CLICK HERE FOR NOTES,

UPDATES, AMENDMENTS
 INDEX
FADU 01

CHAPTER
NATURE, OBJECTIVE AND SCOPE OF AUDIT

Part 1-Introduc on to Audit 1

Audit in 80 Pages Part 2-Core Audit Process 1
PREFACE Part 3-SA Introduc on 2
Part 4-SA 200 3
We at Auditguru believe in making consistent efforts in improving our content Part 5-SA 210 4
quality as well as content delivery. We work on the principles of Kaizen i.e. Part 6-SA 220 5
continuous improvement. Part 7-Other Concepts 6
It gives us immense pleasure in presenting our CA Inter FADU Chart Book. This
02

CHAPTER
AUDIT STRATEGY, AUDIT PLANNING AND
book will help ease the stress of Audit subject for students. AUDIT PROGRAMME
Whole CA Inter Audit is covered is just 80 pages. This Chart Book is an outcome
Part 1-SA 300 8
of more than 1 year of hard work and dedication of the entire Auditguru team and It Part 2-SA 320 9
covers 95% of the entire CA Inter audit course. All 13 Chapter as per ICAI module Part 3-Other Concepts 11
are covered except CH 6 & Part of CH 13.
03

CHAPTER
We believe that Studying from charts is highly effective. This chart book is suitable AUDIT DOCUMENTATION AND AUDIT EVIDENCE
for all students irrespective of whether they have studied from Ravi sir before or
not. However, If students have also seen our Regular In-depth course or Exam Part 01-SA 230 12
Oriented course, it would be an added advantage. All concepts of BHASKAR (our Part 02-SA 330 14
regular notes) are covered in charts in same sequence. Part 03-SA 500 16
Part 04-SA 501 18
SUPER LINKING FEATURE : Cross referencing is given for questions & MCQs to Part 05-SA 505 19
respective Charts also we have given reference of UNIQUE Questions at the end. Part 06-SA 510 20
Part 07-SA 550 21
The videos covering FADU Charts are available on our YouTube channel - "Ravi
Part 08-SA 560 22
Taori" and our Telegram Channel-Auditguru (CA Ravi Taori) (AIR).
Part 09-SA 570 23
Students are advised to also cover PARAM Question Bank for best preparation. Part 10-SA 580 24

I would like to mention my Sincere thanks to VSMART management. Vishal

04

CHAPTER
Bhattad Sir has always inspired me to become better professor. Ujwal Bhattad Sir RISK ASSESSMENT AND INTERNAL CONTROL
has been my Mentor on every aspect of teaching & encouraged me to make FADU
Chart Book. Part 1-SA 315 RISK 25
Part 2-SA 315 ICS 29
I am blessed with best people in my team. They have worked passionately with all
Part 3-SA 610 32
enthusiasm. CA Neha Jangra, CA Anjanesh Kanojiya, Vaishnavi, ACCA Akash Hirani.
Rohit, Anshul, Devesh, Vaibhav B, Vaibhav R, Sudhir, Rajni, Rahul, Kunal, Nilesh &
team of designers. CHAPTER
05 FRAUD AND RESPONSIBILITIES OF THE
AUDITOR IN THIS REGARD
Lastly but most importantly, we all are thankful to Snehal Madam. She is our Fire Part 1-SA 240 33
Fighter, Trouble shooter & my Life Line. Part 2-SA 250 34
Happy Studying!!! Part 3-Other Concepts 34
Note :- CH 6 & Part of CH 13 are not covered in this edi on
CA Ravi Taori
 07
CHAPTER
AUDIT SAMPLING
Master Link For All Our Resources Join Telegram Channel
Part 1-SA 530 36

08
CHAPTER

ANALYTICAL PROCEDURES
Part 1-SA 520 40

09
CHAPTER

AUDIT OF ITEMS OF FINANCIAL STATEMENTS

Part 1-AIFS LIABILITY 42
Part 2-AIFS ASSET 46
Join YouTube Channel Join Facebook Page
Part 3-AIFS INCOME EXPENSE 51
Part 4-Other Concepts NA

10
CHAPTER

THE COMPANY AUDIT

Part 1 Company Audit 56
Part 2 Cost Audit 62
Part 3 Company Account & Misc 63
Part 4 CARO 2020 64
Part 5 SA 299 67
Join Instagram Download Files

11
CHAPTER

AUDIT REPORT
Part 1-SA 700 68
Part 2-SA 701 70
Part 3-SA 705 70
Part 4-SA 706 72
Part 5-SA 710 72

12
CHAPTER

AUDIT OF BANKS Read Success Stories Discussion points (Ask Doubts)

Part 1-BANK AUDIT 73

13
CHAPTER

AUDIT OF DIFFERENT TYPES OF ENTITIES

Part 2-GOVT AUDIT 81

UNIQUE QUESTIONS & MCQ 84

 CHAPTER 01 NATURE, OBJECTIVE AND SCOPE OF AUDIT

Part 1 – Introduction to Audit CNO--INTRO.080 (QNO--INTRO.080) Part 2 – CORE AUDIT PROCESS

CNO--INTRO.020 TYPES OF AUDIT As per Professional Ethics covered under CA Act –
Audit Offered CA’s should not solicit work through advertisements
BACKGROUND OF AUDIT
Mandatory Audit Voluntary Audit Pre- Conditions 1. Client should take responsibility to prepare financial statements
(SA 210) 2. Client should use acceptable Financial Reporting Framework
ARE THEY Entities are not required to
Mandatory Audit to various I. Initial
RELIABLE get audit done, but they Limitation of
entities as per different laws Phase
??? Scope Prior
still get books audited to Acceptance Whether to Accept / Continue Engagement (SA 220)
MANAGEMENT FINANCIAL PERFORMANCE *In case of intial audit communicate with previous auditor also
(In Sequence of Size) (SA 210)
REPORT -- Proprietor Evaluate compliance with ethical requirements & independence
Corporations Specific Act Preliminary (SA 220)
-- HUF Engagement
RELIABLE Banking Co. Banking Regulation Act Activity (SA 300) Engagement Letter (SA 210)
-- Partnership
NOT Electricity Co. Electricity Supply Act Audit Strategy
Planning
RELIABLE (SA 300) Initial Audit Plan for RAP
Companies Companies Act
Update & Change during the audit as suitable
FINANCIAL PERFORMANCE Tax Audit as per Income Risk Assessment It simply means collecting information & Obtaining
AUDITOR
AUDITOR AUDIT REPORT Specified Entities Procedures
REPORT Tax Act understanding which is relevant to audit, to find out risk
(SA 315)
AUDIT = CHECK+REPORT Public & Charitable Trust Act, Religious Trust
Identifying & Identifying Risk What can go Wrong ? II. Planning /
Trust Act etc. Risk
Assessing Assessing Risk Level (H / M / L) & Nature of Risk
Co-op. Society Co-operative Society Act Risk (SA 315) (FST / Assertion) Assessment
CNO--INTRO.040 (QNO--INTRO.040) Phase
Risk at Risk at
CNO-INTRO.100 (QNO-INTRO.100) Financial Assertion
Audit
Statement Level Level
ADVANTAGES OF AUDIT
Definition How to perform audit?/ Example Response to
How to check FST are Risk (SA 330)
Audit is misleading? (In General) -Repair & Subsequent Audit Plan for FAP
As auditor regularly visits clients Overall Further
-Systematic Maintenance Exp Response 1. Test of Controls
1 Supporting v Audit Procedures
Entries in Data in input Moral check on employees against defalcation
-Independent Documents should match -Power & Fuel -
Primary Books or embezzlements Substantive Analytical Procedures
(Voucher workings) with output Exp 2. Substantive
-Examination Ledger Account Appraisal of existence & operation of controls Procedures Test of Details
2 Entries in
in Books Data in Appearing in v
-of Financial primary books of Account Sampling (SA 530)
output should FST (P&L) Can also help detection of wastages & losses
Information
3 Ledger Account Trial Balance be supported v
-Whether or not & Financial with input As auditor finishes audit Income / Expenditure Assets / Liabilities III. Risk
in Books of Account Not supported by v
Profit Oriented statements Response/
presented entries in Books Safeguards financial interest of person not associated with management Vouching Verification
-Irrespective of 4 Classified/Described/Disclosed Execution
of Accounts Sufficient & We also rely Another Auditor Phase
size or legal form as per Accounting Standard
Appropriate on work done (Eg Br Auditor SA 600)
-with ultimate E.g., Dormant Partner, Shareholders, Bankers & Financial Institutions
FST Data 5 Clear & Unambigous FST not giving Evidence (SA 500) by Others
- -
Internal Auditor (SA 610)
objective T&F view
6 Present T&F view of P&L and B/S Written Representation (SA 580) Experts (SA 620)
-to give opinion Post Audit Benefits
- What if there is Misstatement? Follow SA 450
-Whether FST give Get government assistance or license
True & Fair view Govt Frame Opinion & Draft Audit Report (SA 700)
Settling Tax Liability
Engagement Quality Control Review ( SA 220) IV. Reporting Phase
CNO-INTRO.060 Bank Negotiating Loan
Sign Audit Report
ORIGIN OF WORD AUDIT Insurance Insurance claim Settlement / Dispute Complete Documentation (SA 230)
Other Points
LATIN WORDS Settlement of accounts specially Inspection & Monitoring (SA 220)
Partners at the time of admission/death
AUDIRE - HEAR
AUDITUS - HEARING Owner Purchase consideration of business
AUDITUS COMPOTI - AUDIT Settlement of trade dispute of
AUDITOR ACCOUNTANT Emp
higher wages or bonus
01
 CNO--SAINTRO.080
Part 3 -- SA Intorduction
SRE 2400 Review of Historical Info BREAK-UP OF SAs
CNO-SAINTRO.060 (QNO--SAINTRO.07,SAINTRO.08)
Review Standards Specifically for Review of
v TYPES OF STANDARDS SRE 2410 Interim financial info by
Introductory Matters 100-199
regular auditor
General Principles &
Engagement Standards Standards on Quality 200-299
v W Responsibilities
Control CNO--SAINTRO.66
Assurance service Related Services Risk Assessment &
w W SQC 300-499
(where we assure Response to Risk
about reliability of (1-99) STANDARDS ON ASSURANCE ENGAGEMENT
W[Not a assurance 1 Std
information, it generally service, but such Audit Evidence 500-599
covers audit & review) service need similar WProvides principles, For assurance on information E.g., Prospective
set of skills] Applicability Using work of others 600-699
~ W v policies, systems to be other than Historical Financial Information
SA`s SRE’s SAE’s
followed to maintain
(100-999) (2000-2699) (3000-3699) WSRS’s quality of services covered Audit Report 700-799
38 Stds 3 Stds Prospective Financial Information
2 Stds (4000-4699) in Engagement Standards
v v 2 Stds Prepared on the basis of best estimate assumption about future Specialised Areas 800-899
For audit vFor Review For audit or Forecast
e events and management actions
review of other For assignments like
of Historical of Historical
than Historical Compilation of Financial Prepared on the basis of hypothetical assumptions of future
Information Information Information Statements or Agreed Projection CNO--SAINTRO.180 (QNO--SAINTRO.05)
events and management actions
procedure (AUP)
Historical Financial Based on past events, - COMPLIANCE WITH DOCUMENTS ISSUED BY ICAI
Historical Derived from Past economic events Information conditions, circumstances.
Expressed in Difference
accounting systems or Past economic
Information financial terms condition or circumstances Between Based on future events STATEMENTS / STANDARDS Critical for proper accounting
Prospective Financial
& management actions & auditing by members
Information
CNO--SAINTRO.62
SAE 3400 Examination of Prospective Financial Information Mandatory in nature unless specifically exempted

STANDARDS ON AUDITING Example Examination of Proforma Financial Information

Duty w.r.t. Statement on Duty w.r.t. Statement on
included in prospectus (Hypothetical Financial
SAE 3420 Accounting Auditing
Examples Statement prepared assuming acquisitions after
Matters Covered
year end happened from start of financial year)
Examine Compliance in Ensure that audit is
Overall Objectives of Audit SA 200
preparation & presentation of FST performed as per them
Planning of Audit SA 230
CNO--SAINTRO.68
SA 315 If there is deviation disclose If there is deviation disclose
Identifying & Assessing Risk
STANDARDS ON RELATED SERVICES in audit report it in Audit Report
Audit Evidence SA 500
SA 700 Not a assurance service, but such services need similar sets of skills GUIDANCE NOTE
Audit Sampling
Provides guidance on matters which may arise during accounting or auditing
Going Concern
Agreed Upon Procedure (AUP) Compilation of Financial Statement or
Forming Opinion & Reporting other Financial Information Recommendatory in nature, if there are justified reasons,members may not follow them
Perform certain procedures as (E.g., Fixed Asset Register)
Audit Documentation
agreed between client &
Duty w.r.t. guidance note on Accounting Duty w.r.t. guidance note on Auditing
chartered accountant Covered by SRS 4410
CNO--SAINTRO.64
Report FACTS Obtained Examine compliance in preparation Ensure audit is performed as
AUDIT VS REVIEW & presentation of FST per them
Related to individual item of FST
or FST or Complete set of FST If there is deviation auditor should If there is deviation auditor should
More Time Available Less Time Available
consider whether disclosure is consider whether disclosure is
All types of examination E.g., Accounts Receivable List
Generally, 2 types of examination required in audit report required in audit report
procedures are applied procedures are applied (1) Match with Debtor ledger
Risk is reduced to (1) Inquiry (2) Call for confirmation & match them
acceptably low level
(2) Analytical Procedure (3) Reconcile Difference
Reasonable level of Covered by SRS 4400
Risk is reduced to acceptable level
assurance provided
Limited / Moderated level of assurance provided
E.g., Annual Company Audit
Review of Quarterly financial statements

02 Continue on next column...

CNO--SAINTRO.200
In 2007 under clarity project existing Hence has to do
- Engagement Standards Appropriate planning
DUTY OF MEMBER OF ICAI standards were revised, new standards
- Standards on Quality Control
were issued under nomenclature
- Guidance Notes Difficulty, Time &
While discharging attest function (Certification, Audit, Review, AUP) Engagement & Quality Standards
Cost (DTC)
- General Clarifications
Mandatory to follow relevant standards / Statements
- Technical Guides, Practice Manuals, There is whether, alternative audit
Studies & Other Papers (TPSO) procedure providing persuasive evidence
If there is deviation (material departure) draw attention in its report

CNO--SAINTRO.240 (QNO--SAINTRO.01) Part 4 – SA 200 Yes No

Avoid audit We cannot avoid

OBJECTIVES / ROLE / FUNCTIONS OF IAASB CNO-SA200.020 (QNO-200.01,200.03) (MCQ-200.2, 200.4, 200.6, 200.12,
procedure audit procedure
200.14, 200.16, 200.17, Incs.07.1, Incs.18.2)
Formed in 1977 involving DTC involving DTC

IFAC Formation
& Objective
Objective to harmonise Accounting & Auditing

Developed IFRS for accounting & ISA for auditing

- OVERALL AUDIT OBJECTIVES

W Authorities has established Accounting

CNO-SA200.060 (QNO-200.18)

– Standards & FST Formats for entities (Applicable FRF) POTENTIAL EFFECT OF THE INHERENT
ICAI is member of IFAC, duty to implement in India
– Auditor’s overall objective is to check following points :-

v
Established by IFAC
LIMITATIONS OF AN AUDITOR'S ABILITY TO DETECT
Express opinion whether FST in all material respect are as per applicable MMST IN CERTAIN AREAS/OTHER MATTERS THAT
IAASB Formation Objective to develop & issue high quality
& Objective
WPoint 1 financial reporting framework. If it is fair presentation framework, we have AFFECT THE LIMITATION OF AN AUDIT
Auditing Standards in Public Interest
to additionally specify whether FST give T&F view.
Independent standard setting body Because of inherent limitations auditor's ability to detect material
Different standards & pronouncements issued to achieve objective For this obtain reasonable assurance (High Confidence Conclusions) misstatement gets affected in certain assertions or subject matter as
Point 2
whether all material items in FST are free from misstatements. given below, these matters make auditing procedure further difficult
High quality standards & guidance
Point 3 Misstatements can occur due to fraud or error Shortcut – FiRaNGi

For audit of For other For For other

For other Point 4 Finally draft report as per findings & SAs & communicate client To check existence & To identify events &
FST (SAs) related Quality pronoun- Fraud where senior Non-compliance
assurance completeness of of law & conditions that may
services Control Decision management is
cements Related party relationship
services (SRSs) Efficiency involved or collusion regulation affect Going concern
Generally accepted (SQCs) & transactions
& recognised by Not an objective to comment on Effectiveness
Government On Financial For Propriety/Prudence Relevant SA give specific audit procedures to mitigate this effect of inherent limitations
& advancing
Banking Regulator Future Viability
Non-financial public CNO-SA200.080
Securities Regulator matters (SREs understanding CNO-SA200.040 (QNO-200.09, 200.15) (MCQ-200.20, 200.1, Incs.07.4)
& SAEs) (Implementation
Investors

Auditors
Guide, Hand - INHERENT LIMITATIONS OF AUDIT
SUBSEQUENT DISCOVERY OF
MATERIAL MISSTATEMENT
Book etc.)
Other key stakeholders - Auditor is not expected & he cannot
- Reduce audit risk to zero Subsequent discovery of material misstatement whether due to fraud or error does
- Hence no absolute assurance not mean that auditor has failed to comply with standards on auditing
CNO--SAINTRO.260 (MCQ--INCS.02.5, INCS.09.5)
- Because of Inherent Limitations
- Which leads to persuasive evidence rather than conclusive evidence To evaluate whether auditor has performed audit as per Standards
AASB on Auditing we have to evaluate following things then conclude

Nature of Financial Reporting Nature of Audit Procedures Time & Cost

History Objective of AASB Limitation Further auditor cannot say that
Practical & Legal Limitation because of inherent limitation he
In 1982 ICAI constituted Auditing Judgement by management Audit Audit Evaluation of audit
To review To identify Expectation of users relied on (got satisfied) with audit
in applying FRF procedure evidence evidence (audit
Practice Committee (APC) they existing & areas where Mgt Related for reasonable time & evidence which is less than persuasive.
use to issue Statement on Auditing To Formulate reasonable cost performed obtained report was framed)
emerging revision or Further it involves Intentionally or un-intentionally (Not a protection against
Practices (SAPs) / Develop Degree of uncertainty information not provided or
practices new document poor quality audit)
(Provisions) misinformation is provided by mgt Delay reduces value
worldwide is required Sophisticated designed &
In 2002 APC was converted to AASB Range of Interpretation
⑧

concealed frauds e.g. Collusion,

and name of SAP was changed to (Dep./ Inventory) Auditor has to
Falsify documents.
Auditing & Assurance Standards (AASs) Subjectivity balance time & cost
(Goodwill, Brand, Art) Auditor Related
Not expected & Not Trained to be
expert in authenticating documents
No power of investigation/search
Use of sampling
03 Continue on next column... Continue on next column...
 CNO-SA200.100 (QNO-200.19, 200.21 200.24) (MCQ- 200.7, 200.8, 200.9, Examples : Shortcut -C-FAR CNO-SA210.060 (QNO-210.03) (MCQ-210.1, 210.2, 210.3, 210.4, 210.9 Incs.08.1)
200.19, 200.11, Incs.32.2)
C F A R
ETHICAL REQUIREMENTS & INDEPENDENCE ENGAGEMENT LETTER (EL)

- Ethics provide principles of conduct

Contradictory
Evidence
Conditions including
possible Fraud
Audit Procedure Info which questions Reliability
in A
addition to SAs of Documents & Responses e Terms of Engagement

- What is morally correct or incorrect Specifies

- Code of Ethics of respective profession provide ethical requirements Reduces risk of
- Principles to be followed to have ethical conduct Nature & Scope of Engagement Responsibilities of Mgt & Auditor
Overlooking Overgeneralisation Inappropriate assumptions
Mandatory for Auditor to Comply with General
Don't misinterpret Prof Skepticism Sent by Auditor to client Reduces possibility of misunderstanding
Ethical Requirement (To be ethical) & Independence
Questioning Mind
PS = Be Alert & Apply In partnership ensure appointment
Is expressed as fundamental Principle of Professional Independence of Critical Assessment Imp for Very Imp for
mandatory audit of auditor & nature of services are
voluntary audit as per Partnership Deed
Ethics given in Code of Ethics issued by ICAI Appearance If after applying PS
Mind Don't disregard past
experience of honesty & integrity
Enhances ability to Act with Mandatary to agree terms of Audit Engagement with TCWG or Mgt
Doubt over
No Issues
Integrity reliability But don't show blind faith on it Mandatory Clauses
Shall be in
Objectivity Investigate written form Objectives & scope of audit
Accept Solution is always
2
Short Cut – C BI Office explains Ethical Requirements Document further
Attitude of Prof Skepticism Responsibilities of Management
as genuine Modify or add first apply PS Mgt Related
C C B I O Identification of applicable FRF
audit procedure see if there are any
Professional reliability issue Auditor Responsibilities of Auditor SA 210
Confidentiality Competence Prof. Integrity Objectivity
Behaviour Related Reference to expected form & content of audit report
& Due Care And then decide further course of action,
Attain & Honest ~ also considering past experience If law or regulation prescribe terms in sufficient detail
Comply Not compromise
Keep info maintain prof. with law & Straight Forward with
obtained as knowledge regulation - prof judgement No need to make regular EL, explain in letter law or regulation apply & ask Mgt to
a result of & skill acknowledge it and that they understand their responsibilities as given in Pre-conditions
professional Avoid conduct Do not associate with Part 5 – SA 210
-
or business Act which brings Communication Avoid
Diligently - KBJ
relationship discredit to
v Returns ~ Bias (Strong CNO-SA210.020 (QNO-210.02) (MCQ-210.10) CNO-SA210.080 (QNO-210.05) (MCQ-Incs.32.3)
confidential profession

N
As per Reports favour or
~
2 Exceptions technical against people) ENGAGEMENT LETTER IN RECURRING AUDITS
& prof
Other info v [Khunnus] PRE-CONDITIONS OF AUDIT /PREMISES OF AUDIT
-
Required standards Not Mandatary to make Engagement Letter
by law Sec Conflict of
Info Where Interest Agreement of Management that they accept responsibility Acceptable Financial Reporting
143(12) Info
diligent means materially omission v Preparation of FST framework Auditor shall assess whether circumstances require change in terms
provided could lead to (Personal
Permitted false or Benefit) [Bikna] Access to all information prepared by them of engagement or need to remind existing terms
by client
~
Recklessly misleading v Int Control system for FST
Act misleading FST
~ Undue Info to Auditor Additional Information as required by auditor Considering following factors
influence of Chg in Law or Regulation
Carefully Throughly Timely others Unrestricted access to personnel for inquiry External Changes
(External Chg in FRF
If any precondition not present Discuss with Mgt Don’t accept unless
For audit Assignment Ethical Requirement Pressure) e required by Law Significant Chg in Ownership
[Jhukna]
+ Independence
Chg from Chg in Senior mgt
for other Assignments Only Ethical Requirement CNO-SA210.040 Management Side Chg in nature or size of business

v
(Accounting, Taxation etc.)
Misunderstand objective & scope of Audit
CNO-SA200.120 (QNO-200.25) (MCQ-200.9, 200.7, 200.8, 200.18, 200.20, 200.3, 200.5) LIMITATION ON SCOPE PRIOR TO AUDIT Revised or Special terms of engagement
Chg from
ENGAGEMENT ACCEPTANCE

~
auditor side Chg in reporting requirement
PROFESSIONAL SKEPTICISM Mgt/TCWG Imposes limitation on scope in proposed terms

Auditor believes the limitation will result in disclaimer of opinion

Attitude to remain Alert for condition indicating possible misstatement
(Don’t just blindly rely on past) Auditor should not accept engagement unless required by law

Including

Questioning Mind & Critical Assesment

Examples : Shortcut -C-FAR

Continue on next column...

04
01
CNO-SA210.100 (QNO-210.07, 210.09) (MCQ-210.5,210.6,210.7,210.8) CNO-SA220.045 CNO-SA220.100 (MCQ-220.2)

CHANGE IN TERMS OBJECTIVE OF SA 220 ETHICAL REQUIREMENT

"C"
MR
Shortcut- CMR Auditor should perform quality audit Principles which auditor & his team should follow to be ethical. Discuss in SA 200 (5 Principles)
Chg in need of Service Dillment
espes of
General Reasons Audit)
Misunderstanding (Roles &responsibilitia) Audit work should be as per legal requirements / Audit report issued is appropriate SQC 1 says audit SA 220 says that its engagement partners responsibility to
⑳
Examine Reason
Restriction on scope Regulatory Requirement / Professional Standards in the circumstances firm should establish ensure team is fulfilling Ethical Requirement
Justified Unjustified policies & procedures
to ensure that audit Engagement team can rely that firm level policies & procedures
CNO-SA220.060 (QNO-220.01, 220.02) (MCQ-220.3, Incs.32.1) as per SQC 1 will be effective to maintain quality of engagement
Agree & record new terms of Not able to agree then teams comply with
engagement in writing continue Original EL Ethical Requirements & also fulfil ethical requirements
v
ELEMENTS OF QUALITY CONTROL
Withdraw from engagement Engagement partner should do inquiry, collect data & evaluate whether

~
- 1 Leadership Responsibilities for Quality Audit team is complying with firm level policies & thereby fulfilling ethical requirement
Report to other parties as required by law or EL
2 Human Resources including (Assignments of Team)
CNO-SA220.120
CNO-SA210.110
2 HUMAN RESOURCES
REQUEST FOR LOWER LEVEL OF ASSURANCE

W
Policies & procedures
Auditor appointed for doing audit 3 Ethical requirements (Independence)
Firm should have policies & procedures to ensure that sufficient number of personnel with
4 Acceptance &Continuence Audit offer competence, capability & commitment to ethical principles so as to perform engagement
Before completion he gets request to give lower level of assurance
v
Client As per laws, rules & regulations & professional standards
Audit to Review (Moderate Assurance) Audit to AUP (No Assurance) enable to issue report in appropriate circumstances
w 5 Engagement Performance
If there is reasonable justification ~ Matters which are addressed generally in policies & procedures (In logical sequence)
6 Monitoring
Work to be performed & report to be given
is appropriate for revised engagement v Requirement Recruitment Performance evaluation
CNO-SA220.080 (QNO-220.03)
Work performed till date may be relevant - Estimation of It should include procedures Benefits
W LEADERSHIP & RESPONSIBILITY number of
that help to select individuals
FOR QUALITY OF AUDIT personnel required Compensation
To avoid confusion don't give reference of original engagement of integrity as well as capacity
or audit procedures performed during original engagement Competence to develop competence & Promotion
1. Who is engagement partner Career development
capabilities to perform firm's
v ~ Capability
But if it is Agreed Upon Procedure (AUP) assignment we have to give Engagement Partner refers to partner (In India only partners can lead & s ign audit. work
detail of all steps performed, so here we will have to give reference to or Other Person in the firm v So point of other person not relevant)
original assignment audit procedure -
CNO-SA220.140 (QNO-220.06)
Who is responsible for Where required having appropriate authority
-
from
- professional, legal & regulatory body (Again in India
engagement performance
any partner can represent firm no specific permission
4 ACCEPTANCE & CONTINUANCE (A & C)
Part 6 – SA 220 & its audit report on

CNO-SA220.040
behalf of firm

2. Responsibility of
is required)

He shall take responsibility for overall quality

W EP shall be satisfied that appropriate procedures for A &C are followed

Information which will assist in A & C

v
engagement partner of engagement which is assigned to him ~
QUALITY OF AUDIT IS MAINTAINED IF Integrity of Owner, Key Mgt, TCWG
~ ~
His actions as engagement partner & appropriate messages to other members of Competence of Team
Ch
Audit work Compliance with Report issued is appropriate in engagement team regarding taking responsibility for overall quality should Compliance with ethical requirement
- v given circumstances emphasize following
Significant matters during current & previous engagement
~
Legal Req (LR) Regulatory Req (RR) Prof Standards (PS) If after acceptance EP obtains info that would have caused
~ ~ Quality is essential & absolute necessary for performing audit engagement
v declining assignment, inform firm promptly to take appropriate action.
SQC1 Firm Level Quality Systems at firm level to achieve quality for
Control FLQC all assurance & related assignments First two points are similar to definition of quality.
Importance of audit 1. It involves complying with legal, regulatory
Implementation of FLQC to individual b quality / Requirement requirements & professional standards
Engagement Level Quality
SA 220 engagement level (only for audit of of audit quality 2. Issuing audit report which is appropriate in the
Control circumstances
historical FST)

3. Compliance with the firms quality control procedures as applicable

Other points
4. Engagement teams ability to raise concern without fear of reprisals
(Punishments)
05
CNO-SA220.160 (QNO-220.07) CNO-C1OC.040
Part 7 – OTHER CONCEPTS
check
5 ENGAGEMENT PERFORMANCE CNO-C1OC.020 (QNO-COA.07, COA.08, COA.09, COA.11, COA.13, COA.15) (MCQ-CIA.1) SCOPE OF AUDIT
- what check
Policies & Firm should establish policies & procedures to ensure that RELATIONSHIP BETWEEN AUDITING & OTHER DISCIPLINES Range of Activities
we
procedures engagement is performed with reasonable assurance in (Recollect subjects from Foundation & Inter) How
accordance with What we do in Audit
quality Law, rules & regulation & professional standards
Sound GAAP Knowledge is required for audit Imp of A/c

O
Closely
Accounts Def Ultimate objective is to give opinion. For this we do following
Related Auditing review FST, result of A/c process Imp of Audit Scope.
& to issue appropriate report in given circumstances -
Generally
It can be in the form of written or electronic manuals,
Business Laws
Analyse their financial
- Date Tessadice
Basic Accounting Data Presentation in FST
⑧ Form of policies
software tools, industry or subject matter guidance material, Good Laws of contracts & FST Compare FST & Accounting
& procedures
Beyond
-

other forms of standardized documentation (checklist) Law Whether accounting data Data whether FST properly
knowledge of Negotiable Instruments accounting impact on
is complete & reliable
-

Financial Items - Restrict summarizes accounting data

Matters addressed include (In logical sequence) Taxation Laws
Examining Mgt. judgements
Keep all policies & procedures updated -v Demand
For this we
with respect to A/c policy,
Appropriate process for staff training & coaching - Estimates, Presentation,
Supply Disclosure
Micro Understand & Test Then we check
w briefing so that team members can understand objectives of their work. 2
Engagement Production Helps to confirm economic
Process for complying with engagement standards while working changes in entity Internal Control Systems
e Economics
Cost Financial Transaction
& Balances
Process for engagement supervision nV Economic Environment Helps to evaluate future Then A/c systems
work performed, significant judgement made, report issued 5
Method of reviewing w assumptions & estimates
Role of Govt.
Appropriate documentation of work performed & timing & extent of review of such work. Macro
Growth What we should not do Constraints on Scope
6-
Inflation
CNO-SA220.180 (QNO-220.08) (MCQ-220.4,220.09)
Audit sampling needs statistics knowledge Activities which are beyond Mgt. stops audit activities
Statistics & Maths our competence (Knowledge,
6 MONITORING PROCESS To check complex computations mathematical If not able to collect SAAE
Training, Qualification)
knowledge is required (E.g., Cost of Inventory) set it out in Audit Report
Establishing monitoring process
⑪ Relevant Continuous ongoing Behavioural Science (Helps understanding & predict human behaviour)
Cupdated) CNO-C1OC.060
Whether system consideration Involves lot of interaction with client
Policies & Adequate Financial Audit
Procedures of Quality Control (overage) Periodic Inspection v employees & own team
Operating & REFERENCE OF SCOPE IN EL & AR
of Selected Completed
Complied
- Involves evaluating ICS, which depends
engagement Internal Audit
⑬ ~ on human behaviour
-

Purpose of monitoring Helpful in Engagement Letter Audit Report reference of scope in

Involves understanding decisions,
Whether system of quality control is successful in ensuring compliance of Management Audit behaviour of top management & eval- Explain scope in EL and Explain it in report so that users
v uating how it can be taken to next level. get better understanding & there
Adherence to law, rules & regulation & professional standards get it signed by client
is no misscommunication
Whether report issued by the firm are appropriate in the given circumstances Internal Control Performance depends whether employees
System (ICS) v understand, accept & implement systems
Whether quality Designed & implemented effectively by firm CNO-C1OC.080
control system Important to understand E.g., By Product, Joint Product, Process
Appropriately applied by engagement partners
COVERAGE OF ENTITIES
③ Responsibility of monitoring
Production production process & Costing etc.It affects accounting & cost
costing system of inventory
Work of monitoring is performed by competent individuals (Partner/Partners/Other Business Oriented Entities Non- Profit Organizations & Trusts
Persons) & covers both appropriateness of design & effectiveness of operations Financial Management
of quality control system. Sometimes audit is mandatory to get
Trends in Financial Market Audit of Financial Institutions Generally covered in Audit
License, Govt. Grants, Tax Exemption
Govt. Actions Evaluating Financial positions Governing Bodies, Members,
Knowledge of & performance Beneficiaries want audit to be conducted
Financial Institutions
to prevent & detect financial irregularities
Financial Techniques Reasonableness of Finance
(Ratios, Capital Budgeting) related Inc/Exp/Asset/Liab

Revolution happened in
Check whether computer
processing accounting data
Data systems are working properly
Processing How info is documented,
Use them to extract more
records are created in system,
information relevant for auditing
Information collated in reports

06
CNO-C1OC.100 (QNO-COA.17) CNO-C1OC.140 (QNO-COA.32) (MCQ-CIA.13)

ASPECTS TO BE COVERED IN AUDIT INDEPENDENCE OF AUDITOR Circumstances where auditor develops close
Familiarity Threat Definition relationship & becomes sympathetic towards
client
Examine Internal Control System Concept of Independence covers 2 aspects as per code of ethics issued by IFAC Example

Test of Control related points Examine Accounting System Member of engagement team having close or immediate family relationship with
Independence of mind Independence in appearance
Whether material inadequacies & weakness Director
exists to prevent & detect frauds & errors Not being dependent Should not get into circumstances
Officer of the client
Substantive Procedure related points Not be under influence / condition Should not ignore facts With an employee who is in position to exert direct
and significant influence over subject matter
Check validity of transactions as per Law, Such as financial, personal
That are so significant that they create
Regulations, MOA, AOA, Contracts etc. relationships, business relationships Former partner of the firm
doubt about auditor's ability to act
or any other condition/ circumstances
with (IOP) Is a director
Check authenticity of transaction entered
Transactions Which affect auditor's ability to act with (IOP)
in Books with supporting documents Is a Officer
Ascertain proper distinction between Capital Is an employee who is in position to exert direct
Integrity Objectivity Professional Skepticism and significant influence over subject matter
& Revenue
Ensure all transactions are posted in Books of Accounts Essential characteristic for accountancy profession Having long association with the client

Critical for framing proper opinion on FST Acceptance of Significant gifts or hospitality
Check arithmetical accuracy of balances of Books of
Accounts
Balances Independence is influence free state of mind & also Situation where auditor promotes or is
Verify assertions related to balances (Assets & Liab) appear to exist to all reasonable persons perceived to promote clients opinion so
Existence, Completeness, Valuation, Rights & Obligation Advocacy Threat Definition
much that people may believe auditors
Circumstances may create threats to Independence objectivity is getting compromised
If its audit of corporate body ensure compliance
of statutory requirement Auditor is helping company in listing shares
Identify Threats
or getting better issue price of shares
FST Related Points Whether B/S, P&L gives True & Fair view Apply Safeguards Example
Auditor is representing client in litigation
Report opinion on FST to appropriate authority Eliminate threat or reduce to acceptable level or 3rd party disputes
in proper format
Circumstances where auditor is deterred
(QNO-COA.33) (MCQ- CIA.2, CIA.5, CIA.6, CIA.7, CIA.11, CIA.12,) Intimidation Threat
CNO-C1OC.160 (discouraged/threatened) to act objectively
CNO-C1OC.120 (QNO-COA.27)
Threat of Replacement
THREATS TO INDEPENDENCE
QUALITIES OF AUDITOR
v Shortcut – I am FAIR
Example Pressure to reduce work
Threatened with litigation Review of any judgement or
Professional/Technical Qualities Personal Qualities conclusion reacted in previous
I F A I R Self-Review Circumstances audit or non-audit engagement
Ethical Requirement Related Definition
Knowledge of Threat which involve Member of audit team was
Integrity Self-Interest Familiarity Advocacy Intimidation Self-Review
Law previously director or senior
Threat Threat Threat Threat Threat Example
Objectivity employee of client
Business Practices & Transactions
Auditor is evaluating subject matter previously prepared by them
Accounting Prof Competence & Due Care Circumstance where Firm/Partner/
(ICS/Fixed Asset Register/FST etc.)
Self-Interest Threat Definition Associate is in position to benefit
Various A/c Systems Prof Behaviour Recently director or senior employee of company joins audit team as member
from financial interest from client
Confidentiality Examples (Business FILE)
A/c Treatment of Designing & Implementing IT System
Transactions & Events Business Related Close business relationship
Approach Related Internal Audit
Non-Audit Engagement includes
Auditing Undue dependence on client fees
Application of practical approach (IIM-I) Management Services
Latest Developments Fees Related
Analytical in approach Contingent fees Investment Advisory
Firmness & Patience Direct financial interest
Investment Related
Common Sense Indirect significant financial interest

Loan Related Loan or Guarantee To or from concerned client

Employment Related Potential employment with client

Continue on next column...

07
CNO-C1OC.180 (QNO-COA.35)

SAFEGUARDS TO INDEPENDENCE 02 AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME

Confidence of public on audit should be maintained

Part 1 – SA 300
There should be quality audit Reporting & Communication
CNO--SA300.010
Decide & organize meetings with management & TCWG to discuss
Key fundamental principles like Integrity, Objectivity, & Prof Skepticism are required nature, timing & extent of audit work to be performed
AUDIT PLANNING Communication
Discuss with management expected status of communication of audit
Independence is must for these principles work throughout the engagement
First prepare Audit Strategy Then prepare Audit Plan Discuss with management & TCWG regarding expected type of reports
Independence should exist as well as appear to 3rd parties & other communication both oral & written for Ex. - Audit report, Reporting
management letter & other communication to TCWG
CNO--SA300.020 (QNO-300.03) (MCQ-300.3, 300.5,300.7, 300.9)
Hence identify threats & implement safeguards against them
Finalize timetable of reporting such as interim & final

Before taking any work carefully think about threats to independence vESTABLISHING OVERALL AUDIT STRATEGY
Preliminary engagement activities & factors significant in directing
(OVERALL AUDIT PLAN) Identifying areas of risk of material misstatement (FST Level)
When threats exist apply safeguards & eliminate them
Consider results of previous audit regarding operating effectiveness of internal
ShortCut – Rajasthan SRPF
control & deficiency identified & action taken to address them.
If auditor is unable to implement appropriate safeguards, he must not accept the work
R
S S R P F
Volume of transaction during the year which may determine whether to rely
on more internal controls
CNO-C1OC.200 (QNO-COA.07) Characteristics Reporting PEA & Factors
NTE of Knowledge significant
of engagement objectives gained from other
Resources defining & Nature of engagement in directing CNO--SA300.060 (QNO-300.07) (MCQ-300.12, 300.15, 300.16, Incs.02.1, Incs.02.2, Incs.09.1)
AUDIT VS INVESTIGATION SCOPE Communication engagement Team
by EP
OVERALL AUDIT STRATEGY FOR
Investigation Audit RESOURCE MANAGEMENT
CNO--SA300.040 (QNO-300.05)

Objective purpose Special Purpose Reasonable Assurance Following matters should be decided while establishing strategy
FACTORS CONSIDERED FOR DETERMINING OVERALL AUDIT STRATEGY
Validate Fact
Evaluate situation
Whether FST give T&F
(FURTHER DETAILED EXPLANATION OF EACH FACTOR) ⑧ Number of members
Inventory Counting ③
Amount of Resources Reviewing work of
Examples
Pre Conceived Notion Yes No to allocate to specific
audit areas
Experience of members For ⑧ other auditors in
group audit
⑳
Resources Audit Budget in Numbers

Periodical
No
(Findings in Audit may Yes Select engagement team & assigning audit areas to team members
High Risk Areas ⑲
(high RMM areas to experienced team members) Example
lead to investigation) ⑳
Allocation/Deploying
Experienced Team
To high risk areas
Prepare engagement budget specifying appropriate time for all areas resources within
(more time should be allocated to areas having higher RMM) & Experts should
specific audit areas Complex areas
be allocated
Characteristics Defining SCOPE Scope of Audit
Auditor should decide when these resources should be deployed
⑫
Timing of
deploying in an audit whether at an interim stage audit or at key cut-off dates
Coverage of Audit
resources (B/s date – 31st of March)

What aspects/parts of entity will be covered? How we are going to check? Auditor should Further it should be decided how will direct,
decide who would supervise, review (manager review &
Resources manage
whole team & what engagement partner review) of team
Every assignment has unique factors (characteristics) which affects SCOPE Management
should be the members & whether this assignment needs

③
Example reporting hierarchy engagement quality control review.
Decide audit coverage including number & location of components
(branches/ subsidiary)
What
Decide number of business segments to be audited

Decide whether to use audit evidence obtained in previous audits for How
Risk assessment & test of control

Continue on next column...

08
CNO--SA300.080 (QNO-300.23)(MCQ-300.1, 300.2, 300.4, 300.6, 300.8) CNO--SA300.160 CNO--SA320.020 (QNO-320.01) (MCQ-320.5, Incs.09.3)

DEVELOPING AUDIT PLAN ADDITIONAL CONSIDERATION IN INITIAL AUDIT ENGAGEMENT (IAE) SHORT NOTE ON MATERIALITY
Additional Activities Prior to starting initial audit
Determine NTE
⑳ Concept of materiality in FRF
SA 200 explains that financial reporting framework generally explains the
Planned Risk Planned Further Acceptance procedures Communication with concept of materiality & also explain that accounting should be done keeping
Planned other Audit Procedures (OAP) in mind the concept of materiality
Assessment Audit Procedures as per SA220 predecessor auditor
to ensure compliance with SAs
Procedure (RAP) (FAP) If applicable financial reporting framework is having such discussion auditor
(QNO-300.27) (MCQ-300.10) should use this knowledge to determine materiality for the assignment
CNO--SA300.180
1st RAP then FAP
But if FRF is not having such discussion then he should use definition given as
Results of RAP influences FAP DOCUMENTATION OF AUDIT PLAN per SA 200
RAP happens at early stage
Significant changes in OAS & AP SA 200 says that generally Misstatement including omissions
OAS AP will be considered as material if they
Planning & Execution of FAP’s of some area financial reporting framework
TBD’s before planning remaining FAP Definition explains materiality in individually or in aggregate could
Record of Key Record of planned NTE of Record of significant changes in influence the economic decision of
decision for following matter
OAS &AP the user of financial statements
proper planning RAP
CNO--SA300.100 (QNO-300.15)(MCQ-300.14, Incs.09.2, Incs.62.1) & communication
of significant matters FAP Why Changes It is used in planning, performing audit, evaluating
Materiality is used
①
- -
Uses of misstatements, understanding impact of uncorrected
OAP Final OAS &AP throughout the --

Summary of OAS materiality misstatement on financial statements & then forming

RELATIONSHIP BETWEEN OVERALL AUDIT STRATEGY & OVERALL AUDIT PLAN audit process -

can be prepared in the opinion on financial statements

form of memorandum Standard Audit Programs/ Response to changes -

v Generally first we make overall audit strategy & on that basis we develop (document containing Checklist Tailored as per

③ 0
audit plan so as to achieve audit objective effectively & efficiently key points) Particular engagement Materiality is user oriented Needs of user of financial statements
Combination
Framing audit strategy & audit plan is not necessarily a discrete
CNO--SA300.190
Depends on following ⑧
Size of misstatements
of these
matters
(one time activity). It is a continuous process
⑧
Nature of misstatements

It is not sequential also that every time strategy will change & then audit plan

Sometimes first audit plan may change & then after audit strategy
EXAMPLE OF MATTERS WHICH SHOULD FORM PART OF AUDIT
DOCUMENTATION WHICH ARE RELATED TO PLANNING STAGES ④ Common needs of users as a group is important & not individual requirements

They are closely interrelated to each other
CNO--SA300.120
PLANNING, DIRECTION, SUPERVISION & REVIEW
Auditor has to determine what are the need of the users of the
In Logical Sequence financial statements
While making such determination he has to consider need of the
Past Auditor's report users as a group & not need of individual users
(QNO-300.29)
Past Other reports as specified in the engagement agreement Assumption about users
(e.g., debt covenant compliance letter)
Other communications or agreements with TCWG/MGT ⑤ Knowledgeable
Only those users who have reasonable knowledge of
business, economic activity & their accounting

Following factors should be considered while planning DSR Understands accounting & financial statements, reasonable understanding of
Summary of discussion with key decision makers.
accounting process & he knows that financial statements are prepared keeping
Shortcut – CA TS are good at planning
2
in mind materiality
Access letters documentation
C Complexity of the entity

O
He understands that many items in financial statement are in
Recognizes form of estimates which are determined by making judgements
A Area of Audit Documentation of audit committee pre-approval of services
uncertainties & considering future events
A Assessed risk of material misstatement Eg. Increased RMM will increase DSR
T Team member capabilities & competence Eg. -Prod Process Issues
-Inventory will become obselete
Part 2 – SA 320 ⑧ Economic
decisions
Only those users take economic decisions on the basis
of financial statements only they are covered
S Size of the entity -Involve senior for DSR CNO--SA320.010
-Extent depends on Team Experience CNO--SA320.040 (MCQ-Incs.02.4, Incs.09.4)

Potray True Financial Performance P&L

CNO--SA300.140 (QNO-300.17) (MCQ-300.11)
Role of FST
& Fair view
~ BENCHMARKING
State of Affairs B/S
Selection of E.g., RBI clarification It is a method of computing materiality level.
CHANGES TO PLANNING DECISIONS Role of Plays important role A/c policy on Accrual of Income
Materiality in preparation of FST Materiality Level= Benchmark (Base) x Percentage
Disclosures in FST
Shall update & change OAS & AP as necessary Size of item is important to determine materiality
Role of
Factors may lead to modify OAS & AP Quantity But nature of item & needs of users should be considered

Income or Expenditure
Changes in Result of Result of Audit exceeding 1% of revenue
Condition unexpected events Procedures from operation or Additional Info in notes
Prescribed 1,00,000 whichever is higher
Further if there is revision in assessed risk modify NTE of FAP Quantitative
Limits
Shareholder holding more than 5% shares Details in Notes to A/c's
09
CNO--SA300.040 (QNO-320.03) (MCQ-320.3, Incs.40.5) (CNO--SA320.060) (QNO-320.04) CNO--SA320.100 (QNO320.05) (MCQ- 320.2)

RELATIONSHIP BETWEEN MATERIALITY

⑰
STEP 1 DECIDE BENCHMARK MATERIALITY FST LEVEL VS TBD LEVEL
& AUDIT RISK
Decide Benchmark First determine materiality for FST as Lower amount of
a whole Generally same materiality is In Specific Materiality and Audit risk are two very important governing factors in the audit process
Factors affecting identification of benchmark materiality for TBD
applied for TBD Circumstances
can be set if auditor is setting low level of audit risk & low materiality level then following things
need to be done carefully
Items in OVEN
Law , Regulation, FRF requirement affects user expectation
Identifying & assessing the risk of material misstatement
I O V E N Factors which indicates of measurement or disclosure
separate level of TBD Determining NTE of further audit procedures
Materiality Key Disclosures in relation to Industry
Nature of Entity Evaluating effect of uncorrected misstatement
Attention of Ownership Relative Economic Attention is focused on particular aspects of business
Elements of
User of FST Structure Environment Forming opinion on financial statements
Financial Volatility of Financial
on Items Industry Views of TCWG/Mgt. will be useful in determining TBD level materiality
Structure benchmark Statements (These are the matters affected by the materiality & audit risk)
of FST Life Cycle

Normalised Earning (Average Profit)

(CNO--SA320.080) (MCQ- Incs.02.3)
E
Typically relationships which are not given in SA 320 but are useful

EBIT / PBT from continuing op

Earning Based Relationship between If particular item is material then auditor should perform
PERFORMANCE MATERIALITY materiality of item & more audit procedures on that item & determine whether
EBITDA -

audit risk it is having material misstatement

Gross margin/Profit Auditor has to conclude whether FST are free from material misstatements
- -

Doing this will keep audit risk low

Example
Activity Based
Total Revenue
undetected(HaincoffAudit team compares misstatement & materiality level
Deduction ⑦
-

Total Expense Hence there is inverse relationship

Capital Based
Equity
-

-
matericigeuse
Pafalmance Audit is not full proof. So misstatements are of 2 types Detected
& Undetected. Out of detected, only uncorrected are relevant. Relationship between
materiality level & risk
If in a particular area there is an

Ttet increase in risk of material misstatement

--
Total Assets of material misstatement
So audit team focuses on 2 types of misstatement uncorrected & undetected

E
-

Auditor can reduce materiality level & perform examinations

CNO--SA300.040 -
FsT/TBD They will have to split materiality level in 2 parts carefully on such items which are near materiality level

STEP 2 NORMALIZATION Depending on nature & extent of prior period misstatements & understanding of entity Again there is a inverse relationship.

Prior period financial
result & positions
Financial Data
Budget, forecast
for Benchmarking of current period
comes from
Profits & Position till Date
(Dt. on which we
determine materiality)
Audit team will deduct some part of materiality level & allocate
Chg. in Economic it for undetected misstatement, that's called Haircut. CNO--SA320.120 (QNO-320.07)
Environment
Remaining materiality level after deduction is of lower
Adjusted for Chg. In Industry REVISION OF MATERIALITY
amount and this is called Performance Materiality
Chg. In Circumstances
This performance materiality is used for risk assessment, deciding During audit if auditor That would cause him to Auditor shall
NTE of audit procedure, evaluating uncorrected misstatements gets new information determine different materiality revise materiality

Exceptional Items Audit team will check whether uncorrected misstatement are within performance materiality If auditor concludes Performance Materiality
Auditor shall
lower materiality level determine need to revise
Time period can be less or more than 12 months NTE of FAP
Further Changes for This will ensure total misstatement = uncorrected + undetected are within total materiality
New information, decision to dispose major
If there is exceptional increase or decease of PBT from continuing part of business
operation auditor can use Avg. normalised profit of past years Audit team will be able to conclude whether FST are free from material misstatements Examples when
revision Chg. In auditor’s understanding as result of FAP
may be required
EXAMPLE During year actual financial result substantially
CNO--SA300.040 (MCQ-320.1) different from anticipated
10 Crores Total Materiality Level ~
STEP 3 DETERMINE PERCENTAGE
3 Crores (30%) Haircut for undetected misstatement CNO--SA320.140 (MCQ-Incs.40.4)
~
Relationship between
Exercise Prof. Judgement DOCUMENTING THE MATERIALITY
Benchmark & Percentage 7 Crores (70%) Performance materiality for uncorrected misstatement
-
Generally Inverse Documentation
Suppose
Eg. PBT from
-
10 × 70% = 7 Crores
FST Level Materiality TBD Level Materiality Performance Materiality
Low base high FST Level Materiality 10 Crores
continuing Operation (5%) percentage FST level Performance
~ - Materiality
High base Low Any revision in above during audit
Total Revenue (1%) percentage
TBD Level Materiality 6 Crores
⑳
6 × 70% = 4.2 Crores
TBD level Performance
~ W Materiality
10
 Part 3 – OTHER CONCEPTS (CNO--C2OC.080) (QNO-C2OC.085, C2OC.090, C2OC.087, C2OC.080)
(MCQ-C2OC.1, C2OC.2, Incs.32.5, Incs.41.1, Incs.47.1, 300.17 ) Variety of fields for evidence Example of Best Evidence
(CNO--C2OC.020) (QNO-C2OC.020) (MCQ- Incs.34.2, Incs.53.2) For investment pledged with a
Imagine Hospital visit
AUDIT PROGRAMME (AP) bank, the banker's certificate
Physical examination (Inspection)
AUDIT PLAN TOCNO--C2OC.020
CONDUCT EFFECTIVE AUDIT For verifying assertions about
State of internal controls and internal checks book debts, the client's ledger
Well drafted audit plan ensures Consists of series of verification procedures
Documentary examination (Inspection) invoices, debit notes, credit
Efficient use of resources Meaning To obtain SAAE notes, monthly accounts
Minutes statement sent to the
Timely completion of Audit To express oppropriate opinion
Statements and explanation of management, customers are all evidence:
Effective high quality audit report Shortcut Audit programee for Overall PACE officials and employees (Inquiry) some of these are
corroborative, other being
It should have plan to cover following Arithmetical calculations by the auditor (Recomputation)
- It should provide minimum essential complementary. In addition,
Understanding clients business AP should be Assistants should work called Standard Programme Inter-relationship of the various accounting data balance confirmation
prepared be encouraged to (Analytical Procedure) procedure is often resorted to,
Knowledge of Internal Control System considering - Programme can be altered as per
keep open mind to obtain greater satisfaction
knowledge from carrying out work Subsidiary and memorandum records
Knowledge of A/c system about the reliability of the
Statements and explanations of third parties assertion
Determining Degree of reliance on internal control Nature size Reliability of Scope Keep on (External Confirmation ) For cash in hand, the best
Composition ICS & A/c of the Unnecessary
or open mind Subsequent action by the client and by others evidence is 'count'
Nature, timing & extent of audit procedure of Business System work beyond the
irrelevant
Co-ordination, Meeting, Communications programme & Following points should be considered
work may be Construction of
increase audit
dropped Audit Programme
procedures Shortcut - SPECS
Plan should be revised as necessary

S Stay within the Scope and limitation of the assignment

(CNO--C2OC.040) (QNO- C2OC.040) Note & Report significant matters to
Engagement Partner/ Proprietor/ Senior P Consider all Possibilities of error
Determine the Evidence reasonably available and identify
PLANNING CONTINOUS PROCESS 88 E
-
One AP not
Nature,
- -
Size & Composition of Business
-
the best evidence for deriving the necessary satisfaction.
Co-ordinate the procedures to be applied to related items.
Reliability of ICS & A/c system Vary C
Not a discrete phase (One Time) practicable -

Scope of work Apply only those Steps and procedures which are useful in
Rather continual & iterative process (Repetative) S
accomplishing the verification purpose in the specific situation.
-

Begins after completion of previous year audit 00

So one AP to all business in all circumstances not practicable
Evidence Evidence is used to prove or disprove assertion
Continues till completion of current engagement
Make suitable AP for each audit specifying in detail nature It helps in drawing conclusions & ultimately express opinion
Auditor decides activities & its timings of work, so that no time wasted in unimportant matters &
special matters are properly covered We use accounting as well as other records
Made in form of audit programme
Periodic Review of Audit Programme What is best evidence is matter of expert knowledge & experience
e
Consider (thinks carefully) following matters I 3. Utility of AP can be Customer order
1. There should be periodic review to
ensure AP is adequate & appropriate retained & enhanced only
Price List
to obtain SAAE through periodic Review
Obtain general understanding of legal & regulatory framework
W Sales managers' advice to the inventory section
2. If AP is obsolete due to negligence -
Determination of Materiality Till the AP is not officially Inventory-issue records
Analytical Procedures in periodic review, whole audit will changed, assistants Example
Risk Assessment Procedures be considered as negligent should follow it. Forwarding notes to client (Delivery Memo)
Other audit procedures
Example ~ Acknowledgements of the receipt of goods by the customers
Involvement of Expert
Above point may bring Invoices raised by the client
Branch changed its business policy rigidity, but periodic
from vehicle finance to real estate review will ensure proper Collection of money against sales by the client
(CNO--C2OC.060) (QNO- C2OC.060) finance. If AP is not changed, audit changes as per input
will get mis-directed & fail.
from assistants
OVERALL AUDIT STRATEGY – RESPONSIBILITY OF AUDITOR
Audit Evidence is considered & weighted
to prove or disprove assertion
Involvement Efficiency &
Engagement partner & other Their experience Each piece of evidence should be weighted
of EP& other Effectiveness of Assertions are
key members shall be involved enhances & accordingly decide priority of verification
KM planning process proved or disproved
using audit evidence One evidence may not bring highest satisfaction
Discussion plan May discuss elements E.g., Where client help is required auditor has to so consider all evidences available
with Mgt. of planning with Mgt. pre-discuss with client for better co-ordination
Auditor should know what evidence are generally
available and ask for it
Even if OAS & AP is discussed it remains auditor's responsibility
Ultimate Auditor
Responsibility Further care should be taken while discussing OAS & AP, it
should not compromise effectiveness of Audit Continue on next column...

11
(CNO--C2OC.100) (QNO-C2OC.100)

ADVANTAGES OF PLANNING 03 AUDIT DOCUMENTATION AND AUDIT EVIDENCE

⑳
In logical chronological flow

Selection of Assistants Part 1 – SA 230 (CNO--SA230.040) (MCQ-Incs-52.1)

Helps assistants with clear set of instructions (CNO--SA230.020) (QNO-230.01) (MCQ-230.1, 230.2, 230.4, 230.5, 230.11, 230.13) PURPOSE/ADVANTAGE/IMPORTANCE/NEED
(MCQ-Incs-64.5, Incs.39.4) OF AUDIT DOCUMENTATION (AD)
Significantly less chance of overlooking
WHAT IS AUDIT DOCUMENTATION ?
Appropriate attention to important areas Basic Purpose Additional Purpose
Audit procedures performed Evidence Assists in planning & performing audit
Identify & resolve problems on timely basis
Definition Record of Audit Evidence obtained Audit was planned & Assists in directing, supervision, review (DSR)
Assists in co-ordination with other auditors & express performed as per Eng. team becomes accountable
Conclusions Reached
Can Control progress Explains auditor's responsibility to maintain Legal Req Regulatory Req SAs
⑳
EQCR/Internal Inspection/External Inspection
Significance to future audits
SA 230 AD & manner in which it should be
Guide for succeeding Year Basis of Auditor’s conclusion
Role of maintained & related matters. about achieving overall objectives
SA 230 &
Evidence against charge of negligence other SA's Almost all SA's at the end prescribe, specific
Other SA's document to be maintained w.r.t. matters
(CNO--SA230.060) (MCQ-230.20, Incs.39.1)
covered in that SA.
DISADVANTAGES OF PLANNING
Use of entity's AD can be prepared by auditor TYPES OF AUDIT FILE
Shortcut - MRI Disadvantages
2
records AD may be in the form of abstract or It is not substitute
copy of entity records (Obtained) of Entity's Record Audit File is collection of documents in folder form or other storage
M Work may become mechanical, performed without understanding
media, in physical or electronic form for specific engagement
R Programme may become rigid & inflexible (Arranged in a chronological sequence
Examples
so that it is easy to remember)
I Inefficient assistants may take shelter of plan, that no instructions was given in plan Permanent Audit File Current Audit File
At initial stages Audit Programme
I Initiative of efficient & enterprising assistants may get killed It is taken to all recurring audits. It contains These files are created for audit of
Checklist documents which does not change specific financial year they are
While performing audit generally not taken to subsequent
Analysis (Ratios) very often & useful for all recurring audits
recurring audit
(CNO--C2OC.120) Issue Memoranda
Audit Findings Ex- Certificate of incorporation, MOA, AOA, Ex- Audit plan for the year, bank
Summary of significant matters Long term agreements, collection of previous statements, external confirmation,
QUALITY CONTROL FOR AUDIT WORK
Correspondence concerning significant matters year financial statements & audit report etc. communication with management
Others & TCWG etc.
Audit involves number of people at different level Letter of confirmation & representation

Work is delegated Uses work of other auditors Using work of (CNO--SA230.030) (MCQ-230.4)
to assistants (Branch Auditor, Internal Auditor) technical expert

Carefully Direct OBJECTIVE OF SA 230

Check whether work performed is adequate for audit
Supervise & Review
SA 600 Other Auditor Legal Requirement
Acts as evidence that audit work
Covered by SA 220 SA 610 Internal Auditor Regulatory Requirement
Auditor should was planned & performed as per
SA 620 Expert Standards on Auditing
prepare AD Sufficient & Appropriate basis to
frame opinion & make appropriate
audit report

12
(CNO--SA230.080) CNO--SA230.110 (CNO--SA230.160) (QNO-230.19) (MCQ-230.6, 230.24)

FORM, CONTENT & EXTENT OF AUDIT DOCUMENTATION TIMELY PREPARATION DOCUMENTATION OF SIGNIFICANT
Important MATTERS & RELATED SIGNIFICANT
(Important principles & consideration) AD should be prepared on timely basis
Principle PROFESSIONAL JUDGEMENT
Important, principles & consideration
Why It enhances quality of audit What do you mean by significant matters
Audit documentation should be prepared in such a manner that
It would enable an experienced auditor, having no previous Matters which in judgement of audit team members should be brought to the
How? AD prepared after audit work is done, is less accurate than
connection with audit should be able to understand following notice of senior in the audit team, engagement partner or engagement quality
documents prepared at the time work is performed
control reviewer are generally known as significant matters
Nature, timing & extent of audit procedures perform
Helps in effective review & evaluation of audit evidence
Results & audit evidence obtained Such matters need special audit consideration (Audit procedure which are
Helps in drawing appropriate conclusion different than usually applied in normal circumstances)
Which arised during the audit (matters where risk of
Significant matters particular area was increased, material misstatement Examples of significant matter
was identified, matter which to modifying opinion or
EMP or OMP etc.) (CNO--SA230.120) (QNO-230.15, 230.03) (MCQ- 230.3, 230.7, 230.8, 230.9, 230.14, 230.16, It include (in sequence of performing audit for ease of memorization)
Significant judgements made in 230.17, 230.18, 230.21, 230.22, 230.23, -Incs-52.2, Incs-62.5, Incs.40.1)
Conclusion reached thereon reaching those conclusion Matters that give rise to significant risk

1. Further explanation for documenting nature, timing & extent ASSEMBLY OF AUDIT FILE Significant difficulty in applying necessary audit procedures
of audit procedures performed Results of audit procedures which indicate two things
Performed during / after dt. of AR – Administrative Process (AP)
Identified characteristics of specific items or matters tested (voucher [Not main audit work, it is supporting activity] Need to revise auditors previous assessment of RMM & Auditors
number, fixed asset identification number) response

Who performed the audit work & date on which it was completed No new audit Procedures or Conclusion Financial statements are materially misstated indicating material
misstatement
Who reviewed the audit work & date & extent of such review Changes in AD are done which are in administrative nature. Examples
Matters which could result in modification of auditor's opinion or
2. Further explanation It should include nature of significant matter inclusion in EMP
of significant matters
Documenting Collating Sorting Discarding Superseded Cross Signing off
Documents discussions of significant matter Referencing completion checklist Professional Judgement
Audit Evidence Documents
Inconsistencies with management, TCWG & others
Form, content & extent of significant matters will depend on professional
Time After Assembly Matters arising after Dt. Of AR judgement exercised in performing work & evaluating results
When & whom discussion took place Retention Period
If subsequent event follow SA560
Such documentation should be done so that auditor is able to explain how
its -

If auditor come across any information which is inconsistent with auditors On timely basis Shall not Ordinarily not
Apartfrom SE
Necessary to add or modify he reached particular conclusion & also assure that he has made quality
final conclusion on significant matter the auditor shall also document how shorter than 7 AD Eg. Clarification in AD
As per SQC 1 delete/discard years from Dt. Of judgement
auditor addressed the inconsistency AD completion AD of any after comments from Int/Ext.
AR or later if
should not be nature Dt. Of group AR Inspection of Documents Such matters are of interest to those reviewing audit documentation
more than 60 including people carrying out subsequent audits
days after AR Specify Reasons When & by whom
(CNO--SA230.100) (QNO-230.13) (MCQ 230.12, Incs.39.2) Examples of professional judgement

Changes were made Review was done Evaluating Auditor may come across a area where subjective judgements
FACTORS AFFECTING FORM, are made by management in such areas how auditor concluded
CONTENT & EXTENT OF AUDIT ***Note- Superseded documents means notes that reflect preliminary or incomplete Subjective
about the reasonableness of such judgements like
thinking, previous year document with typographical or other errors, duplicate Judgements reasonableness of significant accounting estimates
Just Imagine documents or draft working papers or financial statements which are no longer
Size required because we have a final version of those documents. Factors of Auditor may come across a circumstances for which standards
Big Company Complexity decision on auditing has provided factors which should be mandatorily
Risk of material Misstatement (CNO--SA230.140) (QNO-230.17) (MCQ-Incs.23.1, Incs.40.2) making considered while making decisions, in this situation how auditor
given in SA applied those factors & made conclusion.
Nature of Audit procedures
Audit Methodology & Tools
COMPLETION MEMORANDUM Auditor may come across a document which under
Start Audit circumstance may not appear authentic. In such situation
Significance of audit evidence Authenticity
how auditor performed further investigation & then concluded
Auditor may prepare & Retain about the authenticity of the document
Nature & Extent of exceptions (mismatch) Benefits
Result of Audit
Need to document conclusion or basis of conclusion Summary of significant matters
& how they were addressed Assist in Efficient & Effective Whether Auditor
Reviews &
considering Inspection of AD has achieved
significant for large & objectives of
Cross referencing to other AD matter Complex Audit relevant SAs

Continue on next column...

13
 (CNO--SA230.180) (QNO-230.21) (MCQ-Incs.15.3)
Nature of test of controls Inquiry in combination of other audit procedures If after considering above factors auditor decides to use PY audit evidence for TOC
RIGHT TO LIEN -

Supporting it
General Principle of Law
Person with lawful possession
How?
E
1. Inquiry + Inspection/ Reperformance More effective Auditor will have to determine whether PY audit evidence is relevant
-
2. Inquiry + Observation Less effective~
Not Supporting it For this he will have to check whether significant changes have taken place in controls
3. Whether Inquiring + Inspection/Reperformance
Sec 128 of companies Act /Observation Depends on Nature of Control Use inquiry combined with Observation or inspection
Books should be kept at RO V

Worked on it, non payment

of dues
Company has to give access to
Auditors, directors, authorized
persons
what? Apply it to cover following Whether there is change in Control?

***
By whom & Application during Yes No
Can exercise lien & same logic is Consistency in Effectiveness of
Impractical to give possession to what w relevant times during
applicable to clients books application
w indirect controls Can rely on PY audit evidence
means period under audit Then test control
Auditors w
w in Current Year TOC atleast once in every Third audit
ICAEW Conditions Saxena vs Sharma 2 ways of For particular Time
Timing of TOC testing can be Test some controls each year
Possession is lawful Throughout the period
Supreme court said professionals done
Documents belongs to client should not exercise lien So as to avoid testing all controls in single year & then no testing for next 2 year
Worked on documents
ICAI Ethical standard Board (ESB) EXAMPLE
Client owes Money
If CA exercise lien it will be misconduct 1. If stock count is performed once at year end then TOC for (CNO--SA330.080) QNO-330.13 (MCQ-330.1, Incs.48.5)
Then exercise lien count should be done for year end
2. Sales occurs on daily basis, so TOC for sales will be EVALUATING OPERATING EFFECTIVENESS
performed for the whole year.
Legally it may appear that auditor has right to exercise lien but it is not OF CONTROLS
practical & would lead to professional misconduct. Higher Degree
Important Increase Obtain more persuasive Test of Controls Results Evaluate
Extent of of reliance on
Controls principle controls in extent of evidence for
TOC effectiveness of controls Whether Result are providing reasonable
(CNO--SA230.200) (QNO- 230.05, 230.07) Audit strategy No Deviation Deviation basis Eg. Rate of Deviation 8% .
Tolerable Rate 20%
OWNERSHIP OF AUDIT DOCUMENTATION 1. Resampling
Extent of TOC depends on following factors Additional Audit
Good Specific Enquiry
Procedures 2. Check all signature
Shortcut “ Right- LEFT of Junior
Unless otherwise specified Discretion to make Should not affect
AS per SQC1 by law or regulation portions or extracts independence or R L E F T Areas where only Substantive
AD is property of Auditor available to clients validity of work Procedures can help
Relevance & Length of time Frequency of Audit evidence
Expected Rate Role of misstatement detected by Substantive procedures
*** Branch Auditor is Owner of its audit documents, he may make it available to Reliability of during audit performance of from Test of other
HO auditor as per audit requirements but ownership remains with him. of Deviation Misstatement Indicates that controls are not operating effectively
Audit Evidence period the control controls
Material Misstatement Strong indicator of existence of significant deficiency
Part 2 – SA 330 No Misstatement
(CNO--SA330.060) (QNO-330.09) Does not provide audit evidence that controls are effective
(CNO--SA330.040) QNO-330.01, 330.03, 330.05, 330.07 (MCQ-330.4, 330.5, (Absence)
USING AUDIT EVIDENCE OBTAINED IN PREVIOUS YEAR
330.2, 330.6)(MCQ-Incs.23.5, Incs.53.5)

Auditor has to determined whether it is appropriate

TEST OF CONTROLS (TOC)
v
Audit procedure performed to obtain audit evidence of effectiveness of
-Definition To use audit evidence about Also after how much time
effectiveness of controls from PY retest of controls should be done
Design of ICS and accounting
v
system (Design to prevent, ~Operation of ICS
throughout the period.
detect & correct MMST) Following factors should be considered
Which controls
v should be tested?
Design & perform test of controls for relevant controls when Shortcuts “ P2M & CM are Chief Guest” ask them
~
P M C M C G
Auditors assessment of RMM includes Substantive procedures
expectation that controls are alone cannot provide Other Changing
Personnel Chg. Risk of material General IT
operating effectively S&A audit evidence Having Manual or component misstatement & circumstances
Significant Automated of Controls extent of reliance but lack of Controls
controls effectiveness
effect effectiveness on controls change in
Continue on next column... controls
Previous year
effectiveness
of controls
& extent of
Deviations

14 Continue on next column...

(CNO--SA330.090) (QNO-330.14) (CNO--SA330.115)

2A Substantive Analytical Procedures 2B Test of Details (TOD)

PROCEDURAL TESTS (TRADITIONAL THEORY FACTORS AFFECTING USE OF EC
Suitable for large volume transactions Nature of risk & assertion are
Testing of controls should be done in 2 ways relevant while designing TOD Shortcut – “OK-A”
Apply SA 520
Eg. Direction of testing for Objectivity of TP If it is related to entity, EC will be less reliable
Procedural Tests (Tests of Compliance) (AE)
Whether procedures are designed for each stage Stages Existence :- Financial Records to Actual Knowledge of subject If not having requisite knowledge EC will be
matter of TP less reliable
Are they prima-facie effective? Initiation Actual to
Completeness :- Ability & If there is lack of willingness or ability EC will
Financial Records
Whether employees understand it Authorization willingness be less reliable
Are employees complying with it Recording If TOC is unsatisfactory, increase extent Situation which indicates lack of willingness & Ability
Documentation
!
3. Effect of Test of Controls
of Substantive Procedure (SP)
TP may operate in environment where responding to EC
request is not significant (important)
Select few transaction
-
In TOD extent can be increased by increasing sample
Examination In-depth Check them from beginning till end size & using more effective selection method. Willingness TP may not accept responsibility to respond for EC request
Ensure each transaction was properly initiated, TP may be concerned with potential legal liability resulting
authorized, recorded & documented Shall consider whether external confirmation from responding
4. External Confirmation procedures should be performed
Example of Procedural Test for sales TP may consider responding too costly or time consuming
Ability
Customer order received in proper format 5. Closing Process Shall included SP for closing process May account for transaction in different currency
Initiation Inventory level is ascertained
Agreeing/Reconciling FST & Examine material journal entries & other
Credit section evaluates credit worthiness
underlying records adjustments during preparing FST (CNO--SA330.120)
Sales manager authorizes acceptance of
customer order
SUBSTANTIVE PROCEDURES RESPONSIVE
Authorization Advice (Intimation) sent to customer, with (CNO--SA330.110) TO SIGNIFICANT RISKS
internal reference number
For special credit period special authorization
EXTERNAL CONFIRMATION AS Auditor Identified & Assessed Significant Risk
Rate SUBSTANTIVE PROCEDURE Auditor shall design audit procedure specifically for such risk
Transport
Recording Clearly stated TOC & Substantive Procedure both should be applied
Insurance Mandatory to While designing substantive procedure always consider whether Important Principle
consider EC EC can be used & Explanation If only Substantive Procedure is possible then ensure it shall
Credit terms include Test of Details. That means only analytical
Are linked with procedure is not allowed
Relevant for Relevant for a/c balances & related info
All documents of reference number EC gives evidence with high reliability, it should be used when
Documentation A/c Balances
particular transaction Transaction Details there is significant risk
Easy to access but not restricted
to it It can be useful to confirm Terms of agreement / contract Mgt. under pressure to meet earning expectation

(CNO--SA330.100) (QNO-330.15, 330.03) (MCQ-330.3, 330.20, Incs.23.3,Incs.23.5)

Absence of conditions Significant risk that mgt. may inflate sales
FA Property titles held by lawyers or financiers By booking sales before shipment or ignoring
DESIGNING & PERFORMING \ Investment
Certificates with stockbrokers or custodians Example terms of sales agreement
SUBSTANTIVE PROCEDURES (SP) for safe keeping
Terms of sales contract
Examples Related Receivable Auditor may ask for EC of
to Assets Balance & Terms
1. Auditor shall Design & Perform Substantive Procedures for each MATERIAL TBD Transaction Details
Inventory With third party for processing or on Inquiring of non-finance personnel in the entity
consignment
Irrespective of assessed RMM regarding sales terms & its changes
Bank Balance & other information
Risk assessment is judgement based & may not identify all risks
Because Related to Liabilities Loan Balance & other info
There are inherent limitations in ICS (Including Mgt. override)
A/c Payable Balance & other info
Only substantive analytical procedures

2. Auditor may perform any of the following Only test of details

Less relevant Relevant for existence of balance but it may be less relevant
Combination of above 2 for certain for recoverability of balance i.e., for valuation assertion
assertions
Continue on next column...
One request When we design EC for one purpose, we can ask for more
can give lot information. E.g., Apart from bank & loan balance we can
of information get details of terms & conditions

15
 Part 3 -- SA 500 (CNO--SA500.040) (MCQ- Incs.18.4) (CNO--SA500.050)

(CNO--SA500.010) TYPES OF AUDIT EVIDENCE OBJECTIVE OF SA 500

ROLE OF AUDIT EVIDENCE Visual Attending physical verifications Obtain SAAE, to draw conclusions on FST items & frame opinion on FST
1.Depending on Nature Oral Inquiry For this design & perform audit procedures
Audit is logical process
Documentary Bank statement
Auditor has to give opinion whether FST give T&F view
2. Depending on impact/Reliability (CNO--SA500.060)
For making this opinion he needs high quality audit evidence
It means convincing evidence we cannot say SOURCE OF AUDIT EVIDENCE
To get such evidence he has to do objective & critical Persuasive evidence
that it is 100% or full proof ROLE OF A/C RECORDS
examination & evaluation of FST
It means where we don't have any doubt, it
Conclusive evidence cannot be contradicted by any other evidence Accounting Records Auditor majorly evaluates accounting
Reckless & negligent examination & evaluation may lead to
legal action, loss professional standing & prestige (Internal Audit Evidence) records to obtain audit evidence
*Auditor should try to get more & more persuasive evidence
Ex- Documentary evidence is more persuasive than oral evidence Following can be used to obtain audit evidence
SA 500 explains what constitutes SAAE audit evidence & auditor's responsibility
on performing audit procedures to obtain it, so as to draw conclusion As in audit we have less time & cost constraint more persuasive
evidence is preferred over conclusive Reperforming procedures in Reconciling Related &
Analysis & Review.
financial reporting process similar type of information
(CNO--SA500.020) (QNO-500.01) (MCQ-500.1)
3. Depending upon source 2 types of AE [Ex- generating trial balance [Ex- Comparing sales report
[Ex- Sales Report]
AUDIT EVIDENCE from accounting software] with monthly transporter
Internal External bill etc.]
Meaning
Originates within clients Originates outside clients organisation
organisation If above evidence are internally consistent & agree with
Anything which helps auditor to draw conclusions on financial financial statements auditor gets assurance
statements whether they give true & fair view is audit evidence E.g., Quotations / Purchase Challan &
E.g., Sales Challan & Forwarding Forwarding Note / Debit Credit Independent sources Ex- Third party confirmations, Analyst reports, comparable
Generally includes two types of information (External Audit Evidence) data from competitor (bench marking data)
Note / Sales Invoice Note received
GRN / Inspection Report If auditor obtains different nature of audit evidence from different
More Reliable
Accounting records Other information Important Principle sources & if they are consistent with each other he get much
Cash Memo / Debit Credit more assurance thanconsistency of individual audit evidence
Comes from TP, which are normally not
All the documents which are prepared during It helps to authenticate accounting records Note Issued
interested in manipulation of others
the course of accounting process are & support true & fair view of financial
Less Reliable
covered here Ex- Vouchers, Worksheets, statement If auditor has reason to doubt (CNO--SA500.070) (MCQ-500.14,500.15)
Cost allocation, Depreciation calculation, Client & Staff has control independence of TP, be careful
Legal records AOA, MOA, BOD
Journal entries, Ledger, Trial Balance AUDIT PROCEDURE TO OBTAIN EVIDENCE
minutes, court orders
Not suggested to suspect, but be
Employee records communication Types of Audit Procedure
alert to possibilities of manipulation
with employees, employee register etc.
& creation of false evidence
Production records consumption Risk Assessment Procedures Further Audit Procedures
(RAP) (FAP)
Confirmations from third parties Always try to match internal & external evidence as far as practical
Collecting information & obtaining Test of Substantive
Approaches by Auditor If external evidence not available corroborate from various internal evidence
understanding of entities environment, Controls Procedures
entity & its internal control system.
4. Corroborative v/s Contradictory Evidence
He uses combination of accounting records & other information
Substantive Analytical Test of
So as to identify RMM at FST Procedures Details
As Auditor performs various audit procedures he
Level & Assertion Level
gets initial audit evidence for financial items

Evidence obtained after this is called additional audit evidence if

additional audit evidence supports initial audit evidence

Yes No

It is called corroborative audit evidence It is called contradictory audit evidence

16
(CNO--SA500.080) (QNO-500.05) (MCQ-500.3,500.7,500.8, 500.13, 500.16, (CNO--SA500.110) (QNO-500.14) (CNO--SA500.135)
Incs.51.1, Incs.51.2, Incs.51.3, Incs.51.4, Incs.51.5)
NATURE & TIMING OF AP CHANGE APPROPRIATNESS OF AE
METHOD OF COLLECTING AUDIT EVIDENCE
IF DATA IS IN ELECTRONIC FORM
1.Factory Visit : Observation Measure of Quality of AE

Auditor 2. Sales File : Inspection
3. Cross questioning
Employee: Inquiry
Certain data may be in electronic form only. (E.g., Sales invoice in McDonalds etc) Reliability
Quality means
Relevance
For certain period (E.g., Monthly salary computation details)
SA 330 Design AP for SAAE
At certain point of time (E.g., Matching report while accepting customer order)
SA 200 Balance Time & Cost obtain SAAE
Auditor can do 2 things in above situation
Then only we will be able to give opinion with
4. Recalculate GST: reasonable assurance
Either request retention Go & perform audit procedure
Recomputation of certain information when information is available
(CNO--SA500.140) (QNO-500.09)

(CNO--SA500.120) (QNO-500.03) (MCQ-Incs.44.5) RELIABILITY

7. Top customer: 6. Graph: Analytical 5. Generating TB/sales report: SUFFICIENT & APPROPRIATE EVIDENCE Factors affecting reliability
External Confirmation Procedure Reperformance
ShortCut Think about external conformation
Give opinion with reasonable assurance (high level of confidence)
(CNO--SA500.100) (QNO-500.05, 500,13) That means audit risk should be low, within acceptable level Source Form Nature Obtained by
SA 200
(2%, 5%, 10% etc.)
INSPECTION Independent Documentary Original Document Directly obtained
For this we need SAAE as compared to by auditor as
outside source paper/ Electronic/
Role of For this design & perform audit procedures to obtain SAAE as compared other as compared photocopy, face mails, compared to received
Examine Records Internal or Paper or electronic or other Media AP to internal to oral filmed, digitised etc through others
or Documents External (Printed on machines, vehicle, stock etc) From audit procedure during the audit
Def OR AE is
obtained Or other information such as previous year audit, Is more reliable
Physical examination of assets
predecessor auditor, internal auditor etc.
Further in case of Internally Generated evidence
Degree of Reliability Depends on Reliability of records or documents
It is majorly internal in the form of accounting
records, also include work of management expert Effective related Controls = increased reliability
Example of Use in
Inspection of records to check evidence of authorisation (signature)
TOC Corroborative
Inspect tangible assets: gives evidence about existence but may not Evidence can be Contradictory
cover valuation & ownership
Absence also contributes to AE
Example of
Inspection of financial instruments: gives evidence of existence Observation to EC as discussed earlier
Use in TOD
Inspection of sales contract: gives evidence about implementation of Methods
Inquiry is simple & easy to execute but
accounting policy, which affects many assertions only inquiry not enough for SAAE

(CNO--SA500.100)
(CNO--SA500.125) (QNO-500.07) (MCQ- 500.4, 500.11)
INQUIRY
SUFFICIENCY OF AUDIT EVIDENCE
Seeking info from knowledgeable person

Financial or non financial

Def Sufficient & Appropriate Factors affecting sufficiency
Within or outside entity
Quantity Quality Shortcut MRP
Written or oral
M Materiality Direct Relationship
Evaluation of Obtain information not previously possessed (New Info) Interrelationship
R RMM Direct Relationship
Responses responses can Corroborative audit evidence (consistent info)
Higher Quality may lead to lower P Population Direct Relationship
lead to 3 things quantity but higher quantity may
Info that differ significantly (Contradictory Info)
not lead to lower quality Homogenous Less
Past History of carrying Nature
Heterogenous More
out stated intention
Evidence May
about Use Corroborate Current reasons for choosing
Inquiry responses obtain
managements course of action
Intent WR
Future ability to pursue
17 specific course of action
(CNO--SA500.140) (CNO--SA500.160) (QNO-500.02,500.13) (CNO--SA500.180)
a
RELEVANCE OF AUDIT EVIDENCE USING THE WORK OF MGT EXPERT SELECTING ITEMS FOR AE
Auditor shall determine approach how AE will be selected
When Audit evidence fulfils achieve purpose of the audit Qualification
Meaning
procedures then it is called as relevant Competence Published papers or books Selecting all items
Obtain
Step 1 Capability information Personal experiance
e with expert Approaches Available Selecting specific items
When it is able to prove or disprove particular from
assertion where there is doubt it is relevant Objectivity of expert Discussion with expert Audit Sampling

We can check existence of inventory by attending Discussion with others

Examples familiar with expert
(1) Inventory physical verification but it may not sufficient to check Part 4 – SA 501
valuation of inventory as per accounting standards
Aspects of mgt expert field
Step 2 Understanding work of expert (CNO--SA501.020)
(2) Checking subsequent recovery of debtors Assumptions/methods
Step 3
Subsequent recovery of debtors will prove that debtors OBJECTIVE AS PER SA 501
were real, they existed & there valuation is appropriate Evaluating
appropriateness Source Report/ Objectives
+ Assumption + Method =
of expert's work Data Conclusion
But it doesn't prove to which year these debtor belong.
So cut off assertion is not proved Evaluate Shall obtain S&A evidence for
Evaluate Evaluate
C- Completeness Relevance
(3) Checking overstatement or understatement of creditor Relevance Existence & Condition Completeness of Presentation & Disclosure
A - Accuracy
(Both these purposes will have different relevant audit evidence) Reasonableness Reasonableness of Inventory (Part 1) Litigation & Claims (Part 2) of segment Information (Part 3)
R - Relevance
Consistency with
Overstatement of creditors Understatement of creditors other evidence (CNO--SA501.040) (QNO-501.05)(MCQ-Incs.05.1, 05.2, 05.3, 05.4)

Whether creditors include fake There is a doubt that some creditors are Part 1 :- Existence & Condition of Inventory
creditors that means doubt in (CNO-SA500.165)
existence assertion unrecorded affecting completeness
INFORMATION TO BE USED AS AUDIT EVIDENCE If inventory is material : Obtain S&A evidence for existence & condition
Relevant audit procedure will be Relevant audit procedure would include
to select creditors from books of selecting some supporting documents Step 1: Attend Physical inventory counting ,Unless impractical
accounts & then match it with other If auditor is to use any information as audit evidence he
like unmatched or year end purchase
documents such as purchase order, order, receiving reports & subsequent should ensure that it should be
receiving report (GRN), purchase payments to the creditors & then Evaluate mgt instruction Observe
invoice, payment in bank statement matching it with recorded creditors. Relevant Reliable & procedure + obtain AE Perform Test Inspect the
mgt count
as to reliability of count Count Inventory
procedures procedure
*Interesting point We can obtain evidence from different sources of
Further if any information is produced by the entity then before considering
different nature for same assertion
it as evidence he should ensure that information is
Whether they It simply means
For Ex- Existence of debtor can be checked by external APCD Performing Over entity's to match
Step: 2 reflect actual
confirmation as well as subsequent recognition. Audit final inventory records &
Procedures inventory
records count results actual inventory
Designing audit Designing test of controls Accurate Sufficiently Precise & Detailed for auditor's purpose Complete
procedures
In test of controls we check controls are able to (CNO--SA501.060)
Meaning (CNO—SA500.175)
prevent, detect or correct material misstatement

We have to identify part of the control which protects a particular INCONSISTENCY OR DOUBT OVER SPECIAL CASE 1 : COUNTING IS CONDUCTED
assertion & whether it is performing properly. Ex- Signature & RELIABILITY OF AUDIT EVIDENCE AT DATE OTHER THAN YEAR END
Stamp of senior manager ensures that only genuine purchases
are recorded, if signature & stamp are present on documents it If auditor come across a situation Perform above procedure +Obtain evidence whether changes
proves assertion of occurrence. in inventory between count date & date of FST are properly recorded

Substantive Procedures Information with one source is Auditor has doubt over reliability of Adjusted in Reconciliation
OR
inconsistent with another sourse information to be used as audit evidence Reconciliation of Accuracy &
changes Perpetual Reliability
Inventory between
Substantive procedures It includes It should be are proper Records Reasons for
For Ex- External count date & B/S date
The auditor shall determine what modification should be done Significant Difference with
are designed to check analytical designed to confirmation &
to audit procedures as necessary to resolve the matter physical counting
assertion of transaction, procedures check subsequent recovery
balances & disclosures & test of particular of debtor proces
debtors existence It should consider the effect of that matter if any on other aspects of audit.
in financial statements details assertion

18
(CNO--SA501.080) (CNO--SA501.140) (QNO-501.11, 501.11.50) (MCQ-501.2, Incs.24.2) Part 5 – SA 505

SPECIAL CASE 2 : COUNTING IS IMPRACTICABLE PART 2 - LITIGATION OR CLAIMS (LOC) (CNO-SA505.020) (QNO-505.03) (MCQ-Incs.52.3)

Reason for Impractical
Inventory counting
Nature of Inventory
Location of Inventory
(SA 501 objective talks about completeness & then as per EXTERNAL CONFIRMATION (EC)
Perform alternative Alternative procedure
audit procedure doesn't give S&A evidence detailed procedures it covers all assertions) W
Direct written response to auditor from TP
Step 1:-
Definition
Comparison with If not possible to give WPaper/Electronic or other medium
previous year Design & perform audit procedure to identify RMM in litigation
S&A evidence regarding

Threats to safely Acceptable reason Inspect prior existence & Condition

or claims (LOC) following are some procedures
~V
Source
Form & Nature
Independent outside entity
Documentary form & Original
Purchase of Inventory Inquiry of mgt inhouse legal counsel & others within entity EC is considered reliable because
documents W Recipient ~ Obtained directly by auditor
General Not acceptable Reviewing minutes of TCWG (Audit committee )/BOD
Inconvenience reason Inspect Modify opinion as Examples ShortCut just imagine B/S & P&L
documents of Correspondance between entity & external legal counsel
per SA 705
Difficulty Time No alternative audit subsequent sale Reviewing legal expense accounts
procedure available B/S P&L
Cost involved
or audit evidence Internal Auditors Step 2 :- What if RMM is identified?
report w
will be less than FA Property title deeds ~
persuasive It RMM is identified in litigation or claim (LOC) or risk that other wBank W with TP Transactions Terms of
agreement
Loans & Related
LOC exist (List incomplete) Inv. Purchased but of
Balances Investments Details
Can not avoid physical verification Creditors W not delivered transactions
Auditor should seek direct communication with entity's external w Stock Held by Third Party
legal counsel W
(CNO--SA501.100) (QNO-501.07) (MCQ-501.1, Incs.40.3,Incs.47.4) Debtors Balances
W
Use letter of inquiry, designed by auditor, prepared by mgt& sent by
SPECIAL CASE 3 :- CUSTODY CONTROL Bank Balances & other info
auditor, response will be directly sent to auditors w
OF A THIRD PARTY
If prohibited by law then auditor shall perform alternative audit procedure
(CNO-SA505.040) (QNO-505.05/505.07) (MCQ-505.6, Incs.47.3, Incs.47.5)
For material Inventory obtain S&A evidence by following
Meeting: In certain cases because of Complexity/Significant Risk/Disagreement
between external legal counsel & mgt then-meet external legal counsel, needs mgt EXTERNAL CONFIRMATION PROCEDURES
Confirmation from TP Perform Inspection or Other Audit Procedure permission & held in presence of mgt representative
regarding Quantity &
Condition Depending on circumstances Disclosed to Auditor Auditor shall Maintain control over external Confirmation request sent to Third Parties
Integrity/objectivity of TP Steps 3:- Ask for written All known actual or possible
representation LOC relevant for FST Accounted
Apply Following are important 4 Steps
SA 505 Disclosed properly in FST

(CNO--SA501.200) (QNO-501.14) Step 1 Step 2 Step 3 Step 4

(CNO--SA501.120) (QNO-501.09)
Determine Selecting Designing Confirmation Sending Request
MATTERS RELEVANT IN PLANNING ATTENDANCE AT PART 3 : SEGMENT INFORMATION information to appropriate Request +
be confirmed Confirming Party Follow up Request
PHYSICAL INVENTORY COUNTING or requested
S&A evidence regarding presentation & disclosure as per applicable FRF Properly Contain
Locations of inventory Having knowledge Addressed return Additional/Follow-up
A/c Balances & & authority to address request is sent when
Visit Related Points Nature of inventory Understand methods used in Perform analytical procedures other elements respond on behalf replies to previous
(Directly to
determining segment information or other audit procedures. Transactions of TP entity auditor) request are not
Stage of completion of WIP Terms of received
Risk of material misstatement related to inventory Agreements
Evaluate Methods as per AS & Ind AS
Risk related points Internal control established for inventory
Whether perpetual inventory records are maintained Test application of such methods

Whether proper instruction are given for physical verification

(CNO--SA501.200)
Physical verification Timing of physical verification
Assistance of auditor's expert required for physical verification UNDERSTANDING METHODS USED BY MANAGEMENT

(Further explanation)

Consistency with prior periods & adequacy of disclosures with respect

to inconsistency
Sales, transfer & charges between segments & elimination of inter
segments accounts
Allocation of common assets & cost among segments

19 Comparison with budget & other expected results such as net profit margin
 FACTORS TO CONSIDER WHEN DESIGNING
CONFIRMATION REQUESTS INCLUDE:
Letter Head of the Company
To
Customer
Address
Subject:- Confirmation Request
Our annual audit is being conducted by
ABC & Associates; it's their regular audit
procedure to call for confirmations. This
time your account is selected for
confirmation process. This doesn't change
or has any impact on our legal
understandings & balances. It has nothing
to do with discounts and other issues.
Balance / Transaction / Cheque /
Agreement etc as per our records is…….
Sign
1.Layout & Presentation
Letter Head Vs Blank
2.Management Encouragement
More Encouragement—More Response
3. Assertions being examined
Occurrence-Transactions (Dates)
Cut off – Last Bill & Last Cheque
(Number)
4. Ability to Confirm information
Invoice wise balance vs total balance
Depending on Software & Its access
5. Management Authorization Sign
Higher Authority—More Response
6. Risk of Material Misstatement
4. Past experience says generally no mismatch
(CNO-SA505.080) (QNO-505.08) (MCQ-505.5, 505.3, Incs.24.3) (CNO-SA505.130)
NEGATIVE CONFIRMATION EVALUATING EVIDENCE OBTAINED
Def: Confirming Party/ TP will reply only if Confirming Party After receiving responses
disagree with information provided in request Exception
Auditor will get complete Responses
No Exception
Less persuasive evidence as compared to positive confirmations details of No Responses
so positive confirmation is preferred
He will have to evaluate Sufficient (Quantity)
Negative confirmation as sole substantive audit procedure results are they Appropriate (Reliable & Relevant)
for RMM only if ALL following conditions satisfied
Enough to draw conclusions
ShortCut: Imagine Herba Life Nutrition Co. (Notional)
Or Additional audit procedures are required
1. First it takes 50000 deposit from each agent Assess RMM is low
Controls relevant to assertions are
2. App based dealings & daily cash deposit operating effectively Part 6 – SA 510
(CNO--SA510.020) (QNO-510.01/510.03)
Comprises large number of small,
3. Agents spread across world, 10000 agents homogeneous transactions,
balances, conditions
WAPPLICABILITY: APPLICABLE TO INITIAL AUDIT ENGAGEMENTS
Very low exception rate is expected

Low Risk—Negative Confirmation
Request
Please write balance as per your records
High Risk—Positive Confirmation
in cut out area given below
Request
W
Not Audited
Initial Audit Engagement Immediately preceding year
Not aware of circumstances or Audited by a predecessor
5. Present experience, Agents are prompt in conditions that would cause recipients auditor(someone else)
replying of negative confirmation to disagreed

7.Method of Communication 8. Prior Experience

request
X Objective Obtain S&A E
Op bal contain material misstatements

Paper Form / Electronic When it should be sent / How many evidence whether Consistency in implementation of A/C
Form / Any Other Form should be selected (CNO-SA505.100) policy if There are changes whether
properly accounted, presented, disclosed
DOUBTS OVER RELIABILITY
OF RESPONSES TO EC
(CNO-SA505.050) (MCQ-Incs.03.5) (CNO--SA510.040)
If there are Perform Modify
If Adjust
OBJECTIVE & DEFINITION factors that give further audit
confirmation NTE of Get S&A INCLUSION IN OPENING BALANCES
rise to doubt procedures RMM/ other audit
is not evidence
to resolve reliable ROF procedures
Objective of Design & use EC in such a manner to obtain relevant & over reliability doubt Means opening balance of FST amounts such as assets
SA 505 reliable audit evidence & liabilities
Opening Balance
Request to respond directly to auditor Includes matters of disclosures (notes to A/c) where
Positive (CNO-SA505.120) (QNO-505.11) (MCQ-Incs.03.3) status as on beginning of the year is required.
Confirmation Provide requested information OR E.g., Contingencies & Commitments
Request (PCR) Whether confirming party agrees with info
given in request MGT’S REFUSAL TO ALLOW AUDITOR TO
Definition
SEND CONFIRMATION REQUEST (CNO--SA510.060) (QNO-510.03)
Request to respond directly to auditor
Negative Confirmation
AUDIT PROCEDURE TO EXAMINE OPENING BALANCES
Request (NCR) Only if confirming party disagrees with Inquire & Determine Reasonableness of Management Reasons
information in request
Includes situation where confirmation request is undelivered If its reasonable Check whether Obtain S&A evidence whether there is consistency in
Non-Response If its not reasonable implementation of A/C policy, if there are changes whether
Failure of confirming party To respond or fully respond op bal is misstated properly accounted presented, disclosed
Further evaluate effect on RMM/ROF
Information provided by confirming party
& Evidence from Last year Evidence from current year Misstatement Detected
Difference between Apply Alternate Audit Procedures and
Information sent in confirmation Request Obtain S&A Audit Evidence 1. Whether cl. Bal have 1. Evaluate whether current 1.If misstatement is
Exception or info in entity's records been correctly brought detected in op bal then
year audit procedure provide
forward from LY ledger perform additional
Analyse reason for difference evidence relevant to op bal
Inform TCWG procedures
No, S&A Yes, S&A
& consider implication 2. Agree op bal with the
Is it a misstatement on Audit & opinion Evidence Evidence Obtained
most recent FST 2. Perform specific audit 2. If there is
Assess for whole population procedure to obtain evidence misstatement in current
about op bal year also follow SA 450
3. Read predecessor AR,
If any modification evaluate
whether it leads to RMM

4. If any prior period item then trace it to revious period documents

20
(CNO--SA510.080) (MCQ-510.1, 510.2, Incs.52.4) (CNO--SA550.060) (QNO-550.03) (CNO--SA550.080) (QNO-550.04)

AUDIT CONCLUSION & REPORTING RESPONSIBILITIES OF THE AUDITOR MAINTAINING ALERTNESS FOR RELATED
PARTY INFORMATION WHEN REVIEWING RECORDS
1. Responsibility to Generally there are specific standards on
Opening Balance Consistency of A/P Modification in predecessor AR OR DOCUMENTS (FOLLOWING DOCUMENTS OR
FRF understand financial related parties which tell us how accounting
reporting framework should be done & what disclosures to be made RECORDS ARE GOOD SOURCE OF INFORMATION)
Unable to obtain Contain material Not Change If relevant & material in notes to accounts for related party
S&A evidence misstatement consistently not in CY FST transactions, relationships & balances
applied on Auditor should remain alert while inspecting records or documents given
(no proper A/C properly
op bal below as they may give information about related parties relationship and
Express presentation, (change not Modify as per SA 705 Auditor should understand these requirements carefully transactions which were not told by management previously.
disclosed) valid)
Qualified (Better explained in
opinion Accounted SA 710) Risk 2. Responsibility with respect to risk It is mandatory to inspect following documents
or disclaimer Express
Qualified Presented
as per SA 705 Auditor is supposed to identify, assess risk of material misstatement External Confirmations
rd
From Banks, Legal Counsel, 3 Party
or adverse Disclosed
opinion as per that entity will not be able to identify, account for or disclose related Minutes of meeting of shareholders
Minutes
SA 705 party relationship, transaction & balances
Express Qualified or Adverse Opinion Other records or documents Eg. Scheme of Reconstruction
Then he should determine appropriate response for this particular risk
Documents which may be inspected to give information
Part 7 – SA 550 He should also check whether there are fraud risks factors as explained in
SA 240 because these factors It is easy to commit fraud in related party In the sequence of importance
(CNO--SA550.020)
Responce
S 3. How to handle Risk Sec. 189 Register
DEFINITION OF RELATED PARTY Law Related Information supplied to regulatory authorities
Auditor should plan and perform audit keeping in mind professional
skepticism as required by SA 200 (filing with SEBI, SEC, tax returns)
Whether related party is elaborately defined in FRF
Renegotiated contracts
Yes That particular definition should be followed He should also understand & Implement requirement of SA 550
Contract Related
which are designed to assist auditor in identifying & assessing risk Contract not in ordinary course of business
No (or minimal description is given)then follow below definition given by SA 550 & respond appropriately.
Shareholders Related Shareholder register
That has control or significant influence Conclusion 4. Responsibility with respect to conclusion
A person or Director register
Directly or indirectly through one or more intermediaries Contract with TCWG/Director/KMP
other entity It is auditor's responsibility to perform audit on related party transaction, Director Related
Over reporting entity balances & disclosure and to obtain reasonable assurance about them ⑧
For transaction Life Insurance policies
with directors
Which reporting entity has control or significant influence and make conclusion whether Pensions plans with directors
Another
entity over Directly or indirectly through one or more intermediaries In fair FRF – Whether it gives In compliance FRF – Statement of conflict of interest by
true & fair view Whether it is misleading directors on various transactions
Another entity that is Common control ownership Exception: - Entity Internal audit report
under common that are under 5. Problems & Professionals
Owner who are close family Because of inherent limitations in audit there is
control with reporting common control issues while Invoices and correspondence with professionals
entity bcoz of members by Govt. Problem unavoidable risk that some material misstatements
doing audit of
Common key management (national, regional related party may not be detected even if auditor has planned &
Subsidiary and Investment Register
persons or local) performed audit as per SA
Associates
These inherent limitations affect auditors ability to detect
But if there is significant transactions or share resources to
misstatement in related party
significant extent then exception will not be available
Problems in Related Party Area
(CNO--SA550.040) (QNO-550.02) (MCQ-Incs.24.5)

NATURE OF RELATED PARTY RELATIONSHIPS AND TRANSACTIONS Mgt Unaware Collusion Concealment & Manipulation

If RPT are in normal course of business

Yes No

There may not be higher risk of MMST as In other circumstances they

(CNO—SA
compare to550 .060) with unrelated parties
transactions may have higher risk of MMST

Information system
Transactions not Extensive and Complex may be ineffective
conducted under range of relationship and at identifying,
normal market terms structure which increases summarizing transactions
and conditions the complexity of RPT and outstanding
balances.
21
(CNO--SA550.140) (CNO—SA560.040) (QNO-560.01) (1) Duty of Auditor

Even after year end auditor is suppose to perform audit procedures and
THE IDENTITY OF RELATED PARTIES ENTITIES DEFINITION OF SUBSEQUENT EVENTS
collects SAAE that management has identified events which needs
adjustments and things which needs disclosures and gave them proper
SITUATION 1 Financial reporting framework establishes related party requirement Subsequent Events accounting treatment as per FRF.
Requirements FRF will specify identity (definition of related party,
*If Auditor has checked SE of some areas like debtor, creditor etc., then no
of FRF related party transaction, format of disclosure requirement) Events Facts need to check them again.
In this case management must be having accounting
Management software system to identify related party, to group all the Events after the balance Facts which were existing as on date of signing (2) Audit Procedures
preparation related transaction at one place & make its summary so sheet date till Audit Report but which became known to auditor
as to fulfil disclosure requirement the date of signing Audit Report afterwards Understand management procedures to identify subsequent events

Auditors responsibility Inquiring management and TCWG whether any subsequent event has occurred
Audit procedures differs when auditor came
In such scenario management will be having list of related party & to know about facts Read minutes of meetings or were minutes are not available inquire about the
what changes have occurred as compared to prior period matters discussed in such meetings (Eg: - Information about proposed dividend,
Before publishing FST & AR After publishing FST & AR bonus issue etc.)
If it's a recurring engagement auditor will be having documents of the previous
year. Both these things will be useful in evaluating related party disclosures Read entity latest subsequent interim financial statements
31st March th
10 June 20th June 15th July 20th September
Auditor should make inquires with management regarding basis of
identifying. & summarizing related party relationship & transaction (3) Treatment of Adjusting Events
If Auditor identifies events require adjustment or disclosure
SITUATION 2 FRF does not establish related party requirement Approval Date Signing date of AR Publishing of FST AGM Date
Balance Sheet Date
FRF does not give definition of related parties, related party transaction Auditor should ensure that such events are properly reflected in FST as per AFRF

Management preparation In such cases management may not be Events Facts Facts (4) Written Representation
aware about related parties & their transactions
Written representation from management or TCWG, assuring that all the
Auditor responsibility Note: - Auditor may came to know about facts any time in future. If he comes to events occurring after the date of FST are properly analysed and
know facts before AGM then it is easy to amend FST and AR. If he comes to know accounted for as per AFRF.
But even in such case auditor should make inquiry from management regarding after AGM, it legally becomes difficult to amend, so it better amend in next year.
related party relationship & transaction as per definition given in SA 550.
(CNO--SA560.080) (QNO-560.06)(MCQ-560.1)

Auditor shall make such inquiry when he is understanding entities (CNO--SA560.050)

& its environment under SA 315
FACTS WHICH BECAME KNOWN TO THE AUDITOR
AFTER THE DATE OF AUDITOR'S REPORT BUT
OBJECTIVE AS PER SA 560 BEFORE THE DATE OF FST ARE ISSUED
He will get useful information from points given in 315 regarding ownership &
governance, types of investment & structure of the entity & how it is financed
Obtain SAAE that events between If auditor comes to know Auditor's Duty
Date of FST & Date of AR FACTS after Date of AR
He should be focused on entities where there are significant transaction or sharing
of resources as there are good chances that these party may be related. Which if know earlier would Auditor has no obligation to perform any audit procedures after date of Audit report
Which need adjustment or
disclosure in FST have amended audit report v
Further he should also inquire about common control relationship But if he comes to know any facts (existing as on date of Audit Report) which if known
as such relationship will be significant for the client Appropriately Reflected Respond Appropriately earlier would have change opinion of Auditor, then auditor has to perform audit procedures

Discuss matter with management and TCWG

Part 8 – SA 560
(CNO--SA560.060) (QNO-560.03)(MCQ-Incs.52.5) Determine whether FST need amendment
(CNO--SA560.020) (QNO-560.02)
Inquire how management intends to amend FST
EVENTS OCCURING BETWEEN THE DATE OF FST
SUBSEQUENT EVENTS
AND THE DATE OF AUDITOR'S REPORT Mgt Responce
All the events which occur
As per AS- 4, Basic Subsequent 31st March th
10 June 20th June 15th July 20th September
between balance sheet date and
IND AS- 10 Principles events Amending FST Not Amending FST
date of approval of FST by BOD.
Speak at AGM
Non-Adjusting Events Adjusting Events Approval Date Signing date of AR Publishing of FST AGM Date Revised Audit Report Take Appropriate Action With draw Audit Report (Public Notice)
Balance Sheet Date
Events other than the adjusting events
are non-adjusting events Events which give more
information regarding Subsequent Events as per SA 560
uncertainties (conditions)
Additional requirement as per IND AS- 10
which are existing as
on balance sheet date
Material non- adjusting events should be disclosed in
notes to accounts
Continue on next column...
Note:- As per SA 700 users of FST generally assume that auditor has
considered events & transactions, which he was aware till date of Auditor Report
22
(CNO--SA560.100) (CNO--SA570.030) (QNO-570.02) Operating
Management intends to liquidate the entity or cease operations
RESPONSIBILITIES OF AUDITOR Management
FACTS WHICH BECOME KNOWN TO THE Loss of key management without replacement
AUDITOR AFTER THE FST HAVE BEEN ISSUED Same as objectives as discussed earlier. So just reproduce same.
Employee Labour difficulties
Explains inherent limitations of audit
All the steps / points in these area are similar to previous concept, Raw Material Shortage of important supplies, loss of principal supplier's
there are few notable change given below These inherent limitations makes it difficult to
deal with EC-SD over GC Production Serious breakdown
SA 200
If management decides to amend FST and Auditor gives new Audit Report So, users of audit report should be careful Loss of major market, key customers, franchise, license or
Sales
Even if there is no reference about material Emergence of highly successful competitor
Management should inform everyone who If management does not take uncertainty in Audit Report, it doesn't mean
receive old FST and AR not to rely on it there is guarantee regarding GC. Others Catastrophes
appropriate step to inform people
and wait for new set receiving old FST to discard it, (CNO--SA570.040) (QNO-570.15) Uninsured or under insured catastrophes whey they occur
Auditor should inform TCWG Law related
In new AR, Auditor should put EMP / OMP, STEP 1 RAP FOR GOING CONCERN
explaining revision of FST and Referring to If TCWG does not take necessary steps, Non-compliance with capital or other statutory requirements
para in notes to accounts, which explain Auditor should take steps to prevent SA 315 asks auditor to perform RAP over entity, SA 570 says while Adverse change in law or govt policy or regulation
Combine
detail .reason for revision reliance on old AR. (public notice or
with doing this consider whether events or conditions exist that may cause
speak at AGM) Pending legal or regulatory proceedings against the entity
SA 315 significant doubt (EC-SD) over GC
that may if successful result in claims that entity is unlikely
to able to satisfy
Mgt's Ask Mgt. whether they have prepared preliminary assessment of
Part 9 – SA 570 Assessment entity's GC
(CNO--SA570.080) (QNO-570.07)
(CNO--SA570.010)
If Yes If No
STEP:- 2 ADDITIONAL AUDIT PROCEDURES WHEN
GOING CONCERN BASIS OF ACCOUNTING Obtain it Why it was not prepared?
EVENTS OR CONDITIONS ARE IDENTIFIED
Discuss with Mgt. How they ensured there
Fundamental A/c Assumption
are no issues with GC? If events or conditions identified that may cast significant doubt on entity's ability to
Whether EC-SD (Basis of GC Assumption)
We assume that entity will continue operations for over GC exist continue as going concern, Auditor shall obtain SAAE to determine whether or not a
forceable future (which is generally 12 months) Inquire with Mgt. whether material uncertainty exists through performing additional audit procedures including
If yes how Mgt. plans
to address them EC-SD over GC exist consideration of mitigating factors
General Purpose FST (prepared for wide range of users)
Throughout the audit for evidence of EC-SD over GC Compulsory Audit Procedures
Remain
Prepared as per going concern assumptionUnless Alert SA 315 asks auditor's to be flexible & revise risk assessment,
Management's Management's assessment if not prepared yet then
FAP when additional info affecting assessment is obtained
assessment requesting management to make it assessment
(CNO--SA570.060) (QNO-570.03) (MCQ- 570.2, 570.3)
Mgt. intends to liquidate Not having realistic alternative but to liquidate Evaluating management's plans for future actions in Adequale
Management's
EVENTS OR CONDITION MAY CAST relation to going concern assessment, whether
plans
STEP 1A SIGNIFICANT DOUBT OVER GOING CONCERN
outcome of such plan is likely to improve the situation Feasible
If GC Appropriate If GC is not appropriate
Where entity has prepared the CF forecast, analysis of
Few examples of events or condition that individually or collectively may cast Cash flow forecast is a significant factor in considering the future
Valuation will be done in such a Assets will be valued at realisable value &
significant doubt about the going concern assumption forecast outcome of events or conditions in evaluating
manner that assets will be realised & liabilities will be valued at payable value
management plans for future actions
liabilities will be discharged in normal Financial Substantial operating losses or deterioration
course of business. So historical cost in value of assets used to generate cash flow
concept & depreciation are followed. Negative operating cash flow Evaluate reliability of underlying Determine whether adequate support
In sequence of
data generated for assumption underlying the forecast
falling business Arrears or discontinuance of dividends
(CNO--SA570.020) (QNO-570.01) Negative liability or net current liability position Consider whether any additional facts or information
Additional have become available since the date on
Adverse key financial ratios information which management made it assessment
OBJECTIVES AS PER SA 570
Inability to comply terms of loan & agreements
Request WR from management & TCWG
Obtain SAAE regarding Mgt's assumption with respect to Going Concern Fixed term borrowing approaching maturity without WR
regarding plan for future actions & its feasibility
realistic prospects of renewal or repayment
If there exists events & condition creating significant doubt over going concern then make Borrowings
Excessive reliance on STB Short term borrowing to
conclusion whether material uncertainty exists & whether GC assumption is appropriate. related points Continue on next Page...
finance long term assets
After making conclusions, consider implications on audit report Inability to obtain financing for essential new product
development or other essential investments

3
steps Inability to pay creditors on due dates

- Creditors related points

Indications of withdrawal of financial
support by creditors

23 Continue on next column... Changing terms from credit to cash

 (CNO--SA580.040)
Optional, if required
Yes No
TYPES OF WRITTEN REPRESENTATION
Management & third party plan (in sequence of power)
Then express unmodified opinion Then express qualified or adverse~
Inquiring of entity's legal counsel regarding existence of litigation & claims and BUT a separate section **MATERIAL Written Representation about management responsibility
opinion as appropriate and in basis
reasonableness of management assessments of outcome and the estimate of UNCERTAINTY RELATED TO ~
of para, explain that disclosure Auditor will request management to provide WR that they have
their financial implications GOING CONCERN** to be included
in audit report was not adequate For preparation fulfilled their responsibility of preparing financial statements
Obtain & review reports of regulatory actions of financial in accordance with financial reporting framework & if there is
statements a fair presentation framework then also –
Reading minutes of share holders & TCWG financial statement give true & fair view as pv
Refer to note in Express that they cast significant doubt
Determine adequacy of support for any planned disposals of assets financial statement over going concern but opinion in not modified For information
~ Management has provide auditor with all relevant information
Reading terms of debentures and loan agreement & determine whether any v provided
MU is important for users of FST & given access to all records & people as agreed in terms of
have been breached for completeness engagement
There should be adequate disclosure in FST of transaction
Evaluate entity's plans to deal with unfilled customer orders -
Cash flow, Forecast & Interim FST
0
Note on MU
Disclosure
Separate section with heading referring to MU All transaction have been recorded & reflected in FST
Discussion on matters leading to MU
Description of Management responsibility shall be described in written
Analyzing & discussing CF, profit and other relevant forecasts with management
Cautioning users assets may not be realised & management representation in same manner in which these responsibility
Analyzing & discussing latest interim FST liabilities may not be paid in normal course of business. responsibility in are describe in terms of audit engagement (key paragraph
written about management responsibility will be same in WR & in
Subsequent Event (CNO--SA570.100) representation terms of engagement)
Perform audit procedures regarding SE to identify those that either
mitigate or otherwise affect the entity ability to continue as going concern MATERIAL UNCERTAINITY & KEY AUDIT MATTER (CNO--SA580.050)
W.R. from 3 parties
rd

If KAM reporting is applicable under SA 701 OTHER WRITTEN REPRESENTATION

Confirming the existence, legality and enforceability of arrangement with
related and 3rd parties and assessing the financial ability of such parties And MU over GC is identified Other Written Many SA's like SA 501, 540, 550, 560, 570 require auditor to obtain
to provide additional funds Representation written representation from management
SA 701 says MU by its nature is KAM as its examination
Confirming the existence terms and adequacy of borrowing facilities
needs significant auditor's attention
Apart from these SA auditor may decide to obtain WR to support
(CNO--SA570.090) QNO-570.10 So KAM will have a reference that GC matters is a KAM & other audit evidence for one or more specific assertion in FST.
also mention section in which more details can be read
(CNO--SA580.060)
STEP 3 IMPLICATION ON AUDIT REPORT
Part 10 – SA 580
MANAGEMENT FROM WHOM WR IS REQUESTED
After concluding about Material Uncertainty & its treatment, auditor
should evaluate about going concern and its implications on audit report (CNO--SA580.020) (QNO-580.01/580.09,580.05,580.07)(MCQ-580.1,580.2
WR is expected from people who were responsible to prepare FST
Incs.63.4,Incs.46.1,Incs.24.1)
From whom & they have knowledge regarding this matter & Authority
Going Concern Appropriate but Going Concern Going Concern in WR is expected These individual differ depending on the organization
whether material uncertainty exists? inappropriate
WRITTEN REPRESENTATIONS
Doubtful and Management structure of the entity, governance, law & regulation
is not willing to extend its Definition
Assessment Generally it is expected from management. So it may come from CEO
But management still use Written statement by the management
If MU doesn't If MU exists Includes & CFO or people holding such positions or other equivalent persons who
going concern assumption may not be having such titles.
exists and disclosure
is adequate as base then auditor shall give Auditor may qualify
ADVERSE opinion or give disclaimer as To confirm certain matters (matter's
Express - To support other audit evidences In some circumstances TCWG may be responsible to prepare & present financial
Unmodified appropriate. which promised under engagement statements. So it may be expected from them
(like SA 560, 570 etc.)
Opinion letter under SA 210)
- If GC assumption is inappropriate
Why it is Management is responsible for conducting entities business
Financial statements, assertions therein or generally so it is expected that they have knowledge of the entity & its
Mgt. may shift to another basis of Accounting supporting books or records (because we
(E.g., Liquidation Basis) Excludes expected from transaction & how financial data is processed & financial
want evidence to prove FST, hence management statements are prepared & presented
Auditor has to determine whether another these documents cannot be called as 'WR')
basis is acceptable
INQUIRY BY MANAGEMENT
As Auditor request the WR management consider the matter
If yes examine whether it is properly Advantages more rigorously and thereby enhancing the quality of information
implemented & adequately disclosed
in notes to accounts In some case management themselves may not be having detailed knowledge of certain or specialized
Compulsory Written Representation about areas. So they may do inquiry from the people who have knowledge of this area & then make WR
If yes auditor can give unmodified opinion Types management responsibilities

Other Written Representations For Ex- They may do inquiry from

He may include Emphasis of Matter Para to Continue
highlight alternative basis used (3) Internal counsel on
It is necessary but it is not sufficient and appropriate on its own (1) Actuary (2) Staff engineers
Not a
determining actuarial determining environmental determining provision for next
substitute It cannot substitute other audit procedures and evidences liabilities liabilities litigations Page...
24
 QUALIFYING LANGUAGE BY MANGEMENT In some assertions Within high/low categories E.g., IR is higher in
Degrees of there can be range of
it can be high, while in case of complicated
What if WR is still not reliable Inherent Risk others it can be low Degrees of Inherent Risk calculations
In some cases management may use qualifying (conditional language) while
making written representation, they may say that we are confirming matters to Business Risk also E.g., Technological Development may make
Auditor shall take appropriate action including determine the possible effect on opinion.
the best of our knowledge & belief Influences IR fixed assets or inventory obsolete

(CNO--SA580.160) (QNO-580.05) In the Entity E.g., Lack of sufficient working capital

It is reasonable for auditor to accept such wordings, if auditor is satisfied that representation Factors
Influencing IR In its E.g., Declining Industry & Large Business Failures
is made by people who has responsibility & knowledge about the given matters
OBJECTIVES OF AUDITOR Environment

(CNO—SA315-P1.020)
(CNO--SA580.080) Obtain WR for Mgt. Fulfilled its responsibility w.r.t. preparation of FST
Responsibility Provided complete information to auditor
DATE AND PERIOD COVERED CONTROL RISK (CR)
Obtain WR on specific assertions to support
Other WR audit evidence already available Controls not able to prevent, detect & correct (PDC)
Date
Definition Material misstatements individually or in aggregate
Respond After WR is received
Appropriately In assertion of TBD
As near as practical to the Period If WR is not received
Design
date of Audit report but it
Reasons Ineffective Implementation
should never
be after Audit report
It shall be for all FST and periods
referred in Audit Report
04 RISK ASSESSMENT AND INTERNAL CONTROL Maintenance
(befane) Can reduce it but not eliminate
Part 1 – SA 315 (RISK) Elimination Top Level Mgt Override
(CNO--SA580.100) (QNO-580.09)
(CNO—SA315-P1.020) (QNO-315.01, 315.05, 315.11,315.13) (MCQ 315.1, 315.2, 315.3, 315.4, 315.5, Because Mid-Level Collusion
REQUESTED WRITTEN REPRESENTATION 315.10, 315.13, 315.18, 315.20, 315.26, Incs.18.3 Incs.10.1, Incs.10.2, Incs.23.2) Lower Level Human Error
NOT PROVIDED
AUDIT RISK & ITS COMPONENTS Assessment Separate or Combined Quantitative or Non-Quantitative
Auditor shall follow the following steps 5 Separate IR
Discuss with management
zo Sampling Risk Non-Sampling Risk
Big Client Good ICS
Assessment
RMM
Inherent Risk Control Risk CR

Re-evaluate the integrity of management and evaluate whether can rely Chances that Not having properly Combined
Assuming no Internal Internal Controls Chances that Small Client RMM
on other Written Representations or audit evidence in general conclusion documented ICS assessment
Controls chances that conclusion
are not able to obtained from goes wrong
Take appropriate actions, including determing the possible effect on transaction, balance & prevent / detect sampling Inverse Relationship With efficiency of control
because of
opinion in Audit report as per SA 705. disclosure are &correct doesn't match with
population inappropriate audit
materially misstated misstatements (Detailed in SA 530) procedure etc. (CNO—SA315-P1.020)
(CNO--SA580.120)

FORM OF WRITTEN REPRESENTATION

⑳ RISK OF MATERIAL MISSTATEMENT (RMM)
Risk of Material Misstatement (RMM) Combined Risk Detection Risk
-
(Inherent X Control)Circumstances that transaction, Chances that material Chances that FST are materially misstated
Letter Public statement under law balance & disclosure presented in financial Definition
misstatements are not Presented to auditor prior to audit
statements are materially misstated.(Prior to Audit) detected by auditor
It is generally in the form of letter If law requires client to make written public Inherent Risk
statements about some of the matters which Components
which is written by management Control Risk
were required under written representation.
RMMYRe
& addressed to the auditor giving Audit Risk
Then such matters need not be Audit procedures performed
the all information AR Basis of RMM
=

covered again in WR. -

Chances that final opinion given by auditor is inappropriate. Info/Evidence obtained

(CNO--SA580.140) ** Unmodified opinion is given when modification was required

Matter of Prof
Judgement
Rather than matter of capable
of precise measurement
(CNO—SA315-P1.020)
DOUBT AS TO RELIABILITY OF WRITTEN REPRESENTATION Relates to Overall response
FST Level by auditor
whole FST
INHERENT RISK (IR) 2 Levels
Concerns / Doubt Inconsistency with Assertion Relates to Auditor decides
other Audit evidence Definition Level TBD assertion NTE of FAP
If Auditor has concerns Note:- Response of auditor reduces risks to acceptably low level
Before Susceptibility Individually or
Auditor shall perform To be MMST
considering of About TBD Reported in FST
audit procedures in aggregate
Integrity, ethical Diligence of management related controls Assertion
Competence to resolve the matter Refers to difference
values or its commitment TBD &
Analysis of Inherent Risk between
Required to be disclosed
If matters remain unresolved Misstatement as per applicable FRF
Determine the effect than auditor will have to repeat Shortcut - RD Burman Factors meaning
the 'concern/ doubt' steps again Fraud
Reasons Always consider reasons for IR while designing TOC & SP
Reliability of representations Audit Can arise because of Or
(oral or written)(all information evidence in Continue on next column... Continue on next column...
25 is given in oral or written form) general Error
(CNO—SA315-P1.020) Evaluation of IT processes Application controls (CNO—SA315-P1.040) QNO-315.05.50, 315.06,315.06.50 (MCQ-315.7, Incs.23.4, Incs.10.4)
I
related to IT dependent manual controls
DETECTION RISK
RISK ASSESSMENT PROCEDURE

Meaning
Risk that
Procedures performed by auditor
Example of Controls STEP - 1
- (HOW TO COLLECT INFORMATION)
For occurrence of sales For Completeness Entity & Environment
Won't be able to detect material misstatements To obtain To identify &
Definition understanding
No sales entry without Control Including ICS assess RMM
Difference Between IR/CR/DR Control 1 shipping report Inquiry
Regular reconciliation of quantities I
IR/CR Functions of
No shipping report till goods shipped to quantity billed Shall Include Observation & Inspection
Business & its
environment
Nature of
TBD
ICS
Control 2 actually dispatched
Controls Compensate Risk, that
Analytical Procedures 23
Several controls operate collectively, means they compensate Further detailed discussion of risk assessment procedure given above
to ensure real sales in FST What Could Go Wrong
Not dependent Not controlled Inquiry
on Audit by Auditor Assess whether all controls
operating effectively
10
Shortcut As per the importance with respect to entity
DR Function of Audit
TCWG Helps auditor to understand the environment in which
Planning
W
Team Audit Procedures DSR FST are prepared

Identify & Inquire With people given responsibility of risk

Dependent on Controlled by
(CNO—SA315-P1.024) (QNO--315.02)
w Mgt management within the entity if working fine, it will be helpful to
identify operational & regulatory risk
Audit Auditor
CONTROL RISK ASSESSMENT WHEN
Auditor Assesses IR & CR Understand design & effectiveness of internal control system

Inverse Relation Inversely Adjusts DR

CONTROL DEFICIENCY IS IDENTIFIED ~Internal Audit
personnel Whether management has responded to findings of internal
Such that ultimate AR is Auditor performs Control Risk “Rely on auditor
Controls =
within acceptable limit TOC Effective Assessment (CRA) Controls” (ROC)
WInhouse legal counsel Understand the following
Communicate to Mgt. (letter of weakness)
(CNO—SA315-P1.020)
Report on Internal Controls Law & Arrangement with business Other Litigations
Controls regulation partners (such as JV) Contractual terms
AUDIT RISK Ineffective Effect on Control Risk Assessment
Understand system changes, system
Risk that Auditor gives inappropriate opinion
(CRA) = “Not Rely on Controls” (NROC) WInformation system personnel controls, failures & its related risk
Update Audit Strategy
Meaning In circumstances where there exist MMST Marketing strategies, contractual,
Consider all controls
W Marketing & sales personnel arrangement with customer, sales trend
Auditor gives unmodified opinion
Mitigating Control Identified, Inquire with employees involve in initiating, processing,
AR = RMM × DR More than one control ~Employees recording complex & unusual Transaction
Equation for relevant assertion Tested & Effective
CRA = ROC
AR = IR × CR × DR Analytical procedures

Risk that auditor reports MMST Insignificant Risk

Compensating Control Identified,
Tested & Effective w Collect both financial & non-financial data. For Ex. Sales & square foot of
-

when they don't exist (Rarest Chance) Special Case Control Ineffective, No other control for that assertion CRA = NROC sales, square footage of selling space, quantity of goods sold etc.
Not included in Computing ratios, percentage, graphs & comparing them may help auditor
Audit Risk Loss of Reputation
Does not refer to auditor's Affects one What Could Go Wrong (WCGW) unusual & unexpected relationship
business risk because of Adverse Publicity
inappropriate opinion If analytical procedures are performed on aggregate data at high level then
Other related events Protects other What Could Go Wrong it may provide indication of material misstatement.
(CNO—SA315-P1.022) (QNO--ICS.43)
It may give auditor new information which he was not aware about.
CRA = “Rely on Controls”
CONTROL RISK ASSESSMENT Results of analytical procedures will be useful if it is consistent with
evidence from other audit procedure
Perform additional substantive procedure for such WCGW (Risk)
Consider following factors
wObservation & Inspection
Shortcut – ACE-Industries (CNO—SA315-P1.030)
Control Reliance Observation
⑧ Visit premises & plant facility
A Approach of Testing See operations
Substantive only strategy OBJECTIVES OF AUDITOR
Inspect documents, record, internal control manual
Strong CE Improves PDC & reliability of ICS Inspection
1. Understand entity & its environment including ICS (RAP) Read reports prepared by management & TCWG
Control Environment Weak CE Reduces PDC & reliability of ICS
C
Influence
But only strong CE does not guarantee 3. Design & implement
This provides 2. Identify & This provides responses to reduce audit
specific effective control basis Assess RMM basis risk to acceptable level
Expectation of operating High Expectation Be extra careful
E
effectiveness Low Expectation No need to worry At 2 levels Due to Fraud or Error

26 Continue on next column... FST Assertion

(CNO—SA315-P1.050) (CNO—SA315-P1.060) (QNO--315.08) (CNO—SA315-P1.060)

RISK ASSESSMENT PROCEDURE USE OF 1 INDUSTRY RELATED POINTS 4 FINANCIAL PERFORMANCE RELATED
STEP - 1A
INFORMATION & RISK DUE TO ERROR & FRAUD
Measurement & Review
Product
1. Info obtained in RAP
Price E.g.,
Primarily used as basis for Industry E.g., Competitive Environment Includes Demand
Identifying & Assessing RMM Analyst Credit Rating
Cyclical/Seasonal
Reports agency reports
Use of Information Test of Control Capacity
2. It can be used as
audit evidence for Substantive Audit Regulatory Requirement E.g., Effect of Regulations (CNO—SA315-P1.060)
Procedure
Technological Developments
Other External Factors
3. Option RAP + IA – RMM 5 OBJECTIVE & STRATEGY RELATED
(Including Applicable Financial E.g., Energy Supply & Cost
Hence auditor may choose
TOC Reporting Framework)
to perform Concurrently for Supplier & Customer Relationship
FST Item if its efficient SP Objectives

RMM includes both ROE & ROF Related Parties Unified Buying Groups
Marketing Campaigns
Risk due to Error & Fraud Steady regular growth
ROF is significant Entering new markets
(CNO—SA315-P1.060) Strategies E.g.,
Aggressive growth Complex strategy of
Need to follow requirement of SA 240 Acquiring competitors
2 NATURE OF ENTITY & RELATED POINTS Loss of Financing
(CNO—SA315-P1.060) (QNO-315.07) Related Business Risks E.g., L
Ownership & Governance Lack of personnel with expertise

STEP - 1B UNDERSTANDING ENTITY & ITS ENVIRONMENT Complex structure Significant complicated inter I
Insufficient or Excessive production
of Holding Co's. company transactions capacity
How entity is E.g.,
1. Industry Related Industry structured & financed Failure to keep up to date with new
~ Components in multiple tax jurisdiction F
technology, products, services
Regulatory Requirement Types of Investments (Including investment in special purpose entities) Excessive reliance on key supplier,
E
-
Other External Factors (Including Applicable
individual or product
RMM in earnings of products,
Financial Reporting Framework) Its operations E.g., Sources of Earnings lines, businesses or areas
due to mgt. fraud (CNO—SA315-P1.080) (QNO-315.09)
2. Nature of Entity & Ownership & Governance
Related Points
How entity is structured & financed Key Supplier & Potential Related Parties NEED OF UNDERSTANDING OF THE ENTITY
STEP - 1C
Customer relationships Risk of Revenue Recognition
Types of Investments (Including investment
in special purpose entities) Transaction outside normal course of Business It is a continuous process as we get exposed to entity, its environment, its document
on continuous basis. So we gather, update & analyze information for the audit
Its operations Contracts terms
Leasing premises Rendering Mgt.
changed before Complex Equity With the help of this we create a frame of reference (image) which will
3. AP Related Points Selection of AP~ Without services Without
expiry & then transactions Transactions be useful in planning the audit & exercising professional judgement
Consideration (WC) Consideration (WC)
are executed
Application of AP
Following are the areas where this knowledge will be helpful
Reason for change in AP (CNO—SA315-P1.060)
Shortcut – Main AREAS
4. Financial Performance Related Measurement & Review Materiality Determining materiality as per SA 320
M
3 AP RELATED POINTS
5. Objective & Strategy Related Objectives A Selection & Application of accounting policies
Selection of AP
R Risk of Material Misstatement
Strategies
Application of AP E Evidence Evaluating whether audit evidence is sufficient & appropriate
Related Business Risks A In Analytical procedures developing expectation Assessing risk of
Reason for change in AP
material misstatement
E.g., S -
Identifying audit areas where special audit consideration may be necessary
Ex- Related party, Going Concern
Need to involve Change in AP to make Significant new or
specialist greater comparability revised disclosure

Change in
- Entity's Environment
- Financial Condition
- Activities
27
 (CNO—SA315-P1.100) QNO-315.05, 315.15 (MCQ-315.15, 315.29, 315.30, 315.25) (CNO—SA315-P1.140) (QNO-315.26)
OTHER POINTS RELATED TO ASSERTION
IDENTIFY & ASSESS RISK OF MATERIAL
STEP - 2 Shortcut- DON points IDENTIFYING SIGNIFICANT RISK
MISSTATEMENT (IA-RMM)

Assessed 2 levels
FST Level
D Assertions may be expressed Differently by some auditors

For example
⑧ Definition
Significant risk are risk where there is higher likelihood of occurrence .
Assertion Level -

& higher magnitude of potential misstatement

Audit procedure for IA- RMM -

1 4 They may change ways, In case of audit of govt. related In significant risk we assume that there are no controls when we have to
2
Identify risks Likelihood assertions are presented entities they may add new assertions identify & assess risk, same is the case with inherent risk. So we can say
Assertion Level
throughout the Relate risks & that higher inherent risk is equal to significant risk.
FST Level Magnitude
process of RAP
0
(Pervasive) of MMST Far example they may add assertion
3 They may combine Source of Significant risk
assertions of T/B/D that transactions are as per
(CNO—SA315-P1.100) Ensure it cover all assertions legislation & proper authority (A) Significant non routine transaction
Manual intervention for data
STEP - 2A FINANCIAL STATEMENT LEVEL RISK O Overall Assertion collection & processing
Each FST gives some overall information about the entity. Interventions Management intervention to
Definition For e.g. P&L gives info. about overall financial performance Examples specified accounting treatment
Affecting many Not Identifiable with May increase risk at & B/S about overall financial position
Related to FST as a whole assertions specific assertion assertion level Complexity Complex calculations & accounting policies

Auditor has to 1st examine specific assertions which are related to Nature of non-routine transactions making it
General cases of such risks Effect difficult to implement effective controls
financial items such as TBD
(B) Significant judgmental matters
1.Deficient 3. Concerns about conditions & After this he can formulate opinion about overall assertions of FST
2. Concern about
Control reliability of entity records Different interpretations possible of accounting principles
integrity of Mgt. Negative Assertion
N applicable for accounting estimates & revenue recognition
Environment

Risk of Mgt. Misrepresentation Such that it is unlikely to get S&A

It means entity wants to say some financial items doesn't exist ⑫ Subjective & complex judgements or assuming future events
can be such that audit cannot evidence, it may lead to qualification (C)Following are always significant risk
or Disclaimer as per SA 705 They may be directly expressed or indirectly implied
be conducted
Risk of material misstatement due to fraud
(CNO—SA315-P1.100) (QNO-315.16, 315.17, 315.19, 315.23) (MCQ-315.24, 315.19, Incs.19.4, Incs.44.1 44.2, 44.4) For e.g. when entity writes, No contingent liability, it is directly Significant transactions with related party that are outside normal
expressed negative assertion, on the other hand if there is course of business.
STEP - 2B ASSERTIONS no line item of “Building”, it is indirectly implied

Gand
(CNO—SA315-P1.160)
Representation (Info) by Mgt. in FST (CNO—SA315-P1.120) (QNO-315.25) (MCQ-Incs.59.4)

-
Examined by auditor for potential misstatements
RISK THAT REQUIRES SPECIAL DOCUMENTATION
STEP - 3
Explicit Implicit AUDIT CONSIDERATION
Lineihord RAP performed Identified and Discussion
Directly/Clearly Determine whether risk is significant risk, exclude effect of controls
Not Directly written but understanding Assumed RMM concerning
stated in FST
generally assumed
magnitude obtained & at FST Level &
Related Controls
Engagement
or understood. Consider following factors, ShortCut “ CFO-CSR” sources Assertion Level Team.
Positive Negative ==
C F O C S R
Account Balance (Assets & Liabilities)
e e w W
Gamma
Balance sheet Existence Significant Outside the Related Parties
Risk of Complexity Subjectivity
Changes Normal Course Significant
Land & Completeness Fraud of Business Transactions
Building 100 Cr.
w
Valuation ~
Rights & Obligation~ Special After determining Significant Risk obtain understanding of relevant controls
Transactions (Income/Expenses/Inflow/Outflows) ->

comman -
↳I
Profit & Loss A/c Occurrence
Completeness
Sales 1000 Cr.
Accurate v

spenal
Classification
Cut-off
Presentation & Disclosure (Notes to Accounts)
Commen
-3
Occurrence/Rights & Obligations
W
Lease Rent Completeness Continue
of In Next 5 years. 0 20 Cr
Accuracy & Valuation on next
Classification/Understanding
28
Sp column...
 Part 2 – SA 315 (CNO—SA315-P2.065) (QNO-ICS.14) (MCQ-Incs.59.2) (CNO—SA315-P2.100) (QNO-ICS.03, ICS.11)(MCQ-Incs.63.3)

(CNO—SA315-P2.020) QNO-ICS.01,ICS.02 (MCQ-Incs.53.4) CONTROLS RELEVANT TO THE AUDIT 1. CONTROL ENVIRONMENT

DEFINITION OF INTERNAL CONTROL SYSTEM(ICS) Attitude (Importance)

Shortcut- MS2N Developed Light Compact Nice Watch relevant for kids v Awareness
of TCWG&mgt Concerning ICS
Definition Ability
Designed, By TCWG, to practice with Reasonable Action
Process Implemented Mgt, other M Materiality.
&Maintained Personnel following assurance
S The significance of the related risk. Elements of Control Environment
Experience & Stature
S The size of the entity. Independence from mgt
Laws & Regulation Safeguarding Effectiveness & Efficiency Reliability of (A) TCWG Attributes &Participation
Compliance of Operations Financial Reporting The nature of the entity's business, including its organisation and Related of TCWG Extent of Involvement & Info they receive
Assets N
ownership characteristics. Asking Difficult Questions
Points covered for definition, objectives, general purpose all are same Appropriate
D The diversity and complexity of the entity's operations.
Action Interaction with internal
L Applicable legal and regulatory requirements. & external auditors
(CNO—SA315-P2.030) (QNO-ICS.02.50)
C The circumstances and the applicable component of internal control. Approach towards Business Risk
(B) Mgt Mgt philosophy
UNDERSTANDING ENTITIES INTERNAL CONTROL The nature and complexity of the systems that are part of the entity's Attitude towards info processing & accounting function
N Related & operating style
internal control, including the use of service organisations. Attitude & Action towards financial reporting
Which controls to understand? Only those controls which are relevant to audit Whether, and how, a specific control, individually or in combination with
W (C)Human 1. Policies & Recruitment , Orientation ,training, evaluation,
others, prevents, or detects and corrects, material misstatement. counselling, promotion, Compensation remedial action
Resource Practices
Which controls are relevant? Out of all controls in entity Related
(CNO—SA315-P2.075) 2. Competence Mgt consideration Their translation
Controls related to financial reporting are more likely to be relevant related allocation of competence level to skill & Knowledge

But it is not necessary that all financial reporting

UNDERSTANDING RELEVANT CONTROL 3. Organisation Structure to To achieve objectives of planning
connect employees & teams execution, Control & reviews
controls will be relevant far current year audit
First understand Design then test Assignment of authority & responsibility,
Helpful in assessing controls risk which Design of Ability to Implementation 4. Authority & Responsibility authorisation hierarchies and reporting
will helpful to assets RMM Control PDC
What we relationships
Benefits of understanding ICS Ability to identify TBD & there assertions understand? If design is not satisfactory no need
where MMST can occur Implementation to test implementation 5. Communication Communication & enforcement of integrity & ethical values
(operating effectiveness)
Designing NTE of further Audit procedures (CNO—SA315-P2.110) (QNO-ICS.05)
Improperly designed control may
become significant Deficiency
(CNO—SA315-P2.040) SATISFACTORY CONTROL ENVIRONMENT - NOT
Inquiry
AN ABSOLUTE DETERRENT TO FRAUD
How we understand Observation
STUDY OF VARIOUS ASPECTS OF RAP Inquiry alone not Sufficient Positive Factor
control Inspection
INTERNAL CONTROL SYSTEM Affects evaluation of Not absolute deterrent to fraud
Tracing
Satisfactory Control other components of ICS
(I)General Nature (III)Nature and Extent Not enough to be used as evidence of Test of control Environment (SCE) Only SCE does not prevent,
(II)Controls Relevant (IV)Components of
and Characteristics of the Understanding Use of understanding Reduces RMM detect correct material
to the Audit. Internal Controls. If control is highly automated.
of Internal Controls. of Relevant Controls. Affects NTE of further misstatement
audit procedure
Understanding implementation of control may act as
(CNO—SA315-P2.060) evidence of Test of control (CNO—SA315-P2.120) (QNO-ICS.05.50) (MCQ-Incs.59.3)

GENERAL NATURE AND CHARACTERISTICS Because of Inherent consistency of Automated control

ENTITY RISK ASSESSMENT PROCESS
OF INTERNAL CONTROLS Useful for CR & RMM
Auditor should obtain understanding of Entity's Risk assessment Process
Same as Definition of Inter Control System
(CNO—SA315-P2.080) (CNO-ICS.03, ICS.04)
-
Identifying Risk How entity identify business risk which affect FST items

COMPONENTS OF INTERNAL CONTROL Assess likelihood How entity assess probability that misstatement would occur

5. IS IT Significance of Risk How Entity estimate magnitude of misstatement that could occur

4. Monitoring Action How entity Adresses these Risk

Controls
Understanding above process & its results will help
3. Control Activities Benefits auditor in identifying & assessing RMM

2. Risk Assessment Process

~ 1. Control Environment
29
(CNO-SA315-P2.140) (QNO-ICS.06) (MCQ-ICS.3) (CNO-SA315-P2.160) (QNO-ICS.07) (MCQ-Incs.59.5) (CNO-SA315-P2.195) (QNO-ICS.08)

3.CONTROL ACTIVITIES 4. MONITORING CONTROLS 5.UNDERSTANDING INFORMATION

SYSTEM & COMMUNICATION
Control Activities are policies & procedures which are written
Process to assess effectiveness of Internal Control
Meaning of by TCWG & management to ensure that transaction within Definition It is auditors responsibility to understand important transactions, how it is processed
performance & taking remedial action.
Control Activities the organization are happening as per preference to achieve objectives in business & how its processing takes place in Accounting
of the entity & prevent, detect and correct material misstatement Auditor Responsibility Shall obtain understanding of how entity maintains controls.
For this following matters should be understood
Through ongoing activitie
Entity may have many internal controls
but all of them are not relevant for audit Separate Evaluation Transaction related points
Ways of Monitoring
During risk assessment process we identified Combination of above Identify class of transaction that are significant
Meaning of Such controls
controls which appear capable of preventing, May use info from external parties
Relevant detecting & correcting material misstatement are relevant for Understand business process of these transactions how they are initiated,
Controls audit (E.g. customer complaints, regulator comments etc.) recorded, processed, checked & corrected & transferred to general ledger &
for significant class of transaction
reported in financial statements
Mgt Close
Small Monitoring For each class of transaction identify important accounting records, specific
Entity has lot of IT systems So controls which involvement
Entities Accomplished by Owner / accounts which are used to initiate record, process & report transaction
in their information compensate IT risk are Manager in Operation
processing Significant
relevant for the auditor Events & Understand how information system captures events & conditions other
variations
Examples of specific control activities To
identify
from
expectations Performing
② Condition than transactions

Ex- Goodwill w/off, impairment, investment valuation, provision for

Following are the control activities which are generally used by the entity to prevent, remedial
Inaccurate actions litigation etc.
detect & correct material misstatement Financial Data

(1) Physical controls

They safeguard important assets & records of the
entity & also ensures regular physical verification &
matching them with records
(CNO-SA315-P2.190) ⑭ Financial
reporting
process
Understand financial reporting process used to prepare financial
statements (this will include all the steps required to prepare financial
statements after generating trial balance)

It is must to divide work over different individuals to Understand what are the controls related to journal entries, including
(2) Segregation of duty ensure that work of one person is automatically MONITORING OF CONTROLS - IN THE
Journal non-standard journal entries which are for non-recurring or unusual
checked by other ENTITY HAS AN INTERNAL AUDIT FUNCTION

③
entries transaction or adjustments (setoff of debtors & creditors, bad debts
All important transaction should be initiated only w/off, closing stock)
(3) Authorization after getting authorization from senior authority Monitoring of Control With the help of Internal Audit

(4) Information When transactions are processed corresponding IA Function / Resposibility

information should be carefully captured, processed
processing & reported Understand IA Status with in organization structure
Activities performed or to be performed
On periodical basis reports such as sales report,
(5) Performance purchase reports, production sales report should be Related to Governance
Review created so that unusual activities are identified &
rectified It may include Related to Risk management
Related to evaluation of
Matter while different controls
FURTHER EXPLANATION OF CONTROL understanding IA It changes as per size & structure of organisation
ACTIVITIES RELEVANT TO AUDIT Function / Responsibility
/ Activities It may cover internal controls relevant to Audit.
It includes following controls If yes external auditor may take help of IA.
He will have to follow SA 610
(1) Controls which were identified during risk assessment process as capable of .
preventing, detecting & correcting misstatement
(2) Controls which are related to significance risk

(3) Controls in areas where there is high level of automation & substantive
procedures alone do not provide sufficient appropriate audit evidence

(4) Apart from this auditor can consider any control as relevant for audit as per his
professional judgement

30
(CNO-SA315-P2.198) A Areas of controls which are weak & where there are excessive controls (CNO—SA315-P2.240) (QNO-ICS.23,ICS.25) (MCQ-Incs.41.3)

COMMUNICATING FINANCIAL R Whether management successful in correct Recording of transaction

NARRATIVE RECORDS
ROLES & RESPONSIBILITY Whether management is getting Reliable records, reports, certificate from
R its information system & professional which are hired
2. Communication between TCWG & Recommended where there is no formal control
1. External communication such as system
management where audit committee may I Whether Internal audit department is operating effectively
those with regulatory authority
inform management about important Definition Prepared after observation & Actual Testing
where they may inform industries S Whether system is Safeguarding assets properly
accounting policies that should be followed Complete & Exhaustive description of ICS
or particular entity what kind of & what should be frequency & timing of Auditor may come across Suggestions for management in improving internal
S
financial information is expected preparation of financial statements control system To Comprehend System
E Types of Error & frauds which are likely to be located in ordinary course of Disadvantage To Identify weakness
3. How entity communicates financial roles & responsibility to its employees business To Incorporate Changes
For Ex- Who is responsible for fixed assets, investments, debtor, trade Extend the depth of examination that will be required in certain accounting
E (CNO—SA315-P2.260) (QNO-ICS.15) (MCQ-Incs.41.4)
payable, provisions etc. areas

Further explanation (CNO—SA315-P2.210) (QNO-ICS.41) FLOW CHART

a. Understand how entity communicates roles & responsibility in detail to the individuals Definition Graphic presentation of ICS
FORMULATE AUDIT PROGRAMME
in accounting department with respect to internal control over financial reporting Advantage Birds Eye View of system, flow of transaction & Integration
AFTER UNDERSTANDING IC
Most concise way of review
b. How entity explains employees in accounts department how their work is used in
Understand IC Minimise amount of narrative explanation
overall process & where they can report exception (mistake) so that rectification can Responsibility of Auditor
be done as early as possible Test actual operations Easy to spot deficiencies & suggest improvement

Ex- Amt. & interest payable to micro, small & medium enterprises is relevant for Why? (Benefits) Shortcut - WRAT (CNO—SA315-P2.280) (QNO-ICS.21, ICS.25) (MCQ-Incs.41.2)
Schedule III notes to accounts reporting, disallowance of interest in tax computation &
also reporting in form 3 CD of tax audit Weakness & Suggestions CHECK LIST
Objective Audit programmes & evaluation
Employee will be told whom to report if he has to rectify things Series of instructions or questions
Bring to notice weakness
Which member of staff must follow & answer
Suggest measures to improve Definition
c. Whether entity has company policy manual & financial reporting
He completes instruction, put his initials after performing instruction
manuals explaining how to deal with transaction & events On interim date check whether weakness removed
Answered in Yes/No / NA
Real state of affairs
d. Whether entity promote open communication so that exceptions Example Check list for purchases
are reported & rectifications are done as soon as possible. Sometimes, after installation mgt doesn't pay attention to compliance
Tender Written order PO Standardised PO Pre-Numbered
He may believe ICS are operational, which are not
e. In small entities, communication is less structured so it is fast clear & action is taken Stock Control Accounts Person Independent of
immediately. But in larger entities, communication can be slow formal & it may take State of affairs may be worst
time to reach people & to initiate rectification He may make inappropriate AP
Purchase Receipt Inspection Custody
Apropriate Audit procedure
(CNO—SA315-P2.200) (QNO-ICS.31, ICS.02.50) Evaluation Studied by Principal/Manager/Senior
Helps deciding appropriate audit procedure
EVALUATION OF INTERNAL CONTROL BY AUDITOR Where controls are weak, some Audit procedure may be selected which are (CNO—SA315-P2.300) (QNO-ICS.17) (MCQ-ICS.1, Incs.41.5, Incs.63.1)
generally not applied or extent of Audit procedure can be increased
It is auditor's duty to evaluate & understand test internal control system as a part
In wages Observe distribution, to INTERNAL CONTROL QUESTIONNAIRE
of financial audit. It helps auditor to understand which areas are less risky which check dummy workers
are more risky so he can further plan substantive procedures. Example Controls are
weak Increase number of EC Request Comprehensive series of Questions
In Trade
Receivable Date should be year end & not Questionnaire is usually issued to Client
We understand internal control with respect to transaction any date close to year end Yes - Satisfactory ICS
as well as accounting controls also for the same Client is requested to fill it
Test checking plan Influences sample planning Questions framed where answer is No - Suggest
Benefits / knowledge obtained from evaluation of internal control Definition weakness
Most widely used
NA - Not relevant
Shortcut – A4R²IS²E² for benefits Framed in one complete set or in sections
(CNO—SA315-P2.220)
Adequacy of internal control system to cover all the areas and circumstances Done Annually
A
TOOLS OF ICS REVIEW If inconsistencies or incongruities noticed, the matter is
Administrative control (system related to managing staff) like if there is
further discussed
A weakness in recruitment of employees then it will increase risk of dummy
employees which auditor needs to be careful
Narrative Records Flow chart Check List Questionnaire
Audit techniques & Audit procedures that will be required to test assertions
A
where controls are not performing properly

A Areas of controls which are weak & where there are excessive controls

31 Continue on next column...

(CNO—SA315-P2.320) (QNO-ICS.27) (CNO—SA315-P2.360) (QNO-ICS.29) (MCQ-Incs.59.1) Part – 3 SA 610
INTERNAL CONTROLS IN SMALL BUSINESS LIMITATION OF ICS
(CNO—SA610.020) (QNO-610.01)(MCQ-610.1)
Even if ICS are effective, there is only reasonable assurance
Controls in Segregation In same case USING THE WORK OF INTERNAL AUDITORS
Audit Extensive use
Small & of duty is compensated by
Objectives of Substantive Related to TOP Level Related to MID Level Related to LOWER
Large is not missing. owner supervisory
are same .same ICS is weak control Procedure Level Employees DEFINITION AND SCOPE (RANGE OF ACTIVITY) OF INTERNAL AUDIT
Judgement by Mgt. Collusion among people
Mgt Override
Definition In Internal Audit function we evaluate / examine 3 areas
(CNO—SA315-P2.325) Cost benefit analysis. Human Judgement Lack of Understanding
in Decision making Purpose
Governance of entity Risk Internal Control
MANUAL & AUTOMATED INTERNAL CONTROL (CNO—SA315-P2.380) (QNO-ICS.33.400, ICS.33.500, QNO-ICS.34)(MCQ-Incs.55.4) (How they are managed) Management Systems

Types of controls There are two types of controls IFC v/s IFCR
So that we can give assurance and also suggest improvements
1. Manual controls are based on activities done by individuals Internal financial control v/s Internal financial control over reporting
Scope of Internal Audit Function
2. Automated controls are machine / software based
Definition
3. Use of IT based Automated controls depends on Activities related to Governance Internal Auditor may be require to evaluate
nature & complexities of business Defined in u/s 134(5)(e) which is similar to

Understanding characteristic
Of manual & Automated controls will be useful in Risk -IFC
definition of internal control as per SA 315
System designed by TCWG or management
Performance of management and
accountability with which employee
Compliance with ethics
and values while
Appropriate
communication
Assessment & Designing further Audit Procedures work to achieve performance. running organization with respect to
Law To ensure that operations are in compliance with the law
Way transaction initiated, processed, recorded
Transaction operation
& reported is different Communication of risk and related Communication between TCWG,
Safeguarding assets
control information to appropriate Management, External Auditors,
In manual system individuals approve, Review, Reconcile & do follow up Operations Orderly & efficientl conduct of business as per company policies areas/department Internal Auditor.
for difference. In Automated system machine / software do these things.
Accuracy & completeness of financial records Activities related to Risk Management
In manual system we see physical Documents while Financial information
Format of Documents Timely preparation of reliable financial information Assist entity to identify areas where there is significant exposure to risk and there
in Automated we see electronic documents

Entity may have combination of Automated & manual controls

W
IFCR Frauds & Errors Prevention & detection of fraud & error
by improving risk management system of entity and improving internal controls to
compensate those risk.
Not defined in companies act but defined in guidance note
Combination Further manual controls may be independent of IT system or they They also help entity in assessing fraud risk and detecting fraud.
of controls may be dependent by using IT produced reports or they may Reliability of financial reporting (Accounting records)
System designed Internal Control (In sequence of Importance)
compliment IT system by monitoring its function & handling exception to ensure Preparation of financial statements for external
purpose as per Generally accepted principles Review of Compliance of Law & Regulation
(CNO—SA315-P2.335)

BENEFITS OF IT IN ENTITY'S
(QNO-ICS.33)
v Difference between IFC v/s IFCR
From above it is clear that IFCR is a subset of IFC. IFC is much broader
Internal Auditor may be required to review requirements of law, regulation
and rules
INTERNAL CONTROLS as compared to IFCR Internal Auditor require to evaluate management policies and directives
given for comply these laws
Shortcut – SMART & C2 Lever IFCR covers only those controls which are related to financial reporting &
financial statements but IFC covers all the controls in the organization which Review actual compliance of laws, regulations and rules
S Segregation of duties are related to financial matters
Evaluation of Internal Controls
M Monitor the performance Legal requirement with both IFC & IFCR are different

Y
A Additional analysis of information Internal Auditor may be required to review controls whether they are
Legal requirement adequately designed
R Reduce the risk
IFC (in the sequence of imp) Evaluating their operations (are they implemented properly)
T Timeliness, availability & accuracy of information
BOD of listed co. are supposed to take responsibility of IFC & specify in DRS
C Consistently apply rules Recommending improvements thereon. (Internal Auditor may be required
Audit committee responsibility to evaluate IFC of company to provide assurance regarding design, implementation and operating
C Perform Complex calculation effectiveness)
Independent directors companies which requires ID, ID have to go & check whether
L Process Large volumes of transaction financial controls are robust & defensible & information generated is reliable Examination of Financial & Operating Information
(CNO—SA315-P2.340) (QNO-ICS.13)
~IFCR
BOD of the companies are responsible to maintain proper IFCR
Internal Auditor may be required to review how system identify, measure,
classify, record, summarize and report financial & operating information.
RISK BECAUSE OF IT SYSTEMS
Auditor of all the companies except as exempted in companies After reviewing the system, Internal Auditor may go and examine like
First comes act have to report on adequacy of IFCR transactions and balances.
IT Personnel Then Comes Data Then Processing Then Changes
Reporting on IFCR is required only in case of companies but even Review of Operating Activities
Unauthorised access Non-Applicability
IT personnel leading to Processing Failure to make
changes
W there we have some exceptions as explained in section 143
Internal Auditor may be assign work to review economy, efficiency and
gaining access inaccurate data Further it will not be applicable to non-corporate like individuals,
Destruction effectiveness of operating activities (including non-financial activities)
privileges beyond Unauthorised partnership, trust, co-operative society etc.
Inaccurate Processing
necessary changes to system
-
Potential loss of data

⑧
It will not be applicable to interim financial reporting also like quarterly or half yearly report
Manual Intervention
Non-existent Transaction Unauthorised
32 changes to Master File It will be only applicable to annual financial statements which are presented in AGM.
Unauthorised Transactions
(CNO—SA610.060) (CNO—SA240.040) (QNO-240.09/240.11)(MCQ-240.5, 240.6, 240.10, Incs.33.1,33.4,33.5,36.2,46.4)
Misappropriation of Assets

SA 610 EXPLAINS THAT STATUTORY AUDITOR FRAUD RISK FACTORS Pressure / Incentive
CAN TAKE HELP OF INTERNAL AUDIT
FUNCTION IN FOLLOWING TWO WAYS:- Events or Conditions that increase chances that fraud can happen in the Following circumstances create pressure for misappropriation
form of Pressure / Incentive or Attitude / Rationalisation or Opportunity
· Personal financial obligations
Using work of Internal Auditor Taking Direct Assistance Fraudulent Financial Reporting · Adverse relationship between entity & employees who have access to
assets
Statutory Auditor refers the work Statutory Auditor appoints Internal Auditor Pressure / Incentive · Adverse relationship may occur because of following – known or
performed by the Internal Auditor as a separate assignment to help him in anticipated layoffs / recent or anticipated changes to employee
doing statutory audit and work as team
as per instructions by the management member.
Pressure is created because of financial stability or profitability is threatened by compensation / promotion / compensation not as per expectation
following factors
Opportunity
(In sequence of importance)
LAW- New statutory or regulatory requirement Following may create opportunity for misappropriation
FRAUD AND RESPONSIBILITIES · Characteristic of assets or circumstances increasing susceptibility
05
Market – High degree of market saturation or competition
Business – Increase in business failure (chances ) of misappropriation
OF THE AUDITOR IN THIS REGARD Customer – Significant decline in customer demand o Fixed assets which are small / marketable / no identification mark
Accounting – New accounting requirements o Easily convertible bonds / computer chips / diamonds
Operating losses – Threatening bankruptcy, foreclosure taking possession of assets
o Inventory items small in size & high in value or high in demand
Part – 1 SA 240 in case of default in repayment or hostile takeover
Cashflow – Recurring negative cashflow or inability to generate cashflow
o Large cash in hand
though there is earning or growth in earning · Inadequate internal control because of following
(CNO—SA240.020) QNO-240.01,240.03,240.6,240.11 (MCQ-240.9, Incs.57.1,Incs.36.1, 36.3,33.3)
o Inadequate physical safeguards
Attitude / Rationalisation
o Inadequate segregation of duties
FRAUD MEANS
o Inadequate system of authorization
Following attitude related matters may suggest inappropriate ethical values o Inadequate records of transaction or assets
Intentional or standards communicated or enforced
1. Omission (Concealing Truth) o Inadequate access control over important records
Eg. Not Disclosing Contingent Liability o Lack of timely reconciliation of assets
2. Misleading (Falsifying) (Shortcut- HIT Require Nerdy Friends) o Inadequate oversight of senior management over expenditure
Eg. Showing Advance from customer as Sales o Inadequate management understanding of IT systems
H – History of violation of security or other laws o Lack of mandatory vacation for employees
I – Excessive Interest by management in increasing or maintaining earning
Attitude / Rationalisation
-
Fraudulent Financial Reporting (Window Misappropriation of Assets strength or inventory price
Dressing)Intentional misstatement in financial Theft of Assets T - For tax motivated reasons using inappropriate means to minimize
statement to deceive users of financial · Careless attitude evident from following increasing chances of
earnings
statements (Involves overriding ICS) Misappropriation Misappropriation misappropriation
R – Relationship between management & auditor is strained & exhibited
of CASH of Stock / Other o Not taking steps to reduce risks of misappropriation
e ~Assets by following
o Overriding existing control over misappropriation
Omission Manipulation Misapplication Eg 1. Suppressing
(Shortcut- DR- DU)
(Not to account (Falsification / Eg 1. Stealing o No rectification of significant deficiency in internal control
(Misapply Cash Receipts D – Frequent disputes /
or Disclose) Alteration of Goods o No monitoring of controls over misappropriation
Accounting R – Restriction on auditor /
Accounting o Tolerance of petty theft
Records or
Principles) 2.Inflating Cash 2. Using assets D – Domineering management /
Eg Payments for personal use U - Unreasonable demands on auditor (CNO—SA240.060) (QNO-240.12,240.13, 240.15) ( MCQ-Incs.36.5)
1. Delaying Supporting

&
Document) N – Not distinguishing between personal & business transaction
expense
booking or
Eg
1. Adjusting F – Failing to rectify significance deficiency
CIRCUMSTANCES THAT INDICATES POSSIBILITY OF FRAUD
D -
advancing Eg assumptions / Salz
income
recognition 01. Fictitious
Journal Entries
judgements
of depreciation, A
B Opportunity 1.Discrepancies in
accounting
2.Conflicting or
missing
3.Problematic or unusual
relationship between auditor
(Showing inventory ⑰Mahuse system & records evidence & management
2. Not payment to valuation
110000 Opportunity may be created for FFR because of following:
disclosing creditors to to increase comis3 1. Discrepancies in accounting system & records
bonus or improve profits (Shortcut - opportunity hai TU DRS le)
revaluation Access to system & record inconsistent with necessary
CA Ratio)
details in Unauthorised or Unsupported transaction balances
notes to T – Tax haven jurisdiction are having subsidiary / branch / significant bank a/c Improperly
2. Engaging in complex Transactions Not recorded in complete or timely manner
accounts ⑧
2. Altering records without any business justification recorded
(Sales Contract transactions so that AS Last minutes adjustments having significant effect
U – Unusual or highly complex significant transaction having difficult “substance
is altered after is not applied properly,
over form ” question Tips or complaint about Fraud Continue on next page....
signing, like repurchase transaction
or finance lease D – Ability to dominate or strong financial presence in certain industry which
to pass incorrect allows to dictate terms or condition to supply or customers
journal entries)
R – Significant related party transaction not in ordinary course of business or
where related party not audited
S – Significant estimates affecting assets, liability, revenue & expenses

33 Continue on next column...

 Part – 2 SA 250 (CNO— C5OC.060)
2. Conflicting or Missing Evidence
(CNO--SA250.020) (QNO 250.01) MISAPPROPRIATION OF GOODS(MOG)
Missing Evidence Conflicting Evidence

System development &

program change
⑧
Any Area Specific Area INDICATORS OF NON- COMPLIANCE Difficult to detect
Allowing persons
testing & implementation Shortcut - Unusual MICA (Inventory)
documents unavailable Shortcut- C2-PUPATE External security to ensure no unauthorized movement
Controls

I
Unusual changes in Missing Inventory or
W over MOG
Documents in original form (only
photocopies or electronic records
⑰ B/s. trend, Ratios,
Relationships
physical assets C C P U P A T E Records
Periodic check
available eUnexplained items
Payment
Inconsistent, vague, or on reconciliation No
Unusual Unspecified Purchase Agent Tax Ratio Analysis
Missing electronic evidence ⑬ implausible responses
of analytical procedures (Account Receivable)
to Country
other Cash
Payments
to related
Unautho-
rised
price
High
Fees/
comm
Haven
Transac-
Foreign
Exchange
Audit procedures
to detect MOG
Check Records
than Payments parties etc. Docu-
Transaction or Low in excess tions Physical verification

I
Fewer responses to Large credit entries
Missing cancelled cheques
⑳ Confirmation
W
& other adjustments
source ments
Detecting fraud is more difficult than detecting errors. But not always
Missing other important Documents
⑬ Mismatch between
confirmation & records W
Difference between
sub-ledger & control
Remaining Points Think what happens after non compliance
Document
Documents appears A/c or Customer Unusual legal Payment of Adverse media
statements Investigation Audit Trail
Altered
③ fees fines coverage (CNO—C5OC.080) (QNO-240.23/240.25/240.27) (MCQ-240.7, C5OC.1, C5OC.2, Incs.07.2,
goes missing
Incs.36.4, Incs.46.2, Incs.57.2, Incs.33.2 )
3. Problematic or unusual relationship between auditor & management

Part – 3 OTHER CONCEPT WAYS OF DEFALCATION OF CASH

Time Denial Management Other
(CNO—C5OC.020) (QNO-240.05) (A) Suppressing receipts
Undue time pressure To meet people or meet in Complaints by Mgt. A/c policy varies No accounting for cash sales
imposed by Mgt. as compared to 1.Don't do accounting for receipts
private TCWG/System MANIPULATION OF ACCOUNTS No accounting for miscellaneous receipts
industry
Unusual delays in
Development staff/ Key IT
Operations/ Security staff/
Unwillingness to W 2.Do fraudulent adjustment & with the help of that withdraw money
providing info address internal Higher mgt personnel
Employees/ venders/ Frequent changes Who? Adjust unauthorized or fictitious / rebate/ allowance / discounts
control deficiencies Requires great tact & intelligence & misappropriate corresponding money
customer in estimates not
or revise disclosures from chg.
Declare dividends when there are Write-off assets in its entirely (fully) & sell them & misappropriate
Circumstances
insufficient profits the proceedings
To access records To increase profits
electronic files for Receive higher managerial remuneration 3.First misappropriate money & then perform these adjustment to conceal it
CAAT Why?
Avoid income tax & other taxes Misappropriate cash receipts from debtors & then write-off their balance as
bad debts
(CNO—SA240.120) (QNO-240.21) (MCQ-240.4) To decrease profits To avoid paying dividends
4.Teeming & Lading
To keep share price low so that certain
people can buy shares at low price
SITUATION AUDITOR UNABLE TO CONTINUE ENGAGEMENT First misappropriate amounts from customer to conceal this fraud show
How? Increase / Decrease money received from another customer as money received from earlier
DUE TO FRAUD (ABILITY TO CONTINUE)
customer keep doing this so that one fraud is hidden with the help of money
Sales & other Income of other customers. By doing this no account will be remain outstanding for
Misstatement Due to fraud Encounters exceptional Bring into question Value of closing stock longer period of time. Not attracting attention of management which will lead
Identified suspected fraud circumstances ability to continue them to communicate customer about outstanding balance
Purchases & Expenses
Charging capital expenditure to revenue expenditure & vice-versa Accountant pay for fictitious voucher
Report problem as per Consider if it is If yes, inform discuss Adjusting current year expenses increasing / decreasing (B) Inflating cash Pay against the voucher which are inflated
LR/RR/PS appropriate to withdraw with Mgt. TCWG, & corresponding current liabilities & prepaid expenses payments
Report decision to withdraw Pay for wages where wage amount is manipulated
- - by including dummy workers & in any other matter
v (CNO— C5OC.040)
(C)Casting wrong totals in cash book

WHY DO MANAGEMENT / EMPLOYEES Undercast receipts or overcast payments & withdraw corresponding money
COMMIT FRAUD In petty cash book cast larger totals of expense in the final total column &
withdraw corresponding amount
Shortcut- Opportunities Unite DONs
O Financial Obligations/ Pressure.
U Management's Unrealistic goals.
D Dissatisfied Employees or Lack of motivation among employees.
Name game (E.g., management using power of authority
N by asking employees to do something illegal).

34 O Opportunity to commit fraud.

(CNO—C5OC.080) (CNO—C5OC.100) (QNO-240.17, 240.29) (MCQ-Incs.46.5) (CNO—SA240.130) (QNO-240.16)

HOW TO DETECT DEFALCATION? RESPONSIBILITY OF AUDITOR RESPONSIBILITY OF AUDITOR FOR FRAUD

Before auditor perform audit procedures detecting defalcation he
WITH RESPECT TO FRAUD DETECTED AFTER COMPLETION OF AUDIT
Detection of
Defalcation should first check important controls with respect to cash transactions.
⑦ Overall responsibility
Overall responsibility of the auditor is to give opinion on whether financial Primary Responsibility
Of fraud prevention & detection TCWG & Mgt

1.Test of important controls with respect to cash transaction statements as per applicable financial reporting framework They should focus on

Proper system should be designed & implemented for cash To fulfill this responsibility auditor has to obtain reasonable assurance about all
Fraud prevention Fraud Deterrence
sales, other cash receipts & disbursement of purchases material items of financial statements whether they are free from material
misstatement whether due to fraud or error
By reducing opportunities By creating & informing about fraud
Because of inherent limitations of audit there are chances that some material to commit fraud detection & punishment system
There should be segregation of duty in important receipt & payment
misstatement are left even if audit is properly planned & performed as per
transaction & further incompatible functions should not be given to standards on auditing Whet FST are as per applicable FRF
same person. For Ex- Custody of cash & its accounting should not Audits Responsibility
be given to same person &
Responsibility while doing audit
For this have to find with reasonable assurance
whether FST are free from MMST
Maintain attitude of professional skepticism throughout the audit
There are two popular ways of keeping record of cash receipts with -
MMST can be because of fraud as error
the entity – .(1) to make carbon copy for each receipt issued. While dealing with internal controls always keep in mind that there
- -

(2) to make counter foil for each receipt. Then accounting is done on is potential for management override of controls Fraud Risk Risk of MMST due to fraud is higher
the basis of carbon copy or counter foil. While designing audit procedure keep in mind that audit procedure which
- Carefully organised Example
are effective for detecting error may not be effective for detecting fraud -Forgery
2A. Verification of cash sales from carbon copy Because Sophisticated
-
Responsibility after detecting fraud Designed to conceal
-Deliberately not
recording transaction
Auditor should check
whether each carbon copy
If cash sales are voluminous then auditor should ensure
that each & every carbon copy is included in cash if there is a error then it is corrected
⑧
Auditor should ensure that fraud is properly accounted in financial statements & May involve collusion -Misrepresentation

there is corresponding
cash receipts entry
summary then cash summary is properly total & for that
amount there is entry in cash book -
Communicate misstatement to appropriate level of management on timely basis
& consider the need to report to TCWG
Subsequent Discovery of MMST Doesn't mean auditor failed

We have to see adequacy of audit procedures & whether appropriate

2B. Verification of cash
receipts from counter foil
Auditor should check that each & every counter foil is
properly accounted & there is corresponding entry in ⑳
Auditor should consider implications of frauds & errors & frame his report
appropriately
audit report was issued in given circumstances
cash book
We have to check his documents
Frauds which can occur in counter foil system Auditor should also ensure that it is properly disclosed in financial statements.

It can happen that amount enter in counter foil is lower than the main
⑦
Otherwise he have to modify his opinion
Whether planning, Risk Assessment, Test of controls,
substantive procedures etc were properly performed. Whether
receipts & the difference is misappropriated He may obtain legal advice before reporting on complicated significant matters properly addressed & documented
It can happen that entity received multiple receipts from a person matters & before withdrawing from engagement

(for Ex- they may receive Rs. 20,000 four times during a month but
cashier may issue only one receipt of 80,000 by doing this cashier
will be able to save three blank receipts which can be used later to
any person for receipt & corresponding amount can be
misappropriated & no one will come to know about it

3. Verification of Dates

It is extremely important for the auditor to check that dates which are
given in counter foil or carbon copy on the same date entry is passed
in the cash book because if there is a time gap between these dates that
means during that time money was used by the cashier for personal
purpose & later on it was entry was passed in the cash book & money
was brought into the entity.

35
 07 AUDIT SAMPLING
(CNO—SA530.020) (QNO-530.01) (MCQ-530.10, Incs.27.1, Incs.38.2, Incs.38.4) (CNO—SA530.040) (QNO-530.01) (MCQ-530.1, Incs.38.1) 4. Performing
Audit Inspection of documents & Inquiry from sales executive.
Procedures
SA 530 SAMPLING RISK
5. Nature and
SAMPLING & POPULATION The risk that the auditor’s conclusion based on a sample may be different Cause of Intentional or Unintentional / Manual or Automated
from the conclusion if the entire population were subjected to the same Deviations and
audit procedure Misstatements
Means checking less than 100% items of population
Sampling
then applying audit procedure on them & understanding 6. Projecting If there are fake sales in sample, then how much in whole population.
their misstatement then on this basis project conclusion Sampling risk can lead to two types of erroneous conclusions Misstatements
Definition on entire population.
Type I – Error Type II – Error
~7. Evaluating
Population Entire set of data from which sample is selected is Results of Whether misstatements are within tolerable limit?
called population Tol
- (Over Reliance on Controls)
T (Under Reliance on Controls) Audit Sampling& Whether further audit procedures should be applied.
In the case of a test of controls, that controls In the case of a test of controls, that Taking Action
Relationship Sample should be such it represents population controls are more effective than they
between both are more effective than they actually are actually are

Characteristic of population Shortcut - CAR I (Incorrect Acceptance) Top(Incorrect Rejection) (CNO—SA530.100) (QNO-530.03/530.04)

or in the case of a test of details, that a material In the case of a test of details that STEP 1 SAMPLE DESIGNING
misstatement does not exist when in fact it does material misstatement exists when
C Completeness Auditor should ensure that population is complete.
infact it does not
Define
For. Ex. if we are performing test of control then it should (Reduces Effectiveness of Audit)
Population and its All sales transactions.
cover control activities which are done throughout the The auditor is primarily concerned with this type (Reduces Effeciency of Audit)
accounting period Characteristics
of erroneous conclusion because it affects audit This type of erroneous conclusion
effectiveness and is more likely to lead to an Stratification Area wise bifurcation in East West South North
affects audit efficiency as it would
A Appropriateness inappropriate audit opinion usually lead to additional work Consider Purpose Examining Sales Transaction. Whether any of the transaction is fake.
Population should be appropriate as per the objective of audit procedure to establish that initial conclusions
were incorrect. Check sales transaction from customer order, gate pass, transporter
Consider Audit report, delivery memo, confirmation. Inquire from sales executive
We should consider direction of testing while defining population Procedures
and visit godown.
Ex. 2. On the other hand while testing (CNO—SA530.040)
Ex. 1.to check over statement Nature of Audit
understatement of accounts payable then Documentary / Oral / Visual
of accounts receivable list of Evidence
accounts receivable will be population will not be list of account NON-SAMPLING RISK
will be population payable but is will be list of unmatched If essential documents of transaction are missing it can be a
GRNs, unpaid suppliers, suppliers What Constitute misstatement. Different dates in documents is fine if its within
Chances that auditors reachs inappropriate
Misstatement
statement, subsequent disbursement conclusions because of reasons given below 3-4 days of sales transaction.

Appropriate sampling unit individual Ex. Debtors can be divided into

items that make up the population are partay wise account balances or Inappropriate Failure to recognise Misinterpretation of
know as sampling units population can it can also be divided individual procedures misstatement or Deviation Audit Evidence
be divided into variety of units customer wise invoices
(CNO—SA530.080) (MCQ-Incs.16.5)
If we want to check existence of debtors we may use party wise balances
as sampling unit for confirmation if we want to check penal interest is
applied on debtors we may consider invoices wise balance as appropriate SAMPLING PROCESS
sampling unit
It is preliminary sampling step. Suppose we have to examine
R Reliable Ensure that info used in the sampling process is sufficiently reliable 1. Sample occurrence of sales. We have to determine our objective
Designing (catch fake sales), audit procedures (match with despatch report)
etc are decided in this step.

After analysis of various factors it was set as 200 units from each
2. Sample Size Of East / West / South / North area so total 200 x 4 = 800 from
population of 5000

3. Selection
of Items for
Testing Stratified Random Sampling
(Sampling
Selection
Method)
36 Continue on next column...
(CNO—SA530.100) (CNO—SA530.120) (QNO-530.05) (MCQ-530.6, 530.14, Incs.16.1, Incs.16.2,Incs.48.1, Incs.48.2) (CNO—SA530.140) (QNO-530.07) (MCQ-Incs.27.2, 530.12, Incs.38.5)

SPECIAL MATTERS IN SAMPLE DESIGNING STEP 2 SAMPLE SIZE STEP 3 SELECTION OF ITEMS FOR TESTING

WHAT CONSTITUTES MISSTATEMENT OR DEVIATION Now Sample size is determined Approaches to sample selection
Sample size & Auditors decide Then determine
in such manner that audit risk is
Sample risk are audit risk at detection risk &
reduced to acceptable low level 2 approaches
First auditor design audit objective then inversely related planning stage sampling risk (Predecided)

Statistical Formula or Statistical Non Statistical

Which condition will be consider deviation or misstatement with the help See following factors Shortcut to remember
Prof. Judgement is used
of this he will able to decide audit procedure which should be applied on sample items affecting sample size the points in the form of Story
to determine sample size Important points

Such clear understanding will be useful at the end while making projections Sample should representative of population
& evaluating results m
(CNO—SA530.120) e
There approaches are not about sample size but the way the items are selected as sample
Ex. – 1. If there is a mismatch between account 2. If credit sale of one CHUNNU, MUNNU ARE ASSIGNED TO AUDIT
Statistical Sampling
receivables balance & confirmation because customer is posted to another “WAGES” IN THE CONSTRUCTION COMPANY
of non accounting of particular receipt it is not customer it is not a misstatement 1. Every unit has equal chance of selection
If sampling ( Random Sampling)
called misstatement (Temporary) at balance sheet level He reads that Int.
Increase in Increase Definition is having two
auditor detects condition 2. Use of probability theory to evaluate sampling
Next day Chunnu fraud in wages assessed RMM sample Size
Above examples are not misstatement by applying a procedure but they may be start travel from results
Advantages
useful for the assessment of fraud risk & they may have effect on assessment of fraud risk home Got Call from Munnu, Decrease in other Increase
to Co. Site. substantive Better
he won't be coming procedure sample Size In statistical sampling every unit has equal chance of
representative
ROLE OF EXPECTED RATE OF DEVIATION & MISSTATEMENT IN selection. So unit are selected from every corner of population
Checked few transaction Increase in Expected Increase sample
SAMPLING DESIGNING and found misstatements sample Size
Chunnu meets Misstatements Scientific in nature it is based on theory and formula which can be proved over a
Account AO says stratification Stratification not Increase period of time in statistical sciences & hence more
Before we perform sampling auditor computes expected rate Officer (AO) not possible possible sample Size reliable than non statistical sampling
of deviation & expected level of misstatement Increase Gives good results in large population. It has been observed that statistical
He want more Increase in desired
Assurance level of Assurance sample Size sampling gives good quality results where population is large.
Get call from
Expected rate of deviation / misstatement is determined taking into Senior He says misstatements Increase Non statistical sampling
Decrease in tolerable
consideration his previous year experience & present circumstances etc should be taken seriously misstatements sample Size
When sample size & its composition is decided on the basis of personal
He comes to know Increase in Negligible effect experience & knowledge of the auditor. It is generally in terms of numbers of
Expected rate of deviation is determine/ on the basis of understanding of the relevant
Finally number of labour (See next chart for accounts & numbers of pages to be checked.
controls on the other hand expected level of misstatement is determine on the basis Population Detailed Analysis)
increased
of cheking of small number of items from population Advantages
Above points are presented from point of sampling in test of detail,
Popular over a period of time because it simple to apply.
These expected are important characteristics of the population similar points applicable for sampling in TOC
Cut off assertion is checked properly generally auditor tends to check
Important sampling decisions are taken on the basis year end transaction more . Hence cut off assertion is properly checked.
(CNO—SA530.120)
Disadvantages
EFFECT OF POPULATION SIZE ON SAMPLE SIZE Non mathematical basis sample is not mathematically
Test of control Test of details designed & there is no mathematical formula to project
Current / Present Population Size Neither
misstatement & it is difficult to understand whether sample
If expected rate of deviation is higher If expected misstatement is scientific size will be adequate for auditor objective & it is difficult to
than tolerable level of deviation higher than tolerable prove auditor decision.
misstatement then we should BIG SMALL
Nor objective
Then we should not perform test of controls not perform sampling in test of
10 Labour 500 Labour
infact we should perform more substantive details instead we can go for 10000 Labour 12000 Labour As auditor is selecting as per his own preferences there are high chances
procedure in this situation 100% checking of the population 500 Sample items 505 Sample items 4 Sample items 100 Sample items that personal bias will affect item being selected hence it cannot be
eliminated

If there is increase in As there is auditor judgment & there will be personal bias hence auditor
If there is increase In will not be able to achieve audit objective
population size population size
Solution to disadvantage auditor
Negligible effect on Sample size Increases For ex. – If you have selected March,
should avoid establishing a
sample size particular pattern which may be June & Sep p.y. then avoid selecting
known to employees. same month in C.Y.
Less efficient
Efficiency Increase

But if there is proportionate increase in

materiality/tolerable misstatement level
then increase will get compensated

37
(CNO—SA530.160) (QNO-530.09) (MCQ-530.4, 530.7) (CNO-SA530.180) (MCQ- 530.3) (CNO-SA530.180)

ADVANTAGES OF STATISTICAL SAMPLING CLUSTER SAMPLING NOT A STATISTICAL TECHNIQUES

Benefits of Statistical Sampling “ Large Powerful & MOR” Step 1: Divide population HAPHAZARD SELECTION
Step 3: Either select ALL
Step 2: Randomly
L P M O R into groups items in cluster
select clusters or again apply random No Structured Use of personal Avoid bias or All items should have
called Cluster Eg. Cluster of sampling to Technique/Pattern Judgement Predictability chance of selection
Better description Sample size does Means to estimate from all the clusters
10, 20 or 30 etc select units from clusters
of Large mass not increase in Minimum Sample More
of data than proportion to objective Calculated
Size with While applying But result are less effective
complete increase & Risk Method is (CNO-SA530.180) (MCQ-Incs.16.4)
specified risk Defensible random sampling as compared
examination of in size of
& precision within cluster use cost effective to simple random sampling
all data population
BLOCK SELECTION
(CNO-SA530.180) (QNO-530.11) (MCQ-530.15)(MCQ-Incs.48.4) Simple random Stratified
sampling/ random But selecting group of Starting point can be as per auditor
Not selecting single
unrestricted sampling sampling consecutive items say
SAMPLE SELECTION METHOD item in selection preference for each block selection
20/30/40/50 etc
Method should be such that sample should represent population (CNO-SA530.180)
Sometimes it may be But majority times Because items with
it won’t be similar characteristics
MONETARY UNIT SAMPLING / appropriate
Statistical Sampling Non-Statistical / Judgement suitable will get selected
VALUE-WEIGHTED SELECTION
Based Sampling
Stratified random Cluster Sample size (CNO—SA530.200)
Sampling Block Selection
sampling Monetary Amounts are used for Selection Method
Haphazard Selection
Simple random Interval Based or Monetary Unit Evaluation of Results STEP 4 PERFORMING AUDIT PROCEDURES
sampling Systematic sampling Sampling (MUS)
Total Sales 20,00,000 Sample size 5 Starting Point randomly selected Shall perform selected audit procedure for each item selected
(CNO-SA530.180) (QNO-530.13) (MCQ- 530.2, 530.11, Incs.27.3) between 1 to 4,00,000 say 620
Monetary Interval
20,00,000/5 = 4,00,000 Selection points Item not suitable Item suitable
RANDOM SAMPLING
620, 400620, 800620, 1200620
If audit procedure is not If auditor is unable to apply
Def :- All items in population or strata have equal chance of selection. Then we may be use applicable on any item audit procedure on selected item
random number table, random between excel function or anything like this to select sample. Bill No Bill Amount Cumulative total Base
Type 1 1,00,000 1,00,000 620 Replace it with new item Perform alternative procedure. If there is no suitable
& perform procedure on it alternative procedure then it is deviation / misstatement
Suitable for 2 40,000 1,40,000
No division Every Unit has unknown/equal chance of
Simple
homogeneous of selection, random number table, picking 3 20,000 1,60,000 Eg. Cancelled cheque get Eg. Unable to apply audit procedure on debtors
Random population population numbers from drum etc. selected while auditing
4 50,000 2,10,000
payments
Because documents are lost or no reply
5 2,00,000 4,10,000 4,00,620 received for positive confirmation request
Suitable for Divide Each stratum is treated as separate
population & random sampling is 6 1,60,000 4,70,000
Stratified hetero- population Checking subsequent receipts is alternative audit procedure
done. Different percentage selection 7 20,000 4,90,000
Random genous in group called can be done for different strata 8 70,000 5,60,000
population Strata (Recall Trade Receivable Example) (CNO—SA530.220)
9 60,000 6,20,000
(CNO-SA530.180) 10 2,50,000 8,70,000 8,00,620
11 45,000 9,15,000 NATURE & CAUSE OF DEVIATION & MISSTATEMENT
INTERVAL BASED / SYSTEMATIC SAMPLING STEP - 5 (Qualitative Aspect)
12 35,000 9,50,000
13 1,00,000 10,50,000
Constant Then Constant Interval can be 14 65,000 11,15,000 Investigate Investigate nature or cause of any deviation or misstatement
First unit is selected
Interval interval is used to in number
randomly 15 1,50,000 12,65,000 12,00,620
is used for select other or monetary Rarely auditor may come across ANOMALY perform additional
within first interval units in sample 16 20,000 12,85,000
selection value procedure to ensure that it is not representing population
17 40,000 13,25,000
Eg. Population 5000 Nature Type of Transaction
first interval 1 2 3 4 5 18 65000 13,90,000
Sample size 1000 Common Location Identify all items with
6 7 8 9 10 19 35,000 14,25,000 common feature & extend
Interval 5000/1000 = 5 11 12 13 14 15 feature Product Line audit procedures
20 95,000 15,20,000
(Interval in number) 16 17 18 19 20 Period of Time
21 3,50,000 18,70,000 16,00,620
Cause Unintentional or Intentional
For example of interval in monetary amounts see monetary unit sampling 22 40,000 19,10,000
Effect Consider Possible effect on defined audit
23 45,000 19,55,000 objective + Effective on other areas
Problem If population is structured in particular manner & intervals are similar to these
structures similar types of items will get selected, not representing whole population 24 25,000 19,80,000
25 20,000 20,00,000
Solution To resolve above we can have random starts after few selections
38
(CNO—SA530.240) (QNO-530.15) (CNO—SA530.280) (QNO-530.21) (CNO—SA530.320) (MCQ-Incs.48.3)

STEP 6 PROJECTING DEVIATION/MISSTATEMENT EXTENT OF CHECKING ON SAMPLING PLAN EFFECT OF SAMPLING ON AUDIT

For Test of Control For Test of Details Shortcut - C-SITA factors Shortcut - Efforts of ICC
S Size of the organisation under audit. (Big) 100% Checking In less efforts
Not necessary to do explicit Shall project misstatements found in So, Auditor can
sample to population I State of the Internal control. (Strong) does not derive Auditor always adopt statistical he can derive
projection (generally) Efforts
Absolute takes some risk sampling good
To obtain broad view of scale of misstatement Adequacy and reliability of books and records. Assurance satisfaction
A
Sample rate Projected Rate (Accurate & Reliable)
= Not sufficient to determine amount
of Deviation of Deviation T Tolerable error range. (High) Internal controls Extent of checking is matter or Auditor judgement
to be accounted (rectification)
Degree of the desired confidence.(Low)
Exclude effect of anomaly while doing projection C But it depends on whether Internal controls are properly designed & Implemented
(Then higher reliance on sampling)

While making final conclusion if it is not corrected If yes If No

(CNO—SA530.300) (QNO-530.19)
then anomaly needs to be considered along with
projected non-anomalous misstatement while Smaller sample size will be required Larger sample size will be required
Evaluating Sampling Result CONCEPT OF STRATIFICATION &
Sample Misstatement VALUE WEIGHTED SELECTION Certain circumstances In certain circumstance sampling is not suitable

Anomaly Suppose not rectified Eg. 50 Lakhs Stratification Another approach is necessary Another approach may provide more
Used for Non-Anomalus projected Suppose satisfaction in less time & efforts
Non-Anomalous It means dividing population into subgroups depending upon specific
projection misstatement in population 5 crores characteristics
Eg. If there is significant risk 100%
With the help of stratification we can reduce sampling size without checking may be required Eg. Recomputing whole depreciation
Total misstatement in population considerd = 5 crore + 50 Lakhs by uploading fixed Asset register
increasing sampling risk so it increases audit efficiency.

(CNO—SA530.260) (QNO-530.17)(MCQ-530.8, 530.9, 530.5, Incs.16.3, Incs.38.3) Ways of stratification

Cannot given Cannot give It is a Auditor should Eg. 2% error
Value wise complete 100% accurate process of ensure sampling may be
reliability Results estimation error is tolerable acceptable
STEP 7 EVALUATION OF SAMPLING RESULTS We can create strata depending on value so that greater
attention can be given to large value items

Projected Expected Tolerable Ex. 20% of items in population may make up 90% of value & remaining
Levels Levels Levels 80% may make up to 10 % of value . So we can give more importance to
20% of items rather than on 80 % items
Depending upon risk Stratification can be done on the basis of risk
TOC TOC TOC
Controls are reliable and Controls are not reliable Controls are not reliable
For ex. While examining value of trade receivables we can create strata on the
low RMM and high RMM unless there and high RMM
basis of age of trade receivables more is the age more will be the risk involved &
TOD is further audit evidence to TOD we can give more attention to risky areas.
No material misstatement prove opposite Material Misstatement
TOD Exists
Reasonable Basis for Projections
conclusions Material misstatement unless
there is further audit evidence Reasonable Basis Every strata has set of items with similar characteristics so we will perform
to prove opposite for conclusions
sampling & testing for each strata & projection will be done on each strata.
Then projected misstatement of all strata will be combined to get projected
misstatement of population (Population - particular transaction/ of account
Sampling alone do not provide reasonable basis. Unacceptable sampling balance)
risk that actuals are more than tolerable limits
Value weight selection

Request management to investigate misstatements & potential for further
misstatement. Modify NTE of further audit procedure (TOC / TOD)
Special Case :- If there is anomalous misstatement (not corrected), consider it long with
projected non-anonalous misstatement and then compare with tolerable misstatement. if its
close or more than tolerable then sampling is not providing reasonable basis for conclusions.
In value weighted selection each monetary unit is treated as sampling unit.
Then we will select monetary units with the help of which we will further select
bills, balances or transactions containing this
In this from of selection bill, balances, transaction, which are bigger
in size will have higher probability of being getting selected so we will be able to
check more value by selecting few items. so this method improve audit efficiency.

Levels = Rate of Deviation / Misstatement Further using value weighted selection with random sampling gives most efficient
result as compared to using it with interval based sampling (systematic selection)

39
 CHAPTER 08 ANALYTICAL PROCEDURES
(CNO—SA520.020) (QNO-520.01)(MCQ-520.5, 520.6, 520.9, 520.10, 520.11, 520.13, 520.18) When we compute expected value on the basis of non (CNO—SA520.100) (QNO-520.04)
Reasonableness financial data of CY & compare it with actual data or
R
Test ratio is called reasonableness test. These test are generally
SA 520 perform for P&L items. ANALYTICAL PROCEDURES USED AS SUBSTANTIVE TESTS

Examples of reasonableness test

ANALYTICAL PROCEDURES Substantive Analytical Procedures (SAP) can be
used alone or in combination of Test of Details
Definition Evaluation of Financial Information through
Computing expected values
Analysis of plausible relationship (Logically true) among both Factors to be kept in Mind
Step 1 Financial & Non-Financial data. So that we can predict Amt / WIP based on issued material for production & sales quantity
Ratio / Graph of Financial data (Expected WIP = Units send for production – units produced in sale) Step 1 Step 2 Step 3 Step 4
Amt
Step 2 Collecting reliable data Rental revenue based on occupancy of premises -
(Expected Rent = Number of rooms x occupancy rate x days x per day rate) Suitability for Evaluate Develop an- Determine the
expectation of
Step 3 Determine expected values
given assertion, Reliability of X amount of any
Interest per Debenture ratio compared with official rate where there is RMM recorded amounts,
data to be used difference between
ratios
Identify fluctuation or inconsistent relationships that differs from Raw material consumed to per unit produced compare with others recorded amounts &
Step 4 -for determining
expected values & Investigate significant differences in the industry Also see Test of Should be sufficiently expected values that
Ratio expected values
Details applicable for precise to identify is acceptable without
With prior period Trend Analysis Discount per unit ratio compared with previous year
those assertion MMST further investigation
With budget or forecast Comparative Analysis Wastage & scrap to the production compare with others in the industry. (In case of range)
Types of
Comparison Auditors own estimates Predictive Analysis
(CNO—SA520.060) (MCQ-520.14, Incs.15.1) (CNO—SA520.120) (QNO-520.05) (MCQ-520.15, 520.4, 520.8)
With similar Industry Information Inter Firm Analysis

Types of Mathematical Financial V/s Non-Financial FACTORS AFFECTING SUITABILITY

Relationship APPLICATION/PURPOSE OF ANALYTICAL PROCEDURES
Simple V/s Complex
ShortCut V-RAT is suitable for all formats
(CNO—SA520.040) (QNO- 520.03, 520.13, 520.17) (MCQ-520.12, Incs.15.2) Planning Collecting Audit Evidence Overall conclusion
↓
TECHNIQUES AVAILABLE AS SUBSTANTIVE Obtain relevant & reliable To assists auditor in forming
Assist the auditor in overall conclusion as to Volume of Risk of Level of Test of
ANALYTICAL PROCEDURES audit evidence using Transactions
planning NTE of other whether FST are consistent Material Assurance Details
Substantive with auditor's & Pretictability (TOD)
audit procedures Misstatement obtained
Analytical Procedures understanding of the entity
Analytical procedures can be used at various places when they are used to
substantiate at financial data it is called substantive analytical procedures
To reduce detection risk to acceptable level Suitable for Depends on Some Analytical Suitability of
C Creativity of audit team large volume Assessed risk of Procedure (SAP) analytical
Application of analytical of Transactions procedure
procedures depends Reliable Data available for Material provide more
Shortcut – CDE D (CNO—SA520.080) (QNO520.03.50) (MCQ-520.1) Misstatements along with
majorly on three factors analytical procedures persuasive test of details
That tend to be + evidence on some
E Experience of audit team
Different forms of analytical procedures predictable over assertion
ANALYTICAL PROCEDURES IN PLANNING AUDIT Relevant
time Assertion Rental Income
Shortcut – STAR vs GP Margin
Use Financial & Understand Business
Non-Financial data (compare with others) Helps in Helps in Expected that graph analysis
In this technique we use knowledge of statistics. We plot relationship
S Structural modeling E.g. Number of EMP Identifying determining
data of two variables on the graph & from that plotting we Understand new NTE of other among data
volume of production developments Potential
get line of regression & we get equation which can be audit procedures exist & continue If elements are
Sq. feet selling space (compare with last year) Risk
used for computing expected values. properly verified
TOD can
In this analysis we compare CY financial data with PY or Check be elimited
T Trend Analysis effectiveness
2 or more PY balances. We check whether it is as per
the past trend increasing, decreasing or remaining stable in detecting
misstatement
A Ratio Analysis before applying
In ratio analysis we compute between two or more
financial item & this ratio is compared with previous year
or with others which will be useful for obtaining assurance.
Ratio can be compared with PY or similar entity in same
industry financial ratios include debtor turnover ratio,
inventory turnover ratio, freight expense to sales ratio.

Continue on next column...

40
(CNO—SA520.140) (QNO-520.07) (CNO—SA520.200) (MCQ-520.7)
Routine Tend to be more predictable
transaction hence analytical procedure are
FACTORS AFFECTING RELIABILITY OF ANALYTICAL PROCEDURES THAT ASSIST Nature of suitable & data can be obtain easily
N
DATA / EXTENT OF RELIANCE ON SAP WHEN FORMING OVERALL CONCLUSION transaction
Non routine They are subject to management
Following are the criteria's that should be considered while deciding reliability of data transaction judgments & hence difficult to
Mandatory to design & perform analytical procedures near the end of audit predict hence analytical procedure
Shortcut - Sr NCC candidates are reliable for overall conclusion are not suitable
S N C C
Above procedures are performed to corroborate conclusion formed during Income These also tends to be more
a - Completeness v audit regarding TBD statement predictable hence analytical
- ~Nature & Comparability Control over account procedure are more suitable
Source of Relevance Accuracy - A Account type
preparation
Data of Data of Data
of information Validity W This assists auditors to draw conclusion & form opinion
They involve lot of management
judgment & adjustments they are less
(CNO—SA520.160) (QNO-520.08) Balance sheet predictable hence analytical
May identify previously unidentified RMM & further plan audit procedures
procedure are generally not suitable
FACTORS AFFECTING DEVELOPING EXPECTATION
Similar to those performed for risk assessment procedure at planning stage But relationship between income account & B/S
Below factor will affect whether we can develop precise can be used to obtain evidence about B/S account
(CNO—SA520.220)
expectation & compare them with actual to get misstatement (ADA)
For ex- Relationship between sale & debtors,
purchase & creditor
ANALYTICAL PROCEDURE IN PUBLIC
Eg. Past sales /
We can design SECTOR UNDERTAKING (PSU) It is more suitable for completeness & valuation
If reliable financial Budgeted sales /
Availability of innovative N Nature of assertion
or non-financial Quantity / No of as compared to rights & obligation
Information analytical
data is available customers / Capital nature expenditure may be debited to P&L,
procedure Accounting policies
Dispatched, etc
& approach are further expenditures incurred on inventory may not be D Disaggregation If there is higher degree of disaggregation in
different considered at the time of closing stock valuation. analytical data it will be used to higher degree
Degree of Disaggregated Better expected If disaggregated of usefulness while performing analytical procedures
Information values in comparison data is available
Because of this expenses fixed assets & inventory
may not appear in B/S at proper value If there is higher level of inherent risk then we should
Eg: Business wise / Product wise / Branch wise, etc I Inherent Risk use test of details and along with that analytical
procedure can be used
If we can predict We can compare them with Traditional In business entity we can see a direct relationship
Expected Results
expected values with actual & determine Relationships don't between revenue & expenditure but because of reasons
Accuracy
Accuracy & confidence misstatement with confidence exists In case of significant risk analytical procedure alone is not likely to give SAAE
given above such relationships may not exist in PSU

Eg: GP Ratio are much more predictable than research or Advertisement expense Transaction, Account balances are predictable over a
Non-availability Further well complied data over a period of time P Predictable
may not be available for public sector period of time. Analytical procedure can be applied easily
(CNO—SA520.170) of data

Some relationships may be relevant like cost per km of road construction, further (CNO—SA520.260)
DETERMINE WHETHER DIFFERENCE IS ACCEPTABLE number of vehicles acquired compared with vehicles retired. Such kind of
relationship can exist in PSU OBJECTIVE AS PER SA520
3 Factors (LMR)

Materiality level
(CNO—SA520.240) (QNO-520.20) (MCQ-520.16) Use analytical procedures
Level of Assurance Risk of Material
required misstatement
FACTORS TO BE CONSIDERED FOR Planning Execution Conclusion
(CNO—SA520.180) (QNO-520.09) (MCQ-Incs.19.1)
SUBSTANTIVE ANALYTICAL PROCEDURE To obtain Business Use as substantive To obtain overall
INVESTIGATING RESULTS OF ANALYTICAL PROCEDURES understanding analytical procedures conclusion whether
It is like a summary of whole SA 520 Financial statements
Identify Risky areas To obtain reliable & are consistent as per
If after performing analytical procedures, auditor Shortcut ANANDI is Predictable relevant Audit evidence Auditor understanding
Which will be helpful to decide for particular assertion of the entity
Availability If reliable data is available we can perform analytical
Identifies fluctuations, Inconsistent relations or A procedure effectively NTE of Audit procedures
differences as compared to expected values of DATA

Continue on next column...

Auditor shall investigate difference by

Inquiring of Mgt. & Obtaining Performing other audit

evidence for responses procedures as necessary

When Mgt. is not giving explanation or

explanation is inadequate
41
(CNO—SA520.270)

ROUTINE CHECK CANNOT IDENTIFY 09 AUDIT OF ITEMS OF FINANCIAL STATEMENTS

ALL MISSTATEMENTS

Routine check Part 1 – AIFS LIABILITY (CNO--AIFS-P1.040) (QNO-AIFS.13) (MCQ- AIFS.22, Incs.21.1, 21.2, 21.3, 21.4, 21.5)
meaning Checking Arithematical accuracy of Primary book / ledger / FST

It includes (CNO.AIFS-P1.020) ISSUE OF SHARES AT PREMIUM

Checking opening Accuracy of ledger Balancing AUDIT OF SHARE CAPITAL

Balance posting ledger Excess of issue price over nominal value is called premium

Not Sufficient To detect all misstatement & manipulation (How to check existence, completeness and valuation, (1) Requirements of Section 52
Such as Trend analysis, Ratio analysis Reasonable rights and obligation related to share capital)
Analytical procedures There is no restrictions or condition to issue share at premium
Tests, etc should be applied
Tally / Compare, current year closing balances with previous year
Premium amount should be credited to securities premium account
Overall Test Above Tests are collectively known as overall Tests audited FST w.r.t. to authorized issue and paid up capital
This balance can be used for limited purpose as prescribed
If there is no change, obtain WR from company secretary
To written off preliminary expenses
If there is a change : -
To written off commission or discount on issue of share or debentures
(1) Resolutions Obtained certified copy of resolutions passed in BOD, To issue fully paid up bonus shares
SH meetings w.r.t. to inc/dec.
For premium payable on redemption of redeemable preference
Check compliance of Companies Act no issue at discount shares or debentures
(minimum application money, minimum subscription, separate
bank a/c, return of allotment, underwriting commission) To purchase of own shares or buyback

Compliance with SEBI regulations and guidelines for listed Co. If there is reduction of security premium apart from as specified
above it will be treated as reduction of share capital
(2) Authorized Share Capital (2) Verification by auditor

It should be checked with MOA and MCA website Whether balances are properly transferred to securities premium account

Is it enough to accommodate paid up share capital If not, it should Is it applied as per requirement of Sec 52
be increased and company is suppose to pay stamp duty and fees for it
(CNO--AIFS-P1.040) (QNO-AIFS.11)
(3) Forms

SH. 7 – for increase in authorized share capital ISSUE OF SHARE AT DISCOUNT (SECTION 53)
PAS 3 – for increase in paid up share capital
Prohibition Company cannot issue share at discount
FCGPR (Foreign Currency Gross Provisional Return) for FDI

(4) Special Points What if contravention

Check whether issue of share is for cash or consideration other

Issue will be Penalty equal to amount raised or 5 lakhs whichever is lower
than cash. (e.g. for promoters, underwriters etc.)
consider as void
Refund of money @ 12% p.a. from the date of issue

Exception (Shares Under section 54 w.r.t. issue of sweat equity shares

can be issued at
discount) Issue of shares to creditors, provided it is as per: -

Statutory Resolution Plan As per guidelines and

Debt restructuring directions of RBI

Check whether issue of shares is at discount,

Audit Procedures if yes whether sec 53 is complied

42
(CNO.AIFS-P1.060) (QNO-AIFS.16, AIFS.17) (CNO.AIFS-P1.070) (CNO.AIFS-P1.080) (QNO-AIFS.17.50)(MCQ- AIFS.21, Incs.19.5, Incs.49.3, Incs.53.1, Incs.56.5)

ISSUE OF SWEAT EQUITY SHARES (SECTION 54) DISCLOSURES OF EQUITY SHARES AS PER SCH III AUDIT OF RESERVES & SURPLUS

Meaning Equity shares issue to director or employee -Authorise

-Issued Accumulated Profits
1. For each class
-Subscribed
of Eq & Pref -Face valve Definition Includes amounts appropriated out of profits
At free discount for consideration other than cash
-Paid up Fully paid/partly paid
Excludes
For know-how intellectual property rights, value addition Rights attached
2. Rights For each
Special Resolution and class of Preference over Liability related amt
other class of shares Asset related amt
Requirement restrictions capital disclose On dividend distribution
of Section 54 Resolution should specify class of directors, employees to To meet any liability For diminution in value of
Restrictions
whom equity shares are issued, number of shares, On repayment of capital assets known as on B/S date
consideration if any, market price. For contingency
Terms of convertible Descending order
Securities For commitment
If shares are listed, requirement of SEBI regulations should be followed.
3. Shareholding
Pari-Passu rights, limitations, restrictions on these shares will be same Examples Capital Reserve, Capital redemption reserve, Securities
By ultimate By subsidiary of ultimate By associate of ultimate premium, general reserve, P&L etc but module focus on
as any other equity shares.
holding company holding company holding company P&L and securities premium
Audit Procedures
(CNO.AIFS-P1.060) Trace opening balances of various accounts in
By holding By subsidiary of Opening Balance
By associate of Reserves & Surplus to previous year AFST. (Audited FST)
company holding company holding company
REDUCTION OF SHARE CAPITAL (SECTION 66)
Additions / Utilization during the year for P&L
Name of shareholders holding more than 5% of shares and
1. Repay excess paid up capital if any. specify numbers of shares held Addition of profit for the year
1. Modes of Shareholding of promoters for each class
2. Reduce unpaid capital Trace it to P&L
reduction 4. Reconciliation Addition
3. Reduce paid up capital, if corresponding assets are lost Prepare reconciliation w.r.t. to issued and subscribed capital
of Share Capital Trace it to statement of changes in equity
So Adjust 10ss]

2. Pre-condition
0 AOA should authorize reduction of Capital Balance at beginning of year Changes during the year Balance at end of year Utilization for dividend & related DDT (not applicable from FY 20-21)
No existing default w.r.t. to repayment of deposit or For the period of 5 years
payment of interest on it 1. Shares issued for No accounting should be done for dividend proposed
immediately preceding
5. Disclosures of consideration other than cash Verify from
B/S date during the year or declared after the B/S date. It should
changes in resolution of BOD
Whether proposal was circularized in advance 2. Bonus Issue be shown in notes to accounts if it is done before
share capital Changes which should & Shareholders
3. Special approval of FST.
Whether meeting was properly conveyed be disclosed 3. Buyback
Resolution
Whether SR was passed Securities Premium
Share forfeiture / calls in Arrears (Due by
6. Addition / Deduction Verify resolution passed by BOD to ensure excess
Directors as officers seperately) Addition of issue price over face value is t/f to securities premium
Examine whether tribunal has passed order approving reduction
4. Tribunal
Check whether company complies with term & conditions Utilization It can be used only for limited purpose as explained
imposed by tribunal. (CNO.AIFS-P1.075)
in section 52
Closing
Whether company has sent, copy of minutes of shareholders UTILISATION OF BORROWED FUNDS AND SHARE PREMIUM
meetings and copy of order of tribunal to Registrar Check arthematically accuracy
5. ROC
Adv / Loan / Invest Intermediary Understanding
Check whether certificate for reduction of capital is issued Whether closing balances are properly reflected in balance sheet
Company (Any person Ultimate
1
/ Entity / Beneficiary
6. MOA Check whether MOA is properly amended Dt & Amt Loan / Inv / Disclosures Capital Reserve, CRR, Securities
Foreign Entity)
Guarantee Premium, DRR, Retained earnings,
7. Change in Either old certificates should be changed or new / Security Sub-classification general reserve, revaluation reserves
share certificate certificates should be issued and old should be cancelled FEMA
Dt & Amt Details required for each reserves (to the extent applicable)
8. Accounting Accounting entries as per resolution and tribunals order Compliance CO.Act
PMLA
Confirm whether tribunal order requires writing the word
'and reduced' to the name of the company in balance sheet Changes (if any) due T/f to retained Closing
Opening Profit/Loss
and whether it is properly written Adv / Loan / Invest Understanding to accounting policy or Dividends
Balance for the year earnings Balance
Funding party prior period items
Whether there is proper disclosures for revaluation of Company Ultimate
9. Disclosures 2 (Any person / Entity
assets during reduction of capital. Beneficiary
Foreign Entity) Dt & Amt Loan / Inv
Note :- Reserves represented by earmarked investment should be denoted as Fund.
Proper disclosure w.r.t. to Sch 3 for reduction of share FEMA / Guarantee
Debit balance of P&L should be shown as negative figure in surplus. If overall reserve
capital (for 5 years) / Security
Compliance CO.Act and surplus become negative still it should be shown in reserve and surplus

43 PMLA Dt & Amt

(CNO.AIFS-P1.100) (QNO-AIFS.23/AIFS.25) (MCQ-Incs.49.4) Borrowings Audit Procedures related to Valuation (CNO.AIFS-P1.110)

AUDIT OF BORROWING Loan

agreement / Agree balance appearing in books of accounts with SPECIAL DISCLOSURES RELATED TO BORROWINGS
Debenture loan agreement
Borrowings Audit Procedures related to Existence Trust Deed
Shortcut Security & charges are important against willfull defaulters & utilization Default
Approval by BOD Accounting Ensure that accounting policy is appropriate, In IND
policy AS we have to follow effective interest rate method Whether Quaterly returns
Check minutes whether loan or any new type of borrowing is approved If loan is taken from
Security Disclose in or statements sent to
along with significant terms and conditions Bank or FI on the
In case of Notes to A/C bank or FI agreed
Check as per AS – 11, exchange rate use for valuing basis of current Asset
foreign closing balance is appropriate and corresponding with book of A/C
Agreement
Check whether agreement is prepared as per BOD currency loans profit loss is properly treated
approval & Ensure terms & conditions of debentures If not give summary of reconciliation & reason for discrepancy
Preparation
are as per trust deed Recompute discount on issue, premium on redemption
Other related Whenever new charge Company needs to
Whether it is authorised by appropriate person and interest accrued and interest outstanding. Ensure Registration of
Authorisation balances is created or existing inform ROC in prescribed
that amortization of premium or discount is appropriate charges
charge is satisfied (over) time & manner
Check compliance with loan agreement w.r.t. amount,
interest, nature etc. and also with lease / hire purchase
Compliance agreement Borrowings Audit Procedures related to Disclosure
If there is delay then chargewise detail along
Ensure borrowing is within the approved limit Requirements of Schedule III w.r.t. long term borrowings with reason should be given in notes to A/C

Discharge of Liabilities Category for disclosing long term borrowings When company having resources
Wilful RBI has issued guidelines
& still they don't repay they are
Ensure that discharged liabilities are not included Defaulter W.R.T declaration
Shortcut TOL2D3 called wilful defaulters
If liabilities are discharged corresponding charge on the Bank
assets should be cancelled T Terms loan from If company is declared wilful defaulter
Related party
External Confirmation O Date of declaration
Other loans & advances
Details of default
Send (Roll out) request and obtain confirmation as per SA 505 from all lenders L & A from related parties
L (Nature of loan, Amt, Time)
Written Representation Long term maturity of If borrowed money is not used for
L Default in utilization Give details in
finance Lease obligations of fund specific purpose for which it was raised Notes to A/C
Obtain WR, that all the borrowings are valid claim by the lenders
D Deposits
Borrowings Audit Procedures related to Completeness
D Deferred payment liabilities
Schedule
D Debentures / Bonds
Obtain schedule of short and long term borrowings & It consist
details of opening, additions, repayment and closing balances Instructions in Schedule III w.r.t. long term borrowings
Audit Procedures related to Completeness Security related

Opening balance Match from last year AFST Sub classify as secured & unsecured

Addition Check with minutes of BOD and corresponding agreements Specify nature of security for each borrowings

Check whether they are as per agreements, authorised If loans are guaranteed by directors or other such
Repayment
and appear in bank statements. amount disclosed separately
Closing balance Check arithmetical accuracy and trace it to general ledger
Repayment related
Subsequent Check transactions after year end whether transactions
transactions of current year have slipped into the next year Specify terms of repayment for each borrowings
separately unless borrowings and terms are similar
Direct confirmation they can be aggregated
Direct Confirmation Procedures (It can be used for existence, completeness
and to check other matters but ICAI module has placed it just next to Disclose number and amount of installment to be
completeness so we are also covering it completeness only) paid in future

If default in repayment than disclose

Auditor should ensure that confirmation request are send to all the lenders
and confirmation are obtained from them and perform the following
Period of default & Amount of default
Ensure that confirmation request Once confirmations are received If there are Note :- Disclosure of short term borrowing is similar to long term borrowing.
ask for all the relevant information balances should be compared with no reply,
like interest rate, due date, primary books of accounts, if there is
As per recent amendment current maturity of long term borrowing should be
ensure that
and collateral security etc. which difference ask clients to make reminders shown under short term borrowing, Earlier it was shown under other current liabilities
will be useful for testing reconciliation which should be are sent to
borrowings checked by auditor them

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(CNO.AIFS-P1.120) (QNO-AIFS.29)(MCQ-AIFS.2) No response Alternate Audit Procedure OTHER CURRENT LIABILITIES

TRADE PAYABLES If confirmation are not received then check subsequent payments after Advances received from customers
year end.
Obtain customer wise listing for advance received
EXISTENCE
Balances outstanding should be broken into identifiable transactions Obtain ageing for the advances received
Audit procedures related to existence and such amount should be matched with invoices or other documents.
If advances are outstanding beyond 6 month, inquire with management
V Internal control related points Special points
whether there is dispute and whether additional liability needs to be
Ensure that such transactions are authorized and prices,
Related Party recorded check underlying documents
System should ensure that liability should be booked only after expenses terms and conditions (arm length price) are properly
are recorded Transactions (RPT) disclosed in FST
Liability for statutory dues (TDS, GST, ESIC, PT, PF payable)
System should ensure that same purchase/expense should not get Analytical Review trend line of purchase / expenses / trade payables
procedures and compare trend over period of time and check unusual GST payable
recorded more than once
trends which should be investigated.
Ledger Scrutiny Obtain details of GST liability for the last month and recompute
GST liability by applying appropriate rate to sales date
Identify large entries and check them with supporting documents. Obtain If variation then ask management to explain it.
ageing report and check whether it appears reasonable and match its total Trade Payable Audit Procedures related to Completeness
with general ledger PF payable
To check whether any purchases or creditor is unrecorded during the year,
Direct confirmation procedures for Trade Payables Purchase should be booked if goods are received. Obtain details of last month PF liability and apply
appropriate rate to employee benefit expense (Salary account)
To contact vendors and ask them to confirm trade
Meaning Documents received just before year end
payable balances directly / independently to Auditor If variation then management to explain it
Obtain last 5 goods received notes / receiving report, Obtain details of
All significant account balances should be selected and Subsequent payments & CARO
last 5 gate entry pass from inward book, Ensure that these are recorded
Selection also parties with whom material purchases are there even as purchases & creditors
if outstanding balances are insignificant Check subsequent payment for each statutory liability which is
outstanding as on year end with deposit challan amount
Obtain last 5 invoices received before year end, Check when goods for the
Revealing Selection should not be revealed to the client till the time
above invoices were received. If received before year end then should be If mismatch between liability amount and challan deposited
Selection they give final trial balance of trade payable ledger
recorded amount ask management for explanation
Consent Documents after year end CARO reporting – understand requirement of CARO w.r.t.
statutory dues and report accordingly
Auditor should inform client that he is planning confirmation for following Obtain details of purchases booked immediately after year end
parties and taken there consent
Obtain details of material payment to creditor after year end TRADE PAYABLE & OTHER LIABILITIES DISCLOSURE
Management may request not to sent confirmation request to some creditors
Obtain details of major expenses after year end Disclosure
In such cases auditor should consider whether there are valid grounds Only payables for purchasing goods and
What should be receiving services should be covered in
Further as per circumstances, auditor may perform alternative audit Check whether these purchases / expenses belong to current year. covered in trade payable trade payables
procedures for such creditors.
Specific disclosure related to MSME under section 22 of MSMED Act, 2006
Confirmation request letter
Trade payable Audit procedures related to valuation Total principal amount and interest DUE as on Balance Sheet date
Preparation In two ways it can be prepared
Penal interest paid as per section 16 for making delayed payments
Old Creditors & Disputes
Auditor may give list of creditors to management and management will
Interest due on late payments made
prepare all the confirmation request and send them to creditors but it Understand method used to identify old creditors
should be under strict supervision and control of the auditor. Accrued Interest on late payment o/s

Alternatively, to obtain pre-authorised confirmation request letter, then Ageing Last Trade Last payment Expert opinion Interest due and not paid even after year end, which will not be allowed
auditor can put name, address, amount and sent directly to creditors as deduction under income tax act.
Check whether the method is consistently applied year on year and it is
Date can be either balance sheet date or date can be closer to appropriate as per business environment Continue On Next Page...
Date
balance sheet date Obtain ageing of trade payable and it should be split between upto 30
days, 30-60, 60-180, 180-365 and more than 365 days.
Balance disclosure
Either balance as per books may be disclosed in the confirmation
Obtain list of vendors with whom company have disputes and whether
request or no balance disclosure will be done in request and it may
there are any litigations for them.
ask balance as per the books of creditors
If company thinks that liability is no longer payable and should be written back then
Ensure confirmation letter or undelivered letter are received directly to auditor it should be approved by appropriate member of senior management (CEO, MD)

If any discrepancy is revealed ask management to prepare Foreign currency Trade payable
Discrepancy
reconciliation and auditor should perform audit procedures
based on reconciliation items Ensure that they are re-stated as per closing foreign exchange rate as per AS-11

45 Continue on next column... Continue on next column...

 Further classification of other current liabilities Disclosure Requirement AUDIT PROCEDURES FOR COMPLETENESS OF PPE

Shortcut - MAI FIDa Movement in provisions

Classification
Obtain PPE schedule for each class of asset showing the
Unpaid matured deposits / debentures and interest accrued Op. Balance movement during the year (Opening + Addition – Deletion
All current and non-current PPE Schedule
provisions should be = Closing)
Income received in advance Addition during the year
classified under
Check arithmetical accuracy of the schedule
Interest accrued on borrowings Employee Benefits Reversal during the year
Opening balance
Current maturity of finance lease obligation Other (specify nature) Utilization during the year Tally it with previous year AFST
of PPE
Interest due on borrowings Closing balance
Obtain list of all the additions during the year
Unpaid dividend Describe nature of obligation and expected timing of outflow
of economic benefits Check whether additions are approved by authorized person
Others (specify nature)
Disclosure to
improve Nature and degree of uncertainty involved and Additions Check whether proper process like floating tenders, receiving
understanding corresponding assumptions for future events quotations, and selecting vendor as per policy of company
Ageing Disclosure
then awarding contracts and placing purchase order is
Details regarding reimbursement of provisions followed
less 6 M 1 yr 2 yr More
than to to to than Total Check documents for installation of the assets, receiving
1 yr 2 yr 3 yr 3 yr If the possibility of outcome is more than remote then such
6 M purchase invoice and payment of the asset
Contingent liability liability is shown as contingent liability and following details
(I) Undisputed Trade payable should be given: -
Accounting of PPE should be as per AS-10
considered good
PPE should be booked only when recognition criteria as per
(ii) Undisputed Trade payable Estimated financial effect Uncertainty involved Possibility of reimbursement AS-10 is fulfilled
considered doubtful
Accounting Cost will include initial acquisition, construction cost and will
Part 2 – AIFS ASSETS for PPE: - also include subsequent additions, replacement, repair and
(iii) Disputed Trade payable
service cost if it gives more than normal future expected benefits
considered good
(CNO.AIFS-P2.020) (QNO-AIFS.31) (MCQ-AIFS.23 Incs.13.1, Incs.43.1, Incs.43.2, Incs.43.3, Day to day servicing cost should not be capitalized
(iv) Disputed Trade payable Incs.43.4, Incs.56.3)
considered doubtful Spare parts, servicing and standby equipment should be
AUDIT OF PPE recognized as PPE only when they are held for more than
one period
(CNO.AIFS-P1.140)
AUDIT PROCEDURES FOR EXISTENCE Understand mgt's reason
(MCQ-AIFS.1, AIFS.13, AIFS.15, AIFS.20, Incs.03.01, Incs.03.4, Incs.49.2, Incs.56.4, Incs.62.4)
Mgt approval and discard note authorising disposal of asset
AUDIT OF PROVISIONS Management should conduct physical verification and auditor should attend it. from active use
Deletions
Policy w.r.t. physical verification whether Periodicity of verification whether Verify whether proper process like tender, competitive quotes
(In this item module has not given audit procedures assertion are received and best one is selected
wise, so we are having combined audit procedures) performed by own staff or 3rd party annual or once in 2 yr / 3 yr
Verify deletion is properly recorded ensuring that book
Provision arising from contracts with customers Obtain evidence that physical verification is supervised value is written off and resultant gain / loss is transfer to P&L
E.g. warranty, after sale services, damages for losses Supervision
by appropriate authority
suffered by customer Closing Balance Closing balance of schedule should agree with closing balance
Types of Provisions Obtain report and supporting working paper and check following of ledger, balance as per fixed asset register and balance as
Provision for litigations and claims
per balance sheet
Other provisions E.g. employee benefits, sale return etc. Assets should be properly tagged (stickers)

Tag should contain details of nature of asset, identification marks or numbers

Obtain list of all provisions and match it with general ledger Continue On Next Page...
Working paper should contain assets physically verified
Obtain detailed working of all material provisions and check
whether they are logical complete and accurate. Reconcile items of report and working paper with fixed asset register

Report from actuary should be obtained for employee Ensure FA register contains all additions and deletions before reconciliation
Obtain experts report benefit provisions
Discrepancy can arise because of shortage, asset not in working condition
in case of complex Special focus on assumptions and methods used by expert or active use & Depreciation should not be charged on such assets and they
and significant should be written off.
provisions Evaluate the work of expert as per SA 500 which deals
with management expert.
Continue on next column...
Report / letter / discussion Understand likely hood of liability arising on the
from legal counsel (lawyers) entity whether if is probable, possible or remote
Continue on next column...

46
 AUDIT PROCEDURES FOR VALUATION OF PPE (CNO.AIFS-P2.030) Criteria for proving existence
Production or Supply
Generally value of PPE is equal to cost less accumulated depreciation less impairment SPECIAL
SPECIAL DISCLOSURES RELATED TO
DISCLOSURES RELATED TOPPE
PPE It there is Then it prove
active use in Administrative
existence
Shortcut:- Disclose TRP Rental to others
We have already checked cost when we are checking
Cost
addition to fixed assets Title deeds of Disclosure is required for immovable properly (L&B) appearing Active use E.g. :- If software is in active use and contributing to
Immovable properly in B/S but title deed is not in the name of the company sale and related services then it exist
Meaning Reduction in value of asset because of use, efflux of
time and obsolescence
Disclosure is not required if asset is acquired through lease agreement (As it is normal) E.g. :- If design / drawings is used to produce goods
Reduction in value of asset is cost to the entity and Collumnar Disclosure required than it exist
it should be debited to P&L
Purpose Description of property If there is no Deletion should be recorded, after taking approval of mgt.
Depreciation It will ensure that assets are shown at proper value active use and amortization should cease they should be written off
B/S line item in which it is covered
Ensure depreciation is charged on each and every asset Gross carrying value
unless asset is non-depreciable
Name of the party holding TD
AUDIT PROCEDURES FOR COMPLETENESS OF INTANGIBLE ASSETS
Depreciation methods should be such that which reflects Whether party is promoter, Director or
future pattern of economic benefits relative, employee of such people Obtain schedule for each class of asset showing the movement
Intangible Asset (IA) during the year (Opening + Addition – Deletion = Closing)
Impairment Check whether mgt has done impairment assessment and if there are Date
any triggers, whether proper calculation has been done as per AS-28 Schedule
Reason Check arithmetical accuracy of the schedule
Dispute if any Opening balance Tally it with previous year AFST
AUDIT PROCEDURES FOR RIGHTS AND OBLIGATION OF PPE of IA
If company has done Whether it is done by
Revaluation of PPE Obtain list of all the additions during the year
Ensure that purchase invoice, title documents like RC re-evaluation of PPE Registered valuer
Moveable assets (registration certificate) are in the name of company Check whether additions are approved by authorized person
Capital WIP
Ageing schedule on aggregate basis
Projects
Check agreement to sell, sale deed/ conveyance WIP Time Check whether proper process like floating tenders, receiving
Additions
quotations, and selecting vendor as per policy of company then
deed is in the name of the company Less than More than
1-2Y Total awarding contracts and placing purchase order is followed
1Y 2-3 3Y
Immovable assets Auditor should check original title deeds Project in
XXX XXX XXX XXX Check documents for usage of the assets, receiving purchase
progress
If title deeds are not available because they are given as invoice and payment of the asset
security to the lenders then obtain confirmation from them Project temp
XXX XXX XXX XXX
suspended Accounting of Intangible assets should be as per AS-26
XXX
Whenever company gives assets as a security then it is (Amt should Tally with BS) Accounting for For all material additions verify all recognition
Registration of Charge
mandatory for them to register charge against these assets Intangible assets criteria has been fulfilled as per AS-26
and disclose in FST Project wise details where time or cost limit is exceeded
Cost of research phase should be debited to P&L
Time for Completion
3 Cost of development phase should be capitalised
AUDIT PROCEDURES FOR DISCLOSURES OF PPE 2
-

Less than More than

1-2Y Total
1Y 3Y Understand mgt's reason
Land / Building / Plant and Machinery / Furniture and Fixtures / Project 1 XXX XXX XXX XXX
Classification Vehicles / Office Equipment / Others (In sequence of value) Mgt approval and discard note for authorization of
Project 2 XXX XXX XXX XXX Deletions asset from active use
Opening (+) Additions (+) Acquisition through business XXX
Verify whether proper process like tender, competitive
Schedule combinations (+) Revaluation (if change is more than 10% of net quotes are received and best one is selected
showing (CNO.AIFS-P2.040) (QNO-AIFS.35, AIFS.35.50, AIFS.36, AIFS.36.50)
carrying value) (+) borrowing cost capitalization (-) Disposal
movement (MCQ-AIFS.3,AIFS.6, AIFS.18, AIFS.19, Incs.13.2, Incs.13.4, Incs.13.5, Incs.49.5)
(-) Disposal through demerger (+)/(-) Other adjustments (=) Closing Verify deletion is properly recorded ensuring that book value is
written off and resultant gain / loss is transfer to P&L
Depreciation Opening accumulated depreciation (+) depreciation during the year INTANGIBLE ASSETS
Closing Balance
details (-) deduction of depreciation (=) Closing accumulated depreciation Closing balance of schedule should agree with closing balance
of ledger, balance as per fixed asset register and balance as
AUDIT PROCEDURES RELATED TO EXISTENCE per balance sheet
Opening Impairment (+) Impairment during the year (-)
Impairment
Impairment reversal (=) Closing Impairment
Important Points in Definition Intangible asset is
Separate Identify assets which are GIVEN ON operating lease and
disclosure assets which are TAKEN ON finance lease
for lease: - Identifiable Non-monetary Without physical
substance
Should be able to point out how it Not a monetary
contribute to revenue generation, receivable Eg
other than goodwill. Debtor, Loans given

47 Continue on next column...

 AUDIT PROCEDURES FOR VALUATION OF INTANGIBLE ASSET (CNO.AIFS-P2.060) (QNO-AIFS.45) (MCQ-AFS.10, AFS.14, Incs.03.2, Analytical procedures
Incs.05.5, Incs.11.2, Incs.42.1, Incs.42.2, Incs.56.1)
Compare financial and non-financial data with prior year, budget and industry
Generally value of I.A. is equal to cost less accumulated amortization less impairment average etc.
INVENTORIES
Cost We have already checked cost when we are checking addition Compare actual inventory to budgets.
to fixed assets
AUDIT PROCEDURES RELATED TO EXISTENCE
Amortization Compare Inventory Turnover ratio (COGS ÷ Average Inventory)
Auditor's attendance / participation Auditor should attend / participate inventory Financial (' ' indicates incompleteness)
Reduction in value of asset because of use, efflux of time count with mgt
Meaning
and obsolescence Vertical analysis (Inventory ÷ total assets) (' ' indicates
Entity's Plan Review entity's plan (mgt instructions) for performing inventory counting incompleteness)
Reduction in value of asset is cost to the entity and it should be
Observations while performing test counts and attending inventory counts Non-Financial
Purpose debited to P&L Compare non-financial information like weights, litres and other
Observe whether employees adhering to mgt plan measurements with prior year to see it reasonableness.
It will ensure that assets are shown at proper value
Assuring that there is appropriate supervision Obtain physical inventory listings and check its arithmetical accuracy
Ensure amortization is charged on each and every asset
Physical
Assuring all the items are tagged Reconcile physical inventory to perpetual records
Amortization methods should be such that which reflects future Inventory
pattern of economic benefits Observe proper amounts are shown on tags Reconcile physical inventory with general ledger control totals
/ accounts
Check whether mgt has done impairment assessment and Ensure that tags and summary sheets are controlled and reconciled with each other
Impairment if there are any triggers, whether proper calculation has been Perform purchase and sales cut-off test
done as per AS-28 Auditor should perform test count of inventory
Test See last few documents of current year and next year, such as
Cut-offs
counts Reconcile test count sheets with summary sheets which should be receiving reports, shipping documents, warehouse records, bill
reconciled with tags and if any discrepancies it should be discussed with and tags of lading and inventory records to check any transaction is missed.
AUDIT PROCEDURES FOR RIGHTS AND OBLIGATIONS
client and treated accordingly.
Tags may have information relating to inventory movements and
Reconcile stock sheets this may be used to check whether any inventory movement is
If government or any omitted or any transaction in financial record in invalid.
If Intangible asset is purchased
If it is self-generated then other authority recognize Collect all the stock sheets made during physical verification
then obtain purchase agreement intangible assets like
check expense invoices and
and it should be in the name patent then it should Match it with the stock records as per books
it should be in the name AUDIT PROCEDURES RELATED TO RIGHTS AND OBLIGATIONS
of company including all be verified from
of the company government records If there is significant discrepancies, discuss with mgt and ensure that it is Shortcut - CS & CPT
ownership rights
/ website treated properly
Documents & Agreements
Periodic v/s Perpetual System
Collateral Check if goods are given as collateral for obtaining finance,
AUDIT PROCEDURES FOR DISCLOSURES OF INTANGIBLE ASSETS Periodic If entity is using periodic system ensure that verification is done agreements check whether client is still owner of the goods.
System at the end of the year
Goodwill / Brands & Trademarks / Computer Check correspondence with customer, sale agreement and
Perpetual If entity using perpetual system then physical verification may be Sale related shipping documents, if risk and reward are transferred then
Software / Copyright and Patents / Licenses and
(In Sequence System th st
done at interim dates (e.g. :- 30 Sept, 31 Dec) we are not the owners.
Classification Franchise / Mastheads and Publishing Titles /
of Popularity)
Mining Rights / Recipes, Formulae, Models, Design,
Others Review consignment agreement to understand who is the
Prototypes / Others (Specify Nature) Consignment owner of goods, nature of goods and ensure that such
Ensure exclusion of 3rd party stock (goods received as consignee), consigned goods are identified and treated properly
Exclusion
damaged, obsolete stock.
Opening (+) Additions (+) Acquisition through business combinations
Schedule (+) Revaluation (if change is more than 10% of net carrying value) Purchase documents such as PRN, purchase order, receiving
Confirm or investigate goods lying with 3rd party (specially
showing Inclusion report, purchase invoice, payment file and cancelled cheque
(+) borrowing cost capitalization (-) Disposal (-) Disposal through jobwork goods)
movement Purchase should be in the name of client.
demerger (+)/(-) Other adjustments (=) Closing
Check last 5 or 10 receiving reports and shipping documents related Review material purchase commitment agreements, in such
Cut-off and ensure goods are recorded in proper period
Amortization Opening accumulated amortization (+) amortization during the year (-) case if delivery is delayed by us then also we will become owners.
Details deduction of amortization (=) closing accumulated amortization Alertness Stay alert all the time specially for empty boxes and obsolete items. Third Party Obtain confirmation of significant items as per SA 501

Opening Impairment (+) Impairment during the year AUDIT PROCEDURES RELATED TO COMPLETENESS
Impairment Auditor should insist on declaration should be obtained on
(-) Impairment reversal (=) Closing Impairment
business letterhead signed by authorised personnel confirming
Shortcut - TAP Completeness inventories belonging to client.

Ensure that stock with 3rd party like part authorities, Continue On Next Page...
warehouses, transporters which belong to client is covered.
Third Party
Ensure goods received on consignment as consignee are
segregated not included in inventory.

Continue on next column...

48
 AUDIT PROCEDURES RELATED TO VALUATION (CNO.AIFS-P2.080) (QNO-AIFS.38, AIFS.38.50) (MCQ-AIFS.5, AIFS.11, AIFS.24, Incs.03.3, No response
Incs.03.5, Incs.27.5, Incs.42.3, Incs.47.2, Incs.56.2, Incs.62.2, Incs.62.3)
Check which cost method is applied (e.g. FIFO, Weighted average) If confirmation are not received then check subsequent receipts after year end.
Cost method TRADE RECEIVABLE
whether it is appropriate as per FRF.
Balances outstanding should be broken into identifiable transactions and
Raw materials and consumables such amount should be matched with invoices or other documents.
EXISTENCE
Elements Ensure along with purchase price, carriage inwards, Special points
Audit procedures related to existence
of costs non-refundable duties etc are included Ensure that such transactions are authorized and prices, terms and
Internal control related points RPT
conditions (arm length price) are properly disclosed in FST
Standard AS allow to use standard cost but at end of the year client
should compare standard cost and actual cost to ensure that System should ensure that debtor should be booked only after goods and Analytical Review trend line of sales/trade receivables and compare trend over
cost both are almost close to each other. services are given income are recorded procedures period of time and check unusual trends which should be investigated.

Replacement Check purchase invoices received in last month, this will give System should ensure that same sales should not get recorded more than once
cost us idea of current replacement cost. TRADE RECEIVABLES AUDIT PROCEDURES RELATED TO COMPLETENESS
Check whether receipts are recorded invoice wise, if not system should adjust
receipts against invoices on FIFO Basis chronologically. Further if there is on
Generally valued at cost, if FG NRV is below cost To check whether any sale or debtor is unrecorded during the year
Valuation account realization (partial realization then it should be confirm from debtor)
then apply Cost or NRV which ever is lower -
Damaged & Obsolete Inventory ⑳
Ledger Scrutiny Documents received just before year end

Work in Progress Ensure that such inventory is valued at ⑳

Identify large entries and check them with supporting documents. Obtain Obtain last 5 shipping documents/dispatch records, Obtain details of last 5
realistic NRV. E
ageing report and check whether it appears reasonable and match its total dispatch entry from goods outward book, Ensure that these are recorded
Elements of cost Check the basis of overhead includes (its rates and application) with general ledger as sales and debtors

Abnormal wastage Ensure that such cost are not included ⑳

Direct confirmation procedures for Trade Receivables
Obtain last 5 invoices issued before year end, Check when goods for the
To contact customer and ask them to confirm trade above invoices are dispatched. If dispatched before year end then should
Valuation Cost or NRV whichever is lower &
Meaning
payable balances directly / independently
- -
be recorded
receivable

Finished goods All significant account balances should be selected and also Documents after year end

Elements of cost
Examine basis of overhead, ensure that overhead rates are ⑧ Selection parties to whom material sales are done even if
outstanding balances are insignificant Obtain details of sales of immediately after year end
completed keeping in mind normal loss and are reasonable.

As Valuation They should be valued at cost or NRV w.e. lower

Revealing
Selection
Selection should not be revealed to the client till the time
they give final trial balance of trade receivables ledger
Obtain details of material receipts from debtor after year end

cost Obsolete Stock Consent

Obtain details of major sales after year end

Nu
Check whether these sales belong to current year.
0
Obtain and carefully examine inventory ageing split between
Auditor should inform client that he is planning confirmation for following

obsolete O
30 days, 30-60, 60-90, 90-180, 180-360, 360 and above
parties and taken there consent

-
Identify TRADE RECEIVABLES AUDIT PROCEDURES RELATED TO VALUATION
Calculated inventory turnover ratio (obsolete inventory may Management may request not to sent confirmation request to some debtors
be revealed if ratio is significantly lower)
Old Debtors & Disputes
In such cases auditor should consider whether there are valid grounds

Valuation
-
Valued at cost or NRV w.e. lower (generally NRV will be lower).
Further as per circumstances, auditor may perform alternative audit
Understand method used to identify old debtors
NRV of FG = Net selling price procedures for such debtors. Check whether the method is consistently applied year on year and it is
= SP - Selling cost
appropriate as per business environment
Confirmation request letter
Obtain ageing of trade receivables and it should be split between upto 30
AUDIT PROCEDURES RELATED TO DISCLOSURES Preparation In two ways it can be prepared
days, 30-60, 60-180, 180-365 and more than 365 days.

Classification Auditor may give list of debtors to management and management will Obtain list of customers with whom company have disputes and whether
prepare all the confirmation request and send them to debtors but it there are any litigations for them. Check whether provision is made at
should be under strict supervision and control of the auditor. appropriate rate considering recoverability.
Others
Raw materials Finished goods Stores and spares
(specify nature) Alternatively, to obtain pre-authorised confirmation request letter, then If company thinks that debtor is no longer recoverable and should be written
auditor can put name, address, amount and sent directly to debtors off then it should be approved by appropriate member of senior management
WIP Stock in trade Loose tools (CEO, MD)
Date can be either balance sheet date or date can be closer to
Date
Mode of valuation for each class of inventory balance sheet date Foreign currency Trade receivables
Balance disclosure Ensure that they are re-stated as per closing foreign exchange rate as per AS-11
Goods in transit should be disclosed in each sub-heading of inventory
Either balance as per books may be disclosed in the confirmation
request or no balance disclosure will be done in request and it may Continue On Next Page...
ask balance as per the books of debtors

Ensure confirmation letter or understand letter are received directly to auditor

undeliverd
If any discrepancy is revealed ask management to prepare

49
⑧ Discrepancy reconciliation and auditor should perform audit procedures
based on reconciliation items
Continue on next column...
 TRADE RECEIVABLES DISCLOSURE (CNO.AIFS-P2.100) (QNO- AIFS.40) (MCQ-Incs.19.2, Incs.42.4) CHECKING BANK RECONCILIATION STATEMENT [BRS]
Disclosure
CASH & CASH EQUIVALENTS Auditor should understand the process & periodicity of making bank reconciliation statement
What should be covered Only receivables for selling goods and giving
in trade receivables services should be covered in trade receivables Auditor should obtain BRS for all bank accounts
Meaning of Cash & Cash Balance with Banks, Cheques /
Good v/s doubtful Check classification of amount due is properly equivalents Drafts on hand, cash on hand others What to check in Bank reconciliation
disclosed as:
Check balance as per bank book to balance as per confirmation / statement
Secured, considered good — Unsecured, Audit procedure to Check existence & completeness of Cash & Cash equivalents
(i.e Opening balance)
considered good — Doubtful. ~ Planning Cash Count
In adjustments check important reconciling items under
Verify that proper disclosure of amounts due from the Cash doesn't have any ownership
Director & Officers following parties has been made: — — —
identification markings so it is difficult to prove that Cheques issued but not yet presented for payments for this we should
Surprise
Directors misappropriated cash belongs to entity. Further if cash is check bank statement
Checking
Other officers of the company missing any other cash can be used to hide the point of We should check whether these cheques are paid subsequent period statement
missing cash.
Any of them either severally or Jointly with any
Further if any cheque has become Stale (i.e. 3 Months or more have
other person lapsed), then that entry should be reversed & again liability should be
So it is very important to use surprise checks in cash
Firms or Private companies respectively in which included in books of accounts
any director is a partner or director or member. counting, without informing client about it
Checking all material reconciling items
Related party Proper disclosure of Related Party Transactions
It can be done on the last day of year or after the close of the year
regarding receivables have been made as per AS Cheque deposited but not credited by bank
18 or IND AS 24.
Ageing Disclosure Simultaneous If there are more than one cash balances with Cashier,
petty Cashier, Branch Cashier, Imprest balance with employees Check them from the deposit slip
Checking
less 6 M 1 yr 2 yr More If cheque is not cleared beyond reasonable time then auditor should
than to to to than Total discuss with management what is the probability of getting money &
6 M 1 yr 2 yr 3 yr 3 yr Then in such cash simultaneous cash counting should be
done, so that cash of one location should not be used he may accordingly book provision also
(I) Undisputed Trade receivables to hide differences in other locations.
Amounts Or Charges
considered good
Performing Cash Count
It is important that Cashier should be present while Auditor should check material reconciling items in this heading, If any amount
(ii) Undisputed Trade Receivable
cash is being counted & once counting is done, is not recorded yet then it should be discussed with the management
considered doubtful Presence of Cashier
details are recorded, he should sign those documents accounting entries should be passed for recording them

(iii) Disputed Trade Receivable If they don't do this Audit Report will be Qualified
considered good Such thing is required otherwise cashier may
blame auditor for any shortage in cash DIRECT CONFIRMATION FOR CASH & CASH EQUIVALENTS
(iv) Disputed Trade Receivable ·BankBalance)
considered doubtful Sometimes in a cash box instead of real cash, we may
I owe you (IOU) Examples of different types of cash balances ,Current Account, Deposit Account,

⑲
find a slip chit or ‘I owe you' (IOU) This simply
Exchange Earners' Foreign Currency Account,(EEFC), Cash credit Account,
represent cash is given to someone for temporary purpose
Restrictive Use Accounts(Like dividends),Escrow Accounts.
& Company is going to get it back. This practice can be done
for few days during the year but there should be proper
loot It should be tried that confirmation should be obtained for 100% of Bank Accounts
authorisation for the same
②

mile
If there is a discrepancy in the balance then it should be investigated
At year end if such things exists then such amounts are
given to staff, it should be shown as advance given ③ If there is no reply, then there should be alternate Audit Procedure.
& auditor should check that there was proper authority
approving these payments
④ mila
Agree balance with bank statement.

If entity is maintaining rough cash book or details of cash Sending audit teams to bank to go & see the reconciliation statement .Auditor shall
transaction, then auditor should ensure that entries in cash ⑪ ensure that monetary items in foreign currency are properly stated.
book agreewith rough cash book or details of cash book
Others Continue On Next Page...

Cash Sensitivity
Auditor should compile summary of total receipts
& payments for different months & then see the trends
& find out if there is anything unusual

50 Continue on next column...

 CASH & CASH EQUIVALENT DISCLOSURE
Balances with Banks,
Cheques, drafts on hands,
It should be classified as
Cash on hand
Others (Specify nature)
Litigation
AUDIT PROCEDURES RELATED TO VALUATION Part 3 – AIFS INCOME & EXPENSE
Understand process followed by the company to identify and assess
Process doubtful accounts, check whether such method is appropriate and (CNO.AIFS-P3.020) (QNO-AIFS.45.50, AIFS.45.55) (MCQ-AFS.12)
consistent with previous year.
Obtain ageing of loans & advances between due, 30 days, 30-60 days AUDIT OF SALES (OVERVIEW)
Ageing
old, 60-180 days old, 180-365, 365 days and above.
Sale / Collection / Revenue Cycle
Identify loans and advances where litigation are going on

*Earmarked balances with banks shall be separately stated Identify It is set of steps which start from receiving customer It is important for auditor to
From above identify doubtful accounts and discuss with mgt if account is
doubtful order to final receipt of the sales money understand revenue cycle
not included in the list of doubtful accounts and discuss reasons with mgt.
Balances with banks to the extent held as margin money or security against, the accounts
borrowings, Guarantees shall be disclosed separately Auditor should understand products and services of entity,
Check whether write-off and other reductions have been authorized Understanding
Write-off major contributor, now additions & deletions, major customer
by senior authorities. revenue centres
If there are repatriation restriction it should be specified and key terms of sales (cash vs credit)
Prepare a schedule for bad loans and advances (opening (+) addition
If bank deposit is more than 12 Months maturity ,shall be disclosed Understand Internal Segregation of duties / setting credit limits / authorization /
during the year (-) written off during the year (=) closing balance)
Schedule control systems collections of amount due / accounting of sales.
***Ear marked balance are those which are already committed for some purpose. Also prepare schedule for provision opening + addition during the
year (-) utilised during the year = closing balance Test of controls
(CNO.AIFS-P2.120) (QNO-AIFS.45)
Foreign Ensure that foreign currency loans & advances are restated during
Currency the year. Common controls includes pre numbered
Auditor should test design and operating
LOAN & ADVANCES AND OTHER CURRENT ASSETS sales invoices, stamps and signature for
effectiveness of ICS, so that he can reduce
approvals and specific authorization if
AUDIT PROCEDURES RELATED TO DISCLOSURE extent of substantive testing and comment
External confirmation should be performed just like debtors credit sales cross a particular limit or if
with only difference that while confirming principle you will on deficiency as per SA 265.
Audit Procedures there is bad debts write off.
Classification as per Nature
related to Existence also confirm interest receivable from the parties as per the
Samples should be selected randomly from customer orders /
agreed terms
Sampling sale invoices / customer statements for applying substantive
Security Loans to Capital Other loans
procedures.
Obtain list of all advances and other current assets Deposits related parties advances (specify nature)
Audit procedures
related to Ensure that all the balances from the ledger are covered
Classification as per recoverability Substantive procedures
Completeness under list
Ensure that all the agreements and acknowledgement from
Secured, considered good Unsecured, considered good Doubtful It should be a mix of test of details In analytical procedures we can compare
the parties in respect of o/s loans are covered in the list and analytical procedures things with previous years / budgets or
It should be disclosed other entities.
Audit procedures related to Rights & Obligations (In the sequence of Importance) Provisions / Allowances for doubtful loans
separately under relevant head
MOA/AOA It should authorize company to provide loans and advances Special Disclosure E.g:- We can compute expected sales taking average price and
then compare it with actual to find out sales are reasonable.
In case of companies, it should be authorized by BOD which Loans due from director
should appear in minutes
Authorization Loans due from director jointly with other persons
Further partner in case of firm and trustee in case of trust In case of AUDIT PROCEDURE RELATED TO OCCURRENCE
director(s) Loans due from partnership firms where director is partner
Regularity Regular recovery and receipt of security proves that client has
& Security rights over such loans & advances, other current assets Loans due from private company where director is director Customer order /
No shipment should be done without consent and
or member. consent / Agreement
agreement of customer specially ensure this at year end.
Related party Ensure that there are special authorized like of audit committee etc. Shipment
Loans & Loans due from other officers of company
In case of other Ensure customer is not fictitious
Advances Also check whether they are reasonable and at arm's length Customer
officers Loans due from other officers and jointly with other persons
Obtain confirmation from few customers
Check GST input receivable, TDS receivable from the returns to company
filled and claims made to authority.
Statutory
balances Check whether balances appear reasonable, we can apply GST Continue On Next Page...
rates to purchases or expenses, to see whether recorded inputs
looks reasonable.

51
 (CNO.AIFS-P3.040) (QNO -AIFS.45.60/ AIFS.69/ AIFS.71/ AIFS.73) (MCQ-AFS.4)
Accounting of sales AUDIT PROCEDURES RELATED TO MEASUREMENT / ACCURACY
Randomly select some journal entries and match them with invoices
Unearned revenue should not be recognized as earned. eg. maintenance ⑧ 0
Examination in Depth 9- DRES AUDIT OF OTHER INCOME
income of future years 2 O
Select few transactions and trace them from inception till end and understand
all the terms and conditions carefully.
Audit of Interest Income on fixed deposits
Whether customer obligation are contingent (installation)
This will help to identify incentives, discounts etc promised and further useful Fixed deposit schedule
If there is substantial uncertainity in measurability and collectability we have
to delay revenue recognition. to identify combination of products, maintenance services, deferred payment, Auditor should ensure that fixed deposit schedule is accurate, with the help
installation etc promised along with sales.
of which we can check the interest income.
Invoice should not be booked twice and canceled sale should be reversed
All these points will affect whether sales to be recorded on immediate basis Opening F.D. can be matched with last year balance, current year F.D. can
Special points
or sales to be recorded over period of time. be match with fixed deposits receipts, redemption of F.D. can be checked
Sequence of sales Check whether there is new unusual sequence of sales with bank statements and for closing F.D. we can see receipts and
invoices invoices, indicating fake sales
Check whether there are unusual journal entries again
5 0
Percentage completion v/s completion method for services

Depending on nature of services which are provided as per AS-9,

confirmation from banks.

Unusual transactions Interest on F.D.

creating doubt revenue can be booked either step by step on percentage basis or it can
booked at the end when all services are given as per completion method. Check arithmetical accuracy of interest income by recomputing, ensure that
Sale Return
lproper amount, rate and days are taken into consideration

Calculate ratios of
30
Related party sales
Check reasonability, rates and conditions are at arm's length when goods sold Confirmation
Check credit notes Sales return may
sales return with to related parties.
Excessive sales which are issued after be checked with While taking confirmation for F.D., auditor can also ask about interest income
sales compare
during the year to ensure that interest income as per books and confirmation
40
return may year end. Huge amount sales invoice, Export sales in foreign currency should be converted at average exchange
with previous year Export match with each other.
of credit note rate as per AS-11.
indicate fake and enquire the challans, credit
for sales return may
sales in past reason for substantial note, Sales should be booked on the amount which entity expects Auditor should obtain copy of form 26AS (this form shows TDS deducted
indicate huge amount of
fictitious sales.
increase stock register etc I O
Collectability
to collect
rd
by 3 party which belong to the entity). So that auditor can do reversed
or decrease. calculation on the basis of TDS deducted by bank, to check interest
income received.
AUDIT PROCEDURES RELATED TO CUT-OFF AND COMPLETENESS AUDIT PROCEDURES RELATED TO DISCLOSURES Audit of Dividend

Requirement of Schedule III Ensure that dividend is recognized

Cut-off
When primary condition of right to receive dividend is established
Ensure that revenue is recorded in correct accounting period. So check Revenue from operations should be disclosed separately in following headings
sales transactions (last 5-10 of current year and 5-10 of next year) Secondary condition that dividend should be measurable and
Sale of Products xxx collectable (probable that economic benefit will flow)
Date of recognizing sales should not be the date on which sales invoice is Sale of Services xxx Audit of Gain/Loss on Mutual funds
generated it should be the date on which risk & reward is transferred which are
generally transferred on delivery of goods but in some circumstances depending Other operating revenue xxx Ensure that this gain/loss should be booked only when title of mutual fund is
on the agreement, it can be other date also (like installation etc) transferred from entity.
Excise Duty / GST (xxx)
It will be difference between redemption price and carrying value of investments.
Completeness Other points
Select some shipping documents and ensure that there is corresponding Auditor can obtain mutual fund statements and check that gain/loss of books
Ensure that sales are properly shown in segment reporting as per different and statements agree with each other.
journal entry. types of products
Quantity appearing in sales register should be reconciled with quantity as Ensure that related party sales are properly shown in notes to accounts.
(CNO.AIFS-P3.050)
per stock and GST records. Sales should be checked with GST returns.

Further we can take GST and by reverse calculation get expected sales and
these sales can be compared with actual sales and if there is variation then DISCLOSURE OF UNDISCLOSED INCOME
auditor should investigate.
Company

Having undisclosed Income

Disclosed it during the year to IT Dept voluntarily

Under scheme other

providing immunity
Disclose in notes to Accounts
No need to disclose

52
(CNO.AIFS-P3.060) (QNO-AIFS.47) Shortcut – BIT COIN (CNO.AIFS-P3.080) (QNO-AIFS.48, AIFS.48.50) (MCQ-AFS.7)

Booking of purchase invoice should be done only when risk and reward are
AUDIT OF PURCHASES (OVERVIEW) transferred to the entity. In case of FOB, it should be booked when goods are AUDIT OF EMPLOYEE BENEFIT EXPENSE
B received by our transporter. In case of CIF, it should be booked when goods
Purchase Cycle are received at our godown.
(Module has given combined audit procedures for all important assertions)

It is a set of process which starts with placing purchase order with the Ensure that Input tax is segregated and booked in appropriate account and
input tax of entity should be match with tax returns and official records of the Obtain list of employees at period end, plus schedule which gives monthly
vendor and ends with making payments to the vendor. I
departments. movement of employees split between new employees and leavers and
continuing employees (There can be separate sheet for each month)
Production Centre
T Transactions which are unusual in nature should be reviewed. Randomly select new employees
Auditor should understand nature of goods and services which are produced and
type of raw materials and other items which are required for production Capitalization or expending of a purchase should be reviewed carefully, Obtain appointment letter
C New Hires
by applying professional judgements.
Check salary of 1st and subsequent month
Auditor should understand pattern of procurement which goods form major part of
Original invoice copy should be received and only on that basis purchase salary computation as per agreed terms
purchases, who are the vendors and what are the terms and conditions like cash
or credit. O should be booked (photo copy or carbon copy) should not be basis of booking Randomly select employees who resigned
purchases. Leavers /
Identify Controls Resignation Obtain full and final computation whether all post
If related party purchases, ensure that they are approved by audit committee or retirement benefits has been properly calculated and
Auditor should understand whether there is segregation of duties, whether I BOD as the case may be and also perform analytical procedures to ensure check whether employee acknowledgement on final
purchases above certain limit are authorized by purchase committee or senior prices are reasonable and are at arm's length price. computation is obtained.
personnel, whether quotations are called before placing purchase order, whether -> photo/ rocess
TOC Understand and check system of attendance
purchase order are numbered, when goods are received whether quality / quantity Name of the entity should appear on purchase invoice and other documents, Fictitious
N
check are done properly and proper GRN is made, whether 2 or 3 way checks sometimes it can be in the name of branch. Meet employee in person on sample basis
Employee
(match purchase invoice with GRN and purchase order, then only payment TOD
Obtain bank details and identity proof of
should be done) employee on sample basis
Analytical Procedures
Test of controls AUDIT PROCEDURES RELATED TO COMPLETENESS,
MEASUREMENT (ACCURACY) Monthly analysis
Ensure that important controls in previous steps are tested through inquiry, Obtain monthly salary register for 12 months
inspection of documents, observation etc.
Cut-off Test Compute average salary per employee per month and compare with same
Sampling month previous year and preceding month to check reasonability.
It should be performed to ensure that purchases are booked in correct accounting year.
Auditor can randomly select purchases to be checked, auditor can match each purchase Overall reasonableness
Select last 5 GRN records and check whether they are properly recorded.
transaction with purchase order which has all the approvals then inward entry in gate Compute production per employee and compare it with previous
register, GRN, purchase invoices, vendor statements and reconciliation. Ensure that goods in transit are given proper treatment as per terms of contract, if its year and prevalent industry trends.
FOB its our GIT and if CIF its not our GIT. Ask for reasons if there is any significant variations.
Substantive Procedures
Obtain written representation that all purchases are booked and nothing is left out. Other points
It will be a mix of test of details and analytical procedures. Obtain monthly calculations and check it accuracy
Analytical procedures
In analytical procedures, compare with latest year's trend analysis, budgets. PF, ESI Obtain deposit challans to verify monthly payments
It is useful to check completeness and measurement and to identify any unusual things. Apply PF, FSI rate to total basic wages for the month and
Auditor predicts purchases depending on Turnover occurred during the year
get expected amount and compare with actual.
and then match it with actual (predictive analysis) Consumption Analysis
Ensure that closing accrued provisions is made for employee
E.g. of simple analytical procedure take average purchase price during the Obtain raw material consumed from manufacturing account to compute raw Closing accrued
benefits like bonus, gratuity, leave encashment, pension etc.
year then take quantity purchased during the year than multiply them, we material to total production cost to know consumption percentage and
can get expected purchase cost which should match with books of accounts. compare with previous year.
If there is variation it should be justified.
Stock composition analysis
AUDIT PROCEDURES RELATED TO OCCURRENCE
Compute percentage of stock as compare to total stock and compare with
Points in flow of practical life sequence previous year

Ensure that entity's vendor selection process operates effectively and also check
whether register of vendor exist
Ensure that there is entry in goods inward register at factory gate for selected
purchases.
There should be quality inspection report.
GRN should be prepared and signed by appropriate personnel.
Ratios
Compute stock turnover ratio, creditor turnover ratio and compare with
previous year.
Make a quantities reconciliation of opening stock
(+) purchases (-) consumption sales (=) closing stock.

Whether stock record has been updated

Purchase invoice should be approved only after 2 or 3 way match.

Special consideration related to purchases

Continue on next column...

53
(CNO.AIFS-P3.100) (QNO-AIFS.49) (MCQ-Incs.42.5, Incs.13.3, Incs.43.5) We can check overall reasonableness of depreciation /
Power & Fuel
Analytical procedures amortization by performing independent calculation and
comparing with actuals Analytical procedures
AUDIT OF DEPRECIATION & AMORTIZATION

Auditor should check that depreciation is charged on all tangible

Average depreciation = (Opening plus closing balance)
÷ 2, multiply by rate of depreciation.
Schedule Obtain month wise expense schedule for power bills and compare with
month on month expense and it is booked for all 12 months
assets and amortization on all intangible assets Auditor can compute expense for each month by obtaining units consumed
E.g. :- Tangible assets like building, plant & machinery, vehicles etc.
AUDIT PROCEDURES RELATED TO DISCLOSURES Predict and rates for each month and get expected power bill for each month and
which can be checked with actual bill
E.g. :- Intangible assets like goodwill, patents, copyright etc. Auditor can check relationship between units consumed per month by linking
Policy for depreciation Useful lives of assets
and amortization as per Schedule II
Residual value of assets. Graph it to finished goods produced each month, both should increase decrease in
There are four things which are important in calculation of depreciation / amortization same manner and if there is variance, auditor should in vestigat
(methods, cost, useful life, residual value) (points are grouped for retention)
(CNO.AIFS-P3.120) (QNO-AIFS.53, AIFS.54, AIFS.55)(MCQ-Incs.06.1, 06.2, 06.3, 06.4, 06.5, Insurance Expense
Method related points Incs.08.2, Incs.19.3)
TOD
Understand entity's system of charging depreciation / amortization
Obtain list / summary of insurance policies along with premium paid and
Identify all the assets having big parts which needs component wise accounting AUDIT OF OTHER EXPENSES (GENERAL)
there validity period
and depreciation and ensure that mgt has identified all the components properly.
Auditor can choose analytical procedures like comparing monthly trends etc or Check whether prepaid expense is properly recognized as per the part of
Select few assets from fixed asset register keeping in mind materiality and check
policy which belong to next year.
whether the rates are appropriate and whether they are in line requirements of vouch for other expenses
schedule II of companies act and they are applied properly.
While vouching auditor should check following matters ⑱ Legal Expense
Cost related points TOD
Auditor should check expense should be
Nature of Expenses
Capitalization of expense is a important decision which affects cost of fixed
asset and also expenses debited to P&L as these judgement can be misused
⑭ for business and not personal expense
Obtain month wise & consultant wise summary
Auditor should ensure that appropriate person
so Auditor has to carefully check these expenses. Authorization For recurring legal expense check whether charges are as per retainer
should authorize as per authority matrix
⑤ ship agreement and they are recorded for all 12 months
Additions / Deletions affect cost and book value of assets, so list should be Every expenditure should have valid supporting documents
obtained and sample should be selected and they should be checked for ⑲ Supporting documents
(e.g. travel ticket, insurance policy, 3rd party invoice)
For non-recurring expenses, select some expenses on sample basis and
match it with underlying agreement, invoices and other documents
Name
authorization and for accuracy of amount. ⑳ Expense should belong to current period
Check whether entity has used revaluation model in particular class of assets
③ Period
Be cautious while checking legal expenses as you may come across
and if 'YES` check whether it is as per appropriate accounting standards ⑬ Capital vs Revenue It should be properly classified between revenue and capital disputes for which no provisions is made.

Expense head Expense should be classified carefully under correct head Travel, repair, printing & miscellaneous expense
We can check number of additions and its value from income tax depreciation
schedule and we can check number of deletions from income tax depreciation ⑭ Analytical procedures
schedule. (CNO.AIFS-P3.120)
Obtain monthly summary, compare month on month expense and analysis
Useful life the trend whether it is usual.
Ensure that depreciation charged from the appropriate date which should be AUDIT OF OTHER EXPENSES (SPECIFIC) We can check overall reasonableness by computing expense per unit
date from which asset is ready to use as compare to when it is put to use in
income tax WRent
produced and we can compare this with previous year, opening budget,
others in industry.
Ensure that depreciation is charged as per reasonable useful life. Analytical Procedures

Whenever there is a change in useful life, depreciation / amortization should be Obtain month wise expense schedule AUDIT PROCEDURES RELATED TO DISCLOSURES
computed prospectively
Compare month to month rent and ensure that rent is recorded for
each of 12 months Legal & Printing & Miscellaneous
Residual value Rent Power & Fuel Insurance Travel
Professional Stationary Expense
Ensure that residual value is properly verified and deducted while computing TOD (In Sequence of practical flow)
depreciation.
Auditor may visit or ascertain that premises are used for running business operations
As per Schedule II it cannot exceed 5%.
Auditor should obtain rent agreement and check whether it in name of entity and
amount of rent is as per the agreement
Other Points
Auditor should find out whether there is escalation clause in the agreement, if it is
There is also a risk that fake assets are introduced to increase depreciation /
there auditor should ensure rent should be booked on straight line basis (average
amortization so attending physical verification can give us evidence
basis
regarding the same
If agreement is of multiple years, then auditor have to compute total rent for the
period and compute average rent and book it consistently. If agreement is of 1
Continue on next column...
year or less, than such calculation may not be required

Continue on next column...

54
(CNO.AIFS-P3.130) (QNO-AIFS.78, AIFS.80)
Notes By Students
OTHER IMPORTANT DISCLOSURES

Shortcut - Benami property should be used for C SR

2 2

Company Proceedings under Benami Transaction Act

Reason

Holders of Benami property Transferred property to others

for Beneficiary to hide it (Benami) or Abetted
Benami Transaction

Details Details

Property Beneficiary Line Item Nature of

Amt Status Co’s views
in B/S case
Nature of Activities
Transaction with related parties from CSR fund
CSR Exp
Required to be spend
Amt spent
Details of amount
Shortfall
Total shortfall of previous years

CRYPTO Co traded / Invested in CRYPTO

Received deposit / Advances for
Trading as Investment
Details Profit / loss
Currency Held (Bal) as on Reporting Date

Transaction with struck-off company

Company Name
Relationship
Details
Receivable / payable
O/S Balance Investment in securities / They hold co. Shares
Other O/S balances (Eg Loan)
Ratio Numerator Investment
Return on Capital Employed
Equity

Income Trade Receivable

Turn over T/O Ratio
Ratio Net capital T/O Ratio
Other Debt service Ratio
Inventory T/O Ratio
Expense
Trade payable T/O Ratio
Asset Current Ratio
Liability Debt Equity Ratio

*Explain Numerator / Denominator

*Explain 25% change

Less than 100 crores Hundreds / Thousands / Lakhs / Million

Total Income
More than 100 cores Lakhs / Million / Crores

55
 CHAPTER 10 COMPANY AUDIT
Part 1 – Company Audit CNO--CA.080

MEANING OF BUSINESS RELATIONSHIP(DIRECT/INDIRECT)

-

CNO--CA.060 (QNO-CoAud.47/CoAud.49/CoAud.78) (MCQ-CA1.14,CA1.19)

-
-
Meaning of directly or indirectly in case of Individual Auditor:

Any Commercial Purpose Transaction.

SEC 141(1) & (2) QUALIFICATIONS
Paren Through Relative ED
Supplier Custome
~ Sec 141(1) Individual Chartered Accountant holding COP wDoing Business together & Joint Providing Goods & W Procuring Goods
Venture, Partnership etc ~ Services to clients services Through other Where significant Influence/ ID
Exception Exception E Company Control of auditor
vSec 141(2) Partnership Firm including LLP (Majority Partners should be CA holding COP) No Exception provided
Only partners who are CA+COP can perform audit and sign FST & Audit report v ShortCut Auditor
~Can provide CA related Ordinary course of Individual Through Where same name/trade ID
services which Business +Hotels(H), Entity mark/brand
H2AT
CNO--CA.080 (QNO-CoAud.51) (MCQ-CA1.12, Incs.49.1, Incs.54.1) are not prohibited by Hospitals(H), Airlines Any person Associated or Connected
Companies Act, (A), Telecommunication
2013 and Chartered ID
(T)+Arm's length
Accountants Act.
SEC 141(4) - DISQUALIFICATIONS prices (All conditions Prohibited services directly or indirectly in case of Audit Firm:
*** For Direct/Indirect refer Sec 144 are cumulative)
IP
Disqualifications are to be checked at the time of appointment & after that Through Partner
CNO--CA.080 (QNO-Co.Aud.61, 61.50) (MCQ-Incs.26.3)
ID
Disqualification before Disqualification on date of Disqualification after SEC 141(3)(I) P-PROHIBITED SERVICES DISQUALIFICATION Where significant Influence/
Through other
appointment appointment appointment D Company Control of auditor
No Appointment Prohibited services Auditor
No problem
(Void-Ab-Initio)
Automatic Removal Sec Through Where same name/trade ID
- v ~
Fim Entity mark/brand
Holding Company Subsidiary 144
Through Parent/ Subsidiary/ Associate
CNO--CA.080
CNO--CA.080 ID

SEC 141(3) - DISQUALIFICATIONS

SEC 144 - AUDITOR NOT TO RENDER CERTAIN SERVICES

Shortcut: In Big PROPS there is Challenge & Chance of Failure.

B P R O P S C C F

v vPartner or Auditor Firm v Auditor

~-
- Officers of (officer or -v
Relative Employee w
Securities/ Ceiling Body v
Business Prohibited is &
Relation services Director Employees Employee) Indebtedness/ Limit Corporate Fraud Prohibited services
or KMP That Guarantee
company
ShortCut : BAD MAFIA
(CNO--CA.080) (QNO-CoAud.52)
B Investment banking Services

v SEC 141(3)(C) B-BUSINESS RELATION DISQUALIFICATION A Investment Advisory services

D Designing & Implementing FIS

Holding Co-Subsidiary
~ -
M Management Services
Person (CA)
~ Business Relationship
~Company ~Associate (Includes
A Actuarial Services
(Direct/Indirect) JointVenture also)
F Outsourcing of Financial services

Firm
vSubsidiary vSubsidiary I Internal Audit
-
A Accounting & Book keeping Services

***Note: CA can give some services which are not covered in Section
144. Ex:- Tax, GST, Training. For any other service, prior approval of AC / BOD is required
56
 CNO--CA.080 (QNO-CoAud.21) (QNO-CoAud.53/Co.Aud.55/Co.Aud.59/Co.Aud.60)(MCQ-CA1.4, Incs.04.2,
CNO--CA.080 Announcement by ICAI:
Incs.12.2, Incs.26.1, 26.2, 26.4, 26.5
SEC 141 (3)(f) R-RELATIVE IS DIRECTOR/KMP DISQUALIFICATION Directors cannot become auditor for 2 years after leaving Directorship.
SEC 141(3)(d) S-SECURITIES/ INDEBTEDNESS / GUARANTEE
GIVEN DISQUALIFICATION Tax Auditor GST Auditor & Company auditor can be same.
D

Co. Auditor
Internal auditor can not do Tax Auditor
I E Gst Auditor
Holding
Securities or interest in Cost Auditor
Company Relative
Person (CA) Relative
Holding Co subsidiary (CNO--CA.120) (QNO-CoAud.17, CoAud.19/ CSSoAud.21)
(MCQ-Incs.22.1, Incs.22.5, CA1.5, CA1.7, CA1.10 CA1.11, CA1.21)

I SEC 139 - APPOINTMENT OF AUDITOR AND ROTATION

Person (CA) is indebted >Rs. 500000 Company Associate
Ind Jv)
Director (In employment
KMP APPOINTMENT OF FIRST AUDITOR
& Not in employment)
Subsidiary
Guarantee / Security Section 139(7)
Partner Section 139(6)
Rs.100000
Sec 2(77) - Definition of relative: Sec 2(51) - KMP Means Section 139(6) Appointment of Auditor for Section 139(7) Appointment of Auditor
***No Disqualification if relatives holds any security & guarantee in the company of face company Other than Government company Government company
Father & Mother & *** In Sequence of Power
value Rs.100000. Limit is cumulative for all relatives and COs taken together. OGC GC
Step Father Step Mother ***In the event of acquiring any security or interest by a relative, above 100000,
Managing Director Company (Incorporation) Company (Incorporation)
the corrective action to maintain the limits as specified above shall be taken by the
Brother & Person & Sister & auditor within 60 days of such acquisition
Step Brother spouse Step Sister Whole Time Director
***All limits are cumulative eg. 1,00,000 is for all relatives taken together.
Son & Step Daughter + CNO--CA.080 (QNO-CoAud.57/CoAud.58)(MCQ-CA1.26, Incs.22.3) C&AG
CEO/Manager
Son + Wife Husband
***Note: Also HUF members if auditor has HUF C-Ceiling Limit Within 30 days Board of Directors Within 60 days C&AG
CFO
(As per Income tax)
A person cannot hold appointment in more than 20 companies.
CS
Exemptions while counting: Full time employment : Limit zero
One Level below
director+ Whole Time One Person Company Part-time employment : Limit zero Within 30 days Board of Directors
Employment+ Dormant Company 3
Multiple Partner : 20*No. of partners Within 90 days Shareholders at
Designated KMP
Small Company 2 (limit of 1 partner can not be used by other) EGM (from the
by Board
Pvt Co. whose Paid up end of 30 days)
Capital < Rs.100 crore ↳ Partner in multiple firms : Total audit in the
CNO--CA.080 (QNO-CoAud.55, CoAud.56) name one person not exceeding 20 Within 60 days Shareholders at EGM
***Solve problems as per limit 20 only, unless specified about guidelines.Climit 30
SEC 141(3)(b) O- OFFICERS & EMPLOYEES OF ↓
CNO--CA.080 Following are not proper appointments of first Auditor
THAT COMPANY DISQUALIFICATION Exclusion
B-BODY CORPORATE OpcDormant)
SEC 141(3)(c) P-PARTNER OR EMPLOYEE OF OFFICER OR EMPLOYEE
Other than Government Company
/6
OF THAT COMPANY DISQUALIFICATION Body Corporate other than LLP. By MD/WTD
In sequence of power
CNO--CA.080 Power delegated to MD
Key Management Personnel
F-FRAUD By AOA or MOA
Directors
Officers includes
Manager Convicted by court of offence involving fraud and a period of 10 years
has not elapsed from date of conviction. Power to appoint auditor cannot be delegated.General rule applicable to all appointments.

Any person on whose instruction board is Accustomed CNO--CA.080 (QNO-CoAud.51) (MCQ-CA1.12, CA1.37)
***Partners of Officers/ Employees are disqualified.
OTHER DISQUALIFICATIONS BY OTHER
***Partners of Partners of Officers/ Employees are not disqualified.
SECTIONS /CA ACT & GUIDELINES
***If any partner is disqualified, firm will get disqualified, but even if firm is
disqualified, individual partner may be eligible. ShortCut- CAR RALLY is PLANNED UANIMOUSLY on MELTING ICE with Liquidator.

C R P U M I L
Note : Director of holding cannot become auditor of subsidiary

Relatives Partner or
Cost holding Unsound Membership
Firm holding Insolvent Liquidator
Auditor 20% or Mind removal
57
36 more 20% or more
CNO--CA.120 (QNO-CoAud.23) CNO--CA.180 (QNO-CoAud.37)(MCQ-Incs.22.2)

Sec 2 (45) - DeFfinition of Government Company RECOMMENDATION PROCESS (AUDIT COMMITTEE - NOT APPLICABLE)
SEC 139(10) - AUTOMATIC REAPPOINTMENT
Central If BOD agree
Government No Auditor Appointed At AGM Existing Auditor will get reappointed Recommend of Auditor
State Paid up Share capital Company
Hold 51% or more & Preference share capital CNO--CA.180 Board of Director Shareholders @AGM
Government
Eity SEC 139(9) - REAPPOINTMENT OF AUDITOR CNO--CA.180 QNO- CoAud.05/CoAud.11
Central
& Other Government Company Treated STEP 2 Consent & Certificate
State Govt. as GC
A Retiring Auditor may be
Subsidiary of Government Company

***Paid up Share Capital shall mean total voting power where shares Reappointed at AGM, if Send
Auditor
with differential rights are issued
CNO--CA.140 (QNO-CoAud.17, CoAud.05/CoAud.09/ CoAud.74)(MCQ-CA1.1, CA1.23,CA1.29, Incs.20.1) Not Disqualified under Law Not given Unwillingness No Special resolution BOD
to reappointment has been passed w.r.t. Consent
SUBSEQUENT AUDITORS Certificate
I/We agree to become
providing expressly that he auditor of the company I certify that following is true & Correct.
Appointing someone else
Sec 139(1) - Appointment in Other than Government Company:(OGC) shall not be re-appointed * I am qualified u/s 141.
He should communicate * I am Not disqualified u/s 141.
CNO--CA.180 to previous auditor * Appointment is correct as per other sections
Shareholder will appoint in Tenure of Till the thconclusion before sending consent * I have limit to accept audit.
Subsequent Auditor of 6 AGM AUDIT COMMITTEE as per CA Act 1949 * List of orders & proceeding s provided to CA CA Firm
company is True & Correct.
Eg If no AGM is Same Auditor will SEC 177
conducted for continue till the CNO--CA.180 (QNO-CoAud.05/CoAud.11)(MCQ-Incs.04.1, Incs.12.1)
3 years AGM is conducted
office
Holding
Resolution at AGM & Intimation of Appoinment
-

No Ratification is required. Aucht

-
Tenure
- Applicability Exemptions
STEP 3
- Reappoints ended
CNO--CA.140 (QNO-CoAud.25)(Incs.20.3) Wholly Owned
All All Public All Public unlisted Subsidiary
unlisted All Public unlisted
Sec 139(5) - APPOINTMENT IN listed companies having in
Companies companies having Joint Venture Intim
aggregateo/s loans or a te
GOVERNMENT COMPANY (GC) public with a PUSC Turnover of 100
of 10 crores borrowings or debentures or Dormant Company Resolution will be passed in AGM FRO ROC in
company crore or more MA 1
or more; deposits exceeding 50 crore (Special Notice will be required for DT- 5 days
no reappointment or new appointment) 1
CAG within 180 days from start of Financial year Tenure upto conclusion of next AGM
(QNO-CoAud.03/ CoAud.04, CoAud.11, CoAud.11/ CoAud.84)
CNO--CA.180 “Form ADT-1 is not required to
CNO--CA.160 (QNO-CoAud.27/ CoAud.29/ CoAud.31/CoAud.35) (MCQ-CA1.3) (MCQ-CA1.8, CA1.13, CA1.33, CA1.34, Incs.20.4, 20.5, Incs.28.1)
be filed in case of First Auditor” ROC
CNO--CA.160
PROCEDURE FOR APPOINTMENT OF AUDITOR CNO--CA.200 (QNO-CoAud.15, CoAud.13, CoAud.05/CoAud.07, CoAud.15) (MCQ-CA1.24,CA1.25, Incs.20.2)
SEC 139(8) - CASUAL VACANCY

CASUAL VACANCY SEC 139(2) - ROTATION OF AUDITOR

STEP 1 Selection and Recommendation of Auditor
Listed Companies & Other prescribed Other Prescribed Companies:
OGC Government Company GC SELECTION BY AUDIT COMMITTEE / BOD AS THE CASE MAY BE companies Shall not appoint
Factors that should be considered Not Disqualification
Conside Public company whose paid up share
Only capital is Rs. 10 cr. Or more ; or
An individual as an auditor for more
Whether competence Orders of They can call
Misconduct than one term of five consecutives years. Private company whose paid up
& capabilities are misconduct proceedings for more
Due to resignation Other reason Be filled by CAG capital is Rs. 50 cr. Or more ; or
Qualification Experience commensurate passed information An audit firm as an auditor for more
pending
with requirement - against - from CA or than two terms of five consecutive years.
Within 30 days against CA
Be filled by BOD To be filled by BOD - of company. auditor. CA Firm Any company having public
borrowings from fI, bank or public
Within 30 days Within 30days If CAG does not fill Cooling period an individual auditor and deposit of Rs. 50 crores or more
RECOMMENDATION PROCESS (AUDIT COMMITTEE- APPLICABLE) audit firm not eligible for reappointment for
Such appointment shall be It will be filled 5 years after completing tenure. Rotation is not Applicable to
If BOD agrees following companies:
Approved in ⑧
EGM Board of Directors Recommend Name Recommendation
of Auditor of Auditor
One person Company, Small Co, Dormant company
Convened within 3 months Within 30 days
Board of Director Shareholders @AGM
By Shareholder If BOD disagree refer Back + Reasons
I
2
If AC doesn't reconsider, then BOD
***Casual Vacancy : Vacancy after proper appointment before end of tenure will send its own recommendation If AC Reconsiders, then they will recommend
***Special Case : Improper appointment - Void ab Intio - Not a Casual Vacancy nd also record reason for rejecting new name and process will continue.
58
36 AC recommendation
CNO--CA.200 CNO--CA.200 IMMEDIATELY SEND
STEP 2
COPY OF SPECIAL
Rotation of Auditor 139(2) & Rule 6 of CAAR Key Point 6 (Jaipur)
Internal
NOTICE

Partner within firm Rotation (Voluntary)

If these is break in term If individual
Cooling period will
get applicable Rotation
Break (Auditor
vacates office)
because of any reason,
it will be assumed that
his term of 5 AGM is over
If firm in
2nd term
Cooling period
will get applicable
⑧
Example there is a firm ABCDE & Associate
Company Auditor
Company can pass resolution to change partners every year

Break of It will be assumed that he has served cooling

5 years
period of 5 year he will get eligible for
A B C D A
E
STEP 3 AUDITOR WILL SEND REPRESENTATION
LETTER OF REASONABLE LENGTH
RND
maximum tenure again FY 23-24 FY 24-25
FY 20-21 FY 21-22 FY 22-23 (SHOULD NOT BE USED FOR NEEDLESS
CNO--CA.200 PUBLICITY OR DEFAMING COMPANY)

Key Point 1 ( Delhi ) CNO--CA.200

Complaint to NCLT - Right is abused
Company - -

Auditor
Key Point 7 (Jammu) by auditor - if NCLT satisfied - Stop Circulation
-

joint auditors
STEP 4 SEND COPY OF “SPECIAL NOTICE” ATLEAST
-

AB & Associates (CA Firm) A B C D & Associates (CA Firm) the company may follow the rotation of auditors in such 7 DAYS BEFORE MEETING
+
-

Other firms with common partners a manner that both or all of the joint auditors, as the
If they are not eligible for 5 years case may be, do not complete their term in the same year. SPECIFY THAT REPRESENTATION IS MADE
E
will also get disqualified. We have to -

+
check it at the time of appointment COPY OF REPRESENTATION BY AUDITOR
CNO--CA.220 (QNO-COA.43.50)(MCQ-CA1.2,CA1.17,CA1.22) -

CNO--CA.200 Company If representation is not circulated because

- Shareholder
SEC 140 - REMOVAL & RESIGNATION received too late or because
Key Point 2 (Kolkata) of mistake of company-
It should be read at AGM & Copy should be
sent to ROC

REMOVAL OF AUDITOR BY SHAREHOLDER STEP 5

This firm was not eligible for Partner who was in-charge Firm (New / Existing) will BEFORE AGM AT AGM
5 years as they completed of firm and signing financial not be eligible for 5 years
their maximum tenure. statement left the firm Resolution will be passed in AGM
CNO--CA.220 (QNO-CoAud.39 /CoAud.41) AUDITOR REMOVED
CNO--CA.200
REMOVAL BEFORE AGM - Sec 140 (1) & CAAR Rule 7
Key Point 3 (Chennai) ***IMPORTANT OBSERVATIONS 1. No re appointment of retiring
Incoming Auditor or (a) Procedures of section 140(4) are auditor at AGM
If outgoing Auditor or audit firm
audit firm is associated or it is applicable in following cases (Removal)
2. Appointing auditor other than retiring
Not eligible in same network
auditor at AGM
CNO--CA.200 Step 1 Auditor Step 2 Board Step 4 Special
should be given Resolution should Step 3 Central
Resolution should (b)Reconstitution of audit firm does not mean
Key Point 4 Bengaluru opportunity of being be passed and CG Government be passed within
should be informed Approval automatic removal of auditor.
heard before 60 Days of receipt
within 30 Days in for removal. of Approval. If there is dissolution then it means removal.
Gap taking any action form ADT-2
First Term Second Term
Gap should be 5 years or more. (c)If any of the joint auditor is not re-appointed
CNO--CA.220 (QNO CoAud.43) then it will lead to removal of that joint auditor
Else it will be counted
as consecutive and section 140(4) will be applicable
SEC 140 (4) - REMOVAL OF AUDITOR AT AGM -

In above example it will be counted as consecutive two STEP 1 Company

terms if gap is less than 5 years
say2
years
Shareholder SPECIAL NOTICE
CNO--CA.200
PROPOSAL TO REMOVE ATLEAST
Key Point 5 (Mumbai) 14 CLEAR DAYS BEFORE AGM
*CERTAIN MEMBERS
Number of years completed before company act 2013 become applicable will be counted Not earlier than 3 months.
Either individually or collectively
Transition period 3 years by such number of members If rotation is applicable
FY 14-15 FY 15-16 FY 16-17 holding at least 1% of total voting i.e maximum term is over,
Applicable from 26/3/2014 power; or Holding shares not then special notice will
not be required.
less than Rs 5 lakhs paid up capital.
59
 CNO--CA.220 (QNO-CoAud.35/ CoAud.45)(MCQ-CA1.22, Incs.28.2, 28.3, CA1.6) CNO--CA.240 (QNO-CoAud.64) (MCQ-CA1.15, CA1.31, Incs.28.5) CNO--CA.300 (QNO-Co.Aud.70/Co.Aud.71/Co.Aud.72/ Co.Aud.73.50)(MCQ-CA1.34)

0
SEC 140 (2) - RESIGNATION SECDISQUALIFICATIONS
142 (1) & (2) - REMUNERATION - SEC 143 (3) - MATTERS TO BE INCORPORATED IN AUDIT REPORT
(Compulsory to report on all matters unless Not Applicable)
RESIGNATION File statement giving reasons
in ADT- 3 within 30 Days
⑪ Obtained all the information and explanationfor the audit
on In Shareholders will decide remuneration of auditor at general meeting or Directors disqualified u/s 164(2) IFCR
ly fo a
i n rm
AUDITOR c a They can decide manner in which it may be determined . (That means they can delegate it) Adequacy and effectiveness of IFCwith reference to Financial statement
co ase tion
m G C
pa ov A
ni er G
es nm
In case of FIRST AUDITOR by BOD, BOD will decide remuneration b O
No IFCR Reporting to Private Company If
③
en
t n -
OPC or Small Company
-

CNO--CA.280 (QNO- CoAud.79, CoAud.63.50) Logical 0

Turnover < 50 Crores as per latest audited FST and Aggregate borrowing
from Banks, FIs, Any Body Corporates during the FY < 25 Crores.
-
-

Flow
DISQUALIFICATIONS
RIGHTS OF AUDITOR No exemption to PVT CO if there is default U/S Sec 92 & 137
-

Company
C Proper books & return has been maintained as per the law
ROC
Sec I40(3) CAG SHORTCUT : A-GIRL has right to do Audit
d Balance sheet and P&L account is in agreement with books of accounts
Penalty :-(a) Non-Compliance will lead to penalty of 50,000 or remuneration of auditor
A G I R L
e Financial statement comply with accounting standards u/s 133
whichever is lower (b) In case of continuing failure, with a further penalty of 500 per day
CNO--CA.220
exceed zLawns
cannot
(MCQ-Incs.28.4) Right to Right to Right to ② Branch audit report has been received and manner in which it is dealt.
Right to receive obtain Report to the Comments on financial transaction having adverse effect on commeced
DISQUALIFICATIONS
SEC 140 (5) - REMOVAL BY TRIBUNAL O Access
notices and to Information members on Right to Lien
Others
functioning of company tuLosses]
Books and the accounts
attend General explanation examined Qualifications w.r.t -
maintenance of accounts
& Vouchers

I SUO MOTO
Application Auditor acted in
Direct Company to
Change it Auditors
+
Sub/Asscichston)
meeting from officers by him
i al Rule 11 Shortcut -L2AF2Da
Pending Probability morethan 50% Provision
Law/s/ICAE
fraudulent CNO--CA.280 L Litigation
manner Shall not be eligible litigationimpact Other cases Contingent liability disclosure
Satisfied or abetted or to be appointed as SEC 143(1) ( HALF PART)
2 On Application by CG TRIUBUNAL
colluded L Losses Adequate provision for losses on long term contract,including derivative contract
auditor of ANY Co Half
in fraud with Other
Co/ Directors / for 5 years from Obtaining Information & Explanation from officer or Employes ↓- Adverse Audit Trail for each transaction (Edit History)
2 powers Report
3
On Application by any Officer date of order Enquiry Accounting If using A/c Edit log of each change in Books of A/c 2
Concerned Person
Also liable U/S 447
Accessing (Any Time) Business Hours
L
en
A software software (Log showing changes) Features
Includes all Books / Registers / Records
Books
-snasece 2
E Whether such feature
If application is sent by CG & tribunal is satisfied that
Statutory or Non Statutory
Personal standent Applicable from 1st April 23
Operated throughout the year
change is required, it shall make an order within 15 days Financial or Non Financial of
->
t

Boonand
sale
and CG may appoint new auditor Vouchers
=

Deposit Audit trail is not tampered

Records of Subsidiary / Associate (JV) Yes Audit trail is preserved till time
consolidation
CNO--CA.220 Special points records need to be preserved
Records at Branches Limited extend for considation
-

F Funds*
CNO--CA.300 (QNO-CoAud.63/ CoAud.65/ CoAud.66/ CoAud.67/ Management
SECTION 447 PUNISHMENT FOR FRAUD
CoAud.69/ CoAud.83) (MCQ-Incs.22.4,Incs.54.2)
Discloses in Notes regarding Also gives representation (WR)
Any Person Found Guilty of FRAUD "Funds Given"& "Funds Received" that disclosure is complete
SEC 143 (2)
Amount of Fraud>=Limit Auditor will have to perform reasonable audit procedure
Limit = 10 Lakhs or 1% of Co Turnover which ever is Lower MAKING AUDIT REPORT &
Comment nothing has come to their attention which
Yes No Then See Public Interst indicate that there is any material misstatement
Continue On Next Page...
On every Financial To best of his Whether
Shall Make Statement Financial
Imprisonment Min 6 Month Max 10 Years Yes No O Report
to Members
placed in General Information
& Knowledge
Statement gives
Meeting true & fair view
Fine Min Amt of Fraud Min NIL
Max 3x Amt of Fraud Silent Max 5 Years
If Public Interest Involved Then Min NIL
Imprisonment Min 3 Years Silent Max 20 Years
-

50 Launs Auditor
a
Apply
penalties
Higher

60
 Disclosure for Same as Company's
Audit Powers
Books of Accounts Maintenance [Sec 143(3)(h)] Statutory Auditor
Funds Given
Power & Duties of branch
During the year Funds Advanced Loaned / Invested See “Qualification, Reservation, Adverse Remark auditor Rule Reporting To the Company's Auditor
Company
(From Any source such as Shares, Borrow etc.) 12 of CAAR 2014.
To Person / Entities (Including Foreign Entities) Adverse Disclaimer Qualification Same as Company's
Remuneration
Intermediary with understanding to Loan /Invest to other person Statutory Auditor
or give guarantee for other person. In Part 1 of AR on FST or AR on IFCR Presentation in If there is separate Branch Auditor SA 600 applicable
Ultimate Beneficiary audit report in
Related to maintenance of Books of Accounts & Related matters case of separate To highlight that Branch Audit
61 Put OMP (SA 705)
8
is done by other auditor
Funds Received TB doesn’t tally branch auditor?
Shows Accounting is Inappropriate E.g
Funding Party Person / Entities (Including Foreign Entities) Sales of last month
not recarded CNO--CA.370

Company Received funds with understanding to Loan / Qualification Adverse Qualification SA 600 USING WORK OF ANOTHER AUDITOR
Invest to other person or give guarantee for
(Intermediary)
other person Obsolete inventory Investment in foreign Company Principal Auditor (PA)
Comp. Is not having money
not valued at NRV to pay loan of 400 crore. subsidiary shares Rs. 100 crores. Situation
Going Concern is Invalid. Now it is defunct with huge Branches Other Auditor (OA)
Ultimate Beneficiary
“No Adj made” accumulated losses, no write-off
Clear understanding of Rules & Responding
-

for investment by company Basic Requirement Roles & Responsibilities

Whether there is delay in trf of funds to Inv
F Fund transfer Proper Rapport
Education & protection fund IEPF CNO--CA.300
ICAI MADE SA 600

Secl43(h)
D Dividend* Whether dividend declared as paid as per sec 123
REASONS FOR NEGATIVE COMMENTS
Entitled to rely on work of OA
Examine Book
For matter reported with a qualification - Auditors shall state reasons thereof
If special circumstances Examine other Recards
O

CNO--CA.300 Visit Branch

Auditor EMPLOYEE
SEC 197 (10) Obtain S&A Evidence that work is Adequate

cows
(Hrithik) (KATRINA)
0 Regular Audit procedure ->
Whether remuneration paid to any director is in excess of the
All Info & Whether received all info & explanation If not give details limit laid down under this At planning stage establish co-ordination
Explanation necessary for doing audit there of 0
section and give such other details as may be prescribed in Audit Report
Explain how his work will be used (Contribution)
Whether branch audit report is sent to CNO--CA.340
Branch Report Significant Accounting / Auditing / Reporting Requirement
him & whether it is properly dealt Basic Principle
SEC 143 (5)/(6)/(7) Special consideration Areas
Adverse Effect on Functioning[Sec 143(3)(f)] POWERS OF C&AG IN CASE OF GOVERNMENT COMPANY Other matters
Identification of Inter component Transaction
[SIT]
See “Observations or Comments of Auditor” Time Table for completion of Audit
Power to Submission Auditor Report
Power to appoint of Auditor's
give him should show
Adverse Disclaimer Qualification EMP/OMP Other Para's (5) auditor
DIRECTIONS Report to C&AG ACTION TAKEN Additional Audit Procedure Discussion
(May)
Written Summary
In Part 1 of AR on FST or AR on IFCR (AR- Audit Report) C&AG can comment Comment /Supplement
or supplement Power to order C&AG will
shall be sent to everyone
Whether it shows Adverse impact on functioning of company
(6) Audit Report to whom AR is sent + supplementary decide person
& purpose
Questionnaire / Checklist visiting branch
(within 60days) audit
Present in AGM
Present or Future losses (Related to losses)
NTE will depend on
O
Circumstances of Engagement
C&AG can conduct AR of such test audit will be presented in parliament
Qualification EMP Going Concern Para () TEST audit as given in Sec 19A of C&AG Act 1971. Professional competence of OA

CNO--CA.360 (QNO-CoAud.73/ CoAud.74, CoAud.74) Preview of previous Audit work useful

Obsolete inventory Highlighting major Heavy accumulated losses there
not valued at NRV litigation given in notes is material uncertainty CNO--CA.380 (QNO-CoAud.75)(MCQ-CA1.16)
with respect to GC
SEC 143 (8) - BRANCH AUDIT
to accounts
AUDITING STANDARDS
What to do you Section 2(14) Branch Office, in relation to a company,
mean by branch means an establishment described as such by the company. person
Any Sec 143 (9) / (10)
Who can become
In case of local Branches Company auditor
Company auditor
Appointed u/s 139 on
Appointed u/s 139
Qualified
In case of foreign
branch auditor
companies In accordance with
asiul AUDIT
-
Accountant duly
Branches qualified laws of that
to act as auditor company Be
-

AUDITOR Mandatory to comply with COMPANY

Who can appoint branch auditor ? Appointment will be similar to appointment Standards on Auditing
of auditor U/S 139
61 Continue On Next Coloum... Continue On Next Coloum... Continue On Next Page...
 STANDARD APPROVAL PROCESS CNO--CA.460 (CNO--COST.020) (QNO-Co.Aud.81.50, CoAud.80,)

RECOMMENDS RECOMMENDS ATTENDING GENERAL MEETING Part 2 – Cost Audit

FINAL
APPROVAL Sec 146
National Financial
APPLICABILITY OF COST RECORD & AUDIT
ICAI
Reporting Authority Central
Government ⑧ Notice of General Meeting Provisions of sec 148 & cost audit rules

CNO--CA.420 (QNO-CoAud.76) (MCQ-CA1.9, CA1.27, CA1.28, CA1.36, Incs.04.3, Incs.07.3, COMPANY -

Cost records are mandatory to all companies including foreign companies Engaged in
Incs.12.3,Incs.46.3, Incs.54.3, Incs.57.3, Incs.57.4) production of goods or providing services

Cost Records if overall

DISQUALIFICATIONS
DUTY TO REPORT ON FRAUDS U/S 143(12) ⑳ To = > 35 Crores
② Auditor Authorized person qualified to do audit
A B
BOD/Audit
Amount 1 CR or above Regulated SectorTelecom/ Electricity/
Comittee Non regulated Sector There are
Report of ⑬
COMPANY can exempt auditor from attendance
Petroleum/ Drugs & Pharmaceuticals/ around 33 different
Officers/employees Fraud (2 days) Fertilizers/ Sugar industries which are covered
Auditor shall have right to be heard at such meeting on any part ↓
of the business which concerns him as the auditor. Cost Audit if overall Cost Audit if overall
Fraud Reply (45 days) TO> = 50 Crores and TO> = 100 Crores and
info* CNO--CA.480 Aggregate Individual sector Aggregate Individual
Auditor Central Gout TO > = 25 Crores TO > = 35 Crores
(Government) PENALTIES
REPORT + REPLY All turnovers referred above are of PRECEDING YEARS.
LETTER HEAD + ADT-4 SECRETARY E
SEALED ENVELOPE (15 DAYS) MCA Sec 147
Company RPAD / SPEED POST
+EMAIL CONFIRMATION
Below chal
L
Name
Notul
Aut
-

-
Sec 139 to 146 00
Sec 139 /144 / 145 Shortcut to Remember Industries in Regulated Sector SET – PDF
Reason to believe that fraud is being committed / already committed we)
-

mc/B0D (24 S E T P D F
Also applicable to Cost Auditor (CMA) & Company Secretary (CS) Le
-water
e
Ant
BOD -Action
-
Company Sugar Electricity Telecom Petroleum Drugs Fertilizers
Will not be considered as breach of principle of confidentiality Auditor
Fine Officer of Fine NOTE: Cost Records / Cost Audit will not be applicable in first
*For listed company Rs. 5,00,000 For any other company Rs.1,00,000
CNO--CA.440 (QNO-CoAud.49/ CoAud.78)
Min 25,000
Max (5,00,000)
Company Min 25,000 Max (5,00,000 or 4 x
the audit fees whichever is less) (CNO--COST.020)
E
year of newly formed Company.
(CoAud.82/CoAud.82.50)
SIGNING AUDIT REPORT Fine If knowingly / willfully / Intention
EXEMPTIONS FROM COST AUDIT RECORDS
Min 10,000 Max 1,00,000
Sec 145 Fine 50,000 Not Applicable
Imprisonment
Min 1,00,000
-

Refund Remuneration of 1 year

Max (25,00,000 or Foreign companies having
Qualification Financial + Pay for damages to the company, statutory BOTH Company classified as
Observation
Adverse
Effect
Transactions/ bodies or authorities or to members or creditors
8 x Audit Fees whichever
- liaison office in India
Comments Matter
for loss arising out of incorrect or misleading
is less) O
Micro Or 0
Small as per
MSMED Act
Read before statements in audit report. If convicted for any contraventions
Open to Inspection (CNO--COST.020)
General Meeting to members

EXEMPTIONS FROM COST AUDIT

Eg Prospectus / GDR / Deposits / MR / Dormant Company etc

CG- Authority Revenues from,

exports, in foreign Operating from Company which is engaged
-exchange, exceeds a Special
in generation of-electricity for captive
⑧75% of its total
revenue;
⑧
Economic Zone
consumption through Captive
Generating Plant

⑳
Captive Generating Plant:- 26% or more of ownership
with captive users &⑳51% or more power is
used by captive users

62
(CNO--COST.040) (CNO--COST.040)

REMOVAL & RESIGNATION OF COST AUDITOR Electronic form

WHO CAN DO COST AUDIT ?
Electronic form is allowed
d Allowed
It can be on local server or it can be on cloud
~- Removal before the Form CRA-2 to be filed with the Right of the cost -
00Practicing Disqualifications of Company Auditor
cannot be appointed
This audit is in
addition to company
expiry of term Central Government for auditor to resign Data should be in original format or it should be in format
CWA/CMA 141 are applicable intimating appointment of from such office which present original information accurately -
as cost auditor financial audit
~ - another cost auditor of the company
Through a board resolution Format Data should be complete & unaltered (HO & Br)
~
(CNO--COST.040) (QNO CoAud.81) - It should be in Legible form ~
After giving a reasonable & also enclose the relevant
APPOINTMENT OF COST AUDITOR opportunity of being heard & It should be accessible from India -
Board Resolution
recording the reasons for Access
Backup server should be physically located in
Before appointing the Cost Auditor wCompany such removal in writing India & Backup should be periodic ~
-Appointment by v
(CNO--COST.040) (MCQ-COST.1) Intimate ROC on annual basis: Name / IP address /
Take written consent & Company (BOD) Inform the cost cloud address / physical location (if any) V
~ auditor appointed CASUAL VACANCY OF COST AUDITOR
Certificate from him
Audit committee, if not BOD should establish system
Within 180 Days
File a notice with Central of storage, retrieval, print out, etc v
System
wContents of Certificate: - Government (Form CRA-2) Casual Vacancy due to
Provisions of sub-section (12) of section w No Deletion unless permitted by law AAA
Commencement
Resignation, death or removal 143 of the Act and the relevant rules shall
of every financial Within a period of 30 days Books of Branch office in India or outside India can be
The individual or the firm- is eligible year apply mutatis mutandis to a cost auditor 128 (2)
of the Board meeting in which Branch
for appointment and is not such appointment is made Filled by the Board of Director maintained at 2 locations
appointed under section 148 of the Act
disqualified for appointment under
the Act, and the rules or regulations Within a period of Within 30 days of occurrence I
At Registered office At Branch office provided proper summarised
made thereunder; 180 days of the
(CNO--COST.040) (MCQ-COST.2, Incs.04.4, Incs.12.4) A returns are sent periodically from Branch to HO
commencement of the FY,
COST AUDIT RELATED FORMS
w
Books maintained at Registered Any director can inspect it
Criteria provided in section
141 of the Act is satisfied Whichever is earlier Woffice or any other place in India during business hours
CRA-1 Format of Cost Records Summarised returns should be sent -
The proposed appointment quarterly & it should be maintained
CRA-2 Intimation of Appointment to CG
W
is within the limits at registered office (Directors can inspect)
CRA-3 Format of Cost Audit Report Books maintained
The list of proceedings pending with outside India Directors can call for details by w
respect to professional matters CRA-4 Intimation of Cost Audit Report giving written request
of conduct, as disclosed in the certificate,
is true and correct. 128 (3) Access
Within 15 days company shall W
Part 3 – CO ACC & MISC produce such information
(CNO--COST.040)
(CNO--COACC.020)
w
Power to inspect can be delegated by director to
COST AUDIT REPORT Delegation attorney / agent / representative but power to call
SEC – 128 & RELATED COMPANY A/C RULES ~ information from foreign branch cannot be delegated
Before they are signed on
w
The cost To be annexed to
statements Shall be approved behalf of the Board by any 128 (1) Inspection of Books BOD can pass resolution & authorise a W
the cost audit v
+ by the BOD of the director authorized by
other statements report the Board It is mandatory to prepare & maintain Books of A/C, other
of subsidiary w person to inspect Books of subsidiary
Maintenance
books & related documents required to prepare FST
Every cost Shall submit the cost audit report
along with his or its reservations
Observations or
Suggestions, Maintained at Place can be changed to
~Company should provide all assistance
128(4)
w
for inspection as discussed above

Books should be maintained for past 8 years & if company is under

any other place in India ~
Place
auditor or qualifications if any, in form CRA-3. Registered office 128 (5)
investigation CG may direct for more years W
- ~
Cost auditor
Within 180 days from
Board of Shall
Particularly
~ Pass BOD resolution ~
Within 7 days inform ROC in form AOC-5
⑳
Person made in charge by
BOD for Books
Such any
Signs report
the closure of the
Directors
consider
report reservation or
Receipt & payment ~
~
Fine of minimum 50,000 -
If not then CFO

-
financial year and examine qualification 128 (6) ~
&

Full information and Which Books

Books should contain Sales & purchases -
~ maximum 5,00,000
u
If not then WTD in charge
of finance
From following details Assets & liabilities -
⑧
Every If Extension
company
Within receipt Furnish the explanation on every ~ If not then MD
reservation or received for Cost records if required u/s 148
covered under 30 of a copy Central
qualification contained holding Annual -
these rules days of the cost Proper Books D Double entry system -
Government in audit report General Meeting
shall audit report
(Form CRA-4) A Accrual Basis ~
File Form CRA-4 Expiry of one hundred Till he submits the cost
audit report, for the T True & Fair view v
within such Extended Tenure and eighty days from the Or financial year for which
period of Filing FST closure of the financial year he has been appointed Explain effects of Transaction between
E
Registered office (HO) & Branch office
63
(CNO--COACC.040) (MCQ-CA2.5, CA2.6)

Sec 138 INTERNAL AUDIT
Chartered Accountant
Who can do Internal Audit
GENERAL CASES INSURANCE COMPANIES 3RD CONDITION LOAN FROM BONUS AND FT'S SHOULD NOT
EXCEED 1 CRORE ANYTIME DURING THE YEAR
Audit report can Consolidated Life Insurance
v
Financial Statements

-
Cost Accountant General Insurance Included Excluded
Audit report of Branches
Such other professional
- Loan from NBFC - Loan from Individuals
>
They may or may not be in practice BANKS - Interest Due - Unfunded facilities till the
time they don't devalue (Eg. LC
-
They may or may not be employee of the Co. -
-
Funded Facilities
Portion payable within 12 months
& Guarantee)
- Interest Accrued
Co-operative Foreign NBFC Converted Bank converted - Short term/ Long Term
Legal form of Auditors They can be NBFC
~ Bank Bank to Bank to NBFC - Secured/Unsecured
Individuals
~ ~
Partnership firm Body corporate (NA)
-
-
Secured by Fixed Deposit
CC Limit (see actual loan taken)
Applicability of Internal Audit ⑳
All Listed companies - Loan crossed above 1 Crore but
repaid by year end
Conditions Public co. W
Private co. CHARITY PURPOSE/OPC
Deposits w≥ Rs 25 Cr - 4TH CONDITION TOTAL REVENUE SHOULD NOT EXCEED 10 CRORE
w≥ Rs 50Cr No Specific cases

0
Paid up share capital -
Unlisted
companies O/s Loans / Borrowing from, *** Note:- When to check these conditions, if no specific instruction, check if as on B/s date Included Excluded
~≥ Rs 100Cr ≥ Rs 100Cr
(Banks & FI's)
Turnover W≥ Rs 200Cr ≥ Rs 200Cr PRIVATE COMPANIES - Sale of Good/Services
- Sales Return(deduct all returns
- IDT (Exclusive method)
- Advance Received
irrespective of year of sale)
Note – Deposits & loan to be seen at any point of time - IDT (Inclusive Method)
All 4 conditions Private limited Private unlimited
of preceding financial year companies Companies - Sale of Scrap
satisfied
PUSC & T.O. - To be seen during preceding FY - Interest/Dividend Income

⑧
- P/L on sale of FA
Appointments / Terms It will be done by audit committee, if not, then BOD - P/L on sale of Investment
& Condition
They will decide scope, functioning, Periodicity & 1ST CONDITION- HOLDING/SUBSIDIARY SHOULD NOT
methodology, in consultation with Internal audit BE A PUBLIC COMPANY
SMALL COMPANY DEFINITION
Check status as on B/s date
Part 4 – CARO Private Company is subsidiary of foreign company (Public status abroad)
(Other than public co.(Pvt. Co.)

(CNO--CARO.040) (QNO-CARO.01, CARO.03, CARO.03.50, CARO.04) (MCQ-CARO.1) - Not Section 8 Company

1ST CONDITION- HOLDING/SUBSIDIARY SHOULD NOT - Not having holding or Subsidiary
APPLICABILITY OF CARO BE A PUBLIC COMPANY - Not governed by special Act

All Companies (From FY 2021-22) Check status as on B/s date *

Paid up capital should not exceed 2 crore (Limit can be increased to 10 crore)

Including Foreign companies

W Private Company is subsidiary of foreign company (Public status abroad)
Turnover of LY should not exceed↳
20 Crore (Limit can be increased to 100Crore)

EXEMPTION FROM CARO 2ND CONDITION- PAID UP CAPITAL & RESERVES SHOULD ***If Private company satisfies either 4 conditions or definition
of small company they will get exemption
NOT EXCEEDS 1 CRORE AS ON BS DATE
ShortCut : IB-COPS w Company Paid-up Capital & Reserves

I B C O P S
Included Excluded
Insurance Banking Charity One Private Small
Purpose Person Companies Companies

~---
Companies Companies Companies (All 4 conditions (Covered in - Equity Share Capital - Calls in Advance
Company

~ satisfied) Definition - Preference Share Capital - Share Application

(section 8) of Small - Fictitious Assets
- Calls in Arrears(-)
Company) (Don't Deduct)
- Share Forfeiture A/c
z - General Reserves
- P&L Balances
IMPORTANT PARTS IN EXEMPTIONS - P&L debit Balances(-)
- Securities Premium
Exemptions - Capital Reserves
- Revaluation Reserves
- Employees Stock Option O/s A/c
No exemption

64
 Slide 3 (Good Food V/s Bad Food ) (CNO--CARO.090) (QNO-CARO.15)
SHORT CUT TO REMEMBER CLAUSES OF CARO 2020

SLIDE 1 (After Passing CA) CLAUSE 3

INVESTMENTS/LOANS/GUARANTEE OR SECURITIES (IF YES )

Loans/G&S Given Sub/JV/Associates

- ~ v
a (not for principle
business)
Aggregate amount
o/s as
on
Other than
Sub/JV/Associates
Nuts Carrot B/S Dt
Chikoo
Cl 15 Non
Cash Transaction
Cl 16 Certificate of
Registrations by RBI Cl 17 Cash Losses - Not prejudicial to Interest of Company

Flipkart to buy professional
accessories Cl 1 Plant,
Property & Equip.
~⑳
Repayment Term specified Regularity of Repayment
Indian Airlines to book LinkedIn to search contacts
flight tickets
Cl 2 Inventory
for job application ⑨
W
Over due more than 90 days Steps of Recovery

Cl 3 Loans given Aggregate amount &

Renew, extend, &
~e Loan fallen due
fresh loan % of total loan given during the year
(NA if Business)

⑱
v
⑧
Rabdi Madira Aggregate
- - Chocolate On Demand or No amount Aggregate amount of
Cl 18 Resignation of Cl 19 Material Cl 20 CSR
⑧
the statutory auditors Uncertainty Repayment term Promoter & related parties
%

Live.com to send emails
for jobs
Cl 4 Loans given under Sec
185 186
(Directors & Others)
(CNO--CARO.100)
Dropbox to get soft copy CNN to get updated about
of his documents current affairs CLAUSE 4
Cl 5 Deposits Taken Cl 6 Cost Records
LOAN/INVESTMENT/GUARANTEE & SECURITIES

Avocado Compliance of
Cl 21 Adverse remarks/
Qualification w.r.t consolidated entities
V Sec 185 Sec 186
(CNO--CARO.070) (QNO-CARO.05/CARO.07/ CARO.07.50/CARO.09/CARO.11)

If Non Compliance maximum If Non Compliance amount

CLAUSE 1 o/s + Closing Balance + Closing Balance

(CNO--CARO.110) (QNO-CARO.15)
Will listen music on spotify
to chill. Cl 7 Reporting on
FIXED ASSETS (TANGIBLE & INTANGIBLE)
statutory dues CLAUSE 5
Maintaining Physical ~Title Deeds e WBenami Property
Revaluation
~ Records ~Verification (Immovable Property) Compliance
(PPE) Y/N Proceeding

* # e v
Quantitative
Details Reasonable
Intervals
⑳
NA to Leased
Assets
If Yes,
Registered
Initiated/Pending

BTP Act
RBI Directions Co. Act Sec 73 to 76 Orders
Valuer
Situation Material Details Description/
Gross Value Disclosure Court CLB (earlier) / NCLT (Now) Tribunal RBI
Discrepancy Amt if 10%
Intangible change in FST
Assets Name/Promoters/ (CNO--CARO.120)
Directors, or more of
One of the biggest steel LIC biggest Infosys India’s Biggest Finolex biggest each class
Relatives/
Software Company

st
manufacturing company insurance company cable company Employees CLAUSE 6
of India Cl 8 Unrecorded of India Cl 9 Cl 10 Application of funds of India

⑳
Period/Reason/Dispute
from IPO / FPO/ Preferential Statutory Dues
transaction
e Loan Repayment Cl 11 Fraud
allotment or private placement (CNO--CARO.080) (QNO-CARO.09/CARO.13)

·
CLAUSE 2 Undisputed Disputed

INVENTORY Amount not deposited

o o
India’s biggest network, Network
18 Cl 12 Nidhi Company
65
India’s biggest Company
Cl 13 Related Party Transactions
Amount o/s for more
Regularity
than 6 months (BS date)
e Details
Working Capital Limits (more than 5 Cr. Bank/FIs)
②
Physical Verification
- Nature Amount Authority Year
India’s biggest petrol manufacturer Reasonable Intervals
By giving current Asset as security ~v r w
Cl 14 Internal Audit
Discrepancies 10% or Whether Quarterly Return or Statements agree
more property dealt with books of accounts, If not give details
(CNO--CARO.130) (QNO- CARO.11/CARO.12/CARO.17)(MCQ-Incs.04.5, Incs.12.5) (CNO--CARO.170) (QNO-CARO.21/CARO.26/CARO.27/CARO.29)(MCQ-CARO.2, CARO.4Incs.57.5) (CNO--CARO.220)

w
CLAUSE 7 CLAUSE 11 CLAUSE 16

Statutory Dues
~
Fraud Reporting NBFC

wUndisputed -Disputed
WFraud
WAny Reporting
under
w
Whistle Blower
complaints
Registration Core Investment companies (CIC)

Amount not deposited section 143(12) considered

Amount o/s for more ~ W
~
⑧
Regularity By the company On the company Whether Unregistered
than 6 months (BS date) Form ADT-4 NBFC or More than 1
required to CIC
W
-
Details Yes/No Housing Financial Whether Criteria CIC
get
Noticed or Reported registration Activities whether of CIC fulfilled if Yes then

~
Nature Amount
~
Authority
Year
conditions number

~
~ Without valid
still fulfilled of CICs
(CNO--CARO.140) Nature and Amount Valid COR
COR
CLAUSE 8 (CNO--CARO.180) ***COR-Cretificate of Registration

wUnrecorded Transaction
CLAUSE 12
(CNO--CARO.230)

CLAUSE 17
Surrendered Disclosed Nidhi Company
Cash Losses (Losses before
Non-Cash Expenses Current Year + Preceding Year Amount of Cash Losses
During the year under IT Act, 1961 Properly recorded in books of accounts
Ratio Compliance Unencumbered Term Defaults E.g. Depreciation)
(CNO--CARO.150) (QNO-CARO.17/CARO.19/CARO.21) Deposits (FD)
(CNO--CARO.240)

-
NOF: Deposite Repayment Interest
CLAUSE 9 10% of Deposit
CLAUSE 18
Loan received
1:20 Deposit (Details)
② Resignation of statutory auditor

⑬ Default ③
ou
Usage Yes/No Incoming Auditor taken into consideration

Issues, objections or concerns raised

00
Repayment of Term Loans Short Term Any Funds Loans raised (CNO--CARO.190)
Willful
Loans & Payment Defaulter raised EBy–Escalation
outgoing auditor
Claim
of Interest W Proper Used for CLAUSE 13
By pledge
Purpose long of securities (CNO--CARO.250)
Any LENDER term For of Sub/JV/
Amount Associate Related Parties
purpose Obligations
of loan
of Sub/JV/
CLAUSE 19
Details Diverted & All Transactions
Purpose Associate Details &
Amount & Material Uncertanity
W Nature Defaults
nature Compliance Sec 177 & Sec 188 Disclosure as per AS/Ind AS
Details of
W Name (Only if Govt/Banks/FIs) each case On the basis of
W Amount not paid on due date Approvals of AC/BOD/Shareholders
w Principal/Interest Ageing & expected dates of Other Information
(CNO--CARO.200) (QNO-CARO.35) Financial Ratios realization of financial assets & accompanying
~ Delay (No. of Days) payment of liabilities Financial statements

(CNO--CARO.160) (QNO-CARO.23/CARO.25)(MCQ-CARO.3)
w
CLAUSE 14
Internal Audit
whether company capable
whether no Material Uncertainty exist

-
W CLAUSE 10
-
of meeting its liabilities falling
as on date of audit report
IA System commensurate with size & nature Report considered by Statutory Auditor within 1 year from date of B/S
Funds Raised
(CNO--CARO.210)

~IPO/FPO (Shares & Debentures) W

Preferential allotment/Private Placement
(Shares/Convertible Debenture)
~CLAUSE 15
Proper Purpose
W Non Cash Transactions
~Compliance of Sec 42/Sec 62 Purpose
~Delays/Defaults/Rectifications
(Details)
Directors/Connected Person
Non-compliance/Defaults (Details)
-
Provision of Sec 192

- Ordinary Resolution, if connection with holding company

66 Ordinary Resolution in Holding Company also.
 I
(CNO--CARO.260) Disadvantages Examining whether the F.S of the entity
4
w
-
Starting Audit Different standing comply with RELEVANT STATUTE.
CLAUSE 20
Superiority complexes 5 Presentation and disclosure Req of the FST .

Every year spend 2% of average profit Eg. suppose it comes to 200 Lakhs ~
During Audit Problems of co-ordination -
Ensuring that AUDIT REPORT complies
with statutes, the app. SA's and the
6
Areas of work of common concern being neglected. relevant pronouncements issued by
Amount spent on CSR activity (Sch VII)
Eg. 120 lakhs
Unspent Eg. 80 Lakhs
w After Audit ⑳ Fees being shared. ICAI.

For ongoing project (multiyear project)

Eg. 60 Lakhs
Other than ongoing project
(CNO—SA299.040)
⑧ Uncertainty about the liability

Trf within 30 days from end of FY to
special A/c “Unspent Corporate
Social Responsibility A/c”
Eg. 20 Lakhs
Trf it within 6 months from
end of FY to Fund in Sch VII
(QNO-299.03)
CO-ORDINATION
AUDIT PLANNING, RISK ASSESSMENT AND ALLOCATION OF WORK During course of the audit J.A shall communicate to the other J.A in
writing prior to the completion of the audit:
Joint Audit Strategy, Joint Audit Plan(1-5)

Spend within 3 years 1 Obtain Common Engagement Letter (Since its Joint Audit) Following Matters

If not trf within 30 days from end of 3 years to FUND in schedule VII Engagement Partner & Other Key Member of each joint auditor Shortcut - RADA
2
shall be involved in planning the audit.
(CNO--CARO.270)
3 Joint Audit Strategy / (Rajneeti) -
Are Relevant to Deserve Require ⑳
Require Application of
-
W areas of Attention Of Disclosure judgment
CLAUSE 21 4 Joint Audit Plan / (Yojana) other joint auditor the other J.A. or discussion. by other joint auditors.
(System Data) (MMST / FRAUD) (Report) (Inter Business Transfers)
CARO REPORT OF Co’s CONSOLIPATED Results of Similar Engagements Performed Earlier
4a Consider
Qualifications or Adverse remarks If, yes By respective auditor Results of Preliminary Engagement Activities
(CNO—SA299.080) (QNO-299.05) (MCQ-299.03, Incs.31.4)
Indicate details ParagraphE number of the
–Escalation CARO reports
Claim 4b 4c 4d 4e

Common N.T.E of Consider & Communicate Reporting: Objectives/ AUDIT CONCLUSION AND REPORTING
Part 5 – SA 299 Division of resources. Factors Significant in
audit areas audit areas Manner/ Timings
directing Eng. Team 1. Before finalizing their Audit Report
(CNO—SA299.020) (QNO-299.01) (MCQ-299.2)
By Mutual Discussion Due to:
1. Business Units 1. Their imp 1a. JA shall discuss and communicate with the other JA's their respective conclusions
JOINT AUDIT 2. Nature.
2.Specified Areas. 2. Audit Report
3 .Assets or Liab. Would not be divided

⑧
Definition 1 or more auditors appointed 4 .Inc or Exp & Covered by all JA
3. Agreement 4. Disagreement with regards to the opinion
To conduct & report jointly Work allocation document shall be signed by all joint auditors and shall be with regard to
5 the opinion 4a. JA is not bound by views of the majority regarding opinion or
communicated to TCWG.

O
Generally in large audits matter to be covered in the audit report
Note : Point 5
Common audit
1.Documentation helps in Avoiding dispute or confusion among the J.A regarding report 4b. In case of disagreement in opinion or any matter to be covered
Either voluntarily Or required as per law rules & regulation
the scope of work. by the audit report, they shall express their opinion in a separate audit
by shareholders Eg. In insurance audit it is mandatary
2.Communication helps in avoiding dispute or confusion between the entity report.
Principles for effective conduct of joint Audit and the J.A
SA 299 4c. Audit report by other JA's (combined) shall make a reference to
Special consideration while doing joint audit Area Level Discussion Documentation & Communication i.e (6-7) the separate audit report, Separate audit report shall also make
reference to Audit Report by other JA’s (combined)
Not Applicable For relationship between principal auditor 6 Assess RMM,document it,communicate it to other J.A
& another auditor (Branch auditor)
4d. Such reference shall be made under the heading “Other Matter
Discuss & Document NTE of audit procedure for common and specific
(CNO—SA299.020) (QNO-299.01) (MCQ-299.2) 7 Paragraph” as per revised SA 706.
allotted areas and communicate to TCWG

JOINT AUDIT ADVANTAGES / DISADVANTAGES 8 Common Written Representation letter

(CNO—SA299.060) (QNO-299.05)
w
Distribution
of work
Lower workload
In case of MNC client, work can be spread
RESPONSIBILITY
lower cost of development (HR / Employee
Benefits to
Auditors wCost Development)
A B
Lower cost of work Specific/Separate Responsibility For: 0
Joint Responsiblity For:

I
Sharing expertise
⑳

-
~
Knowledge
Mutual consolation
1 Work divided. 1 Work not divided / Common Areas

2a Assessment of0 risk relating to Decisions taken by all the J.A together
Better quality performance the areas of work allocated .
Benefit to ~Improved service to client 2 w.r.t , NTE of the audit procedures for
client -
Evaluation of internal control
2b relating to the areas of work
common audit areas .
Healthy competition Matters brought to the notice of the J.A
allocated .
No need to displace auditor in 3 by other J.A and on which there is an
Other
case of take over - N.T.E of the audit procedures
2c for work allocated to said joint agreement among the J.A.
67 Smooth Rotation Continue On Next Coloum... auditor. Continue On Next Coloum...
 CHAPTER 11 AUDIT REPORT
Part 1 – SA 700 Heading Opinion VIII. Auditor
Responsibility 3 Para's Govern This Section
(CNO—SA700.020) Initial Content
1. Intro – We have Audited FST
III. Auditor's
TYPES OF FRF & ITS IMPACT ON AUDIT REPORT 2. Identify which Entity Para 37 Objectives Para 38 Scope Para 39
Opinion 3. Identify title of each statement in set of FST. Communication
1.Types of Financial Reporting Framework 4. Refer to notes, including summary of significant accounting policies. Auditor related points
Reasonable 1. Statement on
5. Dates / Period covered by FST Assurance Professional Judgement & communication
+ Skepticism (alert) regarding ethical
General purpose FRF Special purpose FRF Ultimate Content (Opinion) FREE FROM Material requirements &
Misstatement Process related points independence
Wordings & Issue Audit Report
Followed & suitable for public Followed and suitable for few
If Fair FRF - Whether FST are as per applicable FRF (Fair FRF) Identify RMM 2. Planned scope &
at large Ex. AS in India followed Ex: T.R.A.I asked for circle wise timing of audit,
by all for making FST P&L which is only suitable for - Whether FST give True & Fair view/Presents Fairly – Meaning of RMM due to Fraud may significant audit
decision making of license fees in all material respect Reasonable Assurance involve omission, findings (including
Report covered by SA700 --Meaning of Materiality misrepresentation, forgery, significant deficiencies)
If Compliance FRF - Whether FST are as per Applicable FRF
Report covered by SA 700 & SA800 – Comment about collusion & override of ICS 3. If KAM applicable,
.(Compliance FRF)
Misstatement Design & Perform Audit explain matters in KAM
Further Classification of FRF Why Opinion is Reliable ? Procedures are most significant
Include always in Audit selected from
IV. Basis of 1. Declaration by auditor that he is independent as per code of ethics Obtain Audit Evidence
Fair Presentation FRF Compliance Framework Opinion Report, No Other Option communication to
and also fulfilling other ethical requirements (Such as Integrity /
IMP Points TCWG
Objectivity / Professional Competence & Due Care / Professional
Gives permission either to go for No such permission as gives Behaviour & Confidentiality)
ADDITIONAL DISCLOSURE or Evaluate Accounting Policy / Reasonableness of
in Fair presentation FRF 2. Audit is conducted as per SA's , Issued under Sec 143(10) Estimates & Disclosures
AMEND REQUIREMENT of FRF
for better financial presentation 3. For Further details on how work was conducted refer “Auditor IF Fair FRF evaluate overall presentation,
Opinion wordings Responsibility Section” structure, content & disclosures
Opinion wordings 1 FST as per AFRF 4. To assure everyone statement that, auditor obtained sufficient and Appropriateness of Going Concern
1 FST as per AFRF
2 T&F view appropriate evidence to provide auditor's opinion Internal Control System related points
(CNO—SA700.030) Where applicable, the auditor shall report in accordance with SA 570 Non Corporates
V. Going Concern
(If Required) (Revised)(This is generally required if there exists material uncertainty, We Understand ICS but not for expressing opinion
DIFFERENT FORM OF OPINION unless it is covered in basis of opinion paragraph).
Corporates
Unmodified opinion Modified opinion VI. Key Audit Because of legal requirement to report on IFCR
Matter As per requirements of SA 701 above / statement (regarding not expressing opinion)
Sufficient & Appropriate Because of 2 reasons we (If applicable) cannot be written in company audit report
audit evidence obtained have to modify opinion
Branch related points
No material misstatement present 1 Unable to obtain sufficient & VII. Respons- Heading Depending on circumstances
in FST [ie FST in all material respect appropriate Audit evidence (law applicable , nature of entity etc) Division of Responsibility by Auditor (Division / Branch
ibilities / Subsidiaries covered by another auditor)
is as per Applicable FRF] 2 MMST is present in FST heading can refer to management or also TCWG as the case may be.
of Management
for the FST 1. Description of Responsibility for FST (BASIC)
SA 705 explains implication If compliance framework Preparation of FST as per compliance FRF 3 Options
of modifying opinion If fair presentation framework Preparation of FST as per Fair FRF 1. Include in Report
(CNO—SA700.040) (QN0-700.07/ 700.09/ 700.09.50/ 700.10/ / 700.11 / 700.13) - Ensure FST give True & Fair View 2. Include it in Appendix /
(MCQ-700.1, 700.3, 700.4, 700.7, Incs.58.2, Incs.58.3) (2 MORE TO SUPPORT ABOVE) Annexure of Report
2. Also responsibility to create & maintain internal control system to 3. Refer class note
Clearly Indicate report of Independent Auditor support above.
0
I. Title
(Generally used “Independent Auditor's Report”) 3. Responsibility to Assess whether going concern assessment is
Continue on next Page...
appropriate, disclosure of issues regarding going concern and
Addressed as Per Circumstances (It may be prescribed in statement on appropriateness of going concern
II. Addressee Law / Regulation / Terms of Engagement, if not it can be addressed (LAST TO COVER ALL ABOVE)
to TCWG or Shareholders) (Sec 143(2) asks auditor to report to
4. Identify people who are responsible for oversight of financial
share holders)
reporting process. If TCWG is responsible include their name in
Part 1 Opinion on FST heading.

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68
 ⑧ Part II Other legal & Regulatory para

IX. Other Reporting

(CNO—SA700.080) (QNO-700.15) (CNO—SA700.120) (QNO-700.03)

AUDIT REPORT V/S AUDIT CERTIFICATE FORMING OPINION ON FINANCIAL STATEMENTS

Responsibilities
What opinion Auditor has to frame?
Audit Report Audit Certificate
– For reporting responsibilities other than those specified User expects FST as per standard principles and format, that means they
in earlier sections as per any law or regulations Coverage Generally whole FST Limited Info should be as per AS, IND AS, IFRS etc.
– If topics are same include it in above sections only, but So, auditor has to make opinion whether FST is as per applicable FRF.
specify as per which provision so as to differentiate it Procedures Similar Similar
Use of Judgement Yes No If it is a fair presentation framework
– If we include this as a section of audit report then we
need to give heading to above part as “Report on Auditor also needs to express whether FST give true & fair view
Financial Statement” Opinion with Vouch Accuracy with
Final Result
reasonable Assurance absolute assurance How to frame opinion
of Member
Name Facts Opinion is based Here we comment on To frame opinion on FST, auditor will have to make a conclusion about all
X. Signature accuracy of facts itself
of Firm on facts material items in FST whether material items in FST are free from MMST
(By Individual
Reg. No. Membership Reg. Number (MRN) Examples may be because of fraud or error.
or Partner Examples : the report Examples: As per Section
Firm Reg. Number (FRN) under section 143 of the 66 of the Companies While making this conclusions, auditor should be reasonably
Companies Act, 2013 is Act, 2013, an auditor
XII. DT - Dt of signing Place - Where report is signed assured (high level of confidence)
an opinion based report is required to file a
(Generally it is city where office is situated) and not a certificate certificate in the tribunal How to draw conclusions
where company is
XIII. UDIN - Unique Document Identification Number proposing for the For drawing conclusions following should be done
(It should be generated within 60 days of signing document)
reduction of capital
1. Perform audit procedures and obtain sufficient and appropriate audit
(CNO—SA700.050) (MCQ-700.9) evidence for all material items
(CNO—SA700.100)
2. On the basis of evidence, identify misstatements in FST and ask mgt to
UDIN rectify them and then make list of uncorrected misstatements, now auditor
REPORTING TO SHAREHOLDER have to check these misstatements individually or in aggregate.
Non CAs were forging signatures of CAs & issuing fake V/S REPORTING TO TCWG
report & certificate 3. Apart from quantitative misstatements it is important for auditor to
Problem
Reporting to shareholders Reporting to Those Charged with Governance understand the quality of FST / accounting practices / mgt bias to form
Such malpractices was affecting CAs & other stakeholders in society
opinion on FST.
Profession development committee developed innovative solution in SA 260 deals with the
Solution Section 143 of the companies
the name of UDIN ie unique documents identification number Requirement provisions relating to
Act, 2013 deals with the (CNO—SA700.140) (QNO-700.19) (MCQ-700.8)
Cas with full time COP has to get registered at UDIN portal provisions relating to reporting to reporting to those charged
shareholder. Thus, it is a with Governance.
Now every time CA signs report or certificate he need to fill up key Statutory Audit Report which is SPECIFIC EVALUATION BY AUDITOR'S
Process details of report / certificate on UDIN portal, get them registered addressed to the members.
& generate UDIN for each report / certificate
SA 700, makes some evaluation mandatory for auditor because they are
UDIN number should be specified on report / certificate along it is a reporting on matters
Statutory Audit Report is on hose charged with governance extremely important and they don't want auditor to miss it in any manner
with FRM / MRN Content true and fair view and as per like scope of audit, audit
Implemented in phased manner prescribed Format. procedures, audit modifications,
etc. Shortcut – MASTER (Auditor has to evaluate following)
1 Feb 2019
st
For all certificates
Reporting to those charged Material transactions and events are properly accounted and disclosed in
Statutory Audit Reports are M
1 Apr 2019
st
For GST & Tax audit reports Availability with Governance is an internal the FST, so that user understand their nature and financial effects
in public domain.
document i.e. private report.
1st Jul 2019 For all other Audit, Attest & Assurance function Whether applicable FRF is followed consistently while selecting
A and implementing accounting policies
(CNO—SA700.060)
Whether significant accounting policies are properly disclosed in notes
S
AUDIT REPORT PRESCRIBED BY LAW to accounts
Whether terminology used in FST including the title of FST is appropriate
T
If law prescribes format of audit report then as law overrides standards. (e.g. title for profit oriented and non-profit oriented company is different)
Hence auditor will have to follow format given by law
E Whether estimates made by the mgt appear reasonable (realistic)
He will give reference to standards on auditing in his audit report only if Whether FST as a whole are relevant, reliable, comparable and
R
understandable.
Audit reports includes basic elements which we have discussed earlier

Which means all elements from title to place except going concern,
key audit matters, other requirements are included

In India, we don't refer to standards in tax audit report because it does not
contain management responsibility & auditor responsibility paragraph

69
(CNO—SA700.160) (QNO-700.17) Part 2- SA 701 (CNO—SA701.090) (QNO-701.03) (MCQ-701.1, Incs.31.5)

EVALUATION OF QUALITATIVE ASPECTS INCLUDING MGT BIAS (CNO—SA701.010) KAM NOT A SUBSTITUTE FOR DISCLOSORES IN FST

Qualitative aspects of accounting practices / FST. SA 701 Shortcut – Fast Moving Goods & Services
SA 260, explains what are the qualitative aspects of F Not a substitute for disclosure in financial statement
accounting practices and they majorly focus on 3 things I. Audit of “Complete Set” of “General Purpose FST” of “Listed Entities”
1.Applicability of M Not a substitute for expressing Modified opinion
ii. Required by Law / Regulations
KAM Para (Given G Not a substitute for reporting on material uncertainty over Going concern
Significant Mgt estimates
Disclosures in FST in SA 700) iii. Auditor decides to Communicate KAM
accounting policies & judgements S Not a Separate opinion on individual matters
(Eg Significant Public Interest Involved)
Management Bias (CNO—SA701.100)
SA 705 Prohibits putting KAM if Opinion is Disclaimed, Unless required by Law / Regulation
Mgt has to make many judgement while doing accounting and preparing
FST. There is a possibility that they misuse this opportunity and enforce 2. Determining KAM items ? COMMUNICATON WITH TCWG
there hidden agenda of manipulating FST.
Step 2 Auditor shall communicate following with TCWG
Step 1 Step 3
So auditor should be careful and understand whether mgt appear bias. Identify matters Step 4
Make list of matters Identify items
To understand whether mgt is biased or lack neutrality, auditor should see following which need of Most Current Period If KAM is identified
Communicated
Significant Auditor Item
to TCWG Attentsion Significance
Whether there are selective correction by mgt w.r.t. misstatements identified Yes No
by auditor which may either only increasing earnings or decreasing earnings List given in SA 260 Indepth, frequent, robust interactions,
efforts, time, resources etc If KAM is applicable communicate
Mgt is not rectifying deficience in the system which are focusing on particular Communicate matters which
transaction, balances or disclosures leading to in apprproted reporting that no KAM identified as per
Significant Risk Significant Management Significant Event are identified as KAM
facts & circumstances
or High RMM Judgement or Transactions
whether there is possible Mgt bias while determine accounting estimates. Now,
how to understand whether Mgt is bias in estimate is explained in SA 540 which Except for matters described in basis for Qualified / Adverse
Eg Dominos Eg Mondi Ltd Eg Philips Eg. of wordings
gives examples and circumstances of Mgt is bias in making accounting estimates. or MUGC, we have determined there are no other KAM
UK AR (South Africa) (Netherland)
Effect of low quality accounting practices and mgt bias
Revenue Recognition Because of huge expansion Separation of Health Tech &
if we identity that quality of accounting practices is low or mgt is biased, this in itself Part 3 - SA 705
Cut Off is Highlighted capitalisation of fixed asset Lighting Business as 2 sperate
is not a material misstatement which should be reported
as High RMM hence needs significant judgement companies from across group
But while evaluating misstatements then we should consider effect to low quality KAM (CNO—SA705.020) (QNO-SA705.01/ 705.03/ SA705.05 / SA705.07/ SA705.09/ SA705.11)
hence KAM companies is Significant Event
accounting practice and mgt bias while drawing opinion and because of this we may (MCQ--705.2, 705.5, 705.6, 705.7, Incs.14.1, 14.2,Incs.14.4, Incs.14.5, Incs.31.1, Incs.31.3)
or Transaction Hence KAM
draw opinion which is unfavorable, so they effect opinion making process.
3. How to Heading Introductory Language Main Content of KAM
(CNO—SA700.180) communicate TYPES OF OPINION
KAM ? Key Audit Matter 2 Standard Statements Description of KAM
TRUE & FAIR VIEW 1. Definition of KAM –
Reference to related Sufficient & Appropriate Evidence & No MMST Modified Opinion
Matters which in Disclosure
auditor's professional
True Reliable P&L Fin performance judgement were of Why matter is Unmodified/Unqualified/Clear Opinion No S&A Evidence MMST
Meaning considered KAM?
Fair Neutral / unbiased B / S Fin position Most Significance
How the matter was Financial Statements gives
2. Auditor is not providing addressed?
True & Fair sperate opinion on these True & Fair View Pervasive Not Pervasive Pervasive
SA700 If fair presentation Opinion matter
frame work Presents fairly in all Disclaimer Qualified Adverse
material items
No Communication of some KAM items
Not able to Subject to / FST does not
Inc / Exp
express opinion Except Effect of True & Fair View
No omission 1. Law / Regulations Prohibits 2. Adverse Consequences more than
Asset / Liab
(Eg SFIO) Public Interest (Eg Cyrus Mistry Vs TATA)
Inc / Exp Accuracy Special case of Multiple uncertainty Auditor obtained S&A evidence for
Recorded Disclaimer of opinion exist each individual uncertainty ~
Asset /Liab Valuation
If there is No Key Audit Matter or Key Audit Matters Exist but not Reported as per reasons
W
As per Applicable FRF given above then include a statement under heading “key Audit Matter” and explain this fact.
How to ensure A/C policy But he is not able to form opinion because of
-

FST are T&F Consistently

P&L 4. Relationship with Other paras Potential interaction And their possible cumulative
All maters in
B/S Matters of uncertainties
w
effects on FST W
Disclosures
Unusual / Non-recurring
Modification Material Uncertainty EMP / OMP
Proper understanding Eg. charge on Assets
If common, Include it in KAM.
Include in “Basis of Include in “Going Such items can be put
Modification” Concern” first in KAM sequence
Give Reference in KAM Give Reference in KAM to highlight them
70
 (CNO—SA705.030) Qualification Adverse Disclaimer
5. Basis for Opinion
WHICH TYPE OF OPINION IS APPROPRIATE 6. Material Uncertainity
No Change
5a. Heading Basis of Qualification / Adverse / Disclaimer of Opinion related to Going concern
It is mere repition of types of opinion explained earlier
7. Key Audit Matters No Change(No KAM in case of disclaimer)
Qualification Adverse Disclaimer
(CNO—SA705.040) (MCQ-Incs.58.1) 8. MGT Responsibility No Change
Pauasive 5b. Content Depending on the reason of modification
PERSUASIVE MATTER 9. Auditor Responsibility If there is disclaimer only following will be written
Material Misstatement No Sucient
& Appropriate
Affecting single item but it is Disclosure fundamental to unders-
Affecting many items Evidence Our responsibility is to conduct an audit of the entity’s
substantial portion of FST tanding FST not appropriate
Related Related to Relates to non financial statements in accordance with Standards on
Ex: Indore Branch Ex: Fixed Assets not impaired, Ex: Amalgamation to Amounts Narrative Disclosure The auditor Auditing and to issue an auditor’s report.
not included in FST it accounts for 80% of Assets disclosure not given
shall include However, because of the matters described in the Basis
Description and Disclosures (Eg: Contingent in the Basis for
(CNO—SA705.050)
quantification of An explanation Liability for Opinion Disclaimer of Opinion section of our report, we were
OBJECTIVE OF AUDITOR AS PER SA705 the financial of how Undisclosed) section the not able to obtain sufficient appropriate audit evidence
effects of the the disclosures (a) Discuss the reasons for to provide a basis for an audit opinion on these
Objective of Audit is to express clearly appropriately modified opinion when misstatement are misstated. non-disclosure financial statements.
Unable to obtain sufficient & appropriate audit evidence (Eg: Depreciation (Eg: Company with TCWG;
Financial statements are having material misstatement under charged by has disclosed (b) The nature of
10. Other Matter No Change
5 crores) that CY losses the omitted
(CNO—SA705.060) (QNO-SA705.25, SA705.28, SA705.30) (MCQ-Incs.31.2) 11. Report on other legal
& covers net information; and
and regulatory No Change
EFFECT OF MODIFICATIONS ON AUDIT REPORT If it is not worth, instead it (c)Unless requirements (Part II)
practicable to should be prohibited by law 12. Signature/Place/Date No Change
Qualification Adverse Disclaimer specified that or regulation, 13. UDIN No Change
1. Title No Change CY losses are include the
3 times net omitted (CNO—SA705.080)
2. Addressee No Change
worth of the disclosures,
3. Report on FST (Part I) No Change company as provided it is COMMUNICATION WITH TCWG
4. Opinion on start of the practicable and
year) S&A audit When Auditor expects to modify opinion
4a. Heading Qualifed / Adverse / Disclaimer of Opinion
evidence about He should go to TCWG & explain following
Auditor was
the omitted Circumstances leading to modification
4b. 1st Line engaged to
audit the FST Expected modification & wording of modification
4c. Opinion Wordings

(Misstatement) Because of the Because of the When the auditor expresses a qualified or adverse opinion, the
5c. Last Line
Except for the significance of significance of the auditor shall amend the statement about whether the audit
possible effect of evidence obtained is sufficient and appropriate to provide a
effects the matter(s)
matter(s) described basis for the auditor’s opinion to include the word “qualified”
of the matter(s) described in the
in the Basis for or “adverse”, as appropriate.
described in the Basis for Adverse Disclaimer of
Basis Opinion section Opinion section, When the auditor disclaims an opinion on the financial
the auditor has not statements, the auditor’s report shall not include the
for Qualified Opinion
been able to obtain following
section FST does not give sufficient Those elements are:
T&F view appropriate (a) A reference to the section of the auditor’s report where
(No S&A Evidence) audit evidence to the auditor’s responsibilities are described;
provide a basis for and
Except for the
an audit opinion on (b) A statement about whether the audit evidence obtained
the financial
statements; and
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71 Continue on next Coloum...

 (CNO—SA705.120) (QNO-SA705.40) In other cases. EMP can be presented either before or after 'key (CNO—SA706.060)
audit matter' based on auditor's judgement as to relative
significance given in EMP. COMMUNICATION WITH TCWG
LIMITATION OF SCOPE
E.g. :- If prior period item is very significant, changing profits If auditor plan's to include EMP or OMP, then auditor should communicate with
Inability to obtain Sufficient Appropriate Audit Evidence Due to a Management-Imposed drastically than EMP may be placed before 'key audit matter'. TCWG proposed wordings of EMP or OMP.
Limitation after the Auditor Has Accepted the Engagement
- (CNO—SA706.040) It will make TCWG aware of such matter, TCWG / auditor may obtain further
Request the management to remove the limitation clarification on such matters.
OTHER MATTER PARAGRAPH
If OMP is recurring in each successing engagement then its repeated
Management removes the limitation Management refuses to communication to TCWG may be unnecessary
remove the limitation If auditor wants to highlight other than matter which is not specifically
Proceed with audit procedures 1. Definition presented or disclosed in FST but in auditor's judgement it is
Communicate with TCWG and perform important to improve user understanding of audit or auditor's Part 5 – SA 710
alternative procedures responsibility or auditor report then auditor should 'other matter
~
paragraph. (CNO—SA710.020) (QNO-710.03)
Still unable to obtain sufficient and
appropriate audit evidence v COMPARATIVES AND WAYS OF PRESENTING COMPARATIVES
2. Examples (We have arranged in chronological order so that it is easy to remember)
Possible Effects Material Possible Effects Material No audit was conducted in previous year Amount and disclosures of one or more prior periods as
Last year
but not pervasive
v and pervasive - per AFRF are called as comparative information
related Someone else performed the audit of previous year
Qualified Opinion Withdraw from audit Ways of presenting comparatives
engagement (early stage)- CY related Audit of branches, subsidiaries done by another auditor
or disclaimer of Particular Comparative financial statements Corresponding figures
opinion (Conclusion stage) Auditor has reported more than one set of FST such thing
- can happen if company has prepared FST as per multiple If detailed information is given If detailed information is
FRF. (e.g. :- Ind AS, IFRS, US GAAP) Extent of for 1 or more prior periods. not given for prior periods
Part 4- SA 706 Year end related
If auditor wants to restrict distribution & use of audit report Information Importance given to prior period is Not given importance
then auditor can explain in 'other matter para'. same as current period. similar to current year
(CNO—SA706.020) (QNO-706.01)(MCQ-706.1, Incs.14.3, Incs.32.4, Incs58.4)
(i) Disclosing matter should not be prohibited by law or regulation Information of prior year is
EMPHASIS OF MATTER PARAGRAPH 3. Condition just a comparison not treated
(ii) Matter of OMP should not be a matter which is determined as Is it a separate Prior period information
as separate FST, infact it is
FST? treated as separate FST.
'key audit matter'. considered as integral part
If auditor wants to highlight any matter which is presented or disclosed in
of current year FST.
1. Definition FST so that it improves users understanding of the FST, then auditor (i) Heading – 'Other Matter Paragraph'
should put EMP. 4. Content In intro and opinion para, we In Intro and opinion para,
(ii) If multiple OMP's, we can differentiate one OMP by another Audit Report refer both current year and prior we refer only current year.
2. Examples (We have arranged in chronological flow so that it is easy to remember) by appropriate addition to the heading. (e.g. :- OMP for scope of audit) yeare.g.:- Prospectus e.g.:- Company audit report
Last year related Major prior period item 5. Placement Note 1 :- Corresponding figure approach is popular across the world, generally FRF
Major amalgamation specify that where ever current year amounts are given we should provide previous year
It is not clearly mentioned, but after analysis we can conclude that OMP should
CY related be placed always below KAM, it may not be immediately after KAM but any amounts also which shows that importance is given to current year and previous year
Major catastrophe having significant impact on FST
suitable position below it. amounts is just for comparison nothing more. Same thing is given in Schedule III
Early application of new accounting standard
End of year To distinguish KAM and information given in OMP we can add more words to
Uncertainty related to litigation or regulatory action the heading so that user can differentiate between KAM & OMP like other Note 2 :- This standard gives reporting approach. It doesn't say that we are suppose to
matter – Scope of audit. do audit of 2 years in comparative financial statement approach. That means if we have
After year end Significant subsequent event between date of FST done audit of 2 years, then only we will able to refer current year and previous year in
and date of AR If matter in OMP is related to 'other reporting responsibility' then we can place it opinion and intro para. If we have not done audit of previous year, we will have to put
3. Conditions Auditor should include EMP, provided following conditions are satisfied: - in section 'Report on other legal and regulatory requirement' OMP explaining either previous year audit was not done or it was done by predecessor
auditor, also provide the type of opinion with reason if it is modified and date of audit report.
(i) Matter of EMP should not be a matter which needs modification of opinion If matter is such that it is important for all auditor's responsibility and
(ii) Matter of EMP should not be determined as key audit matter understanding of his audit report then it may be included after 'Report on
as per SA 701. FST' and 'Report on other legal and regulatory requirement'. (CNO—SA710.030)

4. Content (i) Heading Separate section with heading EMP

OBJECTIVES AS PER 710
(CNO—SA706.050)
(ii) If multiple EMP's, we can differentiate one from (e.g. :- EMP for
another by appropriate addition to the heading subsequent event)
OBJECTIVE OF THE AUDITOR AS PER SA 706 To obtain sufficient & appropriate To report appropriately with
(iii) Description of matter
evidence whether comparative respect to comparative
(iv) There should be clear reference to the matter in FST which we Objective of Auditor is to draw attention of user of financial statement by information in all material respects information in
are highlighting generally, note no. FST is provided for the same.
incorporating additional communication [section] in audit report is as per applicable FRF various circumstances
(v) Auditor should clearly specify that though he is highlighting
matter in FST, auditor opinion is not modified w.r.t. this matter.
With respect to matter which is appropriately With respect to matters other
5. Placement If EMP relates to applicable FRF presented in financial statement than those as given in FST
E.g. :- If it is related to shift from AS to Ind AS, then in such
circumstances it should be placed immediately below 'basis To enhance user understanding with To enhance users understanding
of opinion' section to increase its importance. with respect to audit, auditors
respect to critical matters of FST
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72
(CNO—SA710.040) (QNO-710.01)

AUDIT PROCEDURES FOR COMPARATIVES / PY not

12 AUDIT OF BANKS
3 Put omp Explain fact 3 Same
COMPARATIVES FINANCIAL STATEMENTS / audited
(CNO—BA.020)
CORRESPONDING FIGURES
Additional guidance Additional guidance
Basic Evaluation of Comparative Information INTRODUCTION
MMST identified in PY FST which
Auditor should understand requirements of AFRF w.r.t. to comparative information 1 1 PY audit report modified
and check whether this information is appropriately presented in FST ware audited by predcessar Auditor 1 LEGAL FRAMEWORK
Ask management to resolve it
Agree comparative information with amount and disclosures presented in prior List of important laws which banks are supposed to follow
Ask management to resolve it
period FST.
If not resolve
(Acts are rearrange in chronological sequence for ease of memorizing.
Ensure that accounting policies reflected in comparative information are If Resolved If Not Resolved
consistently followed and if there is a change it is properly accounted, Modify opinion for PY figures They are divided into two sets)
disclosed and presented in current period They agree & reach Modify opinion
out to predcessar of PY If it affects CY For increasing reach of banking in India For improving quality of banking services
Additional procedures in case of possible material misstatements
auditor to amend FST
If auditor become aware of possible material misstatement in comparative Yes No Reserve Bank of India 1934 Information Technology Act 2000
information while doing audit than auditor can perform additional audit procedures He agrees and issues If it affects CY
as suitable to draw conclusion whether material misstatement exists Explain comparability Banking Regulation Act 1949 Prevention of Money Laundering 2002
revised audit report modify for CY also Modify for CY
figure also of CY with PY State Bank of India 1955 Securitization & Reconstruction of
If material misstatement exist then either previous year FST should be revised and No need to report any thing in CY report is affected financial Assets & Enforcement of 2002
such revision should be done as per requirements of SA 560 which deals with State Bank of India Security interest Act (SARFAESI)
subsequent events. It will be auditor's responsibility if he was auditor of previous 1959
(Subsidiary Banks) Act
year. Generally this is possible before AGM easilyIn other cases rectification are Payment & Settlement Systems Act 2007
done in current period as prior period items. Banking Companies (Acquisition
1970 Companies Act
MMST identified in PY FST & Transfer of Undertaking) Act 2013
Written Representations 2 2 LY CY
While doing CY Audit it Regional Rural Bank Act 1976 Co-operative Society
The Auditor shall request WR for all the periods which are refer in opinion para. Opinion Opinion
Ask management to resolve it Banking Companies (Acquisition
1980
In case of comparative financial statements we will request WR for & Transfer of Undertaking) Act
current period or as well as prior periods which are referred in If not resolved FY 20-21 FY 21-22 FY21-22 FY 22-23
CFS audit report. Even if we have taken WR in previous year we will (CNO—BA.040) (QNO-BA.01) (MCQ-BA.3)
take it again to ensure that information is appropriate as on current Unmodified Modified
Modify opinion for PY figures
year (today) Opinion Opinion
Silent if it affects CY, 2 RESERVE BANK OF INDIA – REGULATING BODY
Corresponding figures WR will be requested only for current period If it impacts Cy then modify Fact
with respect to CY also Regulating Body majorly for banks, NBFC. It is central bank of the country
Specific WR may be obtained if there is any prior period
financial items if disclosed in current year's P&L. Highlight
Important functions & responsibilities of RBI
(CNO—SA710.050) (QNO-710.06) (MCQ-Incs.58.5) OMP
Shortcut - RCB Players Understands Functions & Responsibilities

AUDIT REPORTING Development & Banks (Commercial &

supervision of the
Other Banks)
constituents of Indian
Corresponding Comparative FST R Regulator Regulates Financial System NBFC
Reporting Reporting Approach
Figures approach
Examples

Refer only current RBI permission is required for opening

Basic RBI Inspect bank any time they want
1 Basic Principle year no need to 1 Refer CY & PY Both banking services & open branches
sefer previous year principle
Issuance of currency
C Currency Related
Pervious year audited by Regulation of currency issue
2 predecessor Auditor
Acting as Banker to Central & State Govt.
Put OMP B Banker
Acting as Bank to commercial & other types of Bank
2 same including term lending institutions
Statement that
Type of Dt of Audit
PY audited by
opinion Report
predcessar auditor

If modified give reasins

Continue on next Coloum...

73
 (CNO—BA.060) (QNO-BA.02) (CNO—BA.090) (CNO—BA.140)

3
TYPES OF BANKS
(IN DESCENDING SEQUENCE FOR EASE) v FORM / CONTENT / AUTHENTICATION

Given in Sec29 (1) & (2) - 1

PROCESS

STAGES OF CONDUCTING BANK AUDIT

of Banking Regulation Act
Providing product & services to
Main Objective Initial Considerations
general public other segment
Commercial Banks Follow Third Schedule
(Ex- HDFC, Axis Bank) Accepting Deposits
Communication Acceptance Declaration Internal Terms of Establish
Main Functions
Granting Advances wForm A Form B~ with Previous & of Assignments Audit Engagement
Auditor Continuance Indebtedness in Banks Engagements Team
Development Banks Funding of infrastructures facilities important for Format Format
(Ex- SIDBI, IFCI) economic growth of B/S
~ of P&L ~ by Statutory
Auditors
Co-operative Bank Same as commercial banks but set up under co-operetive Also follow AS / Ind AS as applicable under Sec 133 Statutory auditor should not do concurrent audit, stock audit or
(Ex- Gujarat State principles & registered under co-operative society acts of
Co-operative Bank Ltd) respective state any other internal assignments & avoid conflict of interest
SBI / Nationalised Banks / Banking Co / RRB have to follow it
Regional Rural Banks Understanding
To cater to basic financial needs & banking needs of rural
(Ex- Punjab Gramin Bank, (CNO—BA.100)
community (set up in rural areas)
Tripura Gramin Bank)
Understanding the Understanding
AUDIT OF A/C Understanding
Small Finance Banks Bank and its the Risk the Bank's
(Ex- Equitas Small
Finance Bank, All Small
Basic Financial facilities to unserved or unorganized sector
like small marginal farmers, small & micro business units 0
As per sec 30(1) of banking regulation Act 1949
environment including
internal control
Management
Process
Accounting Process

Finance Bank)
Payments Bank
⑧
It is mandatory to get FST audited Identifying & Assessing Risk
New type of bank recently introduced accept receipts
(Ex- Paytm Payment
Banks, & deposits & make payment but cannot issue loans & ⑳
It should be done by person who is qualified to do audit of companies Act
Identifying & Assessing Assess the Risk of Risk Associated Assess Specific
Airtel Payments Bank) credit cards the Risk of fraud including with outsourcing
material misstatements money laundering of activities Risks
(CNO—BA.120) (MCQ-BA.12, Incs.29.1, Incs.34.1)
(CNO—BA.080) (MCQ-Incs.64.4) Execution
5 APPOINTMENT & REMUNERATION OF AUDITOR
BANKS MAY BE DIVIDED INTO THREE Engagement Establishing Audit Planning
Appointment of Auditor Remuneration Consider Going the overall audit
Bank Team Memorandum
4 BROAD CATEGORIES BASED ON ⑱ Concern strategy
Discussions (Summary of
LEVEL OF COMPUTERISATION SBI C&AG in consultation with CG RBI in consultation with CG the audit plan)
-
Subsidiaries of SBI SBI of RBI in consultation with CG Determine Audit Prepare response
Audit Programme
Transactions can be done only at bank branches -
o the Assessed
Non computerized banks
during working hours using paper & pen A Materiality
Risk / Audit Plan
Nationalized Banks BOD with prior approval of RBI RBI in consultation with CG
v
Some transaction are computerized while * Reporting
Partially computerized banks AGM by shareholder with As per Sec 142 of
major are non-computerized Other Banking Companies
- prior approval of RBI * Companies Act 2013
Core banking allows inter-connectivity between Report any other matter to Bank,
Fully computerized banks d Independent Auditor's Report Long form Audit Report
branches of the same bank and with CBS, Regulator or Government
RRB Bank with approval of CG Bank with approval of CG
customer can operate their accounts ~ I
as well as avail banking services from
any branch of the bank over the network

DIFFERENCE

Computerized Non-Computerized

Activities are done using computer system Banking system done manually

Transaction anywhere, anytime Transaction only made during working hours

Banking process – shorten times Takes long time for any banking process

More productive Less productive

74
(CNO—BA.160) (QNO-BA.03) (MCQ-BA.6, BA.9) (CNO—BA.190) (MCQ-Incs.61.5) (CNO—BA.220) (QNO-BA.19.50) (MCQ-BA.7, BA.17, BA.19, Incs.34.5, Incs.61.2)

TYPES OF ADVANCES & DISCLOSURES

2 ENGAGEMENT TEAM DISCUSSIONS 3 MODE OF CREATION OF SECURITY
It involves actual transfer of Term loan cash
-
Timing Ordinarily done at planning stage Funded facilities money from bank to borrower credit, etc
Classification security depending on nature of the item concerned & their terms & conditions
d Types of or on behalf of borrower
Meaning of Important Concept
All person performing engagement including experts Advances Doesn't involve actual transfer Bank guarantor
Engagement Non funded Letter of When there is legal charge on assets lender
contracted by firm of money till the time certain Legal Charge
Team facilities credit, etc gets explicit & immediate power to sell assets
condition are fulfilled
v Bank Bills purchased & discounted
- So as to assess risk of In this case lender has implicit charge over the asset he doesn't
Gain better On the basis
understanding Its environment material misstatement in Cash credit, overdraft & loan get immediate right to sale assets, they have to go to the court
~ of Nature Equitable Charge
financial statements repayable on demand & prove the situation & then they get right to sell the assets as
Objectives v Including Internal Control
~ per court instruction
~ Term loan
Documentation should be appropriate for Secured by Tangible Assets
Documentation Types of When you get immovable property
~ future reference 1. Immovable Property Mortgage
⑳
Disclosures On the basis
of security
Covered by Bank / Government Guarantee as a security it is called mortgage
Prior Years Errors which have been identified in prior years Unsecured loan
~ w Registered Mortgage (Legal charge ) Equitable Mortgage (Equitable charge)
Examples of Errors that are likely to occur On the basis of place
matters w
Methods that may be used for fraud by bank In this simple loan agreement is made with
which Advance in India In this a mortgage deed is created & this
are generally
Current Years
u
~ person or others
deed is registered with the sub-registrar
reference to immovable property. This
agreement is not registered with the sub-registrar
discussed Information or other condition that indicate Priority sector Public sector Banks Others of the property as a security in favour of
misstatement has occurred v property only original documents of the property
(In logical
Advances outside India the bank. This is example of legal charge are given to the bank. This is example of equitable
sequence) Audit responses for specific risk, pervasive
Needs to charge
maintain risk, engagement risk (These terminologies
professional are not used in SA's. We are giving its simple Due from Banks Due from others *
Possession is with bank & ownership is with
skepticism ~ meaning as per general usage)
Bills purchased & discounted -
Pledge
-
borrower. It is a example of Legal Charge
2. Movable Possession is with borrower & ownership is also with
Syndicated loans A
Specific risk Pervasive Risk Engagement risk
w w Hypothecation borrower but from hypothecation agreement it is
Others clear that it is a security given to bank. It is example of
Assertion level risk FST level risk
Business risk + Audit risk
+ Auditor's Business risk (CNO—BA.200) (QNO-BA.19)
⑳equitable charge

Borrower submits periodical statements on hypothecated assets to bank

Helpful in identification of risks & determining 2 NATURE OF SECURITY
appropriate responses for them w
-
3. Others When borrower transfer his debt recoverable (right to receive money) in
Advantages of these Useful to decide delegation of work as per experience of
~
vPrimary WCollateral favour of the bank it is called assignment. Only actionable claims can be
discussion team members & procedure to followed specially in fraud assigned for Ex- Book debts, Right to recover money from insurance
3A.Assignment
Determine whether specialist is required specially in fraud Primary security refer to security (assets) for company, Right to claim provident fund etc. Actionable claim in general
Collateral security is a additional security which
w which banks has given loan. This is also called
is offered apart from primary security. It can
means immediate right to recover money. It doesn't include debt
principle security. Ex- In housing financing recoverable which are in the form of pledge, hypothecation or mortgage
(CNO—BA.180) be tangible, intangible, moveable, immovable
house is a primary security because it involves various process to sale assets & recover money

Examples of Security 3B. Setoff Bank (creditor) has accounts of borrower (debtor). There are two types of
ADVANCES accounts balance borrower has debit balance (loan given), borrower has
Securities are associated with balance sheet item for memory purpose credit balance (fixed deposits, savings deposits).
1 CLASSIFICATION OF ADVANCES

*
Immovable property
fFixed Assets related Borrower gives right to setoff these balances if there is default in repayment of loan
Priority wise Sector wise classification is done as per guidelines Stock exchange securities & other instruments
Sector wise issued by RBI into priority & non-priority because Such setoff can be done only when accounts are in the name of same borrower
Non-priority wise RBI doesn't want to neglect priority sector which WInvestment related xGold ornaments & Bullion & in same capacity i.e. individual, partner of firm, member of HUF
are important for economy & society. Ex- Education,
Agriculture SME, Housing etc. XLife insurance policies
All branches of bank are treated as single entity & can be used for time barred debts
W
E
RBI guidelines also specify rate of interest, service Goods/Stock/Debtors/Trade Receivable of
charge & other terms & condition for priority sector Currents Assets In lien bank gets right to retain the assets till the
Plantations (For Agriculture Advances) 3C. Lien time they don't recover their loan money.
Secured Such classification is required for the purpose of
Security wise presentation of Balance sheet & it also affects Third party guarantee W
*We have changed the point which is explained in the module because it seems illogical & incorrect
Unsecured NPA provisioning
WOthers Personal security of guarantor w
Standard Such classification is required so as to identify
Prudential norms good quality & bad quality loans & also make
Banker's general lien e
NPA provision for them [Section 171 of Indian Contract Act, 1872 says that unless there is contract to contrary
-

if bank is having possession of goods or any security of a borrower & during this time if
there is a default from borrower then banks can retain these things with themselves till
the time they recover their money. They don't have right to sell they have right to retain]
75
 (CNO—BA.240) (QNO-BA.07/BA.07.50/BA.09.50) (MCQ-BA.2, BA.14, BA.16, Incs.29.3, CNO29.4, (CNO—BA.280) (MCQ-BA.18)

- ⑳ 0
29.5, Incs.35.1, Incs.35.2, Incs.35.3, Incs.35.4, Incs.35.5, Incs.61.1, Incs.61.3,
BA.240
Incs.61.4) 6 COMPUTATION OF DRAWING POWER

Bank computes total exposure that can be given to borrower

⑳
4 NON-PERFORMING ASSETS
(3) Consortium Finance Two or ~(4) Temporary Deficiency (5) Agriculture Advance 1. Sanctioned Limit including different types of facilities like cash credit, overdraft,
more banks giving loan together [Documents & procedural export packing credit, non-funded exposure etc.
Shortcut – T - C2AB loan account is NPA
part not done] Natural Calamities
*T Amount is overdue more than 90 days Further broken into limits for different types of loan &
Term Loan Biggest bank is the lead bank doing they also specify maximum working capital limit
all administrative work & collect In case of working capital Banks decide their
*C Cash Credit & Overdraft NPA if it*
is out of order money from borrower & distribute it facility –If stock statement is own measures Sanctioned limit is computed taking into consideration the overall health of the borrower
* to other bank older than 3 months such conversion
If O/S Amt. > limit for continuously 90 days or more If O/S amt. is within limit accounts is deemed as of short-term loan to Drawing power is calculated on the basis of current value of stock, debtor

⑧
Banks in consortium need to see W irregular & if it continue
long term 2. Drawing & creditor. It is computed on the primary security of working capital loan
* Credits are not sufficient to recovery status in their given books as irregular for continuous
reschedulement /
I No Credits of accounts period of 90 days I power & its
covers debit of interest computation Computation earlier drawing power was calculated as per guidelines
it will become NPA fresh
If it is not serviced in their own loans in such formulated by Board of directors & approved by auditor. But now a days
For continuously 90 days or more books of accounts it will be treated case NPA it is calculated as per the approach & formula given in sanction letter
as NPA even if lead bank is getting Renewal of regular limits –

0
classification
If minimum amt. due is not paid within 90 days from next all the money if not done within 180 days Ex- How it is computed Particulars of current assets Amt DP
I governed
I statement date from the due date then it by reschedule (A) Stocks
Gap between two statements should not be more than a month Hence participating bank need to is NPA terms Stocks at realizable value 1000 -
C Credit Card arrange their share of recovery from
Due date in statement is not important to determine NPA but it is Adhoc credit – if it is not Less: Unpaid stock:
the lead bank or take express
important to determine overdue status
consent from the lead bank for renewed / resolved within 180 - Sundry Creditors (300)~
After 90 days inform Credit Information Companies & Levy Penal transfer of their recovery to ensure days from adhoc sanction I - Acceptances / LC's (300) (600)
Charges proper asset classification it will be NPA A
Balance: paid for stocks 400
Long duration crop Margin @ 25% - (100) 300
Wait for 1 crop season after due date Saviours
A
Agriculture (longer than 1 yr.)
(B) Debtors Y
When overdue amt. is paid then it Such accounts are not Total Debtors 1000
As
Advance Short duration crop
Wait for 2 crop seasons after due date is called account is regularised considered as NPA Less: Ineligible debtors
(other crops) (200)
(6) Regularisation Eligible debtors
In case there are few credits before Money withdrawn 800
*State level banking committee decides types of crop, start & subsequently Margin @ 40% (320) I
balance sheet date auditor should evaluate 480
end of season, due dates for each state
it carefully Money was paid Total DP 780
Remain overdue and unpaid for a from new loan of
B Bill purchased & Discounted If it indicate inherent weakness same bank
period of more than 90 days To collect stock debtor statement on periodical basis &

Then account will be deemed as NPA even if it was regularised

w
3. Bank Duty calculate drawing power & ensure that loan is backed
adequately by current assets
(CNO—BA.260) (QNO-BA.07, BA.08) (MCQ-Incs.64.3, BA.8)
(7) Government Guarantee If guarantee is given by
Statements can be on monthly basis & on request of the
borrower or as per the condition it can be on quarterly basis.
5 EXCEPTIONS & CLARIFICATIONS OF NPA's CG SG
But if statement becomes older than 3 months then that
* If particular bank gives multiple loans or It will not be considered as NPA unless government repudiate No exemption will be account will be deemed as irreguler & if it continuos like that
(1) Borrower wise
·

makes multiple investments in a borrower (said no) its guarantee when invoked (ask for money) given from NPA for 90 days it will become NPA

v Then if any loan or investment become NPA or NPI Term Deposit (FD) ~
4. Auditor’s concern
or responsibility
Check whether drawing power calculation is appropriate
and whether outstanding amount is within limit
NSC
Then all the loan or investments become NPA or NPI (8) Security These will not to treated as NPA
Calculation methodology Data used for calculation
I KVP
(2) Erosion in the value of security
(Super 5)
IVP
if loan is take against them
should be as per sanction We monthly statement
letter eg. Deduction of creditor
* Quarterly statement / Return
There is potential threat of recovery LIP etc, margin deduction
+ Annual FST/Report
Erosion in value of security (9) Loan to staff
* Agree with each other
Loan as employer Loan as Banker Sometimes recovery of
Erosion in value of security Realizable value of security is less w principal is done first & interest Reason for difference if any
by more than 50% than 10% of outstanding amount
- * Loan amt. is shown in B/s under Loan amt. is is paid after. Then also no Continue on next column...
shown in need to consider interest as
Classified as doubtful Existence should be ignored & asset B/s under overdue
straightaway ↳ Other Assets “Others”
should classified as loss asset W Things should be considered
X Advances as overdue when payment
If employee leaves shift in of principal or interest are
Advances not paid as per due dates
given in agreement
76
 w Notes By Students
It is mandatory for all the accounts having (CNO—BA.320) (QNO-BA.11/BA.13/BA.15)
5. Stock Audit
⑳
funded exposure of more than 5 crores
8 AUDIT OF ADVANCES
⑳
It is done by different CA/CA firm
Shortcut –0
O
If it is consortium financing then lead bank will ensure stock Be PROUD3 of Advances given
audit is done & distribute report to all the banks
⑮
B Basis of Valuation
Examine whether basis of valuation appropriate (Foreign
Stock audit report should be carefully evaluated & special focus exchange rate etc.)
should be on valuation security & on calculation of drawing power Provisions towards advance should be as per RBI

w
6. Reporting Account balance should be kept within the sanctioned ⑯P Provisions norms, accounting standards & generally accepted
Consideration limit as well as drawing power limit accounting .principles

Reporting should be done to management & head ⑮R Recover ability

Recover ability of advances should be recognized in
valuation (In case of insolvency appropriate percentage
office in the following circumstances of advances
as obtained from liquidator should be used)

0 If Calculation
not appropriate 000
Sanctioned limit or drawing
power limit crossed /
exceeds the limit
If account become
irregular
If unapproved securities
are accepted as
collateral securities
EO Outstanding
Advance outstanding as on year end should appear
in B/SEx- Advances given after year end should not
be included. Recoveries during the year should be
considered & advance given in next year should
be ignored

(CNO—BA.300) (QNO-BA.17) (MCQ-Incs.64.2)

of Unrecorded No unrecorded advance. Ex- Foreign currency loan,
U
Advances new branches etc.

7
EVALUATION OF INTERNAL I
D Documents
Loan amount should be supported by documents as per
CONTROL OVER ADVANCES nature of advances

v1. Credit Worthiness Bank should ensure credit worthiness of borrower

ID Due to bank
Advances should represent amt. due to bank considering
restructuring, takeover & consortium
(Ability to Repay) before sanctioning of loan
Disclosures, classification & description of advance in
Security requiring
Like property or vehicles banks should ensure O
D
Disclosures of
Advances
notes to accounts should be as per regulatory req. &
that they are registered in name of bank recognized accounting practices
registration
or original title documents kept with bank
When goods are received they should be test (CNO—BA.340)
Goods in
checked & thereafter inspected by responsible
possession of bank
officers of branch in addition to inspector of bank
w2. Security
~ 9 SELECTION OF ADVANCES
Stock records should be maintained &
~-
updated on monthly basis & on that basis Substantive procedures should be performed over all large advances, all problem
drawing power register should also be a/c's, all advances which are adversely commented by RBI inspection team,
Hypothecation maintained. Balance outstanding should be concurrent auditor, bank internal inspection team
in the sanctioned limit & drawing limit & if any
account crosses any limits it should be
Further on sample basis advances should be selected from remaining accounts
reported to authorities regularly

Shares &
To be on safer side bank should ensure that ~
ownership transfer in name of bank & proper
Debentures
documents are maintained for same

W3. Sufficient margin

Ensure that sufficient margin is deducted from securities
as per agreement & sanctioned letter

v4. Authorization Sanctioned from appropriate authorities

Y5. Documents Necessary documents such as agreement, promissory
note are documented

x6. Ensure compliance of end of funds with terms of sanction

use

Ensure that operation of each advance is reviewed at least once

7. Operations
~
v in a year & more frequently in case of large advances

77
(CNO—BA.360) (QNO-BA.05) (MCQ-Incs.64.1) Restructuring
I Investment related income R

Income on Investment Fees or commission charged on re-negotiated / re-scheduled loans should

INCOME & EXPENSES not be booked immediately
0 ⑧
Includes interest on govt bonds, debentures etc & dividend income on shares
It should be booked & deferred over the remaining period of the
1 AUDIT OF REVENUE ITEMS Exception / Adjustment
rescheduled / renegotiated loan
Shortcut – RATING of Revenue by PM & CM > ⑳
Dividend from subsidiaries & JVs will be excluded & shown in other Income

w
-
- P Partial recovery
⑳
-

R Reversal of Income Broken period interest (accrued interest) on securities should be netted
off / adjusted against interest income Meaning Installment overdue 10 lakhs
As soon as account becomes NPA all accrued income
W
Reversal of through Principal – 8 Lakhs~
Interest
related to that particular loan a/c should be either
reversed or provided for -
Premium (difference between purchase price & redemption value) on
SLR investment should be amortised & netted off from the interest income
example Interest – 2 Lakhs~
income
Recovery – 1 Lakh w
Income from such a/c's should be booked on ~Profit on sale on investment Should be shown as other income It is called partial recovery
realization basis (cash basis)
~Profit / Loss on
Revaluation
Banks have to regularly
value the investment as per
Shown in Treatment It should be as per agreement between banks & borrower
This is applicable even if loan or advance is other Income
of investments RBI circulars If agreement is silent then bank has right of appropriation, but bank should
guaranteed by govt. exercise their right in uniform & consistent manner across various loans by

Y
making standard policy
Reversal of Fees / Commission or similar income from the borrower N NPA effect on different types of loans
other whose a/c has become NPA should not be booked on Accounting policies should be as per appropriations done by the bank
income accrual basis. It should be booked on collection basis Finance Lease Finance lease is a type of loan given, installment of lease
v includes finance income. It is booked as per AS 19 Interest income will not be booked if the funds are out of fresh additional
or realization basis
facilities given by the bank to concerned borrower
Reversal of
If bank has wrongly recognized any income then it
wrongly In case of NPA all accruals should be reversed & income should be
recognized
should be reversed in current year or provision of equal
amount should be made
booked on realization basis (cash basis). ~
M Materiality level

⑳
For income booked on gross basis 1% of TI
income
RBI has given two ~
In case of such loans interest income will be booked to
For income booked ⑳
Loan given on materiality levels
Reversal after Borrower may point out difference or mistake of the extent of available margin on net basis
basis on super 1% of NPBT
communication interest being charged to his accounts & if it is justified Ex- P/L on sale of investment -
then such reversal is done. This will lead to large debits 5 securities Ex- Loan Value of Margin 25 Interest can be
from borrower
in the accounts. A 100 securities 125 of booked upto 25
Treatment
Income item which fall below materiality level can
I I on accrual basis
* be booked on receipt basis. Auditor should not
qualify audit report
Auditor should check it carefully Takeout Finance Meaning- Banks finance infrastructure project, after
projects are completed & successfully operational for Basic principle for Further income should be booked on accrual basis
A Allocation of Discount in Bills purchased * specified time banks invite financial institution to income recognition only when it is reasonable to expect ultimate collection
takeover this loan, so that they free their money for
If bill purchased is outstanding at the year end that means part of the discount other projects this is called takeout finance.
falls in next year it is called unexpired discount or rebate on bill discounted
If loan involved in takeover arrangement has become
C Bill for Collection
un
Such discount should be transferred from discount account to rebate NPA in books of lending bank, then bank should be careful Banks earns commission on collection of bills on behalf of customers. It is a service
on bill discount a/c. they should book interest income but it should be booked income it should be booked only when collection is completed & amt. credited to
only when interest income is received either from taking customer account not before that.
-
Rebate on bill discount should be shown under the heading of other liabilities over institution or borrower

G General Points
M Memorandum account
W
-
If Bank rediscounts bills purchased then discount expense on such
Banks may maintain separate memorandum account outside financial books
rediscounting expense should not be netted off with discount income
Unrecorded income No income should remain unrecorded to keep record of accrued incomes & total amount of loan recoverable from
Tw Test Check It should belong to bank
borrowers including interest.

Interest earned should be checked for sample items It is only kept for the purpose of information & other purpose & not for
Recorded income Recorded at proper amount accounting purpose
Fees or Commission on bills for collection, letter of credit, Bank
Allocated to proper period
guarantees should be checked on sample basis Amt. shown in balance sheet is net off this accrued interest
Continue on next column... income in case of NPA

Continue on next column...

78
(CNO—BA.380) (QNO-BA.18) (CNO—BA.440)

2 AUDIT OF INTEREST EXPENSE

Changes in interest rates
a 5 AUDIT OF TAX PROVISION
If there is a change auditor should ensure that proper changes are made in
-Test of Controls
Interest expense entries are generated automatically by core
banking system so auditor should understand & evaluate
the system from particular date. Further he should also obtain interest cards
Just imagine how things are performed in practical life to retain following points
for all the quarters & for different types of deposits & analyze whether
hese systems interest cost has changed accordingly Auditor should obtain P&L enquire & analyze exempted
P&L is finalized
*Substantive
procedures
Analytical
Procedures
Auditor should use analytical procedures to
test reasonableness of the interest expense
Re-computation
w income & expenses which are should be disallowed

Auditor should obtain tax computation & check whether

Auditor should himself recompute interest on sample basis. Tax computation
This can be done by following three comparisons adjustments are done properly taking into consideration
is prepared
items of P&L
He should ensure that rate of interest, amount o/s, period
Comparison with previous year - used is appropriate as per term sheet, agreement,
Taxable income Auditor should check arithmetical accuracy.
deal ticket etc.
Compute average interest rate for various deposits & (Meaning of deal Ticket : Summary of terms & Conditions of is computed Tax is computed auditor should apply tax rates himself &
borrowings for last year as well as current year & then any trade/transaction/borrowing recompute the tax figure
compare it & investigate material differences
(CNO—BA.400) (QNO-BA.20) (CNO—BA.460)
Monthly / Quarterly Comparisons ~

Auditor should obtain for each month / quarter total expense 3 AUDIT OF OPERATING EXPENSES 6 AUDIT OF OTHER PROVISIONS
incurred and its breakup into interest for various deposits &
borrowings. Then interest of particulars month / quarter should Imagine the practical flow
Auditor should understand & examine control systems related
be compared with previous month / quarter. If there is
material difference should be investigate
e
Test of Control to operating expenses special focus on authorization
Expenditure Auditor should understand nature of expenditure which they
related point
Results of TOC affect quantum of other audit procedures incurred by have incurred & corresponding circumstances why accurate
Comparison of Quarterly & Annual
w
First obtain outstanding balances & interest rates for each
WAnalytical Procedures
entity bill is not available & provisioning is required.

quarter using this data compute weighted average interest

rate for the year
iSubstantive Auditor should make monthly graph of different types of
operating expenses & compare them over the months & also
Provision is
computed
Auditor should understand the basis & discuss it & obtain
explanation from management about its appropriateness &
Procedures adequacy
previous year to determine any unusual or divergent trends
Then use annual interest expense & annual o/s balances to wTest of details (CNO—BA.480)
compute average interest rates. Compare both these rates.
They should be close to each other. If there is material Auditor should obtain underlying bills, debit notes &
7 DISCLOSURE OF PRIOR PERIOD ITEMS
difference, investigate it. other supporting documents & verify expenses

Requirement As per AS – 5 prior period items should be disclosed on

Banks management is supposed to extract interest data & compute
average balances & average interest rates as per auditor instructions
(CNO—BA.420) (QNO-BA.20.50)
0of AS – 5 the face of the P&L

As per Banking Regulation Act, 1949, third schedule, form B,

0
4 AUDIT OF NPA PROVISION Requirement in
Auditor is supposed to analyze this data & ratio. Auditor will case of bank there is no specific requirement with respect to prior period items

check calculations done by management on sample basis * Obtain understanding of RBI circulars for NPA provisioning & Accounting Standards cannot override format of P&L
RBI -> ensure its compliance Conclusion given by Law. So if required we can give this information in
Check whether interest is provided on
notes to accounts for better understanding of users
all the deposits till balance sheet date Auditor should understand system used for computing NPA
~
Completeness A Test of Control provisions
of interest Check whether accrued interest is recorded A
Test of w for all o/s borrowings & deposits, Basis / criteria used for NPA classification
details check them with general ledgers~ A
Whether rate of provision used in the system are appropriate
Accuracy
Depending on types of Deposit & borrowing
Substantive Obtain total amount of standard asset & different categories
Interest rates
interest rates will be provided by RBI
Procedures of non-performing loans A
~ directives, agreements with depositors or
banks internal regulation
Then obtain its loan wise breakup o
For fixed deposits it should be as per
fixed deposit receipt / certificate w of
Select some loans on sample basis & check this with
For savings account it should be as per general ledger & check its classification is appropriate
~
rules framed by the banks
For inter branch balances it should be as Recompute NPA provision as per balances of
per rates provided head officeu various categories & provisioning rate applicable
For deposits overdue / matured it should

79
~
be as per banks internal regulation
Continue on next column...
(CNO—BA.500) (CNO—BA.540) (QNO-BA.23) (MCQ-BA.10, Incs.34.4) (CNO—BA.550)

REPORTING 3 FRAUD REPORTING OTHER

1 TYPES OF BANK AUDIT REPORTS TO BE ISSUED (GENERALLY)

it
Shortcut : - Report Should be in ITALICS
O
Reporting to RBI RBI has circulars & made recommendations

As per circulars of RBI Aiditor are supposed to communicate

1 EFFECTIVE RISK MANAGEMENT SYSTEM

TCWG should approve risk management policy.

Report on IRAC done as per RBI guidelines frauds if it crosses a specified limit Involvement of TCWG
This policy should ensure minimum impact on
-
S in risk management
profitability & capital

⑧
Report on treasury operation conducted as per RBI instructions Reporting under As prescribed in Sec 143 (12) of companies Act, 2013
S Co. Act. [Please refer to company audit for Sec 143(12)]
Report on adverse credit deposit ratio in rural areas It should take into consideration existing management
A
O
expertise & also regulatory requirement
Reporting
Long form Audit Report Auditor need to evaluate FST & give opinion
- Principle
Identification, Measurement All significant risk should be identified, measured,
Bank registered as companies Report u/s 143(3)(i) of the companies Act 2013 Auditor come across any instances of fraud & Monitoring of risks against
monitored against preapproved limits & criteria
I
Report on compliance of bank regard to implementation & recommendation on
preapproved limits -
Should report to RBI in addition to Chairman / Managing Following is the examples of controls which
Ghosh Committee (relates to fraud & malpractices) Director / Chief Executive / Government Control Activities
can mitigate risk Cop eisn)
O
Standards on Auditing 240 also speaks about -
0
Jilani Committee (relates to internal control & inspection / credit system)
Standards on communication with respect to fraud Segregation of duties
Report on compliance with SLR requirements
-
Auditing
0
As per SA 250 – duty of confidentiality is overridden
by statute, law or by courts
Setting lo limits

Approval of transaction
(CNO—BA.520) (QNO-BA.21) (MCQ-BA.13, Incs.29.2, Incs.34.3)
Accurate measurement & reporting of positions
2 REPORTING IN BANKS (Audit Report on FST) Reporting & approval of exception

w
Audit Report on Basic format of audit report is given in
Reconciliation of positions & results

Financial Statements SA 700 series [700, 701, 705, 706 , 710] Physical security & contingency planning
Law requirement
wRequirement as per banking related laws Monitoring risk management
methodologies & models
Risk management methodologies & models, assumptions
used should be regularly monitored & updated

(In practical sequence)

0 Information & explanation found to be satisfactory

This function will be conducted by independent risk management unit

⑧ Transaction are within the powers of the company

Returns received from branches & other offices are adequate

for the purpose of audit
Reporting
of Risk
Banks need reliable information system to get financial, operational,
& compliance information on a timely & consistent basis

TCWG requires risk management information that is easily understood

-
Whether B/S give true & fair view to enable them to assess changing nature of banks risk profile

0
Whether P&L give true balance of profit for the period

Any other matters brought to the notice of shareholders of company

~
Requirement of companies act

Section 143 prescribes the requirement

Should also include matters covered under Rule

11 of companies (Audit & Auditors) Rules, 2014 e
CARO is not applicable W
*See contents in Companies Act

LFAR

This report is on banks internal working of various departments special

focus on how deposits are raised & how they are repaid

00
Submit to the chairman of Audit committee every year by 30th June

80 0
& the chairman of audit committee need to submit this report to RBI
 CHAPTER 13 AUDIT OF DIFFERENT TYPES OF ENTITIES
Part 2 Article 150 Accounts Format To audit receipts &
R Audit & report all receipt & expenditure of anybody or authority
expenditure
The accounts of Union & States
(CNO—GA.010) (MCQ-Incs.45.1) Consolidated fund of India/
Shall be kept in such form as President may prescribe Substantially financed State/union territory
MEANING OF GOVERNMENT AUDIT On advice of C&AG
Substantially financed Grant or loan exceeding 25 lakhs & exceeds 75% of
Article 151 Audit reports of CAG total expenditures of that body or authority
Objective, systematic, professional & independent examination
Relating to accounts of CG/SG/UT (CNO—GA.060) (QNO-GA.05) (MCQ-Incs.60.2, 60.4)

Administrative operatioins Financial operations -

Other operation (Govt. corporation
& Govt. Companies)
Be submitted to President/ Governor of state/Lt. Governor or AUDIT OF EXPENDITURE
Administrators of UT

Purpose Who shall cause them to be laid before Parliament/ State Audit against Audit of Audit against Propriety audit Performance audit
rules & order sanctions provision of funds
Legislative Assemblies
W
Evaluating WeVerifying (CNO—GA.030) (MCQ-Incs.60.1)
(CNO—GA.080) (MCQ-Incs.45.2) (QNO-GA.10)

AUDIT AGAINST RULES & ORDER (REGULATORY AUDIT)

Presenting report OBJECTIVES
Aim & objective
Containing Policies
Programmes Ministry Compliance of things made by
Explanatory comments Expressing opinion Conclusions & Appraisal Evaluating Of
Operations
⑧
on Audit findings Govt. departments Parliament Competent aurthority
on fin. statement recommendations
Overall management
Constitution Laws Rules Financial rules Regulation & order
GOVERNMENT AUDIT Administrative accountability Ensuring accountability of administration to legislature
(IAS Officers & Govt. employees) Functioning as aid to legislature Coverage
Conducted by
Lower hierarchy Who has powers to incur / allocate expenditure from consolidated funds /
Highlighting lapses (mistakes) Of
contingency \funds of India or state
Comptroller & Auditor General of India (C & AG) with its IAAD Corrective actions Govt employees
Helping supervisory officers
(Indian Audit & Accounts Department) Withdrawing money Consolidated fund/Contingency funds
to take corrective measures
Procedure for From
Presenting claims & public accounts of GOI & States
Accounting of Serves as mechanism or process for public accounting of
(CNO—GA.020) (MCQ-GA.2) public funds governments funds.
Government employee Conditions of service
Rule & orders regulating
(CNO—GA.040) (QNO-GA.01, GA.03)
renumeration Pay & allowance & pensions
LEGAL FRAMEWORK FOR GOVERNMENT AUDIT
DUTIES OF C&AG
Independent Constitutional Authority for Government Audit C&AG doesn't frame rules & regulations, but he examines rules & regulation
Provides Shortcut SAG AR
2 2

Such Authority is Comptroller & Auditor General of India (C&AG), performs C&AG understands rules & Whether government expenditure is
Check for their
duties through its work force in Indian Audit & Accounts Department (IAAD) C&AG has authority to audit and report
S To audit accounts of Stores & Stock regulation & orders appropriateness as per there rules, regulation & orders
on accounts of stores & stock
Constitution
v Compile accounts relating to annual receipts
A To compile & submit accounts Because he is checking for appropriateness of law which is similar to the court
Article 148 Appointment & R-R-R & disbursement of

Union/ State/ Union territory So called as quasi- judicial

Submit
Appointment Remuneration After Retirement Removal
While checking for appropriateness he checks following
On the grounds of President Governor Administrator
By President of Equivalent to S.C Judge Will not be eligible for proven misbehavior
Audit specific Given out of consolidated Excludes loans or grants
India & should be Non-Votable appointment of any / incapacity To audit grants No conflict Whether issuing authority Consistent with essential
G purpose loan fund of India/ state/ union given to foreign state or
or loans territory international organization Not inconsistent with orders or possess necessary requirements of audit &
office under CG/SG Resolution should or grant
with
Article 149 Duties & Powers, Term be passed with rules by higher powers for making accounts determined
G To control audit of Government Exercise such powers & duties with respect to constitution or law
atleast 2/3rd majority companies & corporations Govt.co. & corporations as given in respective laws authority rules, regulation & orders by C&AG
C&AG shall perform such duties & exercise such power as in each house of
prescribed by law In relation to accounts of Union & State Expenditure from consolidated fund of India/state/union territory
parliament (Lok To audit Audit
Sabha/ Rajya A and & All transactions relating to contingency funds & public accounts
C&AG's (Duties, Powers and Conditions of Service) Act 1971, Sabha) report report
defines these duties & powers in detail Trading a/c, P&L a/c, B/S of any department of Union / State

Term of C&AG 6 years or up to 65 years (whichever is earlier) To audit Audit receipts payable to Assessment
receipts consolidated fund India/ State/ Union Collection
R of Union
Continue on next column... or States territory to check effectiveness of Proper allocation
81 Continue on next column...
(CNO—GA.100) (QNO-GA.13) (MCQ-Incs.45.3) (CNO—GA.180) (QNO-GA.23)(MCQ-Incs.60.5) Step 3 Accounting Whether accounting of receipts & purchases, issue, sales is appropriate

AUDIT OF SANCTIONS AUDIT OF RECEIPTS Whether balances are also accurate

Concept of numerical & priced accounts
Basic principles
Whether each expenditure was General (one approval for many expenditure) For items used for admin
Maintain numerical records
having sanction either purpose like stationery.
Focus (only quantity)
Specific (special approval for every expenditure) Office equipment
Whether authority was competent as per constitution / law rules & regulations For all other items i.e. Maintain priced accounts (separate
Whether all revenue & Individual cases may be selected on test regular goods column for quantity as well as value
to sanction such expenditure other receipts are properly check basis & evaluated but auditor
wants to understand overall system in Whether regular physical verification is conducted &
(CNO—GA.120) (QNO-GA.1) (MCQ-GA.1, Incs.45.2, 60.3)
general & not indiudual cases whether balances as per records agree with the
Step 4 Evaluate balances
AUDIT AGAINST PROVISION OF FUNDS balances as per godown
Assessed Collection Refunds Allocation
Whether inventory is in excess or lying idle
Whether the funds where used for the Whether the funds used were Amt is Credited to Whether proper In case of disputes whether Priced accounts
purpose for which they were approved within the approved limits realized govt a/c allocation between cases are properly allocated
center & state among authorities Whether prices which are charged for purchase, issue & sales are reasonable and at the
(CNO—GA.140) (MCQ-GA.7, Incs.37.1 Incs.45.4) (QNO-GA.15)
STEPS end of the period whether closing stock is properly valued, if required prices should be
increased or decreased & corresponding profit / loss should be booked
PROPRIETY AUDIT Whether properly framed by department agencies
Regulation systems &
1
procedures Are they adequately secure & ensure proper accounting
Propriety word comes from proper (CNO—GA.220) (QNO-GA.30) (MCQ-GA.5)

Whether expenditure is for 2 Compliance

Even if the Adequate system/ Checks for detection, investigation of irregularity
expenditure is as benefit of public AUDIT OF COMMERCIAL ACCOUNTS
Meaning of propriety audit
per laws/ rules & Brings out cases of improper, Ommission or negligence to levy or collect tax
Related to collection Govt. can perform commercial activities like selling goods & services in different forms
regulation avoidable, or infructuous 3 Irregularity Loss of revenue through fraud
No precise rule of expenditure expenditure
Double refund Nature of enterprises Audit undertaken by
General principles to determine financial morality Fraudulent or forged refund voucher Departmental enterprises they work under
Related to refund
government departments & ministry C&AG
Principles of public interest Negligence to issue refunds
Government corporations created by specific laws As given in respective Laws
Not for particular person or section of community Assessment
Give suggestions Government companies hold 51% or more CA appointed by C&AG
Exception 4 Suggestions regarding how to Collection
improve (CNO—GA.240)
Refunds
As per recognized Claim can be
Amt is insignificant Allocation
policy or custom enforced in court of law AUDIT METHODOLOGY
Authorities are not sanctioning expenditure for their own direct or (CNO—GA.200) (QNO-GA.25)
indirect benefit Extent & quantum (dept & quantity of Hierarchy & functions of IAAD
1 2
transactions to be checked) department which works under C&AG
Principles related to proper procedure
AUDIT OF STORES & STOCKS

Public officers should show same vigilance which he would have It is one of the duty of the C&AG (as discussed above) Decided by No one can No one can Top level Group leader Gives directions
Introduction C&AG question it negotiate it members & control audit
shown whilespending his own money
Treated as a part of expenditure audit
Procedure for claiming allowance is such that employees get claim Middle level Supervisior Test check work
for genuine expenses, should not result in profits in the hands of employees Purchase member
Depends or following factors
Expense should not be more than the occasion demands Properly designed Receipts
Whether regulation, With Shortcut :- T2FIN Employees Does basic audit work
Step 1 system, Custody
(CNO—GA.160) (QNO-GA.20) Whether there is any respect
producers are
defects or Issue Work of each employee is checked
to Totality of Total plan Frequency Importance of Nature of
PERFORMANCE AUDIT deficiencies in them transaction of audit of checking transaction transaction
Sale 3 Location
Definition: Objective examination of govt. org programmes, authority or functions Regular inventory Large High Infrequent High Risky
taking Where records are dept
To evaluate (physical verification) Where receipt & payment occur
Decided after
Audit against rules
& order Examples prices were
Economy Efficiency Effectiveness General review In-depth checking of some areas Sampling plan & method
Audit of sanctions reasonable, process were as
Audit of purchases is per contract, quantity & quality
Whether targeted similar to audit of Audit against
Whether govt has acquired Whether resources are Step 2 were as per certificates issued
objectives are expenditure we have provision of funds
human & other resources in utilized properly to to cover similar aspects by receiving units, uneconomical
achieve in best purchases, losses due to
least cost possible maximize input output ratio Propriety audit
possible manner inferior quality
Performance audit
82 Continue on next column...
(CNO—GA.250)
REPORTING BY CAG
Right & obligation of CAG
Given in Article 151
Report on Union / State / UT
Report to President /
Governor / Administrator
Present before legislature
Committes select & reads
& understand reports
CAG explain reports &
also publishes report
Appropriate public opinion
for remedial Action
Acts as safeguard
(CNO—GA.260)
ACTION ON AUDIT REPORT
Annual Accounts & Report are submitted to President/ Governor / Administrator or LG
Which are ultimately presented before parliament/ state legislature/ union territory LA
These reports are of diversed & specialized nature & they need lot of time for its analysis
As parliament is having limited time hence specialized committees are constituted
to study them
Public accounts committee (PAC)
For report of govt department
& ministries
Functions
Reappropriation of funds
Authorization of expenditure ⑰
Disbursement & application of money
for specified purpose
Statement of account of autonomous &
semi-autonomous bodies
83
(CNO—GA.280) (QNO-GA.35, GA.40) (MCQ-GA.3)
4 Major expenditure (as per importance)
POWERS OF C&AG
Public work General administration Interest
Public safety Public health Education payments
Powers given v/s 143 (5) / (6) / (7) (These powers are given in logical sequence) (roads) & revenue collection
Important features in India
5 Financial administration
143 (5) Appointment,direction & reporting
Factual Facts are Readers make
Reporting separated opinion Power to appoint auditor as given is sec 139 How they manage their financial transaction
Power to give him directions
Recommendations Given by CAG Budgetary procedure
After conducting audit as per directions audit report will be submitted to C&AG audit Financial accountability (discuss & decide by
To Rectify vote where money should be spend)
Appropriate For proper report should show action taken & its impact on the financial statement & audit report
Authority Action TO prevent from Basic objective
143 (6) as C&AG feel appropriate they can comment on existing matters within 60 days Control of expenditure (expenditure should be
re-occurrence within the budgets decided & authorised by
They can supplement new matters to audit report legislature)
These comments & supplements shall be send to everyone to whom audit Beneficial to determine the taxation rates which will
Tax rates be required to cover the expenditure
report is sent
It should be presented to AGM just like audit report in same time & same manner Format is no fixed
If require they can order audit & they will also decide person & purpose of No distinction between capital & revenue expenditure
such supplementary audit items sometimes capital exp. may called as extraordinary
Feature Their can be separate budget for certain expense like education
Information as given by C&AG shall be given to such auditors in such formats as
C&AG decides Special funds can be created & maintained
(MCQ-GA.4) Sec 143 (7) C&AG office can themselves conduct test audit Separate presentation of enterprise activity
Expenditure control
C&AG power as per C&AG act 1971 (arranged in logical sequence)
Central govt. at state level, parliament / legislature decides the budget
To call for information & put questions or make observation and ask explanation
IAS officer's executer the budget & accounting department supervises the transaction
Require papers, Accounts, Document, book to be sent to specific place
Problem at local government level
Inspect any office of account of central govt. or state government including
offices responsible for initial or subsidiary accounts There is no segregation. Legislation & executive powers are integrated.
there is no independent finance & accounts officers also
Power to dispense with any part of detailed audit of accounts or calls of
transaction & apply limited checks Hence the system of external audit becomes very important
Accounting system is poor
(CNO—GA.300) (QNO-GA.43, GA.45, GA.50, GA.55) (MCQ-GA.6)
Process & format of preparing budget & accounts is very poor, sometimes
Committee on public undertaking (COPU) AUDIT OF LOCAL BODIES they give inadequate information, sometimes they give excess information
Types of local bodies Objectives of audit
~
Reports on govt. corporations & govt. companies 1 Local government in India covers 5 types of urban local 6
authorities
I Law compliance Reporting on the adherence to legal req.
Functions 24 53
Municipal Municipal Notified area Town area Cantonment
C&AG Audit Report System Reporting on strength & weakness on system
corporations council committee committee committee
Examine Auditor's report Expenditure Reporting upon whether value is fully received on money spent
Management annual ↳Regulatory (rules for land utilization construction, taxation etc.)
FST Reporting on the fairness of the content & presentation of fin. St.
accounts/ annual report
2 Functions Development activities (constructing schools, hospitals etc.)
Evaluate policy & programmes & financial
workings
w Maintenance activities
Frauds or errors Detection & prevention of error, fraud & misuse of resources
7 Audit programme
Whether it is managed as per sound business Power to impose & collect taxes on property,
3 Major incomes Taxes
practices (efficiency & effectiveness) water, animals, boats, advertisements etc. Who does the audit in case of municipal a/cs, municipal council & lower local bodies
Any other work as alloted by speaker General To fill up gap between expenditure required It is done by local fund audit wing of the state govt.
Grants purpose to function of local body & receipts / Income
grants available with local body In case of municipal corporation they themselves appoint auditor
To be used for certain Objectives + other points are similar to audit of expenditure (5 types of audits
Specific purpose grants studied earlier)
specified purpose only
State govt. may impose statewide
taxes & in the process they may take
Compensatory
grant away some powers of some local
bodies to compensate this they
receive such type of grants
Continue on next column...
 01. NATURE, OBJECTIVE AND SCOPE OF AUDIT 03. AUDIT DOCUMENTATION AND AUDIT EVIDENCE

PART 4 PART 1
UNIQUE QUESTION UNIQUE Question
QNO-200.07 Applicable financial reporting framework SA230.30 Documenting every matter considered & separate documentation showing compliance of SA not
required.
QNO-200.17 Professional Judgement
UNIQUE MCQS
UNIQUE QUESTION
MCQ No. 230.10
MCQ No. Incs.18.1, Incs.18.5
MCQ No. 230.15
MCQ No. Incs.39.3
PART 6 MCQ No. Incs.39.5
UNIQUE QUESTION
QNO-220.09 Relying on Work Performed by Others/ Death of original EP/ signed by other partner. PART 2
UNIQUE MCQS UNIQUE QUESTION
MCQ No. 220.1 QNO-330.11 TOC & Preliminary Risk Assessment of Controls
MCQ No. 220.8
UNIQUE MCQS
MCQ No. Incs.10.3, 10.5, Incs.15.4
PART 7
UNIQUE QUESTIONS PART 3
QNO-COA.29 “Provisions giving concrete shape to Auditor's Independence"
UNIQUE MCQS
QNO-COA.31 Importance of Independent Audit MCQ No. 500.2, 500.5, Incs.44.3, 500.10, 500.12
QNO-COA.39 Others- Self Revealing Error

UNIQUE MCQS PART 5

MCQ No. CIA.4, CIA.9, CIA.10
UNIQUE QUESTION
QNO-505.04 Overview of external confirmation-Types /Non Response/Exception
02. AUDIT STRATEGY, AUDIT PLANNING UNIQUE MCQS
AND AUDIT \PROGRAMME MCQ No. 505.1, 505.2, 505.4, 505.5, Incs.24.4

PART 1 PART 9
UNIQUE QUESTIONS UNIQUE QUESTIONS
QNO-300.01 Overall Audit Plan (Factors for Development) QNO-570.05 Material Uncertainty Exists & no mitigating factors
QNO-570.18 Management's Ability to make judgement about going concern
PART 2
UNIQUE QUESTIONS UNIQUE MCQS
MCQ No. 570.1
QNO-320.02 Materiality Discussion, Multiple Points

UNIQUE QUESTIONS

MCQ No. 320.4

84
 04. RISK ASSESSMENT AND INTERNAL CONTROL 07.SA 530 -- AUDIT SAMPLING

PART 1 UNIQUE QUESTIONS

QNO-530.10 Why auditors use sampling ?
UNIQUE MCQS
QNO-530.16 Multiple Definitions
MCQ No. 315.8, 315.12, Incs.27.4
QNO-530.23 Sampling- Traditional Approach Extensive Checking – All Entities

PART 2 QNO-530.24 Precautions of Test Check

UNIQUE QUESTION
QNO-ICS.39 Weakness in ICS (Case Study)
08. SA 520 – ANALYTICAL PROCEDURES
Control risk assessment when control deficiencies are identified
QNO-ICS.43
(Covered in SA 315 CNO—SA315-P1.022) UNIQUE QUESTIONS
QNO-520.03.20 Financial Statement Based -- Common Used Ratios
UNIQUE MCQS
ICS.2 QNO-520.04.50 Matters to be consider to decide combination of analytical procedures and test of details
MCQ No.
QNO-520.11 Analytical Procedure-Inventories

PART 3 QNO-520.13 Analytical Procedure- Trade Receivable

QNO-520.21 Analytical Procedures for Rental Payments
UNIQUE MCQS
UNIQUE MCQS
MCQ No. Incs.08.3, 08.4, 08.5
MCQ No. 520.2, 520.3

05. FRAUD AND RESPONSIBILITIES OF THE AUDITOR IN THIS REGARD 09. AUDIT OF ELEMENTS OF FINANCIAL STATEMENTS

PART 1 PART 1
UNIQUE QUESTION UNIQUE QUESTIONS
QNO-240.19 Auditor Responsibility- Misstatements Management Fraud
QNO- AIFS.19 B/S( Reserve vs Provision & Capital vs Revenue Reserve)
QNO-240.31 Fraud Case (Provision without Documentary or Other Evidence) QNO- AIFS.41 Disclosure requirements of IND AS compliant Schedule III-"Other Equity."

UNIQUE MCQS QNO- AIFS.27 B/S (Criteria for Classification as Current Liability)
MCQ No. 240.1, 240.2, 240.8, Incs.07.5
PART 2
06. AUDIT IN AN AUTOMATED ENVIRONMENT UNIQUE QUESTIONS
QNO- AIFS.37 B/S (Trade Receivables, Compliance Procedures (TOC) of Sales)
UNIQUE QUESTIONS QNO- AIFS.30.80 Identify Assertions Verified by Audit Procedures

QNO- AAE.07 Important IT related terms in brief

PART 3
QNO- AAE.50 Framework for Testing Internal financial control over financial reporting(IFCR)

QNO- AAE.60 UNIQUE QUESTIONS

Definition of multiple terms
QNO- AIFS.62 Evidence is the very basis for formulation of opinion - Example of evidence in respect of Sales
QNO- AAE.65 Definition of Multiple Terms (Second)
QNO- AIFS.75 P&L (Revenue Nature Expenses Which Can be Capitalised)
QNO- AAE.70 Definition of Multiple Terms (Third)
UNIQUE MCQ
UNIQUE MCQS MCQ No. AIFS.8, AIFS.9, Incs.11.4, Incs.15.5, Incs.17.1, Incs.17.2, Incs.17.3, Incs.17.5, Incs.63.3
MCQ No. AAE.1, AAE.4, AAE.6, AAE.18, Incs.01.4, Incs.30.4
85
 PART 4 11. SA 700 – AUDIT REPORT
UNIQUE QNO
QNO- AIFS.01 B/S (Capital Subsidy)
PART 1
QNO- AIFS.03 B/S (Share Capital Application & Allotment) UNIQUE QUESTION
QNO- AIFS.51 P&L (Advertisement Expense) QNO-700.05 True & Fair view
QNO- AIFS.57 P&L (Provision of Tax) QNO-700.14 SA 700 aims to make audit report consistent & comparable
QNO- AIFS.59 P&L (Provision of Tax)
QNO- AIFS.61 P&L (Foreign Travel Expenses) PART 3
QNO- AIFS.63 P&L (Goods Sent On Consignment)
UNIQUE QUESTION
QNO- AIFS.65 P&L (Sales on Approval)
CNO-SA705.18 Adverse vs qualified opinion
QNO- AIFS.67 P&L (Scrap Sale)
QNO- AIFS.76 Multiple items (From Old Course Vouching & Verification)
12. AUDIT OF BANKS
QNO- AIFS.77 Multiple items (From Old Course Vouching & Verification)

UNIQUE QUESTION
QNO-BA.02.50 Funded Loans & Its types
10. THE COMPANY AUDIT QNO-BA.04 Effective risk management system

QNO-BA.09 Difference in provisioning of NPA- Secured/Unsecured

PART 1 QNO-BA.17.20 Drawing power calculation
UNIQUE QUESTIONS QNO-BA.17.50 Audit of income (RBI)directions, Materiality, Revenue Certainity)
QNO- CoAud.01 Sec-139 Relevance of MOA / AOA in appointment of Auditor QNO-BA.24 Additional Reports apart from report on financial statements
QNO-CoAud.62 Appointment other than auditor QNO-BA.30 Risk on Money Laundering
QNO-CoAud.77 Sec-143 -Failure of Auditor to send AR to Members
UNIQUE MCQS
UNIQUE MCQS MCQ No. BA.1, BA.4, BA.5, BA.11, BA.15
MCQ No. CA1.32

13. AUDIT OF DIFFERENT TYPES OF ENTITIES

PART 3

UNIQUE QUESTIONS PART 1

CNO- Co. Acc.42 Audit Committee (Role/Function)
Unique Question
UNIQUE MCQ QNO-AOC.15 Inspection under Sec 79
MCQ No. CA2.1
MCQ No. CA2.2 PART 2
MCQ No. CA2.3
MCQ No. CA2.4 UNIQUE QUESTION
MCQ No. CA2.7 QNO-GA.00 Government Audit & its objectives
MCQ No. Incs.17.4 QNO-GA.00.50 Government audit is not investigative activity

QNO-GA.41 Reporting Procedures of CAG

PART 5
UNIQUE QUESTIONS PART 3
CNO-299.07 Responsibilities of Joint Auditor- Concealment- Professional Negligence UNIQUE QUESTIONS
QNO- ADE.75 Audit of an NGO (Receipts & Remittances to Others)
86
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