d) Audit against rules and orders
4. The Auditor of a Sole Proprietor Concern is appointed by

(a)
CAG (b) Bank
(c) Sole Proprietor himself (d) District Administration
5. Every LLP would be required to file annual return in Form with ROC within 60 days
of closer of financial year :-
(a) Form 11 (b) Form 8
(c) Form 9 (d) Form DPIN
538
6. In addition to the audit certificate in the prescribed form and various schedules, the
auditor of a Co-operative society in the applicable State has to answer two sets of
questionnaires called as
(a) Internal Control Questionnaires (b) Audit Supplements
(c) Audit Memos (d) Memorandum reports
7. While conducting the audit of a local body , the auditor’s areas of audit do not include
(a) Budgetary Procedure (b) Expenditure Control
(c) Accounting System (d) Dispute Resolution
8. After a Government expenditure has been incurred and the accounts are closed, the
Appropriation Accounts are prepared which are scrutinized by the
(a)
CAG (b) President
(c) Public Accounts Committee (d) Parliament
9. The part of Government Audit which is concerned with examining whether the money
has been spent for the purpose specified in Appropriation/ Budget Act is called.
a) audit of sanctions b) audit of provision of funds
c) audit of rules and orders d) audit of financial propriety
10. The income Tax Department has sent Mr. X double refund of advance tax. The
Government Auditor detected this while conducting
a) audit of expenditure b) performance audit
c) audit of stores and stock d) audit of receipts
11. A state Government spent rupees fifty lakhs on renovation of Raj Bhavan’ for its
Governor. In the C & AG’s opinion, this expenditure was more than what occasion
demanded? It is an exampled of –
a) Propriety audit b) Performance audit
c) Audit against provision of funds d) None of the above
12. Audit reports on PSU are

a) submitted to the President/Governor for being laid before the parliament
b) sent to concerned ministries/departments
c) Submitted to BOD of concerned PSU
d) Any of the above
539
13. The C & AG, some years ago, gave adverse comments on expenditure incurred on
buying coffins for soldiers killed in a war. In his opinion, the coffins cases imported
could have been replace with less expensive, domestically produced ones.
This is an aspect of –
a) Audit of sanctions b) Audit of stores and stocks
c) Propriety audit d d) All of the above
14. Which of the following is not objective of audit of local bodies

a) Reporting on the fairness of the content and presentation of financial statements
b) Reporting on office infrastructure and maintenance of local bodies
c) Reporting on the adherence to legal and/or administrative requirements
d) Detection and prevention of error, fraud and misuse of resources
15. _________________________ is generally in charge of the audit of municipal

accounts.
a)
CAG b) CG
c) Local Fund Audit Wing of the State Government d) ROC
16. CAG can resign any time through a resignation letter addressed to
a) Prime Minister of India b) Parliament
c) CBI d) President of India
17. The CAG shall be paid salary equivalent to

a) Judge of High Court b) Judge of Supreme Court
c) Prime Minister d) President of India
18. ____________ is competent to make laws to determine salary and other conditions
of service
a) The Parliament b) President of India
c) Prime Minister of India d) CBI
19. The CAG shall hold office

a) For 6 Years b) Up to the age of 65 Years
c) (a) or (b) whichever is earlier d) (a) or (b) whichever is later
540
20. The CAG shall audit

a) Receipts of Union or State
b) Account of Store and Stock
c) Grants and Loans given from Consolidated Fund
d) All of these
21. Which of the following is not power of CAG

a) To inspect any office of accounts under the control of the union or a State
Government
b) To require that any account, book, paper and other documents which deal with
or are otherwise relevant to the transaction under audit, be sent to specified
places
c) To attend Parliament Session
d) To put such questions or make such observations as he may consider necessary
to the person in charge.
22. Which of the following is not a standard for audit of public expenditure
a) Audit of Rules and Orders b) Audit of Sanction
c) Audit of Propriety d) None of these
23. While auditing a cinema hall, the auditor needs to verify that
a) Entrance to the cinema hall during show is only through printed tickets
b) Tickets are serially numbered and bound into books
c) That for advance booking a separate series of tickets is issued
d) All of above
Answer
1 D 7 D 13 C 19 C
2 A 8 C 14 B 20 D
3 A 9 B 15 C 21 C
4 C 10 D 16 D 22 D
5 A 11 A 17 B 23 D
6 C 12 B 18 A
541
CASE 1.
As per Section 143(5) of the Companies Act, the power to appoint auditor of Government
Company or any other company owned or controlled, directly or indirectly, by the Central
Government, or by any State Government/s rests with Comptroller & Auditor General of
India. Sigma & Associates ( a practicing Chartered Accountant firm) having good practice
spread across regions, industries now applied to Comptroller & Auditor General of India
for allotment of audits of Government departments, Local bodies, Co-operative societies
etc. The firm is also interested in taking up LLP audits and wants to know peculiarities
related to LLP audits in accordance with LLP Rules 2009. Two senior Chartered Accountants
are entrusted for this division within Sigma & Associates. Both of them are seasoned
and highly experienced Chartered Accountants. Based on below queries/cases, you are
required to answer on specific cases which require special attention while conducting
audit of Government departments, Local bodies, Co-operative societies etc.
1 Public money should not be utilized for the benefit of a particular person or a
section of the community or for the person who is sanctioning the expenditure.
These are the principles covered in
(a) Performance Audit (b) Audit against rules and orders
(c) Propriety Audit (d) Efficiency Audit
2 In case of co- operative societies, bad debts and irrecoverable losses before being
written off against Bad Debt funds, Reserve fund etc. should be certified as bad
debts or irrecoverable losses by the
(a) auditor where the law so requires
(b) the managing committee of the society , when law is silent as to certification
by auditor
(c) the managing committee of the society , irrespective of the provisions of the
law
(d) Both (a) and (b)
3 As per Rule 24 of LLP Rules, 2009, Statement of Account and Solvency shall be filed
in ____________ with the ____________, within a period of _________________.
(a) Form 5, SEBI, 30 days from the end of 3 months of the financial year to which
the Statement of Account and Solvency relates.
542
(b) Form 5, Registrar, 30 days from the end of 6 months of the financial year to
which the Statement of Account and Solvency relates.
(c) Form 8, SEBI, 30 days from the end of 3 months of the financial year to which
the Statement of Account and Solvency relates.
(d) Form 8, Registrar, 30 days from the end of 6 months of the financial year to
which the Statement of Account and Solvency relates
4 LLP, whose turnover does not exceed ________ or whose contribution does not
exceed _________, is not required to get its accounts audited.
(a) 40 Lakhs, 25 Lakhs (b) 50 Lakhs, 25 Lakhs (c) 40 Lakhs, 20 Lakhs (d) 60 Lakhs, 30
Lakhs
5 Which of the following matter is not required to be inquired by auditor of multi-

state co-operative society under Sec. 73(2) of Multi-State Co-operative Societies
Act, 2002:
(a) Whether loans and advances made on the basis of security have been properly
secured and whether the terms on which they have been made are not
prejudicial to the interests of the society or its members;
(b) Whether transactions which are represented merely by book entries are not
prejudicial to the interest of Society;
(c) Whether personal expenses have been charged to revenue account; and
(d) Whether loans and advances shown as deposits.
Answer
1 C 2 D 3 D 4 A 5 D
543
1. Article 150 of the Constitution provides that the accounts of the Union and of the
States shall be kept in such form as the Finance Minister may on the advice of the
C&AG prescribe.3.74
2. According to ‘propriety audit’, the auditors try to bring out cases of improper,
avoidable, or infructuous expenditure even though the expenditure has been incurred
in conformity with the existing rules and regulations.
3. Expenditure incurred by the municipalities and corporations can be broadly classified

under the following heads: (a) general administration and revenue collection, (b)
public health, (c) public safety, (d) education, (e) public works, and (f) others such as
interest payments.
4. The external control of municipal expenditure is exercised by the Central Government

through the appointment of auditors to examine municipal accounts.
5. NGOs may be defined as non-profit making organisations which raise funds from
members, donors or contributors apart from receiving donation of time, energy and
skills for achieving their social objectives.
6. The accounts of every LLP shall be audited in accordance with rule 24 of LLP Rules
2009.
7. The auditor of an LLP may be appointed by the Designated Partners or other Partners
whosoever is available at the time of appointment.
8. The Comptroller and Auditor General does not have any authority to audit the
accounts of stores and inventory kept in any office or department of the Union or of
a State .
9. An Operating Lease is a kind of Financing arrangement.
544
10. An auditor should ensure that proper valuation of occupancy-in-progress at the

balance sheet date is made and included in the accounts in the case of audit of a
Hotel.
11. The Constitution of India contains no specific provisions regarding the appointment,
salary and duties and powers of the C&AG. Moreover, the constitution does not
guarantee the independence of the C&AG of India.
12. Government audit does not serve as a mechanism or process for public accounting
of government funds
13. The accounts of every LLP shall be audited in accordance with rule 24 of LLP Rules
2009.
545
1. Incorrect. Article 150 of the Constitution provides that the accounts of the Union
and of the States shall be kept in such form as the President may on the advice of
the C&AG prescribe.
2. Correct. According to ‘propriety audit’, the auditors try to bring out cases of improper,
avoidable, or infructuous expenditure even though the expenditure has been incurred
in conformity with the existing rules and regulations.13.76
3. Correct . Expenditure incurred by the municipalities and corporations can be broadly

classified under the following heads:
(a) general administration and revenue collection, (b) public health, (c) public safety,
(d) education, (e) public works, and (f) others such as interest payments, etc.
4. Incorrect. The external control of municipal expenditure is exercised by the state

governments through the appointment of auditors to examine municipal accounts.
5. Correct. NGOs can be defined as non-profit making organisations which raise funds
from members, donors or contributors apart from receiving donation of time, energy
and skills for achieving their social objectives like imparting education, providing
medical facilities, economic assistance to poor, managing disasters and emergent
situations.
6. Incorrect- Rule 24 of LLP Rules 2009 provides that any LLP, whose turnover does
not exceed, in any financial year, forty lakh rupees, or whose contribution does not
exceed twenty five lakh rupees, is not required to get its accounts audited.
However, if the partners of such limited liability partnership decide to get the
accounts of such LLP audited, the accounts shall be audited only in accordance with
such rules.
7. Incorrect- The auditor is to be appointed by the designated partners of the LLP.

However , the Partners may appoint the auditors only if the Designated Partners
have failed to appoint them.
546
8. Incorrect- The Comptroller and Auditor General shall have authority to audit and
report on the accounts of stores and inventory kept in any office or department of
the Union or of a State.
9. Incorrect- A Finance Lease is a Financing arrangement. An Operating lease, on the

other hand, is a simple arrangement
where, in return for rent, the lessor allows the lessee to use the asset for a certain
period.
10. Correct- The auditor should ensure that proper valuation of occupancy-in progress
at the balance sheet date is made and included in the accounts for proper recording
of closing and opening entries and maintainance of accounts on Accrual basis as
per the Matching concept.
11. Incorrect: The Constitution of India contains specific provisions regarding the
appointment, salary and duties and powers of the C&AG. The constitution guarantees
the independence of the C&AG of India by prescribing that he shall be appointed by
the President of India and shall not be removed from office except on the ground of
proven mis-behaviour or incapacity.
12. Incorrect: Government audit serves as a mechanism or process for public accounting
of government funds. It also provides public accounting of the operational,
management, programme and policy aspects of public administration as well as
accountability of the officials administering them.
13. Incorrect- Rule 24 of LLP Rules 2009 provides that any LLP, whose turnover does
not exceed, in any financial year, forty lakh rupees, or whose contribution does not
exceed twenty five lakh rupees, is not required to get its accounts audited.
However if the partners of such limited liability partnership decide to get the
accounts of such LLP audited, the accounts shall be audited only in accordance with
such rules.
547
PART F
ANNEXURE
548
AUDITING AND ASSURANCE

STANDARDS
Sr.No AAS Title Page No.

1 SA 200 Overall Objectives of Independent Auditor and 326 – 333
conduct of audit in accordance with Standards on
Auditing
2 SA 210 Agreeing to the terms of audit engagement 334 – 336
3 SA 220 Quality Control for an Audit of Financial 337 – 340
Statements
4 SA 230 Audit Documentation 341 – 342
5 SA 240 The Auditor’s responsibilities Relating to Fraud in 343 – 347
an Audit of Financial Statements
6 SA 250 Consideration of Laws and Regulations in an Audit 348 – 350
of Financial Statements
7 SA 260 Communication with Those Charged with Not in syllabus
Governance
8 SA 265 Communicating Deficiencies in Internal Control to Not in syllabus
Those Charged with Governance and Management
9 SA 299 Responsibility of Joint Auditors 351 – 353
10 SA 300 Planning an Audit of Financial Statements 354 – 355
11 SA 315 Identifying and Assessing the Risks of Material 356 – 359
Misstatement through Understanding the Entity
and its Environment
12 SA 320 Materiality in Planning and Performing an Audit 360 – 362
13 SA 330 The Auditor’s Responses to Assessed Risks Not in syllabus
14 SA 402 Audit Considerations Relating to an Entity Using a Not in syllabus
Service Organization
15 SA 450 Evaluation of Misstatements Identified during the Not in syllabus
Audits
16 SA 500 Audit Evidence 363 – 364
549
17 SA 501 Audit Evidence - Specific Considerations for 365 – 367

Selected Items
18 SA 505 External Confirmations 368 – 370
19 SA 510 Initial Audit Engagements-Opening Balances 371 – 373
20 SA 520 Analytical Procedures 374 – 375
21 SA 530 Audit Sampling 376 – 378
22 SA 540 Auditing Accounting Estimates, Including Not in syllabus
Fair Value Accounting Estimates, and Related
Disclosures
23 SA 550 Related Parties 379 – 383
24 SA 560 Subsequent Events 384 – 386
25 SA 570 Going Concern 387 – 389
26 SA 580 Written Representations 390 – 391
27 SA 600 Using the Work of Another Auditor Not in syllabus
28 SA 610 Using the Work of Internal Auditors 392 – 394
29 SA 620 Using the Work of an Auditor’s Expert Not in syllabus
30 SA 700 Forming an Opinion and Reporting on Financial 395 – 399
Statements
31 SA 701 Communicating Key Audit Matters in the 400 – 401
Independent Auditor’s Report
32 SA 705 Modifications to the Opinion in the Independent 402 – 404
Auditor’s Report
33 SA 706 Emphasis of Matter Paragraphs and Other Matter 405 – 407
Paragraphs in the Independent Auditor’s Report
34 SA 710 Comparative Information – Corresponding 408 – 410
Figures and Comparative Financial Statements
35 SA 720 The Auditor’s Responsibility in Relation to Other Not in syllabus
Information in Documents Containing Audited
Financial Statements
36 SQC 1 Quality Control for Firms that Perform Audits
and Reviews of Historical Financial Information,
and Other Assurance and Related Services
Engagements
550
SA 200 OVERALL OBJECTIVES OF THE INDEPENDENT AUDITOR AND

THE CONDUCT OF AN AUDIT IN ACCORDANCE WITH STANDARDS
ON AUDITING (EFFECTIVE ON OR AFTER APRIL 1, 2010)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) establishes the independent auditor’s
overall responsibilities when conducting an audit of financial statements in
accordance with SAs.
1.2 It also explains the scope, authority and structure of the SAs, and includes
requirements establishing the general responsibilities of the independent
auditor applicable in all audits, including the obligation to comply with the
SAs.
1.3 As the basis for the auditor’s opinion, SAs require the auditor to obtain
reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error. Reasonable
assurance is a high level of assurance. However, reasonable assurance is not
an absolute level of assurance, because there are inherent limitations of an
audit (Refer Q1)
2 Objective
2.1 In conducting an audit of financial statements, the overall objectives of the
auditor are:
2.1.a To obtain reasonable assurance about whether the financial statements as
a whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
2.1.b To report on the financial statements, and communicate as required by
the SAs, in accordance with the auditor’s findings by providing reasonable
assurance.
3 Definition
551
3.1 Applicable financial reporting framework:

The financial reporting framework adopted by management and, where
appropriate, those charged with governance in the preparation and
presentation of the financial statements that is acceptable in view of the
nature of the entity and the objective of the financial statements, or that is
required by law or regulation.
3.1.a Fair Presentation Framework:
The term “fair presentation framework” is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework
and:
(i) Acknowledges directly or indirectly that, to achieve fair presentation
of the financial statements, it may be necessary for management to
provide disclosures beyond those specifically required by the framework;
or
(ii) Acknowledges directly that it may be necessary for management to
depart from a requirement of the framework to achieve fair presentation
of the financial statements. Such departures are expected to be necessary
only in extremely rare circumstances.
3.1.b Compliance Framework:
The term “compliance framework” is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework,
but does not contain the acknowledgements explained in Fair Presentation
Framework.
3.2 Audit Evidence (SA 500):
Information used by the auditor in arriving at the conclusions on which the
auditor’s opinion is based. Audit evidence includes both information contained
in the accounting records underlying the financial statements and other
information
3.2.a Sufficiency of Evidence:
Sufficiency of audit evidence is the measure of the quantity of audit evidence.
The quantity of the audit evidence needed is affected by the auditor’s
assessment of the risks of material misstatement and also by the quality of
such audit evidence
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3.2.b Appropriateness of Evidence:

Appropriateness of audit evidence is the measure of the quality of audit
evidence; that is, its relevance and its reliability in providing support for the
conclusions on which the auditor’s opinion is based
3.3 Audit Risk : (Refer Q2, Q3 and Q4)
The risk that the auditor expresses an inappropriate audit opinion when the
financial statements are materially misstated. Audit risk is a function of the
risks of material misstatement and detection risk
3.4 Risk of Material Misstatement (SA 315):
The risk that the financial statements are materially misstated prior to audit.
This consists of two components, described as follows at the assertion level:
3.4.a Inherent Risk:
The susceptibility of an assertion about a class of transaction, account balance
or disclosure to a misstatement that could be material, either individually
or when aggregated with other misstatements, before consideration of any
related controls
3.4.b Control Risk:
The risk that a misstatement that could occur in an assertion about a class
of transaction, account balance or disclosure and that could be material,
either individually or when aggregated with other misstatements, will not
be prevented, or detected and corrected, on a timely basis by the entity’s
internal control.
3.5 Detection Risk:
The risk that the procedures performed by the auditor (as per SA 330) to
reduce audit risk to an acceptably low level will not detect a misstatement
that exists and that could be material, either individually or when aggregated
with other misstatements.
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3.6 Premise, relating to the responsibilities of management and, where appropriate,

those charged with governance, on which an audit is conducted –
That management and, where appropriate, those charged with governance
have the following responsibilities that are fundamental to the conduct of an
audit in accordance with SAs. That is, responsibility:
1. For the preparation and presentation of the financial statements in
accordance with the applicable financial reporting framework; this
includes the design, implementation and maintenance of internal control
relevant to the preparation and presentation of financial statements
that are free from material misstatement, whether due to fraud or error;
and
2. To provide the auditor with:
a) All information, such as records and documentation, and other
matters that are relevant to the preparation and presentation of
b) Any additional information that the auditor may request from
management and, where appropriate, those charged with
governance; and
c) Unrestricted access to those within the entity from whom the auditor
determines it necessary to obtain audit evidence
4 Requirements
4.1 Ethical Requirements: Independence is a pre-requisite for auditing. Apart from
Independence (Refer Q5), auditor is subject to following ethical requirements
as per Code of Ethics issued by the ICAI:
4.1.a Integrity-Honesty
4.1.b Objectivity- Being unbiased
4.1.c Professional Competence and due care- Skills, Knowledge and Questioning
Mind
4.1.d Confidentiality- should not disclose information acquired during the course
of audit without client’s prior consent unless required by law or regulation.
4.1.e Professional Behaviour- Good Code of Conduct and systematic approach to
audit.
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4.2 Professional Skepticism:

An attitude that includes a questioning mind, being alert to conditions which
may indicate possible misstatement due to error or fraud, and a critical
assessment of audit evidence.
The auditor shall plan and perform an audit with professional skepticism
recognising that circumstances may exist that cause the financial statements
to be materially misstated (Refer SA 240)
4.3 Professional Judgment:
The auditor shall exercise professional judgment in planning and performing
an audit of financial statements.
Professional judgment is not to be used as the justification for decisions that
are not otherwise supported by the facts and circumstances of the engagement
or sufficient appropriate audit evidence.
Professional judgment is necessary in particular regarding decisions about:
4.3.a Materiality and audit risk
4.3.b The nature, timing, and extent of audit procedures used to meet the
requirements of the SAs and gather audit evidence.
4.3.c Evaluating whether sufficient appropriate audit evidence has been obtained,
and whether more needs to be done to achieve the objectives of the SAs
4.3.d The evaluation of management’s judgments in applying the entity’s applicable
financial reporting framework
4.3.e The drawing of conclusions based on the audit evidence obtained, for example,
assessing the reasonableness of the estimates made by management in
preparing the financial statements
4.4 Sufficient Appropriate Audit Evidence and Audit Risk:
To obtain reasonable assurance, the auditor shall obtain sufficient appropriate
audit evidence to reduce audit risk to an acceptably low level and thereby
enable the auditor to draw reasonable conclusions on which to base the
auditor’s opinion
4.4.a Inherent risk is higher for some assertions and related classes of transactions,
account balances, and disclosures than for others. For example, it may
be higher for complex calculations or for accounts consisting of amounts
derived from accounting estimates that are subject to significant estimation
uncertainty
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4.4.b Control Risk is a function of the effectiveness of the design, implementation

and maintenance of internal control Internal control, no matter how well
designed and operated, can only reduce, but not eliminate, risks of material
misstatement in the financial statements, because of the inherent limitations
of internal control.
4.4.c Detection Risk is a function of the effectiveness of an audit procedure and of
its application by the auditor to reduce the possibility that an auditor might
select an inappropriate audit procedure, misapply an appropriate audit
procedure, or misinterpret the audit results.
4.4.d For a given level of audit risk, the acceptable level of detection risk bears an
inverse relationship to the assessed risks of material misstatement at the
assertion level. For example, the greater the risks of material misstatement
the auditor believes exists, the less the detection risk that can be accepted
and, accordingly, the more persuasive the audit evidence required by the
auditor
4.4.e There is an inverse relationship between materiality and audit risk. Higher the
materiality/significance of financial items, lower will be the audit risk that
auditor would accept.
4.5 Conduct of an audit in accordance with SAs
4.5.a The auditor shall comply with all SAs relevant to the audit. An SA is relevant
to the audit when the SA is in effect and the circumstances addressed by the
SA exist.
4.5.b To achieve the overall objectives of the auditor, the auditor shall use the
objectives stated in relevant SAs in planning and performing the audit.
4.5.c In exceptional circumstances, the auditor may judge it necessary to depart
from a relevant requirement in an SA. In such circumstances, the auditor shall
perform alternative audit procedures to achieve the aim of that requirement.
4.5.d If an objective in a relevant SA cannot be achieved, the auditor shall evaluate
whether this prevents the auditor from achieving the overall objectives of
the auditor and thereby requires the auditor, in accordance with the SAs, to
modify the auditor’s opinion or withdraw from the engagement
4.5.e In performing an audit, the auditor may be required to comply with legal or
regulatory requirements in addition to the SAs. The SAs do not override laws
and regulations that govern an audit of financial statements. In the event
that those laws and regulations differ from the SAs, an audit conducted only
in accordance with laws and regulations will not automatically comply with
SAs.
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SA 210 AGREEING THE TERMS OF AUDIT ENGAGEMENTS

(EFFECTIVE ON OR AFTER APRIL 1, 2010)
S.N Particulars
1 Introduction:
This Standard on Auditing (SA) deals with the auditor’s responsibilities in
agreeing the terms of the audit engagement with management and, where
appropriate, those charged with governance.
2 Objective:
The objective of the auditor is to accept or continue an audit engagement only
when the basis upon which it is to be performed has been agreed, through:
2.1 Establishing whether the preconditions for an audit are present
2.2 Confirming that there is a common understanding between the auditor and
management and, where appropriate, those charged with governance of the
terms of the audit engagement.
3 Definition
3.1 Preconditions for an audit – The use by management of an acceptable financial
reporting framework in the preparation of the financial statements and the
agreement of management and, where appropriate, those charged with
governance to the premise on which an audit is conducted.
4 Requirements
4.1 Pre-conditions for an Audit
4.1.a Determine whether the financial reporting framework to be applied in the
preparation of the financial statements is acceptable; and
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4.1.b Obtain the agreement of management that it acknowledges and understands

its responsibility:
1. For the preparation of the financial statements in accordance with the
applicable financial reporting framework, including where relevant their
fair presentation
2. For such internal control as management determines is necessary
to enable the preparation of financial statements that are free from
material misstatement, whether due to fraud or error
3. To provide the auditor with:
a. Access to all information of which management is aware that is
relevant to the preparation of the financial statements such as
records, documentation and other matters;
b. Additional information that the auditor may request from
management for the purpose of the audit; and
c. Unrestricted access to persons within the entity from whom the
auditor determines it necessary to obtain audit evidence
4.1.c If the preconditions for an audit are not present, the auditor shall discuss the
matter with management. Unless required by law or regulation to do so, the
auditor shall not accept the proposed audit engagement.
4.2 Agreement on Audit Engagement Terms (LETTER OF ENGAGEMENT)
4.2.a Content:
the agreed terms of the audit engagement shall be recorded in an audit
engagement letter or other suitable form of written agreement and shall
include:
a) The objective and scope of the audit of the financial statements;
b) The responsibilities of the auditor;
c) The responsibilities of management;
d) Identification of the applicable financial reporting framework for the
preparation of the financial statements; and
e) Reference to the expected form and content of any reports to be issued
by the auditor and a statement that there may be circumstances in which
a report may differ from its expected form and content
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4.2.b Reference to applicable law

If law or regulation prescribes in sufficient detail the terms of the audit
engagement referred above, the auditor n eed not record them in a written
agreement, except for the fact that such law or regulation applies and that
management acknowledges and understands its responsibilities as discussed
in pre-conditions for an audit.
4.2.c Recurring audit engagement
On recurring audits, the auditor shall assess whether circumstances require
the terms of the audit engagement to be revised and whether there is a need
to remind the entity of the existing terms of the audit engagement.
4.3 Limitation on Scope Prior to Audit Engagement Acceptance
4.3.a If management or those charged with governance impose a limitation on the
scope of the auditor’s work in the terms of a proposed audit engagement
then auditor shall evaluate the possible effect of such changes.
4.3.b If the auditor believes the limitation will result in the auditor disclaiming
an opinion on the financial statements, the auditor shall not accept such
a limited engagement as an audit engagement, unless required by law or
regulation to do so.
4.4 Acceptance of a Change in the Terms of the Audit Engagement
4.4.a The auditor shall not agree to a change in the terms of the audit engagement
where there is no reasonable justification for doing so.
4.4.b If, prior to completing the audit engagement, the auditor is requested
to change the audit engagement to an engagement that conveys a lower
level of assurance, the auditor shall determine whether there is reasonable
justification for doing so.
4.4.c If the terms of the audit engagement are changed, the auditor and
management shall agree on and record the new terms of the engagement in
an engagement letter or other suitable form of written agreement.
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4.4.d If the auditor is unable to agree to a change of the terms of the audit
engagement and is not permitted by management to continue the original
audit engagement, the auditor shall:
(i) Withdraw from the audit engagement where possible under applicable
law or regulation; and
(ii) Determine whether there is any obligation, either contractual or
otherwise, to report the circumstances to other parties, such as those
charged with governance, owners or regulators
4.5 Additional Considerations in Engagement Acceptance
4.5.a If financial reporting standards established by an authorised or recognised standards
setting organization are supplemented by law or regulation, the auditor shall
determine whether there are any conflicts between the financial reporting
standards and the additional requirements.
If such conflicts exist, the auditor shall discuss with management the nature
of the additional requirements and shall agree whether:
(i) The additional requirements can be met through additional disclosures
in the financial statements; or (ii) The description of the applicable financial
reporting framework in the financial statements can be amended accordingly.
If neither of the above actions is possible, the auditor shall determine whether
it will be necessary to modify the auditor’s opinion in accordance with SA 705
4.5.b In some cases, the law or regulation applicable to the entity prescribes the layout
or wording of the auditor’s report in a form or in terms that are significantly
different from the requirements of SAs. In these circumstances, the auditor
shall evaluate:
(a) Whether users might misunderstand the assurance obtained from the
audit of the financial statements and, if so,
(b) Whether additional explanation in the auditor’s report can mitigate
possible misunderstanding.
If the auditor concludes that additional explanation in the auditor’s report
cannot mitigate possible misunderstanding, the auditor shall not accept the
audit engagement, unless required by law or regulation to do so.
An audit conducted in accordance with such law or regulation does not comply
with SAs. Accordingly, the auditor shall not include any reference within the
auditor’s report to the audit having been conducted in accordance with SAs
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4.5.c Financial Reporting Framework Prescribed by Law or Regulation

If the auditor has determined that the financial reporting framework
prescribed by law or regulation would be unacceptable but for the fact
that it is prescribed by law or regulation, the auditor shall accept the audit
engagement only if the following conditions are present:
(i) Management agrees to provide additional disclosures in the financial
statements required to avoid the financial statements being misleading
(ii) The auditor’s report on the financial statements will incorporate an
Emphasis of Matter paragraph, drawing users’ attention to the additional
disclosures, in accordance with SA 706
(iii) The auditor’s opinion on the financial statements will not include phrases
such as “present fairly, in all material respects”, or “give a true and fair
view” unless required by law or regulation to do so.
561
SA 220 QUALITY CONTROL FOR AN AUDIT OF

FINANCIAL STATEMENTS (EFFECTIVE ON OR AFTER
APRIL 1, 2010)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the specific responsibilities of
the auditor regarding quality control procedures for an audit of financial
statements
1.2 This SA is premised on the basis that the firm is subject to SQC 1.
2 Objective:
The objective of the auditor is to implement quality control procedures at the
engagement level that provide the auditor with reasonable assurance that:
2.1 The audit complies with professional standards and regulatory and legal
requirements
2.2 The auditor’s report issued is appropriate in the circumstances
3 Definition
3.1 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.
3.2 Engagement quality control reviewer:
(i) a partner,
(ii) other person in the firm,
(iii) suitably qualified external person, or
(iv) a team made up of such individuals, with sufficient and appropriate
experience and authority to objectively evaluate provided such team
should be headed by a member of the Institute
3.3 Engagement team:
All personnel performing an engagement, including any experts contracted
by the firm in connection with that engagement. The term “engagement
team” excludes individuals within the client’s internal audit function who
provide direct assistance on an audit engagement when the external auditor
complies with the requirements of SA 610.
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3.4 Network Firms:

A firm or entity that belongs to a network.
Network means a larger structure:
(i) That is aimed at cooperation, and
(ii) 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
4 Requirements
4.1 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.
He shall deliver the following messages to the audit team clearly:
4.1.a Performing work that complies with professional standards and regulatory
and legal requirements
4.1.b Complying with the firm’s quality control policies and procedures as applicable
4.1.c Issuing auditor’s reports that are appropriate in the circumstances; and
4.1.d The engagement team’s ability to raise concerns without fear of reprisals
4.2 Relevant Ethical Requirements as discussed in Code of ethics issued by the ICAI
4.2.a Throughout the audit engagement, the engagement partner shall remain
alert, through observation and making inquiries as necessary, for evidence
of non-compliance with relevant ethical requirements by members of the
engagement team
4.2.b If matters come to the engagement partner’s attention through the firm’s
system of quality 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
4.3 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:
4.3.a Obtain relevant information from the firm and, where applicable, network
firms, to identify and evaluate circumstances and relationships that create
threats to independence
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4.3.b 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
4.3.c 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.
4.4 Acceptance and Continuance of Client Relationships and Audit Engagements:
Information such as the following assists the engagement partner in
determining whether the conclusions reached regarding the acceptance and
continuance of client relationships and audit engagements are appropriate:
4.4.a The integrity of the principal owners, key management and those charged
with governance of the entity
4.4.b Whether the engagement team is competent to perform the audit engagement
and has the necessary capabilities, including time and resources
4.4.c Whether the firm and the engagement team can comply with relevant ethical
requirements
4.4.d Significant matters that have arisen during the current or previous audit
engagement, and their implications for continuing the relationship
4.5 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:
4.5.a Perform the audit engagement in accordance with professional standards
and regulatory and legal requirements
4.5.b Enable an auditor’s report that is appropriate in the circumstances to be
issued
4.6 Engagement Performance:
Following Measures must be taken to improve the engagement performance
and reduce audit risk to an acceptably low level:
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4.6.a Direction:
Direction of the engagement team involves informing the members of the
engagement team of matters such as:
i) Their responsibilities, including the need to comply with relevant ethical
requirements, and to plan and perform an audit with professional
skepticism
ii) Responsibilities of respective partners where more than one partner is
involved in the conduct of an audit engagement
iii) The detailed approach to the performance of the engagement.
4.6.b Supervision:
It includes matters such as
i) Tracking the progress of the audit engagement
ii) Addressing significant matters arising during the audit engagement
iii) Identifying matters for consultation or consideration by more experienced
engagement team members during the audit engagement
4.6.c Reviews:
Timely reviews of the following by the engagement partner at appropriate
stages during the engagement allow significant matters to be resolved on a
timely basis to the engagement partner’s satisfaction on or before the date
of the auditor’s report:
(i) Critical areas of judgment
(ii) Significant Risks identified as per SA 315
(iii) Other areas the engagement partner considers important
4.6.d Consultation:
It may be appropriate for the engagement team to consult outside the firm,
for example, where the firm lacks appropriate internal resources.
For E.g. They may take advantage of advisory services provided by other
firms, professional and regulatory bodies, or commercial organisations that
provide relevant quality control services.
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4.6.e Engagement Quality Control Review:

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 determine
that engagement quality control reviewer has been appointed and not date
auditor’s report until such review is completed.
The reviewer shall:
(i) Discuss significant matters with the engagement partner
(ii) Review the financial statements and the proposed auditor’s report
(iii) Review of selected audit documentation relating to the significant
judgments the engagement team made
(iv) Evaluation of the conclusions reached in formulating the auditor’s report
4.7 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
4.8 Monitoring
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.
4.9 Documentation
4.9.a Issues identified with respect to compliance with relevant ethical requirements
and how they were resolved
4.9.b Conclusions on compliance with independence requirements that apply to the
audit engagement
4.9.c Conclusions reached regarding the acceptance and continuance of client
relationships and audit engagements
4.9.d The nature and scope of, and conclusions resulting from, consultations
undertaken during the course of the audit engagement including
(i) The issue on which consultation was sought
(ii) The results of the consultation, including any decisions taken, the basis
for those decisions and how they were implemented
4.9.e Whether the engagement quality control review has been completed on or
before the date of the auditor’s report and findings of such review
566
SA 230 AUDIT DOCUMENTATION (EFFECTIVE ON OR

AFTER APRIL 1, 2009)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to
prepare audit documentation for an audit of financial statements
1.2 Nature and Purpose of Audit Documentation:
It acts as a basis for auditor’s conclusion and serves a number of additional
purposes as given below:
1.2.a Assisting the engagement team to plan and perform the audit.
1.2.b Enabling the engagement team to be accountable for its work
1.2.c Acts as an evidence that audit was done as per professional and legal
standards
1.2.d Enabling the conduct of external inspections in accordance with applicable
legal, regulatory or other requirements
1.2.e Enabling the conduct of quality control reviews and inspections in accordance
with SQC 1 and SA 220.
2 Objective:
The objective of the auditor is to prepare documentation that provides:
2.1 A sufficient and appropriate record of the basis for the auditor’s report
2.2 Evidence that the audit was planned and performed in accordance with SAs
and applicable legal and regulatory requirements. Definitions
3 Definition
3.1 Audit documentation – The record of audit procedures performed, relevant
audit evidence obtained, and conclusions the auditor reached (terms such as
“working papers” or “workpapers” are also sometimes used).
4 Requirements
4.1 The auditor shall prepare audit documentation on a timely basis.
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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4.2 Form, Content and Extent of Documentation:

The auditor shall prepare audit documentation that is sufficient to enable
an experienced auditor, having no previous connection with the audit, to
understand:
4.2.a The nature, timing, and extent of the audit procedures performed to
comply with the SAs and applicable legal and regulatory requirements. In
Documenting this, the auditor shall record:
(i) identifying characteristics of the specific items or matters tested
(ii) Who performed the audit work and the date such work was completed
(iii) Who reviewed the audit work performed and the date and extent of
such review
4.2.b The results of the audit procedures performed, and the audit evidence
obtained
4.2.c Significant matters arising during the audit, the conclusions reached thereon,
and significant professional judgments made in reaching those conclusions
4.2.d 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
4.2.e document how the auditor addressed the inconsistency to resolve the doubts
as identified during the course of audit.
4.3 Factors determining Form, Content and Extent of Audit Documentation:
4.3.a The size and complexity of the entity
4.3.b The nature of the audit procedures to be performed
4.3.c The identified risks of material misstatement
4.3.d The significance of the audit evidence obtained
4.3.e The nature and extent of exceptions identified
4.3.f 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
4.3.g The audit methodology and tools used
4.4 Departure from a Relevant Requirement:
If, in exceptional circumstances, the auditor judges it necessary to depart
from a relevant requirement in a SA, the auditor shall document how the
alternative audit procedures performed achieve the aim of that requirement,
and the reasons for the departure.
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4.5 Matters Arising after the Date of the Auditor’s Report:

If, in exceptional circumstances, 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.
4.6 Assembly of the Final Audit File and Retention Period
4.6.a The auditor shall assemble the audit documentation in an audit file and
timely basis after the date of the auditor’s report.
SQC 1 requires firms to establish policies and procedures for the timely
completion of the assembly of audit files. An appropriate time limit within
which to complete the assembly of the final audit file is ordinarily not more
than 60 days after the date of the auditor’s report.
4.6.b After the assembly of the final audit file has been completed, the auditor
shall not delete or discard audit documentation of any nature before the end
of its retention period.
SQC 1 requires firms to establish policies and procedures for the retention
of engagement documentation. The retention period for audit engagements
ordinarily is no shorter than seven years from the date of the auditor’s report,
or, if later, the date of the group auditor’s report.
4.7 Ownership of Audit Documentation:
Standard on Quality Control (SQC) 1 issued by the Institute, provides that,
unless otherwise specified by law or regulation, audit documentation is the
property of the auditor.
He may at his discretion, make portions of, or extracts from, audit
documentation available to clients, provided such disclosure does not
undermine the validity of the work performed, or, in the case of assurance
engagements, the independence of the auditor or of his personnel
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SA 240 AUDITOR’S RESPONSIBILITIES IN RELATION TO

FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS
S.N Particulars
1 Introduction
1.1 It expands on how SA 315, “Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and Its Environment,” and SA
330, “The Auditor’s Responses to Assessed Risks,” are to be applied in relation
to risks of material misstatement due to fraud.
1.2 Although fraud is a broad legal concept, for the purposes of the SAs, the
auditor is concerned with fraud that causes a material misstatement in the
1.3 Two types of intentional misstatements are relevant to the auditor–
misstatements resulting from fraudulent financial reporting and misstatements
resulting from misappropriation of assets.
1.4 Although the auditor may suspect or, in rare cases, identify the occurrence of
fraud, the auditor does not make legal determinations of whether fraud has
actually occurred
1.5 The primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and management
accordance with the SAs
1.7 The risk of not detecting a material misstatement resulting from fraud is
higher than the risk of not detecting one resulting from error
1.8 Auditor can be held liable for fraud only if it is proved that he was grossly
negligent while performing his duties.
2 Objective:
2.1 To identify and assess the risks of material misstatement in the financial
statements due to fraud.
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2.2 To obtain sufficient appropriate audit evidence about the assessed risks of
material misstatement due to fraud, through designing and implementing
appropriate responses.
2.3 To deal appropriately with identified or suspected fraud.
3 Definition
3.1 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.
3.2 Fraud risk factors - Events or conditions that indicate an incentive or pressure
to commit fraud or provide an opportunity to commit fraud.
4 Requirements
4.1 Professional Skepticism
4.1.a In accordance with SA 200, the auditor shall maintain professional skepticism
throughout the audit, recognizing the possibility that a material misstatement
due to fraud could exist, notwithstanding the auditor’s past experience of the
honesty and integrity of the entity’s management and those charged with
governance
4.1.b Unless the auditor has reason to believe the contrary, the auditor may accept
records and documents as genuine. If conditions identified during the audit
cause the auditor to believe that a document may not be authentic, the
auditor shall investigate further by
 Confirming directly with the third party
 Using the work of an expert to assess the document’s authenticity
4.1.c Where responses to inquiries of management or those charged with governance
are inconsistent, the auditor shall investigate the inconsistencies.
4.2 Discussion among the engagement team:
SA 315 requires a discussion among the engagement team members especially
emphasizing on following matters:
4.2.a An exchange of ideas among engagement team members about how and
where they believe the entity’s financial statements may be susceptible to
material misstatement due to fraud.
4.2.b A consideration of the known external and internal factors affecting the
entity that may create an incentive or pressure for management or others to
commit fraud, provide the opportunity for fraud.
571
4.2.c A consideration of any unusual or unexplained changes in behaviour or

lifestyle of management or employees which have come to the attention of
the engagement team.
4.2.d A consideration of how an element of unpredictability will be incorporated
into the nature, timing and extent of the audit procedures to be performed.
4.2.e A consideration of any allegations of fraud that have come to the auditor’s
attention.
4.3 Risk Assessment Procedures and Related Activities:
While performing risk assessment procedures as discussed in SA 315, the
auditor shall perform the procedures given in following paragraphs to obtain
information for use in identifying the risks of material misstatement due to
fraud.
4.3.a Inquiries of Management regarding:
(i) Management’s assessment of the risk that the financial statements may
be materially misstated due to fraud
(ii) Management’s process for identifying and responding to the risks of
fraud in the entity, including any specific risks of fraud that management
has identified or that have been brought to its attention
(iii) Management’s communication, if any, to those charged with governance
regarding its processes for identifying and responding to the risks of
fraud in the entity
(iv) Management’s communication, if any, to employees regarding its views
on business practices and ethical behaviour
(v) Whether they have knowledge of any actual, suspected or alleged fraud
affecting the entity
4.3.b Inquiries of Internal Auditor: In accordance with SA 610 following inquiries
can be done
(i) The procedures performed, if any, by the internal auditors during the
year to detect fraud
(ii) Whether management has satisfactorily responded to any findings
resulting from those procedures
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4.3.c Inquiries of Those Charged With Governance:

(i) How those charged with governance exercise oversight of management’s
processes for identifying and responding to the risks of fraud in the entity
and the internal control that management has established to mitigate
these risks.
(ii) Whether they have knowledge of any actual, suspected or alleged fraud
affecting the entity.
4.3.d Unusual or Unexpected Relationship Identified:
The auditor shall evaluate whether unusual or unexpected relationships that
have been identified in performing analytical procedures, including those
related to revenue accounts, may indicate risks of material misstatement due
to fraud (SA 315)
4.3.e Other Information:
The auditor shall consider whether other information obtained by the auditor
indicates risks of material misstatement due to fraud.
4.3.f Evaluation of fraud risk factors:
The auditor shall evaluate whether the information obtained from the other
risk assessment procedures and related activities performed indicates that
one or more fraud risk factors are present.
While fraud risk factors may not necessarily indicate the existence of fraud,
however, they may indicate risks of material misstatement due to fraud.
4.4 Responses to the assessed Risks of Material Misstatement
4.4.a Responses to the assessed risks of material misstatement at Financial
Statement Level:
(i) Assign and supervise personnel taking account of the knowledge,
skill and ability of the individuals to be given significant engagement
responsibilities and the auditor’s assessment of the risks of material
misstatement due to fraud for the engagement.
(ii) Evaluate whether the selection and application of accounting policies
by the entity, particularly those related to subjective measurements and
complex transactions, may be indicative of fraudulent financial reporting
resulting from management’s effort to manage earnings.
(iii) Incorporate an element of unpredictability in the selection of the nature,
timing and extent of audit procedures.
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4.4.b Responses to the assessed risks of material misstatement at assertion level:

(i) The nature, timing and extent of audit procedures to be performed may
need to be changed to obtain audit evidence that is more reliable and
relevant or to obtain additional corroborative information
(ii) For significant and unusual transactions, particularly those occurring at
or near year-end, investigating the possibility of related parties and the
sources of financial resources supporting the transactions
(iii) Conducting interviews of personnel involved in areas where a risk of
material misstatement due to fraud has been identified, to obtain their
insights about the risk and whether, or how, controls address the risk
(iv) Seeking additional audit evidence from sources outside of the entity
being audited.
(v) Performing computer-assisted techniques, such as data mining to test
for anomalies in a population
4.4.c Responses Related to Risk of Management Override of Control:
Management is in a unique position to perpetrate fraud because of
management’s ability to manipulate accounting records and prepare
fraudulent financial statements by overriding controls that otherwise appear
to be operating effectively.
Irrespective of the auditor’s assessment of the risks of management override
of controls, the auditor shall design and perform audit procedures to:
(i) Test the appropriateness of journal entries by
 Making inquiries of individuals involved in the financial reporting process
about inappropriate or unusual activity relating to the processing of
journal entries and other adjustments.
 Selecting journal entries and other adjustments made at the end of a
reporting period.
 Considering the need to test journal entries and other adjustments
throughout the period.
(ii) Review accounting estimates by
 Evaluating whether there are circumstances leading to biased recognition.
 Verifying whether the judgments and decisions are individually
reasonable.
 Retrospectively Reviewing estimates reflected in the prior year.
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4.4.c Evaluation of audit Evidence:

When the auditor identifies a misstatement, the auditor shall evaluate whether
such a misstatement is indicative of fraud. If there is such an indication,
the auditor shall evaluate the implications of the misstatement in relation
to other aspects of the audit, particularly the reliability of management
representations.
4.5 Auditor is unable to continue the engagement:

If, as a result of a misstatement resulting from fraud or suspected fraud, the
auditor encounters exceptional circumstances that bring into question the
auditor’s ability to continue performing the audit, the auditor shall:
4.5.a Determine the professional and legal responsibilities applicable in the
circumstances, including whether there is a requirement for the auditor to
report to the person or persons who made the audit appointment or, in some
cases, to regulatory authorities.
4.5.b Consider whether it is appropriate to withdraw from the engagement, where
withdrawal from the engagement is legally permitted.
4.5.c If the auditor withdraws:
(i) Discuss with the appropriate level of management and those charged
with governance, the auditor’s withdrawal from the engagement and
the reasons for the withdrawal and
(ii) Fulfil professional and legal responsibilities applicable in the
circumstances.
4.6 Written Representation:
The auditor shall obtain written representations from management and,
where applicable, those charged with governance that:
4.6.a They acknowledge their responsibility for the design, implementation and
maintenance of internal control to prevent and detect fraud.
4.6.b They have disclosed to the auditor the results of management’s assessment
of the risk that the financial statements may be materially misstated as a
result of fraud.
4.6.c They have disclosed to the auditor their knowledge of fraud or suspected
fraud affecting the entity.
4.6.d They have disclosed to the auditor their knowledge of any allegations of
fraud, or suspected fraud, affecting the entity’s financial statements.
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4.7 Communication to Management and those charged with Governance:

4.7.a If the auditor has identified a fraud or has obtained information that indicates
that a fraud may exist, the auditor shall communicate these matters on
a timely basis to the appropriate level of management in order to inform
those with primary responsibility for the prevention and detection of fraud of
matters relevant to their responsibilities.
4.7.b If the auditor suspects fraud involving management, the auditor shall
communicate these suspicions to those charged with governance and discuss
with them the nature, timing and extent of audit procedures necessary to
complete the audit.
4.8 Communication to regulatory authorities:
If the auditor has identified or suspects a fraud, the auditor shall determine
whether there is a responsibility to report the occurrence or suspicion to a
party outside the entity. The auditor’s legal responsibilities may override the
duty of confidentiality in such circumstances.
4.9 Documentation- Maintain records for following matters:
4.9.a The identified and assessed risks of material misstatement due to fraud at
the financial statement level and at the assertion level
4.9.b The results of the audit procedures, including those designed to address the
risk of management override of controls
4.9.c Communications about fraud made to management, those charged with
governance, regulators and others
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SA 250 CONSIDERATION OF LAWS AND REGULATIONS IN AN

AUDIT OF FINANCIAL STATEMENTS
(Effective for audits of financial statements for periods beginning on or after April 1, 2009)
S.N Particulars
1 Introduction
1.1 This SA does not apply to other assurance engagements in which the auditor
is specifically engaged to test and report separately on compliance with
specific laws or regulations.
1.2 The effect on the financial statements of laws and regulations varies
considerably.
The provisions of some laws or regulations have a direct effect on the financial
statements in that they determine the reported amounts and disclosures in
an entity’s financial statements.
1.3 Other laws or regulations are to be complied with by management or set the
provisions under which the entity is allowed to conduct its business but do
not have a direct effect on an entity’s financial statements. However, Non-
compliance with laws and regulations may result in fines, litigation or other
consequences for the entity that may have a material effect on the financial
statements.
1.4 The requirements in this SA are designed to assist the auditor in identifying
material misstatement of the financial statements due to non-compliance
with laws and regulations. However, the auditor is not responsible for
preventing noncompliance and cannot be expected to detect non-compliance
with all laws and regulations.
2 Objective
2.1 To obtain sufficient appropriate audit evidence regarding compliance with
the provisions of those laws and regulations generally recognised to have a
direct effect on the determination of material amounts and disclosures in the
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2.2 To obtain sufficient appropriate audit evidence regarding compliance with

the provisions of those laws and regulations generally recognised to have a
direct effect on the determination of material amounts and disclosures in the
2.3 To respond appropriately to non-compliance or suspected non-compliance
with laws and regulations identified during the audit.
3 Definition
3.1 Non-Compliance- Acts of omission or commission by the entity, either
intentional or unintentional, which are contrary to the prevailing laws.
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.
4 Requirements
4.1 Risk Assessment Procedure:
As part of obtaining an understanding of the entity and its environment in
accordance with SA 315, the auditor shall obtain a general understanding of
4.1.a The legal and regulatory framework applicable to the entity and the industry
or sector in which the entity operates e.g.
i) Update the understanding of those laws and regulations that directly
determine the reported amounts and disclosures in the financial
statements.
ii) Inquire of management as to other laws or regulations that may be
expected to have a fundamental effect on the operations of the entity.
4.1.b How the entity is complying with that framework e.g.
i) Inquire of management concerning the entity’s policies and procedures
regarding compliance with laws and regulations
ii) Inquire of management regarding the policies or procedures adopted for
identifying, evaluating and accounting for litigation claims
4.2 The auditor shall obtain sufficient appropriate audit evidence regarding
compliance with the provisions of those laws and regulations generally
recognised to have a direct effect on the determination of material amounts
and disclosures in the financial statements:
4.3 The auditor shall perform the following 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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4.3.a Inquiring of management and, where appropriate, those charged with

governance, as to whether the entity is in compliance with such laws and
regulations
4.3.b Inspecting correspondence, if any, with the relevant licensing or regulatory
authorities.
4.4 During the audit, the auditor shall remain alert to the possibility that other
audit procedures applied may bring instances of non-compliance or suspected
non-compliance with laws and regulations to the auditor’s attention
For example, such audit procedures may include:
 Reading minutes;
 Inquiring of the entity’s management and in-house legal counsel or
external legal counsel concerning litigation, claims and assessments;
and
 Performing substantive tests of details of classes of transactions, account
balances or disclosures
4.5 The auditor shall request management and, where appropriate, those charged
with governance to provide written representations that all known instances
of non-compliance or suspected non-compliance with laws and regulations
whose effects should be considered when preparing financial statements
have been disclosed to the auditor
4.6 Audit Procedures When Non-Compliance is Identified or Suspected:
4.6.a If the auditor becomes aware of information concerning an instance of
noncompliance or suspected non-compliance with laws and regulations, the
auditor shall obtain:
a) An understanding of the nature of the act and the circumstances in which
it has occurred
b) Further information to evaluate the possible effect on the financial
statements
4.6.b The auditor shall discuss the matter with management and, where appropriate,
those charged with governance. If management or, as appropriate, those
charged with governance do not provide sufficient information that supports
that the entity is in compliance with laws and regulations then the auditor
shall consider the need to obtain legal advice.
579
4.6.c If sufficient information about suspected non-compliance cannot be obtained,

the auditor shall evaluate the effect of the lack of sufficient appropriate audit
evidence on the auditor’s opinion
4.6.d The auditor shall evaluate the implications of non-compliance in relation to
other aspects of the audit, including the auditor’s risk assessment and the
reliability of written representations, and take appropriate action
4.7 Reporting of Identified or Suspected Non-Compliance
4.7.a Reporting Non-Compliance to Those Charged with Governance:
The auditor shall communicate with those charged with governance matters
involving noncompliance with laws and regulations that come to the auditor’s
attention during the course of the audit.
If it is believed to be intentional and material then auditor shall communicate
the matter to those charged with governance as soon as practicable.
4.7.b 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.
Where no higher authority exists, or if the auditor believes that the
communication may not be acted upon or is unsure as to the person to whom
to report, the auditor shall consider the need to obtain legal advice
4.7.c Reporting Non-Compliance in the Auditor’s Report on the Financial Statements:
i) 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, in accordance with SA 705,
express a qualified or adverse opinion on the financial statements.
ii) If the auditor is precluded by management or those charged with
governance from obtaining 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 on
the basis of a limitation on the scope of the audit in accordance with SA
705
4.7.d Reporting Non-Compliance to Regulatory and Enforcement Authorities:
If the auditor has identified or suspects non-compliance with laws and
regulations, the auditor shall determine whether the auditor has a
responsibility to report the identified or suspected non-compliance to parties
outside the entity
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SA 299 RESPONSIBILITY OF JOINT

AUDITOR
S.N Particulars
1 Introduction
1.1 This Standard lays down the principles for effective conduct of joint audit to
achieve the overall objectives of the auditor as laid down in SA 200 “Overall
Objectives of the Independent Auditor.
1.2 In addition to the requirements enunciated in this Standard, the joint auditors
also need to comply with all the relevant requirements of other applicable
Standards on Auditing
1.3 This Standard does not deal with the relationship between a principal auditor
who is appointed to report on the financial statements of an entity and
another auditor who is appointed to report on the financial statements of
one or more component.
2 Objective
2.1 To identify the distinct areas of work and coverage thereof by each joint
auditor.
2.2 To identify individual responsibility and joint responsibility of the joint auditors
in relation to audit.
3 Definition
3.1 A joint audit is an audit of financial statements of an entity by two or more
auditors appointed with the objective of issuing the audit report. Such auditors
are described as joint auditors
4 Requirements
4.1 Audit Planning, Risk Assessment and Allocation of Work
4.1.a The engagement partner and other key members of the engagement team
from each of the joint auditors shall be involved in planning the audit.
4.1.b The joint auditors shall jointly establish an overall audit strategy that sets
the scope, timing and direction of the audit, and that guides the development
of the audit plan
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4.1.c Prior to the commencement of the audit, the joint auditors shall discuss and develop
a joint audit plan. In developing the joint audit strategy, the joint auditors shall:
a) Identify division of audit areas and common audit areas amongst the
joint auditors that define the scope of the work of each joint auditor
b) Ascertain the reporting objectives of the engagement to plan the timing
of the audit and the nature of the communications required.
c) Consider and communicate among all joint auditors the factors that, in
their professional judgment, are significant in directing the engagement
team’s efforts
d) Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other or similar engagements
performed earlier by the respective engagement partner(s) for the entity
is relevant.
e) Ascertain the nature, timing and extent of resources necessary to perform
the engagement.
4.1.d Risks of material misstatement need to be considered and assessed by each
of the joint auditors and shall be communicated to other joint auditors, and
documented, whether pertaining to the overall financial statements level or
to the area of allocation among the other joint auditors.
4.1.e The joint auditors shall discuss and document the nature, timing, and the
extent of the audit procedures for common and specific allotted areas of
audit to be performed by each of the joint auditors and the same shall be
communicated to those charged with governance.
4.1.f The joint auditors shall obtain common engagement letter and common
management representation letter.
4.2 Responsibility division
4.2.a In respect of audit work divided among the joint auditors, each joint auditor shall
be responsible only for the work allocated to such joint auditor including
proper execution of the audit procedures.
It shall be the responsibility of each joint auditor to determine the nature,
timing and extent of audit procedures to be applied in relation to the areas
of work allocated to said joint auditor.
It is the individual responsibility of each joint auditor to study and evaluate
the prevailing system of internal control and assessment of risk relating to
the areas of work allocated to said joint auditor.
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4.2.b All the joint auditors shall be jointly and severally responsible for:
i) the audit work which is not divided among the joint auditors and is
carried out by all joint auditors.
ii) decisions taken by all the joint auditors under audit planning in respect
of common audit areas concerning the nature, timing and extent of the
audit procedures to be performed by each of the joint auditors.
iii) matters which are brought to the notice of the joint auditors by any one
of them and on which there is an agreement among the joint auditors.
iv) examining that the financial statements of the entity comply with the
requirements of the relevant statutes.
v) presentation and disclosure of the financial statements as required by
the applicable financial reporting framework.
vi) ensuring that the audit report complies with the requirements of the
relevant statutes, the applicable Standards on Auditing and the other
relevant pronouncements issued by ICAI.
4.3 Co-ordination amongst joint auditor
4.3.a Where, in the course of the audit, a joint auditor comes across matters which
are relevant to the areas of responsibility of other joint auditors and which
deserve their attention, or which require disclosure or require discussion with,
or application of judgment by other joint auditors, the said joint auditor shall
communicate the same to all the other joint auditors in writing prior to the
completion of the audit.
4.3.b Each joint auditor is entitled to assume that:
i) The other joint auditors have carried out their part of the audit work and
the work has actually been performed in accordance with the Standards
on Auditing issued by the Institute of Chartered Accountants of India.
ii) The other joint auditors have brought to said joint auditor’s notice any
departure from applicable financial reporting framework or significant
observations that are relevant to their responsibilities noticed in the
course of the audit.
4.3.c Where financial statements of a division/branch are audited by one of the
joint auditors, the other joint auditors are entitled to proceed on the basis
that such financial statements comply with all the legal and regulatory
requirements and present a true and fair view of the state of affairs and of
the results of operations of the division/branch concerned.
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4.3.d Before finalizing their audit report, the joint auditors shall discuss and
communicate with each other their respective conclusions that would form
the content of the audit report.
4.4 Reporting Responsibilities
4.4.a The joint auditors are required to issue common audit report, however, where
the joint auditors are in disagreement with regard to the opinion or any
matters to be covered by the audit report, they shall express their opinion in
a separate audit report.
It is important to note that each joint auditor with a differing opinion would
be required to issue a separate audit report and the reference to the other
joint auditors report would be required to be made by each such joint auditor
in their respective audit report.
4.4.b A joint auditor is not bound by the views of the majority of the joint auditors
regarding the opinion or matters to be covered in the audit report and shall
express opinion formed by the said joint auditor in separate audit report in
case of disagreement
4.4.c In such circumstances, the audit report(s) issued by the joint auditor(s) shall
make a reference to the separate audit report(s) issued by the other joint
auditor(s). Further, separate audit report shall also make reference to the
audit report issued by other joint auditors. Such reference shall be made under
the heading “Other Matter Paragraph” as per SA 706(Revised), “Emphasis of
Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s
Report.
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SA 300 Planning an Audit of Financial Statements

(Effective for audits of financial statements for periods
beginning on or after April 1, 2008)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to plan
an audit of financial statements.
1.2 This SA is framed in the context of recurring audits
1.3 Additional considerations in initial audit engagements are separately
identified.
2 Objective
2.1 The objective of the auditor is to plan the audit so that it will be performed
in an effective manner
3 Definition- (no definition)
4 Requirements
4.1 Involvement of Key Engagement Team Members:
The engagement partner and other key members of the engagement team
shall be involved in planning the audit, including planning and participating
in the discussion among engagement team members.
4.2 Preliminary Engagement Activities:
The auditor shall undertake the following activities at the beginning of the
current audit engagement:
4.2.1 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.
4.2.2 Evaluating compliance with ethical requirements, including independence, as
required by SA 220
4.2.3 Establishing an understanding of the terms of the engagement, as required
by SA 210
4.3 Planning Activities:
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4.3.1 The auditor shall establish an overall audit strategy that sets the scope,
timing and direction of the audit, and that guides the development of the
audit plan.
In establishing the overall audit strategy, the auditor shall:
a) Identify the characteristics of the engagement that define its scope
b) Ascertain the reporting objectives of the engagement to plan the timing
of the audit and the nature of the communications required
c) Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts
d) Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other engagements performed
by the engagement partner for the entity is relevant
e) Ascertain the nature, timing and extent of resources necessary to perform
the engagement
4.3.2 The auditor shall develop an audit plan that shall include a description of:
(a) The nature, timing and extent of planned risk assessment procedures, as
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.
4.4 The auditor shall update and change the overall audit strategy and the audit
plan as necessary during the course of the audit.
4.5 The auditor shall plan the nature, timing and extent of direction and supervision
of engagement team members and the review of their work.
4.6 Additional Considerations in Initial Audit Engagements:
The auditor shall undertake the following activities prior to starting an initial
audit:
4.6.1 Performing procedures required by SA 220 regarding the acceptance of the
client relationship and the specific audit engagement.
4.6.2 Communicating with the predecessor auditor, where there has been a change
of auditors, in compliance with relevant ethical requirements
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SA 315 Identifying and Assessing the Risks of Material Misstatement

Through Understanding the Entity and its Environment (Effective for audits of
financial statements for periods beginning on or after April 1, 2008)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to identify
and assess the risks of material misstatement in the financial statements,
through understanding the entity and its environment, including the entity’s
internal control.
2 Objective
2.1 The objective of the auditor is to identify and assess the risks of material
misstatement, whether due to fraud or error, at the financial statement
and assertion levels, through understanding the entity and its environment,
including the entity’s internal control, thereby providing a basis for designing
and implementing responses to the assessed risks of material misstatement.
This will help the auditor to reduce the risk of material misstatement to an
acceptably low level
3 Definition
3.1 Assertions – Representations by management, explicit or otherwise, that are
embodied in the financial statements, as used by the auditor to consider the
different types of potential misstatements that may occur
3.2 Risk assessment procedures – The audit procedures performed to obtain an
understanding of the entity and its environment, including the entity’s internal
control, to identify and assess the risks of material misstatement, whether
due to fraud or error, at the financial statement and assertion levels.
3.3 Significant Risks: An identified and assessed risk of material misstatement
that, in the auditor’s judgment, requires special audit consideration.
4 Requirements
4.1 The auditor shall perform risk assessment procedures to provide a basis for
the identification and assessment of risks of material misstatement at the
financial statement and assertion levels
587
4.2 Risk assessment procedures by themselves, however, do not provide sufficient

appropriate audit evidence on which to base the audit opinion.
4.3 The risk assessment procedures shall include the following:
4.3.1 Inquiries of management, of appropriate individuals within the internal audit
function (if the function exists), and of others within the entity who in the
auditor’s judgment may have information that is likely to assist in identifying
risks of material misstatement due to fraud or error.
4.3.2 Analytical procedures
4.3.3 Observation and inspection
4.4 The auditor shall consider whether information obtained from the auditor’s
client acceptance or continuance process is relevant to identifying risks of
material misstatement
4.5 Where the engagement partner has performed other engagements for the
entity, the engagement partner shall consider whether information obtained
is relevant to identifying risks of material misstatement.
4.6 When the auditor intends to use information obtained from the auditor’s
previous experience with the entity and from audit procedures performed in
previous audits, the auditor shall determine whether changes have occurred
since the previous audit that may affect its relevance to the current audit
4.7 The engagement partner and other key engagement team members shall
discuss the susceptibility of the entity’s financial statements to material
misstatement.
The engagement partner shall determine which matters are to be communicated
to engagement team members not involved in the discussion.
4.8 In order to provide a basis for further audit procedures the auditor shall:
4.8.1 Identify risks throughout the process of obtaining an understanding of the
entity and its environment, including relevant controls that relate to the
risks, and by considering the classes of transactions, account balances, and
disclosures in the financial statements.
4.8.2 Assess the identified risks, and evaluate whether they relate more pervasively
to the financial statements as a whole and potentially affect many assertions.
4.8.3 Relate the identified risks to what can go wrong at the assertion level, taking
account of relevant controls that the auditor intends to test;
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4.8.4 Consider the likelihood of misstatement, including the possibility of multiple

that could result in a material misstatement
4.9 Understanding the entity and its environment:
The auditor shall obtain an understanding of the following:
4.9.1 Relevant industry, regulatory, and other external factors including the
4.9.2 The nature of the entity, including:
(i) its operations;
(ii) its ownership and governance structures;
(iii) the types of investments that the entity is making and plans to make,
including investments in special-purpose entities; and
(iv) the way that the entity is structured and how it is financed
4.9.3 The entity’s selection and application of accounting policies, including the
reasons for changes thereto. The auditor shall evaluate whether the entity’s
accounting policies are appropriate for its business and consistent with the
applicable financial reporting framework and accounting policies used in the
relevant industry.
4.9.4 The entity’s objectives and strategies, and those related business risks that
may result in risks of material misstatement.
4.9.5 The measurement and review of the entity’s financial performance.
4.10 Components of Internal Control:
The division of internal control into the following five components provides a
useful framework for auditors to consider how different aspects of an entity’s
internal control may affect the audit:
4.10.1 The control environment
The control environment includes:
(i) the governance and management functions and
(ii) the attitudes, awareness, and actions of those charged with governance
and management.
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4.10.2 The entity’s risk assessment process:

The auditor shall obtain an understanding of whether the entity has a process
for:
(a) Identifying business risks relevant to financial reporting objectives;
(b) Estimating the significance of the risks;
(c) Assessing the likelihood of their occurrence; and
(d) Deciding about actions to address those risks.
The entity’s risk assessment process forms the basis for the risks to be managed.
If that process is appropriate, it would assists 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.
4.10.3 The information system, including the related business processes, relevant to
financial reporting, and communication
The auditor shall obtain an understanding of the information system, including
the related business processes, relevant to financial reporting, including the
following are as:
a) The classes of transactions in the entity’s operations that are significant
to the financial statements;
b) The procedures by which those transactions are initiated, recorded,
processed, corrected as necessary, transferred to the general ledger and
reported in the financial statements
c) The related accounting records, supporting information and specific
accounts in the financial statements that are used to initiate, record,
process and report transactions;
4.10.4 Control activities
Control activities, whether within IT or manual systems, have various objectives
and are applied at various organisational and functional levels.
The auditor shall obtain an understanding of control activities relevant to the
audit, which the auditor considers necessary to assess the risks of material
misstatement. An audit requires an understanding of only those control activities
related to significant class of transactions, account balance, and disclosure in the
590
4.10.5 Monitoring of controls

Monitoring of controls is a process to assess the effectiveness of internal
control performance over time.
(i) Helps in assessing the effectiveness of controls on a timely basis:
(ii) Management accomplishes through ongoing activities, separate
evaluations etc.:
4.11 Risks that require special audit consideration
4.11.1 Whether the risk is a risk of fraud.
4.11.2 Whether the risk is related to recent significant economic, accounting, or other
developments like changes in regulatory environment, etc., and, therefore,
requires specific attention.
4.11.3 The complexity of transactions.
4.11.4 Whether the risk involves significant transactions with related parties.
4.11.5 The degree of subjectivity in the measurement of financial information
related to the risk, especially those measurements involving a wide range of
measurement uncertainty.
4.11.6 Whether the risk involves significant transactions that are outside the normal
course of business for the entity, or that otherwise appear to be unusual.
591
SA 320 Materiality in Planning and Performing an Audit

(Effective for audits of financial statements for periods
beginning on or after April 1, 2010)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to apply
the concept of materiality in planning and performing an audit of financial
statements.
SA 450, explains how materiality is applied in evaluating the effect of
identified misstatements on the audit and of uncorrected misstatements, if
any, on the financial statements
1.2 The auditor’s determination of materiality is a matter of professional judgment,
and is affected by the auditor’s perception of the financial information needs
of users of the financial statements. In this context, it is reasonable for the
auditor to assume that users:
a) Have a reasonable knowledge of business and economic activities and
accounting and a willingness to study the information in the financial
statements with reasonable diligence
b) Understand that financial statements are prepared, presented and
audited to levels of materiality
c) Recognize the uncertainties inherent in the measurement of amounts
based on the use of estimates, judgment and the consideration of future
events;
d) Make reasonable economic decisions on the basis of the information in
1.3 The materiality determined when planning the audit does not necessarily
establish an amount below which uncorrected misstatements, individually or
in aggregate, will always be evaluated as immaterial.
2 Objective
2.1 The objective of the auditor is to apply the concept of materiality appropriately
in planning and performing the audit.
3 Definition
592
3.1 Performance Materiality: For purposes of the SAs, performance materiality means
the amount or amounts set by the auditor at less than materiality for the financial
statements as a whole to reduce to an appropriately low level the probability that
the aggregate of uncorrected and undetected misstatements exceeds materiality
for the financial statements as a whole. If applicable, performance materiality also
refers to the amount or amounts set by the auditor at less than the materiality level
or levels for particular classes of transactions, account balances or disclosures
4 Requirements
4.1 Determining Materiality and Performance Materiality when Planning the Audit
4.1.1 When establishing the overall audit strategy, the auditor shall determine
materiality for the financial statements as a whole.
4.1.2 If, in the specific circumstances of the entity, the auditor shall also determine
the materiality level or levels to be applied to those particular classes of
transactions, account balances or disclosures.
4.1.3 Determining materiality involves the exercise of professional judgment. A
percentage is often applied to a chosen benchmark as a starting point in
determining materiality for the financial statements as a whole.
4.1.4 Determining a percentage to be applied to a chosen benchmark involves the
exercise of professional judgment.
There is a relationship between the percentage and the chosen benchmark, such
that a percentage applied to profit before tax from continuing operations will
normally be higher than a percentage applied to total revenue. For example,
the auditor may consider five percent of profit before tax from continuing
operations to be appropriate for a profit oriented entity in a manufacturing
industry, while the auditor may consider one percent of total revenue or
total expenses to be appropriate for a not-for-profit entity. Higher or lower
percentages, however, may be deemed appropriate in different circumstances.
4.2 Performance Materiality
4.2.1 The auditor shall determine performance materiality for purposes of assessing
the risks of material misstatement and determining the nature, timing and
extent of further audit procedure.
4.2.2 Planning the audit solely to detect individually material misstatements
overlooks the fact that the aggregate of individually immaterial misstatements
may cause the financial statements to be materially misstated, and leaves
no margin for possible undetected misstatements.
593
4.2.3 Performance materiality (which, as defined, is one or more amounts) is set

to reduce to an appropriately low level the probability that the aggregate
of uncorrected and undetected misstatements in the financial statements
exceeds materiality for the financial statements as a whole.
4.2.4 Similarly, performance materiality relating to a materiality level determined
for a particular class of transactions, account balance or disclosure is set
to reduce to an appropriately low level the probability that the aggregate
of uncorrected and undetected misstatements in that particular class of
transactions, account balance or disclosure exceeds the materiality level for
that particular class of transactions, account balance or disclosure
4.2.5 The determination of performance materiality is not a simple mechanical
calculation and involves the exercise of professional judgment.
4.2.6 It is affected by the auditor’s understanding of the entity, updated during the
performance of the risk assessment procedures; and the nature and extent
of misstatements identified in previous audits and thereby the auditor’s
expectations in relation to misstatements in the current period.
4.3 Revision as the Audit Progresses
4.3.1 The auditor shall revise materiality for the financial statements as a whole
(and, if applicable, the materiality level or levels for particular classes of
transactions, account balances or disclosures) in the event of becoming aware
of information during the audit that would have caused the auditor to have
determined a different amount (or amounts) initially.
4.3.2 If the auditor concludes that a lower materiality for the financial statements
as a whole (and, if applicable, materiality level or levels for particular
classes of transactions, account balances or disclosures) than that initially
determined is appropriate, the auditor shall determine whether it is necessary
to revise performance materiality, and whether the nature, timing and extent
of the further audit procedures remain appropriate
4.3.3 For example, if during the audit it appears as though actual financial
results are likely to be substantially different from the anticipated period
end financial results that were used initially to determine materiality for the
financial statements as a whole, the auditor revises that materiality.
594
4.4 Documentation
The audit documentation shall include the following amounts and the factors
considered in their determination:
4.4.1 Materiality for the financial statements as a whole

4.4.2 If applicable, the materiality level or levels for particular classes of
transactions, account balances or disclosures
4.4.3 Performance materiality
4.4.4 Any revision of (a)-(c) as the audit progressed
595
SA 500 Audit Evidence (This SA is effective for audits of

financial statements for periods beginning on or after
April 1, 2009)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) explains what constitutes audit evidence in an
audit of financial statements, and deals with the auditor’s responsibility to
design and perform audit procedures to obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the
1.2 This SA is applicable to all the audit evidence obtained during the course of
the audit. Other SAs deal with specific aspects of the audit and with specific
procedures to be applied in the given situation.
2 Objective
2.1 The objective of the auditor is to design and perform audit procedures in such
a way as to enable the auditor to obtain sufficient appropriate audit evidence
to be able to draw reasonable conclusions on which to base the auditor’s
opinion
3 Definition
3.1 Audit evidence – Information used by the auditor in arriving at the conclusions on
which the auditor’s opinion is based. Audit evidence includes both information
contained in the accounting records underlying the financial statements and
other information.
3.2 Sufficiency (of audit evidence) – The measure of the quantity of audit evidence.
The quantity of the audit evidence needed is affected by the auditor’s
assessment of the risks of material misstatement and also by the quality of
such audit evidence
3.3 Appropriateness (of audit evidence) – The measure of the quality of audit
evidence; that is, its relevance and its reliability in providing support for the
conclusions on which the auditor’s opinion is based.
596
3.4 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
4 Requirements
4.1 The auditor shall design and perform audit procedures that are appropriate
in the circumstances for the purpose of obtaining sufficient appropriate
audit evidence. The sufficiency and appropriateness of audit evidence are
interrelated.
4.2 Sufficiency is the measure of the quantity of audit evidence. The quantity of
audit evidence needed is affected by the auditor’s assessment of the risks of
misstatement (the higher the assessed risks, the more audit evidence is likely
to be required) and also by the quality of such audit evidence (the higher the
quality, the less may be required). Obtaining more audit evidence, however,
may not compensate for its poor quality
4.3 Appropriateness is the measure of the quality of audit evidence; that is, its
relevance and its reliability in providing support for the conclusions on which
the auditor’s opinion is based. The reliability of evidence is influenced by its
source and by its nature, and is dependent on the individual circumstances
under which it is obtained
4.4 When designing and performing audit procedures, the auditor shall consider
the relevance and reliability of the information to be used as audit evidence.
597
4.5 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.
• The reliability of audit evidence is increased when it is obtained from
independent sources outside the entity.
• The reliability of audit evidence that is generated internally is increased
when the related controls, including those over its preparation and
maintenance, imposed by the entity are effective.
• Audit evidence obtained directly by the auditor (for example, observation
of the application of a control) is more reliable than audit evidence
obtained indirectly or by inference (for example, inquiry about the
application of a control).
• Audit evidence in documentary form, whether paper, electronic, or other
medium, is more reliable than evidence obtained orally (for example,
a written record of a meeting is more reliable than a subsequent oral
representation of the matters discussed).
Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or facsimiles, or documents that have been
filmed, digitised or otherwise transformed into electronic form, the reliability
of which may depend on the controls over their preparation and maintenance.
4.6 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,:
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for
the relevant assertion.
598
4.7 Considerations when evaluating the appropriateness of the management’s

expert’s work as audit evidence for the relevant assertion may include:
• The relevance and reasonableness of that expert’s findings or conclusions,
their consistency with other audit evidence, and whether they have been
appropriately reflected in the financial statements;
• If that expert’s work involves use of significant assumptions and methods,
the relevance and reasonableness of those assumptions and methods;
and
• If that expert’s work involves significant use of source data, the relevance,
completeness, and accuracy of that source data
4.8 When designing tests of controls and tests of details, the auditor shall
determine means of selecting items for testing that are effective in meeting
the purpose of the audit procedure
4.9 If:
a) audit evidence obtained from one source is inconsistent with that
obtained from another; or
b) 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.
599
SA 501 AUDIT EVIDENCE- SPECIFIC

CONSIDERATIONS FOR SELECTED ITEMS
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with specific considerations by the
auditor in obtaining sufficient appropriate audit evidence in accordance with
SA 330, SA 500 and other relevant SAs, with respect to certain aspects of
inventory, litigation and claims involving the entity, and segment information
in an audit of financial statements
2 Objective
The objective of the auditor is to obtain sufficient appropriate audit evidence
regarding the
2.1 Existence and condition of inventory.
2.2 Completeness of litigation and claims involving the entity.
2.3 Presentation and disclosure of segment information in accordance with the
3 Definition----
4 Requirements
Existence and Condition of Inventory
4.1 When inventory is material to the financial statements, the auditor shall
obtain sufficient appropriate audit evidence regarding the existence and
condition of inventory by:
600
4.1.1 Attendance at physical inventory counting, unless impracticable, to:

a) Evaluate management’s instructions and procedures for recording and
controlling the results of the entity’s physical inventory counting;
E.g.  The application of appropriate control activities, for example,
collection of used physical inventory count records, accounting for
unused physical inventory count records, and count and re-count
procedures.
 The accurate identification of the stage of completion of work
in progress, of slow moving, obsolete or damaged items and of
inventory owned by a third party, for example, on consignment.
b) Observe the performance of management’s count procedures
c) Inspect the inventory
d) Perform test counts
4.1.2 Performing audit procedures over the entity’s final inventory records to
determine whether they accurately reflect actual inventory count results
4.2 If physical inventory counting is conducted at a date other than the date of the
financial statements, the auditor shall, in addition to the procedures required
above, perform audit procedures to obtain audit evidence about whether
changes in inventory between the count date and the date of the financial
statements are properly recorded
4.3 If the auditor is unable to attend physical inventory counting due to unforeseen
circumstances, the auditor shall make or observe some physical counts on an
alternative date, and perform audit procedures on intervening transactions
4.4 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. If it is not
possible to do so, the auditor shall modify the opinion in the auditor’s report
4.7 When inventory under the custody and control of a third party is material to
the financial statements, the auditor shall obtain sufficient appropriate
audit evidence regarding the existence and condition of that inventory by
performing one or both of the following:
4.7.1 Request confirmation from the third party as to the quantities and condition
of inventory held on behalf of the entity
4.7.2 Perform inspection or other audit procedures appropriate in the circumstances
601
Litigation and Claims

4.8 The auditor shall design and perform audit procedures in order to identify
4.8.1 Inquiry of management and, where applicable, others within the entity,
including in-house legal counsel
4.8.2 Reviewing minutes of meetings of those charged with governance and
correspondence between the entity and its external legal counsel
4.8.3 Reviewing legal expense accounts
4.9 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.
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. If law, regulation or the respective
legal professional body prohibits the entity’s external legal counsel from
communicating directly with the auditor, the auditor shall perform alternative
audit procedures.
4.10 If:
a) 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
b) the auditor is unable to obtain sufficient appropriate audit evidence by
performing alternative audit procedures, the auditor shall modify the
opinion in the auditor’s report in accordance with SA 705.
4.11 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 applicable
602
Segment Information:
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
• Evaluating whether such methods are likely to result in disclosure in
accordance with the applicable financial reporting framework; and
• Where appropriate, testing the application of such methods
b) Performing analytical procedures or other audit procedures appropriate in the
circumstances.
603
SA 505 EXTERNAL CONFIRMATION
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s use of external
confirmation procedures to obtain audit evidence in accordance with the
requirements of SA 330 and SA 500. It does not address inquiries regarding
litigation and claims. SA 501 deals with obtaining sufficient appropriate audit
evidence from such inquiries.
1.2 Other SAs recognise the importance of external confirmations as audit
evidence, for example:
a) SA 240 indicates that the auditor may design confirmation requests to obtain
additional corroborative information as a response to address the assessed
risks of material misstatement, whether due to fraud at the assertion level.
b) SA 500 indicates that corroborating information obtained from a source
independent of the entity, such as external confirmations, may increase the
assurance the auditor obtains from evidence existing within the accounting
records or from the representations made by the management.
2 Objective
2.1 The objective of the auditor, when using external confirmation procedures, is
to design and perform such procedures to obtain relevant and reliable audit
evidence
3 Definition
3.1 External confirmation – Audit evidence obtained as a direct written response
to the auditor from a third party (the confirming party), in paper form, or by
electronic or other medium.
3.2 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
604
3.3 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.
3.4 Non-response – A failure of the confirming party to respond, or fully respond,
to a positive confirmation request, or a confirmation request returned
undelivered
3.5 Exception – A response that indicates a difference between information
requested to be confirmed, or contained in the entity’s records, and information
provided by the confirming party
4 Requirements
4.1 External Confirmation procedure:
When using external confirmation procedures, the auditor shall maintain
control over external confirmation requests, including:
4.1.1 Determining the information to be confirmed or requested
4.1.2 Selecting the appropriate confirming party
4.1.3 Designing the confirmation requests, including determining that requests are
properly addressed and contain return information for responses to be sent
directly to the auditor
4.1.4 Sending the requests, including follow-up requests when applicable, to the
confirming party
4.2 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:
4.2.1 Inquire as to management’s reasons for the refusal, and seek audit evidence
as to their validity and reasonableness
4.2.2 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.
4.2.3 Perform alternative audit procedures designed to obtain relevant and reliable
audit evidence.
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.
The auditor also shall determine the implications for the audit and the auditor’s opinion
605
4.3 Negative Confirmation:

Negative confirmations provide less persuasive audit evidence than positive
confirmations. Accordingly, the auditor shall not use negative confirmation
requests as the sole substantive audit procedure to address an assessed risk
of material misstatement at the assertion level unless all of the following
are present:
4.3.1 The auditor has assessed the risk of material misstatement as low and
has obtained sufficient appropriate audit evidence regarding the operating
effectiveness of controls relevant to the assertion
4.3.2 The population of items subject to negative confirmation procedures comprises
a large number of small, homogeneous, account balances, transactions or
conditions
4.3.3 A very low exception rate is expected
4.3.4 The auditor is not aware of circumstances or conditions that would cause
recipients of negative confirmation requests to disregard such requests
4.4 Evaluating the Evidence obtained:
When evaluating the results of individual external confirmation requests, the
auditor may categorise such results as follows:
4.4.1 A response by the appropriate confirming party indicating agreement with
the information provided in the confirmation request, or providing requested
information without exception
4.4.2 A response deemed unreliable
4.4.3 A non-response
4.4.4 A response indicating an exception
4.5 Results of External Confirmation procedure
4.5.1 If the auditor identifies factors that give rise to doubts about the reliability of
the response to a confirmation request, the auditor shall obtain further audit
evidence to resolve those doubts
4.5.2 If the auditor determines that a response to a confirmation request is not
reliable, the auditor shall evaluate the implications on the assessment of the
relevant risks of material misstatement, including the risk of fraud, and on
the related nature, timing and extent of other audit procedures
4.5.3 In the case of each non-response, the auditor shall perform alternative audit
procedures to obtain relevant and reliable audit evidence
606
4.5.4 The auditor shall investigate exceptions to determine whether or not they are
indicative of misstatements.
4.5.5 If the auditor has determined that a response to a positive confirmation request
is necessary to obtain sufficient appropriate audit evidence, alternative audit
procedures will not provide the audit evidence the auditor requires. If the
auditor does not obtain such confirmation, the auditor shall determine the
implications for the audit and the auditor’s opinion in accordance with SA
705.
607
SA 510 Initial Audit Engagement- Verification of opening balances

(Effective for audits of financial statements for periods beginning
on or after April 1, 2010)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities relating
to opening balances when conducting an initial audit engagement. In addition
to financial statement amounts, opening balances include matters requiring
disclosure that existed at the beginning of the period, such as contingencies
and commitments.
1.2 When the financial statements include comparative financial information,
the requirements and guidance in SA 710 also apply.
2 Objective
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:
2.1 Opening balances contain misstatements that materially affect the current
period’s financial statements
2.2 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 financial reporting framework
3 Definition
3.1 Initial audit engagement –
An engagement in which either:
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a
predecessor auditor.
608
3.2 Opening balances

Those account balances that exist at the beginning of the period. 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. Opening balances also include matters requiring
disclosure that existed at the beginning of the period, such as contingencies
and commitments.
3.3 Predecessor auditor –
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.
4 Requirements
4.1 Audit Procedure
4.1.1 The auditor shall read the most recent financial statements, if any, and
the predecessor auditor’s report thereon, if any, for information relevant to
opening balances, including disclosures
4.1.2 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
(c) Evaluating whether audit procedures performed in the current period
provide evidence relevant to the opening balances
4.2 If the prior period’s financial statements were audited by a predecessor auditor
and there was a modification to the opinion, the auditor shall evaluate the effect
of the matter giving rise to the modification in assessing the risks of material
misstatement in the current period’s financial statements in accordance with SA 315
609
4.3 If the auditor obtains audit evidence that the opening balances contain
misstatements that could materially affect the current period’s financial statements,
the auditor shall perform such additional audit procedures as are appropriate in
the circumstances to determine the effect on the current period’s financial
statements.
If the auditor concludes that such misstatements exist in the current period’s
financial statements, the auditor shall communicate the misstatements with
the appropriate level of management and those charged with governance in
accordance with SA 450
4.4 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.
4.5 Audit Conclusions and Reporting
4.5.1 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
4.5.2 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
4.5.3 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) a change in accounting policies is not properly accounted for or not
adequately presented or disclosed in accordance with the applicable
financial reporting framework, the auditor shall express a qualified
opinion or an adverse opinion as appropriate in accordance with SA 705
4.5.4 If the predecessor auditor’s opinion regarding the prior period’s financial statements
included a modification to the auditor’s opinion that remains relevant and material
to the current period’s financial statements, the auditor shall modify the
auditor’s opinion on the current period’s financial statements in accordance
with SA 705(Revised) and SA 710
610
SA 520 ANALYTICAL PROCEDURES

(Effective for audits of financial statements for periods beginning
on or after April 1, 2010)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s use of analytical
procedures as substantive procedures (“substantive analytical procedures”),
and as procedures near the end of the audit that assist the auditor when
forming an overall conclusion on the financial statements.
The use of analytical procedures as risk assessment procedures is dealt with
in SA 315.
SA 330 includes requirements and guidance regarding the nature, timing
and extent of audit procedures in response to assessed risks; these audit
procedures may include substantive analytical procedures
2 Objective
The objectives of the auditor are:
2.1 To obtain relevant and reliable audit evidence when using substantive
analytical procedures.
2.2 To design and perform analytical procedures near the end of the audit that
assist the auditor when forming an overall conclusion as to whether the
financial statements are consistent with the auditor’s understanding of the
entity.
3 Definition
3.1 For the purposes of the SAs, the term “analytical procedures” means evaluations
of financial information through analysis of plausible relationships among
both financial and non-financial data.
Analytical procedures also encompass such investigation as is necessary of
identified fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount.
The auditor’s choice of procedures, methods and level of application is a
matter of professional judgement.
4 Requirements
611
4.1 When designing and performing substantive analytical procedures, either

alone or in combination with tests of details, as substantive procedures in
accordance with SA 330, the auditor shall:
4.1.1 Determine the suitability of particular substantive analytical procedures for
given assertions, taking account of the assessed risks of material misstate-
ment and tests of details, if any, for these assertions
4.1.2 Evaluate the reliability of data from which the auditor’s expectation of rec-
orded amounts or ratios is developed, taking account of source, comparabil-
ity, and nature and relevance of information available, and controls over
preparation
4.1.3 Develop an expectation of recorded amounts or ratios and evaluate whether
the expectation is sufficiently precise to identify a misstatement that, individ-
ually or when aggregated with other misstatements, may cause the financial
statements to be materially misstated
4.1.4 Determine the amount of any difference of recorded amounts from expected
values that is acceptable without further investigation
4.2 The auditor shall design and perform analytical procedures near the end of
the audit that assist the auditor when forming an overall conclusion as to
whether the financial statements are consistent with the auditor’s under-
standing of the entity.
4.3 Investigating Results of Analytical Procedures
If analytical procedures performed in accordance with this SA identify
fluctuations or relationships that are inconsistent with other relevant
information or that differ from expected values by a significant amount, the
auditor shall investigate such differences by:
4.3.1 Inquiring of management and obtaining appropriate audit evidence relevant
to management’s responses
4.3.2 Performing other audit procedures as necessary in the circumstances
4.4 Examples
612
4.4.1 Analytical procedures include the consideration of comparisons of the entity’s

financial information with, for example:
- Comparable information for prior periods.
- Anticipated results of the entity, such as budgets or forecasts, or
- Similar industry information, such as a comparison of the entity’s ratio
of sales to accounts receivable with industry averages or with other
entities of comparable size in the same industry.
4.4.2 Analytical procedures also include consideration of relationships, for example:
- 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.
- Between financial information and relevant non-financial information,
such as payroll costs to number of employees.
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SA 530 AUDIT SAMPLING (EFFECTIVE FOR AUDITS OF

FINANCIAL STATEMENTS FOR PERIODS BEGINNING ON OR
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) applies when the auditor has decided to use
audit sampling in performing audit procedures. It deals with the auditor’s use
of statistical and non-statistical sampling when designing and selecting the
audit sample, performing tests of controls and tests of details, and evaluating
the results from the sample.
1.2 This SA complements SA 500, which deals with the auditor’s responsibility to
design and perform audit procedures to obtain sufficient appropriate audit
evidence to be able to draw reasonable conclusions on which to base the
audit opinion.
SA 500 provides guidance on the means available to the auditor for selecting
items for testing, of which audit sampling is one means.
2 Objective
2.1 The objective of the auditor when using audit sampling is to provide a
reasonable basis for the auditor to draw conclusions about the population
from which the sample is selected
3 Definition
3.1 Audit sampling (sampling) – The application of audit procedures to less than
100% of items within a population of audit relevance such that all sampling
units have a chance of selection in order to provide the auditor with a
reasonable basis on which to draw conclusions about the entire population.
3.2 Population – The entire set of data from which a sample is selected and about
which the auditor wishes to draw conclusions.
614
3.3 Sampling risk – 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. Sampling risk can lead to two types of erroneous
conclusions:
(i) In the case of a test of controls, that controls are more effective than
misstatement does not exist when in fact it does. 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.
(ii) In the case of a test of controls, that controls are less effective than
misstatement exists when in fact it does not. This type of erroneous
conclusion affects audit efficiency as it would usually lead to additional
work to establish that initial conclusions were incorrect
3.4 Non-sampling risk – The risk that the auditor reaches an erroneous conclusion
for any reason not related to sampling risk.
3.5 Anomaly – A misstatement or deviation that is demonstrably not representative
of misstatements or deviations in a population.
3.6 Statistical sampling – An approach to sampling that has the following characteristics:
(i) Random selection of the sample items; and
(ii) The use of probability theory to evaluate sample results, including
measurement of sampling risk
A sampling approach that does not have characteristics (i) and (ii) is considered
non-statistical sampling
3.7 Tolerable misstatement – A monetary amount set by the auditor in respect
of which the auditor seeks to obtain an appropriate level of assurance
that the monetary amount set by the auditor is not exceeded by the actual
misstatement in the population.
3.8 Tolerable rate of deviation – A rate of deviation from prescribed internal control
procedures set by the auditor in respect of which the auditor seeks to obtain
an appropriate level of assurance that the rate of deviation set by the auditor
is not exceeded by the actual rate of deviation in the population.
4 Requirements
4.1 Sample Design, Size and Selection of Items for Testing
615
4.1.1 When designing an audit sample, the auditor shall consider the purpose of
the audit procedure and the characteristics of the population from which the
sam-ple will be drawn.
4.1.2 The auditor shall determine a sample size sufficient to reduce sampling risk
to an acceptably low level.
4.1.3 The auditor shall select items for the sample in such a way that each sampling
unit in the population has a chance of selection.
4.2 Performing Audit Procedure
4.2.1 The auditor shall perform audit procedures, appropriate to the purpose, on
each item selected
4.2.2 If the audit procedure is not applicable to the selected item, the auditor shall
perform the procedure on a replacement item
4.2.3 If the auditor is unable to apply the designed audit procedures, or suitable
al-ternative procedures, to a selected item, the auditor shall treat that item
as a deviation from the prescribed control, in the case of tests of controls, or
a mis-statement, in the case of tests of details
4.3 Methods of Sampling
4.3.1 Random Sampling:
Random Sampling: 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. Random sampling includes two very popular
methods which are discussed below:
(i) Simple Random Sampling: Under this method each unit of the whole
population e.g. purchase or sales invoice has an equal chance of being
selected. The mechanics of selection of items may be by choosing
numbers from table of random numbers by computers or picking up
numbers randomly from a drum. It is considered that random number
tables are simple and easy to use and also provide assurance that the
bias does not affect the selection. This method is considered appropriate
provided the population to be sampled consists of reasonably similar
units and fall within a reasonable range.
(ii) 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 of them. Each stratum is treated as if it was a separate
population and if proportionate of items area selected from each of
these stratum. The number of groups into which the whole population
has to be divided is determined on the basis of auditor judgment.
616
4.3.2 Systematic or Interval Sampling:

Systematic selection is a selection method in which the number of sampling
units in the population is divided by the sample size to give a sampling
interval, for example 50, and having determined a starting point within the
first 50, each 50th sampling unit thereafter is selected. When using systematic
selection, the auditor would need to determine that sampling units within
the population are not structured in such a way that the sampling interval
corresponds with a particular pattern in the population.
4.3.3 Monetary Unit Sampling:
It is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts.
4.3.4 Block Sampling:
This method involves selection of a block(s) of contiguous items from within
the population. Block selection cannot ordinarily be used in audit sampling
because most populations are structured such that items in a sequence
can be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population.
4.3.5 Haphazard Sampling:
Haphazard selection, in which the auditor selects the sample without
following a structured technique. Although no structured technique is used,
the auditor would nonetheless avoid any conscious bias or predictability (for
example, always choosing or avoiding the first or last entries on a page)
and thus attempt to ensure that all items in the population have a chance
of selection. Haphazard selection is not appropriate when using statistical
sampling.
4.4 Nature and Cause of Deviations and Misstatements
4.4.1 The auditor shall investigate the nature and cause of any deviations or
misstatements identified, and evaluate their possible effect on the purpose
of the audit procedure and on other areas of the audit
4.4.2 In the extremely rare circumstances when the auditor considers a misstatement
or deviation discovered in a sample to be an anomaly, the auditor shall
obtain a high degree of certainty that such misstatement or deviation is
not representative of the population. The auditor shall obtain this degree
of certainty by performing additional audit procedures to obtain sufficient
appropriate audit evidence that the misstatement or deviation does not affect
the remainder of the population
617
4.4.3 For tests of details, the auditor shall project misstatements found in the
sample to the population
4.4.4 The auditor shall evaluate:
a) The results of the sample
b) Whether the use of audit sampling has provided a reasonable basis for
conclusions about the population that has been tested
618
SA 550 Related Parties (Effective for audits of financial

statements for periods beginning on or after April 1, 2010)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities
regarding related party relationships and transactions when performing an
audit of financial statements. Specifically, it expands on how SA 315, SA 330
and SA 240 are to be applied in relation to risks of material misstatement
associated with related party relationships and transactions.
1.2 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.
However, the nature of related party relationships and transactions may, in
some circumstances, give rise to higher risks of material misstatement of the
financial statements than transactions with unrelated parties. For example:
 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.
 Information systems may be ineffective at identifying or summarising
transactions and outstanding balances between an entity and its related
parties.
 Related party transactions may not be conducted under normal market
terms and conditions; for example, some related party transactions may
be conducted with no exchange of consideration.
1.3 Because related parties are not independent of each other, many financial
reporting frameworks establish specific accounting and disclosure requirements
for related party relationships, transactions and balances to enable users of
the financial statements to understand their nature and actual or potential
effects on the financial statements
619

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:
 Management may be unaware of the existence of all related party
relationships and transactions, particularly if the applicable financial
reporting framework does not establish related party requirements.
 Related party relationships may present a greater opportunity for
collusion, concealment or manipulation by management
2 Objective
The objectives of the auditor are:
2.1 Irrespective of whether the applicable financial reporting framework
establishes related party requirements, to obtain an understanding of related
party relationships and transactions sufficient to be able:
a) To recognise fraud risk factors, if any, arising from related party
relationships and transactions that are relevant to the identification and
assessment of the risks of material misstatement due to fraud; and
b) To conclude whether the financial statements, insofar as they are
affected by those relationships and transactions: a. Achieve a true
and fair presentation (for fair presentation frameworks); or b. Are not
misleading (for compliance frameworks);
2.2 In addition, where the applicable financial reporting framework establishes
related party requirements, to obtain sufficient appropriate audit evidence
about whether related party relationships and transactions have been
appropriately identified, accounted for and disclosed in the financial
statements in accordance with the framework.
3 Definition
3.1 Arm’s length transaction–A transaction conducted on such terms and conditions
as between a willing buyer and a willing seller who are unrelated and are
acting independently of each other and pursuing their own best interests.
620
3.2 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
c) Another entity that is under common control with the reporting
entity through having:
• Common controlling ownership;
• Owners who are close family members; or
• Common key management
Note: However, 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
4 Requirements
4.1 As part of the risk assessment procedures and related activities that SA 315
and SA 240 require the auditor to perform during the audit, the auditor
shall perform the audit procedures and related activities given below to
obtain information relevant to identifying the risks of material misstatement
associated with related party relationships and transactions:
4.1.1 Understanding the Entity’s Related Party Relationships and Transactions:
The auditor shall inquire of management regarding:
a) The identity of the entity’s related parties, including changes from the
prior period
b) The nature of the relationships between the entity and these related
parties
c) Whether the entity entered into any transactions with these related
parties during the period and, if so, the type and purpose of the
transactions
621
4.1.2 Evaluating accounting system and related internal controls regarding related party
relationships and transactions:
The auditor shall inquire of management and others within the entity, and
perform other risk assessment procedures considered appropriate, to obtain
an understanding of the controls, if any, that management has established
to:
a) Identify, account for, and disclose related party relationships and
transactions in accordance with the applicable financial reporting
framework
b) Authorise and approve significant transactions and arrangements with
related parties.
c) Authorise and approve significant transactions and arrangements
outside the normal course of business
4.1.3 During the audit, the auditor shall remain alert, when inspecting records or
documents, for arrangements or other information that may indicate the
existence of related party relationships or transactions that management
has not previously identified or disclosed to the auditor
4.1.4 If the auditor identifies significant transactions outside the entity’s normal course
of business when performing the audit procedures the auditor shall inquire of
management about:
(a) The nature of these transactions; and
(b) Whether related parties could be involved
4.2 Auditor’s Responses to the Assessed Risks of Material Misstatement
622
4.2.1 Identification of Previously Unidentified or Undisclosed Related Parties or

Significant Related Party Transactions:
If the auditor identifies arrangements or information that suggests the
existence of related party relationships or transactions that management
has not previously identified or disclosed to the auditor, the auditor shall
determine whether the underlying circumstances confirm the existence of
those relationships or transactions.
During the audit, the auditor may inspect records or documents that may
provide information about related party relationships and transactions, for
example:
• Entity income tax returns.
• Information supplied by the entity to regulatory authorities.
• Shareholder registers to identify the entity’s principal shareholders.
• Statements of conflicts of interest from management and those charged
with governance.
• Records of the entity’s investments and those of its pension plans.
• Contracts and agreements with key management or those charged with
governance.
• Significant contracts and agreements not in the entity’s ordinary course
of business.
• Specific invoices and correspondence from the entity’s professional
advisors.
• Life insurance policies acquired by the entity.
• Significant contracts re-negotiated by the entity during the period.
623
4.2.2 For identified significant related party transactions outside the entity’s normal
course of business, the auditor shall:
a) Inspect the underlying contracts or agreements, if any, and evaluate
whether:
• 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;
• The terms of the transactions are consistent with management’s
explanations
b) The transactions have been appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework
c) Obtain audit evidence that the transactions have been appropriately
authorised and approved
4.2.3 Assertions That Related Party Transactions Were Conducted on Terms Equivalent
to Those Prevailing in an Arm’s Length Transaction:
When management has made an assertion in the financial statements to the
effect that a related party transaction was conducted on terms equivalent
to those prevailing in an arm’s length transaction, the auditor shall obtain
sufficient appropriate audit evidence about the assertion
Management is responsible for the substantiation of an assertion that a related
party transaction was conducted on terms equivalent to those prevailing in an arm’s
length transaction. Management’s support for the assertion may include:
a) Comparing the terms of the related party transaction to those of an
identical or similar transaction with one or more unrelated parties.
b) Engaging an external expert to determine a market value and to confirm
market terms and conditions for the transaction.
c) Comparing the terms of the transaction to known market terms for
broadly similar transactions on an open market.
624
4.2.4 In forming an opinion on the financial statements in accordance with SA 700,

the auditor shall evaluate:
a) Whether the identified related party relationships and transactions have
been appropriately accounted for and disclosed in accordance with the
b) Whether the effects of the related party relationships and transactions:
• Prevent the financial statements from achieving true and fair
presentation
• Cause the financial statements to be misleading
4.3 Where the applicable financial reporting framework establishes related
party requirements, the auditor shall obtain written representations from
management and, where appropriate, those charged with governance that:
a) They have disclosed to the auditor the identity of the entity’s related
parties and all the related party relationships and transactions of which
they are aware; and
b) They have appropriately accounted for and disclosed such relationships
and transactions in accordance with the requirements of the framework.
4.4 In meeting the documentation requirements of SA 230 and other SAs, the
auditor shall include in the audit documentation the names of the identified
related parties and the nature of the related party relationships.
625
SA 560 SUBSEQUENT EVENTS (EFFECTIVE FOR AUDITS OF

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities relating to
subsequent events in an audit of financial statements. It does not deal with matters
relating to the auditor’s responsibilities for other information obtained after
the date of the auditor’s report, which are addressed in SA 720.
However, such other information may bring to light a subsequent event that
is within the scope of this SA.
1.2 Financial statements may be affected by certain events that occur after
the date of the financial statements. Many financial reporting frameworks
specifically refer to such events. Such financial reporting frameworks ordinarily
identify two types of events:
(a) Those that provide evidence of conditions that existed at the date of the
financial statements; and
(b) Those that provide evidence of conditions that arose after the date of
2 Objective
2.1 To 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 of, or disclosure in, the financial statements
are appropriately reflected in those financial statements
2.2 To Respond appropriately to facts that become known to the auditor after the
date of the auditor’s report, that, had they been known to the auditor at that
date, may have caused the auditor to amend the auditor’s report.
3 Definition
3.1 Date of the financial statements – The date of the end of the latest period
covered by the financial statements
626
3.2 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
3.3 Date of the auditor’s report – The date the auditor dates the report on the fi-
nancial statements in accordance with SA 700
3.4 Date the financial statements are issued – The date that the auditor’s report and
audited financial statements are made available to third parties
3.5 Subsequent events – 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.
4 Requirements
4.1 Events Occurring Between the Date of the Financial Statements and the Date
of the Auditor’s Report
4.1.1 Obtaining an understanding of any procedures management has established
to ensure that subsequent events are identified
4.1.2 Inquiring of management and, where appropriate, those charged with gov-
ernance as to whether any subsequent events have occurred which might
affect the financial statements
4.1.3 Reading minutes, if any, of the meetings, of the entity’s owners, management
and those charged with governance, that have been held after the date of the
4.1.4 Reading the entity’s latest subsequent interim financial statements, if any.
4.1.5 Obtain written representations as per SA 580, that all events occurring subse-
quent to the date of the financial statements and for which the applicable
fi-nancial reporting framework requires adjustment or disclosure have been
ad-justed or disclosed
4.2 Facts Which Become Known to the Auditor After the Date of the Auditor’s Report
but Before the Date the Financial Statements are Issued:
627
4.2.1 The auditor has no obligation to perform any audit procedures regarding
the financial statements after the date of the auditor’s report. However,
when, after the date of the auditor’s report but before the date the financial
statements are issued, a fact becomes known to the auditor that, had it been
known to the auditor at the date of the auditor’s report, may have caused the
auditor to amend the auditor’s report, the auditor shall:
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
4.2.2 If management amends the financial statements, the auditor shall:
a) Carry out the audit procedures necessary in the circumstances on the
amendment.
b) Unless prohibited by law:
• Extend the audit procedures referred to such events up to the date
of the new auditor’s report and
• Provide a new auditor’s report on the amended financial statements.
The new auditor’s report shall not be dated earlier than the date of
approval of the amended financial statements.
4.3 Facts Which Become Known to the Auditor After the Financial Statements have
been Issued:
4.3.1 After the financial statements have been issued, the auditor has no obligation to
perform any audit procedures regarding such financial statements. However,
when, after the financial statements have been issued, a fact becomes known
to the auditor that, had 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, where appropriate, those
charged with governance.
b) Determine whether the financial statements need amendment and, if
so,
b) Inquire how management intends to address the matter in the financial
statements.
628
4.3.2 If the management amends the financial statements, 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.
4.4 In some entities, management may not be required by the applicable law, regulation
or the financial reporting framework to issue amended financial statements
and, accordingly, the auditor need not provide an amended or new auditor’s
report. However, when management does not amend the financial statements
in circumstances where the auditor believes they need to be amended, then:
a) 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, unless all of those charged with
governance are involved in managing the entity, those charged with
governance, not to issue the financial statements to third parties before
the necessary amendments have been made.
If the financial statements are nevertheless subsequently issued without the
necessary amendments, the auditor shall take appropriate action, to seek to
prevent reliance on the auditor’s report.
4.5  If management does not take the necessary steps to ensure that anyone in
receipt of the previously issued financial statements is informed of the
situation and does not amend the financial statements in circumstances
where the auditor believes they need to be amended, the auditor shall
notify management and those charged with governance.
 If, despite such notification, management or those charged with
governance do not take these necessary steps, the auditor shall take
appropriate action to seek to prevent reliance on the auditor’s report.
629
SA 570 GOING CONCERN (EFFECTIVE FOR AUDITS OF

S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities in the
audit of financial statements relating to going concern and the implications
for the auditor’s report
1.2 When the use of the going concern basis of accounting is appropriate, assets
and liabilities are recorded on the basis that the entity will be able to realize
its assets and discharge its liabilities in the normal course of business
1.3 Where the going concern basis of accounting is a fundamental principle in
the preparation of financial statements then it requires management to
assess the entity’s ability to continue as a going concern even if the financial
reporting framework does not include an explicit requirement to do so.
1.4 The auditor’s responsibilities are to obtain sufficient appropriate audit
evidence regarding, and conclude on, the appropriateness of management’s
use of the going concern basis of accounting in the preparation of the financial
statements, and to conclude, based on the audit evidence obtained, whether
a material uncertainty exists about the entity’s ability to continue as a going
concern.
2 Objective
2.1 To obtain sufficient appropriate audit evidence regarding, and conclude on,
the appropriateness of management’s use of the going concern basis of
accounting in the preparation of the financial statements
2.2 To conclude, based on the audit evidence obtained, whether 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
2.3 To report in accordance with this SA
3 Definition--
4 Requirements
4.1 Risk Assessment Procedures and Related Activities
630
4.1.1 When performing risk assessment procedures as required by SA 315, the

auditor shall consider whether events or conditions exist that may cast
significant doubt on the entity’s ability to continue as a going concern.
4.1.2 In so doing, the auditor shall determine whether management has already
performed a preliminary assessment of the entity’s ability to continue as a
going concern
4.1.3 If such an assessment has been performed, the auditor shall discuss the
assessment with management and determine whether management has
identified events or conditions that, individually or collectively, may cast
significant doubt on the entity’s ability to continue as a going concern and, if
so, management’s plans to address them;
4.1.4 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
4.1.5 The auditor shall remain alert throughout the audit for audit evidence of
events or conditions that may cast significant doubt on the entity’s ability to
4.2 Evaluating Management’s Assessment
 If events or conditions have been identified that may cast significant
doubt on the entity’s ability to continue as a going concern, the auditor
shall obtain sufficient appropriate audit evidence to determine whether
or not 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.
 Where management has not yet performed an assessment of the entity’s
ability to continue as a going concern, requesting management to make
its assessment
631
4.2.1  In evaluating management’s assessment of the entity’s ability to continue

as a going concern, the auditor shall cover the same period as that used
by management to make its assessment as required by the applicable
financial reporting framework, or by law or regulation if it specifies a
longer period.
 If management’s assessment of the entity’s ability to continue as a
going concern covers less than twelve months from the date of the
financial statements ,the auditor shall request management to extend
its assessment period to at least twelve months from that date
4.2.2 The auditor shall consider whether management’s assessment includes all
relevant information of which the auditor is aware as a result of the audit.
4.2.3 The auditor shall inquire of management as to its knowledge of events or
conditions beyond the period of management’s assessment that may cast
4.2.4 Evaluating management’s plans for future actions in relation to its going
concern assessment, whether the outcome of these plans is likely to
improve the situation and whether management’s plans are feasible in the
circumstances
4.2.5 Considering whether any additional facts or information have become
available since the date on which management made its assessment
4.2.6 Where the entity has prepared a cash flow forecast, and analysis of the
forecast is a significant factor in considering the future outcome of events or
conditions in the evaluation of management’s plans for future actions:
(i) Evaluating the reliability of the underlying data generated to prepare the
forecast; and (ii) Determining whether there is adequate support for the
assumptions underlying the forecast.
4.3 Auditor Conclusions
4.3.1 The auditor shall evaluate whether sufficient appropriate audit evidence
has been obtained regarding, and shall conclude on, the appropriateness of
management’s use of the going concern basis of accounting in the preparation
of the financial statements.
632
4.3.2 How do we conclude whether material uncertainty exists or not?

A material uncertainty exists when the magnitude of its potential impact and
likelihood of occurrence is such that, in the auditor’s judgment, appropriate
disclosure of the nature and implications of the uncertainty is necessary for:
(a) In the case of a fair presentation financial reporting framework, the fair
presentation of the financial statements, or
(b) In the case of a compliance framework, the financial statements not to
be misleading.
4.3.3 If the auditor concludes that management’s use of the going concern basis of
accounting is appropriate in the circumstances but a material uncertainty exists,
the auditor shall determine whether the financial statements:
a) Adequately disclose the principal events or conditions that may cast
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
4.3.4 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 in the preparation of the financial statements is inappropriate,
the auditor shall express an adverse opinion
4.3.5 If adequate disclosure about the material uncertainty is made in the financial
statements, the auditor shall express an unmodified opinion and the auditor’s report
shall include 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.
633
4.3.6 Adequate Disclosure of a Material Uncertainty is Not Made in the Financial

Statements
If adequate disclosure about the material uncertainty is not made in the financial
statements, the auditor shall:
a) Express a qualified opinion or adverse opinion, as appropriate, in
accordance with SA 705 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
4.3.7 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 auditor’s report.
4.4 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 those
additional audit procedures necessary, as well as consider the effect on the
auditor’s conclusion regarding the existence of a material uncertainty.
634
SA 580 WRITTEN REPRESENTATIONS (EFFECTIVE FOR

AUDITS OF FINANCIAL STATEMENTS FOR PERIODS
BEGINNING ON OR AFTER APRIL 1, 2009)
S.N Particulars
1 Introduction
obtain written representations from management and, where appropriate,
those charged with governance
1.2 Audit evidence is all the information used by the auditor in arriving at the
conclusions on which the audit opinion is based. 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
1.3 Although written representations provide necessary audit evidence, they do
extent of other audit evidence that the auditor obtains about the fulfilment
2 Objective
2.1 To obtain written representations from management and, where appropriate,
those charged with governance 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
2.2 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
2.3 To respond appropriately to written representations provided by management
and, where appropriate, those charged with governance, or if management
or, where appropriate, those charged with governance do not provide the
written representations requested by the auditor.
3 Definition
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3.1 Written representations – A written statement by management provided 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.
4 Requirements
4.1 The auditor shall request written representations from management with
appropriate responsibilities for the financial statements and knowledge of
the matters concerned
4.2 The auditor shall request management to provide a written representation
that it has fulfilled its responsibility for the preparation of the financial
statements in accordance with the applicable financial reporting framework,
including where relevant their fair presentation, as set out in the terms of the
audit engagement.
4.3 The auditor shall request management to provide a written representation
that:
a) It has provided the auditor with all relevant information and access as
agreed in the terms of the audit engagement, and
b) All transactions have been recorded and are reflected in the financial
statements.
4.4 Other SAs require the auditor to request written representations. If, in
addition to such required representations, the auditor determines that it is
necessary to obtain one or more written representations to support other
audit evidence relevant to the financial statements or one or more specific
assertions in the financial statements, the auditor shall request such other
written representations
4.5 The date of the written representations shall be as near as practicable to, but
not after, the date of the auditor’s report on the financial statements. The
written representations shall be for all financial statements and period(s)
referred to in the auditor’s report.
4.6 The written representations shall be in the form of a representation letter
addressed to the auditor. If law or regulation requires management to
make written public statements about its responsibilities, and the auditor
determines that such statements provide some or all of the representations
mentioned above, the relevant matters covered by such statements need not
be included in the representation letter
636
Doubt as to the Reliability of Written Representations

4.7 If the auditor has concerns about the competence, integrity, ethical values
or diligence of management, or about its commitment to or enforcement of
these, the auditor shall determine the effect that such concerns may have
on the reliability of representations (oral or written) and audit evidence in
general
4.8 In particular, if written representations are inconsistent with other audit
evidence, the auditor shall perform audit procedures to attempt to resolve
the matter. If the matter remains unresolved, the auditor shall reconsider
the assessment of the competence, integrity, ethical values or diligence of
management
4.9 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.
Requested Written Representations Not Provided
4.10 If management does not provide one or more of the requested written
representations, the auditor shall:
a) Discuss the matter with management;
b) Re-evaluate the integrity of management and evaluate the effect that
this may have on the reliability of representations (oral or written) and
audit evidence in general; and
c) Take appropriate actions, including determining the possible effect on
the opinion in the auditor’s report in accordance with SA 705
The auditor shall disclaim an opinion on the financial statements in accordance with SA 705 if:
a) The auditor concludes that there is sufficient doubt about the integrity of
management such that the written representations are not reliable; or
b) Management does not provide the written representations
637
SA 610 USING THE WORK OF INTERNAL AUDITORS

(EFFECTIVE FOR AUDITS OF FINANCIAL STATEMENTS FOR
PERIODS BEGINNING ON OR AFTER APRIL 1, 2016)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the external auditor’s responsibilities
if using the work of internal auditors. This includes
a) using the work of the internal audit function in obtaining audit evidence
and
b) using internal auditors to provide direct assistance under the direction,
supervision and review of the external auditor
1.2 The external auditor has sole responsibility for the audit opinion expressed,
and that responsibility is not reduced by the external auditor’s use of the work
of the internal audit function or internal auditors to provide direct assistance
on the engagement.
Although they may perform audit procedures similar to those performed
by the external auditor, neither the internal audit function nor the internal
auditors are independent of the entity as is required of the external auditor in
an audit of financial statements in accordance with SA 200.
2 Objective
The objectives of the external auditor, where the entity has an internal audit
function and the external auditor expects to use the work of the function
to modify the nature or timing, or reduce the extent, of audit procedures to
be performed directly by the external auditor, or to use internal auditors to
provide direct assistance, are:
2.1 To determine whether the work of the internal audit function or direct
assistance from internal auditors can be used, and if so, in which areas and
to what extent; and having made that determination
2.2 If using the work of the internal audit function, to determine whether that
work is adequate for purposes of the audit
2.3 If using internal auditors to provide direct assistance, to appropriately direct,
supervise and review their work.
638
3 Definition
3.1 Internal audit function – 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.
3.2 Direct assistance – The use of internal auditors to perform audit procedures
under the direction, supervision and review of the external auditor
4 Requirements
4.1 Evaluating Internal Audit Function
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:
4.1.1 The extent to which the internal audit function’s organizational status and
relevant policies and procedures support the objectivity of the internal
auditors
4.1.2 The level of competence of the internal audit function
4.1.3 Whether the internal audit function applies a systematic and disciplined
approach, including quality control
Using the work of Internal Auditor without Direct Assistance.
4.2 Using the work of Internal Audit Function
4.2.1 The external auditor shall consider the nature and scope of the work that has
been performed, or is planned to be performed, by the internal audit function
and its relevance to the external auditor’s overall audit strategy and audit
plan
4.2.2 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.
4.2.3 the external auditor shall discuss the planned use of its work with the function
as a basis for coordinating their respective activities
4.2.4 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
639
4.2.5 The nature and extent of the external auditor’s audit procedures shall be responsive
to the external auditor’s evaluation of:
a) The amount of judgment involved;
b) The assessed risk of material misstatement;
c) The extent to which the internal audit function’s organizational status
and relevant policies and procedures support the objectivity of the
internal auditors; and
d) The level of competence of the function
Direct Assistance.
4.3 Determining Whether, in Which Areas, and to What Extent Internal Auditors Can
Be Used to Provide Direct Assistance
4.3.1 The external auditor may be prohibited by law or regulation from obtaining
direct assistance from internal auditors.
4.3.2 If using internal auditors to provide direct assistance is not prohibited by
law or regulation, and the external auditor plans to use internal auditors to
provide direct assistance on the audit, the external auditor shall evaluate
the existence and significance of threats to objectivity and the level of
competence of the internal auditors who will be providing such assistance.
4.3.3 In determining the nature and extent of work that may be assigned to internal
auditors and the nature, timing and extent of direction, supervision and review
that is appropriate in the circumstances, the external auditor shall consider:
a) The amount of judgment involved in:
• Planning and performing relevant audit procedures; and
• Evaluating the audit evidence gathered;
b) The assessed risk of material misstatement; and
c) The external auditor’s evaluation of the existence and significance of
threats to the objectivity and level of competence of the internal auditors
who will be providing such assistance.
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4.3.4 The external auditor shall not use internal auditors to provide direct assistance
to perform procedures that:
a) Involve making significant judgments in the audit
b) Relate to higher assessed risks of material misstatement where the
judgment required in performing the relevant audit procedures or
evaluating the audit evidence gathered is more than limited;
c) Relate to work with which the internal auditors have been involved and
which has already been, or will be, reported to management or those
charged with governance by the internal audit function
d) Relate to decisions the external auditor makes in accordance with this
SA regarding the internal audit function and the use of its work or direct
assistance
4.4 Using Internal Auditors to Provide Direct Assistance
4.4.1 Prior to using internal auditors to provide direct assistance for purposes of
the audit, the external auditor shall:
(a) Obtain written agreement from an authorized representative of the
entity 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
4.4.2 The external auditor shall direct, supervise and review the work performed by
internal auditors on the engagement in accordance with SA 220. In so doing:
(a) The nature, timing and extent of direction, supervision, and review shall
recognize that the internal auditors are not independent of the entity;
and
(b) The review procedures shall include the external auditor checking back
to the underlying audit evidence for some of the work performed by the
internal auditors.
The direction, supervision and review by the external auditor of the work
performed by the internal auditors shall be sufficient in order for the external
auditor to be satisfied that the internal auditors have obtained sufficient
appropriate audit evidence to support the conclusions based on that work.
641
4.4.3 If the external auditor uses internal auditors to provide direct assistance on
the audit, the external auditor shall include in the audit documentation:
(a) The evaluation of the existence and significance of threats to the objectivity
of the internal auditors, and the level of competence of the internal auditors
used to provide direct assistance;
(b) The basis for the decision regarding the nature and extent of the work
performed by the internal auditors;
(c) Who reviewed the work performed and the date and extent of that
review in accordance with SA 230;
(d) The written agreements obtained from an authorized representative of
the entity and the internal auditors; and
(e) The working papers prepared by the internal auditors who provided
direct assistance on the audit engagement
642
SA 700 FORMING AN OPINION AND REPORTING ON FINANCIAL

STATEMENTS (EFFECTIVE FOR AUDITS OF FINANCIAL STATEMENTS
FOR PERIODS BEGINNING ON OR AFTER APRIL 1, 2018)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibility to form
an opinion on the financial statements. It also deals with the form and content
of the auditor’s report issued as a result of an audit of financial statements.
1.2 SA 701 deals with the auditor’s responsibility to communicate key audit
matters in the auditor’s report. SA 705 (Revised) and SA 706 (Revised) deal
with how the form and content of the auditor’s report are affected when
the auditor expresses a modified opinion or includes an Emphasis of Matter
paragraph or an Other Matter paragraph in the auditor’s report. Other SAs
also contain reporting requirements that are applicable when issuing an
auditor’s report.
1.3 This SA applies to an audit of a complete set of general purpose financial
statements and is written in that context. SA 8004 deals with special
considerations when financial statements are prepared in accordance with a
special purpose framework. SA 805 deals with special considerations relevant
to an audit of a single financial statement or of a specific element, account
or item of a financial statement. This SA also applies to audits for which SA
800 or SA 805 apply.
2 Objective
2.1 To form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained
2.2 To express clearly that opinion through a written report
3 Definition
3.1 General purpose financial statements – Financial statements prepared in
accordance with a general purpose framework
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3.2 General purpose framework – A financial reporting framework designed to

meet the common financial information needs of a wide range of users. The
financial reporting framework may be a fair presentation framework or a
compliance framework.
The term “fair presentation framework” is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework
and:
(i) Acknowledges explicitly or implicitly that, to achieve fair presentation
of the financial statements, it may be necessary for management to
provide disclosures beyond those specifically required by the framework;
or
(ii) Acknowledges explicitly that it may be necessary for management to
depart from a requirement of the framework to achieve fair presentation
of the financial statements. Such departures are expected to be necessary
only in extremely rare circumstances.
The term “compliance framework” is used to refer to a financial reporting
framework that requires compliance with the requirements of the framework,
but does not contain the acknowledgements in (i) or (ii) above
4 Requirements
4.1 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
4.2 In order to form that opinion, the auditor shall conclude as to whether the
auditor has obtained reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to
fraud or error. That conclusion shall take into account:
(a) The auditor's conclusion, in accordance with SA 330, whether sufficient
appropriate audit evidence has been obtained.
(b) The auditor's conclusion, in accordance with SA 450, whether uncorrected
misstatements are material, individually or in aggregate
4.3 The auditor shall evaluate whether the financial statements are prepared, in
all material respects, in accordance with the requirements of the applicable
financial reporting framework. This evaluation shall include consideration of
the qualitative aspects of the entity's accounting practices, including indicators
of possible bias in management's judgments.
644
4.4 In particular, the auditor shall evaluate whether, in view of the requirements
of the applicable financial reporting framework:
(a) The financial statements adequately disclose the significant accounting
(b) The accounting policies selected and applied are consistent with the
applicable financial reporting framework and are appropriate;
(c) The accounting estimates made by management are reasonable;
(d) The information presented in the financial statements is relevant,
(e) The financial statements provide adequate disclosures to enable the
(f) The terminology used in the financial statements, including the title of
each financial statement, is appropriate
4.5 If the auditor:
(a) concludes that, based on the 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,
the auditor shall modify the opinion in the auditor‟s report in accordance
with SA 705
4.6 Elements of Audit Report
4.6.1 Title: The auditor’s report shall have a title that clearly indicates that it is
the report of an independent auditor. For example, “Independent Auditor’s
Report,” distinguishes the independent auditor’s report from reports issued
by others
4.6.2 Addressee: The auditor’s report shall be addressed, as appropriate, based on
the circumstances of the engagement. Law, regulation or the terms of the
engagement may specify to whom the auditor’s report is to be addressed.
The auditor’s report is normally addressed to those for whom the report is
prepared, often either to the shareholders or to those charged with governance
of the entity whose financial statements are being audited
645
4.6.3 Auditor’s Opinion: The first section of the auditor’s report shall include the
auditor’s opinion, and shall have the heading “Opinion.” The Opinion section
of the auditor’s report shall also:
(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 financial statements
4.6.4 Basis for Opinion:
The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with Standards on
Auditing;
(b) Refers to the section of the auditor’s report that describes the auditor’s
responsibilities under the SAs;
(c) Includes a statement that the auditor is independent of the entity in
accordance with the relevant ethical requirements relating to the audit
and has fulfilled the auditor’s other ethical responsibilities in accordance
with these requirements.
(d) States whether the auditor believes that the audit evidence the auditor
has obtained is sufficient and appropriate to provide a basis for the
4.6.5 Going Concern: Where applicable, the auditor shall report in accordance with
SA 570 (Revised).
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4.6.6 Key Audit Matters: For audits of complete sets of general purpose financial
statements of listed entities, the auditor shall communicate key audit matters
in the auditor’s report in accordance with SA 701.
When the auditor is otherwise required by law or regulation or decides to
communicate key audit matters in the auditor’s report, the auditor shall do
so in accordance with SA 701.
Law or regulation may require communication of key audit matters for audits
of entities other than listed entities.
The auditor may also decide to communicate key audit matters for other
entities, including those that may be of significant public interest, for example
because they have a large number and wide range of stakeholders and
considering the nature and size of the business.
4.6.7 Other Information
Where applicable, the auditor shall report in accordance with SA 720
4.6.8 Responsibilities for the Financial Statements: The auditor’s report shall include
a section with a heading “Responsibilities of Management for the Financial
Statements.”
SA 200 explains the premise, relating to the responsibilities of management
and, where appropriate, those charged with governance, on which an audit
in accordance with SAs is conducted. Management and, where appropriate,
those charged with governance accept responsibility for the preparation of
the financial statements. Management also accepts responsibility for such
internal control as it determines is necessary to enable the preparation of
financial statements that are free from material misstatement, whether
due to fraud or error. The description of management’s responsibilities in
the auditor’s report includes reference to both responsibilities as it helps to
explain to users the premise on which an audit is conducted.
647
4.6.9 Auditor’s Responsibilities for the Audit of the Financial Statements:

This section of the auditor’s report shall:
(a) State that the objectives of the auditor are to:
(i) Obtain reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to
fraud or error; and
(ii) Issue an auditor’s report that includes the auditor’s opinion.
(b) State that reasonable assurance is a high level of assurance, but is not
a guarantee that an audit conducted in accordance with SAs will always
detect a material misstatement when it exists; and
(c) State that misstatements can arise from fraud or error, and either:
(i) Describe that they are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements; or
(ii) Provide a definition or description of materiality in accordance with
the applicable financial reporting framework
4.6.10 Other Reporting Responsibilities: If the auditor addresses other reporting
responsibilities in the auditor’s report on the financial statements that are in
addition to the auditor’s responsibilities under the SAs, these other reporting
responsibilities shall be addressed in a separate section in the auditor’s report
with a heading titled-
“Report on Other Legal and Regulatory Requirements” or otherwise as appropriate
to the content of the section, 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
648
4.6.11 Signature of the Auditor: The auditor’s report shall be signed. The report is
signed by the auditor (i.e. the engagement partner) in his personal name.
Where the firm is appointed as the auditor, the report is signed in the personal
name of the auditor and in the name of the audit firm.
The partner/proprietor signing the audit report also needs to mention the
membership number assigned by the Institute of Chartered Accountants
of India. They also include the registration number of the firm, wherever
applicable, as allotted by ICAI, in the audit reports signed by them.
Auditor’s Address: The auditor’s report shall name specific location, which is
ordinarily the city where the audit report is signed.
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
4.6.12  An auditor may be required to conduct an audit in accordance with, in
addition to the Standards on Auditing issued by ICAI, the International
Standards on Auditing or auditing standards of any other jurisdiction.
 If this is the case, the auditor's report may refer to Standards on Auditing in
addition to the International Standards on Auditing or auditing standards of
such other jurisdiction, but the auditor shall do so only if:
(a) There is no conflict between the requirements in the ISAs or such
auditing standards of other jurisdiction and those in SAs that would
lead the auditor
(i) to form a different opinion, or
(ii) not to include an Emphasis of Matter paragraph or Other
Matter paragraph that, in the particular circumstances, is
required by SAs; and
(b) The auditor's report includes, at a minimum, each of the elements
above when the auditor uses the layout or wording specified by the
Standards on Auditing
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SA 701 COMMUNICATING KEY AUDIT MATTERS ((EFFECTIVE FOR

AUDITS OF FINANCIAL STATEMENTS FOR PERIODS BEGINNING ON
OR AFTER APRIL 1, 2018)
S.N Particulars
1 Introduction
1.1  This Standard on Auditing (SA) deals with the auditor’s responsibility to
communicate key audit matters in the auditor’s report. It is intended to
address both the auditor’s judgment as to what to communicate in the
auditor’s report and the form and content of such communication.
 This SA applies to audits of complete sets of general purpose financial
statements of listed entities and circumstances when the auditor
otherwise decides to communicate key audit matters in the auditor’s
report.
1.2  The purpose of communicating key audit matters is to enhance the
communicative value of the auditor’s report by providing greater
transparency about the audit that was performed.
 Communicating key audit matters provides additional information to
intended users of the financial statements (“intended users”) to assist
them in understanding those matters that, in the auditor’s professional
statements of the current period.
 Communicating key audit matters may also assist intended users in
understanding the entity and areas of significant management judgment
in the audited financial statements
1.3 Communicating key audit matters in the auditor’s report is in the context of
the auditor having formed an opinion on the financial statements as a whole.
Communicating key audit matters in the auditor’s report is not
a A substitute for disclosures in the financial statements that the applicable
financial reporting framework requires management to make, or that are
otherwise necessary to achieve fair presentation
650
b A substitute for the auditor expressing a modified opinion when required by

the circumstances of a specific audit engagement in accordance with SA 705
(Revised)
c A substitute for reporting in accordance with SA 570 (Revised) when a material
uncertainty exists relating to events or conditions that may cast significant
doubt on an entity’s ability to continue as a going concern
d A separate opinion on individual matters
1.4 SA 705 (Revised) prohibits the auditor from communicating key audit matters when
the auditor disclaims an opinion on the financial statements, unless such reporting
is required by law or regulation.
2 Objective
2.1 The objectives of the auditor are to determine key audit matters and, having
formed an opinion on the financial statements, communicate those matters
by describing them in the auditor’s report
3 Definition
3.1 Key audit matters - Those matters that, in the auditor’s professional judgment,
were of most significance in the audit of the financial statements of the
current period. Key audit matters are selected from matters communicated
with those charged with governance.
4 Requirements
4.1 The auditor shall determine, from the matters communicated with those
charged with governance, those matters that required significant auditor
attention in performing the audit. In making this determination, the auditor
shall take into account the following:
4.1.1 Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315 (For examples Refer SA 315)
4.1.2 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.
4.1.3 The effect on the audit of significant events or transactions that occurred
during the period.
651
4.1.4 The auditor’s decision-making process in determining key audit matters

is designed to select a smaller number of matters from the matters
communicated with those charged with governance, based on the auditor’s
judgment about which matters were of most significance in the audit of the
financial statements of the current period.
4.1.5 Notwithstanding that the auditor’s determination of key audit matters is for
the audit of the financial statements of the current period and this SA does
not require the auditor to update key audit matters included in the prior
period’s auditor’s report, it may nevertheless be useful for the auditor to
consider whether a matter that was a key audit matter in the audit of the
financial statements of the prior period continues to be a key audit matter in
the audit of the financial statements of the current period.
4.2 The auditor shall determine which of the matters determined in accordance
with paragraph were of most significance in the audit of the financial
statements of the current period and therefore are the key audit matters.
4.3 The auditor shall describe each key audit matter, using an appropriate
subheading, in a separate section of the auditor’s report under the heading
“Key Audit Matters”.
The introductory language in this section of the auditor’s report shall state
that:
(a) Key audit matters are those matters that, in the auditor’s professional
statements [of the current period]; and
(b) These matters were addressed in the context of the audit of the financial
statements as a whole, and in forming the auditor’s opinion thereon,
and the auditor does not provide a separate opinion on these matters.
4.4 The auditor shall describe each key audit matter in the auditor’s report unless:
(a) Law or regulation precludes public disclosure about the matter; or
(b) In extremely rare circumstances, the auditor determines that the matter
should not be communicated in the auditor’s report because the adverse
consequences of doing so would reasonably be expected to outweigh
the public interest
652
4.5 If the auditor determines, depending on the facts and circumstances of the
entity and the audit, that there are no key audit matters to communicate or
that the key audit matters have been addressed by other paragraphs, the
auditor shall include a statement to this effect in a separate section of the
auditor’s report under the heading “Key Audit Matters”.
4.6 The auditor shall communicate with those charged with governance:
(a) Those matters the auditor has determined to be the key audit matters;
or
(b) If applicable, depending on the facts and circumstances of the entity
and the audit, the auditor’s determination that there are no key audit
matters to communicate in the auditor’s report
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A 705 Modifications to the Opinion in the Independent Auditor’s Report

(Effective for audits of financial statements for periods beginning on or
after April 1, 2018)
S.N Particulars
1 Introduction
issue an appropriate report in circumstances when, in forming an opinion in
accordance with SA 700(Revised), the auditor concludes that a modification
to the auditor’s opinion on the financial statements is necessary
1.2 This SA also deals with how the form and content of the auditor’s report is
affected when the auditor expresses a modified opinion.
2 Objective
The objective of the auditor is to express clearly an appropriately modified
opinion on the financial statements that is necessary when:
2.1 The auditor concludes, based on the audit evidence obtained, that the
financial statements as a whole are not free from material misstatement
2.2 The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement.
3 Definition
3.1 Pervasive – A term used, in the context of misstatements, to describe the
effects on the financial statements of misstatements or the possible effects
on the financial statements of misstatements, if any, that are undetected
due to an inability to obtain sufficient appropriate audit evidence. Pervasive
effects on the financial statements are those that, in the auditor’s judgment:
a) Are not confined 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 users’ understanding of
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3.2 Modified opinion – A qualified opinion, an adverse opinion or a disclaimer of

opinion on the financial statements
4 Requirements
4.1 Circumstances When a Modification to the Auditor’s Opinion is Required
The auditor shall modify the opinion in the auditor’s report when:
4.1.1 The auditor concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement.
4.1.2 The auditor is unable to obtain sufficient appropriate audit evidence to
conclude that the financial statements as a whole are free from material
misstatement. (also referred to as a limitation on the scope of the audit)
4.2 Qualified Opinion:
The auditor shall express a qualified opinion when:
4.2.1 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
4.2.2 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
4.3 Adverse opinion
The auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the
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4.4 Disclaimer of Opinion

 The auditor shall disclaim an opinion when the auditor is unable to
obtain sufficient appropriate audit evidence on which to base the opinion,
and the auditor concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be both material
and pervasive.
 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
4.5 Additional Considerations relating to Adverse or Disclaimer of an 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 report3 in these
circumstances would contradict the auditor’s adverse opinion or
disclaimer of opinion on the financial statements as a whole
4.6 When the auditor modifies the audit opinion, the auditor shall use the
heading “Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as
appropriate, for the Opinion section
4.7 When the auditor modifies the opinion on the financial statements, the auditor
shall, in addition to the specific elements required by SA 700 (Revised):
(a) Amend the heading “Basis for Opinion” required by paragraph 28 of SA
700 (Revised) to “Basis for Qualified Opinion,” “Basis for Adverse Opinion,”
or “Basis for Disclaimer of Opinion,” as appropriate; and
(b) Within this section, include a description of the matter giving rise to the
modification
4.8 Changes in the report due to disclaimer of an opinion
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4.8.1 When the auditor disclaims an opinion on the financial statements, the
auditor’s report shall not include following statements in Basis for Opinion
Para as discussed in SA 700:
(a) A reference to the section of the auditor’s report where the auditor’s
responsibilities are described; and
(b) A statement about whether the audit evidence obtained is sufficient and
appropriate to provide a basis for the auditor’s opinion
4.8.2 The auditor shall amend the description of the auditor’s responsibilities to
include only the following:
a) A statement that the auditor’s responsibility is to conduct an audit of the
entity’s financial statements in accordance with Standards on Auditing
and to issue an auditor’s report;
b) A statement that, however, because of the matter(s) described in the
Basis for Disclaimer of Opinion section, the auditor was not able to
obtain sufficient appropriate audit evidence to provide a basis for an
audit opinion on the financial statements; and
c) The statement about auditor independence and other ethical
responsibilities required by SA 700 in Basis for opinion paragraph.
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SA 706 EMPHASIS OF MATTER PARAGRAPHS AND OTHER MATTER PARAGRAPHS IN

THE INDEPENDENT AUDITOR’S REPORT (EFFECTIVE FOR AUDITS OF FINANCIAL
STATEMENTS FOR PERIODS BEGINNING ON OR AFTER APRIL 1, 2018)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with additional communication in the
auditor’s report when the auditor considers it necessary to:
a) Draw users’ attention to a matter or matters presented or disclosed
in the financial statements that are of such importance that they are
fundamental to users’ understanding of the financial statements
b) Draw users’ attention to any matter or matters other than those
presented or disclosed in the financial statements that are relevant to
users’ understanding of the audit, the auditor’s responsibilities or the
auditor’s report.
1.2 SA 701 establishes requirements and provides guidance when the auditor
determines key audit matters and communicates them in the auditor’s report.
When the auditor includes a Key Audit Matters section in the auditor’s
report, this SA addresses the relationship between key audit matters and any
additional communication in the auditor’s report in accordance with this SA
1.3 SA 570 and SA 720 establish requirements and provide guidance about
communication in the auditor’s report relating to going concern and other
information, respectively
2 Objective
The objective of the auditor, having formed an opinion on the financial statements,
is to draw users’ attention, when in the auditor’s judgment it is necessary to do so,
by way of clear additional communication in the auditor’s report, to:
2.1 A matter, although appropriately presented or disclosed in the financial
statements, that is of such importance that it is fundamental to users’
understanding of the financial statements
2.2 As appropriate, any other matter that is relevant to users’ understanding of
the audit, the auditor’s responsibilities or the auditor’s report
3 Definition
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3.1 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
3.2 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 the auditor’s judgment, is relevant to users’ understanding
of the audit, the auditor’s responsibilities or the auditor’s report
4 Requirements
4.1 When EOM Para is used?
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:
4.1.1 The auditor would not be required to modify the opinion in accordance with
SA 705 as a result of the matter and
4.1.2 When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report
4.2 Drafting EOM Para
When the auditor includes an Emphasis of Matter paragraph in the auditor’s
4.2.1 Include the paragraph within a separate section of the auditor’s report with
an appropriate heading that includes the term “Emphasis of Matter
4.2.2 Include in the paragraph a clear reference to the matter being emphasized
and to where relevant disclosures that fully describe the matter can be found
in the financial statements. The paragraph shall refer only to information
presented or disclosed in the financial statements
4.2.3 Indicate that the auditor’s opinion is not modified in respect of the matter
emphasized
4.3 Circumstances Where EOM Para becomes Mandatory
4.3.1 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
4.3.2 To alert users that the financial statements are prepared in accordance with
a special purpose framework
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4.3.3 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
4.4 When OM Para is used?
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:
4.4.1 This is not prohibited by law or regulation
4.4.2 When SA 701 applies, the matter has not been determined to be a key audit
matter to be communicated in the auditor’s report
4.5 Drafting OM Para
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
4.6 Circumstances where OM Para becomes Mandatory
4.6.1 In the rare circumstance where the auditor is unable to withdraw from an
engagement even though the possible effect of an inability to obtain sufficient
appropriate audit evidence due to a limitation on the scope of the audit
imposed by management is pervasive, the auditor may consider it necessary
to include an Other Matter paragraph in the auditor’s report to explain why it
is not possible for the auditor to withdraw from the engagement
4.6.2 Law, regulation or generally accepted practice may require or permit the
auditor to elaborate on matters that provide further explanation of the
auditor’s responsibilities in the audit of the financial statements or of the
auditor’s report thereon
4.6.3 the auditor may include an Other Matter paragraph in the auditor’s report,
referring to the fact that another set of financial statements has been prepared
by the same entity in accordance with another general purpose framework
and that the auditor has issued a report on those financial statements
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4.7 The placement of an Emphasis of Matter paragraph or Other Matter paragraph in

the auditor’s report depends on the nature of the information to be communicated,
and the auditor’s judgment as to the relative significance of such information
to intended users compared to other elements required to be reported in
accordance with SA 700
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SA 710 COMPARATIVE INFORMATION - CORRESPONDING FIGURES AND

COMPARATIVE FINANCIAL STATEMENTS (EFFECTIVE FOR AUDITS OF FINANCIAL
STATEMENTS FOR PERIODS BEGINNING ON OR AFTER APRIL 1, 2011)
S.N Particulars
1 Introduction
1.1 This Standard on Auditing (SA) deals with the auditor’s responsibilities
regarding comparative information in an audit of financial statements.
When the financial statements of the prior period have been audited by a
predecessor auditor or were not audited, the requirements and guidance in
SA 510 regarding opening balances also apply
1.2 The nature of the comparative information that is presented in an entity’s
financial statements depends on the requirements of the applicable financial
reporting framework. There are two different broad approaches to the
auditor’s reporting responsibilities in respect of such comparative information:
corresponding figures and comparative financial statements. The approach to
be adopted is often specified by law or regulation but may also be specified
in the terms of engagement.
1.3 The essential audit reporting differences between the approaches are:
(a) For corresponding figures, the auditor’s opinion on the financial
(b) For comparative financial statements, the auditor’s opinion refers to
each period for which financial statements are presented
This SA addresses separately the auditor’s reporting requirements for
each approach.
2 Objective
2.1 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 for comparative
information in the applicable financial reporting framework
2.2 To report in accordance with the auditor’s reporting responsibilities
3 Definition
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3.1 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
3.2 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
the amounts and other disclosures relating to the current period (referred to
as “current period figures”). The level of detail presented in the corresponding
amounts and disclosures is dictated primarily by its relevance to the current
period figures
3.3 Comparative financial statements – Comparative information where amounts
and other disclosures for the prior period are included for comparison with
the financial statements of the current period but, if audited, are referred to in
the auditor’s opinion. The level of information included in those comparative
financial statements is comparable with that of the financial statements of
the current period (FINAL CA)
For purposes of this SA, references to “prior period” should be read as “prior periods”
when the comparative information includes amounts and disclosures for more than
one period.
4 Requirements
4.1 Audit Procedures
4.1.1 The auditor shall determine whether the financial statements include the
comparative information required by the applicable financial reporting
framework and whether such information is appropriately classified. For this
purpose, the auditor shall evaluate whether:
(a) The comparative information agrees with the amounts and other
disclosures presented in the prior period; and
(b) The accounting policies reflected in the comparative information are
consistent with those applied in the current period
4.1.2 If the auditor becomes aware of a possible material misstatement in the
comparative information while performing the current period audit, the
auditor shall perform such additional audit procedures as are necessary
in the circumstances to obtain sufficient appropriate audit evidence to
determine whether a material misstatement exists
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4.1.3 If the auditor had audited the prior period’s financial statements, the auditor
shall also follow the relevant requirements of SA 560
4.1.4 As required by SA 580, the auditor shall request written representations
for all periods referred to in the auditor’s opinion. The auditor shall also
obtain a specific written representation regarding any prior period item that
is separately disclosed in the current year’s statement of profit and loss.
4.2 Audit Reporting- Corresponding Figures
When corresponding figures are presented, the auditor’s opinion shall not
refer to the corresponding figures except in the circumstances described below:
4.2.1 If the auditor’s report on the prior period, as previously issued, included a
qualified opinion, a disclaimer of opinion, or an adverse opinion and the
matter which gave rise to the modification is unresolved, the auditor shall
modify the auditor’s opinion on the current period’s financial statements. In
the Basis for Modification paragraph in the auditor’s report, the auditor shall
either:
(a) Refer to both the current period’s figures and the corresponding figures
in the description of the matter giving rise to the modification when the
effects or possible effects of the matter on the current period’s figures
are material; or
(b) In other cases, explain that the audit opinion has been modified
because of the effects or possible effects of the unresolved matter on
the comparability of the current period’s figures and the corresponding
figures
4.2.2 If the auditor obtains audit evidence that a material misstatement exists in
the prior period financial statements on which an unmodified opinion has
been previously issued, the auditor shall verify whether the misstatement
has been dealt with as required under the applicable financial reporting
framework and, if that is not the case, the auditor shall express a qualified
opinion or an adverse opinion in the auditor’s report on the current period
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4.2.3 If the financial statements of the prior period were audited by a predecessor
auditor and the auditor is permitted by law or regulation to refer to the
predecessor auditor’s report on the corresponding figures and decides to do
so, the auditor shall state in an Other Matter paragraph in the auditor’s
report:
(a) That the financial statements of the prior period were audited by the
predecessor auditor;
(b) The type of opinion expressed by the predecessor auditor and, if the
opinion was modified, the reasons therefore; and
(c) The date of that report.
4.2.4 If the prior period financial statements were not audited, the auditor shall state
in an Other Matter paragraph in the auditor’s report that the corresponding
figures are unaudited. Such a statement does not, however, relieve the auditor
of the requirement to obtain sufficient appropriate audit evidence that the
opening balances do not contain misstatements that materially affect the
current period’s financial statements.
4.3 Audit Reporting- Comparative Financial Statements (FINAL CA)
4.3.1 When comparative financial statements are presented, the auditor’s opinion
shall refer to each period for which financial statements are presented and
on which an audit opinion is expressed.
4.3.2 When reporting on prior period financial statements in connection with the
current period’s audit, if the auditor’s opinion on such prior period financial
statements differs from the opinion the auditor previously expressed, the
auditor shall disclose the substantive reasons for the different opinion in an
Other Matter paragraph in accordance with SA 706.
4.3.3 If the financial statements of the prior period were audited by a predecessor
auditor, in addition to expressing an opinion on the current period’s financial
statements, the auditor shall state in an Other Matter paragraph:
a) That the financial statements of the prior period were audited by a
predecessor auditor;
b) The type of opinion expressed by the predecessor auditor and, if the
opinion was modified, the reasons thereof; and
c) The date of that report,
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4.3.4 If the prior period financial statements were not audited, the auditor shall
state in an Other Matter paragraph that the comparative financial statements
are unaudited. Such a statement does not, however, relieve the auditor of the
requirement to obtain sufficient appropriate audit evidence that the opening
balances do not contain misstatements that materially affect the current
period’s financial statements
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CARO 16
Section Particulars
1. What is  Additional Reporting Requirement prescribed by Ministry of Corporate
CARO 2016 affairs
 Prescribed Under Section 143(11) by MCA.
 Total Number of Clauses- 16
 Auditor Must comment upon all clauses in cases where CARO 2016
is applicable.
 It is issued as an annexure to the Independent Auditor’s Report
2. It is applicable to all companies including foreign companies except for
Applicability companies given below:
Companies CARO is NOT APPLICABLE TO:
Excluded a. banking company as defined under Banking Regulation Act, 1949
b. an insurance company as defined under the Insurance Act, 1938
c. a company licensed to operate under section 8 of the Companies
Act, 2013
d. a One person Company as defined under section 2(62) of the
Companies Act, 2013
e. a Small Company as defined under 2(85) of the Companies Act 2013
f. a private limited company, not being a subsidiary or holding company
of a public company, having:
(i) a paid-up capital and reserves and surplus not more than
rupees one crore as on the balance sheet date and
(ii) 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
(iii) Which does not have a total revenue exceeding rupees ten
crores during the financial year as per the financial statements.
Consolidated The Order specifically provides that it shall not apply to the auditor’s
Financial report on consolidated financial statements.
Statement
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Branch Audit The Order is also applicable to the audits of branch(es) of a company
since sub-section 8 of section 143 of the Act read with Rule 12 of the
Companies (Audit and Auditors) Rules, 2014 clearly specifies that a
branch auditor has the same duties in respect of audit as the company’s
auditor. It is, therefore, necessary that the report submitted by the branch
auditor contains a statement on all the matters specified in the Order, as
applicable to the company.
Status of the The applicability of the Order would be based on the status of the
Company company as at the balance sheet date for the financial year under audit.
3. Clause Reporting
Clause (i) Fixed Assets
a) whether the company is maintaining proper records showing full
particulars, including quantitative details and situation of fixed
assets;
b) whether these fixed assets have been physically verified by the
management at reasonable intervals; whether any material
discrepancies were noticed on such verification and if so, whether
the same have been properly dealt with in the books of account;
c) whether the title deeds of immovable properties are held in the name
of the company. If not, provide the details thereof
Clause (ii) Inventory
whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether any material
discrepancies were noticed and if so, whether they have been properly
dealt with in the books of account
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Clause (iii) Loans given by the company (Secured and Unsecured)

Whether the company has granted any loans, secured or unsecured to
companies, firms, Limited Liability Partnerships or other parties covered
in the register maintained under section 189 of the Companies Act, 2013.
If so,
a) whether the terms and conditions of the grant of such loans are not
prejudicial to the company’s interest;
b) whether the schedule of repayment of principal and payment of
interest has been stipulated and whether the repayments or receipts
are regular;
c) 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;
Clause (iv) Compliance of Sec 185 and Sec 186 of Companies Act 2013
In respect of loans, investments, guarantees, and security whether
provisions of section 185 and 186 of the Companies Act, 2013 have been
complied with. If not, provide the details thereof
Clause (v) Acceptance of Deposits
a) In case, the company has accepted deposits, whether the directives
issued by the Reserve Bank of India and the provisions of sections
73 to 76 or any other relevant provisions of the Companies Act,
2013 and the rules framed thereunder, where applicable, have been
complied with? If not, the nature of such contraventions be stated.
b) If an order has been passed by Company Law Board or National
Company Law Tribunal or Reserve Bank of India or any court or any
other tribunal, whether the same has been complied with or not?
Clause (vi) Cost Records
Whether maintenance of cost records has been specified by the Central
Government under sub-section (1) of section 148 of the Companies Act,
2013 and whether such accounts and records have been so made and
maintained.
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Clause (vii) Statutory Dues

a) Undisputed Statutory Dues : whether the company is regular in
depositing undisputed statutory dues including provident fund,
employees' state insurance, income-tax, sales-tax, service tax, duty
of customs, duty of excise, value added tax, cess and any other
statutory dues to the appropriate authorities and if not, the extent
of the arrears of outstanding statutory dues as on 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;
b) Disputed Statutory Dues : where dues of income tax or sales tax
or service tax or duty of customs or duty of excise or value added
tax have not been deposited on account of any dispute, then the
amounts involved and the forum where dispute is pending shall be
mentioned.
(A mere representation to the concerned Department shall not be treated
as a dispute).
Clause (viii) Default in repayment of Loans or Borrowings
Whether the company has defaulted in repayment of loans or borrowing
to a financial institution, bank, Government or dues to debenture holders?
If yes, the period and the amount of default to be reported
Clause (ix) Public Offer and money raised by debt and Term Loans
Whether moneys raised by way of initial public offer or further public
offer (including debt instruments) and term loans were applied for the
purposes for which those are raised.
If not, the details together with delays or default and subsequent
rectification, if any, as may be applicable, be reported
Clause (x) Fraud
Whether any fraud by the company or any fraud on the Company by its
officers or employees has been noticed or reported during the year.
If yes, the nature and the amount involved is to be indicated
Clause (xi) Managerial Remuneration
Whether managerial remuneration has been paid or provided in
accordance with the requisite approvals mandated by the provisions of
section 197 read with Schedule V to the Companies Act?
If not, state the amount involved and steps taken by the company for
securing refund of the same.
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Clause (xii) Nidhi Company

a)Whether the Nidhi Company has complied with the Net Owned Funds to
Deposits in the ratio of 1: 20 to meet out the liability and
b)Whether the Nidhi Company is maintaining ten per cent unencumbered
term deposit as specified in the Nidhi Rules, 2014 to meet out the liability.
Clause (xiii) Related Parties
Whether all transactions with the related parties are
a) in compliance with sections 177 and 188 of Companies Act, 2013
where applicable and
b) the details have been disclosed in the Financial Statements etc., as
required by the applicable accounting standards(AS-18).
Clause (xiv) Allotment
If the company has made any
-preferential allotment or
-private placement of shares or
-fully or partly convertible debentures
during the year under review then whether
the requirement of section 42 of the Companies Act, 2013 have been
complied with and
The amount raised have been used for the purposes for which the funds
were raised. (b) If not, provide the details in respect of the amount involved
and nature of non compliance;
Clause (xv) Non Cash Transaction
Whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions
of section 192 of Companies Act, 2013 have been complied with.
Clause (xvi) Registration under Reserve Bank of India Act ,1934
Whether the company is required to be registered under section 45-IA of
the Reserve Bank of India Act,1934 and if so, whether the registration
has been obtained.
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Key Audit Considerations Amid

COVID 19 ( SA 501)
B.3.1 The use of alternative audit procedures may include one or more of the following:
B.3.1 Paragraph A16 of SA 610(Revised), “Using the Work of Internal Auditors”

states as below:
(a) Using the work of internal auditor
“Examples of work of the internal audit function that can be used by the
external auditor include observations of inventory counts.”
As stated in paragraph A16 of SA 610(Revised), the external auditor can
use the work of internal auditor regarding inventory verification. However,
it needs to be noted that the external auditor has sole responsibility for
the audit opinion expressed, and that responsibility is not reduced by the
external auditor’s use of the work of the internal audit function or internal
auditors to provide direct assistance on the engagement. It also needs
to be noted that the external auditor’s use of the work of the internal
audit function or internal auditors to provide direct assistance on the
engagement would also depend on the assessment of the risk regarding
existence of inventory. Paragraph 18 of SA 610(Revised), inter alia, states
the external auditor shall plan to use less of the work of the internal
audit function and perform more of the work directly if the assessed risk
of material misstatement at the assertion level (existence) is higher and
with special consideration given to risks identified as significant.
If the external auditor intends to use the work of the internal audit function
or internal auditors to provide direct assistance on the engagement,
in addition to complying with the requirements of SA 610(Revised), the
external auditor shall also perform the following procedures:
1. Understand and evaluate the competence, independence and
objectivity of the internal auditor.
2. Obtain and evaluate the adequacy of the inventory physical
verification instructions prepared and issued by the management
to determine if the instructions provided are appropriate and
comprehensive.
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3. Issue instructions to the internal auditor on the procedures to be

performed by the internal auditor, including indication of the
samples selected by the external auditor for verifying inventory from
the books to the floor. The external auditor shall also specify the
sample size for verification by the internal auditor of inventory from
the floor to the books and the indicative qualitative / quantitative
factors that should be considered by the internal auditor when
selecting the samples.
4. Issue a copy of the instructions issued by the management (as stated
in point 2 above) to the internal auditor and instruct the internal
auditor to assess compliance with the instructions during the
physical verification process.
5. Issue any other instructions to the internal auditor regarding the
inventory counting as may be deemed necessary considering the
external auditor’s assessment of the risk and understanding of the
entity’s business and operations.
6. Inform the internal auditor of the deliverables like inventory counting
reports, memorandum of observations on the inventory counting,
conclusions reached, etc. that are to be prepared and provided to
the external auditor after the inventory counting.
(b) Engaging other Chartered Accountant(s) to attend physical verification
Where due to lockdown restrictions imposed by the Government, the
auditor is not able to attend the physical verification of inventory, the
auditor in discussion with the management may appoint other Chartered
Accountant(s), who is resident of the location of the entity’s warehouse/
factory/ inventory, to observe the physical counting. The auditor should
issue instructions to the other Chartered Accountant(s) as described
in points 1 to 6 given in paragraph B.3.1.(a) above. In addition the
auditor, where feasible, may virtually participate in the observation of
the physical verification being conducted by the management through
video applications as this would enable him to assess the efficacy of the
internal controls operating during the physical verification process for
determining its impact on his audit procedures.
Additionally, the auditor should also perform the following procedures:
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• Inquiring for any relationships that may create a threat to objectivity

of Chartered Accountant(s).
• Determine the nature and extent of work to be assigned.
• Communicate planned use of Chartered Accountant(s) with those
charged with governance.
• Obtain written agreements from the entity for the use of Chartered
Accountant(s) and from Chartered Accountant(s) for providing direct
assistance.
The auditor should direct, supervise and review the work performed by
Chartered Accountant(s) providing direct assistance, including providing
instruction / work program, including sample selection.
For supervising the work of such Chartered Accountant(s), the auditor may
use web or mobile based video-conferencing technologies (i.e., Microsoft
Teams, Facetime, Whatsapp, Zoom).
(c) Use of technology in inventory counting
In certain situations where physical attendance by auditors at inventory
counting is not possible, they may be able to observe the inventory counting
remotely via video call with the help of technology. Auditors would
need to ensure the security on these applications. Auditors would need
to understand the technological and practical constraints to observing
an inventory counting remotely. If auditors are observing an inventory
counting remotely, they would need to perform the same procedures as
required in case of physically attending the inventory counting.
Virtual attendance
If the entity intends to conduct a full inventory counting, auditors may
be able to attend virtually, for example using video call facilities. This
method of gathering audit evidence should be approached with caution
as there are inherent weaknesses with this. For example, obsolete or
damaged stock may be hidden from view and records-based alternative
audit procedures may not detect this. This should be used only in
circumstances wherein the inventory items can be identified with a unique
reference number etc. so that there are no chances of replacement of
inventory during/ after inventory counting. Further, auditors may carry
out additional procedures to mitigate the increased risk which might
include increasing sample sizes and following up on items tested at a
later date. Also, auditors should consider the previous experience while
conducting inventory counting at an earlier date (e.g. inventory counting
conducted at an interim date before the year end).
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Leveraging technology to help with inventory counting

Standards on Auditing do not prohibit use of technology when performing
inventory observations. If auditors are satisfied with the inventory
counting process, they may be able to utilize technologies to observe
these counts. Of course, auditors may need to ensure there is some level
of comfort that the videos are live feeds of client inventory locations,
perhaps by confirming visually with key staff and using voice technology
to have cameras moved to specified locations on command and direct
certain boxes to be opened.
B.4 Inventory held by a third party
Where the entity has inventory under the custody and control of a third
party, it may be possible, in accordance with SA 501 to place reliance
on confirmation received from that third party regarding the quantities
and condition of the inventory held on behalf of the entity. However,
in such cases, auditors would need to exercise professional skepticism
and perform a careful evaluation of such confirmations since auditors
themselves have not been able to attend the physical inventory counting.
It would be preferable that such confirmations are obtained by the direct
confirmation requests addressed to the auditor directly without the
management being involved in the process.
In this regard, the auditor should read and understand the contract with
the third party to determine if the contract specifies the responsibility of
the third party to track and record the inventory of the entity separately
and any consequential impact on the ability of the auditor to rely on such
confirmation from the third party.
B.5 Inventory in transit / cut-off procedures
Due to the lockdown situation, it might be possible that inventory purchased
or sold might be locked up in transit. Auditors should obtain suitable
audit evidence regarding the location and condition of the inventory
including documentary records about purchases/sales. Appropriate cut-
off procedures need to be employed to ensure appropriate quantities are
considered in the inventory.
675
C.1 The primary responsibility of the auditor is to physically attend the

inventory counting either at/prior to/ post the balance sheet date
as required by SA 501. Even in situations where the auditor opts for
alternative audit procedures as envisaged in paragraph B.3 above, the
auditor is not absolved from the primary responsibility in respect of
attendance at physical inventory counting and thus cannot include a
division of responsibility in the auditor’s report in respect of alternative
audit procedures carried out.
C.2 The implications of an inability to attend inventory counting on the
auditor’s opinion will depend on the quality and reliability of audit
evidence obtained by performing alternative audit procedures. Where
such alternative audit procedures provide sufficient appropriate audit
evidence to conclude that inventory is free from material misstatement,
the auditor’s opinion need not be modified in respect of inventory.
C.3 However, if it is not possible to perform alternative audit procedures
to obtain sufficient appropriate audit evidence in relation to material
inventory balances, the auditor should modify the opinion in the auditor’s
report in accordance with SA 705(Revised). In many cases, this will result
in a modified auditor’s opinion due to a limitation of scope. Nature of
modification i.e. qualification vis-à-vis disclaimer would depend on
whether the matter is pervasive to the financial statements.
676
Key Audit Considerations

Amid COVID 19 (SA 560)
Examples of Events and Conditions that May be Relevant in the Current Environment
The following are examples of events or conditions that may be affected by, or exist
as a result of, the COVID-19 pandemic, and which may be relevant for the auditor in
determining whether subsequent events have occurred and, if applicable, have been
appropriately reflected in the financial statements (also refer paragraphs A7–A10 of SA
560):
 New commitments, borrowings or guarantees that have been entered

into as a result of the pandemic.
 Invocation of force majeure clause after the year-end by any party
(e.g., supplier, customer etc.) thereby impacting the supply chain /
availability of customers for the entity’s products.
 Recent or planned sales or acquisitions of assets as a result of the
pandemic.
 Increases in capital or issuance of debt instruments, such as the issue
of new shares or debentures, or an agreement to merge or liquidate
that has been made or is planned.
 Expected credit loss provisioning – where there are customers
in COVID-19 impacted countries and where they have filed for
liquidation post the entity’s year-end will impact the collectability
of the trade receivables.
 Probability of meeting performance vesting conditions under share-
based payment arrangements and the appropriate accounting for
modifications or settlements of such arrangements.
 Relief or economic stimulus payments provided by the government
in the form of loans or grants. It is important to understand the
nature of the stimulus, conditions to be complied by entities, etc.
Many of the concessions have dates attached and entities need to
be cognizant of those as they determine impact on the financial
statements.
677
 Any developments regarding contingencies (for example, new

contingent liabilities or circumstances affecting the evaluation
of existing contingent liabilities, the ability to meet agreed-on
performance targets for contingent consideration in business
combination arrangements, etc.).
 Any unusual accounting adjustments that have been made or are
contemplated, such as additional or revised closing entries.
 Any events that will bring into question the appropriateness of
accounting policies and assumptions used in the financial statements
(e.g. events call into question the validity of the going concern
assumption, expected credit loss model, inventory obsolescence,
useful lives of PPE etc.).
 Any events that are relevant to the measurement of estimates or
provisions made in the financial statements. Examples include
derivative and hedging considerations (e.g. where a forecast
transaction is no longer highly probable), insurance claims (e.g.
whether it is virtually certain that amounts are receivable under
business interruption and/or other insurance and the potential
disclosure of contingent assets), rebate arrangements with customers
or suppliers, variable consideration, commission accruals, etc.).
 Any events that are relevant to the recoverability of assets, ongoing
pertinence of business and valuation assumptions, valuation of plan
assets.
 Modification of existing contractual arrangements (e.g. reduction
or deferral of lease payments granted by a lessor to a lessee,
modifications to debt terms, etc.).
 Tax considerations (e.g. impact of reduced flow of goods and services
on transfer pricing agreements; recoverability of deferred tax assets).
 Employee termination benefits resulting from a workforce reduction
(e.g. as a result of closure or reorganization of operations that
occurred after the reporting date). This may be a contrary evidence
in a situation where an entity is forecasting expansion in business in
the subsequent year(s).
678
 Some industries are more impacted than others e.g. entities in the
aviation sector (and therefore entities that are feeder industries
to entities in the aviation sector), real estate, construction, retail,
tourism, hospitality, transportation, financing, infrastructure sectors.
In such industries, it is critical for management to assess the impact
of events occurring after the balance sheet date on the financial
statements.
 Impact on realizable values of inventory of a short-term nature in
case of inability to sell the products during the period of lockdown.
 Dishonour of payments / EMI received from debtors / borrowers at a
date later than 31st March 2020.
 Indications of impairment in the value of investments in companies
whose businesses have been severely affected by the pandemic.
 Any other significant events which would raise doubts over the
entity’s ability to continue as a going concern in accordance with SA
570(Revised), “Going Concern”.
The Exercise of Professional Skepticism
Management’s identification, determination and treatment of adjusting
or non-adjusting events, as applicable, are likely to be more challenging
due to the impact of COVID-19. Consequently, there may be a need for
the auditor to design and perform enhanced or additional procedures.
The uncertainties and challenges associated with COVID-19, taking into
account the facts and circumstances of the entity, are more likely to
result in significant management judgments, requiring significant auditor
judgments, which requires the auditor to exercise professional skepticism
in undertaking work on subsequent events. Applying professional
skepticism in this regard means questioning and considering the sufficiency
and appropriateness of audit evidence that all material subsequent
events (i.e., those requiring adjustment of, or disclosure in the financial
statements) have been identified and are appropriately reflected in the
financial statements in the light of the circumstances.
679
Written Representations
The auditor is required by paragraph 9 of SA 560 to request a written
representation that all events occurring subsequent to the date of the
financial statements, and for which the applicable financial reporting
framework requires adjustment or disclosure, have been adjusted or
disclosed. As per paragraph 13 of SA 580, “Written Representations”,
written representations are required to be dated as near as practicable to
the date of the auditor’s report, but not after that date.
The Importance of Communication with Those Charged with Governance
The Importance of Communication with Those Charged with Governance

The COVID-19 pandemic has resulted in various challenging and complex
areas related to financial reporting. Those charged with governance
are likely to have increasingly important responsibilities in the entity’s
financial reporting and other governance processes. For example, they
may need to ensure that the entity adapts its design and maintenance of
appropriate controls with regard to the reliability of financial reporting,
effectiveness and efficiency of operations and compliance with applicable
laws and regulations.
The auditor’s ongoing and regular communication with those charged
with governance, particularly in the period past the date of the financial
statements, may assist with the auditor’s understanding of the changes
being made to respond to the evolving environment and may help the
auditor in assessing what procedures they need to undertake to gather
sufficient appropriate audit evidence.
680
Auditors Reporting Key audit

Considerations amid COVID-19
I. Impact on Auditor’s Report

The possible impact of COVID-19 on the auditor’s report is discussed below.
a. The auditor should modify his opinion on the financial statements in the
Modification following circumstances:
of the  Improper accounting/ inadequate disclosures: Auditors should remain alert
Auditor’s to the possibility that, in the current circumstances, misstatements
may occur. Such misstatements may arise, for example, due to a
Opinion
failure to recognise adequate impairment of assets or adequate
[SA 705
provisions for obligations or to provide related disclosures. When the
(Revised)]
auditor has concluded that the necessary accounting adjustments
have not been appropriately made and/or the disclosures in the
financial statements that the management has made regarding the
impact of COVID-19 on the entity are not adequate or appropriate in
the circumstances, the auditor’s opinion may be modified. The said
modification could be a qualified or adverse opinion, as appropriate
in the circumstances depending on the materiality and pervasiveness
of the impact [SA 705(Revised), paragraphs 7, 8]. For example, the
consequences of COVID- 19 may have a potential adverse impact on
cash flows and trigger an impairment test; however the management
has not carried out such an assessment or has not made appropriate
disclosures in respect of the underlying assumptions.
 Inability to obtain sufficient appropriate audit evidence: A modification
to the auditor’s opinion (qualification or disclaimer of opinion, as
appropriate in the circumstances) is necessary if the auditor is unable
to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement
[SA 705(Revised), paragraphs 7, 9].
If the auditor determines that he is unable to obtain sufficient appropriate
audit evidence from alternative audit procedures possibly due to lock
down, social distancing or work from home restrictions, it may affect
auditor’s opinion on the financial statements, auditor’s opinion on
internal financial controls and auditor’s reporting on CARO 2016.
681
b.Going For many entities, the measures taken by Government in order to curb
Concern the spread of COVID-19, such as lockdown restrictions may impact the
Consid business operations and result in events or conditions that may cast
-erations significant doubt on the entity’s ability to continue as a going concern.
[SA 570 When such events or conditions are identified, the auditor should seek
(Revised)] sufficient appropriate audit evidence to determine whether or not a
material uncertainty exists and also assess whether the use of going
concern basis of accounting is appropriate and report accordingly.
For detailed guidance on this aspect, please refer the guidance: “Going
Concern - Key Considerations for Auditors amid COVID-19” issued by the
Auditing and Assurance Standards Board of ICAI.
c.  As per SA 706(Revised), the term “Emphasis of Matter Paragraph” is
Including an defined as
Emphasis follows:
of Matter “Emphasis of Matter paragraph – A paragraph included in the auditor’s
Paragraph in report that refers to a matter appropriately presented or disclosed in
the Auditor’s the financial statements that, in the auditor’s judgment, is of such
Report importance that it is fundamental to users’ understanding of the
financial statements.”
 Where there are substantive COVID-19 related disclosures in the
financial statements made by the management of the entity and
the auditor is satisfied that these disclosures are appropriate and
adequate, then based on the professional judgment of the auditor,
an Emphasis of Matter (EOM) paragraph may be included in the
auditor’s report. An EOM paragraph is a way to draw attention /
highlight such disclosures to users of the financial statements when
the auditor considers it is fundamental to their understanding of
the financial statements. An EOM paragraph cannot be used as a
substitute for reporting the matter as a key audit matter.
Example of EOM wordings for auditor’s report
“Emphasis of matter – Effects of COVID-19
682
We draw attention to Note X in the financial statements, which

describes the economic and social [consequences/disruption] the
entity is facing as a result of COVID-19 which is impacting [supply
chains / consumer demand/ financial markets/commodity prices/
personnel available for work and or being able to access offices].
Our opinion is not modified in respect of this matter.”
 On the basis of its assessment of the impact of the outbreak of
COVID-19 on business operations of the entity, the entity’s
management may conclude that no adjustments are required in the
financial statements as it does not impact the current financial year.
However, the situation with COVID-19 is still evolving. Also, the
various preventive measures taken (such as lockdown restrictions
by the Government of India, travel restrictions etc.) are still in force,
leading to a highly uncertain economic environment. Due to these
circumstances, the management’s assessment of the impact on the
subsequent period is dependent upon the circumstances as they
evolve; and consequently, the auditor shall decide on the adequacy
of disclosures made by the management and if disclosures are
adequate, the auditor may include an EOM paragraph to highlight
the uncertainties relating to the future and to draw the attention
of the users of the financial statements. [paragraph A5 of SA
706(Revised)]
 As stated in paragraph A5 of SA 706(Revised), the auditor may include
an EOM paragraph in the following situations while assessing the
impact of COVID-19 on the entity and the impact on the financial
statements:
 An uncertainty relating to the future outcome of exceptional
litigation or regulatory action.
 A significant subsequent event that occurs between the date
of the financial statements and the date of the auditor’s
report.
 A major catastrophe that has had, or continues to have, a
significant effect on the entity’s financial position.
683
For example, the auditor should assess the impact of COVID-19 on

aviation, hospitality industries, etc.
The dictionary meaning of the word “catastrophe” is “an event causing
great and usually sudden damage or suffering; a disaster”. The impact
of COVID-19 should be assessed by the auditor and the auditor may
include an EOM paragraph in the situations indicated above in the
auditor’s report. Further, the auditor may include an EOM paragraph
to highlight a significant subsequent event. It is highlighted that
such EOM paragraph shall be included by the auditor only when
all related disclosures are appropriately made by the management.
Otherwise, it could even lead to modification of auditor’s opinion as
per SA 705(Revised).
d. COVID-19  A common question that is being asked is whether the impact of
and Key COVID-19 is a key audit matter (KAM) in an audit per se. The impact
Audit of COVID-19 on specific areas of the financial statements needs to be
Matters evaluated for the purpose of reporting KAM. For example, physical
verification of inventory using alternative audit procedures may
involve more effort vis-à-vis a non-COVID-19 scenario. Similarly,
the auditor would be more skeptical about impairment assessment
in current scenario. Further, it should be noted that the auditor is
not performing procedures to assess the impact of COVID-19 itself
rather the procedures are being performed in respect of specific
items of financial statements or assumptions (for example going
concern, impairment, expected credit loss, valuation etc.) and thus
that particular item/assumption would qualify to be a KAM, where
the criteria set out in SA 701 are met.
 When drafting the KAM in the auditor’s report, the auditor should not
use generic / vague language and should use entity specific & clearly
articulated language to explain the impact of COVID-19. Language of
KAM should bring out clearly the complexities arising from COVID-19
on the verification aspects of the financial statements. Lastly, a
matter should be considered for inclusion as KAM only when the
auditor has concluded that it does not warrant modification of the
auditor’s opinion and also does not indicate a material uncertainty
related to going concern.
684
 In some cases, a matter that has been determined to be a KAM in

accordance with SA 701 may also be, in the auditor’s judgment,
fundamental to users’ understanding of the financial statements (i.e., could
also be reported as an EOM paragraph). When the auditor determines
that the matter is a KAM, the auditor should include it in the KAM section
of the auditor’s report. However, if the auditor wishes to highlight or
draw further attention to the KAM (because the KAM is also considered
fundamental to users’ understanding of the financial statements), the
auditor may do so by presenting the matter more prominently than other
matters in the key audit matters section of the auditor’s report (e.g., as
the first matter) or by including additional information in the description
of the key audit matter to indicate the importance of the matter to users’
understanding of the financial statements.
e. KAM It is possible to identify KAM related to going concern matters, which
Related would be reported in the KAM section of the auditor’s report, when the
to Going auditor:
Concern  Identifies events and conditions that may cast significant doubt on
an entity’s ability to continue as a going concern; and
 Concludes that no material uncertainty exists; and
 Concludes that the disclosures related to those events or conditions
are adequate.
In such cases, the auditor should describe the identified events or
conditions disclosed in the financial statements that were the focus of
the auditor’s attention, such as substantial operating losses, available
borrowing facilities and possible debt refinancing, or non-compliance
with loan agreements, and related mitigating factors in accordance with
SA 701.
685
f. Auditor’s Other information that accompanies the financial statements may be

Respons- expected to include discussion on the risks associated with the COVID-19
ibilities in pandemic that provides entity’s additional perspectives or details beyond
respect of the information disclosed in the financial statements. As required by SA
Discussion 720(Revised), the auditor should read the other information included
about the in the entity’s annual report and consider whether there is a material
COVID-19 inconsistency between the other information and (a) the audited financial
Pandemic statements; and (b) the auditor’s knowledge obtained in the audit, in the
included in context of audit evidence obtained and conclusions reached.
the Other
Information When reading the other information, the auditor should pay particular
in the attention to the information provided with regard to the impact COVID-19
Entity’s may have on the entity and consider whether there is new or updated
Annual information that should be disclosed in the financial statements or that
Report may affect the audit or the auditor’s report. In doing so, the auditor
should also consider whether the other information contradicts any
aspects of the auditor’s understanding of the impact the pandemic has
on the entity’s business or operations.
When the other information is made available after the date of the
auditor’s report, the auditor is also required to read and consider the
other information when it becomes available.
If the auditor identifies a material misstatement in the other information,

the auditor should assess the effect on the auditor’s report and to deal
with the same in accordance with SA 720(Revised).
686

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Inter CA

Auditing is the subject which is given a step motherly treatment by most of

The coaching is well-planned, systematic, time bound and totally examination

I wish you a very happy study time.

INTER C.A. - AUDIT

Chapter No. Chapter Pg. No.

1 Nature Scope and Objectives of Audit 01 - 40

2 Audit Strategy, Planning and Programming 41-64

3 Audit Evidence and Documentations 65-125

4 Risk Assessment and Internal Control 126-169

5 Auditor’s responsibility in relation to Fraud 170-198

6 Audit in an Automated Environment 199-218

7 Audit Sampling 219-243

8 Analytical Procedures 244-260

9 Audit of Items of Financial Statements 261-318

10 Company Audit 319-416

11 Audit Report 417-452

12 Audit of Banks 453-493

13 Audit of Different Types of Entities 494-547

Annexure: BARE SAs from Auditing Pronouncements 548-686

NATURE SCOPE AND

PART A - THEORY SECTION

3.4. The auditor determines whether the relevant information is properly

3.7.10 Reporting to the appropriate person/body whether the statements of

2. Fraud may involve sophisticated and carefully organised schemes

5.4 Other Matters that Affect the Limitations of an Audit:

8.5 Threats to Independence:

8.5.6 SAFEGUARDS OF INDEPENDENCE

9.2 Ethical requirements:

9.3 Human resources

10 Acceptance and Continuance of Client Relationship

(ii) For such internal control as management determines is necessary to

11.3.6 A change in legal or regulatory requirements

12 Basic Principles Governing an Audit of Financial Statements.

12.8 Integrity, objectivity and independence: The auditor should be straight

INTRODUCTION- AUDITING AND ASSURANCE STANDARD BOARD, AUTHORITY OF THE

15 Scope and a) To review the existing auditing practices in India and to

16.3 Standards a) It is prescribed for conducting review of financial statements

(b) to ensure that the ‘Statements’ relating to auditing

Professional skepticism is necessary to the critical assessment of audit evidence.

PART B - BRIEF ANSWERS – PRACTICE QUESTIONS

Q. No Question and Answer

2. Fraud may involve sophisticated and carefully organised schemes

PART C : MULTIPLE CHOICE QUESTIONS

3. As per SA-200 “Overall Objectives of the Independent Auditor”, in conducting an

4 (IESBA Code) related to an audit of financial statements establishes which of the

6. Which of the following is the responsibility of the auditor:

9. If the auditor concludes that there is reasonable justification to change the

regulation and determine whether there is any obligation, either contractual or

13. ____________refers to a difference between the amount, classification, presentation,

15. Which of the following is Incorrect:

17. The basic requirement which is absent is auditing is

19. Pick the odd one

20. In which of the following engagement an opinion is expressed on a subject matter

21. Which of the following is not principal of ethics

22. Standards on Auditing are____________

23. SA Series 200-299 cover the aspects of

24. Which of the following is exception of confidentiality by auditor

26. If auditor is requested by management to change the audit engagement to an

c) Determine that there is a reasonable justification for doing so

30. If in exceptional circumstances the auditor departs from Standards on Auditing, he

Which of the following option is correct:

33. Auditing has all features except

35. Independence comprises

43. Reasonable assurance is _ level of assurance but it is not ____