Audit Chart Book

Charts Book
Auditing & Assurance

For CA Inter – May 2020 & Nov 2020
By CA Katik Aggarwal
Auditing & Assurance - CA Intermediate [May 2020 & Nov 2020] 1
Index
Chapters No. Name of the chapter Page number
1 Introduction to Audit (including SA 200, 210, 220 & SQC 1) 3
2 Audit Strategy, planning & programme (including SA 300 & 320) 22
3 Audit Evidence & Audit Documentation 27
4 Fraud & Auditor’s Responsibility (including SA 240) 31
5 Audit in Automated Environment 43
6 Audit Sampling (including SA 530) 55
7 Audit Risk 60
8 Audit Procedures (including SA 315 & SA 330) 63
9 Analytical Procedures & External Confirmation (SA 520 & SA 505) 67
10 Standards for specific items to be tested during audit (SA 500 series) 73
11 Written Representation 81
12 Internal Controls (Including SA 315 & SA 330) 84
13 Internal Audit (SA 610) & Joint Audit (SA 299) 99
14 Audit Report (SA 700 series) 109
15 Company Audit 134
16 Bank Audit 155
17 Special Audit 176
18 Audit of items of Financial Statements
Audit Class 1 Audit Class 2 Audit Class 3
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Chapter 1 –
Introduction to Audit

Chapter 1 – Introduction to Audit CA Katik Aggarwal
Nature, Objective & Scope of Audit

How do a person conducting audit, satisfy
What is Audit? Objective of Audit himself that financial statements don’t
mislead anyone?
Audit is This he can do honestly by satisfying himself that

To obtain To report on FS
reasonable 1 2 3
The entries in the The accounts
Independent AND None of the entries in the
assurance books of have been drawn up books of account has been
examination
account are with reference to
To omitted in the process of
communicate adequately supported entries in the books
Of financial Whether FS as compilation and nothing which
Whether profit
Statements a whole are by sufficient and of account;
oriented or not
As required by SAs is not in the books of
free from appropriate account has found place
of any entity MMS In accordance with evidence;
Irrespective of auditor’s findings
in the statements;
With a view to its
express Size Legal 4 The information conveyed

opinion thereon. form by the statements is clear
and unambiguous;
5 The financial statement amounts

are properly classified, described
and disclosed in conformity with
accounting standards;
and
6 The statement of
accounts present
a
true and fair picture
of the operational results and
of the assets and liabilities.

FS = Financial Statements
MMS = Material Misstatements
Meaning of certain key words

1 2 3 4 6
Reasonable Financial Reporting
Independence Financial Statements Misstatement
assurance Framework (FRF)
Independence
FS means Reasonable assurance It means the framework which
implies that
means A difference between
prescribes the
the judgement A structured manner for • Amount, & • Amount,
of a person is representation of a highbut not • classification, • classification,
absolute level of preparation & • presentation & • presentation &
Historical Including assurance.
not financial info. related notes presentation of the • disclosure • disclosure
subordinate to It is so because financial information
the wishes or Intended to of inherent of an entity. of reported That is
direction of another communicate limitation of Audit. financial required as
person
5 per applicable
entity’s items
Absolute assurance? Applicable FRF FRF
who might have Economic Changes
Absolute It can result from
engaged him. resources & & therein
assurance means It means the FRF
obligations
100% That is
Fraud Error
assurance. Adopted by
It should not
only management/ required by 7
At a point of For a period TCWG law & Material
exist in facts time of time or regulations misstatement
In preparation &
presentation of Misstatements, including omissions,
But also appear FS are considered to be material if
to so exist to all &
reasonable persons 8 they, individually or in the aggregate,
that is
Opinion
Independence
acceptable
in view of could reasonably be expected
includes
Unmodified Modified to influence the
Nature Objective
Independence Independence opinion opinion
of entity of FS economic decisions of
of mind in appearance
users
Qualified Adverse Disclaimer of
opinion opinion opinion
taken on the basis of the FS

FRF = Financial Reporting Framework FS = Financial Statements
TCWG = Those charged with Governance
Scope of Audit Aspects to be covered in Audit

The following points merit consideration The principal aspects to be covered in an audit concerning final statements of account are
regarding scope of audit – the following:
1 2 (a) An examination of the system of accounting and internal control K Limited

Auditor should be Auditor should also
satisfied that decide whether the (b) Reviewing the system and procedures to find out whether they are
accounting relevant adequate and comprehensive
information which information is
is the basis for the properly (c) Checking of the arithmetical accuracy of the books of account
preparation of FS is
disclosed in the (d) Verification of the of the entries in the books of accounts with the relevant
reliable and
FS.
sufficient. support authenticity & validity of transactions entered into by
4 making an examination of documents.
Auditor is not
3 (e) Ascertaining that a proper
distinction has been made between items of
expected to
Audit should be capital and of revenue nature
organized such that perform
all aspects of an duties which fall (f) Comparison of the balance sheet and profit & loss A/c or other
enterprise to be
covered in audit.
outside the statements with the underlying record
scope of his
competence (g) Verification of the title, existence and value of the assets appearing in the
5 balance sheet.
Auditor should set out constraints on (h) Verification of the liabilities stated in the balance sheet.
the scope of the audit in the report that
impair auditor’s ability to express an unqualified (i) Checking the result shown by the profit and loss and to see whether
opinion. the results shown are true and fair.
(j) Where audit is of a corporate

body, confirming that the statutory
requirements have been complied with.
(k) Reporting to the appropriate person/body whether the statements

of account examined do reveal a true and fair view of the state of
affairs and of the profit and loss of the organisation.

FS = Financial Statements
Types of Audit Advantages of Independent Audit

Audit is not a legal obligation for all types of business Advantages of audit of financial statements are as follows –
organizations or institutions.
a) It safeguards the financial interest of persons who are
not associated with the management of the entity, whether they are Hospital
Audit required partners or shareholders, bankers, FI’s, public at large etc.
Voluntary Audit
under Law
b) It acts as a moral check on the employees from committing
defalcations or embezzlement.
Organisations that require It includes audit of the
audit under law are accounts of
following - - Proprietary entities c) Audited statements of account are helpful in settling liability
- Partnership firms for taxes, negotiating loans and for determining the purchase
• Companies, - HUF
consideration for a business.
• Banking companies,
• Income tax audit for • In respect of such accounts,
d) These are also useful for settling trade disputes for higher
there is no basic legal
specified org., wages or bonus as well as claims in respect of damage suffered
requirement of audit by property, by fire or some other calamity.
• GST audit for specified
org. Etc. • Many of such enterprises
e) An audit can also help in the detection of wastages and
require audit as a matter
of internal
rule or losses to show the different ways by which these might be
Govt. requirement checked, especially those that occur due to the absence or
inadequacy of internal checks or internal control measures.
• Some may be required to get
their accounts audited on the f) Audit ascertains whether the necessary books of
directives of govt. for account and allied records have been properly kept
various purposes like sanction
and helps the client in making good deficiencies or inadequacies in
of grants/ loans etc.
this respect.
• However, the main

g) As an appraisal function, audit reviews the existence and
reason may be the
operations of various controls in the organizations and reports
advantages that follows weaknesses, inadequacies, etc., in them.
from independent audit.
h) Audited accounts are of great help in the settlement

of
accounts at the time of admission or death of
partner.

HUF = Hindu Undivided Family
FI = Financial Institutions
Inherent limitations of Audit

Auditor He is not This is Timeliness of
He can because of
cannot expected to Nature of
Nature of Audit
Financial
obtain only
obtain reduce inherent financial Reporting & Other matters
reasonable Procedures
absolute audit risk limitations reporting Balance b/w
assurance benefit & Cost
assurance. to ZERO of Audit.
In certain cases,
Preparation of FS There are practical Some audit
limitations are
involves use of & legal procedures are time particularly significant.
judgement by limitations to consuming It includes –
management. auditor’s ability to Sometimes, cost of
obtain SAAE. audit procedures A. Fraud (particularly
It involves E.g. Accounting involving senior Mgt.
may exceed
• subjective Estimates or collusion)
benefit due to
decisions/ which auditor may
B. Non-compliance
assessments A. Complete omit such with laws & regulations
• degree of information not C. Existence &
procedures.
provided completeness of
Q. What are the matters in case of which limitations of audit is particularly uncertainty The matter of
significant? difficulty, time, related party
Q. Auditor omits an audit procedure on the basis that it is time consuming and Interpretation of
B. Fraud may be or cost involved is
transactions.
its cost is more compared to benefit. Can he do so? certain matters may
carefully organized to D. Future conditions
conceal it not in itself a
Q. Describe why the auditor cannot reduce audit risk to zero? or events that may
differ from valid basis for the cause entity to cease
Q. Describe what are the legal and practical limitations to auditor’s ability to
obtain SAAE. person to C. Audit is not auditor to omit an to exist as going
Q. MNO Ltd requested the auditor CA P to provide for absolute assurance in person. concern
official investigation audit procedure
respect of its ten branches scattered in Delhi and confirm that the financial for which there is no
statements are free from material misstatement due to fraud or error. Advise. alternative.
Q. DEF & Co. Chartered Accountants successfully carried out the audit of Shree
Garments for the FY 2015-2016. After the completion of the audit, there were
found material misstatements due to fraud in the financial statements which
were not noticed and reported by the auditor. Management alleges that it is
failure on the part of auditor. Comment.

SAAE = Sufficient and appropriate audit evidences
Auditing and other disciplines

Auditing & Behavioural
Auditing & Accounting Auditing & Law Auditing & Economics
science
• Accounting & auditing are very • Relationship is very close one. • Accounting is concerned with the • Auditor interacts with lot of people.
close with each other accumulation & presentation of
• Auditing involves examining Economic activity. • Auditor is expected to deal with
• Thorough and sound knowledge of
transaction, whether they have human beings along with
GAAP is required been properly entered into. • There are a lot of similar
financial figures.
• Thorough knowledge of grounds on which accounting has
• Good knowledge of business • One of the basic elements in
flourished.
accounting language is designing Internal control
law (Eg. Contract act, Negotiable
essential to be able to • Auditor is more concerned with
instrument act) affecting the entity is system is personnel.
communicate effectively and important Micro economics rather
efficiently than macro economics • Therefore, knowledge of human
• Good knowledge of taxation behavior is indeed very essential.
• Auditor is expected to be familiar with
laws is inevitable..
economic environment of
client
Auditing & Statistics and Auditing & Financial

Mathematics Auditing & Data processing Auditing & Production
Management
• Test check procedures have • The field of data processing is • Auditing is closelyrelated with • Good knowledge of production
become common in auditing getting revolutionized.
other functional fields of function is necessary.
• Computers help organisation process business.
• Discipline of Statistics become • Knowledge of production
close to auditing.
data and information at a • Auditor is expected to have Sound
very high speed. process is essential for internal
knowledge of various financial
• Knowledge of statistical auditor.
• It brings accuracy to the data techniques (Eg. WC
sampling become quite important.
processing. management, funds flow, ratio • Also understand the cost system
analysis, capital budgeting etc.)
• Knowledge of mathematics • Auditor should have good knowledge in operation in factory.
required for verification of inventories. of Computerized • Fair knowledge of institutions
• Understand terminology of
information system. and government activities
production to communicate with
that comprise the market place.
production EEs effectively.

WC = Working Capital ER = Employer
EE = Employee
Standard setting process

International
International Earlier known as
Auditing and
federation of Established International
Assurance Audit Practice
Accountants
Standards Board Committee
(IFAC)
(IAASB)
It is independent standard setting body.

Set-up for bringing
harmony in profession Objective – Achieved this objective by establishing
of accountancy on (1) Setting high quality standards • Auditing Standards and Guidance for Financial
international scale (2) Facilitate convergence of International Statement Audit
and national standards • Standards and Guidance for other types of
(3) Enhancing Quality and uniformity of assurance services
audit practice • Standards and Guidance for other related
(4) Enhancing public confidence in global services
auditing practice • Standards for quality control
Clarity project – Clarity project to improve • Publishing other pronouncements
the clarity of International Standard of
Auditing
Institute of Earlier known as

Auditing and
Chartered Audit Practice
Established Assurance
Accountants Committee
Standards Board In line with
of India (ICAI) (APC)
Clarity project
of IAASB
It is member of IFAC.
HISTORY
1982 July 2002 2007
Board
ICAI APC APC SAP re- revised
established developed converted named as AAS into
APC SAP into AASB AAS SA

SAP = Standard Auditing Practices IFAC = International federation of Accountants APC = Audit Practice Committee
AAS = Auditing and Assurance Standards IAASB = International Auditing and Assurance Standards Board SA = Standards on Auditing
An overview of standards in relation to assurance &

non-assurance services
SQC SA SRE SAE SRS

Standards on Standard on
Standard for Standard on Auditing: apply in audit of Standard on
review assurance
Quality Control historical financial information related services
engagements Engagements
SQC 01 - 99 SRE 2000-2699 SAE 3000-3699 SRS 4000-4699
SA 100 -199 Introductory matters
Apply in review of Apply in assurance Apply in agreed
Apply on firm for upon procedures &
historical financial engagement (other
quality control General principles & other related
SA 200 -299 info. than Historical FS)
responsibilities service
engagements
Risk assessment and
SA 300 -499 response to assessed risk
SA 500 -599 Audit Evidence
SA 600 -699 Using work of other
Audit Conclusions and

SA 700 -799
Reporting
SA 800 -899 Specialised areas

S TAT E M E N T S GUIDANCE NOTES
These are mandatory in nature. These are recommendatory in nature. A member should ordinarily
follow the guidance note except where he is satisfied that in the
circumstances, it may not be necessary to do so
In few guidance notes, the council has stated that they should be considered
as mandatory by the members.
The ‘Statements’ have been issued with a view to secure compliance by The guidance notes are primarily designed to provide the guidance to
members on matters which are critical for the proper discharge of their members on matters which may arise in the course of their professional
functions. work.
Statements may be related to Guidance notes may be related to
- Accounting matters - Accounting matters
- Auditing matters - Auditing matters
Therefore, auditor has to – Therefore, auditor has to –
- To examine whether “Statements relating to accounting matters” are - Examine whether “Guidance note relating to an accounting matter”
complied with in the presentation of financial statements covered by have been followed in preparation of FS.
their audit. If the same have not been followed, the member should consider
In case of deviation, auditor should make adequate disclosures in his whether keeping in view the circumstances of the case, a disclosure in
audit reports so that users are aware of such deviations his report is necessary.
- To ensure whether “Statements relating to auditing matters” are - Follow recommendations in a “Guidance note relating to an auditing
followed in audit of financial statements covered by their audit. matter” except where he is satisfied that in the circumstances of the
In case of deviation, the auditor should make adequate disclosures in case, it may not be necessary to do so.
his audit reports so that users are aware of such deviation.

Quality of Audit & Auditors

Elements of firm’s
Objective of quality
system of quality
control procedures
control
1 2 3 4 5 6
The auditor’s
Auditor
report is Leadership Ethical Acceptance and Human Engagement Monitoring
complies with
appropriate in responsibility for requirements continuance of Resources Performance
the given quality within client
circumstances the firm. relationships
Regulatory &
Professional
legal
standards
requirements
SAs
2
Principles of professional ethics
The fundamental principles of Firm should establish policies and
professional ethics are – procedures to ensure that the firm

SQC 1
and its personnel comply with
a) Integrity
relevant ethical requirements.
b) Professional Behavior
c) Professional Competence The engagement partner for evidence of non-compliance with
d) Confidentiality SA 220 shall remain alert relevant ethical requirements by

throughout the audit, members of the engagement team
e) Objectivity
It also includes the requirement of

If any non-compliance comes to his
Independence
attention, he should determine apt
action in consultation with others in
firm.

2
Independence of the Auditor
Meaning of Independence Threats to Independence
Independence Independence The Code of Ethics for Professional Accountants prepared by the IFAC identifies five types of threats.
implies that includes These are:
Independence of Independence in Self-Interest Self-review Advocacy Familiarity Intimidation

the judgement of mind appearance Threat threat threat threat threat
a person is
not subordinate
to the wishes or
It is the state of mind It means avoidance of
direction of that permits facts and
another person circumstances that Firm/ its partners/ Review of any Auditor Auditor forms Auditor is
are so significant associate can judgement/ promotes client’s relationship with threatened to
The provision of an benefit from conclusion reached opinion such client and discourage him
who might have opinion without being financial interest in previous audit/ that to act with
in audit client. non-audit end up being too
engaged him. influenced. that a third party may integrity,
engagement people believe sympathetic to
conclude that professional
Examples that objectivity of client’s interest.
skepticism,
1. Direct financial OR auditor is
It, therefore, allows Example objectivity.
It should not only interest (Shares) compromised.
the auditor to act with auditor’s integrity, Member of audit 1. Close relative →
exist in facts 2. Loan/ guarantee Example
integrity, objectivity objectivity or team was previously Example Senior position
3. Client fees/
and professional professional
contingent fees
director/ senior EE 2. Former Partner →
1. Threat of
skepticism. skepticism have been of client Auditor is client’s Senior position
But also appear 4. Close business replacement
compromised. advocate in 3. Long association
relationship
to so exist to all litigation or third 4. Sig. gift/ hospitality
5. Potential 2. Threat of
reasonable employment party dispute from client
reducing the fees
persons
Safeguards to Independence of auditor
1 Before taking work
Desist from
Consciously 2 taking work
consider whether it
3
If Yes
involves threats to Put adequate If can’t implement Don’t
independence safeguards in adequate + reliable accept the
place safeguards work

Quality of Audit & Auditors

1
Leadership responsibilities for quality within the firm.
SQC 1 SA 220
The firm should establish policies and Engagement partner should emphasize on -
procedures
to promote an internal culture Compliance with prof. Engagement team’s

standards and legal & ability to raise concerns
regulatory requirements without fear
that quality is essential in performing
engagements.
Complying with firm’s
Issuing auditor’s report
quality control policies
that are appropriate in
Such policies and procedures should require & procedures as
the circumstances
applicable
the firm’s CEO or managing partners (or
equivalent), Fact that quality is
essential in performing
audit engagement
to assume ultimate responsibility for the
firm’s system of quality control.
Who is Engagement Partner?
Any person further assigned operational Engagement Partner refers to

responsibility for the firm’s quality control
system
partner or other person in firm
by the firm’s CEO or managing partners

Who has apt. authority
Who is responsible for –
should have sufficient & appropriate from –
experience, ability, authority in this Audit engagement Professional body
regard.
Its performance Legal & regulatory
authority
Auditor’s report

3 4
Acceptance & continuance of client relationship & audit
Human Resource
engagement
SQC 1 SA 220 SQC 1
Information required to be obtained by the firm before Engaged partner should be satisfied that Firm should establish P&P to
acceptance or continuance of client relationship apt. procedures in this regard have been
provide reasonable assurance that
followed.
it has
Integrity of the owners, Whether firm and ET
Mgt. & TCWG of the can comply with ethical
entity requirements What if the engagement partner obtains Capable, competent and
an information at a later stage which Sufficient personnel
would have caused the firm to decline committed personnel
Implication of significant the engagement earlier?
ET is competent, has Such P&P should address -
matters identified in
capability include time
current/ previous The engagement partner shall
and resources - Recruitment - Promotion
engagement communicate that information promptly - Capabilities - Compensation
to the firm,
- Competence - Performance
- Career development evaluation
so that the firm and the engagement
partner can take the necessary action.
SA 220
Engaged partner should be satisfied that

engagement team & auditor’s expert
have apt. competence and capabilities to
achieve [Objective of SA 220]

5
Engagement Performance
SQC 1 SA 220
Firm should establish P&P to Engagement partner shall be responsible for -

provide reasonable assurance
that
Direction, Review Consultation Engagement Difference of
supervision. quality opinion
Auditor complies The report issued
performance control
with is appropriate in
review
the given
circumstances
Professional SAs
Legal &
standards regulatory
requirements

6 Engagement partner taking over an engagement in

Monitoring
the middle
As per SA 220
Engagement he will be entitled
partner taking to rely on work
SQC 1 SA 220 performed by Apply review
over an audit
others, provided procedures
during he exercises due
engagement diligence & care
Engagement partner should
Firm should establish P&P to AND
consider the result of firm’s &
evaluate monitoring process Reasons –
(Death of DOESN’T have
SAs in relation to his audit any reason to Obtain reasonable
partner)
a) Adherence to professional standards and engagements. believe to not rely assurance that work
regulatory & legal requirements; (Removal of
on the work. performed is
partner) etc.
adequate for his
b) Whether the quality control system has been
BUT purpose
appropriately designed & implemented; and
c) Whether the reports that are issued by the firm or

engagement partners are appropriate in the He shall continue to
circumstances. be responsible for
forming & expressing
d) Whether necessary modifications are promptly his opinion
made to the quality control policies and procedures.

Agreeing the terms of Audit Engagement
Pre-conditions
for an audit engagement The terms of Audit engagement
Auditor and client should be clear about the nature of engagement.

The agreement should be reduced in writing.
Agreement of
Use by the management to
management of the premise on
acceptable FRF which audit is Auditor and This way both
Agreement
conducted client should parties shall
should be
be clear about avoid any
reduced in
the nature of mis-
writing.
engagement. understanding
To determine whether pre-conditions are
present or not, auditor shall -
Obtain agreement In partnership, ensure appointment is valid in terms of “Partnership deed”

Determine whether
from mgt. that it
FRF is acceptable Terms of engagement letter shall include the following -
understands its
or not
responsibility for - (1) Objective (5) Identification of applicable FRF
(2) Scope (6) Ref. to expected form & content

+ Statement that there may be
Preparation of Internal controls as (3) Responsibility of auditor circumstances where it shall differ
Provide auditor
financial mgt. considers
from expected form & content.
with - (4) Resp. of management
statements necessary
the law
If any law & Auditor need
Access to all the Additional Unrestricted applies
regulation prescribes not mention He can
information information access to persons in sufficient detail the such terms in mention
terms of the audit the engagement that management
within the entity acknowledges &
engagement letter.
understands
responsibilities.

Recurring audit engagement

Is it compulsory for the auditor to send EL for each period in case of recurring audit?
Ans. On recurring audits, the auditor may decide not to send a new audit engagement letter
or other written agreement each period. However, it is not compulsory.
Assess whether -
Terms of audit He needs to remind

engagement need & entity of the
to be revised existing terms
Factors which may make it apt to revise the terms of the audit engagement or to remind the entity of existing
terms -
Revised or special
Misunderstanding Change
terms
of Objective Of senior In legal & regulatory

management requirements
& Scope
Financial reporting
In ownership
framework
Nature or size of Other reporting

entity’s business requirements

Limitation on scope of Engagement

Request for change
Limitation on scope
in engagement
of engagement
terms
After acceptance of
Prior to acceptance
audit engagement
Auditor believes it It provides same or

It provides lower
would result in higher level of
level of assurance
assurance Original
engagement
Disclaimer of Consider the reasonable Reasonable
Accept the Don’t refer To avoid
opinion justification justification
change in report confusion
for change Procedure
Consider the legal & & record under
Then, auditor shall contractual obligation the new original eng.
not accept the terms
engagement Mgt.
NO Don’t agrees
Change in Misunderstanding as Restriction on scope,
reasonable Accept the
circumstances affecting to nature of audit/ whether imposed by
need for services related services Mgt/ Circumstances justification change Mgt. Comm. To
Withdraw
doesn’t TCWG/
from Eng.
agrees promoters

Chapter 2 –
Audit Strategy, Planning
and Programme

Chapter 2 – Audit Strategy, planning & programme CA Katik Aggarwal
Audit Strategy, Planning and Programme

Sets the scope, timing & direction of the
Overall audit Relationship between audit
audit & guides the development of the
strategy and audit plan Audit Plan
Strategy more detailed audit plan.
Purpose/ Matters covered Once overall audit strategy What does it include?
established
Resources to be deployed Experienced team, experts NTE of Risk assessment procedures (SA 315)
Amount of resources to allocate to Various matters have been
Allocation to specific areas, NTE of Further Audit Procedures (SA 330)
specific audit areas identified
audit budget in hours
When to deploy the resources Interim audit stage, key cut-off NTE of other audit procedures
Audit plan can be developed
dates
How such resources will be managed, to address such matters
directed & supervised Briefing, Debriefing, Review
Audit plan should be
developed taking into account Steps/ audit plan should be made to cover among
Steps in forming/ establishing audit strategy
Location, components,
overall objective of audit other things the following -
Identify the Characteristics of the
engagement that define its scope segments etc. Acquire knowledge of client accounting systems, policies, ICs.
Audit plan and strategy are not
Ascertain the reporting objectives of the Interim/ final, meetings &
discrete or sequential process Establishing the expected degree of reliance to be placed on ICs
engagement to plan timing & nature of discussions with mgt/ TCWG
communication
Consider the factors that are significant Change in law, merger/ amlg. Determining the NTE of the audit procedures
in directing the engagement team’s They are closely inter-related.
efforts Co-ordinating the work to be performed
Consider result of preliminary engagement Tax consultation/ Tax audit,
SA 220, SA 210 etc. Changes in one lead to
activities & knowledge from other Plans should be further developed and revised as necessary during the course
engagement changes in the other
of the audit.
Ascertain the nature, timing & extent of resources necessary to perform
engagement
Auditor’s responsibility w.r.t. Changes in planning decision Audit planning is a

Common points
Benefits of Planning Documentation

strategy and plan during conduct of audit continuous process
• Helps auditor devote apt attention to imp. audit areas Development of strategy and plan is Auditor should update the strategy and • Overall audit
Planning is not discrete phase.
• Helps auditor identify & resolve problems on timely basis resp. of auditor plan if he feels necessary to do so. strategy
• Helping the auditor properly organize & manage the audit It is continual and iterative process.
engagement Factors/ circumstances where • Audit plan
It can’t be left upon entity’s personnel It begins shortly after completion of
• Assisting in the selection of ETM & the proper assignment auditor may need to update plan
previous audit • Significant
of work
Auditor may discuss elements of Unexpected events & changes in audit
• Facilitating the direction & supervision of work of ETM
planning with Mgt/ TCWG to facilitate continues till completion of current strategy and
• Assisting in selection of engagement team members of Change in conditions
conduct of audit audit. audit plan
work done by auditors of components and experts
Change in audit evidences
But should take care that effectiveness New info diff from info available during
is not compromised planning

Obtaining knowledge of client’s business is necessary for developing an overall audit plan. Planning for direction & supervision of ET and review of their work
What are the matters for which the auditor should obtain understanding as per SA 315?
Factors impacting the NTE of direction, supervision and review of ET and their
work -
The area of
the audit
The size and Assessed risks

complexity of of material
the entity misstatement
AP Capabilities and
competence of the
FRF individual team members
Obtaining knowledge of client’s business is necessary for developing an overall audit plan.
What are the matters for which the auditor should obtain understanding as per SA 315?

Audit Series of To be For To enable auditor Steps in developing an audit programme

Consists
verification applied to obtaining to express
of
Programme procedures FS & A/c SAAE opinion thereon
Auditor should prepare written audit programme
Programme may contain objective for each area and instructions as well
Mr. Piyush uses same audit programme for Audit programme should be strictly followed while
Auditor may or may not decide to rely on ICs
all the businesses. Is it practical? keeping open mind and conducting periodic review
Financial Audit Programme contains both (1) list of task Auditor may be flexible in performing certain audit procedures. For
Business vary
ICs may be and (2) instructions to carry such tasks some he may not have discretion.
in nature, size performance
different
& composition may differ
Unless officially changed by principal, it should Audit planning commences shortly after end of previous audit and
be followed unfailingly should be considered for modification along with audit programme.
Business Nature of
objective may service may
People believe that it brings element of rigidity
differ differ
Evolving one audit programme may not be Rigidity can be avoided by
suitable for all business. Audit programme should
Advantages of audit programme Disadvantages of audit programme
be tailored as per specific needs Undertaking Encouraging
periodic review of assistants to keep • Helps in selection of assistant for • Work may become mechanical.
audit programme an open mind jobs on basis of capability Some parts may be carried out
• Provides total perspective of work without understanding the objective
Points to be kept in mind while Otherwise, any change in the • The programme may become rigid
business policy of the client • Avoids danger of ignoring or
constructing audit programme and inflexible
may not be adequately known. overlooking certain books or
records • Inefficient assistant may take
Stay within scope and Consider all Audit work may be carried on shelter behind the programme
• Clear set of instructions • It may kill initiative for efficient and
limitation of assignment possibilities of error an obsolete programme
• Assistant accepts responsibility intelligent assistants
The whole audit may be held • Principal can control the progress
Determine evidences Apply only those as negligently conducted
reasonably available & procedures which are • It serves as a guide for succeeding How to eliminate disadvantages
identify best evidence useful in accomplishing The auditor may face legal year
• Imaginative supervision of work
for deriving satisfaction the verification purpose consequences
• Serves as evidence in case of • Receptive attitude
charge of negligence • Assistants encouraged to observe
Co-ordinate the
matters
procedures to be
applied to related items

Materiality in planning & What is performance materiality? Documentation of materiality

performing an audit • It is amount(s) set by the auditor at less than • Materiality for FS as a whole
materiality • Materiality for specific T/B/D
Auditor should consider materiality at planning level. • To reduce the probability that aggregate of MMS • Performance materiality
exceed the materiality level. • Revision in materiality level (if any)
What is materiality?
• It can be set of FS level or level of a particular T/B/D.
Something that in the auditor’s judgement has to
potential to impact the decision of the users of financial
statement is material. The term materiality may be
construed accordingly.
Materiality level = Benchmark (BM) x Percentage (%)
Level of materiality Choose the Determine percentage Revision in materiality

Relevant financial data
appropriate to be applied to level as audit
Materiality can be determined at for chosen benchmark
benchmark chosen benchmark progresses
Examples – PBT, Revenue, It may include –

FS level as a Level of 1 or more transaction/ Materiality may need to be
GP, Total expenses, Total Determine the % to be
whole balance/ disclosures Equity, NPV - prior periods’ financial revised as a result of few
results applied to chosen BM. factors –
• PBT often used for profit-
For which MS of lesser oriented entities - the period to-date It involves exercise of • Change in
amount than Materiality for • When PBT is volatile, financial results professional judgement. circumstances during
FS others like GP or the audit
revenue may be chosen. - budgets or forecasts for
the current period There is a relationship • New information
Factors affecting between the percentage and
Can be expected to influence available
identification of apt. BM the chosen benchmark.
the decisions of users • Change in auditor’s
• Elements of FS It is then adjusted for –
Same % cannot be applied understanding of entity
• Items having special - significant changes in the for PBT and revenue as a If materiality level reduced,
RPT, Mgt attention from users circumstances for entity benchmark.
Law & Regulations or Applicable FRF auditor consider whether
Remuneration he need to revise
• Nature of entity - Relevant changes in
R&D cost in industry % applied to PBT shall Performance materiality &
Key disclosures in relation to industry normally be lower than %
Pharms • Stage in lifecycle NTE of FAP
- Economic environment in applied to total revenue.
Attention to particular aspect of entity Newly acquired which entity operates
business
• Ownership structure
• Volatility of BM

Chapter 3 –
Audit Evidence & Audit
Documentation

Chapter 3 – Audit Evidence & Audit Documentation CA Katik Aggarwal
Audit Evidence
If T/B/D If T/B/D
Materiality Qty Qty
What is Auditor’s PJ materiality materiality
It refers to Definition
sufficient may be
Sufficient Quantity of
depends upon impacted by Risk of
audit evidence
It should PJ of auditor factors like Material If RMMS Qty If RMMS Qty
Audit Evidence
be misstatement
It refers to Definition
Information used by Size and Char. If large Qty If small Qty
auditor of population
In arriving at conclusions Definition If Hetero Qty If Homo Qty
On which auditor’s opinion Audit

is based Logical procedures AE relevant for one
Relevance It refers to
connection assertion may not be
It refers to with relevant for other
It includes Its assertion
Appropriate Quality of
about
Info contained audit evidence E.g. sale invoice, minute
Other Internal
in A/c records & Sources of AE book, inventory report
information It is E.g. Purchase invoice,
underlying FS External
Reliability influenced confirmation, bank st.
E.g. E.g. by
Minutes of Nature of AE E.g. Sale invoice,
Vouchers, Documentary
meeting Generalisation about reliability of audit evidence purchase invoice
Invoices,
Ledgers, Written • Independent sources → Reliability Characteristics Visual E.g. Inventory count
JE, confirmation • IC effective → Reliability of AE
E.g. Discussion with
IC manuals • AE obtained directly more reliable than AE Oral
Mgt.
obtained Indirectly
• Documentary more reliable than orally
• Original documents more reliable than
photocopied or digitized

Method for Method for

obtaining audit OR performing audit
evidences procedures
1 2 3 4 5 6 7
External Analytical
Inspection Observation Re-calculation Re-performance Inquiry
Confirmation procedures
It involves examination It involves looking into Audit evidences It involves checking It involves It involves study of Seeking information from
of a procedure being obtained by auditor as arithmetical accuracy of plausible relationships
Independent execution
performed by others documents or records. b/w Knowledgeable person
Records & Physical of
Direct written response Both
documents examination Financial Non-financial
from III party It may be done Procedures or controls
It provide evidence data data Financial or non-financial
of assets
Whether about performance of In other
Physically OR Manually That were originally
internal or a process paper electronic media Within or outside
external form performed as part of
the Entity
But limited to the point entity’s internal controls
In paper or of time, when process
It provides evidences It may be
electronic form is being observed
about assertions in Formal written Informal oral
or other media
The act of “being relation to A/c balances Obtain written communication communication
Depending upon & their elements representation
observed” may impact
nature of inspection, it from Mgt/ TCWG Evaluation of inquiry is an
how the procedure is It need not be limited to
may provide evidence important process
being performed account balances. It
about
Responses to enquiry may
Ownership Impairment can also be in relation
provide
to
Existence - Inventory with third New Corroborative Contradictory
party evidences evidences evidences
- Certain transaction
- Terms in agreement Perform Deploy
- Side agreements additional professional
Etc. procedures skepticism

Audit Documentation
Audit Documentation Nature Purpose Factors impacting form, content & Ownership of audit Doc. Retention
• Assist in planning & performing extent of AD
• Size & Complexity of entity As per SQC 1 As per SQC 1
It refers to It provides an audit
record of evidence • Assist in direction, supervision • Identified RMMS
AD is property of auditor Firm to establish P&P
and review • Nature of AP
• Enable ET to be accountable
For That audit • Nature of exceptions identified Auditor may make available For retention of AD
for work
audit audit Auditor’s was planned • Significance of audit extracts to the client
Conclusions • Record of matters of continuing
procedures evidences basis of & performed evidences obtained
reached significance However, take care that it Ordinarily, not shorter than
performed obtained conclusion as per
• Enabling conduct of quality • Audit methodology & tools does not undermine
Also called ‘Working papers’ or control review • Need to document a
‘Work papers’ Law & Validity of work Independence 7 years from date of
SAs • Enabling conduct of external conclusion or basis for a
regulations performed of auditor auditor’s report
inspections conclusion
Changes in AD during final Advantages of Completion

Audit file Assembly of Audit file Completion memorandum
assembly process Memo
It may be defined as Auditor to assemble It doesn’t involve It is summary of • Helpful in review and
AD in AF
Performance Drawing Inspection
Folders or other Complete this admn. process of new audit new Significant matters identified • It assists auditor to support
storage media after audit on timely basis procedures conclusions during audit and justify his conclusion of
& significant matters
In physical or As per SQC-1 Only admn. changes How they were addressed
electronic form may be made • Helps auditor judge
whether overall objective of
Firm to Apt time limit < Example Is it compulsory to prepare?
containing the audit achieved
establish 60 days from No
records of AD for a Deleting Sorting,
specific engagement P&P for this audit report date
superseded collating, cross
documentation ref. WP Also called as
The auditor may include
B AD is not a substitute Signing off
copies of the entity’s records Documenting
Audit documentation summary
U for the entity’s completed
(E.g. Agreements, invoices) discussions
T accounting records. checklist
as part of AD.

Chapter 4 –
Fraud & auditor’s
responsibility

Chapter 4 – Fraud & auditor’s responsibility CA Katik Aggarwal
NAME OF SA: SA 240: The Auditor’s Responsibilities

Fraud Relating to Fraud in an Audit of Financial Statements
Meaning of Fraud What kind of Fraud the Does an auditor need to

auditor is concerned make legal determination
with? of Fraud?
An intentional act
The auditor is concerned No. Auditor may suspect or identify the
with fraud that causes a occurrence of fraud.
by one or more individuals material misstatement in the He does not make legal determination of
among financial statements whether fraud has actually occurred or not.
Management TCWG
Characteristics of Factors influencing
Employees Third parties
Fraud Fraud
involving the use of
deception to obtain an unjust Fraud is
or illegal advantage Fraud is
broad legal Incentive/ Rationalisation
Intentional Opportunity
concept Pressure
The distinguishing Although fraud is
factor between Mgt. is under When IC are weak Some people
a broad legal
Types of Fraud or 2 fraud and error is pressure to achieve and person believe possess attitude,
concept but
types of intentional that of intention. expected results. that they will not be character, values
misstatements caught. that they think
committing fraud is
Misstatement resulting from rational.
Fraudulent
Misappropriation
Financial
of Asset
Reporting
Misappropriation Defalcation of
of goods cash

Fraudulent Financial NAME OF SA: The Auditor’s Responsibilities Relating to

Fraud Reporting (FFR) Fraud in an Audit of Financial Statements
Ways to accomplish Why do Management/ Employees commit FFR often involves management override of controls
FFR fraud? What induces Management/ that otherwise may appear to be operating effectively.
Employees to commit fraud?
Techniques by which
• Financial obligations/ Pressure.
management
Intentional overrides controls
Manipulation/ Misrepresentation/ • Opportunity to commit fraud.
Misapplication of
Falsification/ Intentional
accounting (a) Recording fictitious journal entries, particularly close to the
Alteration Omission • Management’s unrealistic goals.
principles
end of an accounting period, to manipulate operating results
or achieve other objectives
• Dissatisfied Employees or Lack of
Manipulation, Misrepresentation Intentional motivation among employees.
falsification in or intentional misapplication of (b) Inappropriately adjusting assumptions and changing
(including forgery), omission from, the accounting • Name game (E.g. management using judgments used to estimate account balances.
or alteration of financial principles relating power of authority by asking employees
accounting statements of to amounts, to do something illegal).
records or events, classification, (c) Omitting, advancing or delaying recognition in the financial
supporting transactions or manner of statements of events and transactions that have occurred
documentation other significant presentation, or
during the reporting period
from which the information. disclosure
financial
statements are Why manipulation of Ways to commit the (d) Concealing, or not disclosing, facts that could affect the
prepared. accounts is fraud of manipulation amounts recorded in the financial statements.
conducted? of accounts
• to avoid incidence of taxes • Inflating or suppressing purchases and (e) Engaging in complex transactions that are structured to
Manipulation • for declaring a dividend when there expenses; misrepresent the financial position or financial performance
of accounts are insufficient profits • inflating or suppressing sales and of the entity.
• to withhold declaration of dividend other items of income,
even when there is adequate profit • inflating or deflating the value of
• for receiving higher remuneration closing inventory (f) Altering records and terms related to significant and
where managerial remuneration is • failing to adjust outstanding liabilities unusual transactions
payable by reference to profits or prepaid expenses;
• charging items of capital expenditure
to revenue or by capitalising revenue
expenses.

Misappropriation of
Fraud Assets
Misappropriation of
Defalcation of cash
goods
Goods can be
Its not
Suppression of Inflation of Casting wrong
Teaming
Machinery Stationery Inventory cash receipts Cash Payment totals in cash book
They may be misappropriated by 1) Teeming and Lading - - Making payment against

fictitious vouchers
- Amount received from customer 1 is
Management Employees Third party misappropriated.
- Making payment against
- To prevent its detection, money received from vouchers the amount of which
Customer 2 subsequently credited to account of have been inflated
Misappropriation of goods can be avoided by - Customer 1.
- Money received from another customer 3 is - Manipulating wage rolls by
- Record keeping about physical subsequently credited to account of Customer 2. including name of fake workers
quantities or inflating the wage shown in
- This ensures that no amount remains outstanding
for payment for any length of time. books
- Periodic check of records so kept
2) Adjusting unauthorised or fictitious rebates, allowances,
discounts, etc. to customer’ accounts and - Casting a larger total for petty
- Entry restrictions in place where goods misappropriating amount paid by them. cash expenditure and adjusting
are kept (Store/ Godown) the excess
3) Writing off as debts in respect of such balances against
which cash has already been received but has been
- External security arrangement misappropriated.
4) No accounting for cash sales fully
- Intelligent ratio analysis
5) Not accounting for miscellaneous receipts, e.g., sale of
scrap, quarters allotted to the employees, etc.
6) Writing down asset values in entirety, selling them

subsequently and misappropriating the proceeds.

Fraud
Detection of Fraud or
Error – Duty of the
Auditor
1 2 3 4 5 6 7
Reasonable Audit Risk cannot be Inherent Limitations of Risk of non-detection Fraud by Mgt. vs. Professional
Primary Responsibility
Assurance reduced to zero Audit in Fraud vs. Error Employees Skepticism
As per SA 240, the Auditor is responsible Audit risk is inevitable As per SA-200, owing Risk of detecting Further risk of auditor Auditor is required to
primary responsibility for obtaining and cannot be to inherent limitations misstatement from not detecting a MM maintain an attitude of
for the prevention and reasonable assurance reduced by the auditor of audit, there is fraud is higher than resulting from professional
detection of fraud rests that financial to zero even if he unavoidable risk that that from error. management fraud is skepticism throughout
with both those statements are free resorts to 100% some material greater than employee the audit.
charged with from material checking. misstatements will not This is because fraud fraud.
governance of the misstatements be detected even may involve
entity and whether caused by though audit is sophisticated and This is because
management. fraud or error. properly planned and carefully organised management is in
performed. schemes to conceal it. easier position to over-
Management and ride controls
TCWG should place
strong emphasis on 8
fraud prevention. They
Should specify high The subsequent discovery of MMS of the financial information resulting from fraud does not indicate that the auditor has not adhered to the basic principles governing an audit.
punishment on the
detection of the fraud. The liability of the auditor for failure to detect fraud exists only when such failure is clearly due to not exercising reasonable care and skill.
If the auditor can prove with the help of his papers (documentation) that he has followed adequate procedures necessary for the proper conduct of an audit, he cannot be held
responsible for the same.

Fraud Risk
Factors
Fraudulent
Misappropriation of
financial reporting
assets (MOA)
(FFR)
Incentives/ Attitude/ Incentives/ Attitude/

Opportunities Opportunities
pressure Rationalisation pressure Rationalisation
Mgt. is under When IC are weak and Some people possess Mgt. is under It may arise from certain Disregard for the need for
pressure to achieve person believe that they attitude, character, values pressure to achieve characteristics of entity or monitoring or reducing
expected results will not be caught. that they think committing expected results weakness in IC risks related to misapt. of
fraud is rational. assets.
• High degree of • Significant RPT not in ordinary • Known history of violations of • Personal financial Certain Characteristics that • Failing to take apt.
competition or market course of business or with laws & regulations. obligation upon Mgt./ increase susceptibility of MOA remedial action on known
saturation, unaudited related parties EE with access to deficiencies in IC
aloncompetitiong with • Excessive interest by excess cash/ other • Cash → Large amounts • Behavior indicating
declining margins. • A strong financial presence management in maintaining or assets • Inventory → small size & dissatisfaction of EE with
or ability to dominate a certain increasing the earnings trend.
high value (E.g. Jewellery) the entity
• Rapid changes, such as industry sector • Adverse relationship
• Failure of Mgt. to remedy • Changes in lifestyle that
changes in technology, b/w entity and EE with
• Assets, liabilities, revenues, or known significant deficiencies • Easily convertible assets may indicate assets have
product obsolescence, or access to cash or other
expenses based on significant in internal control. (E.g. bearer bonds) been mis-apt.
interest rates. assets. Examples –
estimates that involve Fixed assets → small size • Tolerance of petty theft
• Significant declines in subjective judgments or • interest by Mgt. in minimizing • Known future layoffs (E.g. Computer chips)
uncertainties that are difficult to reported earnings for tax- Inadequate IC/ Weakness in IC
customer demand &
increasing business failures corroborate. motivated reasons. • Recent or
• Inadequate segregation of • Lack of complete and timely
anticipated reconciliations of assets.
• Operating losses making • Significant, unusual, or highly • The owner-manager makes no degradation in EE
duties
complex transactions, that distinction between personal • Inadequate oversight of • Lack of timely and apt.
the threat of bankruptcy. pay or benefits
pose “substance over form” and business transactions. senior management documentation of
• Recurring negative cash questions. • Promotions or expenditures E.g. travel exp. transactions.
flows from operations • Strained relationship between compensation • Inadequate record keeping • Lack of mandatory vacations
• Significant bank accounts or Mgt. and auditor rewards inconsistent • Inadequate system of for employees performing
• New accounting, statutory, subsidiary or branch operations authorization and approval of key control functions.
with expectations
or regulatory in tax-haven jurisdictions transactions • Inadequate understanding of
requirements. with no business justification. • Inadequate physical IT by Mgt., creating
safeguards opportunity for IT EE.

Strained relationship between Mgt. and auditor

- Unreasonable Demand
Unreasonable demands on the auditor, such as unrealistic time constraints regarding the completion of
the audit or the issuance of the auditor’s report.
- Frequent Disputes
Frequent disputes with the current or predecessor auditor on accounting, auditing, or reporting matters
- Restriction
Restrictions on the auditor that inappropriately limit access to people or information or the ability to
communicate effectively with those charged with governance.
- Domineering Mgt. Behaviour
Domineering management behaviour in dealing with the auditor, especially involving attempts to
influence the scope of the auditor’s work or the selection or continuance of personnel assigned to or
consulted on the audit engagement.

Circumstances Relating
to Possibility of Fraud
Problematic or
Discrepancies in the Conflicting or missing
unusual relationships Others
accounting records evidences
b/w auditor & Mgt.
• Transactions that are not recorded in • Missing documents. • Denial of access to records, facilities, • Unwillingness by management to
a complete or timely manner or are certain employees, customers, permit the auditor to meet privately
improperly recorded as to amount, • Documents that appear to have been vendors, or others from whom audit with those charged with governance.
accounting period, classification, or altered. evidence might be sought.
entity policy. • Accounting policies that appear to be
• Significant unexplained items on • Undue time pressures imposed by at variance with industry norms.
• Unsupported or unauthorized reconciliations. management to resolve complex or
balances or transactions. contentious issues. • Frequent changes in accounting
• Unusual discrepancies between the estimates that do not appear to
• Last-minute adjustments that entity’s records and confirmation • Unusual delays by the entity in result from changed circumstances.
significantly affect financial results. replies. providing requested information.
• Tolerance of violations of the entity’s
• Evidence of employees’ access to • Large numbers of credit entries and • Unwillingness to facilitate auditor Code of Conduct.
systems and records inconsistent with other adjustments made to accounts access to key electronic fi les for
that necessary to perform their • receivable records. testing through the use of computer-
authorized duties. assisted audit techniques.
• Missing or non-existent cancelled
• Tips or complaints to the auditor about cheques in circumstances where • Denial of access to key IT operations
alleged fraud. cancelled staff and facilities, including security,
operations, and systems development
• cheques are ordinarily returned to the personnel.
entity with the bank statement.
• An unwillingness to add or revise
• Missing inventory or physical assets of disclosures in the financial statements
significant magnitude. to make them more complete and
understandable.
• Unavailable or missing electronic
evidence, inconsistent with the entity’s • An unwillingness to address identify
record retention practices or policies. ed deficiencies in internal control on a
timely basis.

Reporting of Fraud u/s

143(12) of Companies
Act, 2013.
Fraud involving amount less Fraud involving amount of

than Rs. 1 Crore Rs. 1 Crore or above
Report to the CG in the following

Report to Board/ Disclose in Board’s manner -
Audit committee Report
Within 2 days of knowledge

Immediately but not later Following details To be sent
than 2 days of knowledge TO: Secretary, MCA
Report to Board/ Audit Committee
Report the following • Nature of fraud IN: Sealed cover by
matters with description registered post
Seek reply within 45 days acknowledgement due or
• Approximate
Speed post
• Nature of fraud amount involved
with description Reply received within Reply not received ALSO: send E-mail
• Parties involved, stipulated time within stipulated time
• Approximate if remedial FORMAT: In form of
amount involved action not taken Statement in Form ADT-4
Forward Forward
• Parties involved • Remedial action it should be on letter head of
taken Note containing auditor containing his
Report Board Reply/ His Report
Observation Comments details of report address, email, phone no.
for which no
SIGNED: It should be signed
To CG reply received
by auditor along with his seal
& Membership No.
Within 15 days of receipt of To CG
such reply/ Observation

Q. Auditor is required to If Auditor finds 2 frauds Do provisions of Section Do statutory auditor need to report a
maintain confidentiality as each of Rs. 75 Lakhs, 143(12) apply only to fraud involving 1 Cr or more, if it has
per the code of ethics. therefore totalling to Rs. 1.5 Statutory auditor? already been reported by cost auditor/
If he reports a fraud to the Crore. Will he report it to secretarial auditor to CG?
government, isn’t it a the CG as per Section
No, provisions of Section
violation of his code of 143(12).
143(12) apply mutatis No, if a fraud has already been reported
ethics?
mutandis to the under section 143(12) by cost auditor/
As per Rule 13 of The secretarial auditor,
Section 143(13) Companies (Audit and
safeguards the act of fraud Auditors) Rules, 2014, Cost Secretarial
and the auditor becomes aware of such
reporting by the auditor if it auditor is required to report auditor auditor
fraud,
is done in good faith. the matter to CG
How much Fine if not he need not report the same
only if the fraud involves complied?
It states that no duty to individually an amount of since he has not per
which an auditor of a Rs. 1 Cr or more. se identified the suspected offence of
company may be subject to Minimum = Rs. 1 L
Maximum = Rs. 25 L fraud.
shall be regarded as having Therefore, no reporting to
been contravened by CG will be required in this However, the auditor should review the
reason of his reporting the case. steps taken by the mgt./ TCWG in this
matter above if it is done in case.
good faith.
He is satisfied If he is not satisfied
State reasons for

dissatisfaction in writing
& Request mgt. to perform

additional procedure to his
satisfaction.
Auditor Mgt. fails within 45

satisfied days of request
Auditor should
evaluate whether
he should report to
CG or not.

CARO = Companies
Reporting of Fraud Auditor’s Report Order
under CARO
Auditor procedures
Clause Clause (x) of Para 3 & reporting under
CARO
What kind of fraud By the Company
to be reported By officer
On the Company Auditor shall
By Employee Discuss with Obtain
Noticed/ Reported/ Only Noticed or reported frauds
Suspected Other Management Other WR from Mgt.
Not suspected frauds
members of Employees that
Facts to be reported Nature of Fraud Parties involved audit team including
officers It acknowledges It believes that It has disclosed
Amount of Fraud Remedial action
its responsibility effect of any
Susceptibility If they are aware of uncorrected MS Facts related to Results of its
Does this clause No, it does not of Company any fraud noticed/ For accounting any fraud assessment of
relieve the auditor relieve the auditor to MMS from reported or and ICS known to Mgt. risk that FS
of its duty to Fraud suspected may be
is immaterial for
consider fraud in He is still required to misstated due
For prevention/ FS as a whole
audit of FS comply with SA 240. to fraud
detection/
Examine
correction of
Can auditor consider Yes, auditor may fraud or error
the principle of consider the Further, a
materiality while Reports of Minutes of summary of such
materiality of
reporting fraud in Internal audit items should be
principle as per SA
CARO Auditor committee included in WR
320.
Minute book
of board
This WR is important because Mgt. is
meeting
responsible for adjusting FS to correct MMS
If management We do not agree that

Management
believes that certain items constitute
may want to
uncorrected MS are misstatements
following words
not MS at all. because “reason”

If auditor concludes that it is

not possible to continue the
engagement
Due to MS resulting
from fraud
The auditor shall
Report Withdraw
Consider professional Consider possibility

or legal responsibility to of withdrawing from
report the fraud to engagement
Person who made Regulatory If withdrawing

the appointment authorities
Discuss withdrawal Consider prof./ legal

with apt. level of responsibility to
Mgt./ TCWG report withdrawal to
Person who made Regulatory

the appointment authorities

Chapter 5 –
Audit in Automated
Environment

Chapter 5 – Audit in Automated Environment CA Katik Aggarwal
Audit in automated environment

Basics
Key features of Certain situations

Meaning of automated
automated where IT will be
environment
environment relevant to an audit
It refers to a business • No manual intervention • Increased use of systems and

environment where application software in business
(E.g. ERP)
• More system driven
processes operations
• Complexity of transactions has
• Complexity of business increased (Multiple systems/
accounting decisions environment depends upon the network)
level of automation
are carried out by using • Hi-tech nature of business
computer systems. • More automation means more (Telecom, e-commerce)
complex business environment.
It is also known • Volume of transaction is high

• E.g. ERP makes the
business environment
Information • Company policy (Compliance)
Information complex. Off-the shelf
Technology
systems accounting software makes
systems
the environment less • Regulatory requirements
complex (Companies Act 2013 – IFC, IT
act, 2008)
• Requirement of Indian and

International standards (ISO,
PCI-DSS, SA 315, SOC, ISAE)
• Increases efficiency and

effectiveness of audit


Basics
Points to be considered for

understanding of automated environment
Auditor shall obtain understanding of automated environment as per SA 315 -
Info Version Purpose Location Architecture Interfaces In-house Outsourced Key In-
Systems [Local vs. within vs. activities persons scope
global] systems package
SAP ECC 6.0, Accounting, Texas, USA Client/ Server, Paymaster Packaged CIO, Yes
EHPS supply chain , Unix AIX 5.3, Administrat
production MS-SQL Server ors
2008
PayMaster 5.3 Payroll Gurgaon, Web based, SAP, accent Packaged Payroll Yes
India windows, processed at
Apple, Oracle ADP Limited
11g
Accent 2 Appraisal Hyderabad, Lotus Notes, Paymaster In-house No

India Windows
Budget King 1 Management Hyderabad, Web-based, None In-house No
MIS budgeting India Windows,
Apache,
Oracle 11 g
The understanding of a company’s IT environment should be documented as per SA 230 – Audit Documentation using any standard
format or template.


IT Specific risk
Whether IT specific Impact of IT

Does automation Examples of IT risks are relevant specific risks on
leads to risks? specific risks for audit of financial substantive audit,
statements controls & reporting
IT systems and automation benefits • Inaccurate data processing In audit of FS, primary focus is on The above risks, if not mitigated, could have an impact on audit in different ways.
the business by making operations the risks associated with the
• Processing of inaccurate data
accurate, effective, reliable and financial reporting.
efficient. • Unauthorized access to data Impact on Substantive audit Impact on Controls Impact on Reporting
However, there could be non-audit
• Excessive access/ privileged
However, they introduce certain new engagements in the nature of
access to data(super users) We may not be able to Cannot rely on Communicate the
risks called as IT specific risks. rely on data obtained automated controls and
• Loss of data • Internal audits deficiency to the TCWG
from systems where risk procedures built-in
• IT audits +
Auditor should identify & understand • Direct data changes (backend exists application
• Pre-implementation audits
such risks that arise from IT systems changes)
in compliance with “SA 315 –
• Data migration audits + + Due to regulatory
requirement to report on
• Unauthorized changes to • Third party assurance System data needs to Cannot rely on IT
Identifying and assessing the risks of systems or programs. Internal Financial
material misstatement through be thoroughly tested dependent manual Controls
For which IT risks may be relevant.
understanding the entity and its • Failure to make necessary for controls
environment for detailed changes to systems or
understanding” and programs
Further with introduction of + Auditor may be required
Companies Act 2013, there is Accuracy Completeness Auditor shall be to modify the report
• Lack of aggregate greater emphasis given to internal + required to perform
respond to such risk in compliance segregation of duties financial controls (IFC). additional procedures
Auditor shall be
with SA 330.
required to perform
Therefore, auditor responsibility
additional procedures
includes reporting on the IFC which
also includes understanding IT
environment of the company along
with relevant risks and controls.


Types of Controls in
automated
environment
General IT Control
Meaning Types of General IT Controls Purpose
General IT Controls Application System To To

Types of General
are the Data Center and Network Operations Program Change Access Security acquisiton, development support mitigate
IT Control
and maintenance
Policies & procedures Objectives To ensure that production systems To ensure that modified systems To ensure that access to To ensure that systems are
are processed to meet financial continue to meet financial programs and data is developed, configured and Functioning of IT specific
reporting objectives. reporting objectives. authenticated and implemented to meet application risks
That That control
& authorized to meet financial financial reporting
relate to support
reporting objectives. objectives.
Other names of
Many functioning of Activities to be - Management – Overall - Change Management Process – - Security Organisation and - Overall management of General IT Control
applications application performed in each management definition, roles & responsibilities Management development activity
control type - Batch Jobs – Preparing, Scheduling, - Change Requests – record, - Security Policies and - Project initiation These are implemented
They apply to mainframe, performing manage, track Procedures - Analysis and Design commonly across Multiple
mini-frame and end-user - Backups – Storage and retention - Making changes – Analyse, - Application security - Construction IT systems, applications
environments - Performance Monitoring – of OS, design, develop - Data Security - Testing and quality and business processes.
database, network - Test Changes – Test plan, test - Operating System Security assurance
- Recovery from failures – BCP, DRP cases, user acceptance testing - Network Security - Data conversion
- Help Desk Functions – record, - Apply Changes – in production - Physical Security - Go-live decision Hence these are also
monitor, tracking - Emergency & Minor changes - System Administration - Documentation and known as ‘Pervasive’
- Service level agreements – - Documentation – User/ Technical and privileged accounts training controls or ‘indirect’
monitoring, compliance manual (super users, sysadmin, controls
- Documentation – service manuals, - User Training DBA)
service reports


Types of Controls in
automated
environment
Are application controls and IT Relationship between General

IT Dependent
Application Controls dependent controls dependent IT Control and Application
controls
upon General IT Controls Control
Application controls These are manual Application controls These two category of controls of IT
include both controls that make and IT dependent systems are inter-related.
use of the controls are inherently
dependent upon the
Automated Manual General IT controls are required to
General IT Controls for
application application Data, information or support functioning of application
their effectiveness and
controls controls report controls
reliability.
These are It includes Therefore, it requires Both are required to ensure
embedded Manual control Produced by IT system & complete and accurate processing
applications. general IT Controls to
into IT over the be effective. of information through IT Systems.
applications application &
Design and effectiveness
Helping to Example – of such controls depends
ensure Pen-drive to upon
access the
Completeness application
Reliability of source data
Accuracy
Integrity
Of data &
system.


Testing Methods in
automated
environment
Concluding about
Different types of audit Most efficient &
Methods of testing effectiveness of
test effective audit tests
controls
1 Inquiry is most efficient but least • Understand (Inspect, Inquiry, Using the aforementioned
• Inspection effective. Observation) how automated test, auditor should test the
Define in the similar manner
transaction is processed by doing a existence and efficiency of

Hence, inquiry alone is not sufficient. walkthrough of one transaction end to General IT Controls
end.
Hence, inquiry should always be
• Inquiry used one or more of other tests.
• Observe how a user is processing
General IT General IT
transaction under different scenarios General IT
2 Re-performance is most effective as controls are not
controls are in controls are in
audit test. existence but not existence &
• Inspect the configuration defined in the in existence
• Re-performance opr effective effective as well
However, it can be very-time application
consuming and therefore least
efficient. • Inspect the user manual/ technical
manual
• Observation 3 Applying inquiry with inspection
Evaluate the
gives the most effective and efficient • Inspect the system logs to determine
impact of IT risks
audit evidence. changes made since last audit testing.
Which audit test to use, to what High Low &
extent and at what point of time is a • Carry out a test check and observe the plan alternative
matter of professional judgement Inquiry error message displayed by the procedures
application
+
Effectiveness
The auditor should document the Observation • Conduct re-performance using raw-data In order to rely
Efficiency
nature of test applied, along with the source and independently applying on system based
judgements as per SA 230. formulae information
Inspection
Reperformance
Low High


Internal Financial
Controls
Importance of IFC as Responsibility of

Audit approach for
Meaning per Companies Act, directors and
IFC
2013 auditors
As per Section 134((5)(e) The Companies Act, 2013 has placed a great Directors/ Management Next Page
of Companies Act, 2013, emphasis on IFC. The table below gives a summary of Directors and Mgt. have the
the requirements of the Act. primary responsibility of
Internal Financial designing, implementing &
Controls are Who is maintaining an effective internal
Reference Applicability
responsible controls framework
the policies & procedures Section BoD Listed Companies
adopted by the company 134(5)(e) Auditor
for : Rule 8(5) of BoD All Companies
Companies Auditors are expected to
(Accounts) evaluate, validate and report on
Rules the design and operating
Section 149(8) Independent All Companies effectiveness of internal financial
Orderly & Safeguard Completeness, Timely Prevention or & Schedule IV Directors having controls.
efficient of assets integrity & preparation detection & Independent
conduct of accuracy of of reliable correction of directors
business accounting financial fraud & Section 177 Audit All Companies
records information errors Committee having audit
committee
Business Assets BOA Financial Prevention Section Statutory All Companies
or detection 143(3) auditors
& correction
of fraud &
errors

Audit approach for

IFC
Risk Understand & Test for

Assessment evaluate operating Reporting
effectiveness
• Identify significant • Document • Assess Nature, Timing • Evaluate Control

accounts and understanding of & Extent (NTE) of efficiencies
disclosures business processes Controls testing
using flowcharts/
narratives • Significant deficiencies,
• Qualitative & • Assess reliability of material weaknesses
quantitative source data;
considerations • Prepare risk and control completeness of
matrices (RCM) population • Remediation of control
weaknesses
• Relevant financial
statement assertions • Understand design of • Testing of key reports
controls by performing and spreadsheets • Internal Controls Memo
(FSA)
walkthroughs of end-to- (ICM) or Management
end process Letter
• Identify likely sources of • Sample testing
misstatement
• Process wide • Auditor’s report
• Consider competence
considerations for Entity
• Consider risk arising and independence of
level controls,
from use of IT system staff/ team performing
segregation of duties
controls testing.
• IT General controls and

application controls


Data Analytics for
Audit
Suggested
Meaning of Data How do CAAT help
approach to benefit
analytics auditor (Benefits)
from CAAT
Processes, tools and • Testing completeness of

techniques data and population to be
Understand
used in TOC, SAP
business Define the Objective Identify Source &
used to tap the electronic environment and Criteria format of data
data • Audit sampling including IT
to obtain meaningful • Re-computation of
information out of the balances
same
• Re-performance of Verify the
is called data analytics. calculations – Apply criteria on completeness &
Depreciation, interest etc.
Extract Data
data obtained accuracy of
Companies use Auditors can use such extracted data
such tools & tools & techniques • Analysis of Journal Entries
techniques as per SA 240
In their audit for
For their business analyzing data in • Fraud investigation
operations electronic form to Report & document
obtain audit findings Validate and confirm results and
• Evaluation of Control
deficiencies results conclusions
Such tools & techniques [SA 230]
are also termed as CAAT
Example - Spreadsheets,
IDEA, ACL etc.


Assess & report audit
findings in IC
Some points to be Approach to assess Reporting of audit Next Page

Control Deficiency
considered audit findings findings
It means
Are there any weaknesses Does the finding/ exception Approach to assess audit findings in controls is same whether
in IT controls? result in control deficiency the audit is conducted in automated environment or manual
Either Or not No
Control is operating environment.
What is the impact of Yes
missing effectively
these weaknesses on Audit findings may be assessed individually or in aggregation
Report to Management
overall audit? with other findings/ deficiencies.
To prevent or
detect & correct Report deficiencies to
a MS in timely management – Internal Evaluate likelihood and Is it a significant deficiency Communicate in writing to
manner. Controls Memo or magnitude of deficiency or material weakness Yes TCWG
Management Letter.
Can we test compensating
Communicate in writing controls, if any Yes
any significant
deficiencies to TCWG No
Can we obtain evidence of
other mitigating factors
Yes
No
Is there an impact on
Additional audit evidence Assess impact on opinion
automate control or IT
Yes may be required and audit report
dependent controls
No Document results of
assessment & thought Conclude
process in audit file


Assess & report audit
Some definitions
findings in IC
Reporting of audit
findings Material weakness or
Segregation of duties Privileged access Direct data change
significant deficiency
Password resets should be supported with proper request. A Control deficiency A type of internal A type of super user A backend
control that is access to information modification that is
Objectives As per Information Security Policy User Access changes implemented in a systems that made directly to data
In internal controls
should be initiated and approved. However, we observed company
that there is no formal process being followed for password enforces less or no that is stored in a
That is important to prevent two or limits on using that database
reset in SAP. enough to merit the more conflicting system.
Password reset requests are presently communicated over attention of TCWG functions bypassing business
phone and there is no supporting documentation being rules built-in to a
Since there is
maintained for password reset requests. reasonable
from being assigned software.
to same person.
[Ref Information Security policy sub-section no.........] possibility that
Exposure Passwords of User ID with critical privileges may be reset
and misused. the resultant MMS
will not be prevented
Recommendations It is recommended that all password resets should be or detected and
requested through a formal process. corrected by mgt. on
Adequate supporting documentation should be maintained timely basis
for user changes in SAP, including password resets, and
reviewed periodically.
Management Comments
response

Chapter 6 –
Audit Sampling

Chapter 6 – Audit Sampling CA Katik Aggarwal
Audit Sampling
What is audit sampling? What is Sampling Unit? Types of Sampling? Sampling related risk
Application of audit procedures Individual items that make up
the population are known as Statistical Non-statistical
Sampling Risk Non-sampling risk
To less than 100% of items sampling units. Sampling Sampling
within a population of audit
Risk that auditor’s conclusion Risk that auditor reaches
relevance This approach It does not have
based on sample erroneous conclusion
to sampling has characteristics of
Such that all the sampling units the following random selection
have a chance of selection characteristics - May be different from conclusion for reason not related
Use of if entire population was subject to sampling risk
Random to same audit procedures
in order to provide the auditor Use of Probability
Random selection
with a reasonable basis Probability Theory
selection
Theory Types of erroneous conclusions Sources of non-sampling risk
to draw conclusion about entire Sample size & its • Relying on erroneous
To Measurement Test of Controls are Controls
population. composition are determined information
evaluate of sampling Control more are less
on the basis of
sample risk effective than effective • Applying audit procedures
What is Population? results Personal Knowledge of they actually than they not appropriate to the
The Entire Set of Data experience auditor are actually are objectives of audit
Advantages of Statistical Sampling Test of MMS don’t MMS exist • Human mistake
From About which Details exist when in when in
• Testing size does not increase with the This method was in • Misinterpreting the sample
which auditor wishes fact it does fact it does
size of the universe (universe). common application results
sample is to draw not
because of its simplicity
selected conclusion • The sample selection is more objective
Characteristics of Population and thereby defensible.
• It provides means of estimating the Auditor primarily concerned with It affects audit efficiency
Completeness Appropriateness Reliable minimum sample size associated with these type of erroneous as
a specified risk and precision. conclusions because it would require additional
Population Population Population work to establish that initial
to include from which from which • It provides means for deriving a it affects audit effectiveness conclusions were incorrect.
all the sample is sample is ‘calculated risk’ and corresponding
relevant drawn should drawn should &
precision.
items. It be be accurate is more likely to lead to
should be appropriate • It may provide better description of a inappropriate audit opinion.
complete. large mass of data than a complete
examination of all the data.

Audit Sampling
Sample Design Sample Size Sample Selection
When designing an
Test of Controls [NEXT PAGE]
audit sample, auditor
Considering
shall consider,
characteristics of the Sample
Factors
population, auditor Size
Purpose of the Characteristics of may decide to use
audit procedures population Increase in the extent to which the auditor’s risk assessment takes
Value-weighted into account relevant controls.
Stratification
It involves making selection
It involves clear Increase in the tolerable rate of deviation
understanding of an assessment of Increase in expected rate of deviation of the population to be
what constitutes a expected rate of In it, auditor divides In it, specific
the population into monetary items are tested
deviation deviation / MS
sub-population (each selected within the Increase in the auditor’s desired level of assurance that the
called as Stratum) population tolerable rate of deviation is not exceeded by the actual rate of
For For deviation in the population.
TOD TOC on the basis of One benefit of this Test of Details
characteristics of approach is that
If expected rate If expected rate population audit effort is
of MS is of deviation is Sample
directed to large Factors
unacceptably unacceptably Size
Such that each value items
high high An increase in auditor’s assessment of RMMS
stratum has similar
characteristics. Increase in use of other substantive procedures directed at the
Because they have same assertion
Auditor may Auditor may greater chance of
decide 100% decide not to Increase in auditor’s desired level of assurance that tolerable MS
Example – selection & can is not exceeded by actual MS in the population
examination perform TOC Population may be result in smaller
or use of stratified on the basis sample size An increase in tolerable misstatement
large sample of monetary value An increase in amount of misstatement the auditor expects to find
size
in the population
Example – Debtors Stratification of the population when appropriate
may be stratified on
the basis of age In case of large Actual population For small populations,
population, size has little impact Sampling may not be
on sample size. efficient

Audit Sampling
Sample Selection
methods
Systematic selection Haphazard Monetary unit

Random Selection Block Sampling
or Interval Sampling sampling sampling
In it population size is Example This method involves
Auditor selects sample It is a type of value-
It involves use of random number table or random divided by Sample size to Units in population = 1000 selection of a block(s)
without following weighted selection
number generator. arrive at sampling Sample size = 50 of contiguous items
structured technique. in which sample
interval. Sampling interval = Example - from within the size, selection and
1000/50 = 20 Avoiding diff. to population.
All items have equal chance of selection. Auditor should avoid evaluation results
locate items in a conclusion in
Starting point may be Example conscious bias
Always choosing Example – Selecting monetary amounts
determined haphazardly. Out of first 20 items, one 1st or last item all invoices of Sept
It is apt. when population (sub-population) consists of
is selected haphazardly or He should ensure that month.
reasonably similar units.
using random number all items should have Or selecting first 50
But to make sample truly
table or random number equal chance of items on every page of
random, start point may
Simple random generator selection sales book
Stratified Sampling be determined using
sampling random selection.
It cannot ordinarily be
Each unit of the whole In it, the population is It is not apt. when using used for sample
Make sure that sampling Example
population has an divided into few separate statistical sampling. selection
units are not structured In population of branch
equal chance of being groups call Strata on such that similar units fall sales, particular branch
selected. basis of characteristics at an interval. Otherwise, sale occurs as 100th item Because items in
this method is not correct. sequence are
Items may be selected by - Each stratum is expected to have
treated as separate similar characteristics
To minimise the impact,
Using random Picking no. population.
more than 1 starting point
No. table randomly from may be chosen.
drum Certain percentage of
It is simple items are selected
and ensures from each stratum.
that bias does
not impact
selection.

Audit Sampling
Nature and cause of
Performing audit Projecting Evaluating results of
deviation &
procedure on sample Misstatement audit sampling
misstatement
If auditor finds that In extremely rare For For

Auditor shall perform audit For For
many deviations/ cases TOD TOC
procedures on each item TOD TOC
MMS have
selected
common features He may find that
deviation/ MMS Auditor shall No explicit Unexpectedly high Unexpectedly high
If auditor is unable to E.g. When voided is anomaly project MS projection is misstatement rate deviation rate
perform procedure on Cheque is selected He may decide to
while testing found in sample necessary
selected item, he shall identify all items
evidence of payment Obtain high degree May cause auditor to May lead to increase
perform it on replacement having such As
authorization. of certainty that This is to obtain believe that class of in assessed RMMS
item. common feature Sample
such Deviation/ broad view of transaction is materially
MMS is not scale of MS deviation rate misstated
E.g. When He may find that
If auditor is unable to apply representative of =
documentation
designed audit procedure such MMS/ population projected
relating to selected Projected MS + Anomaly
item has been lost Deviations are When MS deviation rate
intentional and thus & doesn’t impact established is the best estimate of misstatement in the
Or indicate fraud. as anomaly population for the auditor.
remainder of
E.g. Examination of population
Unable to apply suitable It should not be
subsequent cash If (Projected MS + If (Projected MS +
alternative procedure to receipts when no
included while
By performing projecting MS anomaly) exceed anomaly) exceed
selected item, reply received for EC
additional tolerable MS expected MS
procedures
Auditor shall treat that item However
Auditor may Auditor may
as
its effect shall still conclude that conclude that
be considered.
sample doesn’t there is unexpected
Misstatement Deviation
When population is provide reasonable sampling risk that
divided in strata, the basis of conclusion actual MS exceed
In case of TOD In case of TOC MS is projected for tolerable MS.
each stratum
separately. In such case, In such case,
auditor shall auditor shall
perform additional perform additional
Anomaly - An exception [Galti se hone wali Galti] procedures procedures

Chapter 7 –
Audit Risks

Chapter 7 – Audit Risks CA Katik Aggarwal
Audit Risk = Risk of Material Misstatement (RMMS) x Detection Risk

Audit Risk = RMMS [ Inherent Risk x Control Risk ] x Detection Risk
Risk that auditor gives Risk that FS
are materially The risk that Transaction The risk that Either The risk that
inappropriate audit
opinion misstated prior or individually
to audit an assertion about Balance a materially misstatement or Procedure performed to reduce audit risk to
when the financial or in aggregate acceptably low level
statement are Disclosure Transaction
Either
materially misstated. or
individually
could be materially misstated in an assertion about Balance Will not be able to detect
or
in aggregate or
Disclosure Either
before consideration of any related controls will not be prevented or detected & corrected individually
Material misstatement or
that exists in aggregate
on timely basis by entity’s internal controls
Audit risk does not include 1. It may exist 1. Auditor cannot control this risk. Auditor cannot control this risk. Auditor can control this risk.
at 2 levels -
• Risk that auditor might
express opinion that FS 2. Inherent risk is higher for some assertions Control risk depicts how effectively
• Overall FS level the ITC are designed, implemented
are materially misstated and related classes of transactions, account
when in-fact they are and maintained by the
• Assertion level for balances, and disclosures than for others.
not. management.
For example, it may be higher for complex
• It is different from T or B or D calculations. Internal controls are subject to
business risk such as inherent limitations.
risks of loss from 2. It is assessed to Inherent risk factors are considered while
litigation, adverse determine NTE of designing tests of controls and substantive Accordingly, Internal control can
publicity etc. FAP to obtain procedures. only reduce but not eliminate risks
SAAE of material misstatement in the
Assessment of audit risk is financial statements.
a matter of professional
judgment.

Chapter 7 – Audit Risks CA Katik Aggarwal
Significant risk
Significant risk Matters to be considered in

Meaning
often relates to judging which risks are significant
An identified and assessed Significant Significant (a) Whether the risk is related
RMMS that, non-routine Judgmental to fraud;
transaction matters
in the auditor’s judgment, (b) Whether the risk is related
Transactions Development of to recent significant
requires special audit that are unusual accounting developments [E.g. GST]
consideration. due to estimates
(c) The complexity of
nature transactions;
size For which there
is significant (d) Whether the risk involves
And therefore measurement significant transactions with
occurs uncertainty related parties;
infrequently
(e) The degree of subjectivity/
RMMS may be high for SNRT RMMS may be high for SJM uncertainty in the measurement
arising from following matters – arising from following matters- of financial information related
• Accounting principles for to the risk
• Greater mgt. intervention to
specify A/c treatment accounting estimates or (f) Whether the risk involves
revenue recognition may be significant transactions that are
• Greater manual intervention for outside the normal course of
subject to diff. interpretation
data collection & processing business
• Required judgment may be
• Complex calculations or
subjective or complex or
accounting principles
require assumptions

Chapter 8 –
Audit Procedures

Chapter 8 – Audit Procedures CA Katik Aggarwal
Audit Procedures
Risk Assessment Procedures Further Audit Procedures
Definition Describe various RAP performed by auditor It is designed & performed in response to
Audit procedures performed RMMS identified & assessed in SA 315

Analytical Observation
Inquiry
To obtain understanding of procedures & Inspection
Most of information Definition It may support Test of controls Substantive
Entity Its environment
obtained by auditor is AP performed as inquiries from procedures
Including ICs from Inquiry of Mgt & RAP may help in Mgt/ others and Substantive
To identify and assess RMMS TCWG. identifying RMMS provide relevant Test of Details analytical procedures
Though, auditor can information Definition
At FS level & assertion level inquire others as well It may provide Example –
For the purpose of identifying and auditor with broad Observing &
assessing RMMS, the auditor shall Internal audit initial indication. inspecting
personnel
- Entity’s
Assess the Finance Dept. Auditor may evaluate
Identify operations
identified Employees results of such AP
Risk - Documents
risk with help of other
In-house legal - Mgt reports
counsel information obtained
- Entity premise
Consider Relate Mkt & sales
the identified personnel What are the matters which auditor
likelihood of risk to
Personnel of risk consider to obtain understanding of entity,
MMS WCGW
its environment, including ICs.
mgt. dept.
RAP obtain evidences about operating
effectiveness of IC or MMS in T/B/D? IT personnel
Yes, RAP may provide it even though
it is not performed as TOC/ SP Do RAP provide
Do RAP assess RMMS only due to SAAE?
fraud? No, RAP is meant
No, it may identify RMMS due to fraud to identify RMMS.
or error. It may provide AE
Obtaining understanding of entity & its
Can auditor perform TOC & SP but not sufficient
environment is continuous & dynamic
concurrently with RAP? enough to conclude
process & continues throughout the audit.
Yes, because it is efficient to do so an opinion.

Test of Controls
Definition NTE of Test of Controls For using audit evidences about OE of

IC obtained during
Audit procedure designed &
performed to evaluate NATURE of test of controls Matters considered in TIMING of TOC
Auditor shall determining the EXTENT of TOC
Auditor shall test Interim Previous
Operating effectiveness of IC in audit audit
• Frequency of performance of the controls for
Preventing Correcting Controls by entity
Perform other Determine whether Obtain AE about Establish whether
Detecting • Length of time for which Particular Throughout
AP with Inquiry controls to be tested significant evidences
MMS at the assertion level auditor is relying on OE of time the year
depend upon other changes in control continue to be
controls
controls subsequent to relevant
To obtain AE about • Expected rate of deviation
Auditor shall perform TOC when - (Indirect controls) For which auditor interim period
OE of controls, from controls
including intends to rely on About any
• Relevance and reliability
Auditor shall perform TOC, when - these controls Determine significant
If yes [Aptness / Quality] of audit
The additional audit changes in
How the evidence to be obtained
consistency evidence to be controls
Auditor expects the SP alone controls Whether there regarding OE of controls
with which obtained for the subsequent to
ICs to be operating cannot provide is need to obtain • Extent of evidence obtained
By whom they remaining period audit
effectively SAAE at SAAE about OE from test of other controls
and what
assertion level of these indirect related to same assertion
means they
Auditor intends to rely controls
on OE of controls in No changes Changes are
were applied Factors that warrant How to determine relevance of such
determining NTE of are there there
retest of controls controls?
SP • Deficient control environment • The effectiveness of other elements of IC
• Deficient monitoring of controls Test all controls Test controls
• Risk arising from Characteristics of the
control at least once in current
Do MMS identified during SP indicate Communicating material • Significant manual element to the
lack of OE in IC? weakness to Mgt. & TCWG every 3 years year as well
relevant controls • Effectiveness of general IT-controls
Yes, auditor should evaluate whether Auditor shall communicate • Deficient general IT control • The effectiveness of the control and its While testing some
it indicates any material weakness in deficiencies in IC, significant • Personnel changes that application by the entity including whether controls every year
IC deficiencies in IC/ material significantly impact the application there have been personnel changes that to avoid testing all
weaknesses in IC to of control significantly affect the application of the
BUT in single year
control
• Changing circumstances that
Absence of MMS does not provide TCWG Mgt. indicate the need for changes in • Whether lack of change in particular IC poses
evidence that the related controls are the controls risk due to changing circumstances
effective As per SA 265 & SA 260

Substantive procedures
Procedure designed to
Preventing Correcting
Detecting
MMS at the assertion level
Can auditor skip SP if he doesn’t What factors impact the Factors impacting Extent of What combination of substantive
identify any RMMS? DESIGN of SP? TOD? procedures auditor may use?
Depending upon circumstances,
No, auditor has to Following are the factors - When results from the TOC are
auditor may perform
compulsorily perform SP unsatisfactory, the auditor may
because need to increase the extent of
Nature Nature of SP. Only Only Combination
Risk ICs have of Risk Assertion SAP TOD of SAP &
assessment is inherent In designing test of details, the TOD
judgmental limitations Example extent of testing is ordinarily
thought of in terms of sample
So, auditor Including Existence Completeness size. Substantive procedures relating to
may not management assertion assertion
identify all override
RMMS FS closing Significant Presentation
We have to We have to
process risk & disclosure
pick items pick items
contained in expected in
FS FS Examining If auditor finds an
Reco. of financial Perform
statement with material Journal assertion with procedures that
underlying entries & other Significant risk overall
records adjustments presentation of
made during He shall perform FS is as per
prep. of FS procedures applicable FRF
responsive to
Further, auditor documentation
that risk
should demonstrate
How FS reconcile with underlying

accounting records

Chapter 9 –
Analytical Procedures &
External Confirmation

Chapter 9 – Analytical Procedures & External Confirmation CA Katik Aggarwal
Analytical Procedures
Meaning of analytical procedures? Purpose of Analytical procedures Relevance of analytical procedure for PSU?
It means
Evaluation of financial information 1 Relationship b/w Financial & non 3 However, other relationships
Analytical procedures help in checking reasonableness of data
financial data applied in case of may be relevant.
business entities
Through analysis of plausible Analytical procedures are used for the following purpose - Example –
relationships among Cost per KM of construction
May not always be relevant in case
of No. of vehicles retired vs.
Non- purchased
Financial
financial
data Planning Performing Conclusion
data. Government Other non-
entities business entities
It includes comparisons of
Example – Revenue & profit
entity’s financial information with It assists auditor in related ratios may not be relevant
It helps in concluding
in the end
Planning the It helps 2 Further, industry data/ statistics may
Understanding
NTE of other auditor in not always be available in case of
Comparable Anticipated Similar client whether FS are
procedures obtaining public sector
info. for results for industry business consistent with
Identifying evidences
prior period current period information auditor’s Example –Railways
areas of using SAP
understanding of the
potential Techniques for SAP
entity
It includes consideration of relationship risks
Among Between Trend Ratio Reasonable Structural

Planning Testing Completion Analysis Analysis ness test Modelling
Elements Non- Stage Phase Phase
Financial
of Financial information financial We check It relies on non-
Relationship of It involves
information information whether financial data
various constructing
Timing of Analytical procedures current data elements of FS for audit statistical
That give moves in line are checked period. model from
predictable trend with help of prior period to
patterns E.g. Increase
established by trend analysis predict current
in occupancy
previous account
rate should
balances balances.
lead to
increase in
revenue

Analytical Procedures
Develop an Determine acceptable
Determine suitability of
Evaluate the reliability expectation of difference b/w
particular SAP for a
of data recorded amounts or recorded amt and
given assertion
ratios expected value
SAP more suitable for large Reliability of data is Using the data
Expectations developed
volume of data that tends to influenced by its accumulated in Step 2,
using SAP cannot
be predictable overtime. the auditor shall develop
exactly match with the
the expectations.
Source Nature Circumstances recorded amount.
Suitability depends on in which it is
auditor’s assessment of obtained The auditor shall ensure that
the expectation developed is The auditor should Investigating results of
how effective it will be in Factors which are relevant when determining
sufficiently precise therefore, determine analytical procedures
detecting MMS whether data is reliable for SAP or not acceptable difference
between recorded
For this, auditor shall
Different types of analytical • Source of data amount & expected
consider the following value If AP identify
procedures provide diff. Internal/ External/ dependent/ independent matters fluctuations or
level of assurance
• Nature and relevance of data inconsistent
Predictability relationships
Budget → Goal or expectations
Suitability is also influenced Accuracy with which result of
by • Comparability of information available SAP can be predicted The auditor should
Adjustments to be made to data E.g. Sales commission more enquire the
Nature of RMMS predictable than advertisement management about
• Controls over preparation of information exp reason for the same
assertion assessment
Controls over prep of budget Availability
Availability of financial & non-
financial information IF Mgt. IF Mgt. IF Mgt.
E.g. Employees hours data, provides no provides provides
budgets etc. may or may not be response inadequate adequate
available response response
Disaggregation
Degree to which information Evaluate the
can be disaggregated Perform alternative response obtained
E.g. Different GP ratio for each procedures from the
product instead of single management
blanket rate

Analytical procedure
Factors to be
considered while
applying SAP
Nature of
Availability of data Disaggregation Account type Source of data Predictability Inherent risk
assertion
or
Availability of reliable Degree of disaggregation SAP are more useful Source of data is SAP is useful for SAP may be more
What Could go
and relevant data will available in data can for certain account another important predictable data relevant for some
Wrong?
facilitate effective directly affect the degree types than for others factor to be considered only. assertion than for
procedures of its usefulness in while applying SAP others Amount of inherent
detecting misstatements. E.g. risk is also relevant
Example- E.g. Sales Example – It is
factor in applying
Income Are more Balance commission more suitable for
Independent/ dependent SAP.
It is important if the statements predictable sheet predictable than completeness,
auditor wants the result of items than items Internal/ External advertisement exp valuation, occurrence.
If Inherent risk is
analytical procedures to
high or significant,
be sufficiently precise As they reflect While they SAP alone may not
accumulated reflect net effect be appropriate and
transactions of transactions needs to be done
over a period at a point of time with TOD

External As direct In paper or

Audit Obtained by From III Procedure for external
written Electronic or
evidence auditor party confirmation
Confirmation response other media
Determine
information Select Apt. Design the Sending the
Types to be confirming Confirmation request
confirmed party request
Positive Negative The design of a ECR

Select the party from which ECR It may be sent via -
Confirmation confirmation Information that can be confirmed directly affects
shall be obtained
request request OR
Areas where ECR may be used Electronic Paper Other
Such party should have
A request the the reliability mode mode medium
confirmation of audit
• A/c receivables bal. + their elements & terms
Willingness & response rate evidence
Knowledge Objectivity
That confirming party responds ability/ authority
the nature of the
directly to the auditor • A/c payables bal. + their elements & terms audit evidence
of subject
• May Not Confirming obtained from
matter
Whether ONLY IF accept party should responses.
• Terms of agreements Agreement/ transaction be
responsibility Factors to consider when
In such independent
• May account designing confirmation requests
confirming party confirming party case,
• Confirm the absence of Certain conditions/ Side in diff. of the client include:
agrees or disagrees with agreement/ addendum response
currency • RMMS, including fraud risks.
disagrees with information s will be
more • May not
information in provided in the • Bank balances & other relevant info • The layout and presentation of
reliable operate in right
request request the ECR.
environment
Or by III party/ at WH/ on
• Inventories held • May consider • Prior experience on the audit/
consignment
Providing the it costly other engagement
requisite
• Property title deeds held by lawyer → safekeeping • May be • The assertions being addressed.
information by financier → security
concerned about
III party → safekeeping legal liability • The method of communication
• Investments
Broker → not delivered
• Management’s authorisation or
Lender including terms Factors that may assist the auditor in encouragement
• Amounts due to
& restrictive covenants determining whether ECR procedures are • The ability of the intended
to be performed as SP confirming party to confirm or
provide the requested information

Management refusal to
allow the auditor to
send a ECR
Inquire the reason

from the mgt.
Seek AE for validity

& reasonableness
Reasonable Unreasonable
Evaluate its implications

on
RMMS NTE of Communicate to
other TCWG
procedures +
Consider impact
on auditor’s
Perform alternative opinion as per
procedures SA 705
Alternative Alternative
procedures provide procedures don’t
SAAE provide SAAE

Chapter 10 –
Standards for specific
items to be tested during
audit

Chapter 10 - Standards for Specific Items to be tested during audit CA Katik Aggarwal
Audit Evidence – Specific considerations for selected items
Presentation &
Completeness Segment
Litigation & claims Disclosure as
of Information
per AFRF of
Perform the following If auditor assesses RMMS regarding litigation or claims

procedures
P&D of segment is as
Seek Mgt. permission to communicate or meet per applicable FRF
Inquire Review with entity’s external legal counsel By
In-house legal MoM of Legal Obtaining

Management Management Management
TCWG Expense Performing
counsel (if any) refuses allows understanding
account analytical procedure
methods used by
or other audit
Correspondence b/w management in
procedure apt in
entity and in-house Communicate Meet the determining segment
circumstances
legal counsel directly through counsel information
letter of inquiry
Evaluate that it Test the

External legal counsel refuses to results in application of
Perform
respond disclosure as per such methods,
alternative
procedures Or AFRF where possible
Prohibited by law
Unable to Unable to obtain Cases where he may decide

perform SAAE from to meet the counsel
OR
alternative alternative
procedures procedures
Complex Significant Disagreement

Modify the opinion as per SA 705 matter Risk b/w Mgt. and
counsel

Audit Evidence – Specific considerations for selected items
Inventory WHAT IFs
Procedures to test the Matters relevant in Counting conducted If auditor is unable to

existence & condition What about inventory
planning attendance on day other than attend counting due What if attendance is
is in the custody and
When inventory is material, at Physical inventory Date of the Financial to Unforeseen Impracticable?
control of third party?
perform following procedures counting Statements Circumstances
i. Nature of inventory. Then Auditor shall, in addition to When such inventory

Then Auditor shall Due to Due to
procedures required above, is material
Attendance of Perform additional ii. Stages of WIP. genuine general
physical count to procedures reasons inconvenience
iii. The RMMS related to inventory. Make or observe Obtain SAAE
Perform additional procedures some physical count regarding its existence
iv. The nature of the IC related to E.g. E.g.
Evaluate Mgt. & condition by
to test whether inventory. Nature or Difficulty
instructions for To obtain evidence about
v. Whether adequate procedures whether On alternative date location of Time
inventory counting inventory
are expected to be established Cost IIIrd party Perform
entity’s final
+
Observe performance inventory records
and proper instructions issued Changes in inventory & perform is such
that
confirmation inspection or
for physical inventory counting. Not a valid other audit
of Mgt. count audit procedures for basis for procedures
procedures vi. The timing of physical inventory B/w intervening period For its
It poses auditor to appropriate in
Aptly reflect actual counting.
+ inventory count
vii. Whether the entity maintains a Count date Date of FS
threat to
auditor’s
avoid
attending
the
quantities circumstances
Inspect the inventory result & .
perpetual inventory system. safety. physical
+ viii. The locations at which inventory are recorded properly
counting condition
Perform test counts Perform
is held, alternative
ix. Whether the assistance of an procedures
auditor’s expert is needed.
Unable to Unable to obtain
perform SAAE from
OR
alternative alternative
procedures procedures
Modify the opinion as per SA 705

Initial Audit Engagement – Opening Balances
When is this SA Objective of SA/ Audit procedures for

applicable? Auditor opening balances
When To obtain SAAE
about
Where prior year Determine whether Determine whether Obtain SAAE Changes in Evaluate whether If predecessor
FS of FS of prior
FS is audited prior period closing opening balances about whether accounting policies AP performed in auditor’s report
prior period were Whether Opening
balances have reflect the accounting policies have been properly CY provide contain any
period audited by Opening balance
Peruse copies of been application of reflected in accounted, evidence about modification
were not predecessor balance reflect apt.
appropriate opening balances presented and opening balance
audited auditor contain accounting
Audited FS accounting policies disclosed in Ascertain its
any MMS policies correctly brought
including auditor’s forward Have been current year impact on current
Such policies report and other consistently period FS as per
have been relevant applied in current SA 315
to the current
consistently documents year
period
applied in
current
period FS
Auditor is able to Auditor identifies a Auditor unable to

Changes in obtain SAAE and obtain SAAE about
misstatement
accounting does not identify opening balances
policies any MMS
properly
Effect of misstatement not
accounted,
properly accounted, presented
presented &
or disclosed in FS
disclosed
Qualify or
No modification Qualify or Adverse
Disclaimer
Depending upon Depending upon
pervasiveness pervasiveness

Related Parties
RPR RPT RPB
Meaning of related When scope of definition Examples of RPR/RPT
in AFRF is narrower than Responsibility of auditor
party this definition
where RMMS may be higher
It means
Related parties Information RPT not Auditor shall Further, impact of inherent
Where AFRF Where AFRF
operate through system conducted under evaluate whether limitation of audit is higher
A related Where AFRF establish the don’t establish
extensive and ineffective in normal market fraud risk factors in case of RPR/RPT/RPB
party as establish minimal requirements the requirements
complex identifying or terms (E.g. with are present in RPP/ for following reasons
defined in or no
relationships reporting RPR/ no exchange of RPT as
AFRF requirement
RPT/ RPB. consideration) Understand Still obtain required by SA 240. Mgt. may be RPR may
those understanding of unaware of present a
requirements & RPR, RPT, RPB This is because the existence greater
fraud may be more of all RPR. opportunity for
& collusion by
Understand easily committed
Conclude management.
A person/ entity Another entity Another entity RPR, RPT, RPB through
whether FS in
as per those related parties.
That is under relation to such
That has Over which requirements
common control RPR, RPT, RPB
Control Significant With reporting entity
reporting entity has Check whether Planning & performing the
influence through Achieve Are not
firm complies audit with professional
Common T&F View misleading skepticism [as per SA 200] is
Control Significant Common key with those
Directly or indirectly influence controlling management important
requirements
ownership For fair For
Owners who presentation compliance
Over reporting entity Directly or indirectly
are close framework framework
family
members
However, entities under common control by a state (i.e., a national, regional or local
government) are not considered related unless they engage in significant transactions
or share resources to a significant extent with one another.

Subsequent Events
Meaning of Audit procedures for

Subsequent events Subsequent events
It means
Generally, the
Facts that become
Events occurring auditor has no
Facts that known to auditor
Events that b/w Date of FS & obligation to
become known after date of perform any audit
occurred
to the auditor auditor’s report
Between Auditor’s report procedures after
after the date of the
auditor’s report.
Date of Date of Date of Obtaining an Inquiring of Read MoM of Owner/ Reading the But before date
FS auditor’s auditor’s After the date of
understanding of management/ TCWG /TCWG/Mgt entity’s latest when FS are
report report issue of FS
subsequent issued
interim
Procedures, if any Comes to know of Comes to know of
whether any held after the date of financial
management has Fact Fact
1 2 subsequent events financial statements statements
established to ensure
have occurred which
that subsequent That had he known That had he known
Objective of the might affect the before date of before date of
events are identified.
auditor FS auditor’s report auditor’s report
To He would have He would have

amended the report amended the report
Obtain Respond
Discuss with Mgt./ Discuss with Mgt./
SAAE that aptly to TCWG TCWG
1 2 Determine whether Determine whether
are aptly FS needs to be FS needs to be
adjusted & amended amended
reflected in
Examples of Subsequent events - Other things that you Inquire how Mgt. Inquire how Mgt.
FS
• Going concern can inspect – intends to address intends to address
• Dividend • MIS of Mgt the issue the issue
• Debtors - realisation • Major realisations

What is Going concern assumption? –

Going Concern It is an assumption that entity will continue its
operations for a foreseeable future.
Mgt responsibility Auditor’s responsibility Auditor’s procedures
Where AFRF Where AFRF gives no To obtain To conclude

SAAE about whether Determine whether Mgt. has Remain alert to events or conditions
expressly require explicit requirement performed preliminary assessment that cast doubt about entity’s ability
aptness of material
mgt’s use of uncertainty to continue as GC
Irrespective of this, Mgt. has to assess the GC exist about
Yes No
entity ability to Financial indicators Operating indicators Other
entity’s ability to continue as a GC continue as
GC Discuss with mgt about Discuss basis of using • Adverse key financial • Loss of key Mgt. • Changes in laws
Mgt. assessment should cover a period of at such assessment and GC assumption and ratios • Loss of major • Non-compliance
least 12 months from last date of FY any events/ conditions inquire whether events/
identified in it conditions exist • -ve operating market with capital or
cashflows other stat. req.
• Labor difficulties
If not, auditor should request mgt. to extend it
• LT borrowings • Pending legal or
Evaluate Mgt. • Emergence of
to at least 12 months approaching maturity regulatory
assessment for GC highly successful
without prospects of proceedings
assumption competitors
renewal • Uninsured or
If mgt. refuses, auditor may consider its • Shortage of
Inquire the mgt. of its Auditor has no • Substantial operating under-insured
implication on his opinion. supplies catastrophes
knowledge for events/ other duty for losses
conditions beyond mgt. period beyond
Auditor shall even ask the mgt. of its • Inability to pay
assessment period. Mgt. assessment
creditors on time
knowledge of any events or conditions beyond
• Discontinuance of
the period of mgt. assessment dividends
Additional procedures when events/ conditions identified
Where mgt. has Check if any Analysis of Analysis of Read the Evaluate Request WR
not done any additional facts cash flow Interim FS minutes of the action for the plan
assessment → available since forecast of of entity meeting of SH, plan of the of action and
request them to mgt. assessment entity. TCWG etc. entity its feasibility
assess

Going Concern
Level 1
Events/ conditions Events/ Conditions WHAT IF
identified identified
Management
Unwilling to Make
Level 2
Yes No or Extend Its
Material uncertainty Assessment
exists
Material uncertainty
Level 3 exists Auditor should
Going concern consider its
assumption is not apt. implications on
Yes No auditor’s report
He may or
Check whether
But Going may not
& Going Applicable FRF
concern modify his
concern require disclosure
assumption is opinion
assumption is about such events
apt. not apt.
Mgt
Mgt doesn’t Mgt prepared But Mgt
adequately
discloses FS without GC prepared FS
discloses
material basis on GC basis
material
uncertainty in
uncertainty in
FS
FS
Modified Give adverse Give
Unmodified opinion opinion opinion unmodified
but opinion but
include separate disclose it in
section under the report
heading “Material
uncertainty related to
Going Concern”

Chapter 11 –
Written Representation

Chapter 11 – Written Representation CA Katik Aggarwal
Meaning of WR Does it include FS, assertions

Objective of the SA Whom should we request WR Date of WR Form
therein, supporting documents
Written Statement
No Obtain WR from the management It should be as near as possible to It should be in
By Management To obtain To respond aptly or TCWG the date of auditor’s report form of
Does WR provide SAAE? WR from to WR provided representation
But It should be dated after the
Mgt./ TCWG or if No WR letter addressed
No With apt. Having date of Auditor’s report
To confirm To support It provides necessary evidence provided to the auditor
responsibility & knowledge of
certain other audit but not SAAE about any matter That they To support of FS the matter Period for WR
matters evidences they deal with have fulfilled other audit
Also called ‘Management their evidences It should be for all FS and periods
It may be CEO, CFO or equivalent
Representation Letter’ responsibility referred to in auditor’s report
WR that management has fulfilled Can auditor ask Mgt. to reconfirm

Qualifying language by Mgt in WR Matters covered in WR
its responsibilities its acknowledgement &
Qualifying language can be that This WR draws on the agreed understanding of its resp. as per WR shall cover the following matters -
representations are made to the acknowledgement & SA 210 in WR again?
1 2
best of its knowledge & belief. understanding of mgt. of its resp. WR about Mgt.
as per the pre-conditions of audit. Yes, auditor may ask Mgt. to Other WR
resp.
Can auditor accept it? reconfirm. Especially when -
Evidences that Mgt has fulfilled its Those who Eng. Terms
Yes, it is reasonable for auditor to responsibility are not enough for signed the eng. were prepared That mgt. fulfilled resp WR required as per
accept provided auditor to conclude terms no longer in previous year for prep. Of FS other SAs
have relevant Indication that & &
Auditor is satisfied that Auditor has to ask the mgt. That mgt. provided auditor Other matters as
resp. mgt.
representation is made by people whether it has fulfilled its resp. or with all info and access auditor may deem fit
Changes in misunderstands
with apt resp. & knowledge not &
circumstances its resp. All trans. are recorded and
reflected in FS
Also
Mgt resp. will be described
in WR as described in
Audit Eng. term.

Chapter 11 – Written Representation CA Katik Aggarwal
Impact on opinion But if, Mgt.
Does not provide Provides WR

Mgt. provides Mgt. does not WR for Mgt. for Mgt. resp.
WR BUT provide WR
responsibilities as as per 1
Doubt WR Discuss per 1
about CIE inconsistent with Mgt. but there is
of Mgt. with other sufficient doubt
Re-evaluate about integrity
evidences
Consider integrity of of Mgt.
impact on Attempt to Mgt.
reliability resolve
Take apt. Auditor shall disclaim his opinion
of WR the doubt
action
Reconsider
CIE of Mgt
Consider impact on opinion as per SA 705
CIE – Competence, Integrity & Ethical

values

Chapter 12 –
Internal Controls

Chapter 12 – Internal Controls CA Katik Aggarwal
Discussion on Internal Control

Internal Controls
Benefits of
Meaning Objective of IC Purpose of IC
understanding IC
General Identifying factors To provide reasonable assurance

It may be defined as processes
authorization affecting RMMS about achieving entity’s objective
• Transaction must As per w.r.t.
designed maintained be executed mgt. Identifying different
Implemented Specific Compliance Reliability
types of potential MS
authorization with L&R of Financial
By
reporting
Designing NTE of
amount FAP
TCWG • All transactions are Effectivene
Mgt. EE
promptly recorded In apt. account ss & Safeguard
efficiency of of assets
To provide reasonable assurance A/c period operations
about achieving entity’s objective access

w.r.t.
• Assets are From
use
safeguarded unauthorized
Compliance Reliability
disposition
with L&R of Financial
reporting
Effectivene • The recorded assets Apt. action taken

ss & Safeguard are compared with the & against any
efficiency of of assets
existing assets at differences
operations
reasonable intervals


Internal Controls
Limitations of IC
Collusion among
Reasonable Human judgement in Lack of understanding people & inapt. Judgement by Limitation in case of
assurance decision making the purpose Override of controls management small entities
by Mgt.
Human judgement in Operation of control Controls can easily be In Design Because Same person is
IC can provide auditor
decision making can may not be effective circumvented Implementation & of Limited owner & manager
only with reasonable
be faulty Maintenance of employees as well.
assurance
Where people don’t controls,
By collusion By inapt.
understand the Over-riding of Segregation
About achieving its among people. Such owner manager
It can therefore lead to purpose of the info. Mgt. makes of duties not
objectives controls by can easily over-ride
break-down in IC Produced by the IC judgement about NTE practicable.
(Already covered) E.g. Mgt. the controls because
of controls
Segregation of IC are less structured
And therefore fail to duties is done E.g. Mgt.
take apt. action to lower the enters into On the basis of
opportunities side risks it chooses
of fraud. agreement to assume.
with customer
EE can work over and
together to above the
bypass these entity’s
restrictions. standard sales
contract
Circumvent – To find a way around


Internal Controls Relevance of IC
Do we have to obtain Factors affecting IC over completeness

IC over safeguard of IC relating to objective IC require to report on
understanding of all the auditor judgement & accuracy of
assets not relevant to auditing as per Statute
controls? about relevance of IC Information
OR
• Materiality. Relevant only when
Whether all the controls It may include controls IC relating to objective If statute requires the
are relevant for the • The significance of related risk. relating to both are not generally auditor to report on
auditor? Auditor intends to relevant for the auditor compliance with
• The size of the entity.
make use of the certain specific
Auditor shall obtain Financial
• The nature of the entity’s business information in Operations aspects of IC
understanding of IC relevant reporting Therefore,
to the audit. • The diversity and complexity of performing audit
understanding such
the entity’s operations. procedures The auditor shall
Example - controls may not be
MOST controls relevant to Example - review such controls in
• Applicable legal and regulatory Password on relevant for the auditor
the audit are likely to relate Even controls relating Safeguard over broad and detailed
requirements. access of
to financial reporting. to operations and excessive use manner
financial data to
• The circumstances and the compliance may be of material in Example –
protect its
BUT not all controls that applicable component of internal relevant in such production Airline system of
control. integrity
relate to financial reporting circumstances automated controls to
are relevant to the audit. maintain flight
• The nature and complexity of the
systems that are part of the Auditor is more concerned schedules
It is a matter of auditor’s entity’s internal control, including about controls relevant to
professional judgment the use of service organisations. financial reporting
• How a specific control prevents,
whether a control is relevant
or detects and corrects, material
to the audit or not.
misstatement. [Effectiveness]


Internal Controls Components of IC
Risk Information System

Control Monitoring of
Assessment including business Control Activities
Environment Controls
Process processes
Understanding to The Auditor shall

What does it obtain
be obtained by Meaning Definition
include? understanding of
auditor
ISBP for FR
Understanding The Auditor shall

Its Importance Examples of How to accomplish
control obtain
for auditor specific control Monitoring of
environment understanding of
activities Controls
ISBP for Comm.
Elements of Control activities Monitoring also

Control that are relevant includes
Environment to the audit
Satisfactory
Control Monitoring in case
Environment – Significant risk of small entities
Not absolute Meaning
deterrent of
Fraud Monitoring in case
Significant risk of Internal Audit
often relates to function
Matters to be considered in
judging which risks are significant


Internal Controls Control
Components of IC
Environment
What does it Understanding Elements of Control Is Satisfactory Control

7 elements Env. an absolute
include? control environment Environment
deterrent of Fraud
It includes Auditor shall obtain an (a) Communication and enforcement of d) Management’s philosophy and operating
integrity and ethical values It can be a positive factor when the
understanding of control style
Governance & Attitude, auditor assesses the RMMS.
environment. These elements influence effectiveness It includes –
Mgt. function awareness & For this, auditor shall - - Mgt. approach for business risk
of Design, implementation and It may help reduce the risk of fraud
action of TCWG - Attitude and action towards Financial
Evaluate whether maintenance of IC
& Mgt. reporting
But it is not absolute deterrent of
Control environment sets the (b) Commitment to competence - Attitude towards information processing
Mgt. has Elements of fraud.
tone of the org. created a Control It includes matters such as
e) Organizational structure
culture of environment management’s consideration of the Conversely, deficiency in control
Influencing the control competence levels for particular jobs Framework within which entity’s activities environment may undermine
are planned, executed, controlled & effectiveness of control in deterring
consciousness of people Honestly Ethical Provide apt.
(a) Participation by TCWG reviewed to achieve entity’s objective. fraud
behaviour foundation
for Attributes of TCWG –
f) Assignment of authority and responsibility Control environment thus
- Their independence from Mgt.
Other - Their experience and stature It includes matters such as how authority influences auditor’s evaluation of
components - Extent of their involvement and responsibility for operating activities other controls &
of IC - Aptness of their action are assigned in the org.
- Interaction with internal & thereby assessment of RMMS.
external auditor g) Human resource policies and practices
It includes policies and practices related It therefore, impacts auditor NTE of
to recruitment orientation, training, further audit procedures as per SA
evaluation, counselling, promotion, 330.
compensation etc. for human resources.


Information system
Internal Controls Components of IC including business
processes
Risk assessment Relevant to Relevant to

process financial reporting communication
Auditor shall obtain understanding of ISBP Auditor shall obtain understanding, how entity
relevant to financial reporting, including the communicates roles & responsibilities
following
Understanding to be Importance for the Internally Externally,
obtained by auditor auditor a) Significant class of transactions in entity’s operations with
B/w Mgt. &
Entity’s risk assessment TCWG regulators
Auditor shall obtain an
process forms the basis for b) Procedures by which those transactions are initiated,
understanding whether The following points need consideration in this regard:
recorded, processed, reported
entity has process for the risks to be managed
(i) Understanding of Roles and Responsibilities:
c) Supporting information, accounting records etc. in FS, Communication should provide understanding of individual
If it is appropriate that are used to initiate, record, process, report these roles and responsibilities pertaining to IC over FR.
a) Identifying business risks
relevant to financial transactions.
reporting objectives; It helps auditor identify (ii) Understanding relationship of Activities:
RMMS Employees should understand how their activities relates to
d) Controls surrounding journal entries
others within entity.
b) Estimating the
significance of the risks; Whether it is apt or not, is a e) Financial reporting process used to prepare the entity’s (iii) Policy Manuals and Financial Reporting Manuals:
matter of professional financial statements; Communication may involve policy manuals and financial
judgement reporting manuals.
c) Assessing the likelihood
of their occurrence; and f) How the information system captures events and
(iv) Open Communication Channels:
conditions that are significant to the financial statements
Open communication channels help ensure that exceptions
d) Deciding about actions to are reported and acted on.
address those risks
(v) Less structured and easier for Small Entities:
Communication may be less structured and easier to
achieve in a small entity than in a larger entity due to
fewer levels of responsibility and management’s greater
visibility and availability.


Internal Controls Components of IC Control Activities
Examples of Control activities

Meaning specific control that are relevant to
activities the audit
Control activities are • Authorization 1 That relates to

Significant risk
• Segregation of duties
Policies and procedures
• Performance review 2 That relates to risk
That help ensure that for which
• Physical control
management directives Substantive
are carried out. • Information processing
procedure alone
don’t provide SAAE
3 That are relevant in

judgement of the
auditor
SNRT = Significant non-routine transaction

SJM = Significant Judgemental matters


Internal Controls Monitoring of
Components of IC
Controls
How to accomplish Monitoring in case

Monitoring also Monitoring in case
Definition Monitoring of of Internal Audit
includes of small entities
Controls function
It can be It also includes using Monitoring is often If the entity has an internal audit
It is a process to assess
accomplished information from accomplished by function,
through
Effectiveness of IC Communication from the auditor shall obtain an
Owner-manager’s
external parties understanding the following about
Ongoing Separate Combination close involvement in internal audit function (IAF):-
Over a period of time. or or
activity evaluation of both the operations.
Such as
IAF’s The activities
These are built responsibilities performed by IAF
into the normal Customer Regulators
recurring complaints comments How IAF’s fits in
activities. Org. structure
Other points that merit consideration regarding IAF -
Various IAF related to IAF Objective What if external

responsibilities financial reporting is depends on size and auditor’s wishes to use
of IAF relevant to auditor structure of entity the work of IAF?
IAF responsibility
may include - IAF objective In such case, he
IAF may be relevant
depends upon shall first evaluate
to audit if its activities
Monitoring Compliance Operations, Activities related IAF audit plan and
are related to
of internal with L&R effectiveness to financial Size & structure Requirement of perform functions as
financial reporting
controls , efficiency reporting of entity Mgt. per SA 610.

Evaluation of IC by Auditor
Formulating Audit
Benefits of
program after
Evaluation of IC
understanding IC
It enables the auditor to know -

The auditor can formulate his Audit Programme
i. Whether misstatements are likely to occur in the ordinary course of only after
business he has had a satisfactory understanding of the internal
control systems.
ii. Whether an adequate internal control system is in existence
Otherwise, his Audit Programme may become very heavy
iii. Whether Effective internal audit department is effective. and
the object of the audit may be lost.
iv. Whether any administrative control has a bearing on his work
It is also important for him to know whether the system is
v. Whether the controls adequately safeguard the assets; actually in operation.
vi. Whether transaction are recorded correctly The auditor may be led to believe that a system is in
operation while in reality it is not.
vii. How reliable the reports, records and the certificates to the
management are Auditor should review the internal control system of client.
viii. The extent and the depth of the examination that he needs to carry out This would enable him to be more objective in framing of the
in the different areas of accounting; Audit Programme.
ix. What are the areas where control is weak and where it is excessive; He can identify weaknesses, bring them to the notice of the
and management and check further in time whether those
weaknesses have been removed or not.
x. Whether some worthwhile suggestions can be given to improve the
control system. From the foregoing, it can be concluded that the extent and
the nature of the Audit Programme is substantially
xi. What would be appropriate audit procedure in the given circumstances; influenced by the internal control system in operation.

Evaluation of IC by Auditor
Methods of
The Narrative evaluation of IC
Flow Chart method
Record method
Exhaustive description - This is a Graphical presentation - It is a

Internal Control
complete and exhaustive description of Checklist method graphic presentation of each part of
Questionnaire
the system as found in operation by the the company’s system of internal
auditor. Instructions/ questions - This is a series of Comprehensive series of questions - This is a control.
instructions and/or questions which a member of comprehensive series of questions concerning internal control.
Pre-testing necessary - Actual testing the auditing staff must follow and/or answer. Most concise - A flow chart is
and observation are necessary before Most widely used - This is the most widely used form for considered to be the most concise
such a record can be developed. Signature - When he completes instruction, he collecting information about IC in an organization. way of recording the auditor’s
initials the space against the instruction. review of the system.
Recommended for - It may be Advantage - Overlook or omission of significant internal control
recommended in cases where no Type of answers - Answers to the check list review procedures is less likely to occur with this method. Minimizes narrative explanation -
formal control system is in operation instructions are usually Yes, No or Not It minimizes the amount of narrative
and would be more suited to small Applicable. One time/ sections - Internal control evaluation can be explanation
business. completed at one time or in sections as per the requirement of
On job requirement - This is an on the job auditor. Bird’s eye view - It gives bird’s eye
Disadvantages of narrative records requirement and instructions are framed having view of the system and the flow &
regard to the desirable elements of control. Types of answers - In the questionnaire, generally questions integration of transactions can
are so framed that a ‘Yes’ answer denotes satisfactory position be easily spotted.
To comprehend Difficult to Difficult to incorporate Studied by principal/ manager – This list is and a ‘No’ answer suggests weakness.
system in identify changes on account of studied by senior/ manager/ partner to evaluate Provision is made for an explanation or further details of ‘No’
IC. answers.
operation is weakness or reshuffling of
In respect of questions not relevant to the business, ‘Not
difficult gaps in system manpower Applicable’ reply is given.
A few examples of check list instructions
1. Are tenders called before placing orders?
2. Are the purchases made on the basis of a Filled by client - The questionnaire is usually issued to the
written order? (Purchase order) client and the client is requested to get it filled by the concerned
3. Is the purchase order form standardized? executives and employees.
4. Are purchase order forms pre-numbered?
5. Are the inventory control accounts maintained Inconsistencies further discussed - If on a perusal of the
by persons who have nothing to do with custody answers, inconsistencies or apparent incongruities are noticed,
of work, receipt of inventory, inspection of the matter is further discussed by auditor’s staff with the client’s
inventory and purchase of inventory? employees for a clear picture.
The concerned auditor then prepares a report of deficiencies

and recommendations for improvement.

Controls in manual system & IT System
Benefits of IT in entity’s internal control

Controls in Manual Controls in IT
System System • Processing of large volume of transactions or
data become simple
Transactions are recorded in Transactions are recorded in • Facilitate the additional analysis of information
form of paper documents. electronic form. • Enhance the ability to monitor the performance
of the entity’s activities and its policies and
procedures
Controls in a manual system Controls in IT systems consist of a • Enhance the timeliness, availability, and
may include such procedures combination of automated controls accuracy of information
as approvals, reviews of (for example, controls embedded in • Reduce the risk that controls will be
transactions, reconciliations computer programs) and manual circumvented
and follow-up for reconciling controls. Further, manual controls • Effective segregation of duties by implementing
items. may be independent of IT. • security controls
Mix of manual and automated

elements varies with nature and
complexity of entity’s use of IT
Suitability - Manual elements in internal control

may be more suitable where judgment and
discretion are required
Reliability: Manual elements in internal control

may be less reliable than automated elements
because they can be more easily bypassed,
ignored, or overridden and they are also more
prone to simple errors and mistakes.
The use of manual or automated elements in

internal control affects the manner in which
transactions are initiated, recorded,
processed, and reported:

Internal Audit
Who can be Companies required

Meaning
appointed as IA? to appoint IA
An independent management As per section 138, internal As per Section 138 of

function, auditor can either be Companies Act,
2013
which involves a continuous
and critical appraisal of Chartered Cost Such other
functioning of an entity with a accountant accountant profession
as may be Every listed Every unlisted Every
view to
decided by company public private
board company company
suggest add &
improvements value strengthen
thereto to He may or may not be employee of the having having
company OR OR OR
Paid-up Turnover of Turnover of O/s loan/
O/s loan/
share borrowings from
Overall strategic risk internal control borrowings from
capital of bank/ FI of
governance management system bank/ FI of
Rs. 50 Cr. Rs. 200 Cr. Rs. 200 Cr. Rs. 100 Cr.
Rs. 100 Cr.
or more or more or more or more
or more
During During During At any point

At any point
preceding preceding preceding of time
of time
FY FY FY during
during
preceding preceding
FY FY

Internal Audit
Objective & scope
of internal audit
function
Activities Activities Activities

relating to relating to relating to
Governance Risk Mgt. Internal audit
IAF may assess whether governance IAF may assist the entity by
process accomplished its objectives on identifying and evaluating Evaluation of Examination of Review of operating Review of compliance
significant exposures to risk internal controls financial and operating activities with law & regulation
• ethics and values, & information
• performance management, contributing to the improvement of
risk management and internal The IAF may be assigned The IAF may be assigned The IAF may be assigned The IAF may be
• accountability, control to review the operating to review the means used to review the economy, assigned to review
(including financial reporting effectiveness of internal to identify, recognize, efficiency and compliance with laws,
• communicating risk and control process). controls in preventing or process and report effectiveness of operating regulations and other
information
detecting and correcting financial and operating activities, external requirements.
• to appropriate areas of the IAF may assist the entity in the the MMS information.
organization and detection of fraud.
• effectiveness of communication among

• TCWG,
• external and internal auditors,
• & management

Basics of Standards on Internal audit issued by ICAI

Considering the increasing importance of internal auditing, List of SIA
SIA 1: Planning an Internal Audit.

Name of committee the ICAI has constituted a Committee on Internal Audit (CIA) as a
non-standing committee in February 2004 SIA 2: Basic Principles Governing Internal Audit
& when constituted
Objective with the object of formulating Standards and Guidance Notes on SIA 3: Documentation.
Internal Audit.
SIA 4: Reporting.
Current name Now it is known as Internal Audit Standard Board. SIA 5: Sampling.
No. of SIA issued The Board has, till date, issued eighteen Standards on Internal SIA 6: Analytical Procedures.
Audit (SIAs).
SIA 7: Quality Assurance in Internal Audit.
Purpose of SIA The SIAs codifies the best practices in the area of internal audit SIA 8: Terms of Internal Audit.
and
SIA 9: Communication with Management.
provides a benchmark of the performance of the internal audit SIA 10: Internal Audit Evidence.
services.
SIA 11: Consideration of Fraud in an Internal Audit.
Factors considered While formulating SIAs, the Board takes into consideration the
while formulating SIA SIA 12: Internal Control Evaluation.
- applicable laws, SIA 13: Enterprise Risk Management.
- customs, SIA 14: Internal Audit in an Information Technology Environment.
SIA 15: Knowledge of the Entity and its Environment.

- usages and
SIA 16: Using the Work of an Expert.
- business environment and
SIA 17: Consideration of Laws and Regulations in an Internal Audit.
- generally accepted auditing practices in India. SIA 18: Related Parties.

Chapter 13 –
Joint Audit and using the
work of internal auditors
Chapter 13 – Joint Audit and using the work of internal auditors CA Katik Aggarwal
SA 299 – Joint Audit of Financial Statements

SA 299 vs. SA 600 Meaning of Joint Audit
A joint audit is
SA 299 SA 600
It deals with an audit of financial

It deals with Relationship between statements of an entity
Specific consideration
Principal Another
auditor auditor by two or more auditors
in carrying out audit
appointed
by joint auditors
Dealing with Dealing with
audit of the 1 or more
entity components with the objective of issuing
of entity the audit report.
Components can be Meaning of Joint Auditor

• divisions, • subsidiary, • associates,
• branches, • joint venture, • other entity Such auditors are known as
joint auditors.
Example Example
E.g. ICICI bank appoints E.g. ICICI bank appoints EY to audit

EY & Deloitte to jointly the bank as a whole.
audit the bank as a Further, it appointed
whole.
• Deloitte for audit of all its
branches South and west Indian
States
• KPMG for audit of branches in
North Indian States
• GT for audit of branches in East
Indian States

The documentation
How planning, risk assessment & allocation of work will take place in Joint Audit will help in avoiding
disputes & confusion
later on.
PLANNING Signing of work

RAP NTE of FAP
(including work allocation) allocation document
Engagement partner
& other key members
of engagement team
from each of the joint
auditors shall be
involved in planning. Division
of audit
RMMS need to be Joint auditors After allocation, the
areas Amongst considered and shall discuss & work allocation Same shall be
Joint auditors shall Identify joint assessed by document the document shall be & communicated
Common
jointly establish auditors NTE of audit signed by all the joint to the TWCG
audit
areas Each of the procedures auditors.
OVERALL AUDIT joint auditor
STRATEGY For For
& Ascertain the reporting objectives of the engagement common specific
develop JOINT & shall be allotted
AUDIT PLAN. Consider and communicate among all joint auditors the communicated areas
factors that are significant in directing Engagement team to other joint
efforts auditors
In developing joint
audit plan, the joint Joint Auditors shall obtain common engagement letter and common
auditors shall Consider the results of preliminary engagement activities management representation letter.
Ascertain the nature, timing and extent of resources Assets or

necessary to perform the engagement. Basis of liabilities Other
Identifiable Specified Items
Division OR OR OR reasonable
units areas of Income or
of work basis
expense
Same as steps in developing overall audit strategy

Execution of the agreed
Responsibility of Joint
upon audit procedures is
Auditor, co-ordination
joint responsibility of Joint
among joint auditor
auditors?
NO, Individual responsibility
For For
Audit work Audit work Auditor’s are jointly
divided NOT divided responsible for obtaining
& evaluating information &
explanations from Mgt.
Each Joint Auditor shall All Joint Auditor shall be (1)
be responsible only for jointly & severely Common YES, Unless they agree for
work allocated to such responsible Work specific division of this
joint auditor responsibility.
FURTHER, Joint
auditors shall be jointly
& severely responsible
for -
(2) (3) Matters (5) (6)

(4)
Common brought to Applicable Auditor’s
Statutes
Decision all’s notice FRF Report
Decisions taken by all Matters brought to the Examining that Presentation & Ensuring that auditor’s
the joint auditors notice of joint auditors disclosure of FS report complies with
FS of entity complies requirement of
under audit planning by any one of them with requirement of Is as per applicable
relevant statutes FRF
in respect of common on which there is an Statutes Applicable Other
audit areas agreement among the SAs pronouncements
joint auditors of ICAI

Audit Conclusion &
reporting
Auditor’s Report REFERENCE to other ASSUMPTION Discussion before Communicate to

reports finalization TCWG
Required to issue
COMMON AUDITOR’S Both Common auditor’s Other joint Other joint Other joint Before finalizing If modifying the If adding EOM or
REPORT report & separate auditor auditors have auditors brought report OR OM para in the
auditors have
reports shall make carried out their complied with to his notice any Discuss and auditor’s report
However, reference to each other. part of work SA departure from SA 705 SA 706
communicate
requirements applicable FRF respective
if someone is in Where? conclusions to
DISAGREEMENT with regard to each other Pre-communicate the same along with
opinion or any matter Reference to be made in proposed wordings with TCWG
“Other Matter Paragraph”
They can issue
SEPARATE AUDITOR’s
REPORT.
SA 610 – Using the work of Internal auditors

Meaning of
What does this SA deal
When does this SA not
with?
apply?
[Objective of SA 610]
Internal Audit Function Direct Assistance
To determine whether to, in A function of an entity

If entity has If entity has IA It means
which areas and to what that performs
extent no IA function function BUT
Use of internal auditors
1 Assurance & consulting
Use the Obtain direct activities
Its activities & L&R prohibits To perform audit
3 Auditor
work of IAF assistance from IA does not 4
2 responsibilities the EA from procedures
expect to use
are not relevant the work IAF using the work To evaluate and
for the audit of IA improve Under direction,
If yes for supervision & review of
Say, IA (based on Say if Co. Act Effectiveness of entity’s external auditor.
function just preliminary inserts a
Using the Using direct for operating understanding section
work of IA assistance effectiveness as per SA 315) prohibiting EA Governance Risk Internal control
function of IA from using management process
work of IA
Determine To aptly direct,
whether its supervise and
work is review his
adequate work Who is responsible for
auditor’s opinion?
Auditor is solely responsible

for his opinion.
His responsibility is not

reduced upon using the
work of IAF or taking direct
assistance of IA.
Determining whether to
Using the work of IAF
use work of IA Function
Determine nature &

Evaluate IA Function extent of work of IAF
(-) that can be used
CAO
For this, auditor should
evaluate
Discuss the planned use of
Nature & Consider the Use lesser of EA should ensure work with IAF
extent of the relevance of work of IAF & that he is still
Competence Application Objectivity
work the work perform more of sufficiently
Approach
performed by performed by work directly. involved after Read the report of IAF
IAF IAF using IAF work relating to work to be used
Level of Whether IAF Objectivity of IAF
competence of applied in IF Obtain SAAE of its adequacy
IAF systematic & By evaluating how
disciplined by checking whether –
well it is supported
approach, by • Work properly planned or
including quality not
control
Organizational Policies & • Suf & apt. evidences
structure procedures The work involves The assessed The organizational The level of obtained or not
use of significant RMMS is high or structure and P&P competence of
judgement in significant IAF is low • Conclusions reached are
apt. or not
If IAF is not If IAF is not If Org. structure, don’t adequately
competent applied in P&P don’t support the
enough systematic & support Planning of audit Evaluation of objectivity of the
objective objectivity of IAF procedures audit evidences internal audit
manner function
Circumstances when EA will not use the work of IAF

JOCR

Determining whether to Directing, supervising &
use direct assistance from reviewing the work
IA performed by IA
Nature & Extent of work

L&R Prohibits L&R does not
that can be assigned to IA
prohibit
providing direct assistance
&
In such case, he Auditor plans
can’t obtain to use Prior to taking direct assistance from IA,
direct assistance auditor shall -
from IA Then, auditor Amount of Assessed Threats to Competence
should evaluate judgement RMMS objectivity level of IA • Obtain WR from entity that IA is
involved in allowed to follow EA instructions
Level of Threats to
Competence of • Obtain WR from entity that IA is
objectivity of IAF
IA Planning of audit Evaluation of allowed to follow EA instructions
procedures audit evidences
For this EA should The EA shall direct, supervise and review
ask him questions
the work performed by IA as per SA 220.
about
JOCR While doing so, auditor shall keep in mind
His interest in His relationship that
business
The external auditor shall not use internal auditors to provide
direct assistance to perform procedures in following areas - • Internal auditor is not independent of
the entity
If IA lacks If there are • EA shall check the underlying audit

Where significant Where RMMS IA already To decide
competence threats to his evidence for some of the work
judgement is is high or function and whether to
Objectivity performed by IA
involved significant report to Mgt/ use the work
TCWG. of IAF
The DSR will be more extensive compared
to DSR in case of engagement team.
EA will not use the work of IAF

How to check whether IAF
How to check
How to check objectivity? is applied in systematic
competence?
and disciplined manner.
Whether IAF has apt. Whether Internal Whether procedures

Appropriate Whether IAF quality control P&P audit procedures & guidance is
remuneration is adequately are documented commensurate with
policy resourced the size of entity
HR Example –
P&P applicable
as per SQC 1
Technical Policies for

Organizational Any conflicting
training & hiring, training
Status of IAF responsibilities
proficiency IAs
Any Constraints Objectivity implied IAF knowledge Whether IAs are

& restrictions on by professional of entity’s FR member of relevant
IAF bodies & AFRF professional bodies
Areas which involve

Examples of work of IAF
significant judgement,
that can be used by
therefore IAF work can’t
external auditor
be used
Substantive Evaluating
TOC involving limited Inventory counting Evaluating mgt. use
procedures involving Assessing RMMS sufficiency of test
judgement observations of going concern
limited judgement performed
Testing of Review of Fin. Info of

Tracing transaction
compliance with subsidiaries which Significant Evaluating adequacy
through Info. Sys.
regulatory are not sig. comp. of accounting estimates of disclosure in FS
Relevant for FR
requirements Entity’s group
SA 330 (2 times), SA 250, SA 501, SA 600, SA 315, SA 540, SA 570, SA 530, Disclosure
Tran tracing
Chapter 14 –
Audit Report
Chapter 14 – Audit Report CA Katik Aggarwal
SA 700 – Forming an opinion & reporting on FS

Meaning of
What does this SA deal
with?
[Objective of SA 700] General purpose financial Special purpose financial Fair Presentation
Compliance Framework
statements statements Framework
To form an To express FS prepared in FS prepared in It is the FRF that It is the FRF that
opinion on the opinion accordance with accordance with requires requires
FS
in written General Purpose Special Purpose compliance with the compliance with the
Based on form Framework Framework requirements of requirements of
evaluation of
framework & framework
But
Conclusions
drawn from Acknowledges OR Acknowledges
audit evidence Does not include
explicitly or acknowledgements as
explicitly that given in Fair
implicitly that
General purpose Special purpose presentation framework.
framework framework
To achieve fair To achieve fair
FRF designed to meet FRF designed to meet presentation presentation
Common financial financial information It may be It may be

information needs needs necessary for necessary for
Mgt. Mgt.
of wide range of users of specific users
To disclose To depart from
beyond specific the requirement
It may be It may be requirements of of framework
the framework
Fair presentation Compliance Fair presentation Compliance
framework framework framework framework
In this case auditor checks, In this case auditor checks,
whether financial statements that financial statements are

achieve fair presentation. not misleading.

Opinion
Unmodified opinion Modified opinion
It is the opinion A qualified opinion or adverse opinion or

expressed by auditor disclaimer of opinion
When auditor concludes Expressed on FS

that
FS are prepared, in all Qualified Adverse Disclaimer

material aspects, opinion opinion of opinion
Auditor shall express qualified Auditor shall express adverse Auditor shall express
in accordance with opinion when opinion when disclaimer of opinion when
applicable FRF
Auditor has obtained
Auditor has obtained OR Auditor is unable to obtain In extremely rare
Auditor is unable to obtain
circumstances
SAAE
SAAE
SAAE SAAE
Involving multiple
& concludes that
& concludes that & concludes that uncertainties
& concludes that
MS are both auditor concludes that
Effect of MS possible effects of
possible effects of
undetected MS
undetected MS are both
Are But NOT Material Pervasive Notwithstanding having
Material pervasive obtained SAAE for each
Are But NOT individual uncertainties
Material pervasive Material Pervasive
To the financial statements
It is not possible to form
To the financial statements To the financial statements opinion on FS due to
To the financial statements
Potential Their possible

interaction of cumulative
uncertainties effect on FS

How do auditor obtain reasonable assurance that FS as a
whole are free from MMS
The conclusion shall take into account -
1 2 3 4 5 6
In case of Fair
Consideration of presentation Whether FS
Auditor’s conclusion Auditor’s conclusion Auditor shall evaluate
qualitative aspects framework, auditor adequately refer to
as per SA 330 as per SA 450 whether
of entity’s accounting shall also take into applicable FRF
consideration
As to whether SAAE As to whether It should also include

have been obtained uncorrected MMS indicators of possible
are material biasness of Mgt. judgement Overall
Whether FS
presentation,
gives fair
Example structure &
presentation
content
Selective correction of Mgt. biasness in
misstatements brought to making accounting
management’s attention estimates
FS adequately Accounting Accounting The info presented Adequate disclosures The terminology
disclose policies selected estimates by mgt. in FS are to enable intended used in the FS
are are users
significant Relevant, reliable is apt.
accounting policies consistent with reasonable & comparable To understand effect
Applicable FRF of MS on FS
AP AP MMS
EST. INFO TERMS
DISC CONSIS DISC
Concept of True & Fair View

The Concept of T&F view is fundamental in auditing.
What constitutes a T&F view is a matter of an auditor’s judgment.
Meaning of T&F view As per SA 700 As per Sec 143(2) Points to check T&F view
T&F view indicates that As per SA 700 As per Section 143(2) of To ensure T&F view, auditor has to see the following
auditor has to express his Companies Act, 2013 also
opinion whether The auditor is required to
Assets neither
The auditor is required to Charge on assets
express his opinion on the FS that, undervalued or
express his opinion disclosed
State of affairs Result of the entity overvalued
such FS present give a true and whether FS give T&F view of state No material liabilities No material asset is
As ascertained by him in fairly, in all material Or fair view of affairs, profit & loss & cash flow. omitted omitted
course of his audit respects,
Are truly and fairly of of its financial P&L and BS disclose Accounting policies
financial position of & performance & all matters required consistently followed
represented in the accounts the entity its cash flows
under audit
as at a particular for the year then All unusual, exceptional or non-recurring items
date, ended disclosed separately.
in accordance with AFRF.
True & Correct View (100% assurance)

• In case of Tax audit
• In that case also we can’t normally give T&C view.
• ICAI guidance note comes into play in such case. Which say we
can give T&C view in accordance with the concept of
materiality.
• So in XML for the Form 3CA/3CB, we add explanatory para
quoting ICAI guidance note.
It should clearly It is report of

Title
indicate that independent auditor
It should Apt. person based

Addressee addressed to on circumstances
Auditor’s opinion
Auditor’s It should have It shall Identity of entity

Opinion heading “Opinion” include being audited
FURTHER Statement that FS

has been audited
When expressing Title of each
unmodified opinion Statement being
on FS preparation audited
Reference to the
As per fair As per notes
presentation Compliance
framework framework Date and period
covered
Use one of Use the
the following following
phrases - phrase -
In our opinion, In our opinion, In our opinion,

accompanying OR accompanying accompanying
FS FS FS
present fairly Give T&F view Are prepared
In all material Of [state of affairs In all material

These shall be read respects & operations] respects
as equivalent
In accordance In accordance In accordance
with [applicable with [applicable with [applicable
FRF] FRF] FRF]
SAs Complied
Basis for It should have

heading “Basis for It shall Reference to auditor’s
Opinion include responsibility section
Opinion”
Compliance with
Independence and
If applicable, auditor shall other ethical
Going
report on going concern as requirements
Concern
per SA 570.
Key Audit For audit of general purpose SAAE obtained

Matters financial statements of listed
entities, or where L&R
demands or where auditor
thinks it is required,
Auditor shall communicate

KAM as per SA 701.
Responsibility
of Auditor shall use the
This section shall describe
Management term apt. in context of
mgt. responsibility for -
& TCWG for legal framework
the FS
Mgt. TCWG BoD Preparation Internal Assessing

of FS controls for entity’s ability
prep. Of FS to continue
Apt in context as going
concern
of Indian
companies &
This section shall also
identify TCWG resp. for
Oversight of the financial

reporting process
Obtain That FS
reasonable are from
Para 37 assurance MMS
Auditor’s
objective Issue an
auditor’s
report
Para 37
High level
State Reasonable
assurance but
that assurance is
not absolute
Para 37
Fraud
State MS can
or
that arise from
Auditor’s Error
responsibility Also
for audit of FS describe
materiality
In this section
auditor will Para 38
state - Prof. Judgement
State Auditor
&
that exercises
Prof. skepticism
Para 38
Stating
Describe
auditor’s
an audit by
resp.
Para 38
State The planned scope,
If SA 600 division timing of audit
applies of resp.
Para 39 Significant
findings
State that
With
auditor has Sig. deficiencies
TCWG
communicated of IC
Auditor complied all

ethical requirements
Auditor’s
Within body of
responsibility
auditor’s report
for audit of FS
In Appendix to Auditor should determine

Location where that description on website
auditor’s report
Resp. in para is not inconsistent with
38 & 39 can be para 38 &39
stated
Specific reference
within auditor’s report to Where L&R
webpage on website of permit to do
apt authority so
OM para
OM and/ or The auditor shall In compliance
EOM Para also include with SA 706
EOM para
If auditor
Other reporting
addresses other
responsibilities
reporting resp.
As per other L&R
He shall report “Report on other

it with heading legal & regulatory
titled requirements”
Sign in personal ALSO mention

Proprietor
name
Signature of Personal Membership no.
auditor name of CA
Partnership &
Sign in &
firm registration no.
Firm name of firm
Place of Name the Where report

Signature specific place is signed
Date of It should not be That date of

Auditor’s report dated earlier obtaining SAAE
Where all we mention

management
responsibility for Remember
pre-conditions
of audit!!
Preparation Internal If the financial statements comply with one of the frameworks but fail to comply with the
of FS controls other framework, an unmodified opinion can be given that the financial statements are
prepared in accordance with the one framework (e.g., in case of a company incorporated in
India, the Accounting Standards issued pursuant to section 133 of the Companies Act,
2013) but a modified opinion given with regard to the other framework (e.g., IFRSs) in
Written accordance with SA 705 (Revised).
Engagement Auditor’s
representation
letter report
from Mgt.
ABC Limited is subject to the following applicable financial reporting frameworks. 1)
Accounting Standards as per Section 133 of the Companies Act, 2013. 2) IFRS.
As per As per As per
As per CA Katik, the auditor of ABC Limited, the financial statements of ABC Limited comply
SA 210 SA 580 SA 700
with Accounting Standards as per Section 133 of the Companies Act, 2013 but fail to
comply with IFRS. How should CA Katik report it in the auditor’s report –
1) Give an overall modified opinion

When some, but not all, of the individuals involved in the oversight of the 2) Give modified opinion in context of IFRS and unmodified opinion in context of
financial reporting process are also involved in preparing the financial Accounting Standards as per Section 133 of the Companies Act 2013.
statements, the description as required by paragraph 34 of this SA may need 3) Give an overall unmodified opinion because entity is required to comply with any one of
to be modified to appropriately reflect the particular circumstances of the the two applicable financial reporting framework, which the entity has in the present
entity. When individuals responsible for the oversight of the financial reporting case.
process are the same as those responsible for the preparation of the financial 4) Give unmodified opinion in context of IFRS and modified opinion in context of
statements, no reference to oversight responsibilities is required. Accounting Standards as per Section 133 of the Companies Act 2013.
Disclaimer of opinion – Excel Glasses Limited – FY 2014-15 Which of the following SA require the auditor to communicate expected form and content of
https://www.moneycontrol.com/annual-report/excelglasses/auditors-report/EG01 any report to be issued by the auditor to the client.
a) SA 700
b) SA 705
c) SA 200
d) SA 210
SA 705 – Modifications to the Opinion in the Independent Auditor’s Report

Objective of SA 705 Types of modified Communication to
opinion TCWG
To express When auditor
modified opinion expects to
Adverse Disclaimer of
Factors Qualified opinion
opinion opinion
If auditor If auditor is Modify the
obtains unable to obtain opinion
Unable to obtain Able to obtain Unable to obtain
SAAE Obtain SAAE of
SAAE of SAAE of SAAE of
He shall
SAAE that SAAE that communicate
MS MS Undetected MS MS Undetected MS
Circumstances The wordings
FS are not free FS are free that lead to of modification
from MMS from MMS modification
the effect of which the possible effect of the effect of which the possible effect of
Effect
is which is is which is
To TCWG
Material
Meaning of
Pervasive
Pervasive
A term used in
context of MS
To describe To describe the when the auditor disclaims

the impact possible impact are not to specific the opinion on the FS,
confined of FS
elements
on FS on FS
A Pervasive
effects are represent the auditor’s report
L If confined to specific
of MS Of undetected those that in substantial of FS
S elements, SHALL NOT include a
MS O auditor’s PJ proportion
Key Audit Matters section
Due to inability In relation to are users’ as per SA 701
of FS
to obtain SAAE disclosures, fundamental to understanding

Unable to obtain SAAE
Such inability may arise

from -
Circumstances outside Circumstances relating Limitations imposed by

control of entity to the nature or timing management
of the auditor’s work
EXAMPLE
The entity is The timing of the The auditor Management Management

Entity’s accounting required to use auditor’s determines that prevents the prevents the
accounting records of a the equity appointment is performing auditor from auditor from
records significant method of such that substantive
destroyed component accounting for procedures observing the requesting
an associated alone is not counting of the external
the auditor is
have been entity, sufficient, physical confirmation of
unable to
seized observe the inventory. specific account
indefinitely and the auditor counting of the but the entity’s balances.
is unable to physical controls are not
obtain SAAE inventories. effective.
by
governmental about the latter’s 501 505
financial
authorities.
information 501 330
to evaluate
whether the
equity method
has been
appropriately
applied.
AS 21
Circumstances
outside control of
entity
Circumstances
relating to nature
or timing of
auditor’s work
Limitations
imposed by Not possible to
Disclaim the
management withdraw from
opinion
Communicate engagement
to TCWG Material &
Unable to Analyse the If Mgt. does pervasive
obtain SAAE cause not removes
the limitation Consider Withdraw from
Communicate
Perform alternative Not possible the engagement if
Request Mgt. to TCWG &
IF it is due to procedures if impact possible
to remove the other
Mgt. Limitation possible
limitation authorities
Material
Mgt. removes Possible Qualify the
but not
the limitation opinion
pervasive
Auditor’s report in case of qualified opinion due to Auditor’s Inability

to Obtain SAAE
Qualified opinion
except for the effects of the matter described in the Basis for Qualified
Opinion section of our report,
V
Basis for Qualified opinion Insert the basis for giving

qualified opinion
In addition to the matter described in the Basis for Qualified Opinion

section we have determined the matters described below to be the
V key audit matters to be communicated in our report.
Insert following
line here
Auditor’s report in case of qualified opinion due to Auditor’s Inability

to Obtain SAAE
Qualified opinion
except for the POSSIBLE effects of the matter described in the Basis for
Qualified Opinion section of our report,
V
Basis for Qualified opinion Insert the basis for giving

qualified opinion
In addition to the matter described in the Basis for Qualified Opinion

section we have determined the matters described below to be the
V key audit matters to be communicated in our report.
Insert following
line here
Auditor’s report in case of adverse opinion due to material

misstatement in financial statements
Adverse opinion
In our opinion and to the best of our information and according to the
explanations given to us, because of the significance of the matter
discussed in the Basis for Adverse Opinion section of our report, the
accompanying financial statements do not give a true and fair view in
conformity with the accounting principles generally accepted in India, of the
state of affairs of the Company as at March 31, 20XX and profit/loss,
(changes in equity) and the cash flows for the year ended on that date.
Basis for Adverse opinion Insert the basis for giving

qualified opinion
In addition to the matter described in the Basis for Adverse Opinion

section we have determined the matters described below to be the key
audit matters to be communicated in our report.
V
Insert following
line here
Auditor’s report in case of disclaimer of opinion due to Auditor’s

Inability to Obtain SAAE
We were engaged to audit the standalone financial

Disclaimer of opinion statements of
We do not express an opinion on the accompanying financial statements of

the Company. Because of the significance of the matter described in the
Basis for Disclaimer of Opinion section of our report, we have not been able
to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion on these financial statements..
Basis for Disclaimer of opinion Insert the “Basis for giving

Disclaimer of opinion”
Delete these lines
Delete these lines
Para 29 of SA 705 prohibits insertion

of Key Audit Matters Section in case
of Disclaimer of Opinion
Our responsibility is to conduct audit of the financial statements in accordance

with Standards on Auditing and to issue an auditor’s report. However, because of
the matter described in the Basis for Disclaimer of Opinion section of our report,
we were not able to obtain sufficient appropriate audit evidence to provide a basis
for an audit opinion on these financial statements.
We are independent of the Company in accordance with the ethical requirements

that are relevant to our audit of the financial statements and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
SA 701 – Communicating KAM in the Independent Auditor’s Report

Objective of SA 705 Definition of KAM To whom does this SA apply KAM is not substitute for
To determine To communicate Those matters that,

KAM those KAM in Listed Where Circumstance Disclosures The auditor A substitute for A
auditor’s report in the auditor’s professional entities L&R when auditor in the FS expressing a reporting as per separate
judgment, require himself modified SA 570 opinion on
decides to opinion individual
For that
KAM in case of disclaimer of communicate matters.
were of most significance general applicable when a material
opinion purpose KAM in FRF requires uncertainty exists
FS auditor’s report management
SA 705 prohibits adding Key in the audit of the FS of the to make
Audit Matters as per SA 701, current period. that may cast
significant doubt
on
unless L&R requires such
reporting
entity’s ability to
continue as a
Communication to going concern
Circumstances when matter TCWG
determined as KAM are not
communicated in the report
Auditor shall
communicate It is a KAM It is a KAM
with TCWG
When L&R When Auditor But it shall be But it shall be
prohibits determines that OR
Matters Audit described described
public doing so determined determination separately in the separately in the
disclosure of as KAM that there are report as per SA report as per SA
such matter no KAM 705. 570.
Would lead to
adverse
consequences KAM section KAM section
shall include shall include
The cost of which reference to this reference to this
outweighs benefits section. section.
SA 701 – Communicating KAM in the Independent Auditor’s Report
Auditor shall describe

KAM are each KAM
selected from
Using apt. sub-heading In describing each
such individual KAM,
matters
auditor shall
communicated In a separate section
with TCWG. with heading “Key
Audit Matters”
Refer Describe Describe
related why the how the
disclosure matter was matter was
in FS considered addressed
In deciding such Language of KAM KAM
KAM, auditor shall
take into account-
Key audit matters are those matters
that, in the auditor’s professional
Areas of high Areas of FS Effect of judgment, were of most significance in
RMMS involving significant the audit of the financial statements [of
or significant mgt. events or the current period]; and
significant judgement transactions
risk These matters were addressed in the
context of the audit of the financial
Involving statements as a whole, and in forming
SA 315 accounting M&A
the auditor’s opinion thereon, and the
estimates auditor does not provide a separate
opinion on these matters.
SA 540
SA 706 – EOM Paras & OM Paras in Independent Auditor’s Report

Objective of SA 705 Communication to
TCWG
To draw user’s
attention When auditor
expects to
When in auditor’s
judgement, it is Include EOM
necessary to do so Para or OM
Para
By way of clear
additional He shall
communication communicate
The matter to The wordings

In auditor’s report be included of Para
to
A matter Any other matter To TCWG
That is although
aptly presented in
FS
Is of such
importance
That it is That is relevant to

fundamental to user’s
user’s understanding of
understanding
Audit Auditor’s Auditor’s

of FS responsibility report
He is talking He is talking
about “Emphasis about “Other
of Matter Matter
Paragraphs” Paragraphs”
EOM Paragraph OM Paragraph
Definition Disclosure Examples OM Paragraph Disclosure Examples

A para that is
A para that is included in It shall be included
included in 1 It shall be included under separate
under separate heading • Uncertainty to future auditor’s report
auditor’s report outcome of heading “Other
“Emphasis of Matter.” SA 501
Matter.” • If auditor is unable to
exceptional litigation That refers to the withdraw, he can
That refers to the matter explain reason in OM
matter It shall clearly • A significant Para.
2 refer the SA 560 SA 705
subsequent event Other than those
Aptly presented/ between date of the which are • If 2 set of FS prepared
disclosed in FS FS and the date of presented/ on basis of 2 AFRF,
Matter Relevant auditor’s report SA 700
being disclosed in FS mention the fact in OM
disclosures
emphasized in FS Para
• Subsequent event SA 560 That in auditor’s
That in auditor’s after auditor’s report judgement • When previous year FS
judgement, are describing due to which
the matter SA 510 are audited by
amended report is predecessor auditor or
issued. EOM It is relevant to
It is fundamental to user’s not audited.
user’s 3 It shall clearly indicate required to describe
understanding
understanding that “opinion is not reason for
amendment. • When reporting on Prior
modified in respect of
SA 710 Period FS in connection
such matter” Audit Auditor’s Auditor’s
of the financial with the current period’s
statements. • Early application responsibility report audit, if the auditor’s
(where permitted) of opinion on such Prior
a new accounting Period FS differs from
Such matter may New AS standard that has a the opinion previously
be included in material effect on expressed, the auditor
Auditor can include
EOM provided the financial shall disclose the
OM para in the
statements. reasons in Other Matter
auditor’s report
provided Para
Auditor is not The matter has not
required to modify been determined SA 210 • If L&R prescribe
wrong FRF to be • When other information
his opinion on such as KAM It is not prohibited The matter has not
followed supplied with FS as per
matter by L&R been determined SA 720
SA 720 is not in
SA 705 SA 701 as KAM
• If FS prepared as conformity with the info
SA 800 per Special purpose L&R SA 701 supplied in FS
framework
A widespread use of EOM para may

diminish the effectiveness of the auditor’s
communication about such matters.
SA 710 – Comparative Information— Corresponding fig. & Comparative FS

Objective of SA 710 Disclosures in OM Para
Comparative
Corresponding
To obtain To report financial
figures
SAAE that statements
Prior period FS were Prior period FS were Prior period FS were
in this regard It means comparative It means comparative audited by the not audited audited by
Comparative
information information concerned auditor predecessor auditor
information is As per himself
presented auditor’s
where prior periods where prior periods
reporting
as per disclosures are included as disclosures are included for
responsibilities
applicable Only if opinion on State the fact in OM State the fact in OM
FRF an integral part of the comparison with the FS of comparative info para para
current period FS, current period differs from that in
prior period
Comparative That That
information and are intended to be read But, If audited, are referred
only in relation to to in the auditor’s opinion • Prior period FS
Amounts & disclosures Disclose substantive Prior period FS were
not audited were audited by
reason in OM Para
the disclosures relating to predecessor
in FS auditor
the current period
w.r.t. 1 or more prior However, it shall not

• Opinion expressed
period The level of details relieve him from
The level of details by him
presented in corresponding obtaining SAAE for
presented in corresponding
As per applicable FRF figures opening balances
figures
(SA 510) • Date of the report
It can be is dictated primarily by its is comparable
in form of
-
relevance to the current with that of FS of the current
period figures. period.
SA 710 – Comparative Information— Corresponding fig. & Comparative FS

Audit Procedures
Factor Corresponding figures Comparative financial statements
Compliance with Check that the disclosure of comparative info is as per Applicable FRF & the information is appropriately classified. For this, auditor
Applicable FRF shall evaluate –
1 2 3
Comparative info agrees with AP are consistent or not If there is change in AP, whether
disclosures in prior periods. change aptly reflected or not?
Periods covered Auditor’s opinion shall not refer to the corresponding figures, except Auditor’s opinion shall refer to each period for which FS
in auditor’s when – are presented.
opinion
1 2 3
Modification given MMS exist in prior Prior period FS not

in prior period is periods even though audited & auditor finds
unresolved unmodified opinion given MMS in prior period
Written WR shall be requested for current period only WR shall be requested for each period for which FS are
representation presented.
Procedures if MS are found in

comparative info? Prior period FS Disclose the
were audited by substantive reason
the concerned for difference in
Perform auditor himself opinion in OM para
Auditor becomes Opinion
additional
aware of possible different from
procedures to
MS in prior period that given in If Predecessor Don’t report it in
obtain SAAE
prior period auditor agrees to current period’s
for this Prior period Request that issue new report report
FS were Communicate predecessor
audited by the MS to Mgt. auditor be
predecessor & TCWG informed If predecessor
Cover the MS in your
auditor auditor does not
report.
report
Chapter 15 –
Company Audit
Chapter 15 – Company Audit CA Katik Aggarwal
Company Audit - Eligibility, qualifications and disqualifications of an auditor (Section 141)

Who is qualified to
People not eligible for appointment (Disqualifications)
be auditor?
1 2 4 5 6
A body An officer or A person A person A person
Who is eligible? corporate employee of the
other than a company Who Or his Or his Who Or his Or his Who Or his Or his
LLP himself relative partner himself relative partner himself relative partner
Only a Chartered Accountant
is eligible to be appointed as
3
auditor u/s 139 A person who is Hold security of or interest in In indebted to Has given guarantee
partner/ or in
employment of
• Company • Associate • Company • Associate • Company • Associate
the officer/
What about a Firm, which company company company
employee of the • its subsidiary, • its subsidiary, • its subsidiary,
contains CA and other Company • Subsidiary of • Subsidiary of • Subsidiary of
Professionals like CS, CWA • its holding • its holding • its holding
such holding such holding such holding
as partners. company company company
Only a CA firm, where majority Does this threshold apply to Relatives may hold security/ In excess of 5 Lakhs. In excess of 1 Lakhs.
of partners are eligible for the auditor or his partner? interest upto face value of Rs.
appointment as CA, may be 1 Lakh.
appointed by its name.
NO
Condition of Rs. 1 Lakh
relevant even in case of
Company having no share
Can a person practicing as capital or securities.
CS in a CA firm appointed as
auditor of X Company, sign If auditor or partner holds If relative holds security > 1
the auditor report. share/ interest in Company, Lakh Face value,
can corrective action be taken
Only a partner who is a CA is in 60 days?
corrective action to be taken
eligible to sign the auditor’s within 60 days of acquisition of
report. NO. auditor is disqualified. interest. Not Market Value
Definition of Relative
• Members of HUF • Son (+Step) • Brother (+Step)

• Husband & Wife • Son’s wife • Sister (+Step)
• Father (+Step) • Daughter
• Mother (+Step) • Daughter’s husband
Company Audit - List of services not to be rendered by auditor u/s 144

Company
7 10 12
A person A person who, renders any service referred to in section 144 to Its holding company
A person or firm that has
Who holds Directly Indirectly Its subsidiary company
Business relationships
(direct/ indirect) with appointment as
auditor of 20 or
Directly & Indirectly

What is covered in
more companies In case of In case of
• Company • Subsidiary of auditor being auditor
such holding / other than
• its subsidiary, individuals, being Firm
associate it covers
• its holding company
Dormant Small
• Associate Company Companies
Himself person Entity with Entity Itself or Parent/ Entity with Entity whose
company
& his associated/ his sig. whose TM/ its Subsidiary/ firm’s sig. TM/ Brand is
One Private Relative connected influence/ Brand is partners Associate influence/ used by Firm
person company
a person who, directly or indirectly, renders any service referred to in section 144 to the company or its holding company or its subsidiary company.
with him control used by him control

8 company having
A person PSC < 100
Crores
(i) accounting and book keeping services; (v) investment advisory services;
under Section 144

whose relative is
List of Services
a Director or is in 11 (ii) internal audit; (vi) investment banking services;
the employment A person
of the Company
(iii) design and implementation of any financial (vii) rendering of outsourced financial services;
as a director or
Who has been information system;
key Managerial
convicted by a Court of (viii) management services; and
Personnel.
an offence involving (iv) actuarial services;
fraud (ix) any other kind of services as may be prescribed
9 and a period of
A person
10 years has not
Transition
Q. CA X was providing Services referred in Section 144 of the Companies Act 2013 to ABC Limited at the time of
provision
elapsed from the date
Who is in full time of such conviction. commencement of the Act. Is he disqualified to be appointed as the auditor?
employment
elsewhere Ans. He shall not be disqualified if he comply with the provisions of this section before the closure of the first financial year
after the date of such commencement.
Q. What If the person incurs any of the disqualifications (any of the 12 points above) after his appointment as auditor?
Ans. He shall vacate his office as such auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.
Company Audit – Appointment of auditor (Section 139)

Appointment of Auditor Filling Casual Vacancy in
(Section 139) office of Auditor
First Auditor Subsequent Auditor Government Company Other than Govt. Company
Vacancy to be filled by C&AG Vacancy to be filled by BOD

Other than Other than within 30 days within 30 days
Govt. Govt. Govt. Govt.
Company Company Company Company If C&AG fails, BOD to fill the If vacancy caused by
vacancy within next 30 days resignation of auditor
Appointment by Appointment by Appointment by Appointment by
BOD within 30 C&AG within 60 members in AGM C&AG within 180 Such auditor anyways holds Such appointment to be
days from Date of days from DOR days from office till the conclusion of next approved at General Meeting
Registration Auditor to hold commencement of AGM with 3 months of
If C&AG fails, office from 1st year (Point just for reference) recommendation by board.
If BOD fails, Appointment by AGM to 6th AGM
Members to BOD within next subject to Auditor to hold Such auditor shall hold office
appoint at EGM 30 days fulfillment of office till till the conclusion of next AGM
within 90 days Certain Conditions conclusion of the
If BOD fails, AGM for that
Auditor to hold Members to financial year
office till appoint at EGM Other Important Provisions Regarding Appointment of Auditors
conclusion of within 60 days
FIRST AGM from Date of (1) A retiring auditor may be re-appointed at an annual general meeting, if-
Registration
• he is not disqualified for re-appointment;
Auditor to hold
office till • he has not given the company a notice in writing of his unwillingness to be re-
conclusion of appointed; and
FIRST AGM
• a special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed.
Company to obtain Inform auditor of (2) Where at any annual general meeting, no auditor is appointed or re-appointed,
Some Company to Certificate from the existing auditor shall continue to be the auditor of the company.
his appointment &
obtain Written auditor that his
Important Consent from
file notice of with
Points appointment Registrar within 15
auditor satisfies Sec 141 days of meeting
Company Audit – Ceiling on number of audit

Ceiling on number of Statutory audits (20 per partner)
Ceiling on number of Tax
Audits
As per Section 141 In the case of a firm of Sometimes, a chartered As per Code of Conduct A CA in full time
auditors, accountant is a partner in a published by ICAI employment elsewhere
A person
number of auditing firms. shall not be taken into 60 numbers
the number of companies A member shall be deemed account
shall be counted In such a case, all the firms guilty of professional
Cannot hold appointment as in which he is partner or misconduct if he holds
auditor of more than 20 proprietor will be together appointment of more than
companies other than considering number of
companies specified for entitled to 20 company audits “specified number of
every partner of the firm on his account. assignments”
Dormant Small
Company Companies who is not in full time
employment elsewhere.
One Private
In the case of an audit firm
person company
having 3 partners, the overall
company having
ceiling will be 3 × 20 = 60
PSC < 100
company audits.
Crores
The number of partners of a

firm on the date of
acceptance of audit
assignment shall be taken
into account.
Company Audit – Rotation of Auditor (Section 139(2))

List of companies in case of which Rotation of Auditor is applicable - Some Important Points
+ + + + (-)
Listed All unlisted All private All companies EXCLUDING Members may Members may
Right of company also resolve that
Companies public limited resolve that in an
to remove auditor in an audit firm,
Companies Companies Having PSC One person audit firm, auditing
or right of auditor audit shall be
below threshold companies to resign is not partner & team
Having Having limit above & shall be rotated at conducted by
prejudiced more than one
PSC > 10 PSC > 50 Small certain intervals
Crores Crores companies auditor
But having
public
borrowings
from FI/ Banks/
Public
Deposits
> Rs. 50 Crores
Provisions of Rotation
2 Firms having
Transition provision
common partners
Individual Auditor Audit Firm Every company in
No audit firm having
common partner to existence on or
No Company shall No Company shall audit firms before
commencement of
Appoint or re-appoint an Appoint or re-appoint an whose tenure has the Act (March 2013)
individual as auditor audit firm expired in a company
Shall company with
for more than 1 term of for more than 2 terms Shall be appointed rotation provisions
5 consecutive years of 5 consecutive years as auditor in same within period not later
company for 5 years. than
He shall not be eligible It shall not be eligible
for re-appointment in for re-appointment in 1st AGM held in
same Company for same Company for
Also 2 Firms under prescribed time after
5 years after 5 years after same network/ 3 years from date of
completion of term completion of term tradename/ brand are commencement of
also not eligible the Act
Company Audit – Provisions relating to Audit Committee (Section 177)

List of companies required to constitute audit committee u/s 177 Manner and procedure of selection and appointment of auditors- Rule 3 of CAAR, 2014
prescribes the following manner and procedure of selection and appointment of auditors-
+ +
Listed public All unlisted public Audit committee/ Audit committee/
Companies Companies having Board to consider Board may
• PSC > 10 Crores Call from the auditor

Experience & Any order or
such information as it
qualification of proceedings for
• O/s loan/ borrowings/ deems fit
individual/ firm to professional
debentures/ deposits be appointed conduct before
> Rs. 50 Crores
Considering size ICAI Other
• Tunover > Rs. 100 of the Company competent
Crores authority
Consider figures as
per last audited FS
If no audit committee Audit committee to
required to be recommend name to Board
constituted u/s 177,
If board agrees with If board DOES NOT agrees
Board will itself recommendation with recommendation
recommend name to
members at AGM It will further the Refer back to audit
recommendation to members committee , citing
at AGM reason
If audit committee If audit committee

does not change changes the name
Such auditor to hold meeting till Board to record

conclusion of 6th AGM, reason for
considering the AGM wherein disagreement in
he is appointed as the 1st AGM writing
Board to further its

own recommendation
to members at AGM
Company Audit – Removal of the auditor

Removal of the auditor Resignation by the auditor
As per section 140(1) As per section 140(2)
For removal of the auditor, the auditor who has resigned from
the company
Pass a board resolution
shall file a statement in the
File an application with CG within prescribed Form ADT–3 (as per
30 days of passing BR Rule 8 of CAAR)
in Form ADT-2. within a period of 30 days from the

date of resignation,
Hold a general meeting within 60
days of receipt of approval of
board. With the With the With the
Company registrar C&AG of
Pass a special resolution. India
The concerned auditor should be In case of a

given an opportunity of being government
heard. company
The statement should indicating the

reasons and other facts as may be
relevant with regard to his
resignation.
In case of failure the auditor shall

be punishable with fine
Not less than

And In case of continuing But Not more than
failure
Rs. 50,000 or Rs. 5,00,000
remuneration of With further penalty
the auditor of 5000 per day after
whichever is less the first during which
the failure continues
Company Audit – Removal of the auditor

Direction by Tribunal in case Auditor acted in Appointment of auditor other than retiring auditor
a Fraudulent Manner
Special notice shall be required at AGM
Tribunal may
OR
For resolution Providing
Suo-Motu On application On application to appoint a expressly that
made to it by CG made to it by any person other retiring auditor
person concerned than retiring shall not be re-
auditor appointed
Direct the company to change the auditor On receipt of notice, company shall send a
(within 15 days of receipt of application) copy of that to the retiring auditor
If it is satisfied that auditor has, directly or indirectly If auditor may make a representation &
OR requests its notification to members,
Acted in Abetted or
fraudulent colluded in any The Company shall
manner fraud by (unless representation received too late)
OR &
The Company Its directors or State the fact that Send copy of
officers representation has representation to
been made in any members
Such person shall notice to the
members Also, a copy of such
& If he couldn’t send
rep. shall be filed
Not be eligible Also be liable to copy of rep.
with registrar
to be appointed action u/s 447 of
as auditor of the Companies The auditor may
any company Act, 2013 require
representation to
for 5 years be read out in the
from date of meeting.
passing the
order
Abusing right of being heard
If the Tribunal is satisfied on an application either of the company or of any other
aggrieved person that the rights of representation is being abused by the auditor,
then, the copy of the representation may not be sent and the representation need not
be read out at the meeting.
Company Audit – Powers/ rights of auditors

The auditor has the following powers/rights while conducting an audit:
1 3 Right to report to members of 5
Right to obtain Information or Right to receive notice or
Right to access to books etc. the Company on accounts Right to Lien
explanation from officers attend general meeting
2 4 examined by him
Auditor has right to access He is entitled to such - Auditor is entitled to attend any Auditor shall make a report to Auditor can exercise lien on
General meeting of Company. members of Company on books and documents placed in
Information explanation (Not just the GM in which audited his possession by the client
Book of Vouchers accounts are to be discussed.) Accounts Financial
accounts
From the officers of Company examined by statements for non payment of fees,
He is entitled to receive all him required to be
Whether kept at -
notices and communications laid in GM.
As he may consider necessary for work done on the books &
for his duties. related to GM. documents.
Registered Any other
As to whether it gives true & fair
office of Co. place
view of the
He is entitled to be heard at any As per ICAEW, this right can be
If this information or GM in any business which
He is entitled to such - exercised considering the
explanation is denied, or State of affairs Profit or loss &
concerns them as auditor. following factors –
access to books of accounts is of Company cash flows
Information explanation denied
As per Section 146 of the • Documents must belong to
Companies Act, 2013 As at the end For the FY. client who owes money
From the officers of Company Auditor’s only remedy would be of FY
to report to the members that • Documents must have come
As he may consider necessary he could not obtain all It is not just his right but also his to possession of auditor on
for his duties. information and explanations duty to attend GM He shall consider the authority of client (BOD), not
he considers necessary. OR following in doing so. illegal or irregular means.
Books, Himself His authorized • He can retain documents only
Officer accounts, Vouchers representative Provisions Accounting Auditing if he has done work on
vouchers of the Act Standards Standards documents assigned to him
• Directors, Includes books Includes any Who is
• Only such documents can be
having bearing correspondence qualified to be
• Managers, an auditor
retained which are connected
on accounts. which auditor may with work on which fees has
• KMP vouch for accuracy not be paid.
of accounts. Unless otherwise exempted by
• Any other the Company
person on
As per Section 128, This provision makes Therefore, it is
whose directions
books of company it difficult for auditor impracticable for
BOD is
are to be kept at to have possession of legal and practical
supposed to act
registered office. book of Company. constraints.
Company Audit – Duties of Auditors

1 2 4
Section Duty of auditor to inquire on Duty to comply with Auditing Duty to state the reason for
143(1) certain matters Duty to Sign the Audit Report
Standards qualification or negative report
3
A Whether D Whether As per section 143(9) of the Act, where any of the matters is
As per section 145 of the Act, the
answered in the negative or with
person appointed as an auditor of
Loans & advances made on transactions represented by book every auditor shall comply with a qualification in an audit report,
the company shall
security by company entries the auditing standards.
the report shall state the reason
sign the auditor's report
Are prejudicial to the interests of Further, as per section 143(10) of
Properly Whether its or
the company the Act, the Central Government
secured terms are sign or certify any other 5
may prescribe
prejudicial document of the company as Duty to report on any other
to interest E Whether required. matter specified by CG
of the standards of auditing as
Personal expenses charged to recommended by the ICAI, in
The qualifications, observations
Company Members consultation with and NFRA CG may in consultation with
or comments on financial
NFRA/ MCA committee
Revenue account. transactions or matters,
B Whether Specify additional matters on
F shall be read before the company
Where any shares have been which auditor may be required to
in general meeting.
Loans & advances made by allotted on cash report.
company
Whether cash has actually been CG has specified CARO using the
Have been shown as deposits. received powers given under this clause.
If no, whether position stated in

C books is correct.
Whether assets of a Company 6
(other than investment or Duty to report on fraud
banking company) in nature of As per Research Committee of ICAI
Shares/ debentures/ other The auditor is not required to report on (Refer Chapter 4 on Fraud)
securities these matters unless he has any special
comments/ adverse comments to make
on any of the items referred to therein. Section CARO Para
Sold at lesser than purchase 143(12) 3(x)
price
If he is satisfied as a result of the
inquiries, he has no further duty to
report that he is so satisfied.
Company Audit – Duties of Auditors

7 Duties of the auditor as per Section 143(3)
A C
Whether Information & Whether Books of account Whether branch audit report
Whether BS & PL in agreement
explanation obtained properly maintained and return sent to him and manner in
with BOA
B for branches received which it is dealt with D
Whether he has sought and obtained Whether, in his opinion, proper books of Whether the report on the accounts of Whether the company’s balance sheet
account as required by law have been any branch office of the company and profit and loss account dealt with in
all the information and explanations kept by the company the report
which to the best of his knowledge and audited by a person other than the
belief so far as appears from his examination company’s auditors are in agreement with
of those books and
were necessary for the purpose of his has been sent to him the books of account and returns;
audit and proper returns adequate for the
purposes of his audit have been received and the manner in which he has dealt J
IF NOT, the details thereof and the effect from branches not visited by him; with it in preparing his report;
Such other matters as may be
of such information on the financial
prescribed
statements; I
G
E The auditor’s report shall also include
Whether any director is Internal Financial Controls
their views and comments on the
Whether FS comply with AS disqualified following matters, namely:-
Whether Company has adequate IFC
whether any director is disqualified from w.r.t. Financial Statements in place (i) whether the company has disclosed
whether, in his opinion, the financial &
being appointed as a director under the impact, if any, of pending
statements comply with the accounting are they operating effectively.
subsection (2) of the section 164; litigations on its financial position in
standards;
its financial statement;
The requirement of IFC is NOT APPLICABLE to
F H following private companies
Observation/ comments of (ii) whether the company has made
Qualification/ reservation or provision, as required under any
auditor on financial
adverse remarks One person Small Company
transactions of Company law or accounting standards, for
company Company having material foreseeable losses, if any,
the observations or comments of the any qualification, reservation or adverse on long term contracts including
auditors on financial transactions or remark relating to the maintenance of TO < 50 Crores Borrowing from derivative contracts;
matters which have any adverse effect accounts and other matters connected Bank /FI/ Body
on the functioning of the company; therewith; (as per latest corporate (iii) whether there has been any delay in
audited FS) < 25 Crores transferring amounts, required to
be transferred, to the Investor
(at any point of Education and Protection Fund by
time during the FY) the company.
Applicability Matters to be included in Report

It is applicable to ALL COMPANIES
including FOREIGN COMPANIES
Except Fraud
Banking Insurance Private Company One

Company Companies Company licensed
u/s 8
person
Company
L Mgt.
& rem.
Not being Small
subsidiary or company
holding of
public company
D Nidhi
1110
Crores Co.
having
C
BOI
Paid-up Borrowing Total revenue
share capital from Bank/ as disclosed in
F
& R&S of FI Schedule III
I
< Rs. 1 < Rs. 1 < 10
Crore Crore Crores L
as on BS At any point During the
Date of time FY as per
during the FS
FY
• The reporting requirement under this order is additional in nature.
• Order does not apply to auditor’s report on Consolidated FS.
1 Fixed Assets 2 Inventory 3 Loan 4 Loan 5 Deposits

Whether public deposits accepted?
Whether the Company has granted Whether loan,
any loans to Parties covered in investment,
register maintained u/s 189? guarantee, security Whether complied with
Whether Whether PV Whether title Whether PV comply with Sec. 185 - directives of RBI and
If yes & 186. - provisions of Section 73 to 76
proper carried out at deed of carried out at
records reasonable immovable reasonable - Other provisions
maintained intervals properly held intervals Whether terms Whether If amount
in name of of such loan repayment overdue, If no, give the If not,
Whether any Company. not prejudicial schedule details
Whether any
material material to company’s stipulated State amount Nature of contravention
discrepancies If not, provide discrepancies interest overdue for more
noticed details noticed and receipts than 90 days
are regular Whether order of CLB/ NCLT/
Whether same & whether court/ tribunal complied with?
Whether same
properly dealt properly dealt reasonable
with with steps taken to
recover
6 Cost Records 7 Statutory Dues 8 Loan Defaults 9 IPO/ FPO/ Term Loan
Whether cost records have been Is Company In case the Whether Company has Whether money raised by
made & maintained as per Section regular in amount is not defaulted in repayment of way of IPO/ FPO/ Term
148(1) of Companies Act, 2013 depositing deposited due loan to FI/Bank/ Govt/ loan applied for the
undisputed to any dispute debenture holders? purpose for which they
Statutory dues were raised
Report the If yes,
Including PF, amount If no, details of delay or
ESI, Income involved Period & amount of default default
tax, VAT, GST, to be reported
Customs, & forum at & subsequent rectification
Excise etc. which dispute & lender-wise details in if any.
is pending. case of bank, FI, Govt
If not,
extent of
arrears o/s for
more than 6
months on last
day of FY
Auditing & Assurance - CA Intermediate [May 2020 & Nov 2020]

148
10 Fraud 11 Managerial 12 Nidhi Companies 13 Related party

Whether any Fraud
remuneration
Whether Nidhi Company has Whether all transactions with
- By company complied with Net Owned related parties are as per Section
Whether managerial Funds to Deposits Ratio of 177 & 188
- On company by its remuneration paid/ provided as
employees/ officers 1:20
per Section 197 read with Whether details of such RPT
Has been noticed or reported Schedule V of Companies Act & whether Nidhi Company is have been disclosed in FS as
during the year. maintaining 10% per applicable AS.
If not, unencumbered term deposits
If yes to meet its liability.
State amount involved & steps
Report the nature of fraud & taken to secure the refund
amount involved.
14 Allotment 15 Non-cash 16 Registration u/s

transaction 45IA of RBI Act
Whether the company has made
preferential allotment or private Whether Company has entered Whether the Company is
placement of into any non-cash transactions required to obtain registration u/s
45IA of RBI Act, 1934
• Shares
with directors, or persons
• Fully/ partly convertible
connected to him If yes,
debentures
If yes, If yes, Whether registration is obtained
whether Section 42 complied Whether Section 192 complied

with & with
whether amount used for the

purpose for which it was raised
If not, details of the amount

involved & nature of non-
compliance

149
Company Audit – Disclosures in auditor’s report

What if
What if
What if
What if the fundamental accounting
accounting policies required to
assumption of going concern proper disclosures regarding
be disclosed under Schedule III accounts have not been
has not been followed and this changes in the accounting
or any other provisions of the prepared on accrual basis
fact has not been disclosed in policies have not been made
Act have not been disclosed
the financial statements
Modify the audit report in such Modify the audit report in such Modify the audit report in such Modify the audit report in such
case case case case
What if
Where a company has been given a specific exemption regarding any of the matters stated above but the fact of such exemption has not been
adequately disclosed in the accounts
the member should mention the fact of exemption in his audit report without necessarily making it a subject matter of audit qualification.
Company Audit – Audit of Branch Office Accounts
Provisions relating to If branch office of a company is audited by

maintenance of books of
Accounts of a Company a person other than “auditor appointed for the company” or “Company auditor” or “Principal auditor”
Books required to be kept on

Branch auditor should prepare a Reporting of fraud w.r.t. Company auditor & branch
accrual basis.
report on branch audited by the branch extends to auditor need to comply
him with SA 600 – “Using the
& branch auditor too.
Books required to be kept on Work of another Auditor”
double entry system send it to Company’s
of accounting auditor
Advise OA Obtain
Books required to be kept at
regarding use of representation
registered office and Consider OA’s
There should be his work, time from OA that he
its branches. Sufficient table, areas has complied
professional
Liaison/ requiring special with relevant
competence
communication attention, accounting/
(qualification)
Books may be kept at other b/w the two accounting/ auditing and
auditing ethical
place requirements requirements
In such case company should
file notice within 7
days with ROC giving full
address of that place
Discuss OA’s
work. Obtain
If branch books kept at branch He may conduct Treatment of
summary of his
office, Supplement test any modification
work using
for component. by OA.
A summarized return Questionnaire/
should be sent to registered checklist.
office.
Company may keep books in

electronic mode
Company Audit – Cost Records & Audit

Applicability Companies upon which it is Limits Additional provisions
applicable
Applicability for Company engaged in production of Applicable if overall turnover from Cost records to be maintained in
maintenance of goods or services. Form CRA-1.
cost records It includes Foreign Companies.
all its products and services of Rs. 35 crore or more
It excludes The cost records shall be maintained on
- Micro enterprise or regular basis.
during the immediately preceding financial year
- Small enterprise
Auditor also required to report as per Para
3(vi) of CARO, 2016, whether cost
records have been properly made &
maintained by the Company, if applicable.
Classes of companies specified Overall annual turnover of the company from all its The requirement for cost audit shall not be
under item (A) “Regulated Sectors applicable to a following companies –
products and services during the immediately preceding
financial year is Rs. 50 crore or more.
(i) whose revenue from exports, in
& foreign exchange, exceeds 75% of
the aggregate turnover of the individual its total revenue; or
product(s) or service(s) for which cost records are
required to be maintained under rule 3 is Rs. 25 crore or (ii) which is operating from a special
Applicability of more. economic zone.
Cost Audit Classes of companies specified Overall annual turnover of the company from all its
under item (B) “Non-Regulated (iii) which is engaged
in generation
products and services during the immediately preceding
Sectors” of electricity for captive
financial year is Rs. 100 crore or more.
consumption through Captive
& Generating Plant.
the aggregate turnover of the individual
product(s) or service(s) for which cost records are
required to be maintained under rule 3 is Rs. 35 crore or
more.
Who can be appointed as cost Casual vacancy in office of

auditor? Appointment of cost auditor Removal of cost auditor
Cost auditor
A Cost accountant
Company to obtain certificate The cost auditor may be removed
from auditor. from his office before the expiry of To be filled by BOD
Can person who is appointed his term,
as statutory auditor of Companies to appoint an Auditor Within 30 days of occurrence
company u/s 139 be appointed within 180 days of the through a board resolution of such vacancy.
as cost auditor too?
commencement of FY.
NO Company shall inform
after giving a reasonable
Government in Form CRA-2.
File notice of such appointment opportunity of being
heard to Qualification, disqualification,
What are the standards
Within 30 days of within 180 days of rights, duties & obligation of
required to be complied with
board meeting commencement of the cost auditor and recording cost auditor
by the cost auditor?
FY the reasons for such removal Same as that of statutory auditor
Cost auditing standards issued in writing.
Whichever is earlier.
by Institute of Cost
Accountants of India
Notice to be filed in Form CRA-2 to be filed with Duty to report Fraud
Form CRA-2. CG shall enclose the relevant
Certificate obtained from the Board Resolution Provision of Section 143(12)
auditor for the following – apply mutatis mutandis to cost
• Individual/ firm is eligible for
Cost auditor shall auditor as well.
Above provisions shall not
appointment and is not continue till
disqualified for appointment. prejudice the right of the
• Individual/ firm satisfies the cost auditor to resign from such
Expiry of 180 Till he submits the Penal Provisions
criteria provided in section office.
days from cost audit report
141 of the Act.
closure of FY for FY for which he
• The proposed appointment is Same as for statutory auditor
is appointed.
within the limits under Section 147.
• the list of proceedings
against the cost auditor/ firm
w.r.t. professional misconduct
given in the certificate is true
& correct
Submission of Cost Audit

Report
To BOD by cost auditor To CG by Company
Auditor to Submit report to BOD along Company to submit report to CG within BUT if
with reservations/ qualifications etc.
30 days of receipt from auditor
Company got
in Form CRA-03
It shall also provide
full extension of time
Within 180 days from information & explanation on for holding AGM
every reservation contained u/s 96 of the Act,
closure of FY
It is to be submitted in
BOD shall consider and examine such It may file Form CRA-
report/
Form CRA-04
04 within resultant
CG to consider the report and may
extended time
period
ask any additional
information/ explanation For filing of Financial
within prescribed time.
Statements u/s 137 of
the Act
Company Audit – Punishments for non-compliance (Section 147)
Nature of Contravention Who shall be Punishment

punishable
Contravention of Section 139 to 146 Company Fine > Rs. 25,000 but < Rs. 5,00,000
of Companies Act, 2013 by
Company
Officer of Company Imprisonment upto 1 year
&
Fine > Rs. 10,000 but < Rs. 1,00,000 Refund the
remuneration to
Contravention of Section 139, 143, Auditor Fine > Rs. 25,000 the Company
Auditor Company
144, 145 by auditor but
shall also statutory body/
(un-knowingly & non-wilfully) < Rs. 5,00,000 or 4 times the authority For loss due to
remuneration of auditor Pay the
incorrect or
(whichever is less) damages to Members of the
misleading
Company
Contravention of Section 139, 143, Auditor Imprisonment upto 1 year statements
144, 145 by auditor & Creditors of the
(Knowingly & Wilfully) Fine > Rs. 50,000 Company
but
< Rs. 25,00,000 or 8 times the If audit is conducted by an audit firm, and
remuneration of auditor auditor acts in fraudulent manner,
(whichever is less)
Civil liabilities or criminal liabilities under
this act or any other law,
Meaning of Remuneration of the Auditor
Officer
Remuneration of the auditor shall be fixed at Annual General Meeting or in such Shall be of the partners concerned & the
• Directors, manner as determined therein. audit firm severally and jointly.
• Managers,
However, board may fix remuneration of the first auditor appointed by it. However, criminal liability other than fine,
• KMP
shall be on the concerned partners only.
• Any other IT ALSO INCLUDES the expenses reimbursed, if any, incurred by the auditor in
person on connection with the audit of the company and any facility extended to him but
whose directions
BOD is
supposed to act DOES NOT INCLUDE any remuneration paid to him for any other service rendered by
him at the request of the company.
Chapter 16 –
Bank Audit

Chapter 16 – Bank Audit CA Katik Aggarwal
Bank Audit - Basics

Types of Banking Reserve Bank of
Types of Banking
Institutions based on India: Regulating Regulatory framework
Institutions
computerization Body
• Commercial Banks • Banking Regulation Act, 1949. • Regional Rural Banks Act, 1976.
• Non-computerized banks. The functioning of banking
• Regional Rural Banks industry in India is regulated by • Banking Companies (Acquisition • State Bank of India (Subsidiary
• Partially- computerized & Transfer of Undertakings) Act, Banks) Act 1959.
RBI. 1970.
• Co-operative Banks
banks
• Companies Act, 2013 ▪ State Bank of India Act, 1955
• Payment Banks It acts as the Central Bank of • Information Technology Act,
• Fully Computerized banks 2000.
our country.
• Development Banks (or • Prevention of Money Laundering • Payment and Settlement
Act, 2002. Systems Act, 2007
‘Term-Lending Institutions’) In computerized environment, Important functions of RBI -
• Small Finance Banks. the auditor should not go by • Credit Information Companies • Securitisation and
Regulation Act, 2005. Reconstruction of Financial
the assumption that the • Issuance of currency; • Power to inspect a bank Assets and Enforcement of
Most widely used –
Security Interest Act, 2002.
system generated information • Regulation of currency • Regulating activities of
Commercial Bank
is correct and reliable. issue other banks
• Acting as banker to the • Responsible for Peculiarities involved

Two of its He should obtain evidence central & state govt. development and
main functions supervision of the
in banking system in
that the system driven
• Acting as banker to constituents of the Indian India
information satisfies the norms/ commercial & other banks fin. system
Accepting Granting parameters as per RBI
• Licensing for banking • Responsible for
deposits deposits guidelines • Huge volumes and • Extensive use of
business or opening a determining, the monetary
complexity of transactions, technology,
branch and credit policies in
Two types of offices at Bank conjunction with CG
• Wide geographical spread • Strict vigilance by the
of banks’ network, banking regulator etc.
Other offices • Large range of products

Branches (including and services offered,
corporate
offices)
Bank Audit – Basics in relation to FS & Auditor

Form & Content of Who can be audit Appointment of
Financial Statements accounts of bank Auditor
Section 29(1) & (2) of the Act As per Section 30 of the Act
deal with Banking Company Nationalized banks State Bank of India Subsidiaries of Regional Rural
FS of banking institutions State Bank of India banks
Form & content of FS of should be audited by Auditor to be Auditor is appointed Auditor is appointed
banking company. appointed at AGM of by bank concerned by C&AG Auditor is appointed Appointment is made
Person duly qualified under any shareholders. acting through its (Comptroller & by the State Bank of by bank concerned
Every banking company law (for the time being in force) Board of Directors. Auditor General) of India with approval of CG
prepare FS as per Third to be an auditor. Further an approval India in consultation
Schedule to the Act of RBI is required Further an approval with CG
Therefore, eligibility, before an of RBI is required
qualifications and appointment is made. before an
Form A Form B appointment is made.
disqualifications of auditor in
case of a bank shall be
Contains form Contains form governed by
of Balance of P&L Remuneration of
sheet Powers of the Auditor
Section 141 of the Companies Auditor
Act, 2013
Every banking company also Auditor of banking Company,

needs to comply with nationalized bank, SBI,
Banking Company Nationalized banks State Bank of India Subsidiary of SBI, RRB
Accounting Standards (AS) as
specified in Sec. 133 of It is fixed by banking Fixed by RBI in Fixed by RBI in Have same powers as those of
Companies Act, 2013 Company as per Sec consultation with CG consultation with CG a company auditor
142 of Companies
Act, 2013
in the matter of access to the
books, accounts, documents
and vouchers.
Bank Audit – Audit Report

Additional matters to
Types of Audit Report
be covered in Report
as per the Act
Various types of audit report
(generally) in bank –
Balance sheet Transactions Returns Profit & Loss Other matters
• Statutory Audit report as Account
per SA 700, SA 705, SA Whether it contains all Whether the Whether the returns Any other matter
706, SA 701 necessary particulars transaction which received from Whether P&L which he thinks he
& have come to his Account show true should bring to
• Long Form Audit Report notice the offices and balance of P&L
(LFAR), as per the Exhibit T&F view. branches of the bank the notice of the CG
requirements of RBI Are within the power for the period
Circular If he called for any of the bank have been found covered by such
information or adequate for the account
• Tax Audit Report as per explanation, whether it purpose of his audit
Income Tax Act, 1961 has been given & it is
satisfactory Other reporting
requirements
Long Form Audit

Q. Whether required to comply with SAs YES, SA 700, SA 701,
Report (LFAR) while preparing Audit Report? SA 705, SA 706
Q. Whether also required to cover YES, it is not substitute but an

matters given in Section 143(3) additional requirement
It is additional Matters covered in Due Date Proper planning Executive summary
requirement LFAR required
Q. Whether required to report under NO, it is not substitute but an
To be submitted by Does Format of CARO? additional requirement
Besides stat. audit Specified by RBI 30 June every year To ensure timely LFAR contain
report, auditor is also submission of LFAR, executive summary?
required to furnish proper planning is Q. What about unaudited branches? Disclose info in relation to
LFAR required NO, but members such branches
may consider It is international practice.
- No. of branches
providing the same to
It provides useful information to
bring out the key - quantification of advances,
users of FS
observations from the deposits, interest income
report and interest expense
Bank Audit – Reporting of Fraud
1 2 3 4 5
SA 250 - Duty of SA 240 – Is auditor required to check
Sec 143(12) of
RBI Circular confidentiality over- Reasonable every transaction because of
Companies Act
ridden by Law assurance circular
As per RBI Circular, if As per SA 250, duty of As per SA 240, auditor As per Section It must be noted that auditor is
auditor finds confidentiality is over- can obtain only 143(12) of Companies not expected to look into each
ridden by reasonable assurance Act, and every transaction
- Statute that FS are free from but
- anything
MMS. An auditor is required to evaluate the system as a
susceptible to - Law to report a fraud to the whole.
Fraud
- Court He cannot obtain central government if it
absolute assurance. exceeds Rs. 1 Crore
- Act of excess within stipulated period Therefore, if the auditor while
power of time. performing his normal duties
He cannot reduce comes across any instance,
audit risk to zero. Further as per Section
- Smell of foul play 143(13) such reporting he should report the matter to
This is because of shall not be
inherent limitation of considered as violation - the RBI in addition to
He shall refer the
audit of the code of ethics
matter to regulators
requiring auditor to - Chairman/Managing
maintain confidentiality Director/Chief Executive of
the concerned bank.
Bank Audit Approach
1 2 3
Understanding
Engagement Team
Audit Plan control activities of
discussions
the Entity
An audit plan should The following are certain common questions /steps, which have to be kept in mind while undertaking/ Engagement team to gain better & assess
be drawn up based on performing control activities: should hold understanding of potential
discussions bank & its MMS.
Nature of Questions to be considered / answered environment
- Assessment of questions
audit risk
Who - Who performs the control? These discussions should be documented for future
purpose
- Does the above person have requisite knowledge and authority to perform the control?
- level of compliance
What - What evidence is generated to demonstrate /prove that the control is performed?
of previous reports, Q. What are the various matters upon which engagement
When - When and with what frequency is the control performed?
team discussions may be held under an audit?
- Is the frequency enough to prevent, detect and correct Risk of Material Misstatements?
- inadequacy in or Where - Where is the evidence of performance of the control retained?
breach of internal • Errors most likely to • Response to
controls/ discipline - For how long is the evidence retained? occur assessed risk
etc. - Is the evidence accessible for / available for audit?
Why - Why is the control being performed? • Errors identified in • Need to maintain
- What type of errors are prevented or detected through the performance of the control? prior years professional
How - How is the control performed? skepticism
- What are the control activities? • Methods by which

fraud committed by • Need to be alert to
- Can these activities be bypassed?
bank personnel info./ conditions
- Can the bypass, if any, be detected? indicating MMS
- How are exceptions / deviations resolved on identifi cation?
Engagement team discussion provides the following/ has
- What is the time frame for resolving the exceptions/ deviations?
the following advantages -
It provides Opportunity It provides Understanding
For Eng. Partner For ETM to Among ETM of

and ETM to share exchange info result of RAP &
their insights related to risks NTE of FAP
Stages in conducting a bank audit
1 2 4 6 7 8
Understanding Bank Understand the
Initial consideration Establishing overall Audit Planning Identifying &
& its environment Bank’s Accounting
by Statutory auditor Strategy Memorandum assessing RMMS
including ICs Process
Refer Page 163 As per SA 300, Auditor Auditor shall As per SA 315, Auditor As per SA 315, Accounting process
shall establish overall summarize their audit shall identify and Understanding Bank’s produced financial &
audit strategy to plans by preparing assess RMMS at FS entity, environment operational information
perform audit in audit planning level and assertion and IC enable auditor & contributes to bank’s
effective manner. memorandum. level ICs.
- to assess risks
Understanding it is
3 5 - Develop plan & important
address those risks
Develop the Audit Determine Audit
Plan Materiality
9 10 11
As per SA 300, Auditor As per SA 320, auditor Assess risk of fraud Assess risk
shall develop audit shall determine including money associated with Understand bank’s risk management process
plan to determine NTE materiality at planning laundering outsourced activities
of RAP, NTE of FAP, & performing stage.
NTE of other RBI has framed
procedures Bank may have An effective risk Management process includes –
guidelines for prevention
outsourced certain
of money laundering &
“Know Your Customer”
activities. - Involvement of TCWG (Control Environment)
(KYC)
There are number of - Identifying measurement and monitoring of risks
risks associated with [Risk assessment process]
Observe whether bank
outsourcing.
complied with those - Control Activities
guidelines.
It is important for bank - Monitoring activities
to manage those risks.
Perform necessary - Reliable information system (including business
procedures as per SA processes)
240 and deploy Prof.
skepticim.
Stages in conducting a bank audit
12 13 14 15 16 17
Engagement Team Responses to Consider Going Reliance on/ review

Stress Testing Basel III Framework
Discussions assessed risks Concern of other reports
ETM should hold Based on the RBI requires that The Basel Committee Auditor should be alert The auditor should take into
discussion to assessment of the risk on Banking Supervision to any conditions or account the adverse
by the auditor as all commercial banks (BCBS) and the events that may cast comments, if any, on
- understand risks, above, shall put in place Financial Stability Board significant doubt about advances appearing in the
(FSB) bank’s ability to following –
he shall design continue as a going
- NTE of FAP, A Board approved concern.
responses in form of ‘Stress Testing has undertaken an • Previous audit reports
NTE of FAP. framework’ extensive review of the
- share insights etc. regulatory framework Auditor should carry • Latest internal inspection
in the wake of the sub- out necessary reports of bank officials
to suit their individual prime crisis. procedures as per SA
requirements which 570.
• Reserve Bank’s latest
In the document titled inspection report.
would integrate into ‘Basel III: A global
their risk management regulatory framework
systems. for more resilient • Concurrent / Internal
banks and banking audit report
systems’, released by
the BCBS in December • Report on verification of
2010, security Etc.
it has inter alia proposed

certain minimum set of
criteria for inclusion of
instruments in the new
definition of regulatory
capital.
Auditor to observe
whether bank complied
with the same.
Stages in bank audit – “Initial Consideration by Statutory Auditor”

It discusses the matters to be considered by a proposed auditor upon receiving intimation of their appointment. It also deals with aspects of planning and preliminary work to be undertaken by the auditor
before actually commencing the audit work.)
1 2 3 4
Internal Assignment
Declaration of Procedures before Communication with
in Bank by Statutory
Indebtedness Planning previous auditor
Audit
Statutory auditor to Statutory auditor Auditor should conduct Auditor should

give declaration of should not be holding procedures in relation communicate with the
indebtedness to the any internal to acceptance and predecessor auditor
bank before taking up assignment in the continuance of client before taking up the
the assignment. bank. relationship as per SA assignment.
210.
5 6 7 8 9
Understanding the
Terms of Audit Initial Engagements Assessment of Establishment of
bank and its
Engagement (SA 510) Engagement Risk Engagement team
environment (SA 315)
Auditor should develop In case of initial Auditor should assess Auditor should select Auditor should obtain
and understanding engagement, auditor the engagement risk the engagement team understanding of the
with the bank should perform beforehand. based on the bank, its environment
management necessary procedures It helps in deciding experience and and internal controls.
regarding terms of in relation to opening whether to accept the qualification He should perform
audit engagement. It balances as well as engagement and also considering the size of necessary risk
should be reduced in per SA 510 helps in planning the the assignment. assessment
writing. engagement. procedures and
determine the NTE of
Further audit
procedures.
Audit of Advances – Various types of Advances

1 3
Various examples of Classification of

Advances Advances
• Term loans • Adverse

balances in Classification Classification of advances
• Cash credits, Deposit of advances as per prudential norms
Overdrafts, Accounts
Demand
Loans • Participation Prudential
Sector wise Security wise
on Risk norms Standard loans NPA Loans
• Bills Sharing basis
Discounted
and • Interest
Purchased bearing Staff Priority Secured Standard
Standard Special Mention
Loans Sub-Standard Doubtful Loss
Regular Accounts
Non-Priority Unsecured NPAs

SMA 0
D1
(Accounts showing
(Doubtful < 1 year)
2 A (i) Bills purchased and discounted stress signals)
(ii) Cash credits, Overdrafts and loans repayable on
Legal requirement of demand
disclosure of (iii) Term Loans SMA 1
D2
advances in Balance B (i) Secured by tangible assets (Overdue between 31
(Doubtful 1 to 3 year)
(ii) Covered by Bank/Government guarantees to 60 days)
Sheet (iii) Unsecured
C. I(i) Priority sectors
I(ii) Public sector SMA 2
As per “Schedule 9” of D3
I(iii) Banks (Overdue between 61
“Part A" of “Third (Doubtful > 3 years)
I(iv) Others to 90 days)
Schedule” of “Banking II(i) Due from Banks
Regulation Act, 1949” II(ii) Due from Others:
(a) Bills Purchased and discounted
(b) Syndicated loans
(c) Others
Audit of Advances – Nature of Securities (Part 1)

Examples of most
1 Types of Security 2 common types of
securities accepted
by banks
Primary Security Collateral Security

• Personal Security of • Third Party
Guarantor Guarantees
Primary security refers Collateral security is
to the main security an additional security.
offered by the • Goods/Stocks/Debtor • Banker’s General
borrower for bank s /Trade Receivables Lien
finance or the one
against which credit
has been extended by • Gold Ornaments and • Life Insurance
the bank. Bullion Policies
This security is the • Immovable Property • Stock Exchange

principal security for Securities and Other
an advance. Instruments
• Plantations (For
Agricultural
Advances)
Audit of Advances – Mode of Creation of Securities (Part 2)

3 Depending on the nature of the item concerned, creation of security may take following forms –
Mortgage Pledge Hypothecation Assignment Set-off Lien
Mortgage are of several kinds but A pledge involves The hypothecation is the Assignment represents a Set-off is a statutory right of a Lien is creation of a
the most important are the following creation of an equitable charge transfer of an existing or creditor legal charge
bailment or delivery of future debt, right or property
goods by the borrower to the in favor of the lending bank belonging to adjust, wholly or partly, with consent of the
Registered Mortgage Equitable mortgage
lending bank owner,
by execution of hypothecation to a person in favour of the debit balance in the
are affected by a is effected by a mere
agreement another person. debtor’s account against any which gives lender a
registered instrument delivery of title deeds or with the intention to create
called ‘Mortgage Deed’. other documents of title charge thereon as security for credit balance lying in legal right
the advance. w.r.t. the moveable securities Only actionable claims (i.e., another account of the
belonging to the borrower. claim to any debt other than a debtor. to keep possession of
It is signed by the with intent to create debt secured by a mortgage, property belonging to
mortgagor. security thereof. The legal ownership of the
hypothecation, pledge) The right of set-off enables a another person
goods remains with the Neither ownership nor
pledger. possession is transferred to the bank to combine two
It registers the property to
bank. such as book debts and life accounts (a deposit account until a debt owed by
the mortgagee as a
The lending banker gets insurance policies are and a loan account) of the that person is
security.
certain defined interests in accepted by banks as same person discharged.
However, the borrower holds the
the goods. security by way of
physical possession of the
assignment. provided both the accounts
goods as an agent/trustee of
the bank. are in the same name and in
The pledge of goods
An assignment gives the the same right (i.e., the
constitutes a specific (or
assignee absolute right over capacity of the account
fixed) charge. The borrower periodically the moneys/debts assigned holder in both the accounts
submits statements regarding to him. should be the same).
quantity and value of
hypothecated assets (stocks,
debtors, etc.) to the lending For the purpose of set-off, all
banker the branches of a bank are
treated as one single entity.
on the basis of which the
drawing power of the borrower The right of set-off can be
is fixed. exercised in respect of time-
barred debts also.
Audit of Advances – Prudential norms on Income Recognition, Asset

classification, provisioning w.r.t. advances (Part 1)
1 NPA 2 Categories of NPA
An asset becomes NPA when it

ceases to generate income for the Categories of Non-Performing Assets: Provision required
Bank. Substandard Assets:
Would be one, which has remained NPA for a period < 12 months. 15%
An NPA is a loan or advance where Doubtful Assets
In respect of One, which has remained in the substandard category for a period of 12 months.
Sub-categories:
Secured Unsecured
Term Loan Bills purchased Overdraft/ • Doubtful up to 1 Year (D1)
or discounted Cash Credit 25% 100%
• Doubtful 1 to 3 Years (D2)
interest
and/or the bill remains the account • Doubtful more than 3 Years (D3) 40% 100%
instalment of overdue for a remains ‘Out of
principal period of more Order’ 100% 100%
than 90 days Loss Assets
remain overdue
One, where loss has been identified by the bank or internal or external auditors or 100%
for more than 90
the RBI inspection but the amount has not been written off wholly.
days
Overdue Out of Order Important points to

3 note regarding
classification
Any amount due to the An account should be
bank under any credit treated as ‘out of order’ if
facility is ‘overdue’
Classification should Availability of Asset Classification
OR OR be based on record security or net would be borrower-
if it is not paid on the due
If the outstanding There are no Credits are not or recovery worth of wise and not
date fixed by the bank.
balance remains credits enough to cover the borrower/ facility-wise.
continuously in continuously for interest debited guarantor should
excess of the 90 days as on during the same not be taken If one is classified as
sanctioned the date of period. into account NPA, all facilities
limit/drawing power. Balance Sheet
including investment
in securities would
be termed as NPA.

Assets regularized Advances under Accounts where Advances Against
near balance sheet Consortium there is erosion in Term Deposits,
date the value of security NSCs, KVPs/ IVPs,
/ frauds committed etc.
The asset classification of borrower Consortium advances should be by borrowers
accounts based on the record of recovery of
the respective individual member In such cases it is not prudent to Advances against term deposits,
where a single credit or a few banks and other aspects. follow stages of asset classification. NSCs eligible for surrender,
credits are recorded before the KVP/IVP and life policies
balance sheet should be handled Where the bank receiving It should be straight-away classified
with care. remittances is not parting with as doubtful or loss asset as need not be treated as NPAs,
the share of other member banks, appropriate.
Where the account indicates provided adequate margin is
inherent weakness on the basis of the account should be treated as not Erosion in the value of security can be available in the accounts.
the data available, the account serviced in the books of other reckoned as significant when
should be deemed as a NPA. member banks.
CG guaranteed Advances, where The banks participating in the The realizable value of the If the realizable value of the
the guarantee is not invoked / consortium, therefore, need to security is security, is
repudiated would be classified as arrange to < 50% < 10%
Standard Assets, of the value of amount outstanding in accounts,
get their share of to get an express

but regarded as NPA for Income recovery consent from the assessed by the bank or As assessed by bank/ RBI/
Recognition purpose. transferred from lead bank for the accepted by RBI at the time of approved valuer
the lead bank transfer of their last inspection
share of recovery the existence of security should be
Such NPAs to be classified ignored and
Drawing Power Allocation in case of under doubtful category and
Cash Credit Account under consortium provisioning should be made as the asset should be straight-away
applicable depending upon classified as loss asset.
ageing.
The Lead Bank would be In certain special It may be either written off or fully
responsible for computing circumstances, at Borrower’s provided for by the bank.
the drawing power of the request,
borrower and allocate the the Lead Bank may allot a
same to member banks. higher or lower share of
Drawing Power to the
member bank, as against
their share of Advance.

Agricultural Advances to Staff Agricultural Advances Against
Advances affected Advances Term Deposits,
by Natural Calamities NSCs, KVPs/ IVPs,
As per the guidelines, etc.
As a Banker As an Employer Agricultural Advances
Master Circular issued by the RBI
deals with the classification and are of two types
Interest bearing staff The staff advances by Advances against term deposits,
income recognition issues NSCs eligible for surrender,
due to impairment caused by natural advances as a banker a bank as an employer
should be included as part and not as a banker KVP/IVP and life policies
calamities. Agricultural Agricultural
of advances portfolio of Advances for Advances for
the bank. are required to be “long duration” “short duration” need not be treated as NPAs,
Banks may decide on their own
included under the crops crops
relief measures, viz.,
In the case of housing sub-head ‘Others’ provided adequate margin is
loan or similar advances under the schedule of available in the accounts.
granted to staff members Other Assets. The “long duration” Crops which are not
conversion of
OR
re-schedulement crops would be crops “long duration” crops
the short term of the repayment with crop season would be treated as
where interest is payable
loan into a term period and the longer than one year. “short duration” crops.
loan sanctioning of after recovery of principal,
fresh short term
It will be treated as It will be treated as
loan, interest need not be NPA, NPA,
considered as overdue
from the first quarter
subject to the guidelines contained in if the instalment of if the instalment of
onwards.
RBI’s latest Master Circular. principal or interest principal or interest
thereon remains thereon remains
Such loans/advances
In such cases, the NPA classification overdue for one crop overdue for two crop
should be classified as
would be governed by such rescheduled season. seasons
NPA only when there is a
terms.
default in repayment of
instalment of principal or Crop season for each crop would be as
payment of interest on the determined by the State Level Bankers’
respective due dates. Committee in each State.
Computation of drawing power (Part 4)
Following are the points to be taken care by Banks as per prudential norms -
1 2 3 4 5 6
Keep accounts Irregular Ensure that DP to be arrived at Stock statements, DP to be calculated

within limit at all accounts to be drawings in WC based on current quarterly returns,
as per guidelines
times. account is covered annual returns
brought to notice of stock statement formulated by BOD of
by adequate submitted should be
Mgt./ HO respective bank.
current assets Considering difficulties for scrutinized in
large borrowers, Stock detail. It should also been
statement not to be older agreed upon by the
than 3 months
concerned
If older than 3 months, statutory auditors.
the drawing power is
to be considered as
Particulars of current assets DP
irregular (A) Stocks
Stocks at realizable value 1000

7 8 9 10 Less: Unpaid stocks
Special consideration Stock audit Obtain stock audit Calculate DP in case of - Sundry Creditors 300
EXAMPLE
to sundry required by bank report from lead construction 600
- Acceptances/ LCs 300
creditors for where funded bank in case of business carefully.
Paid for Stocks 400
calculating DP. exposure > Rs. consortium
Valuation of WIP Less: Margin @ 25% 100 300
5 Crore
should be done in
(A) Debtors
consistent & proper
Total Debtors 1000
manner
Less: Ineligible debtors 200
Mera paisa Kidhar Eligible Debtors 800
Mobilization
hai Margin @ 40% 320 480
advances received to be Total DP 780
reduced while computing DP
Audit of Advances (Audit Procedures)
Evidences that auditor primarily wants to obtain Evaluation of Internal controls over advances
• Credit worthiness & sanction: The bank should make an advance only after satisfying itself as
to the credit worthiness of the borrower.
1 There are no 2 Amounts due to the 3 The stated basis of
unrecorded bank are valuation of advances is
• Execution of all necessary documents: All the necessary documents should be executed by the
advances. appropriately appropriate as per AS
parties before advances are made.
(Completeness) supported by Loan and GAAP. (Valuation)
documents and other
documents as 4 • Ensure end use and compliance: The compliance with the terms of sanction and end use of
Appropriate provisions
applicable to the funds should be ensured.
towards advances have
nature of advances. been made as per the
(Rights) RBI norms, AS and • Sufficient margin: Sufficient margin as specified in the sanction letter should be kept against
GAAP. (Valuation) securities taken so as to cover for any decline in the value thereof.
5 • Ownership of Shares, debentures taken as securities: If the securities taken are in the nature
of shares, debentures, etc., the ownership of the same should be transferred in the name of the
Amounts included in balance 7 The advances are disclosed, bank.
sheet in respect of advances classified and described in
are outstanding at the date of accordance with recognized as
• Security registration in name of bank: All securities requiring registration should be registered
the balance sheet. (Existence) per applicable FRF.
in the name of the bank or otherwise accompanied by documents sufficient to give title to the
(Presentation & Disclosure)
bank.
Advances represent amount 6
due to the bank. (Existence)
• Test check goods pledged as securities: In the case of goods in the possession of the bank,
contents of the packages should be test checked at the time of receipt.
Auditor should examine all large advances while other advances may
be examined on sample basis • Maintenance of DP register: Drawing Power Register should be updated every month to record
the value of securities hypothecated.
The auditor should The accounts As a general rule,
What
identified to be an advance may be
examine all large constitutes a • Reporting of breach of DP: All the accounts which exceed the sanctioned limit or drawing power
advances problem accounts considered to be a large
‘large should be brought to the notice of the controlling authority regularly.
need to be advance if year end bal.
advance’
examined in detail is
while would need to • Frequency of account operations review: The operation of each advance account should be
be determined > Rs. 2 crore OR 5% of the reviewed at least once a year, and at more frequent intervals in the case of large advances.
unless in the context aggregate year-
other advances may end advances of
of volume of
be examined on a the branch
operations of
sampling basis. the amount involved
the branch.
is insignificant.
whichever is less.
Audit of Income – Various types of incomes (Part 1)

Various items
included under head
of Income
1 2 3 4
Profit/ Loss on Profit/ Loss on Profit/ Loss on
Sale of Revaluation of Interest income on exchange
Interest earned Other incomes Investments Investments investments transactions
Investments are As per RBI This includes all This includes

• Interest / Discount on • Commission, Exchange and dealt in the course guidelines, income derived revaluation gains/
Advances / Bills: Brokerage of banking activity from losses on
investments are to
• Government • debentures
• Interest Income on • Profit on Sale of 1 and be valued at • forward exchange
Investments:
3 Investments
securities,
periodical contracts &
intervals and • other
hence the net
• Interest on Balances with • Profit/ Loss on Revaluation • bonds investments
profit or loss on • other derivative
RBI and Other Inter–bank of Investments
2 sale of depreciation or by way of interest contracts,
Funds:
investments is appreciation in and dividend,
• Profit on sale of Land,
taken to P&L valuation should • premium income/
• Others: This includes any Buildings and Other Assets:
account. be recognized expenses on
other interest/discount except income
income not included in the • Profit/Loss on Revaluation earned by way of options, etc.
above heads of Fixed Assets and taken to profit dividends, etc.,
and loss account from subsidiaries
• Profit on exchange 4 and joint ventures
transactions: abroad/in India.
• Income earned by way of

Broken period
dividends, etc., from
interest paid on
subsidiaries and joint
securities
ventures abroad/in India.
purchased &
amortization of
• Miscellaneous income
premium on
investments is net
off from the
interest income on
investments.
Audit of Income – Reversal of income (Part 2)

Reversal of Income Where shall we
record such interest
If any loan or advance or bill purchased or discounted, lease to keep track record?
finance etc. turns into Non-Performing Asset (NPA).
Banks may continue to

The bank should recognize income on realization basis rather
record such accrued
than accrual basis.
interest in a
Memorandum
account in their books
1 4 for control purposes.
Income Income Income not
recognized & recognized but recognized & not For the purpose of
realized not realized realized computing gross
advances, interest
2 recorded in the
Any Income Any Income Memorandum account
Related to Related to
(interest, fees, (interest, fees, should not be taken
current FY previous FY
commission etc.) commission etc.) into account.
recognized and not yet accrued
realised
Any Income Any Income
(interest, fees, (interest, fees, Shall not be
need not be commission etc.) commission etc.) accrued.
reversed. accrued but not accrued but not
realised realised
need to be need to be
reversed. provided for
(creation of
provision). In the absence of a clear agreement
between the bank and the borrower for
appropriation of recoveries in NPAs (i.e.,
towards principal or interest due),
If such income is If such income is If such income is What if partial
recovered at a recovered at a recovered at a recovery?
later stage later stage later stage banks are required to adopt an
accounting policy and exercise the right
of appropriation of recoveries in a
Income can be Provision needs to Income can be uniform and consistent manner.
recognized as be reversed. recognized as
income in the income in the
books of the bank books of the bank
Audit of Income – Audit Procedures (Part 3)
Reasonable Income > 1% of Ultimate Advances against Bill purchased Bill for collection Fees/ commission
assurance total income collection FD, KVP, NSC, IVP outstanding YE for re-scheduling
Auditor is primarily As per RBI For income For Advances against For bill purchased In the case of bills Fees and
concerned with recognized on outstanding at year- for collection, commissions
If any income accrual basis, • National Savings and end, earned by the banks
obtaining exceeds 1% of total Certificates • Life policies the customer’s as a result of re-
reasonable income / 1% of net it should not be (NSCs), • Term Deposits Discount received account is credited negotiations or
assurance profit before taxes unreasonable to • Indira Vikas should be properly only after the bill rescheduling of
expect its ultimate Patras (IVPs) apportioned has actually been outstanding debts
About various It should be collection. collected from the
assertions related to considered on • Kisan Vikas drawee. should be
Interest may be taken to Interest paid on re-
income accrual basis. IF Significant Patras (KVPs) recognized on an
income account on due date discounting
(completeness, uncertainty The commission of accrual basis over
classification, regarding ultimate the branch becomes the period of time
IF NOT, Provided adequate margin is Not to be netted off covered by the re-
occurrence, collection, due only when the
available in the accounts from discount negotiated or
accuracy, cut-ff. bill has been
It can be considered earned. collected. rescheduled
on receipt basis. Recognize it on extension of credit.
receipt basis.
Test checking
Test check should

be conducted for the
fees and
commissions
earned by the banks
made for
commission on Bills
for collection;
Letters of credit;
Bank Guarantees.
Audit of Expenses
Various items
included under Audit procedures
expense head
Interest expended Operating expenses Provisions and Interest expense Operating expenses Provisions and
contingencies contingencies
- Interest on Deposits - Payments to and Provisions - Provisions made in respect • Ratio Analysis of Interest • Evaluate the system of • Obtain understanding on
for Employees of the Non-performing paid to quantum of liabilities internal controls relating to how provisions are made
- Interest on Reserve Bank of
assets. operating expenses
India/Inter–Bank - Rent, Taxes and Lighting • Compare weighted average • Verify loan classification on
Borrowings - Provisions for Taxation interest rate with actual • Segregation of duties sample basis
- Printing and Stationery
interest rate:
- Others - Provisions for Diminution in • Authorization • Test check provisions
- Advertisement and Publicity
the value of investments • Compare average Interest procedures computations
- Depreciation on Bank’s rate with previous year
- Provisions for • Perform analytical
Property
contingencies • Auditor should test check procedures
- Directors’ Fees, Allowances calculations of interest on
• Month on month
and Expenses various deposits like
• Current vs. previous
- Auditors’ Fees and o Savings accounts
year
Expenses
o Fixed deposits
• Test Check
- Law Charges
o Inter-branch balances
• Invoices
- Postage, Telegrams,
o Overdue/ matured
Telephones, etc. • POs
term deposits
- Repairs and Maintenance • GRN
• Auditor should ascertain
- Insurance changes in interest rate • Agreements
during the period
- Direct Marketing Expenses
- Other Expenditure
Disclosure of prior
period items
Format of the P&L A/c in Wherever required, such

Form B under III disclosure can be made
Schedule does not
provide for disclosure of in notes to accounts to
the impact of prior period Balance sheet of banks
items
Chapter 17 –
Special Audit

Chapter 17 – Special Audit CA Katik Aggarwal
Government Audit
Is government audit an
Meaning of Government Audit Provisions related to C&AG
investigation?
Government audit is neither equipped
Government audit
nor intended to function as an
is Removal or
investigating agency. Appointment Remuneration
Professional Objective resignation
Appointed by President of India Can be removed only He is paid salary
Independent Systematic All the expenditures of when each house of equivalent to that of
Examination of Government are met from parliament Judge of Supreme
Court of India.
Financial Administrative Other Term Vote to remove him

Consolidated Consolidated Parliament is
operations
Fund of India Fund of State By majority of 2/3 of competent to make
6 years from date of appointment
In case of CG In case of SG members present and laws for salary of
Of public entity or
voting C&AG
age of 65
For the purpose of
Who discharges the Can be removed only but
Evaluating verifying reporting whichever is earlier
on the grounds of
function of Government proven misbehavior they cannot be varied
Audit Audit Recommend- audit in India? Submission of Audit report
and incapacity. to his dis-advantage
findings conclusions ations. after his appointment.
Independent statutory authority of
Can resign at any point
of time
the Comptroller and Auditor General Related to Union Related to State
Objective of Government Audit Resignation letter to be
through the agency of Submit to the Submit to the addressed to President
the Indian Audit and Accounts president governor/ of India
Mechanism for Department. president
Ensures
public accountability President shall
further cause it to President shall
accounting of government for
be laid before further cause it
HOW DOES THE CONSTITUTION GUARANTEE
of public THE INDEPENDENCE OF C&AG OF INDIA?
Parliament to be laid before
government State
funds Revenue Expenditure Legislature Appointment Provisions for Provision for
provisions Removal of remuneration
C&AG of C&AG
Government Audit
Duties of C&AG
To Audit receipts & To Audit Audit of

General
Compile & Expenditures of bodies To Audit grants & To Audit receipts Accounts of Government
Provisions
Submit Accounts substantially financed loans of union or states Stores and Companies &
relating to audit
from CFI/ CFS Inventory corporations
C&AG shall compile C&AG shall audit all C&AG shall audit C&AG shall audit all C&AG shall audit the C&AG appoints C&AG shall audit
the accounts of receipts & expenditures of receipts into CFI/ CFS. accounts of the auditor in case of
any body specific purpose
government - All
loan/ grant given out of
He shall check that Stores & stock companies.
Union State Union CFI/ CFS expenditures
Which is substantially adequate rules
Territory from CFI/ CFS
financed from CFI/ CFS. and procedures are Kept in any office or
having to anybody C&AG directs such
legislative department of union or
A body shall be treated as state. auditor the manner - All transactions of
assembly In Operating
substantially financed other than effectively in which the accounts Union State relating to
existence
& submit the same to of the Government Contingency
Foreign state/ To ensure effective company are required
if amount of grant/ loan
to be audited. Fund and
in 1 year is international organization.
president Governor Administrator assessment collection allocation Public
` The auditor shall Accounts
Respectively. C&AG to scrutinize
Rs. 25 & 75% of total of revenue submit a copy of
the procedures by
Lakhs expenditure which sanctioning the audit report to - All Trading,
of that body or the Comptroller and Manufacturing, Profit &
Or more authority satisfies itself
authority Auditor-General of Loss account, balance
Or more India. sheet and other
w.r.t. fulfillment of
conditions of giving subsidiary
grants/ loans. The report shall include
accounts kept in
directions given Dept. of Union/ State.
by C&AG, actions
taken thereon, its
impact on FS of
Company
Government Audit
Standards of Expenditure Audit/
Power of C&AG
Types of Expenditure Audit
To require books/
To question/ call for Audit against Audit of
To Inspect accounts to be sent
information Rules and Orders sanctions
at specific place
C&AG can inspect office C&AG may require books, C&AG may put such Expenditure should be Objective of this audit
of accounts papers, documents in questions or call for such incurred in accordance is that
relation to any transaction information with
Under control of Union/ under audit
State. from person-in-charge of Each Sanctions
Be sent to specified office
Constitution Laws Rules and Rules and
Expenditure is should be
regulations regulations
places. & made by made by
covered by given by
As he considers rules C&AG higher proper proper
necessary for preparation
authority sanctions authority
of accounts/ reports as
required. competent
General Specific to do so.
Auditor should have sound
knowledge of rules & orders w.r.t. Auditor should
Have Examine
Powers Mode of conditions knowledge whether all
to incur & presentation sanctions are
of service pay, of
sanction of claims & allowances and sanctioning adequately
expenditure withdrawing
from CFI/ money from
pensions of
power of noted in
government
CFS CFI/ CFS. servants.
various prescribed
authorities. register
Government Audit
Standards of Expenditure Audit/ Types of Expenditure Audit
Audit against
Propriety Performance
provision of
audit audit
funds
2 1
This audit is conducted Auditor has to examine cases of Sometimes, 1 Auditor to ensure that
with the objective of improper or wasteful expenditure may be Government programs
ensuring incurred as per rules have
expenditures
But highly wasteful. Achieved desired At lowest Given
Expenditure is Expenditure
Even though it is incurred intended
made for does not as per rules and regulations.
objectives cost
purpose exceeds benefit
for which grant/ appropriation 2
3 Examples – A building constructed for use Performance audit
fund has been amount as hospital but not used for the same purpose or includes
made. put to use after 5 years
4 Auditor should examine whether public financial Efficiency Economy Effectiveness
audit audit audit
morality is exercised by looking into
3 4 5
wisdom faithfulness economy Efficiency Economy Effectiveness
audit audit audit
of transaction
5
Whether the Whether Whether Whether the
It is hard to frame precise rules for audit program/ program/
against propriety. financial, sanction
scheme/ project scheme/ project
6 human, authorities
Auditor should examine the following -
physical have
Are Achieved overall
executed resources observed targeted
Authority have made Expenditure is not Expenditure not Public money is not in efficient economy objectives.
expenditure with sanctioned by used for benefit of acquired in
more than what manner.
same vigilance occasion authority to accrue its
particular economical
as a normal person own advantage person/ section
would exercise with his demands manner
(directly/ indirectly) of community.
own money
Government Audit
Audit of Stores & stocks
It has been developed as a part of Expenditure Audit.
1 2 3 4 5 6
Regulation Deficiencies Audit of Purchases QL & QT Certificate Physical Verification Valuation
Audit is conducted to Aim is also to bring to the Audit of purchases is conducted Certificate of quality Periodical verification The valuation of the
ascertain and quantity should be of inventory is also inventories is seen
notice of Government
furnished conducted to carefully so that the
whether the regulations in same manner as
Any & deficiencies
ensure their value accounts
governing
deficiencies in ICs By inspecting existence. tally with the
Audit of expenditure
purchase, receipt and
in and receiving physical
quantities
issue, custody, sale
of stores authority. accounts
and inventory taking of
stores It should be as per It should be It should be and
rules of properly economical.
Are well &
Properly purchase laid sanctioned.
down by that adjustment of
devised carried out competent profits or losses due to
authority revaluation, inventory
taking or other causes
Prices paid should It should not is carried out.
be
exceed the
reasonable. Cases which should be specifically brought out in
provision of the report
funds.
Cases of Losses due to Any excess or

uneconomical defective idle inventory is
purchases of inferior quality specifically
stores should should be mentioned in
be brought out brought out in the report
in the report the report
7 8
Uneconomical Losses due to Idle Inventory
purchases poor quality
7
Government Audit
Q. Which one is older, audit of receipts or audit of expenditures?
Audit of Receipts
Ans. Audit of Expenditure
1 2 3 4 5
Prompt detection of Proper accounting and
All revenue realized Adequate regulations Regulations carried out
leakage suggestion to improve
Whether all revenues Whether adequate Whether such Whether adequate Review of systems and
or other debts due to regulations and regulations and procedures to see that the
procedures have been procedures checks are imposed
government have been to ensure
internal procedures
correctly framed by adequately ensure
are actually being
department/agency the prompt detection
assessed, realized concerned carried out and investigation of correct & regular
& credited to accounting of demands
government account to secure an effective irregularities, double collection and refunds and
check on refunds, fraudulent or
by the designated forged refund or other pursuant of dues up to final
authorities loss of revenue settlement and to
assessment,
collection and suggest
through fraud
or
proper allocation of improvement.
cases willful omission
or negligence; The basic principle of audit of
receipts is that it is more
important to look at the
general than on the
particular,
though individual cases of

assessment, demand,
collection, refund, etc. are
important within the area of
test check.
Government Audit
Audit of Commercial Accounts
Public enterprises are required to maintain commercial accounts and are generally
Further Note on Statutory audit of Government Companies
classified under 3 categories -
Departmental Statutory Bodies, Government

enterprises Corporations Companies
C&AG appoints C&AG shall within 60 days of receipt of audit report, have right
the auditor in case of to -
Engaged in These are created by It means the government
government companies companies. Conducts Comment Conducts test
commercial and specific statutes
set up under supplementary upon or audit of the accounts
trading
mostly financed by C&AG directs such audit of the accounts supplement u/s 143(6)(b)
operations, the Companies Act, u/s 143(6)(a)
government auditor the manner such audit report
2013
in which the accounts u/s 143(6)(b)
which are subject to the
in the form of loans, of the Government
same laws, financial and
grants, etc. company are required
other regulations Any comment
to be audited. For this he may Without prejudice to
authorize such person given by C&AG aforementioned rights,
as other government as he may decide shall be sent by he may order test audit
departments and agencies; The auditor shall
Company to
submit a copy of every person
He may require such If he considers
the audit report to entitled to receive
information/ necessary.
the Comptroller and copies of FS.
additional information
Auditor-General of to be furnished to such
Audit of such Audit of these types of Audit is conducted by &
India. person as he may
departmental concerns bodies or corporations statutory auditors decide Also be placed
is undertaken
The report shall include in AGM along
depends on appointed by directions given with audit report.
in same manner
C&AG by C&AG, actions Is BOD required to give explanation/ comments on
as the nature and type of taken thereon, its reservations/ adverse remarks/ disclaimer container in
the statute impact on FS of
any department of auditor’s report? → YES
governing the bodies or Company
government where corporations.
commercial accounts Is BOD required to give explanation/ comments on
are kept.
reservations made by C&AG? → NO
Audit of Local Bodies
Sources of revenue Areas of expenditures Describe salient features of Financial Administration of Local Bodies
Various sources of revenue - Expenditure incurred by the

municipalities/ Budgetary Procedures Expenditure Controls Accounting System
• Taxes on property, corporations can be broadly
classified under the
following heads: It has 2 objectives – Under Municipality, same Municipal accounts has
• Taxes on trade,
entity has both been conventionally
(a) General administration - Financial Accountability prepared on cash basis.
• Taxes on persons; legislation and
and revenue collection,
Expenditure to be incurred executive powers.
as per rules and regulations In recent past, it is being
• Fees and licenses,
(b) Public health, changed to accrual
- Control of Expenditures It makes it difficult for
• Non-tax resources such as system of accounting.
(c) Public safety, municipal council to act
rent of land, houses, Expenditure not to exceed as scrutinizing body.
ceiling limits.
• Income from commercial (d) Education,
undertakings; Moreover, it is difficult
One important feature of
(e) Public works, for municipality to
the municipal budgets is
• Government grants that there is no strict accommodate
(f) others such as interest
separation between independent finance
payments, etc.
Main source of revenue revenue and capital officer.
items; usually there is a
Property taxes and octroi ‘head’ called extraordinary
items which cover most of This leaves the
the capital transactions. system of external
Different types of Grants
audit by state
government as the
General purpose grants: Specific purpose grants Statutory and
compensatory grants only instrument of
These are primarily These grants which are tied controlling
intended to substantially to the provision of certain Given to compensate for municipal
bridge the gap between services or performance of taxes overtaken by State
the needs and resources of certain tasks. Government from local
expenditure.
the local bodies. bodies
Audit of Local Bodies

Objective of audit of
Audit Programme of local bodies
local bodies
1
Reporting on fairness
of content and Ensure his Objective of the Audit against Audit of Audit against Performance
presentation of appointment is auditor rules and sanction provision of Audit
financial valid orders funds
statements
The Local Fund Auditor should The auditor should He should ensure He should ensure The auditor should
2 Reporting upon the Audit Wing of the report on fairness of ensure that the that all types of that there is a check that the
strengths & State Govt. is content and expenditure sanctions, either provision of funds different schemes,
generally in-charge presentation of FS, incurred conforms special or general, and the expenditure programmes and
weaknesses of of the audit of Strength and to the relevant accorded by the is incurred from the projects, are running
financial control municipal accounts. weakness of provisions of the law competent provision and the economically,
system financial control and is in accordance authority. same has been efficiency and
Sometimes bigger system, Adherence with the financial authorized by the achieving the
municipal to legal and rules and regulations competent desired objectives.
3 Reporting on the corporations e.g. administrative framed by the authority.
compliance with Delhi, Mumbai etc requirements, competent authority
have power to whether value of
legal & admn
appoint their own money spent is
requirements auditors for regular received or not. His
external audit. objective should be
4 Reporting upon whether to detect error and
frauds.
value is being fully So the auditor
should ensure his
received on money
appointment is valid.
spent; and
5 Detection of error,
fraud and misuse of
resources
Audit of Non-Governmental Organization (NGO)

Books of accounts
NGO Examples of NGO NGOs Registration (BOA) in case of NGO?
NGO would include Non-Governmental Organizations are generally incorporated as

Non-profit NGOs registered The NGOs which are not
making • Religious organizations, under the Companies registered under the
organisations Act, 2013 Companies Act, 2013
• Voluntary health and Societies Trust Company
welfare agencies,
maintain BOA under are allowed to maintain
which raise Apart from • Charitable organizations, under the Societies under the India under section 8 of the
Registration Act, 1860 Trust Act, 1882, Companies Act, 2013. the ACCRUAL accounts either an
funds from receiving
• Hospitals, BASIS as required by ACCRUAL BASIS or
donation of
the provisions of CASH BASIS.
• Old age homes, Is it compulsory for section 128 of the
• Research foundations etc. NGO to register? said Act.
• Members • Time
• Donors • Energy 1 None of the above mentioned act require mandatory registration
• Contributors • Skills for an NGO.
Various sources of
2 But if an NGO trust relates to Provisions of funds for NGO
For achieving their social is created as immovable
objectives like a trust property worth The main sources of funds include
than Rs. 100 Sec. 17 of Read with
Registration Section 123 of
• Imparting education, Act read with Transfer of Grants & Fund raising
Property Act donations programmes
• Providing medical facilities,
• Economic assistance to poor, Fee for services
Must be complied with & Subscriptions
• Managing disasters and emergent registration is mandatory. rendered
situations
3 In some states, such as the Maharashtra and Gujarat, where Public
Trusts Acts have been passed, such as the Bombay Public Trusts Act Fees from the
Advertisements
1950, members
all charitable trusts have to be registered under these
specific Public Trusts Acts. Sale of produce
Gifts
or publications
4 Registration under the
- Income Tax Act, 1961 and
- the Foreign Contribution (Regulation) Act, 1976
would also be invoked in many cases.

Donation may be Appointment of
given as auditor
Auditor of NGO The auditors of NGO

In the form of or a contribution Donations and grants NGOs may receive registered under registered under
CORPUS towards received for CONTRIBUTION
CONTRIBUTION REVOLVING FUND ACQUISITON OF IN KIND
SPECIFIC FIXED Societies India Trust section 8 of the
ASSETS are those Registration Act, 1882, Companies Act,
A contribution made The objective of a contribution grants These Act, 1860 2013
towards the capital or grant towards a Revolving contributions
or the corpus of an Fund is include
NGO is known as whose primary are normally appointed are appointed by the
corpus condition is that the by the Management of members of the
NGO accepting it ASSETS such ARTICLES such the Society or Trust. company.
contribution. to rotate the amount by as as
giving temporary loans should
Requirement of
land, buildings, food, books, Audit
from the fund to other NGO purchase/
construct/acquire the vehicles, office building materials,
for their projects equipment, etc. clothes, beds, and Some of the statues such as The Foreign
assets for which the
raw material for Contribution
grant is given.
training purposes, (Regulation) Act 1976
and then recover the loan so • The companies act, 2013,
e.g., Wool, reeds,
as to give temporary loans cloth, etc.
again and so on. • Foreign contribution
has prescribed the
(regulation) act 1976,
format and
Any interest earned from the • Income tax act 1961
revolving fund could be
requires the same be
required that the accounts of furnished to the
either added credited to the the NGO be audited & Ministry of Home
back to the OR Income and Affairs
fund Expenditure
Account submitted to the prescribed
authorities and within 60 days from
the close of the
depending on restrictions laid down by financial year i.e. by
the authority providing the contribution failure to do so could lead to May 30 each year.
or by the rules and regulations laid down forfeiture of certain
by the concerned NGO in this regard. exemptions and benefits.

Audit programme should Following points should Receipt of income may be
Planning of Audit OR
include the following be tested w.r.t. NGO checked on following lines -
While planning the audit, the auditor may concentrate Check the following points - Check the following points -
on the following:
Updating knowledge of relevant statutes Corpus Fund Vouch contribution with special ref. to Contributions • Check grant letters
applicable to the NGO letters from donors and Grants • Check agreements with donors
for projects & • Check that Foreign contributions are
Reviewing the Legal form of the NGO and its Reserves Vouch transfers from projects / programmes deposited in Foreign contribution bank
MOA, AOA, Rules and Regulations. programmes with donors letters and account as notified under foreign
board resolutions of NGO contribution (Regulation) Act, 1976.
Knowledge of the NGO’s work, its mission,
vision, areas of operations and Environment in Ear-marked Check requirements of donors
Receipts from • Verify in detail the internal control system
which it operate. Funds institutions, board resolution of NGO
fund raising • Ascertain who are the persons responsible
Reviewing the NGO’s organization chart, then Project / Vouch disbursements & expenditure programmes for collection of funds
Financial and Administrative Manuals, Project and Agency as per agreements with donors for • Verify the mode of receipt
Programme Guidelines, Funding Agencies Balances each of the balances • Ensure that collections are counted and
Requirements and formats, budgetary policies if deposited in the bank daily
Loans Vouch loans with loan agreements,
any. counterfoil of receipt issued
Examination of minutes of the Board/Managing Membership • Check fees received with Membership
Fixed Assets Vouch sale/ purchase & depreciation.
Committee/Governing Body/ Management Fees Register
Check donor’s letter, title deeds.
• Ensure proper classification is made
Study the accounting system, procedures, Investment Check investment register and between entrance and annual fees and life
internal controls and internal checks existing for documents to ensure they are in membership fees
the NGO and verify their applicability name of NGO • Reconcile fees received with fees to be
received during the year
Setting of materiality levels for audit purposes. SA 320 Cash in hand Physical verification to tally with BOA
Subscription • Check subscription register
The nature and timing of reports or other Bank Balance Check BRS and obtain direct fees • Check receipts issued
communications. confirmation. • Check the receipts with subscription rate
schedule
The involvement of experts and their reports. SA 620 Inventory Physical verification, obtain certificate • Reconcile number of subscription with
from Mgt. for quantity and value. printing and dispatch of relevant magazine/
Review the previous year’s audit report. circulars/ periodicals
Programme & Verify agreement with donor/
project contributors to check supportings. Interest & • Check against the investments held by the
expenses Check TDS deduction etc. dividends NGO during the year
• Check actual receipt in the bank account
Establishment Check PF, Insurance premium, ESI,
Expenses other admn. charges
Audit of Sole Trader
Who shall appoint Duty of the auditor in case Audit procedures in Advantage of Audit
Legal obligation Scope of audit
auditor? of change in auditor case of sole trader in case of sole trader
Auditors shall be Sole proprietor In case of change of Same as Same as

A sole trader is under no
appointed by the sole can determine auditor, it would be duty of Partnership firm Partnership firm
legal obligation to incoming auditor to
have his accounts proprietor the scope &
communicate
audited. himself. the
with the previous
conditions
under which it will auditor.
However be carried out.
He can stipulate that

Many such individuals
get their FS audited
due to regulatory
requirements, such as Only a Certain parts of Auditor also shall Audit shall be
partial the accounts prepare the final carried out
shall not be statements of continuously or at
Inventory brokers or on audit shall checked account. the end of the
a specific instructions be carried year.
of the bank for out
approval of loans, etc.
Audit of Partnership Firm
Who shall appoint Duty of the auditor in case

Legal obligation Scope of audit
auditor? of change in auditor
A partnership firm is under Auditors shall be Partners In case of change of

no legal obligation to appointed by the can determine the auditor, it would be duty of
have his accounts audited. partners scope & the incoming auditor to
conditions under communicate with the
which audit will be previous auditor.
Either on basis or on basis of carried out.
However
of decision conditions of
taken by them Partnership
agreement Either on basis or on basis of
Many such firms get
their FS audited due to of decision conditions of
regulatory taken by them Partnership
requirements, such as agreement
The appointment letter should

Inventory brokers or on clearly
a specific instructions
of the bank for
approval of loans, etc. Scope of audit Limitations on
audit
Audit of Partnership Firm

Matters to be considered in audit of accounts of
Matters to be considered before starting audit Advantages of Audit of a Partnership Firm
partnership
Auditor should examine partnership agreement & Auditor should check the following - Auditor should check the following -
note the following provisions therein -
The name and style under which the business Confirming that the letter of appointment clearly Audited accounts provide a convenient and reliable
shall be conducted states the nature and scope & limitations of audit means of settling accounts between the partners
The duration of the partnership, if any, that has Studying the minute book, if any, maintained to On the retirement or death of a partner,
been agreed upon. record the policy decision taken by partners constitute a reliable evidence for computing the
amounts due to the retiring partner or to the
The amount of capital that shall be contributed by Verifying that the business in which the representative of the deceased Partner
each partner - whether it will be fixed or could be partnership is engaged is authorized by the
varied from year to year. partnership agreement Verifying that the business in which the
partnership is engaged is authorized by the
Profit sharing ratio and related terms. Whether
Examining whether BOA appear to be reasonable partnership agreement
losses will be shared by the partners in same way
and are considered adequate
too. Audited statement of accounts are relied upon by
Provisions w.r.t. maintenance of books of Verifying generally that the interest of no partner the banks when advancing loans
accounts has suffered prejudicially by an activity engaged
in by the partnership Audited statements of account can be helpful in the
Borrowing capacity of the partnership negotiations to admit a person as a partner
Confirming that a provision for the firm’s tax
payable by the partnership has been made in the
The rate at which interest will be allowed on the An audit is an effective safeguard against any
accounts
capitals and loans provided by partners undue advantage being taken by a working
The rate at which interest will be charged on their Verifying that the profits and losses have been partner
drawings and current accounts divided among the partners in their agreed profit-
sharing ratio
Whether any salaries are payable to the partners
or withdrawals
Duties of the partners as regards the
management of business of the firm;
Who shall operate the bank account of the firm?
Limitations and restrictions that have been

agreed upon, the rights and powers of partners
Audit of Limited Liability Partnership (LLP) Firm
Statement of Documents available Delay in filing of

Books of accounts Annual return
Account & Solvency for public inspection these documents
LLP to maintain BOA on Cash Every LLP would be Every LLP is also The following documents are The provisions of the Act require LLPs to
or accrual basis. required to file required to submit available for inspection by any file the documents like Statement of
annual return person:- Account and Solvency (SAS) and Annual
Return (AR) etc. within the time
• Incorporation document
According to double entry Statement of Account specifically indicated in relevant
system in Form 11 and Solvency (SAS) provisions.
• Names of partners and changes, if
any, made therein
At its registered office with ROC in Form 8 Delay upto 300 days Delay beyond 300 days
• Statement of Account and Solvency
• Annual Return LLP liable to pay LLP liable to pay

Books shall be required to be within 60 days of within a period of thirty
preserved for 8 years from date closer of FY. days from the end of six - Normal filing fees - Normal filing fees
on which they are made. months the Fees for such inspection → Rs 50/- - Additional fees - Additional fees
Fees for certified copy or extract of any
document u/s 36 → Rs. 5/- per page. NOT liable to be - Liable to be
FY to which SAS prosecuted
Books of accounts which shall prosecuted
relates
contain -
1. Particulars of all sums of Why statement of

money received and solvency?
expended by the LLP
No mandatory Its difficult to assess This would depend upon the
2. A record of the assets and insurance has insurance nature of commercial risk
liabilities of the LLP, been proposed requirements of diff. attached with work or
in the Act types & sizes of LLPs. assignment handled by each.
3. Statements of costs of goods
purchased, inventories, work-
in-progress, finished goods
Therefore, the concern as to the credit worthiness of It would also
and costs of goods sold,
LLP in the event of a contractual default is addressed increase
through statutory provisions for solvency declaration, their costs of
4. Any other particulars which
disclosure of financial information and audit. operation.
the partners may decide.
Audit of Limited Liability Partnership (LLP) Firm

Appointment of Auditor’s Duty Advantages/ purpose/ need of audit
Audit requirement
auditor Regarding Audit of LLP
The accounts of The auditor may be appointed by the 1. The auditor should get definite instructions in writing
every LLP shall be designated partners of the LLP – Auditor should check the following -
as to the work to be performed by him.
audited as per Rule
24 of LLP Rules, 2. The auditor should mention
Auditing the accounts of a LLP helps in detecting
2009. 1. First auditor - At any time for the a) Whether the records of the firm appear to be correct & errors & frauds & verification of FS.
first FY but before the end of first reliable.
FY, Any disputes between any partners in the matter
Such rules b) Whether he was able to obtain all information & of accounts can be settled with the help of audited
provide that explanation necessary for his work. accounts.
any LLP, 2. Subsequent auditor - At least
c) Whether any restriction was imposed upon him. Banks & financial institutions lend money to the
thirty days prior to the end of each
fi rms only on the basis of audited accounts.
whose FY(other than the first FY), 3. The auditor should read the LLP agreement & note the
whose
TURNOVER CONTIBUTION following provisions
does not exceed, does not Periodical visits & suggestions by the auditor will
exceed Rs. 3. Casual Vacancy - To fill the causal a) Nature of the business of the LLP. help in improving the management of LLP
in any FY, Rs.
25L, in any FY vacancy in the office of auditor,
40L, b) Capital contribution of each partner.
For settling accounts between partners at the
c) Interest on additional capital contributed. time of admission, death, retirement, insolvency,
4. Casual Vacancy by removal of insanity, etc. audited accounts are accepted by
is not required auditor - To fill the casual vacancy d) Duration of partnership. those concerned who have dealings with the LLP
to get its caused by removal of auditor.
e) Drawings allowed to the partners.
accounts
audited. f) Salaries, commission etc payable to partners.
What if designated partner fails to
appoint? The partners may appoint the g) Borrowing powers of the LLP.
However, if the auditors if the designated partners have
failed to appoint them. h) Rights & duties of partners.
partners of such Bank
LLP still decide to i) Method of settlement of A/c b/w partners during
get the accounts admission, retirement, admission etc.
audited,
j) Any loans advanced by the partners.
k) Profit sharing ratio
the accounts shall
be audited only in 4. If partners maintain minute book, auditor shall refer it for
accordance with any resolution passed regarding the accounts.
such rule. Hospital
Audit of Charitable Institution

Subscription &
General
donation
Study the legal Verifying Ascertain any Obtain printed list Obtain printed list Receipt book Examining
form of the whether the changes made of subscriptions of subscription & related points internal check
charitable institution is as in the amount and donations donations system regarding
institution per the law of Obtain all receipt moneys received
books for the from box
& tally them with & tally with figures period collections, flag
Annual Life the total published in any days, etc.
Examining the Verify the details subscription membership collections shown report by the
system of internal of income & fees subscription in the accounts institution Confirm that
check, regarding confirm whether adequate controls AND
accounting of amount is are imposed over
amounts deposited into unused receipt
collected. bank regularly. books the steps taken to
ensure that all
List Account List Report collections made
Specially look into have been
any cancelled accounted for.
receipts
Legacies Grants Investment Income
Verifying the Vouch the amount Obtaining

received with certificate from Vouch the amount Check calculations Check that apt. Make special enquiries
amounts received received with of interest received dividend has been into any investments
with responsible official
on received held
relevant
correspondence, showing the Dividend &
Relevant interest counterfoil securities bearing where investment for which no dividend
correspondence, receipts or amount of grant
minutes book received. fixed rates of has been sold ex- has been received.
receipts & legacy interest. dividend or
documents purchased cum-
dividend.
Audit of Charitable Institution

Rent Special Function Income tax refund
Examine the Vouch the rents Where income tax has

rolls been deducted from
Special Vouch the Ensure that investment income
Rent Tenancy
functions may proceeds of all
rolls agreement
from include tickets issued
counterfoils of Gross Gross Check that refund has
concerts,
& notice the receipt book receipts outgoings been obtained
dramatic
performances have been
Rent Due With vouchers/ accounted for
amount dates & check total of cash since charitable
cash book held in aid of statements institution is generally
the charitable exempt from payment of
RENT BOOK, AGREEMENT institution IN & OUT TICKETS Income tax.
Check Check the

Expenditure correspondence calculation of
with Income tax refund claim
department
Vouch the Ensure that any

payment of fund created for CORRESPONDENCE CALCULATIONS
grants special purpose
Ensure that Check that no Has been

grants are paid member/ director utilized for that
only for of managing purpose
committee
Charitable Objects of
purposes Charitable is benefited from SPECIAL
institution grants PURPOSE
FUNDS USED
USED FOR CHARITABLE PURPOSE NOT FOR SPECIAL
FOR PERSONAL BENEFIT PURPOSE
Audit of Educational Institution

General Fees collection Scholarships Fines Hostel Dues
In case of In case of Read the Check names entered Tracing fees Check that fees paid Check that Check that Check that Check that
school/ university minutes of in student fees register collected in in advance has admission scholarships/ fines for late hostel dues are
college, meetings of Fees concessions payment or recovered
been carried fees has been have been absence before
Register forward credited to student’s
With names in class
examine trust Refer to act Managing capital fund accounts were
deed or of legislature committee or registers granted by have been closed
regulations & rules governing with entries in Ensure that fees authorized either collected/
framed body cash book person remitted under
thereunder. Test amount of fees irrecoverable is Unless managing proper authority & their deposit
committee has
charged. written off with taken decision to of caution
& counterfoils proper sanction of the the contrary & as per rules money
Note all the provisions affecting & Note all the of receipts authority and regulations refunded.
accounts provisions affecting Verify that there granted applicable
accounts operates system of
internal checks which
ensure Report old heavy Caution money
Also note decisions arrears of fees/

regarding operating hostel dues to Confirm that
demands are properly & not
of bank account and Managing caution money
raised against students transferred to
sanctioning of & other
expenditure. for the fees. committee. deposits are
revenue unless
they are non-
shown as
refundable.
liability in BS
Investment Income
Rental income Legacies
Vouch the amount Check calculations Check that apt. Make special enquiries
Vouch rental
Verifying the received with of interest received dividend has been into any investments
income with
amounts received on received held
receipts, rent
with
rolls & cash
Dividend &
book
interest counterfoil securities bearing where investment for which no dividend
Relevant fixed rates of has been sold ex- has been received.
correspondence, interest. dividend or
receipts & legacy purchased cum-
documents dividend.
Audit of Educational Institution

Staff Salary Capital Expenditure Grants Income tax refund
Check that Check that Vouch all the Physically Verify that all Vouch the amount Obtaining Where income tax has
increase in PF money of capital verify the the capital received with certificate from been deducted from
staff salaries the staff is expenditure existence of expenditures responsible official investment income
have been invested in against the the capital are
sanctioned by appropriate invoice asset and sanctioned relevant
the securities. ensure that properly correspondence, showing the Check that refund has
committee they are receipts or amount of grant been obtained
tagged minutes book received.
Donations Inventory verification since charitable

institution is generally
exempt from payment of
Income tax.
Obtain printed Obtain printed Physically verify Check with Compare with Also test check
the inventory of reference to the the value Check Check the
list of subscriptions list of subscription furniture, inventory corresponding adopted for
and donations & donations correspondence calculation of
stationery, register inventory of various items with Income tax refund claim
clothing, previous year department
provision and
and agreeing them & tally with figures other equipment
with the total published in any
collections shown in report by the
the accounts institution
Annual statement of accounts Establishment expenses
Verify the Check that separate Vouch the If any annual If not, bring it to
annual statements of establishment budget Managing
statement of accounts are expenses in prepared committee’s notice
accounts prepared w.r.t. Poor usual manner
Boys Fund, Games Check that excess
Fund, Hostel and Any expense was sanctioned by
Provident Fund of exceeds managing
staff , etc. budget committee
Audit of Hospitals
Register of patients Check Collection of cash Grants & TDS Income from investment & rent
Vouch register of Test check With receipts Counterfoils Other Grant from Refund of TDS Check property register Ensure that interest,
certain bills with evidences Government & has been claimed & dividend, rental income,
patients
patient’s local bodies properly & timely investment register is accounted on all the
properly basis properties &
attendance Example – Counterfoil of patient bills,
accounted as per investments
dividends, interest warrants etc.
with copies of bills record AS 12. Match bonds, share
issued to them scripts, title deeds with
Register
Legacies & donations Reconciliation of subscriptions Capital expenditure Depreciation Budget
Received for Applied or Reconcile Reconcile Incurred with prior Against all the Compare Income &
specific purpose specified subscription subscription due sanction of assets, Expenditure accounts
have been purposes collected as per with the budget
OR
subscription At appropriate rates
Trustees Managing
register Study major variances
Committee
From cash book
Report any discrepancies
With subscription
or irregularities to
With subscription outstanding
register OR
Trustees Managing
Committee
Inventories
Physical Check that Match

verification inventory inventories
procedures as register is with inventory
per SA 501 maintained register
properly
Audit of Cinemas
1 Tickets Free Passes Advertisement income
2
3 4
Entrance Tickets are Separate series Stocks of tickets Check that at the Verify that a these are
of tickets are are kept in end of the shows
Verify Verify
allowed only serially record of free issued under Charges Charges
through issued custody of Statement passes is kept
numbered for proper collected for collected for
printed tickets & responsible of tickets properly.
Advance official. authority advertisement advertisement
bound in sold is prepared
booking &
books
cash By reference to With the
collected is register of agreement
Slides entered into in this
reconciled regard.
with it
Examine Advances
Restaurant Income Bill from Distributors Entertainment Tax
paid to distributors
8
5 Check the 6 Vouch Examine 7 Enquire into
If run by If run by Reconcile amount
agreement payment made unadjusted cases where
cinema others between to the balance of of Entertainment tax
distributors and distributor with advances paid collected with total
cinema. the bill to distributors a film is off the number of
Audit should also Check the received. screens of
cover agreement between cinema tickets sold for
such vendor and Against the but each class
cinema. contract advance paid
sale & purchase of has not been
food items, cold adjusted.
Enquire into
drinks etc.
arrangement for
collection of share of
restaurant income.
Audit of Clubs
Purchase & Sale of
Constitution Entrance fees Member’s subscription
3 food items
4
1 2 5 6
Examine the Vouch the Verify the Vouch the Reconcile the Ensure that Vouch Stock of unsold
constitution, entrance fees Register of subscription fees Subscription provisions and
received with the received with purchase of food stores
powers of members due with items, cold drinks,
governing body and
Arrears of cigars, wines
subscription Should be
receipt Counterfoil the subscription fees have been correctly
counterfoil tally it with the of receipts collected and brought forward.
verified
And relevant Test the sales
issued for the subscription subscription fees physically by
rules for period income for the outstanding price to confirm that the management of
preparation and year. Where amount is normal rates of profits the club.
finalization of have been earned
accounts
outstanding
for a long
period, ensure that
necessary
actions have
been taken for
recovery.
Furniture, sports items,

9 Investments
crockery
7 8
Vouch the Verify the Check the Share Check Check that
stock of furniture, scrips and bonds arrangement for accrual of
purchase of
sports items, sports material with safe income
furniture, crockery etc. investment custody against such
& register investment is
done properly
trace their physically
entries into with respective
respective stock registers
registers
Audit of Hire Purchase & Leasing Companies

Meaning Basis Operating Lease Finance Lease
Examples Lease of Projector, Computers, Lease of Plant and Machinery, Land, Office
Finance Lease Operating Lease Laptops, Coffee Dispensers etc. Building etc
Ownership Ownership of the asset remains with Ownership transfer option at the end of
the lessor for the entire period of the lease period is with the lessee. Title may
An arrangement with the following An arrangement that or may not be eventually transferred.
lease.
attributes qualifies as a Finance does not transfer
Lease: Accounting Operating lease is generally treated Financial lease is treated like loan
substantially all the
risks and treatment like a renting arrangement. That arrangement. Hence, the asset
• The lessee has the option to rewards means, the lease payments are treated ownership is considered of that of the
as operating expenses and the asset lessee and thus appears on the balance
purchase the asset at a price does not appear as an asset on lessee’s sheet of the lessee.
that is expected to be sufficiently balance sheet.
lower than the fair value incidental to
ownership Purchase Under operating lease, the lessee does Financial lease allows the lessee to have a
qualifies as an Option not have any option to buy the purchase option at less than the fair
• The lease term is for the major Operating Lease. asset during the lease period. market value of the asset.
part of the economic life of
the asset even if title is not Lease Term Lease term generally extends to less Lease term is generally more than or
transferred In other words, an
operating lease is a
than 75% of the projected useful life equal to estimated economic life
of the leased asset. of the asset under the lease arrangement.
lease
• At the inception of the lease, the arrangement Operating/ Lessee pays only the monthly lease Lessee generally bears
insurance,
present value of the “Other than running payments.
maintenance and taxes.
minimum lease payments is No running or administration
finance lease”. expenses
equal to at least substantially costs are to be borne for example:
all of the fair value of the registration, repairs etc. since it gives
leased asset; and only right to use the asset.
Tax benefit Monthly lease payments is Lessee can claim interest and
claimed as expense depreciation expense as financial
• the leased assets are of such
No depreciation can be claimed lease is treated like a loan.
a specialized nature that by the lessee.
only the lessee can use them
without major modifications
Audit of Hire Purchase & Leasing Companies

While checking the hire- purchase transaction, While checking the hire- purchase transaction,
the auditor may examine the following: the auditor may examine the following:
Hire purchase agreement is in writing and is signed by all parties.
1. Check Object clause of the Leasing Company – See what
kind of capital goods , consumer durables can be leased by the Company
Hire purchase agreement specifies clearly –
2. Procedure for Credit analysis of Lessee – Whether there
The hire- The cash The date of No. of Goods to exists such procedures (credit score, credit worthiness, collateral security)
purchase price of commence- instalments & which the
the goods ment of amount per agreement
price of agreement relates 3. Lease agreements: Check lease agreement for the following points –
the goods instalment
Description of Tenure, dates Whether Whether

Ensure that instalment payments are being received regularly as per lessor, lessee, of payment, equipment shall agreement
the agreement. equipment, late charges be returned on prohibits further
location etc. termination sub-letting.
How does a normal finance lease transaction go? 4. Lease proposal form: Examine Lease proposal form submitted by
Lessee.
The lessee will select the equipment.

5. Invoice retained: as lease is long term in nature.
Having chosen the equipment, the lessee approaches a lessor.
6. Acceptance letter: Examine acceptance letter from lessee indicating
equipment has been received in order and it is acceptable
Lease agreement is broadly negotiated & the rates are finalized.
7. Board resolution of lessee: See the Board resolution authorizing a
The lessor places an order on the manufacturer as chosen by the lessee. particular director to execute the lease agreement has been passed by the
lessee.
The manufacturer delivers the equipment at the site of the lessee, and the
latter gives notice of acceptance to the lessor. 8. Insurance policies - See that the copies of the insurance policies have
been obtained by the lessor for his records.
The lease agreement giving detailed terms of contract is signed between
the parties.
Audit of Hotels
Special consideration in hotel audits can be summarized as follows -
Internal Controls Room Sales Inventories Fixed Assets Casual Labor
Pilferage is greatest Charge for room sales is All movements of Hotels may contain certain Hotels operate on casual
problems in any hotel. posted to guest bills by inventory to be properly quasi-fixed assets like labors.
receptionist/ front office. documented. silver and cutlery.
It is the responsibility of Their wage payment

Some account for them as records are
management to introduce Ensure that proper guest Goods controls to exist over
fixed assets and some as
controls to minimize the registers are maintained. each store area and sales inventory. inadequate.
leakage. point.
Rates charged are as per This can lead to confusion. Auditor to check there is
If the internal control in a the standard rates list. Areas with large quantities to no defalcation of cash
hotel is weak then a very be kept locked & key should Check whether detailed
in such case
serious problem exists for be retained by departmental
manager definition of inventory
the auditor.
exist and followed.
As a result, the scope of his
audit tests will necessarily be
increased.
Audit of Co-operative Societies

Fundamental Act Registrar Power of Registrar Person qualified to be appointed as auditor of Co-operative societies
1 The Co-operative “Registrar” means 1

The Registrar shall audit or
Societies Act, 1912 cause to be audited Chartered Persons holding a Person who has
a person appointed to perform Accountants
the duties of government served as an
It is a central Act.
The accounts of every (CA) diploma in auditor in the
registered society
a Registrar of Cooperative
Societies under this Act.
co-operative
OR
It is applicable in many states, At least once in a Co-operative Co-operation department of a
with or without amendments. year. accounts and government
What is supreme
authority within a accountancy
2 society? 2 The audit shall include
HOWEVER, in many states
like Maharashtra, West
Bengal, Orissa, Examination of Appointment of the auditor
General Body Valuation
overdue of assets &
of Society liabilities of
Co-operative societies are debts WHO → Registrar of Co-operative Societies
governed by specific society
is the supreme body
state acts. of the society
3 The registrar, the collector,
AUDIT REPORT → The auditor conducts the audit on behalf of the
3 any other person authorized Registrar and submits his report to Registrar as also to the society.
by registrar shall
Auditor should be familiar
with provisions of AUDIT FEES → The audit fees are paid by the society on the
At all the time
specific act governing the c-op basis of statutory scale of fees prescribed by the Registrar, according to
society subject to audit.
Have access to all the category of the society audited.
books, papers, securities
of society
And may call such further

information as he deems fit.

Books of Accounts (BOA) Restriction on
Power given to State Government to prescribe BOA to be

maintained Shareholding Loans Borrowings
Example: In Maharashtra → (1) All sums of money received and expended

by the society, (2) All sales and purchases of goods by the society, (3)
Assets and liabilities of the society 1 1
In the case of a society where A registered society shall A registered society shall
the liability
of a not make a loan to accept loans &
Other kind of books that may be maintained by the Co-operative societies
are as follows – member is limited, any person other than a deposits from persons
member. who are not members
(a) Daily cash sales summary register. member of a society other
than a registered society 2 subject to
However, with the special
(b) A register of collection from debtors if credit sales are sanction of the Registrar,
allowed by bye-laws of society.
cannot hold such the restrictions and
portion of the share capital of a registered society
the society exceeding limits of the bye-laws
(c) Loan disbursement register in case of credit society May make a loan to of the society
a maximum of of the value of another registered
(d) A loans recovery register from salaries and directly by
receipts from members in case of credit society
20% of the shareholding to society.
total Rs. 1,000/-.
number 3
(e) Any other columnar subsidiaries depending upon the State Govt. may put
nature and functions of society of shares. further restrictions
as it thinks fit
2 Further, State Govt. may
provide limits other than
that provided by the Central
Act.
3
Auditor of the co-operative society is
concerned that there is no breach relating to
holding of shares.
Auditor should also check and ensure that bye-laws

of the society is not contrary to the statute.

Contributions to Investment of Reserve
Investment of Funds Appropriation of profits
Charitable Purposes Fund
A society may invest its funds in any one or more of the following – A prescribed %age of A registered society may, Some of the State Acts
the profits should be provide that a society may
transferred to with the sanction of the use the Reserve Fund –
Central/ State Other Securities Shares, Any other Registrar,
Co-operative Cooperative specified securities, moneys Reserve Fund, a) in the business of a
Bank Bank under Sec 20 debentures or permitted by contribute an amount society, as working
of Indian Trust any other CG/ SG. before distribution
As approved Act, 1882. society with not exceeding 10% capital
as dividends or bonus to
by registrar limited liability of
members b) may invest as per
provisions of the Act.
Transfer to other reserves/ the net
profits remaining
dividend to members after the compulsory c) may be used for some
Bank Bank Trust Act Other Society transfer to the public purposes
Auditor should have regard to
1
bye-laws of society in this reserve fund likely to promote
regard.
for any charitable purpose the object of the
Contribution to Education Fund society.
Appropriation of profits must be as defined in Charitable
1 As per some of the State 2 IT IS a charge on 2 approved by “General Endowments Act, 1890.
Acts, Body of Society”
profits
Every society shall
NOT an 3 Necessary
contribute
appropriation of accounting entries for
annually towards the appropriation of profits are
profits.
Education Fund after date of
passed
of State Federal approval by General Body.
Society 4
This is a departure
from
At apt. rates as per
the class of society.
corporate accounting,
where accounting entries for
appropriation of profits are
passed subject to approval at
AGM

However, the special features of co-operative audit, to be borne in mind in general while conducting the audit are as follows:
Examination of Overdue Certification Valuation of Adherence to Observations of Verification

overdue debts Interest of Bad Debts Assets and Co-operative Provisions of of Members’
Liabilities Principles the Act & Rules Register
Overdue debts for a Overdue interest As per Maharashtra Regarding valuation of assets, The auditor will have to An auditor of a Examination of entries
period from 6 months should be excluded State Co-operative there are no specific provisions ascertain in general, cooperative society is in members pass books
to 5 years and more from interest Rules, 1961, bad debts or instructions in Act how far the objects, for required to point out regarding the loan
than 5 years will have to outstanding and can be written off only which the co-operative the non-compliance
be classified and shall accrued due while when they are certified So, due regard to the general organization is set up, with the provisions of
given and its
have to be reported by calculating profit. as bad by the auditor. principles of accounting and have been achieved in Co-operative Societies repayments, and
an auditor. auditing. the course of its Act and Rules and bye- confirmation of loan
Overdue interest is Where no such working. laws. balances in person is
interest accrued in requirement exists, the very much important in
accounts in which the managing committee of a co-operative
principal is overdue. the society must organization.
authorize the write-off .
In practice an overdue
Special report Discussion of draft
interest reserve is
created in such cases. Audit classification of society to the audit report with
Registrar managing committee
After a judgement of an If the management of During the course of Regarding valuation of
overall performance of the society is not audit, if the auditor assets, there are no
the society, the auditor satisfied about the notices that there are specific provisions or
has to award a class to award of audit class, it some serious instructions in Act
the society. can make an appeal to
the Registrar, and the
irregularities in the So, due regard to the
This judgement is to be working of the society general principles of
Registrar may direct to
based on the criteria he may report these accounting and auditing.
review the audit
specified by the special matters to the
classification.
Registrar. Registrar, drawing
The auditor should be his specific
very careful, while attention to the
making a decision about
points.
the class of society.
How to think and answer a question in relation to
Audit of Items of Financial Statement/ Vouching & Verification
Accounting Standards on Standard operating Tax laws & Other Methods of obtaining
Assertions
Standards Auditing Procedure laws audit evidences
AS 2 - Inventory SA 402 Fixed Asset Direct tax law I – Inspection

Balances Transactions
AS 4 – Events after BS SA 501 → Request for purchase → TDS C – Ext. Confirmation
Date SA 510 → Capital Budget limit → Cash payment/ bank
C – Completeness C – Completeness A – Analytical Procedures
AS 5 - PPI SA 550 → Quotations invited payment
AS 9 - Revenue SA 560 R – Rights & O – Occurrence → Purchase order place → TDS Reconciliation I – Inquiry
O – Obligation
AS 10 – Fixed Asset Etc. → Goods received
C – Classification (26AS) P – Re-performance
AS 11 – F. Exchange V – Valuation → Invoice received Indirect tax law
O – Cut-Off C – Re-computation/
AS 12 - Grant → Goods receipt note → GST charged
E - Existence calculation
AS 13 - Investment A - Accuracy issued → Input tax credit
O - Observation
AS 19 – Lease → Payment made → Invoice
Etc. → Receipt voucher Companies Law
Sales Provident Fund
→ Purchase order Gratuity Law
received Etc.
→ Goods dispatched
→ Goods Dispatch note
→ Invoice issued
→ Payment received
→ Receipt voucher
issued
Etc.
Chapter 18 – Audit of items of FS will be shared separately

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Nature, Objective & Scope of Audit

Audit is This he can do honestly by satisfying himself that

express Size Legal 4 The information conveyed

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Meaning of certain key words

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S TAT E M E N T S GUIDANCE NOTES

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Therefore, auditor has to – Therefore, auditor has to –

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